Cooperating Adversaries

In this paper we argue that mutual altruism might explain why workers and a firm move from low‐productivity adversarial point(s) to high‐productivity cooperative point(s). The unique critical level of such altruism is identified and hence a stopping rule is provided: The mutual altruism solution to an otherwise prisoner's dilemma equilibrium depends on representing an agent's (workers, firm) preferences as a specific convex combination of his and the other agent's original utilities. The move to the cooperative point(s) is facilitated by revision of the utility functions and a consequent change in the payoffs. This, in turn, is brought about through intrafirm processes such as furnishing employees with superior compensation packages as well as through an interfirm process ‐ drawing lessons from ‘shocks’ ‐ the experience of firms which, as they were locked in low productivity equilibrium points, were weeded out.