Collective‐Action and Exchange: g
a Game‐Theoretic Approach to Contemporary Political Economy
Contemporary Political Economy
in progress for Stanford University Press
William D. Ferguson
Professor of Economics
Professor of Economics
Grinnell College
Ferguso1@grinnell.edu
FFor the Workshop in Political Theory and Policy th W k h i P liti l Th
d P li
Analysis, Indiana University
September 27, 2010
“Explaining
Explaining successful and unsuccessful efforts successful and unsuccessful efforts
to engage in collective action to overcome social dilemmas should be a high priority for
social dilemmas should be a high priority for institutional theorists.” – Elinor Ostrom
Thesis
• Collective‐Action Problems create market failure;;
• The ability to resolve CAPs underlies market success; CAPs thus underlie economic development
• Focusing on CAPs as a unifying theme, this book uses a game‐theoretic modeling approach to unify diverse theoretical work in contemporary political economy
theoretical work in contemporary political economy
• Developments from new institutional theory, information econ, behavioral econ, network theory
• Asymmetric information, power, motivation & social preference, social norms, formal institutions, 2 and 3 party enforcement development
party enforcement, development
Audience
• Advanced
Advanced undergraduates (who have had undergraduates (who have had
game theory)
• Background, context, modeling approach, & Background context modeling approach &
theory for graduate students in economics, policy political science and related disciplines
policy, political science, and related disciplines
This talk
This talk
•
•
•
•
Outline the book by chapter
Outline
the book by chapter
First quick list of chapters
Then comments on each chapter
h
h h
Emphasis on earlier sections, reciprocity, and social norms
Basic Outline: Chapters
Basic Outline: Chapters
Part I: The Significance and Context of Part
I: The Significance and Context of
Contemporary Political Economy
• Thesis; literature; plan of book
Thesis; literature; plan of book
1) Introduction: Overview
2) Domains of Innovative Theory
Part II: Problems of Collective Action and Motivation of Agents
d M ti ti
fA t
(Foundations – Micro Picture)
2) Th
The Basic Economics of Collective Action
B i E
i
f C ll i A i
3) Enforcement, Coordination, and Second‐
O d C ll i A i P bl
Order Collective‐Action Problems
4) Seizing Advantage: Strategic Moves and P
Power in Exchange
i E h
5) Basic Motivation: Rational Egoists and R i
Reciprocal Players
l Pl
6) Foundations of Motivation: Rationality and S i lP f
Social Preference
Part III: Institutions, Enforcement, and Exchange
h
•
7)
8)
9)
Builds on Part II; mechanisms; interactions
Builds
on Part II; mechanisms; interactions
Informal Institutions
S
Second‐Party Enforcement
d
f
Formal Institutions and Third‐Party Enforcement
Part IV: Networks and Dynamics of Collective Action
ll
• Emergent and dynamic properties Emergent and dynamic properties
10)Networks and Political Economy
11)) Agent Based Models and Emergence of d
d l
d
f
Resolution (or not)
Part V: Implications on Policy and Growth
h
• Implications; macro
Implications; macro‐level
level 12)Policy and Political Economy
13)
3) Knowledge, Collective Action, Institutions, l d C ll i
i
i i
Location, and Growth
14) Conclusion: Moving Forward
• Now some details on each
Introduction
• CAPs
CAPs imply market failure
imply market failure
• Resolution of CAPs is necessary for market success
• Resolution CAPs underlies economic potential f
for and quality of development and growth
d
li
fd l
d
h
• Key rationale for policy
• Understanding CAPs is fundamental for policy analysis
y
Chapter 1: Domains of Innovative Theory
h
• Core recent theoretical developments; links to CAPs
• Information Economics: asym info; principal‐agent problems, contracting, enforcement, transact costs, • New Institutional Theory: asymmetric information + New Institutional Theory: asymmetric information +
informal and formal institutions; relations between 2nd and 3rd parties
