Ken Binmore

1
Emergence of InstitutionsA Game Theory Approach

• Ken Binmore
• k.binmore_at_ucl.ac.uk

2
Game Theory and Institutions

• New Institutional Economics?

3
Game Theory and Institutions

• New Institutional Economics?
• Transaction costs explain deviations from
  competitive equilibrium?

4
Game Theory and Institutions

• New Institutional Economics?
• Transaction costs explain deviations from
  competitive equilibrium?
• Institutions as rules of a game?

5
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?

6
Multiple Equilibria
Within game theory, the problem of stable
institutionscan be abstracted as a version of
the
Equilibrium Selection Problem
7
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.
8
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.
9
Big Bang or Evolution?
Peter MurellAvinash Dixit
Sewell Wright Problem
Sewell Wright
10
Big Bang or Evolution?
fitness
localoptimum
characteristic
fitness landscape
11
Big Bang or Evolution?
fitness
basin of attraction
12
Big Bang or Evolution?
fitness
localoptimum
global optimum
climb out with manysimultaneous mutations?
basin of attraction
13
Big Bang or Evolution?
fitness
localoptimum
global optimum
big bang
evolutionary correction
14
Adherent versus Contractual Organizations
John Wallis
Leader (or elite) chooses an equilibrium
Aa a aa
15
Adherent versus Contractual Organizations
John Wallis
Leader (or elite) chooses an equilibrium
Aa a aa
repeated game
16
Adherent versus Contractual Organizations
James Madison
Leader (or elite) chooses an unfair equilibrium?
Aa c Cc
Facilitates the emergenceof a challenging
sub-coalitionaround a potential new leader who
proposes afair equilibrium.
17
Adherent versus Contractual Organizations
Peter Murell
William III(of Orange)
Louis XIV
Aa a aa
Bb b bb
18
Adherent versus Contractual Organizations
Douglass North
Aa a aa
Bb b bb
The existence of coalition B changes the game
played internally by coalition A.
19
Adherent versus Contractual Organizations
equilibrium chosen byexplicit or implicit
bargaining
John Wallis
Aa a aa
Bb b bb
20
Adherent versus Contractual Organizations
equilibrium chosen byexplicit or implicit
bargaining
John Wallis
Ccc
Aa a aa
Bb b bb
Aa a aa
Bb b bb
21
Adherent versus Contractual Organizations
equilibrium chosen byexplicit or implicit
bargaining
John Wallis
Aa a aa
Bb b bb
22
(No Transcript)
23
John Mackies Inventing Right and Wrong

• Metaphysical moral philosophy
• is unsound. Look instead at
• Anthropology
• Game theory

24
Social Contracts
The social contracts of pure hunter-gatherer
societies have two universal properties
No bosses
Fair division
25
Pure hunter-gatherers
26
Toy games
Adams strategies
dove
dove
hawk
hawk
Prisoners Dilemma
Stag Hunt
27
Toy games
Eves strategies
dove
hawk
dove
hawk
Prisoners Dilemma
Stag Hunt
28
Toy games
Adams payoffs
dove
hawk
dove
hawk
dove
dove
4
2
0
0
hawk
hawk
3
3
1
2
Prisoners Dilemma
Stag Hunt
29
Toy games
Eves payoffs
dove
hawk
dove
hawk
2
3
4
3
dove
dove
0
1
0
2
hawk
hawk
Prisoners Dilemma
Stag Hunt
30
Toy games
dove
hawk
dove
hawk
2
3
4
3
dove
dove
2
0
4
0
0
1
0
2
hawk
hawk
2
3
1
3
Prisoners Dilemma
Stag Hunt
31
Nash Equilibria
dove
hawk
dove
hawk
2
3
4
3
dove
dove
2
0
4
0
0
0
1
2
hawk
hawk
3
3
1
2
Prisoners Dilemma
Stag Hunt
32
Coordination Games
left
right
box
ball
0
1
1
0
left
box

0
1
2
0
0
0
1
2
right
ball
0
0
1
1
Battle of the Sexes
Driving Game
33
Reciprocal Altruism
2
3
2
3
2
0
2
3
2
0
1
0
2
0
2
3
1
0
3
1
2
0
0
1
2
3
3
1
2
0
0
1
3
1
indefinitely repeated Prisoners Dilemma
3
1
0
1
3
1
34
Reciprocal Altruism
d
2
3
2
3
2
0
2
3
2
0
1
0
2
0
d
h
h
2
3
1
0
3
1
2
0
0
1
2
3
3
1
2
0
0
1
3
1
3
1
0
1
Grim strategy
3
1
35
Reputation and Trust
Sure I trust him. You know the onesto trust in
this business. The oneswho betray you, bye-bye.
36

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

37
Folk Theorem
Evespayoff
efficientequilibria
currentstatus quo
0
Adamspayoff
38
Equilibrium selection
Fairness is evolutions solution tothe
equilibrium selection problem.
39
Equilibrium selection
Fairness is evolutions solution tothe
equilibrium selection problem.
Fairness therefore evolved as a means of
balancing power---not as a substitute for power.
40
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
41
John Rawls original position

• Veil of ignorance
• Comparison of welfare
• Enforcement

42
I might be Adam and Oskar might be Eve. Or Oskar
might be Adam and I might be Eve
Adam
Eve
Original Position
Oskar
John
43
implicit insurancecontracts
implicit insurancecontracts
deep structure of fairness?
44
implicit insurancecontracts
deep structure of fairness?
original position
original position
45
implicit insurancecontracts
Who is right?
original position
external enforcement
self-policing
utilitarianism
egalitarianism
Harsanyi
Rawls
46
Modern Equity Theory
What is fair is what is proportional.
Aristotle
Eve
slope is ratio of the players
context-dependent social indices
status quo
Adam
0
47
implicit insurancecontracts
original position
cultural evolution
external enforcement
self-policing
utilitarianism
egalitarianism
standard ofinterpersonal comparison
48
Utilitarianism and Egalitarianism
Evespayoff
utilitarian outcome
egalitarian outcome
.
state of nature
.
.
Adamspayoff
0
The slopes are determined by the standard of
interpersonal comparison.
49
Utilitarianism and Egalitarianism
Evespayoff
utilitarian outcome
egalitarian outcome
.
.
.
Adamspayoff
0
The slopes are determined by the standard of
interpersonal comparison.
50
Utilitarianism and Egalitarianism
Evespayoff
utilitarian outcome
egalitarian outcome
.
.
Adamspayoff
0
The slopes are determined by the standard of
interpersonal comparison.
51
Utilitarianism and Egalitarianism
Nash bargaining solution
.
.
0
The slopes are determined by the standard of
interpersonal comparison.
52
Cultural Evolution Egalitarian Case
Nash bargaining solution
.
egalitarian solution
.
.
0
short-run present
medium-run past
53
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.
54
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 societys cultural history.
55
Reform?
56
Evolutionary Drift
antifitness
localoptimum
Sewell Wright
characteristic
Daniel Weissman et al The Rate at which Asexual
Populations Cross Fitness ValleysTheoretical
Population Biology 10 (2009), 10-16.