About 25 years ago, Avner Greif and his co-authors set out to study how the rise, mechanics, and decline of certain institutions in the European middle ages can be explained by the help of game theory (Greif 1989, 1993; Greif, Milgrom, and Weingast 1994). Soon it became clear that the theoretical insights gained do not restrict applicability to – notably fascinating – historical institutions and organizational forms. They were applied to other, more modern cases and questions as well.

The key questions studied in this growing literature were, how can opportunistic behavior be avoided in social dilemma situations, where the joint payoffs of the players are maximized under mutual cooperation but it is individually rational to defect and thereby to maximize one’s own payoff at the expense of others? As a consequence, how should institutions be structured such that the incentives of individual players to free-ride on their companions’ efforts are mitigated? […]

The full post can be read here, at sioe.org.