• Behavioral Economics: social preference, substantive B h i lE
i
i l
f
b t ti
and procedural rationality, relations to social norms
• Network theory: Properties of networks; emergence
y
p
;
g
• Policy Literature: Punctuated‐equilibrium theory
• Game Theory: classical and evolutionary –
• With CAPs unifying conceptual/modeling approach
Wi h CAP
if i
l/ d li
h
Chapter 2: The Basic Economics of Collective Action
ll
• Brief history of thought: Hume, Smith, Coase, e sto y o t oug t: u e, S t , Coase,
Hardin, Olson, Schelling, North, Ostrom
pp
y
• Wide applicability: PG, externalities, CPR, contracting – credible agreements, trust • Two‐Player Games: Public Good, PD as core model; assurance, chicken, battle;
• Variants: returns to scale, benefit/cost conditions, social optima, externalities
i l ti
t
liti
• Illustrate dimensions of/approaches to CAPs
Four Basic Game Diagrams
Four Basic Game Diagrams
• Two
Two‐player
player PD, Assurance, Chicken and Battle
PD Assurance Chicken and Battle
• (Numerical payoffs ranging from ‐1 to 2)
• (in separate Word file)
(i
d fil )
Chapter 2 Continued
Chapter 2 Continued
• Multi
Multi‐player
player games
games
• Basic Public goods equation:
πi = qi – ci + αΣc
Σ j
•
•
•
•
α < 1< Nα
1 N
PD version graph: zero contribution
Externalities: negative →chicken
Positive →assurance; path dependence
→
;p
p
Question of enforcing agreements to cooperate; relations to Coase Theorem and
cooperate; relations to Coase Theorem and Nash cooperative bargaining
Chapter 3: Enforcement, Coordination, and Second‐Order CAPs
d
d d
First and second‐order CAPs
Econ of transactions costs: Coordination and commitment for exchange
Define and enforcing prop rights; North: the key barrier to development
Coordination and assurance (schedules, etc.)
Enforce ,complete information: problem of costs of administering punishment (reward); PG
of administering punishment (reward); PG
• Second‐order CAP
Repetition: t‐f‐t
f t and enforcement; limitations
and enforcement; limitations
• Repetition: t
•
•
•
•
•
•
•
Chapter 3 Continued
Chapter 3 Continued
• Enforcement & contracting with asymmetric information
• Adverse selection, lemons, and coordination failure (perceptions of property rights)
(perceptions of property rights)
• Moral hazard and principal‐agent problems
• Problem of contracting quality; • Requires internal enforcement mechanism; types
• Efficiency wage model; excess supply of labor
• P‐A problems, Table 3‐1; efficiency costs P A problems Table 3 1; efficiency costs
i. Implications on non‐market clearing; power (Ch 4)
ii. Zero‐contribution 2nd‐ and 1st‐order →Ch 5‐9
Chapter 4 Seizing Advantage: Strategic Moves and Power in Exchange
d
h
• Implication of 3: enforcement →power
Implication of 3: enforcement →power
• Definition of power:
– the
the ability of an agent or group to deliberately induce other agents or ability of an agent or group to deliberately induce other agents or
groups to take, alter, or avoid specific actions in a manner that the former believes (perhaps mistakenly) is in its own interest and that the latter would not otherwise pursue
latter would not otherwise pursue
• Power not possible in pure competition
• Implications of chapter 3: power in exchange
Implications of chapter 3: power in exchange
• Economics and formalizing power
Chapter 4 continued
Chapter 4 continued
• Game theoretic representation of Lukes’ 3 faces of power; domains of influence:
• Power 1: altering behavior; Nash cooperative bargaining, given & known parameters
bargaining, given & known parameters
• Power 2: altering rules; strategic moves in GT
• Variation: Triadic Power (Basu) and Power 2
• Power 3: altering beliefs; conditioned power example (Basu)
– Havel’s post‐totalitarian state p
• Power and Political Economy: • Power binds distribution to growth
Chapter 5 Basic Motivation: Rational Egoists and Reciprocal Players
i
d
i
l l
• Begins to address CAP question from ch 3
• Ch 2‐4 assumed traditional (narrow) rationality
