Genesis of social institution
•How existing institutions have emerged
•How to design mechanisms to induce desirable
institutions
Erika Seki
Department of Economics
University of Aberdeen
Examples
•Judicial system (large society)
•Soulmate (medium size society)
•Communal irrigation committee (medium size society)
•SIRE (small society)
Erika Seki
Department of Economics
University of Aberdeen
Timeline of institution formation
1)
2)
3)
4)
Lottery selects a centre
Centre sets a
Individual member decides whether or not to pay a
to become a formal agent or remain to be an
informal agent
All agents are randomly matched to play a PD game
Timeline of institution formation
1)
2)
3)
4)
Lottery selects a centre
Centre sets a
Individual member decides whether or not to pay a
to become a formal agent or remain to be an
informal agent
All agents are randomly matched to play a PD game
•
•
Issue of commitment
Existing level of cooperation:
vaI   x  a 
a  N    1   
•
Size of society: VN ,a  N  a  c 
c
Summary of results
Small 
Large 
Small N
PP3: Full informality is
optimal.
Intermediate N
PP4: Emergence of
inefficient full formality
without collective
commitment.
PP4: Efficient full
formality may not
emerge without
individual commitment
Large N
PP3&5: Full formality is
likely to be optimal but
require collective
commitment.
PP3&4: Full formality is
optimal and
implementable
Nature of social interactions
•One period
•Bilateral random matching
•No possibility of re-matching
Erika Seki
Department of Economics
University of Aberdeen
Nature of social interactions
•One period
•Bilateral random matching
•No possibility of re-matching

•Two periods
•Possibility of re-matching after being matched in the
first period
Erika Seki
Department of Economics
University of Aberdeen
Nature of social interactions
•Possible effect of re-matching
1
N
 N  a  c     
  a  x  a    x  a 
N 1
N 1
•NPV of being formal
commitment

=> a  N   => collective
Erika Seki
Department of Economics
University of Aberdeen
Nature of social interactions
•Trading externality: Diamond (1982)
•Welfare enhancing effect of divorce: Chiappori and
Weiss (2006)
•Option contract
Erika Seki
Department of Economics
University of Aberdeen
Collective production technology
•How endowment invested in interaction produce
output?
•How output is shared?
E.g. use of CPR, partnership
•Collective choice literature:
e.g. Efficient cost sharing in PG production: Roemer
and Silvestre (1989)
2nd best outcome of equal profit sharing in Erika Seki
partnership : Farrell and Scotchmer
(1988)
Department
of Economics
University of Aberdeen
Further questions
•Optimal size of society
•Co-existence of formal and informal agents
•Multiple layered institution
Erika Seki
Department of Economics
University of Aberdeen