Henning Schwardt

Institutional Inertia and Institutional Change in an Expanding Normal-Form Game

We investigate aspects of institutional change in an evolutionary game-theoretic framework, in principle focusing on problems of coordination in groups when new solutions to a problem become available. In an evolutionary game with an underlying dilemma structure, we let a number of new strategies become gradually available to the agents. The dilemma structure of the situation is not changed by these. Older strategies offer a lesser payoff than newly available ones. The problem that agents have to solve for realizing improved results is, therefore, to coordinate on newly available strategies. Strategies are taken to represent institutions; the coordination on a new strategy by agents, hence, represents a change in the institutional framework of a group. The simulations we run show a stable pattern regarding such institutional changes. A number of institutions are found to coexist, with the specific number depending on the relation of payoffs achievable through the coordination of different strategies. Usually, the strategies leading to the highest possible payoff are not among these. This can be taken to reflect the heterogeneity of rules in larger groups, with different subgroups showing different behavior patterns.

Trust and arena size: expectations, institutions, and general trust, and critical population and group sizes

While trust and group size in socio-economic processes have been well investigated separately, approaches to synergize them have been rare. After addressing basic conditions for institutionalized cooperation, the agency capability of preferential mixing is introduced in order to determine the carrier group of an institution of cooperation. That platform typically assumes a meso-size smaller than the initial arena. Habituation and generalization within and across overlapping platforms then may lead to first contextual trust. This has to be carried over from individual platforms into the larger public of the whole economy to constitute general trust. The practical relevance of this analysis is illustrated through the fact that even superficially similar economies show different socio-economic performance and trajectories. Our results suggest investigating their inner deep structure of overlapping meso-sized platforms as a critical factor.

Dynamics, Complexity, Evolution, and Emergence—The Roles of Game Theory and Simulation Methods

This chapter addresses the question how the different methods presented in the preceding chapters, such as simulation, complexity, game theory, and evolutionary game theory relate together. Formal definitions of complexity and emergence are introduced alongside with a short overview over the history of these concepts. A number of related terms including dynamic systems, fixed points, attractors, repellers, ergodicity, limit cycles, fractals, scale-free distributions, deterministic chaos, and bifurcations are also formally defined. The introduction to dynamic systems as given in Chapter 10 is extended to systems of differential equations and nonlinear dynamic systems, an understanding of which is required before approaching a number of the concepts addressed in the chapter. Further, a number of illustrative economic examples including replicator dynamic competition models, gambler’s ruin processes, and the Marx–Keynes–Goodwin growth cycle model are presented. The chapter also addresses the question of the modeling of complex systems.

From Emergent Cooperation to Contextual Trust, and to General Trust: Overlapping Meso-Sized Interaction Arenas and Cooperation Platforms as a Foundation of Pro-Social Behavior

We identify and elaborate some critical factors and mechanisms that foster the emergence of cooperative behavioral patterns. Through institutionalization, which solves social dilemmas through habituation, these factors and mechanisms provide the foundation of contingent cooperation and contextual trust in specific interaction ‘arenas’ and ‘meso’-sized ‘platforms’ (and related carrier groups) in these. This, then, may in turn support the emergence of general trust in the whole population, i.e., across all specific arenas and platforms. The emergence of institutions of cooperation may gain traction more easily in smaller arenas. This, and the transfer, spillover, or generalization to other arenas and platforms, is by no means determined, and the analytical foundation we offer permits to account for the different levels of cooperation, general trust, and socioeconomic performance observable in real-world economies (varieties of capitalisms). Directions of future research, as well as a policy focus, are provided as well.

The (dis-)embedded firm. Complex structure and dynamics in inter-firm relations: adding institutionalisation as a Veblenian dimension to the Coase-Williamson approach

The increasing complexity of the environment of firms seems to have outgrown the traditional Coase-Williamson transaction-cost framework with its market-hierarchy dichotomy. We propose to integrate an institutional dimension to enhance the theory of the firm and the analysis of real-world organisational forms. This institutional dimension is conceptualised as an original institutional (Veblenian) dichotomy that ranges between instrumental cooperative networking and ceremonial encapsulation (lock-in), as power- and status-seeking. Thus, a more comprehensive two-dimensional organisational space is drafted, which can better map the numerous and diverse forms of production and innovation systems, and serve to address questions of their emergence as spatial clusters and corporate networks. In addition to ideal market and hierarchy, it provides the ideal solution of institutionalised network cooperation as a third vanishing point and corner. The resulting organisational triangle is considered a heuristic for inter-firm organisational research. As a check of its usefulness, this device is applied to recent developments in the global corporate economy.

