This paper analyzes the strategic and intertemporal interaction between two economic agents who have "overlapping" concerns, such as altruistic concerns for each other's welfare. The agents may be two individuals, a social bureau and a client, or two units in an organization. We show how the presence of such common concerns may lead to socially inefficient outcomes, in which one economic agent "free rides" on the other's concern. We also briefly how this inefficiency and free-riding, in the context of interaction between individuals, might be mitigated by compulsory social security systems. As another example we interpret the inefficiency in terms of Kornai's "soft budget constraints" within organizations.

This paper provides deterministic approximation results for stochastic processes that arise when ¯nite populations recurrently play ¯nite games.The deterministic approximation is de¯ned in continuous time as a system of ordinary di®erential equations of the type studied in evolutionary game theory.We establish precise connections between the long-run behavior of the stochastic process, for large populations, and its deterministic approximation.In particular, we show that if the deterministic solution through the initial state of the stochastic process at some point in time enters a basin of attraction, then the stochastic process will enter any given neighborhood of that attractor within a ¯nite and deterministic time with a probability that exponentially approaches one as the population size goes to in¯nity.The process will remain in this neighborhood for a random time that almost surely exceeds an exponential function of the population size.During this time interval, the process spends almost all time at a certain subset of the attractor, its so-called Birkho® center.We sharpen this result in the special case of ergodic processes.

This paper investigates stability properties of evolutionary selection dynamics in normal-form games. The analysis is focused on deterministic dynamics in continuous time and on asymptotic stability of sets of population states, more precisely of faces of the mixed-strategy space. The main result is a characterization of those faces which are asymptotically stable in all dynamics from a certain class, and we show that every such face contains an essential component of the set of Nash equilibria, and hence a strategically stable set in the sense of Kohlberg and Mertens (1986).

Language is a powerful coordination device. We generalize the cheap-talk approach to pre-play communication by way of introducing a meaning correspondence between messages and actions, and by postulating two axioms met by natural languages. Players have a lexicographic preference, second to material payoffs, against deviating from the meaning correspondence. Under two-sided communication in generic and symmetric n × n-coordination games, a Nash equilibrium component in such a lexicographic communication game is evolutionarily stable if and only if it results in the unique Pareto efficient outcome of the underlying game. We extend the analysis to one-sided communication in arbitrary finite two-player games.

This paper analyzes the strategic and intertemporal interaction between two economic agents who have "overlapping" concerns, such as altruistic concerns for each other's welfare. The agents may be two individuals, a social bureau and a client, or two units in an organization. The authors show how the presence of such common concerns may lead to socially inefficient outcomes, in which one economic agent "free rides" on the other's concerns. They also brief ly discuss how this inefficiency and free riding, in the context of interaction between individuals, might be mitigated by compulsory social security systems. As another example, the authors interpret th e inefficiency in terms of Janos Kornai's "soft budget constraints" within organizations.

What preferences will prevail in a society of rational individuals when preference evolution is driven by the resulting payoffs? We show that when individuals' preferences are their private information, a convex combination of selfishness and morality stands out as evolutionarily stable. We call individuals with such preferences homo moralis. At one end of the spectrum is homo oeconomicus, who acts so as to maximize his or her own payoff. At the opposite end is homo kantiensis, who does what would be “the right thing to do,” in terms of payoffs, if all others would do likewise. We show that the stable degree of morality—the weight placed on the moral goal—is determined by the degree of assortativity in the process whereby individuals are matched to interact.

We analyze how family ties affect incentives, with focus on the strategic interaction between two mutually altruistic siblings. The siblings exert effort to produce output under uncertainty, and they may transfer output to each other. With equally altruistic siblings, their equilibrium effort is nonmonotonic in the common degree of altruism, and it depends on the harshness of the environment. We define a notion of local evolutionary stability of degrees of sibling altruism and show that this degree is lower than the kinship-relatedness factor. Numerical simulations show how family ties vary with the environment, and how this affects economic outcomes.