Indirect reciprocity provides a narrow margin of efficiency for costly punishment

Indirect reciprocity1-5 is a key mechanism for the evolution of human cooperation. Our behavior toward other people depends not only on what they have done to us, but also on what they have done to others. Indirect reciprocity works via reputation5-17. The standard model of indirect reciprocity offers a binary choice: people can either cooperate or defect. Cooperation implies a cost for the donor and a benefit for the recipient. Defection has no cost and yields no benefit. Currently there is considerable interest in studying the effect of costly (or altruistic) punishment on human behavior18-25. Punishment implies a cost for the punished person. Costly punishment means that the punisher also pays a cost. It has been suggested that costly punishment between individuals can promote cooperation. Here we study the role of costly punishment in an explicit model of indirect reciprocity. We analyze all social norms, which depend on the action of the donor and the reputation of the recipient. We allow errors in assigning reputation and study gossip as a mechanism for establishing coherence. We characterize all strategies that allow the evolutionary stability of cooperation. Some of those strategies use costly punishment, while others do not. We find that punishment strategies typically reduce the average payoff of the population. Consequently, there is only a small parameter region where costly punishment leads to an efficient equilibrium. In most cases, the population does better by not using costly punishment. The efficient strategy for indirect reciprocity is to withhold help for defectors rather than punish them.