Introduction to the Microeconomics of Complex Economies

This is an introduction to direct interdependence among agents and resulting complexity microeconomics for first- and second-semester levels. It introduces to more or less complex multipersonal decision structures and sorts them after degrees of conflict. It explains basic perspectives on the microfoundations of coordination, the invisible-hand and the fallacy-of-aggregation paradigms. It explains rationality under conditions of strategic uncertainty, characterizes resulting processes as path-dependent, nonergodic, cumulative, and open-ended change, with multiple equilibria. Furthermore, it introduces social rules and institutions as solutions of repeated coordination and social dilemma games, respectively, i.e., not only rationally adopted but also partly habituated and semiconsciously applied, as long as conditions remain the same and no surprise warrants a change of strategy. Coordination and dilemma problems and rules and institutions are introduced as systems of externalities with a public good character. Finally, institutions are explained as instrumental (problem-solving) devices and also as potentially degenerated, i.e., ceremonially warranted behavioral lock-ins.

The Ideal Neoclassical Market and General Equilibrium

This chapter presents the core of neoclassical economic theory, the polypolistic competition model. The calculation of optimal consumer decisions is explained, as is the optimal calculation for companies. Partial market equilibrium and general equilibrium conditions are shown. The conditions for the general equilibrium to exist as a unique and stable equilibrium are described. Some further developments such as intertemporal optimizations are explained. Finally, some extensions in models are shown that include some slight modifications of assumptions, which result in at times substantial differences in results.

Tools II: More Formal Concepts of Game Theory and Evolutionary Game Theory

This chapter offers a concise formal guide to the major concepts of game theory and evolutionary game theory. It starts with a formal definition, also introducing the underlying assumptions and properties of strategic games as well as common forms of notations: formal notation, normal-form notation, and extensive notation. After some brief considerations on decision theory, the chapter presents one-shot game solution concepts including successive elimination of strictly dominated strategies, the Nash equilibrium, and Nash equilibrium refinements in pure and mixed strategies. Further, sequential games, repeated games, and supergames are introduced. This part of the chapter also offers an introduction to subgame perfectness and the folk theorem. The chapter proceeds with a presentation of the different approaches to evolutionary game theory. This includes evolutionary stable strategies as well as replicator dynamics and a number of important auxiliary techniques such as stability evaluation in dynamic systems. All methods discussed in this chapter are illustrated by numerical examples.

The Size Dimension of Complex Economies—Towards a Meso-Economics: The Size of Interaction Arenas and the Emergence of Meso-Platforms of Institutional Coordination**This chapter was coauthored by Claudius Gräbner.

This chapter introduces the size dimension of economic interaction systems as a critical factor of solving complex economic problems through institutionalization. The chapter provides comprehensive literature reviews on the size dimension as used in economics so far and on the use and applications of “meso” and “meso-economics” in earlier economic literature. In an evolution-of-cooperation framework and a population perspective, the sizes of both the relevant population (arena) and the emerging carrier group (platform) matter for the possible outcomes. Agency mechanisms that can lead to preferential matching (partner selection) may permit institutional emergence at lower critical minimum masses. In some constellations, a maximum critical mass below the size of the whole population will turn out to carry the institution. We argue that a transfer of behavior, which has become habituated in some platforms, to other arenas provides the foundation for contextual trust to lead to general trust and thus to a culture of cooperation even among strangers and in one-shot interactions.

Problem Structures and Processes in Complex Economies

This chapter illustrates a categorization of real-world problem structures using different prototypical games as well as an analysis of basic mechanisms that allow agents to realize improved results in social dilemma situations. The basic problem structures range from social optimum games to dilemma games, with a number of different coordination and anti-coordination games in between. Mechanisms for improving agents’ results include approaches based on formal, game-theoretic formulations as well as real-world considerations focusing on emerging institutions. The game-theoretic formulations allow identifying basic mechanisms that may change the problem structure that agents face, thereby enabling the realization of improved results. Real-world agents need further support for a structured improvement of the outcomes of their actions. This support is lend to them by social institutions in case of dilemmas, and less demanding social rules, stabilizing expectations regarding others’ behavior, in the case of coordination problems.