Ch 2 4 assumed traditional (narrow) rationality
• Self‐interest axiom (Bowles): self‐regarding, outcome‐
oriented preferences; rational egoists (Ostrom)
• vs. intrinsic reciprocity (Sobel): desire to reward kind and punish unkind
– . . . in response to friendly actions, people are frequently much nicer and much more cooperative than predicted by the self interest model;
much more cooperative than predicted by the self‐interest model; conversely, in response to hostile actions, they are much more nasty and even brutal (Fehr & Gächter)
• Basic Model: ui = πi + κi(aj)πj
• 3 responses: strategic, material r&p; social r&p
• First 2:Public good game; recip alone, add rat egoists, sequential, simultaneous, multi‐player;
sequential, simultaneous, multi
player; • Player type, game structure, ability to sanction & # matter
Chapter 5 Continued
Chapter 5 Continued
• Social rewards punishments (Social exchange)
– Advantages and disadvantages: costs & consequences
Advantages and disadvantages: costs & consequences
– Material consequences or not (pure social exchange)
– Multi‐player assurance; lower tipping point
• Applications/Extensions (scope of R):
/
(
)
– Worker morale: R can foster trust for genuine cooperation in complex jobs; other P‐A problems
– Holdup Problem: R potential resolution; firms seek holdup to signal trust; explicit incentives can crowd out
– Reciprocal conflict: self‐
p
fulfilling expectations of g p
unkindness • R alone not enough; context matters
• > understanding of rationality and social preference: ch
> understanding of rationality and social preference: ch 6
• Institutions → context: ch 7‐9
Chapter 6 Foundations of Motivation: Rationality and Social Preference
l
d
l
f
• Substa
Substantive rationality: consistent goal‐oriented t e at o a ty: co s ste t goa o e ted
with cognition; classical GT w/ app payoffs
y
p
g
• Procedural rationality: adaptive learning; evolutionary GT
• Social Preference with substantive rationality
– Other‐regarding and procedure‐regarding pref
– Intrinsic reciprocity; distributional preference‐‐
inequality aversion; pure altruism or spite; variations
inequality aversion; pure altruism or spite; variations
– More sophisticated models of R & with distribution
– Importance of strategic context for recip. response
Importance of strategic context for recip. response
Chapter 6 Continued
Chapter 6 Continued
• Positive
Positive and Negative Reciprocity
and Negative Reciprocity
– Holländer: social exchange, approval and PG
– Bowles and Gintis: altruistic punishment Bowles and Gintis: altruistic punishment
• Substantive Rationality and Incomplete Information
– Potential breakdown
Potential breakdown
• Procedural rationality
• EGT as modeling foundation for adaptive learning
EGT as modeling foundation for adaptive learning
– Indirect evolutionary models
– Behavioral models
B h i l
d l
Part III: Institutions, Enforcement and Exchange
h
• Builds
Builds upon all of Part II→ Fuller ans to ch 3
upon all of Part II→ Fuller ans to ch 3
• North’s critique of conventional approach to rationality
• Institutions, rules of the game, informal and f
formal, contrast with organizations
l
ih
i i
i. Structure incentives, ii. Reduce uncertainty by aiding predictability
iii Shape cognition and preferences
iii.
hape cognition and preferences
Chapter 7 Informal Institutions
Chapter 7 Informal Institutions
• Coordinating conventions and Social Norms
• Young’s enforcement mechanisms:
i. Shared expectations on coordination
ii Social sanction
ii.
Social sanction
iii. Internalization (belief in SN)
• C Conventions use i; ethically neutral, shared strategies
• SN: use ii and iii (& maybe i): • behavioral regularity concerning behavior towards others p
p
g
g p
that serves as an ethical prescription among some group
• Context specific (seat on crowded bus)
• Basu: ESN (ii), PCN(iii), and RLN (iv – not consider alts)
Chapter 7 Continued
Chapter 7 Continued
• Problems of Coordination & Enforcement
– Driving game; focal points; schedules etc.
