DP3522 | Globalization and Cooperative Relations

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Publication Date

20/08/2002

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Abstract

Globalization ? improved access to integrated, anonymous markets ? is claimed to crowd out cooperative relations: from reciprocal exchange to lifetime employment, from relational governance to corruption/collusion. We study how agents? intertemporal preferences and their access to markets interact and affect their ability to sustain generalized cooperative relations. The aversion to intertemporal substitution, a regular feature of real world agents, facilitates cooperation by decreasing the evaluation of short-run gains from unilateral defections and by increasing that of losses from punishment phases. Access to goods? markets and ?money? may then hinder cooperation by undoing these effects, allowing agents to save and reallocate short-run gains from defections in time at some cost. With their positive return on capital (savings), financial markets make cooperation even harder to sustain, unless the market interest rate is sufficiently below agents? discount rate or there are sufficiently strong income fluctuations. Then financial markets may in fact facilitate relations, by increasing cooperating agents? debt capacity and allowing them to smooth fluctuations along the cooperative equilibrium path.