| This paper gives a general mathematical definition of an institution, and presents an explicit formal method by which to incorporate institutions in a standard general equilibrium model. We illustrate our concept using a modified Prisoner's dilemma game in which property rights over natural resources emerge from an anarchy-like state of nature. Two players decide voluntarily and non-cooperatively whether to give up some fraction of their personal resource to set up an enforcement mechanism that punishes defecting players (i.e., players that do not opt to cooperate). This enforcement mechanism constitutes a credible threat, and is central to the establishment of bilateral cooperation (i.e, government). We highlight the importance of imperfect... |
