1. Emergence of Institutions: A Game Theory Approach
Ken Binmore
John Maynard Keynes
The why is relatively uncointroversial…

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

7. Multiple Equilibria Equilibrium Selection Problem
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.

8. Multiple Equilibria Equilibrium Selection Problem
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”.

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

10. Big Bang or Evolution? fitness landscape fitness local optimum
characteristic
fitness landscape

11. Big Bang or Evolution?
fitness
basin of attraction

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

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

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

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

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

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

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

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

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

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

22. If you want to know more, here is the dust jacket of my latest book.

23. John Mackie’s Inventing Right and Wrong
Metaphysical moral philosophy
is unsound. Look instead at:
Anthropology
Game theory
Mackie’s book argues against metaphysics in morality, and tells us that we need to apppeal to anthropology and game theory. I plan to do both.

24. Social Contracts No bosses Fair division
The social contracts of pure hunter-gatherer societies have two universal properties:
No bosses
The anthropology of PURE hunter-gatherer sociieties is very instructive. (Note that I exclude societies with more complex economies because it is clear that the social contract evolves in tandem with the economic means of production.) No bosses…and social mechanisms to inhibit attempts at dominance..laughter, social exclusion, expulsion. Fair division is particularly striking in the division of meat. How universal?
Fair division

25. Pure hunter-gatherers
Greenland eskimos, Australian aborigines, Paraguaya indians, Kalahari bushmen…

26. Toy games Adam’s strategies dove dove hawk hawk Prisoners’ Dilemma
Game theory. Illustrate with two toy games. The Stag Hunt is derived from a story of J-J Rousseau.
Just two players: Adam and Eve.
Adam chooses a row…either dove or hawk,
Prisoners’
Dilemma
Stag Hunt

27. Toy games Eve’s strategies dove hawk dove hawk Prisoners’ Dilemma
Eve chooses a column…either dove or hawk
Prisoners’
Dilemma
Stag Hunt

28. Toy games Adam’s payoffs dove hawk dove hawk dove dove 2 4 hawk hawk 34
hawk
hawk 3 1 3 2
Adam’s payoffs represent whatever he is trying to maximize. For non-economists, it should be explained that any consistent behavior can be modeled as maximizing something.
Prisoners’
Dilemma
Stag Hunt

29. Toy games Eve’s payoffs dove hawk dove hawk 2 3 4 3 dove dove 1 2 hawk1 2
hawk
hawk
In these games, Eve has symmetric payoffs.
Prisoners’
Dilemma
Stag Hunt

30. Toy games dove hawk dove hawk 2 3 4 3 dove dove 2 4 1 2 hawk hawk 3 14 1 2
hawk
hawk 3 1 3 2
Now the description of the game is complete.
Prisoners’
Dilemma
Stag Hunt

31. Nash Equilibria dove hawk dove hawk 2 dove 3 dove 4 3 2 4 1 2 hawk4 1 2
hawk
hawk 3 3 1 2
The circles show best replies. A Nash equilibrium occurs where both payoffs in a cell are circles. Each player is then making a best reply to the other. Two interpretations: The rational solution of a game (if it has one) must be a Nash equilibrium. If an evolutionary process moves in the direction of better replies, it can only stop at a Nash equilibnrium.
To survive, a social contract must coordinate behavior on a Nash equilibrium of the society’s game of life. No external enforcement is then necessary, because Nash equilibria are self-policing. It does not pay Eve to deviate unless Adam deviates first.
There is only one equilibrium in the PD. This worries some philosophers, but is should not worry us, because if the PD were a representation of our game of life, then we would not have evolved as social animals. The Stag Hunt has two equilibria. Why should we be satisfied with the low payoff equilibrium, when a higher payoff equilibrium is available.
Prisoners’
Dilemma
Stag Hunt

32. Coordination Games left right box ball left 1 box 1 1 2 1 2 right ball
box 1 1 2 1 2
right
ball 1 1
But equilibria are not always so easy to rank. The driving game. The battle of the sexes. We need an equilibrium selection device.
Driving Game
Battle of the Sexes

33. Reciprocal Altruism 2 3 2 3 2 2 3 2 1 2 2 3 1 3 1 2 2 3 1 3 1 2 1
The equilibrium selection problem becomes more acute when we move to repeated games that are better representations of real games of life. The reciprocal altruism mechanism then makes large numbers of equilibria available. 3 1
indefinitely repeated Prisoners’ Dilemma 3 1 1 3 1

34. Reciprocal Altruism d h d h 2 3 2 3 2 2 3 2 1 2 2 3 1 3 1 2 2 3 1 3 12 3 2 1 2 2 3 d h h 1 3 1 2 2 3 1 3 1 2 1
The grim strategy is the simplest strategy for the repeated game that sustains an efficient outcome. If both Adam and Eve use the grim strategy, then the result is a Nash equilibrium in which each player always gets a payoff of 2.
Note the need for punishment (or the threat pf punishment) to sustain cooperation. It is the failure to be realistic about this enforcement issue that sinks all the metaphysical approached of which I am aware. 3 1 3 1 1
Grim strategy 3 1

35. Reputation and Trust
Sure I trust him. You know the ones to trust in this business. The ones who betray you, bye-bye.
There is nothing exotic about reciprocal altruism. The Antwerp diamond market. The New York antiques trade.

36. Sharing food is a way of insuring against hunger…
Sharing food is a way of insuring against hunger….vampire bats are an exotic example….evolutionary pressures are particularly strong, because a vampire bat can’t go more than 60 hours or so without blood…vampire bats share blood even with non-relatives---biologists offer this as an example of reciprocal altruism.
Vampire bats share blood on a reciprocal basis to insure each other against hunger.

