ken binmore [email protected] emergence of institutions: a game theory approach
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Game Theory and Institutions
• New Institutional Economics?
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Game Theory and Institutions
• New Institutional Economics?
• Transaction costs explain deviations from competitive equilibrium?
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Game Theory and Institutions
• New Institutional Economics?
• Transaction costs explain deviations from competitive equilibrium?
• Institutions as “rules of a game”?
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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?
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Multiple Equilibria
Within game theory, the problem of stable institutionscan be abstracted as a version of the
Equilibrium Selection Problem
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Multiple Equilibria
Within game theory, the problem of stable institutionscan 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 operatingone of the equilibria in our game of life.
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Multiple Equilibria
Within game theory, the problem of stable institutionscan 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 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”.
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Big Bang or Evolution?
Peter MurellAvinash Dixit
Sewell Wright Problem QuickTime™ and aTIFF (Uncompressed) decompressor
are needed to see this picture.
Sewell Wright
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Big Bang or Evolution?fitness
local
optimum
characteristicfitness landscape
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Big Bang or Evolution?fitness
basin of attraction
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Big Bang or Evolution?fitness
basin of attraction
global
optimum
climb out with many
simultaneous mutations?
local
optimum
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Big Bang or Evolution?fitness
global
optimum
local
optimum big bang
evolutionary correction
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Adherent versus Contractual Organizations
John Wallis
A
aaaa
Leader (or elite) chooses an equilibrium
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Adherent versus Contractual Organizations
John Wallis
A
aaaa
Leader (or elite) chooses an equilibrium
repeated game
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Adherent versus Contractual Organizations
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.
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Adherent versus Contractual Organizations
Peter Murell
A
aaaa
B
bbbb
William III(of Orange)
Louis XIV
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Adherent versus Contractual Organizations
Douglass North
A
aaaa
B
bbbb
The existence of coalition B
changes the game played internally by coalition A.
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Adherent versus Contractual Organizations
John Wallis
A
aaaa
B
bbbb
equilibrium chosen byexplicit or implicit bargaining
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Adherent versus Contractual Organizations
John Wallis
A
aaaa
B
bbbb
equilibrium chosen byexplicit or implicit bargaining
A
aaaa
B
bbbb
Ccc
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Adherent versus Contractual Organizations
John Wallis
A
aaaa
B
bbbb
equilibrium chosen byexplicit or implicit bargaining
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John Mackie’s
Inventing Right and Wrong
Metaphysical moral philosophy
is unsound. Look instead at:
Anthropology
Game theory
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Social Contracts
No bosses
Fair division
The social contracts of pure hunter-gatherer societies have two universal properties:
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Pure hunter-gatherers
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Toy games
dove
hawk
Prisoners’Dilemma
dove
hawk
Stag Hunt
Adam’s strategies
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Toy games
Prisoners’Dilemma Stag Hunt
dove hawk dove hawk
Eve’s strategies
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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
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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
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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
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Nash Equilibria
dove
hawk
Prisoners’Dilemma
dove
hawk
Stag Hunt
dove hawk dove hawk
3
3
11
44
22
22
0
0
30
03
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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
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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
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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
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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.
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Vampire bats share blood on a reciprocal basis to insure each other against hunger.
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Folk Theorem
efficientequilibria
currentstatus quo
Eve’spayoff
Adam’spayoff
0
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Equilibrium selection
Fairness is evolution’s solution tothe equilibrium selection problem.
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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.
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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
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John Rawls’ original position
Veil of ignorance
Comparison of welfare
Enforcement
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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
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implicit insurancecontracts
deep structure of fairness?
implicit insurancecontracts
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implicit insurancecontracts
original position
deep structure of fairness?
original position
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implicit insurancecontracts
original position
utilitarianism egalitarianism
external enforcement
self-policing
Who is right?
Harsanyi Rawls
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Modern Equity Theory
What is fair … is what is proportional. AristotleEve
Adam0
status quo
slope is ratio of the players’ context-dependent social indices
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implicit insurancecontracts
original position
utilitarianism egalitarianism
external enforcement
self-policing
standard of
interpersonal comparison
cultural evolution
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.
..
0Adam’spayoff
Eve’spayoff
Utilitarianism and Egalitarianism
The slopes are determined by the standard of interpersonal comparison.
utilitarian outcome
egalitarian outcome
state of nature
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.
..
0Adam’spayoff
Eve’spayoff
Utilitarianism and Egalitarianism
The slopes are determined by the standard of interpersonal comparison.
utilitarian outcome
egalitarian outcome
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.
.
0Adam’spayoff
Eve’spayoff
Utilitarianism and Egalitarianism
The slopes are determined by the standard of interpersonal comparison.
utilitarian outcome
egalitarian outcome
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.
.
0
Utilitarianism and Egalitarianism
The slopes are determined by the standard of interpersonal comparison.
Nash bargaining solution
€
(x1 − ξ1)(x2 − ξ 2) = c
€
x1
€
x2
€
ξ
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.
.
0
Cultural Evolution: Egalitarian Case
medium-run past
Nash bargaining solution
€
x1
€
x2
€
ξ
.
short-run present
egalitarian solution
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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.
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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.
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Reform?
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Evolutionary Driftantifitness
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Sewell Wright
local
optimum
characteristicDaniel Weissman et alThe Rate at which Asexual Populations Cross Fitness ValleysTheoretical Population Biology 10 (2009), 10-16.