Justice, Institutions, and Multiple Equilibria

ABSTRACT Schelling's concept of the focal-point effect in games with multiple equilibria is among the most important ideas in social theory. When justice is recognized as a criterion for identifying focal equilibria, we see how justice can affect the rational behavior of selfish economic actors. The foundations of political institutions can be understood in terms of focal equilibrium selection in a more fundamental game. This paper probes these ideas with some simple game-theoretic examples. Multiple equilibria are analyzed in a rival-claimants game, and this coordination game is extended to simple models of property rights, political institutions, boundaries, and economic investment. I. INTRODUCTION How can justice influence the decisions of a rational economic agent? In this paper, I seek a fundamental perspective on this question by considering some simple game-theoretic models where people's treatment of each other may be rationally guided by considerations of justice. In particular, this paper argues that the rational supply of justice is essentially connected with questions of multiple equilibria in games. More broadly, I argue here that the foundations of any social institution may be understood in terms of more fundamental games that have multiple equilibria. Questions about the supply of justice are ancient in the literature of social philosophy. We may begin with a definition of justice cited in Book 1 of Plato's Republic: that justice is giving each person what is due to him.1 But it is difficult for economic theorists to accept Plato's subsequent suggestion that a good society could create an ample supply of justice simply by educating its rulers to love justice above all else. Such ideas of culturally-determined endogenous preferences are very hard to assimilate into economic analysis because they hold the potential of trivializing all our questions about designing or reforming social institutions. It is an economist's job to develop methodologies for analyzing how changes in the structure of institutions may affect people's behavior and welfare. In such questions, we do not want to assume that the problems of poverty could be solved simply by educating the poor to develop a taste for their plight. Virtually any institution could generate better social outcomes if everyone could be motivated solely by a benevolent desire to raise the aggregate welfare of the whole society. To avoid such trivialization of questions about institutional reforms, most economic analysis has been based on a restrictive assumption that individuals' fundamental motivations are generally selfish and materialistic. If an institution cannot perform well under such an assumption, then we have grounds for seeking to reform it. The great successes of economic analysis have been based on this approach. But if everyone is a selfish materialist, then how can anyone be motivated to treat another person better simply because such better treatment is justly "owed" to him? If there were only one decisionmaker in the world, then a person who does not intrinsically care about behaving justly could be induced to respond to demands of justice only if he were otherwise completely indifferent among his behavioral options. Such complete indifference could not provide more than a fragile basis for the supply of justice. But when we consider games with many decisionmakers, we often find multiple equilibria. That is, many different patterns of behavior among the players may be rationally sustained as unique best responses to each other. In such situations, criteria of justice may be a crucial determinant of each individual's rational behavior precisely because he expects everyone else's behavior to be influenced by the same concepts of justice. Thus, justice may be rationally supplied by selfish individuals because justice is a criterion for selecting among equilibria of a game. Although this point is simple, it may have been relatively neglected in economic literature because of a methodological bias against studying games that have many equilibria. …