CONVENTIONS

We have distinguished between three types of informal institutions according to the enforcement agency: conventions, moral rules, and social norms. Conventions are those social rules that are to a large degree selfpolicing in the sense that, after their emergence, no individual has an incentive to switch from the rule that everyone else is following. For a systematic discussion of conventions, we shall pose the four questions formulated in the previous chapter and we shall attempt to answer them.

1. Why Do Conventions Exist? Social conventions are solutions to social problems that are stylized in game theory as coordination games. The simplest case of a coordination game (two players, two alternatives) is presented in Fig. 5. Two Nash equilibria exist in the game, with either coordinated solution being an equilibrium. In the coordinated cases, no individual can improve his situation by deviating from playing his part in the equilibrium, given that the other individuals play their parts in the equilibrium. This means that if all individuals expect the others to play their parts in the Nash equilibrium, they are all better off when they play their parts in it.

The exemplification of the coordination game makes it clear that coordination problems are interaction situations of interdependent problem solving on the part of the individuals involved.