The Evolution of Cooperation in Business

Abstract: The development of cooperative relations within and between firms plays an important role in the successful implementation of business strategy. How to produce such relations is less well understood. We build on work in relational contract theory and the evolution of cooperation to examine the conditions under which group based incentives outperform individual based incentives and how they produce more cooperative behavior. Group interactions are modeled as iterated games in which individuals learn optimal strategies under individual and group based reward mechanisms. The space of possible games is examined and it is found that, when individual and group interests are not aligned, group evaluation and reward systems lead to higher group performance and, counter-intuitively, higher individual performance. Such groups include individuals who, quite differently to free-riders, sacrifice their own performance for the good of the group. We discuss the implications of these results for the design of incentive systems.