Cooperative Equilibrium: A solution predicting cooperative play

Nash equilibrium (NE) assumes that players always make a best response. However, this is not always true; sometimes people cooperate even it is not a best response to do so. For example, in the Prisoner’s Dilemma, people often cooperate. Are there rules underlying cooperative behavior? In an effort to answer this question, we propose a new equilibrium concept: perfect cooperative equilibrium (PCE), and two related variants: max-PCE and cooperative equilibrium. PCE may help explain players’ behavior in games where cooperation is observed in practice. A player’s payoff in a PCE is at least as high as in any NE. However, a PCE does not always exist. We thus consider α-PCE, where α takes into account the degree of cooperation; a PCE is a 0-PCE. Every game has a Pareto-optimal max-PCE (M-PCE); that is, an α-PCE for a maximum α. We show that M-PCE does well at predicting behavior in quite a few games of interest. We also consider cooperative equilibrium (CE), another generalization of PCE that takes punishment into account. Interestingly, all Pareto-optimal M-PCE are CE. We prove that, in 2-player games, both a PCE (if it exists) and a M-PCE can be found in polynomial time, using bilinear programming. This is a contrast to Nash equilibrium, which is PPAD complete even in 2-player games [Chen, Deng, and Teng 2009]. We compare M-PCE to the coco value [Kalai and Kalai 2009], another solution concept that tries to capture cooperation, both axiomatically and in terms of an algebraic characterization, and show that the two are closely related, despite their very different definitions.