Post on 15-Jan-2016
Ken Binmore
k.binmore@ucl.ac.uk
Emergence of Institutions:A Game Theory Approach
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 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
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.
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”.
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
Big Bang or Evolution?fitness
basin of attraction
Big Bang or Evolution?fitness
basin of attraction
global
optimum
climb out with many
simultaneous mutations?
local
optimum
Big Bang or Evolution?fitness
global
optimum
local
optimum big bang
evolutionary correction
Adherent versus Contractual Organizations
John Wallis
A
aaaa
Leader (or elite) chooses an equilibrium
Adherent versus Contractual Organizations
John Wallis
A
aaaa
Leader (or elite) chooses an equilibrium
repeated game
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.
Adherent versus Contractual Organizations
Peter Murell
A
aaaa
B
bbbb
William III(of Orange)
Louis XIV
Adherent versus Contractual Organizations
Douglass North
A
aaaa
B
bbbb
The existence of coalition B
changes the game played internally by coalition A.
Adherent versus Contractual Organizations
John Wallis
A
aaaa
B
bbbb
equilibrium chosen byexplicit or implicit bargaining
Adherent versus Contractual Organizations
John Wallis
A
aaaa
B
bbbb
equilibrium chosen byexplicit or implicit bargaining
A
aaaa
B
bbbb
Ccc
Adherent versus Contractual Organizations
John Wallis
A
aaaa
B
bbbb
equilibrium chosen byexplicit or implicit bargaining
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.
QuickTime™ and aTIFF (LZW) decompressor
are needed to see this picture.
QuickTime™ and aTIFF (LZW) decompressor
are needed to see this picture.
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?
implicit insurancecontracts
implicit insurancecontracts
original position
deep structure of fairness?
original position
implicit insurancecontracts
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
implicit insurancecontracts
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
Utilitarianism and Egalitarianism
The slopes are determined by the standard of interpersonal comparison.
utilitarian outcome
egalitarian outcome
.
.
0Adam’spayoff
Eve’spayoff
Utilitarianism and Egalitarianism
The slopes are determined by the standard of interpersonal comparison.
utilitarian outcome
egalitarian outcome
.
.
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
.
.
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?
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Evolutionary Driftantifitness
QuickTime™ and aTIFF (Uncompressed) decompressor
are needed to see this picture.
Sewell Wright
local
optimum
characteristicDaniel Weissman et alThe Rate at which Asexual Populations Cross Fitness ValleysTheoretical Population Biology 10 (2009), 10-16.