– 4 enforcement mechanisms (increasing breadth) (F 7‐2)
CCn, Social Enforce, Internalization, Rationality Lim
CCn, Social Enforce, Internalization, Rationality Lim
– Longevity
• Models of SN enforcement
–P
Pure internalization: weak, intermediate, strong
i t
li ti
k i t
di t t
– Principled players and rational egoists
– Indirect evolutionary model mixed types strong internalization among some reduces fitness
– Fitness outcomes relate to role of reciprocity
– Add reciprocal types (work in progress); discipline r‐es
p
yp (
p g
);
p
– SN Allow larger groups
Chapter 8: Second‐Party Enforcement & Evolution of Social Norms
l
f
l
• Merge
Merge together asymmetric informaiton, together asymmetric informaiton
incomplete contracting, power, social preference & social norms to model second‐
preference, & social norms to model second
party enforcement
• Limitations of second‐party enforcement
Limitations of second party enforcement
• Adaptive learning and the evolution of social norms EGT models
EGT
d l
Chapter 9 Formal Institutions and Third‐Party Enforcement
h d
f
• North:
North: complex exchange requires 3
complex exchange requires 3rd Party Party
enforcement
• Interactions between 2
Interactions between 2nd and 3
and 3rd parties
– Legitimacy and crowding out
– Basu on law and economics: Law can enforce only B
l
d
i L
f
l
what in principle SN could indicate; li it
limits on deviations from existing SNs
d i ti
f
i ti SN
– Difficulties of amending SN and efficiencies of law
• Implications: why policy is difficult
Part IV Networks and Dynamics of Collective Action
ll
Chapter 10 Networks and Political Economy • Basic Network Theory: as c et o
eo y:
– links, hubs, random and scale‐free models
– Growth, disturbances, diffusion, and stability
• Firms as Networks
– Internal org, subcontracting & enforcement
– Consumer and producer networks
• Markets as Networks
• Networks, Spatial Location, and Growth
• Networks, Influence and Power
Chapter 11 Agent‐Based Models and the Possible Emergence of Resolution
h
bl
f
l
• Principles of Agent‐Based Modeling
–
–
–
–
Complexity & the concept of emergence (Epstein)
Evolutionary GT and Agent‐based modeling
Simulations as tools of analysis
Simulations as tools of analysis
Notes on software
• Examples
–
–
–
–
–
The evolution of norms of fairness
Public goods and collective action
Schelling’s model of residential segregation
g
g g
Becker’s model of worker prejudice
Minsky’s model of financial contagion; sub‐prime mortgages
Chapter 11 Continued
Chapter 11 Continued
• Implications for Political Economy
Implications for Political Economy
– Emergence, collective action, and exchange
– Evolution of social norms and second‐party Evolution of social norms and second party
enforcement
– Evolution of formal institutions
Evolution of formal institutions
– Distribution, power, and growth
Part V Implications on Growth and Policy
l
Chapter 12 Policy and Political Economy
• CAPs as a key rationale for policy
CAPs as a key rationale for policy
– Market failure, 2nd and 3rd Party enforcement
• The policy process as a set of CAPs
The policy process as a set of CAPs
– Advocacy coalitions, punctuated equilibria, agendas selection policy outcomes
agendas, selection, policy outcomes
• CAPs and Implementation
– Bureaucrats, legitimacy, and social norms
– Law and economics again
Chapter 12 Continued
Chapter 12 Continued
• Policy and networks
y
– Coalitions, punctuated equilibria, implementation, diffusion
• Policy & the P‐E of Institutional Development
P li & th P E f I tit ti
lD l
t
Embedded policy: policy, social norms, 2nd & 3rd parties
Policy as remedy or impediment to resolution of CAPs
Policy as remedy or impediment to resolution of CAPs
Design, accident, intended, and unintended consequences
Policy, distribution & the problem of commitment
Policy, punctuated equilibria, and path‐dependent evolution of institutions
– A few general principles for policymaking g
p
p
p y
g
–
–
–
–
–
Chapter 13 Knowledge, Collective Action, Institutions, Location &Growth
h
• Neoclassical and endogenous growth
Neoclassical and endogenous growth
• Implications of non‐rival knowledge
– Complementarity, increasing returns, clusters, and Complementarity increasing returns clusters and
location of production
– Poverty traps, growth circles, and development
• Games and Illustrations
– Silicon Valley vs. rural Appalachia
y
pp
– Multi‐player Assurance
– Agent‐based models
Chapter 13 continued
Chapter 13 continued
• Institutions, CA, knowledge, and LR growth
Institutions CA knowledge and LR growth
– Institutions as the fundamental source (AJR)
– Collective‐action, clusters, spatial location
Collective action clusters spatial location
• Power, distribution, commitment, institutions, and LR growth
d LR
th
Chapter 14 Conclusion and Moving Forward
d
• The
The political economy of economic political economy of economic
development
– Draw together arguments to reiterate core thesis Draw together arguments to reiterate core thesis
that CAPs lie at the foundation of market success, failure and ultimately the potential for and quality y
p
q
y
of economic development and growth
• Directions for future development
p