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5 - Endogenous Institutions and Game-Theoretic Analysis

Published online by Cambridge University Press:  05 September 2012

Avner Greif
Affiliation:
Stanford University, California
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Summary

Chapters 3 and 4 illustrate that restricting the set of admissible institutionalized beliefs is central to the way in which game theory facilitates the study of endogenous institutions. Durkheim (1950 [1895], p. 45) recognized the centrality of institutionalized beliefs, arguing that institutions are “all the beliefs and modes of behavior instituted by the collectivity.” But neither Durkheim nor his followers placed any analytic restrictions on what beliefs the collectivity could institute. Because beliefs are not directly observable, however, deductively restricting them, as game theory lets us do, is imperative. The only beliefs that can be instituted by the collectivity – that can be common knowledge – are those regarding equilibrium (self-enforcing) behavior. Furthermore, the behavior that these beliefs motivate should reproduce, not refute or erode them.

Game theory thus enables us to place more of the “responsibility for social order on the individuals who are part of that order” (Crawford and Ostrom 1995, p. 583). Rather than assuming that individuals follow rules, it provides an analytical framework within which it is possible to study the way in which behavior is endogenously generated – how, through their interactions, individuals gain the information, ability, and motivation to follow particular rules of behavior. It allows us to examine, for example, who applies sanctions and rewards that motivate behavior, how those who are to apply them learn or decide which ones to apply, why they do not shirk this duty, and why offenders do not flee to avoid sanctions.

Type
Chapter
Information
Institutions and the Path to the Modern Economy
Lessons from Medieval Trade
, pp. 124 - 152
Publisher: Cambridge University Press
Print publication year: 2006

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