Joint KULeuven and ULB seminar
John Roemer, Yale University
How we cooperate: A theory of Kantian optimization
(in press, Yale University Press)
Abstract: Standard game theory’s explanation of cooperation is based upon threatened punishment of non-cooperators in a multi-stage game, which induces a Nash equilibrium in which cooperation is observed. Thus, cooperation is explained as a specie of non-cooperative equilibrium. Behavioral economics, on the other hand, explains cooperative behavior by inserting ‘exotic’ agruments into preferences (altruism, fairness, warm glow, etc.), and again deduces cooperation as a Nash equilibrium in a game with non-standard preferences. In both variants, cooperation is envisaged as achievable as a Nash equilibrium.
It is intellectually dissatisfying to model cooperation as a special case of competition, mindful of Ptolemy’s attempt to theorize planetary motion as geocentric. Economic theory has paid too little attention to our cooperative behavior; the way to rectify this lacuna is not to view cooperation as a special case of non-cooperation (i.e., a Nash equilibrium) but to recognize that it requires introducing a different way of optimizing. I propose that when individuals cooperate, they use a Kantian optimization protocol, but with standard, non-exotic preferences. Payoff matrices describing games are unchanged, but players view other players as part of the action, rather than as part of their environment. The Kantian protocol does not insert morality into preferences, but into the optimization protocol, and these are distinctly different approaches. We deduce cooperation in one-shot games in Kantian equilibrium. Kantian optimization resolves the two major failures of Nash equilibrium in games with (positive or negative) externalities: the free rider problem and the tragedy of the commons. While Nash equilibria are inefficient in both kinds of game, Kantian equilibria, in both cases, are Pareto efficient.
When Kantian optimization is inserted into the general equilibrium model, it resolves a number of classical market failures: the under-supply of public goods, the over-supply of public bads, and the deadweight loss of income taxation. Phenonmena that we are used to calling ‘market failures’ come to be viewed, instead, as failures of Nash reasoning.