CHAPTER TWO Spontaneous Order: The Self-organization of Economic Life Such were he Bling of hat See, “hei eines consi o make thes Great, ‘Tos erry Pare wa alo Vie, ‘Ye the whole Mas, Paradiy “The went ofall she Malin id Somehing for the Common Good ‘ternard Manderile The Fable of he Bes or Private Vy, Publick Bont (1705 obser hati wl be for my inert 0 eve ae in she possesion of is goods, provided hearin the same mands wih sad formes. And this may propery Be cal a convention... The stably of possesion «arses ada, andseqie force by a ow rogresion, and by our repeated expen of inconveniences of transgene. In ke manoer ae langue gradually eb’ by haranconsensons without any promise fn ike manner do gol ad ‘siver brome the common messes of exchange. “David Hume, A Tes of Huon Nature, Von I (1739) [ny Mivwaurta, Los Angels, and Cincinnati, over half of hit esi dents, when asked, said they would "prefer to ie in a neighborhood in which 20 percent or more of thee covsidents were Alia Atiesicn (with one in ive prefers equal numbers of each; Clark 1991). Few live in integrated aeighbortoods their peteences were elicited inl ‘ion concecning housing sepregaton in these and othe cites (Most Al rican Americans prefered fty-fty neighborhoods) The respondents imay have mistepresented their preferences, of cours; Dut those st cl seeking integrated neighborhoods would have been disappointed “The housing marke in these cites produced few mixed white-African American neighborhoods evea though these were apparently in sbetan- tial demand. in Los Angeles fr example, irually all whites (more than 90 percent live in neighborhoods wich fewer shan 10 percent “Te Se epizeph cms om Manele 1938) pin on page 24 he ih in [75 Te eond canes om Hae 96425) Spontncous Onder + 57 tack resides, while 70 persent of acs live in neighborhoods wit ac han 20 percent whites (Mare and Beach 201), Why the agre- ‘cul so bxmingly a odde with the debtion of preferences? BS your surpise had I eported shat one inv wanted «Backyard laeing pool end were prepared t pa the going Cost of yet fw ud pool Why doce she abit to pay ge you t poo! but not a ine rast nshborood? ‘Soc ate pene challenges inthe social cence i 0 understand son nggregatectcomes ace oft ferent rom sayone’ tent, some ‘ius ect fs Besnard Mandeville inthe eigaph above and Adam {Ent he opitaph to chape 8 sgget) bat sometmes worse 828 hercan family seeing a multraca! nighborhood might ssp. nies specalze in vnintended consequences an, since Berard Mandevile and David Home, have stiied te way che actions of any wicals acing on hee own produce aggregate ostcomes that 0 dy imended. The many sopbisscrted model of this proces are one {te distinctive contibuons of economics. More important tha the ‘Tove is che ish that no obvious elatonship aks the motives of {Ee people engaging in an iteration andthe noxmatie properties of {Be degree outcomes occuring at rest of the stractons For Stanple what ave cle “invisble Rand arguments show how the Siobomy of good insiions can tanform base motives a valed “nts 0 asin Mander abl, the worst of al the rl {de did something foe the common good.” “Tis beings back to the cassia economists problem of “geting she raes nak Of couse, eve the ight nmitaos ar fo he most yur noe sgn a consttionalconvencons. Rates, parla peop: Tihs and oe forms of economic govereance owe the existence nd the mode of operon tothe pah-dependene consequences of of tCeuncoorinsed snd scidetprone ations of mul of actors ‘ver Tong prod Example lnlude te emergence ad persence of isomary dvsion sles tnd other specs of propery Heh sch Ely Aly op shes and “dare keepers), nom supporting macket, ‘change and the sowertonal ase of pronouns expressing deference Srsokidc ie this capt, 1 wll aks large populations, bow do perstent simctares of nteraction vole tbe absence of debate design? Tis ara modern sarement of the age-old qoeton of sttaionl eve thon: what accounts fr the emergence ifsion nd dsappearance of ‘ti le The cls economist oan erred i how we th acs we have thn in ging se re ight A prominent mod En eaponent ofthe cvoluionaytracion inated by Hume an Sith SS Heder Haye, whore aproachsomeimes ered "the theory ofSh + Chace? spontaneous odes” of “the seloxpanization of socen-” By contrast ta the constwtonal design approach, which posits a benevolent social planner ov other actors seeking to implemen socially optimal aearegate {asus in evolutionary models none of the actors