Social dilemma
People do not take adequate account of the effects of their decisions on others
Strategic interaction
When people are engaged in a social interaction and are aware of the ways that their actions affect others
Strategy
An action that a person may take when that person is aware of the mutual dependence of the results for herself and for others
Games
Models of strategic interactions
Division of Labor
The specialization of producers to carry out different tasks in the production process
Payoffs
The benefit to each player associated with the joint actions of all the players
In a simultaneous one-shot game:
A player chooses an action taking into account the possible actions that others players can take
Best response
Strategy that yields the highest payoff
Dominant strategy equilibrium
every player plays his or her dominant strategy
Dominant strategy
Action that yields the highest payoff for a player, no matter what the other players do
Strictly dominant strategy
The payoff from playing s is strictly greater than the payoff from playing s’
Weakly dominant strategy
The payoff from playing s is no less than the payoff from playing s’, AND against at least one strategy of the opponent, the payoff from s is strictly greater than the payoff from s.
Pareto efficiency
- Not possible to make at least one better off without making anyone else worse off by moving from that outcome to another feasible outcome
- Is Pareto efficient if no other feasible outcome is Pareto superior to it
Nash equilibrium
- A set of strategies (one per player), such that each player’s strategy is the best response to the strategies chosen by everyone else
- No player has an incentive to deviate unilaterally
Prisoner’s dilemma
A game with a dominant strategy equilibrium, in which playing the dominant strategy
yields lower individual and total payoffs compared to other strategies
Social preferences
Preferences that place a value on what happens to other people, even if it results in lower payoffs for the individual
Free ride
- Benefiting from the contributions of others to some cooperative project without contributing oneself
- Dominant strategy
What solves free riding
Altruism
Inequality aversion
Disliking outcomes in which individuals receive more than others
Reciprocity
Being kind/helpful to others who are kind/helpful and vice versa
Social norms
Common understanding of how to act in situations when one’s actions affect others
The invisible hand
Anil and Bala chose their crops in pursuit of their own interests. Their engagement in the village market resulted in a mutually beneficial division of labor
Repeated prisoner’s dilemma
They may refrain from using Terminator for pest control because they recognize the future losses they would suffer as a result of abandoning IPC
Public goods game
Players’ willingness to punish others sustained high levels of cooperation in many countries, without the need for agreements
