Evolutionary implementation with partially effective institutions

Abstract

We consider large population models of a public goods game and a tragedy of the commons. A planner applies externality pricing in these models. However, institutions in society are only partially effective. Hence, the externality price does not compel agents to internalize externalities fully. The resulting externality-adjusted game with partially effective institutions is a potential game. Evolutionary dynamics converge to its Nash equilibrium. More effective institutions bring this Nash equilibrium closer to the original Pareto efficient state. We trace the effectiveness of institutions to a primeval Tullock contest over natural resources in society. The society’s institutional structure arises from the contest’s Nash equilibrium. The institutional structure is more inclusive if natural resources in the contest are less appropriable. Institutions are then also more effective in implementing externality pricing.