has preferences de ‘ned over aggregate outcomes. "The two traditions —constitusonal and evolutionary —deploy dies. ‘nt analyialtechnigues and distinct metaphor. The “insarutions by. “ksign® tradition represents socal rules as analogous to devices originat. ing i the human imagination, evaluated by teir problem-solving capac iy and implemented if they meet a west ofefcacy. Classical cooperative tnd noncooperative game theory are now the standard analytical tech- igus ofthis approach, noe only by economists but also by philosophers Such as Robest Nozick, John Rawls, and David Gauthier as well By ontast, the spontaneous order tradition sees institutions as analogous fo languages the evolution of socal rue, like the acquisition ot an tceng, i the product of countess interactions, the aggregate conse ‘quences of which ate often unincended. Institutions thus evolve by sia] Gnd eros taking place, as Marx once pot it, behiad the backs ofthe pticipancs, The tle of Richad Dawns’ besseling book ens evo- [etonary proceses to a Blind Watchmaker. But ee evocauie metaphors ‘of Dawkins or Marx do not tll ws what the process, only what its ‘ot, Evolutionary game theory isa way of illuminating ths process and ‘ethe favored analytical echnigue ofthis approach Thogia with an overview of the basic structore of evolutionary res soning. follow that with an example—rsidenrial seeps —de- Signed 10 illutate some ofthe tools of evolutionary modeling I then present formal model ofthe process of diferental replication =the Fepleatr dynamic model. The concepts of evoluionary sabi inc ‘ded in the nexe par along withthe replicator dynamic prove a be- haviral foundation for the Nash equilibrium. To illustrate how these analyecal tools can be used tn dy economicstiutons Then use am txtension ofthe Hawk Dove Game fo mode the evolution of property Fights Teonclude witha critical evaiation ofthe evolutionary approach Evourttonany Soeiat Seumse “We study individual behavior primarily to understand aggregate ests (ue concen snot why this particular person is without a job but with the sate of unemployment; not how serepuloss a ten person icin paying taxes bor the diibution of tax compliance so the poplaton. “derstanding an individuals preferences and belts, and the way inst tutions strate the constraints he faces, allows the prediction of ind Spontaneous Onder + 59 vidual bchavoe. Bot co explain aggregate outcomes we cannot simply Tot the predicted ladividual behaviors, because the actions raken by Ech ipialy alee the constrains, bles, or preferences ofthe others ‘Giving account of thes feedback fects can be dane with populaton- [bel models that link individual actions to outcomes for the popelaion ae whole. ‘By lar che most fully developed population-level approach in the so cial sciences ip the model of general competitive market equilibrium, Streted in dhe mide ofthe ls ceotury by Kenneth Arrow, Gevard Bebeeus Tallin Koopmans, and others. Under rather restrictive as ‘impeions, it aggregates the individual ations of producers and con- ‘Mince vo an economy-wide vector of pies, outputs, andthe lloation ‘Eirasoures to alternative uses, The general equlibium model provides the seing forthe Fandamental Taeocem of Welfare Economics men- ‘Soned in chapter 1 and explored more flly in chapter 6. Simplied ‘ons ofthis model have ateracrd wide application not ony in eco ‘omic bu also in the socal cencesgeezall, whee analogies to com- pettve economic euibiam are found in electoral competition, the urrage market and the Hike. Ihave meationed the modes shortcon figs in the peologue and will retum to shero brill in the pages 0 fallow, especially chapters 6 through 10. ‘Other than the Walrasian generat eculbrium mode, the only flly developed class of popelation level models are those depicting evolu- tionary dynamice of ological systems under the combined influences Uf chance, itheritane, and natural selection, The similarity between the two approaches rriking: both model ystems of competition in which peace or designe with higher payotts probferate. Nos i this sup J: Chacles Darwin (1803-1882) got the idea of natural selection in 158 while reading the dlawsial economist Thomas Malthus (1766~ 41834) The clove association of the two approaches predates even chi the fos explictereatment of an evolonary dynamic in a biological Inedel thet lam aware of (a predatorpeey model of the type made fares by Alfed Loska [1880-1949] and Vio