In my last class in the MAREB course in Applied Micro (Javier Asensio takes over in the next few days) I tried to explain the economic role of institutions, borrowing ideas from Samuel Bowles and Masahiko Aoki, and setting the stage for the students to follow and engage in the debate around the book by Acemoglu and Robinson, "Why Nations Fail." I emphasized two ideas:
-That in a game-theoretic analysis of institutions as the rules of the game and also as the equilibrium of previous games, a key component is the combination of allocation and distribution inherent in most interactions (games). Human interactions usually have both a common interest component and a rivarly component (unless they are zero-sum games, but these are unusual). To improve efficiency humans have to agree on how to share the benefits. Elinor Ostrom and Dani Rodrik expressed similar ideas in other contexts. Cearly to me, this is the reason why fixing climate change and solving problems of federalism (for example in the European Union) can only be done from this perspective.
-An important role for institutions is to align beliefs. Without any beliefs about the choices of other interacting agents, we may give equal probabilities to all their potential actions, and then fail to attain outcomes that clearly would be in everybody's interest. Institutions as salient beliefs of how games are played and how games in different domains (economic, political, social) relate to each other are key aspects of how to coordinate into outcomes that are possible but require solving social dilemmas.