Public Goods Game

Here is the catch. Each token you put in becomes 2 tokens in the pot, but you get back only a quarter of that: half a token. So every token you give costs you 1 and returns 0.5, whatever the others do. A purely self-interested player gives nothing. Yet if all four players give all 10, each ends the round with 20 tokens instead of 10. That gap between what is best for each person and what is best for the group is the free-rider problem. It is why things everyone uses, like street lighting and flood defences, are usually paid for through taxes rather than sold.

Economists have run this game in laboratories for decades. Across twelve earlier experiments surveyed by Ernst Fehr and Klaus Schmidt, people put in 40 to 60% of their tokens in the first rounds. By the final round, 73% of the 1,042 players were giving nothing at all.

Fehr and Simon Gächter then added a twist: after each round, players could pay to cut the earnings of others in their group. Punishing cost the punisher, so a self-interested player would never do it. Many did it anyway, and the further someone fell below what the others gave, the harder they were punished. Contributions stopped falling. In groups that stayed together for all ten rounds, 82.5% of players were giving everything by the final round.