In this chapter, we approach groups from the perspective of “methodological individualism,” in which groups are viewed primarily from the point of view of the individuals who make up the group. We begin our study with a brief overview of the elements of game theory as a formal representation of certain group choice problems, based on the preferences and beliefs of individuals in the group. We then apply the game theory representation of group choice problems to the problems of cooperation and bargaining. We shall also review the experimental literature on cooperation to explore when cooperation is likely to occur under conditions of conflict.
We use this same formal and individualistic methodology to consider certain collective choice problems such as choosing a president for a country or a location for a hazardous facility that must serve several communities in a region. Finally, we introduce the principal–agent paradigm, which has become important in economics and finance for understanding contractual relations between two or more parties.
Introduction to game theory
The theory of games is concerned with formal models of groups of selfinterest- seeking individuals engaged in a common endeavor, but whose members may have different preferences and beliefs about what the group should do. As such, game theory is a formal framework for understanding conflict and conflict resolution. As we shall discuss, game theory can be viewed as either a normative or as a descriptive theory, and it enjoys a rich literature in both theory as well as experimental and field studies.