Volera (1860-1940)} teas published jas ten yeare after the Welth of Nation, by Joseph ‘Townsend (1971} in his A Dissertation om the Poor Law by « Well Wher to Mankind. ‘Bue the biologeal model difer in important ways from the eco omic: While biologists employ equilibrium concepts in ways simula 0 ‘conomit, they have given mch more artenton to the explicit model ing ofthe dynamic procenes governing the distribution of ta in 3 population, This ok i feieated by the fac that hey have a model of Ee proven of herable innovation based on mutation and recombins- tion, By contrat, economics hat no generally accepted theory of sano60» Chaper2 cation desi widesprend apron ofa imgomace,Applcton of ‘i 'Welogal moll te hana evo bat reared fg br ‘ine inert Sather ec nove ined toe reap colette acon nade ayo oceans {Se poem othe 12) Ad Utes hat wa opm ton a cheapo nthe enon aprender ‘ent ort inologea odsng vie ewe of seen iyo the proce of competion td les se an op thon doe of scsagas by inde! mene oe ese ‘be cononie moe make cctv dando nal Cpe {Spar the lp ode pedro unans maea o fee Insect enact Wolo creme etes save alaed da fo boy tsa of human popu I wih olay be tuaunit by rig ot wel ge Sat med of hs ent ar eed molar ens by moiig te loge med ake cout of acne he tance, enya ayo kar mou omens tnd om oe Snot fo to spc orange gh ft tao re pte A tcond ran leony gi ey Kt ‘odie tel gaa hy oe oma oo ined cope _ Drs by poslog ron pis el ety ape {2 oer ael liSmton To thf rane ayo Gal evelton ad evar ue ery have ade ey Sire rng pts ose of al etn od cs ge Shon rapes wine ny upmenng he eae ef tent corte proves and dng in he com Tosh lon pa ry nl met fa von de sc th mercado sch bh i ii gn he nan esos ately co "reagent of cnc! gue ec Ada spade Sav Soames sims he my peopl conto ane tc set isp s pute ngage Feowroingpjtrbd sc Saat ily at thee ping upwa ahy may dep Spend stay tcc opty ase ol woh “Besmwertoswhy doy ste har” tery “trate ns tom ah pola he tat eve coed a te wae oping Sn Seed ht yy woul be mas by peak inet Shonda che eres of havo ue, en se oe af es ‘Shen eer dita bcos pave ine polio {3 Goss ade contd minor ec nesSt cmael ‘Re dna poson fe eal Spam ths ne nda ras | Spontaneous Onder + 61 ati oi i ce pt manera oo te a se anamnn neioe «Siders pet eae i tt hn nny eye ecm ae ate naemta senate eevhiatsieisamneroarar ie caterer renee ec me ec ae Seresifhamtiayeptarsescraate Sram ehantg ae! ain se cage cope sn hctc arian et Sepa neceer tie era wei douches dn cat Scrpanusrneenaits meee Bets ts Sr ot Senha cntaon al on : a sotenits sreomant tere sees sheen einai festive ma cect ealepeae antec: Sood cee to alg epee ve te Spc iocmet pears Sedona trat a aigrar ae stents main oeaitar ateoe etree rau aeteer cae Scherr diarenta wane Zeb ra tetas ae Sent nl i ea i Raspetiad ae ie'sacyser Ei Riis tee dome eran ae ings SC me mrt ene mae ah Sis miele tree Sci aes62 + Ghaper? te soc deletion omnes ile tion) — ‘Ee tesco o volta pneu ke West the sonal ad caw acess fede nd so ‘Sor thar we cromony me ae hue hs hae fen od ed Sites compen be et Sree eden te Earn oped oy inal niches}. ™ * ‘Av te mode oda sont wil sow, ileal epeaon eae many forms bond pope! one heeding peso Sta The poplson ditton of bat han enced by {ory Chang ban ofthe non of ne geerpest e Spee okt The Suton of pre chang ve ined ‘2Tundom event nt) an ene ec od of hs proce topos mean eoicve nese of he accad peoyes tat enn. is singing a somes oso or the dal of genic en ote asp Reve soya ptnonge and est a hve te ‘x: expan slp and cay dere he Irodicine rss fnew dae i ng te he ‘Sto te haw dove game Eom) The apie ow reo Aavors fy the ma pu anon a cre ant fy OF tbe np geben ue ye nd el ate to Wav a ted ue a a sed geal mp, eugene sets ‘ined Seria earl ont ie ear Eo thes ad sino ne pars gon ied chi trmaso, aed ining fom meters of och ae Boup cle orn ramon ‘oe The sale en ods ocala idee ch ppc pre up oe thar raf ther ‘hn ileal ep et hp neta, pos temo artes tty tg res hae Bee or ot towing rane eres wen nt ey \conorton pone Wee ns own pu cane eel Khe payor tan ter Keuvse enfremen amie te Cane te betes Srp etl ene Sas fei abur fe ben of eho he porn (toe pdt Bs trai son on a combined with conformist learning, ee “he pac f get td Sul evon ae song ff sored cree nog, lo ‘ena iBone tea my ne ayes of sa Sect ne basco evn ain he do of ray Spontaneous Ordke + 63 teansmited traits in population can influence genetic evoltion. This hd the converse provers genede dsesbutions