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Government Vs. Anarchy: Modeling The Evolution Of Institutions

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  • Mittenzwei, Klaus
  • Bullock, David S.

Abstract

This paper gives a general mathematical definition of an institution, and presents an explicit formal method by which to incorporate institutions in a standard general equilibrium model. We illustrate our concept using a modified Prisoner's dilemma game in which property rights over natural resources emerge from an anarchy-like state of nature. Two players decide voluntarily and non-cooperatively whether to give up some fraction of their personal resource to set up an enforcement mechanism that punishes defecting players (i.e., players that do not opt to cooperate). This enforcement mechanism constitutes a credible threat, and is central to the establishment of bilateral cooperation (i.e, government). We highlight the importance of imperfect information (proposition 1) and risk averse behavior (propositions 2 and 3) for bilateral cooperation to be sustained as the unique Nash-equilibrium. Proposition 1 formalizes an idea of Brennan and Buchanan (1985) that the legitimacy of governments is based on their contribution to reducing uncertainty. Proposition 3 justifies an assumption made by Sened (1997) that rational individuals respect governments dictating specific institutions.

Suggested Citation

  • Mittenzwei, Klaus & Bullock, David S., 1999. "Government Vs. Anarchy: Modeling The Evolution Of Institutions," 1999 Annual meeting, August 8-11, Nashville, TN 21496, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea99:21496
    DOI: 10.22004/ag.econ.21496
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    References listed on IDEAS

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    1. Harsanyi, John C, 1995. "Games with Incomplete Information," American Economic Review, American Economic Association, vol. 85(3), pages 291-303, June.
    2. David S. Bullock, 1994. "In Search of Rational Government: What Political Preference Function Studies Measure and Assume," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(3), pages 347-361.
    3. Dixit, Avinash & Olson, Mancur, 2000. "Does voluntary participation undermine the Coase Theorem?," Journal of Public Economics, Elsevier, vol. 76(3), pages 309-335, June.
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