Theoretical model of institutional ecosystems and its economic implications

Abstract

Previous game-theoretic studies of institutions have viewed institutional changes as either exogenous changes in game form or changes in the game equilibrium through exogenous shocks. Both views of institutions are static and cannot express endogenous changes in institutions. The latter approach states that multiple institutional systems can be kept stable through institutional complementarity and that the changes in institutional systems only arise from exogenous shocks that are sufficiently large to overturn such complementarity. However, they cannot account for the aspects of competition and co-existence where multiple institutions change their relative frequency through endogenous changes. In this article, we model the ecological systems of institutions, as an extensive synthesis of replicator dynamics and evolutionary games, to describe institutional systems that evolve phylogenetically associated with changes in population structure or a pool of rules as replicators, which corresponds to a gene pool. A mathematical model of rule ecosystem dynamics describes rule dynamics wherein multiple rules change their relative weights through evaluations by individuals. In this model, the concept “a meta-rule = an individual value consciousness” is introduced for the rule evaluation. Depending on the setting of the meta-rule, the dynamics of the game rules and individual strategic rules change. We can thus comprehend the endogenous formation, alteration, and extinction (i.e., the evolution of institutions) through the interactions among the game rules as well as those between the game rules and strategic rules. Many other studies focus on how rational individuals select strategies to maximize their payoffs without considering the bounds of rationality. Even when considering these, individual cognitive frameworks and values are typically given. By contrast, this study assumes that individuals have internal rules that express cognitive frameworks and values as meta-rules and analyzes the dynamic interactions between institutions, as social external rules at the meso level, and strategic rules and value consciousness, as individual internal rules at the micro level. In our model, institutional changes do not arise as game equilibria (i.e., players’ selection of strategies in a game), but rather as the rise and fall of game forms, as various rules, in multi-games based on a meta-rule. This view is based on an evolutionary approach where socio-economic evolution is considered to be a selection of rules and institutions rather than that of individuals or their strategies. We discuss the implications of the model of institutional ecosystems on the description of the socio-economy and its evolutionist institutional design.