Cooperation in a large society of self-interested individuals is notoriously difficult to achieve when the externality of one individual's action is spread thin and wide on the whole society. This leads to the 'tragedy of the commons' in which rational action will ultimately make everyone worse-off. Traditional policies to promote cooperation involve Pigouvian taxation or subsidies that make individuals internalize the externality they incur. We introduce a new approach to achieving global cooperation by localizing externalities to one's peers in a social network, thus leveraging the power of peer-pressure to regulate behavior. The mechanism relies on a joint model of externalities and peer-pressure. Surprisingly, this mechanism can require alower budget to operate than the Pigouvian mechanism, even when accounting for the social cost of peer pressure. Even when the available budget is very low, the social mechanisms achieve greater improvement in the outcome.
Bibliographical noteFunding Information:
This work was partially funded by the Martin Family Fellowship for Sustainability. This research was partially sponsored by the Army Research Laboratory under Cooperative Agreement Number W911NF-09-2-0053, by AFOSR under Award Number FA9550-10-1-0122, and by Masdar Institute of Science and Technology. Views and conclusions in this document are those of the authors and should not be interpreted as representing the policies, either expressed or implied, of the sponsors.