Ken Binmore [email protected] Emergence of Institutions: A Game Theory Approach.

Ken Binmore

[email protected]

Emergence of Institutions:A Game Theory Approach

Game Theory and Institutions

• New Institutional Economics?



• Transaction costs explain deviations from competitive equilibrium?




• Institutions as “rules of a game”?




• Institutions as “rules of a game”?

• Example: fairness as an institution?

Multiple Equilibria

Within game theory, the problem of stable institutionscan be abstracted as a version of the

Equilibrium Selection Problem

Multiple Equilibria

Within game theory, the problem of stable institutionscan be abstracted to be a version of the


Realistic games nearly always have many Nash equilibria.Institutions are a social device for selecting and operatingone of the equilibria in our game of life.

Multiple Equilibria

Within game theory, the problem of stable institutionscan be abstracted as a version of the


Realistic games nearly always have many Nash equilibria.Institutions are a social device for selecting and operatingone of the equilibria in our game of life.

Traditional economics evades the equilibrium selectionproblem by looking only at models with a single equilibrium.Multiple equilibria are dismissed as “pathological”.

Big Bang or Evolution?

Peter MurellAvinash Dixit

Sewell Wright Problem QuickTime™ and aTIFF (Uncompressed) decompressor

are needed to see this picture.

Sewell Wright

Big Bang or Evolution?fitness

local

optimum

characteristicfitness landscape


basin of attraction


basin of attraction

global

optimum

climb out with many

simultaneous mutations?

local

optimum


global

optimum

local

optimum big bang

evolutionary correction

Adherent versus Contractual Organizations

John Wallis

A

aaaa

Leader (or elite) chooses an equilibrium


John Wallis

A

aaaa

Leader (or elite) chooses an equilibrium

repeated game


James Madison

Aa

cCc

Leader (or elite) chooses an unfair equilibrium?

Facilitates the emergenceof a challenging sub-coalitionaround a potential new leader who proposes afair equilibrium.


Peter Murell

A

aaaa

B

bbbb

William III(of Orange)

Louis XIV


Douglass North

A

aaaa

B

bbbb

The existence of coalition B

changes the game played internally by coalition A.


John Wallis

A

aaaa

B

bbbb

equilibrium chosen byexplicit or implicit bargaining


John Wallis

A

aaaa

B

bbbb


A

aaaa

B

bbbb

Ccc


John Wallis

A

aaaa

B

bbbb


John Mackie’s

Inventing Right and Wrong

Metaphysical moral philosophy

is unsound. Look instead at:

Anthropology

Game theory

Social Contracts

No bosses

Fair division

The social contracts of pure hunter-gatherer societies have two universal properties:

Pure hunter-gatherers

Toy games

dove

hawk

Prisoners’Dilemma

dove

hawk

Stag Hunt

Adam’s strategies

Toy games

Prisoners’Dilemma Stag Hunt

dove hawk dove hawk

Eve’s strategies

Toy games

dove

hawk

Prisoners’Dilemma

dove

hawk

Stag Hunt

dove hawk dove hawk

Adam’s payoffs

2 0

3 1

4 0

3 2

Toy games

dove

hawk

Prisoners’Dilemma

dove

hawk

Stag Hunt

dove hawk dove hawk

Eve’s payoffs

2 3

0 1

4 3

0 2

Toy games

dove

hawk

Prisoners’Dilemma

dove

hawk

Stag Hunt

dove hawk dove hawk

2 3

0 1

4 3

0 2

2 0

3 1

4 0

3 2

Nash Equilibria

dove

hawk

Prisoners’Dilemma

dove

hawk

Stag Hunt

dove hawk dove hawk

3

3

11

44

22

22

0

0

30

03

Coordination Games

left

right

Driving Game

box

ball

Battle of the Sexes

left right box ball

11

11

12

21

0

0

00

00

0

0

Reciprocal Altruism

indefinitely repeated Prisoners’ Dilemma

2 3

0 12 0

3 1

2 3

0 12 0

3 1

2 3

0 1

2 0

3 1

2 3

0 1

2 0

3 1

2 3

0 1

2 0

3 1

Reciprocal Altruism

d h

d

Grim strategy

h

2 3

0 12 0

3 1

2 3

0 12 0

3 1

2 3

0 1

2 0

3 1

2 3

0 1

2 0

3 1

2 3

0 1

2 0

3 1

Reputation and Trust

QuickTime™ and aTIFF (LZW) decompressor

are needed to see this picture.Sure I trust him. You know the onesto trust in this business. The ones

who betray you, bye-bye.

Vampire bats share blood on a reciprocal basis to insure each other against hunger.

Folk Theorem

efficientequilibria

currentstatus quo

Eve’spayoff

Adam’spayoff

0

Equilibrium selection

Fairness is evolution’s solution tothe equilibrium selection problem.





Equilibrium selection

Fairness is evolution’s solution tothe equilibrium selection problem.

Fairness therefore evolved as a means of balancing power---not as a substitute for power.

Deep structure of fairness norms

As with language, fairness has adeep structure that is universal in the human species. This deep structure is embodied in Rawls’

original position

John Rawls’ original position

Veil of ignorance

Comparison of welfare

Enforcement

QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.

QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.

I might be Adam and Oskar might be Eve. Or Oskar might be Adam and I might be Eve

Original Position

Adam Eve

Oskar

John

implicit insurancecontracts

deep structure of fairness?



original position

deep structure of fairness?

original position


original position

utilitarianism egalitarianism

external enforcement

self-policing

Who is right?

Harsanyi Rawls

Modern Equity Theory

What is fair … is what is proportional. AristotleEve

Adam0

status quo

slope is ratio of the players’ context-dependent social indices


original position

utilitarianism egalitarianism

external enforcement

self-policing

standard of

interpersonal comparison

cultural evolution

.

..

0Adam’spayoff

Eve’spayoff

Utilitarianism and Egalitarianism

The slopes are determined by the standard of interpersonal comparison.

utilitarian outcome

egalitarian outcome

state of nature

.

..

0Adam’spayoff

Eve’spayoff



utilitarian outcome

egalitarian outcome

.

.

0Adam’spayoff

Eve’spayoff



utilitarian outcome

egalitarian outcome

.

.

0



Nash bargaining solution

€

(x1 − ξ1)(x2 − ξ 2) = c

€

x1

€

x2

€

ξ

.

.

0

Cultural Evolution: Egalitarian Case

medium-run past

Nash bargaining solution

€

x1

€

x2

€

ξ

.

short-run present

egalitarian solution

Analogy with language

Chomsky discovered that all languages have a deep structure which is universal in the human species, but the particular language spoken in a society is determined by its cultural history.

Fairness norms similarly have a common deepstructure, but the standard of interpersonal comparison that is necessary as an input to theoriginal position is culturally determined.

Moral relativism

• Need• Ability• Effort• Status

Social indices always respond to these parameters in the same way, but the degree of response varies with a society’s cultural history.

Reform?



Evolutionary Driftantifitness

QuickTime™ and aTIFF (Uncompressed) decompressor


Sewell Wright

local

optimum

characteristicDaniel Weissman et alThe Rate at which Asexual Populations Cross Fitness ValleysTheoretical Population Biology 10 (2009), 10-16.

Ken Binmore [email protected] Emergence of Institutions: A Game Theory Approach.

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