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The important aspect of public monitoring is that giving more information about
actions is beneficial to cooperators in several different respects. First, a player who
observes a deviation might have the option to defect in the future only with a subset of
players (for instance, those known to have deviated). This can only increase the
frequency of cooperation in the economy because it allows players to cooperate with
those known to cooperate. Second, a player is less likely to experience a defection as a
result of a past defection by someone else. In addition more information is detrimental to
deviators, since they can be targeted more effectively. All of these elements serve to
increase the payoff for a cooperator and decrease it for a deviator, which generates
incentives to cooperate for even lower discount factors.

Below we identify three broad classes of strategies. They do not exhaust all possible
behaviors but are indicative of three intuitive ways of behaving. First, players could
switch from a cooperative mode to a punishment mode when they observe a defection, no
matter if coming from an opponent or someone else in the economy. We have already
called it a
global strategy. Conversely, players could switch to a punishment mode when
they observe an opponent defect, but stay in cooperative mode if a defection is observed
elsewhere in the economy, what we refer to as a
reactive strategy. Finally, an even more
selective strategy would involve a player switching to a punishment mode after observing
an opponent defect, limiting defections only to future encounters with the same opponent,
while staying in a cooperative mode with anyone else. We refer to this as a
targeted
strategy
. It is easily demonstrated that, with a targeted strategy, the efficient outcome is
optimal as long as
δ is greater than 0.5.

In random matching with non-anonymous public monitoring all classes of strategies
are available. On the contrary, with private monitoring reactive strategies are available,
but global and targeted strategies are not. Hence, variations in cooperation level between
treatments could suggest what class of strategies enhances cooperation (see Table 1).

One can classify strategies also using a “power” and a “selectivity” score. Power
relates to the incentives to keep cooperating, while selectivity relates to the incentives to
punish following a defection. The
power of a strategy is the maximum punishment that

16



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