Emergence of Institutions A Game Theory Approach Ken

Emergence of Institutions: A Game Theory Approach Ken Binmore k. binmore@ucl. ac. uk

Game Theory and Institutions • New Institutional Economics?

Game Theory and Institutions • New Institutional Economics? • Transaction costs explain deviations from competitive equilibrium?

Game Theory and Institutions • New Institutional Economics? • Transaction costs explain deviations from competitive equilibrium? • Institutions as “rules of a game”?

Game Theory and Institutions • New Institutional Economics? • Transaction costs explain deviations from competitive equilibrium? • Institutions as “rules of a game”? • Example: fairness as an institution?

Multiple Equilibria Within game theory, the problem of stable institutions can be abstracted as a version of the Equilibrium Selection Problem

Multiple Equilibria Within game theory, the problem of stable institutions can be abstracted to be a version of the Equilibrium Selection Problem Realistic games nearly always have many Nash equilibria. Institutions are a social device for selecting and operating one of the equilibria in our game of life.

Multiple Equilibria Within game theory, the problem of stable institutions can be abstracted as a version of the Equilibrium Selection Problem Realistic games nearly always have many Nash equilibria. Institutions are a social device for selecting and operating one of the equilibria in our game of life. Traditional economics evades the equilibrium selection problem by looking only at models with a single equilibrium. Multiple equilibria are dismissed as “pathological”.

Big Bang or Evolution? Peter Murell Avinash Dixit Sewell Wright Problem Sewell Wright

Big Bang or Evolution? fitness local optimum fitness landscape characteristic

Big Bang or Evolution? fitness basin of attraction

Big Bang or Evolution? fitness local optimum climb out with many simultaneous mutations? global optimum basin of attraction

Big Bang or Evolution? fitness local optimum big bang global optimum evolutionary correction

Adherent versus Contractual Organizations John Wallis A a a Leader (or elite) chooses an equilibrium

Adherent versus Contractual Organizations John Wallis A a a Leader (or elite) chooses an equilibrium repeated game

Adherent versus Contractual Organizations James Madison A a c C c Leader (or elite) chooses an unfair equilibrium? Facilitates the emergence of a challenging sub-coalition around a potential new leader who proposes a fair equilibrium.

Adherent versus Contractual Organizations Peter Murell William III (of Orange) A B a a b b Louis XIV

Adherent versus Contractual Organizations Douglass North A a a B The existence of coalition B changes the b game played internallybby coalition A. b b

Adherent versus Contractual Organizations John Wallis equilibrium chosen by explicit or implicit bargaining A B a a b b

Adherent versus Contractual Organizations John Wallis AA aa aa equilibrium chosen by explicit or implicit bargaining C c c BB bb bb

Adherent versus Contractual Organizations John Wallis equilibrium chosen by explicit or implicit bargaining A B a a b b

John Mackie’s Inventing Right and Wrong Metaphysical moral philosophy is unsound. Look instead at: Anthropology Game theory

Social Contracts The social contracts of pure hunter-gatherer societies have two universal properties: No bosses Fair division

Pure hunter-gatherers

Toy games Adam’s strategies dove hawk Prisoners’ Dilemma Stag Hunt

Toy games Eve’s strategies dove hawk Prisoners’ Dilemma dove hawk Stag Hunt

Toy games Adam’s payoffs dove hawk 2 hawk 3 0 1 Prisoners’ Dilemma dove hawk 4 0 3 2 Stag Hunt

Toy games Eve’s payoffs dove hawk 2 3 0 1 Prisoners’ Dilemma dove hawk 4 3 0 2 Stag Hunt

Toy games dove hawk 2 3 2 0 0 3 1 1 Prisoners’ Dilemma dove hawk 4 3 4 0 0 3 2 2 Stag Hunt

Nash Equilibria dove hawk 2 3 2 0 0 3 1 1 Prisoners’ Dilemma dove hawk 4 3 4 0 0 3 2 2 Stag Hunt

Coordination Games left right 1 0 0 1 1 Driving Game box ball 1 0 2 0 0 0 2 1 Battle of the Sexes

Reciprocal Altruism 2 2 2 0 3 22 03 003 22 1 0 3003 11 22 3 1 2 300 11 3 1 3 1 indefinitely repeated Prisoners’ Dilemma

Reciprocal Altruism d 2 2 2 0 3 22 03 003 22 1 0 3003 11 22 3 1 2 300 11 3 1 3 1 d h h Grim strategy

Reputation and Trust Sure I trust him. You know the ones to 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 Eve’s payoff efficient equilibria current status quo 0 Adam’s payoff

Equilibrium selection Fairness is evolution’s solution to the equilibrium selection problem.

Equilibrium selection Fairness is evolution’s solution to the 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 a deep 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

Adam I might be Adam and Oskar might be Eve. Or Oskar might be Adam and I might be Eve Oskar John Original Position

implicit insurance contracts deep structure of fairness?

implicit insurance contracts original position deep structure of fairness?

implicit insurance contracts Who is right? original position external enforcement self-policing utilitarianism egalitarianism Harsanyi Rawls

Modern Equity Theory What is fair … is what is proportional. Aristotle Eve slope is ratio of the players’ context-dependent social indices status quo 0 Adam

implicit insurance contracts original position cultural evolution external enforcement utilitarianism self-policing egalitarianism standard of interpersonal comparison

Utilitarianism and Egalitarianism Eve’s payoff utilitarian outcome egalitarian outcome . state of nature . 0 . Adam’s payoff The slopes are determined by the standard of interpersonal comparison.

Utilitarianism and Egalitarianism Eve’s payoff utilitarian outcome egalitarian outcome . . 0 . Adam’s payoff The slopes are determined by the standard of interpersonal comparison.

Utilitarianism and Egalitarianism Eve’s payoff utilitarian outcome egalitarian outcome . . 0 Adam’s payoff The slopes are determined by the standard of interpersonal comparison.

Utilitarianism and Egalitarianism Nash bargaining solution . . 0 The slopes are determined by the standard of interpersonal comparison.

Cultural Evolution: Egalitarian Case Nash bargaining solution . . egalitarian solution . 0 medium-run past short-run present

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 deep structure, but the standard of interpersonal comparison that is necessary as an input to the original 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 Drift antifitness local optimum Daniel Weissman et al The Rate at which Asexual Populations Cross Fitness Valleys Theoretical Population Biology 10 (2009), 10 -16. Sewell Wright characteristic