We study how strategic interaction and cooperation are affected by the heterogeneity of cognitive skills of groups of players, over consecutive plays of repeated games with randomly matched opponents using Prisoner’s Dilemma as stage game. We observe overall higher cooperation rates and average final payoffs in integrated treatment groups—where subjects of different IQ levels interact together—than in separated treatment groups. Lower IQ subjects are better off and higher IQ subjects are worse off in integrated groups than in separated groups. Higher IQ subjects adopt harsher strategies when they are pooled with lower IQ subjects than when they play separately. We demonstrate that this outcome should be expected in learning and evolutionary models where higher intelligence subjects exhibit lower frequency of errors in the implementation of strategies. Estimations of errors and strategies in our experimental data are consistent with the model’s assumptions and predictions.

We model technological progress as an external effect of organizational design, focusing on how factories, based on labor division, could spawn the Industrial Revolution. Dividing labor, as Adam Smith argued, facilitates invention by observers of production processes. However, entrepreneurs cannot internalize this benefit and choose labor division to facilitate monitoring. Equilibrium with few entrepreneurs features low wage shares, and high specialization, but a limited market for innovations. Conversely, with many entrepreneurs, there is a large market for innovation but little specialization because of high wage shares. Technological progress therefore occurs with a moderate scarcity of entrepreneurs. Institutional improvements affect growth ambiguously.

We study how intelligence and personality affect the outcomes of groups, focusing on repeated interactions that provide the opportunity for profitable cooperation. Our experimental method creates two groups of subjects who have different levels of certain traits, such as higher or lower levels of Intelligence, Conscientiousness, and Agreeableness, but who are very similar otherwise. Intelligence has a large and positive long-run effect on cooperative behavior. The effect is strong when at the equilibrium of the repeated game there is a trade-off between short-run gains and long-run losses. Conscientiousness and Agreeableness have a natural, significant but transitory effect on cooperation rates.