Social Design by Unknown

Author:Unknown
Language: eng
Format: epub
ISBN: 9783319938097
Publisher: Springer International Publishing

1.3 Outline

The purpose of this paper is to relate different concepts of externality to the economic institutions which determine, or at least influence, what outcome to the participating agents emerges.

As argued in Sect. 2, classical externalities come about as a departure from the standard “neoclassical” institutional framework, with complete and perfectly competitive markets for private goods.

Next, Sect. 3 considers pecuniary externalities. As Laffont (2008) correctly observes, unlike classical externalities, they do nothing to upset the usual efficiency properties of equilibrium allocations in competitive markets. They do, however, have a significant influence on gains from trade results.

Section 4 introduces the concept of an institutional externality. Like classical and pecuniary externalities, it captures the idea that one agent’s actions can influence the possibilities open to other agents. With institutional externalities, however, the influence is more subtle. The idea is that, except when the institution can be modelled as a game form in which agents can choose dominant strategies, one agent’s strategy choice can influence what other agents will want to choose. This is what we call an “institutional externality.”

Hurwicz, of course, demonstrated that such strategy-proof mechanisms fail to exist in many economic environments. In this sense, institutional externalities are endemic. Nevertheless, Sect. 4 concludes with some prominent examples of economic environments in which institutional externalities can be avoided.

The final Sect. 5 attempts to put these results in a general perspective.

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