Global Challenges

Individual Decisions in a Social Context

Individuals maximize utility, but preferences include morality, duty, and social identity, not only self-interest.

Social Preferences

Altruism and duty increase willingness to contribute to collective goods; selfishness causes free-riding.

Utility Interdependence

One person’s utility depends on others’ welfare or actions.

Trust and Honesty

They reduce transaction costs and make contracts and cooperation easier.

Shared Understanding

Common beliefs about meanings, rules, or fairness that allow coordination.

Common Awareness

When everyone knows that everyone knows a fact—key for coordination.

Norms and Culture

Stable norms reduce uncertainty and make cooperation possible, but bad norms can trap societies in low-trust equilibria.

Coordination Game

A game with multiple equilibria where success depends on aligning expectations.

Social Dilemma

A situation where individually rational actions lead to collectively bad outcomes.

Nash Equilibrium

A state where no player can improve their payoff by unilaterally changing strategy.

Focal Point (Schelling Point)

The outcome people naturally converge on because it seems most obvious or legitimate.

Institutions Change the Game

Institutions alter payoffs, preferences, or expectations to make cooperation rational.

Authority in Coordination

Authority centralizes decision-making and provides a focal point, reducing coordination costs.

Coercion in Economics

The use of enforcement or punishment to make compliance rational.

Formal vs Informal Institutions

Formal institutions use laws and coercion; informal ones rely on norms and trust.

State Formation

States form to escape anarchy by providing enforcement, public goods, and conflict resolution.

Hobbes vs Locke

Hobbes emphasizes coercion for order; Locke emphasizes legitimacy and consent.

Mechanisms of Cooperation

Morality (intrinsic motivation), social pressure (status and reputation), and coercion (enforcement).

State Capacity

The government’s ability to enforce laws, collect taxes, and provide public goods.

Sustainability Insight (Dasgupta Review)

Economic prosperity depends on maintaining natural capital and biodiversity.

World Trade Organization (WTO)

Provides rules and a dispute-settlement mechanism to promote global trade and reduce protectionism.

Climate Change Game

A global social dilemma where individual countries gain from free-riding on others’ emission cuts.

Montreal vs Kyoto

Montreal aligned incentives with sanctions and subsidies (coordination game); Kyoto lacked enforcement (social dilemma).

Naming and Shaming

Use of reputation and social pressure instead of coercion to encourage compliance.

Global Inequality Causes

Differences in returns to capital, globalization, and institutional quality drive inequality.

Evaluating Inequality

Selfish people care about own income; altruists about total welfare; egalitarians about equality; status-oriented people about relative position.

Inequality and Politics

Unequal societies may form institutions favoring elites, reducing growth and legitimacy.

Institutions (Acemoglu & Robinson)

The “rules of the game” shaping incentives and determining long-term economic performance.

Democratic Backsliding

The gradual erosion of checks and balances, free media, and fair elections in democracies.

Polarization Effects

Polarization lowers trust, weakens legitimacy, and makes coordination on shared goals harder.

Changing the Game in Policy

Modifying incentives, preferences, or expectations so cooperation becomes the rational equilibrium.