Costly punishment sustains indirect reciprocity under low defection detectability

Abstract: Cooperation is fundamental to human societies, and indirect reciprocity, where individuals cooperate to build a positive reputation for future benefits, plays a key role in promoting it. Previous theoretical and experimental studies have explored both the effectiveness and limitations of costly punishment in sustaining cooperation. While empirical observations show that costly punishment by third parties is common, some theoretical models suggest it may not be effective in the context of indirect reciprocity, raising doubts about its potential to enhance cooperation. In this study, we theoretically investigate the conditions under which costly punishment is effective. Building on a previous model, we introduce a new type of error in perceiving actions, where defection may be mistakenly perceived as cooperation. This extension models a realistic scenario where defectors have a strong incentive to disguise their defection as cooperation. Our analysis reveals that when defection is difficult to detect, norms involving costly punishment can emerge as the most efficient evolutionarily stable strategies. These findings demonstrate that costly punishment can play a crucial role in promoting cooperation within indirect reciprocity.