The economic ethics of social dilemmas

Sören Buttkereit and Ingo Pies

No 2006-2, Discussion Papers from Martin Luther University of Halle-Wittenberg, Chair of Economic Ethics

Abstract: Economic ethics is a research program that employs instruments of economic analysis in order to reflect upon problems of morality, e.g. the legitimization of market and state in shaping individual conduct. From the perspective of economic ethics, this paper examines the concept of social dilemmas and its significance for understanding – and improving – the institutional structures of modern society. A social dilemma is a situation, in which all actors behave according to their individual interests but the outcome is Pareto-inferior. The archetype of a social dilemma is the prisoners' dilemma that has become famous as a centerpiece of game theory. However, while game theory looks at optimal strategies for individual players in the interaction with others, economic ethics analyzes the institutional conditions of the interaction from a social perspective. It employs the concept of social dilemmas as a heuristics to identify changes in the rules of the game that improve the overall outcome. In light of this approach, economic ethics is concerned with transforming the outcome of strategy combinations rather than trying to modify individual strategies. This can either imply establishing a social dilemma or overcoming it, depending on the effect of cooperation on a third party. This approach involves changing the payoffs for actors by introducing rewards or penalties through either external authority or through actors' selfcommitment. The optimal choice of method depends on the type of situation, the existence of an effective authority and the available incentives. Thus, understanding the economic logic of social dilemmas is vital for assessing the legitimacy of institutional arrangements.

Date: 2006
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