Monday, July 5, 2010

Even coercion is Pareto efficient

Much of Economics is based on the premise that property rights are well established, in particular that contracts are either enforced, or self-enforcing. But what if you have to deal with agents with no respect for property and armed with mallets?

Harold Houba and Hans-Peter Weikard describe what they term a "stone age equilibrium." It emerges when exchanges can be coercive, but also voluntary and is thus and intermediate between the Walrasian equilibrium (purely voluntary) and the "jungle equilibrium" of Piccione and Rubinstein (purely coercive). In a stone age equilibrium, no one prefers to take from a weaker agents, and there are no bilateral gains from trade. Interestingly, such an equilibrium can feature gifts and withholding goods. In other words, pretty much anything can happen. Required reading for all doomsday sayers and survivalists.

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