Allocation rules create an equilibrium problem that groups must solve collectively

Evidence

The rule is that the job should be allocated to the closest driver. This rule poses an interesting problem of cooperation, for cheating is a feasible option: driver B can wait until driver A answers the operator’s call and then quote a pickup time shorter than A’s. In theory the cheating chain can be long, with drivers C, D, E, and so on trying to outmaneuver A and B. Each driver faces two choices: when to answer and whether to be honest. Given the scope for deception, cooperation at first seems an impossible ideal. But since the system breaks down only in Palermo, it follows that groups have normally been able to find a solution. — Diego Gambetta, The Sicilian Mafia The Business of…, 588

Categorization

• XREF: The close-driver allocation rule is a prisoner’s-dilemma-style coordination problem — the kind Schelling and repeated-game theorists analyze. Sets up the institutional-design question Milgrom et al. ask about private trade.