37. Folk Theorem efficient equilibria current status quo Eve’s payoff
The folk theorem characterizes all of the equilibria that can be achieved by repeating a game indefinitely often. Note that there are many efficient equilibria that represent an improvement on the current social contract (or state of nature). Which equilibrium should be chosen?
current status quo
Adam’s payoff

38. Equilibrium selection
Fairness is evolution’s solution to the equilibrium selection problem.
Just as the solution to the equilibrium selection problem in Japan is to drive on the left, and in France is to drive on the right, fairness is evolutions solution to the equilibrium selection problem in our ancestral (repeated) game of life.

39. 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.
The enforcement issue again…

40. 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
So I claim…

41. John Rawls’ original position
Veil of ignorance
Comparison of welfare
Enforcement
How does fariness work? I argue that fairness is like language in having a deep structure that is biologically determined and so is universal in the human species. I think the deep structure is captured in a stylized form by Rawls’ original position. Describe the original position. The matron who represents justice has all the necessary elements. The blindfold is the veil of ignoraqnce. The scales are to weihg one person’s welfare against another. The sword represents the enforcement mechanism without which justice is powerless. As Thomas Hobbes said: Covenants without the sword are but words.

42. Original Position Adam Eve Oskar John
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. deep structure of fairness?
implicit insurance contracts
implicit insurance contracts
deep structure of fairness?
How did fairness evolve…need a story with no hopeful monsters. What is involved in the implicit insurance contracts that have evolved among vampire bats. Tell the story of Adam and Eve foraging.

44. implicit insurance contracts
deep structure of fairness?
original position
original position
Observe that the deep structure of the original position is the same as that of an implicit insurance contract. The neural wiring for one can be adapted to the second use.

45. implicit insurance contracts
Who is right?
original position
external enforcement
self-policing
Harsanyi invented the original position around the same time as Rawls. But Rawls wrote his Theory of Justice to discredit the ultiliarianism to which Harsanyi was led. Who is right? In the presence of external enforcement, the answer is Harsanyi. But if recognize that there is not external enforcement----everything must be self-policing----one is led to an egalitarian outcome not too different form that advocated by Rawls.
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
There is empirical evidence in support of Aristotle. The body of psychological work is said to be “modern” equity theory.
status quo
Adam

47. implicit insurance contracts
original position
cultural evolution
external enforcement
self-policing
Where do people get their empathetic preferences from? They are determined by cultural evolution. We must expect that in different times and places and different contexts, cultural evolution will generate different standardes of interpersonal comparison.
utilitarianism
egalitarianism
standard of interpersonal comparison

48. Utilitarianism and Egalitarianism
Eve’s payoff
utilitarian outcome
egalitarian outcome .
state of nature . .
Utiltarianism requires maximizing a weighted sum of the players payoffs.
Egaltiarianism requires equalizing the weighted gains over the state of nature…the current social contract.
But where do the weights come from?
Adam’s payoff
The slopes are determined by the standard of interpersonal comparison.

49. Utilitarianism and Egalitarianism
Eve’s payoff
utilitarian outcome
egalitarian outcome . . .
Utiltarianism requires maximizing a weighted sum of the players payoffs.
Egaltiarianism requires equalizing the weighted gains over the state of nature…the current social contract.
But where do the weights come from?
Adam’s payoff
The slopes are determined by the standard of interpersonal comparison.

50. Utilitarianism and Egalitarianism
Eve’s payoff
utilitarian outcome
egalitarian outcome . .
Utiltarianism requires maximizing a weighted sum of the players payoffs.
Egaltiarianism requires equalizing the weighted gains over the state of nature…the current social contract.
But where do the weights come from?
Adam’s payoff
The slopes are determined by the standard of interpersonal comparison.

51. Utilitarianism and Egalitarianism
Nash bargaining solution . .
Utiltarianism requires maximizing a weighted sum of the players payoffs.
Egaltiarianism requires equalizing the weighted gains over the state of nature…the current social contract.
But where do the weights come from?
The slopes are determined by the standard of interpersonal comparison.

52. Cultural Evolution: Egalitarian Case
Nash bargaining solution .
egalitarian solution . .
Utiltarianism requires maximizing a weighted sum of the players payoffs.
Egaltiarianism requires equalizing the weighted gains over the state of nature…the current social contract.
But where do the weights come from?
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 deep structure, but the standard of interpersonal comparison that is necessary as an input to the original position is culturally determined.

54. Moral relativism Need Ability Effort Status
However, my theory offers a handle on how the standard of interpersonal comparison is likely to vary with need, ability, effort and statusin different cultural contexts.
Social indices always respond to these parameters in the same way, but the degree of response varies with a society’s cultural history.

55. Reform?
What is the point of all this? If we can understand how our sense of fairness is wired up, perhaps we can learn to use it for larger issues that those for which it originally evolved. But we need to be realistic about power…no use advocating social contracts that are not in equilibriium because they won’t work. So Moore’s utopia and all the other utopias are out of our reach. In economic jargon, we are a second-best species capable of sustaining only second-best social contracts, If we aim unrealistically at first-best outcome, the inevitable result is that we finish up with some third rate or worse regime. We must also be realistic about the standard of interpersonal comparison when making appeals to fairness---for example, when deciding how to ration health provision in the NHS. People won’t be persuaded that something is fair if you use some metaphysically derived standard, rather than the standard people actually have.

56. Evolutionary Drift Sewell Wright antifitness local optimum
characteristic
Daniel Weissman et al
The Rate at which Asexual Populations Cross Fitness Valleys Theoretical Population Biology 10 (2009),