influencing. cltral ‘Solution are tered gon-ulture evolutionary processes (model an ‘Example ofthis in chapter 13). While enutually determing there i a naj difference inthe pace of culeral and geese change. Changes in fen cistibuion ocur orth te passing of generations and in response fo rare chance events, le calual learning may take the form of epi Alene ditfsion of behaviors as occurred withthe proifertion of he feneal use of familar ponbuns in many Faropean languages during the coure of a single decade, the 1960s. “whether cultural or genet the proces of ditfceadal replication is ‘commonly modeled using replator equations describing a replicator ‘Synamic introduced below The epieator dynamic provides an ale the to comparative static analysis and otber approaches in which time isrot explicitly modeled. I gives us a complet acount of outofequr Tvium movement in population frequencies bsted otk on empirically plausible assumpaons about individeal cognitive capacities and behav fows and on representation of the details of socal interactions (who nee whom, do what, with what pays, wth what information, tnd the like}, Thus, taking explicit coon of out-of equlibinns dy tami Is a third chacacerisie of evoltionay approaches “Two advantages follow fom explicit dynamic analysis. First, one dix covers what {eal evoltionanily irrelevant equi. Explicit dyeamice lluminate the relationship between the solucion conceps of the pre- ‘ious chapter Nath eqilbrium and dominance-and the more com> plete and robust action of evolutionary stability. We will ee (her, in ‘hapeer 6, and especialy in chapter 12) that under plausible models of “fecenit replication, some Nash equilibria may turn out to be vir tually ivlevant to how ral societies Work, once we take evolutionary Processes into account. ‘A second advantage of explicit) modeling dynamical processes is ‘that there exer nonequilibrium states of substan importance in the Functioning of real-world economies. Beaute this claim challenges a base tenet of conventional thikieg in esoaomics, lee me illustrate it with an empiccal example. Many markets exhib a remarkable long: Term coexistence of what one would think of ar winners and loses, ‘ontray to what one would expec if economies Were approximately in ‘equlibriam. Among fs prodacing the same products and sling 10 the same customers inthe high competitive metal-forming industry in the Unit State in the early 1990s, for example, dhe most successful ‘ims (ee measured by labor prodsetve) were well ove tree times 36 productive ar the lest, with the 75th percentile about tice the 25th percentile (Lari 1996). In Indonesia's electronics industry part of66 = Chop the highly compeisve bal mathet— dat from tele 1990s how that he fms ache 73 peel were igh tines as product those in the 25th percent allwardDritmecer, Ivo, and Sokol? 2001). Of coun, the Indonesian cue exteme, some of tes der ces are just satineal noe andthe hghperformance Sona il Band aod the lw-peiorance ns wil ead fo ext theta Bot the selection proces is appre auc weak, cen in these vey ‘ompetive indus, fo cst doubt on the ucuaes of he sem to thar all fms ae opernting onthe production posi fone The instantaneous implementation of elite eof couse even let likly to be observed tn envionneats fe whick eny and xs mee sete, o in which theatre gustion aw pein em ‘ng mone) but individ simpy going abou he. ‘Abang from degulriom sie om geounds chat they are ephemeral generally poo guide on practial mates, Comstuing the above example sgcant conor tote ead ofthe ponte ‘World War Il goiden age of rep productivity growth in the US eon my was areluctio nthe ae at which low produc Bene ner bing weeded ou (Bowes, Gordon, snd Wesskopt 1983, The rp tae of productivity grow tthe Swedish economy daring the te arts f the pst century was in pre die tothe Af in abo and ‘ther resources fom lw 0 high prod es ade bys dl ‘eat poley of wage equation and te consequent fle of fw performing Sms (ibs 200) : “Though insighul on thse and eter policy isses, the anabsis of utetatetimdyearmcs some me desig th onvenonal cmpatative state approach. Bat lang tem nergy havior of the warble of iets on often be staid aaliely ne sila often yielding quite song ecu, Examples age prowided shape 1 though 13 ‘Mouth carci idea is evletionary modeling is tht pop ons are structed hvachcely and diferent vepteaion con take lac a more shan one lvl Indios ineac it nial, bot Jndvduls alo conte groups eg aie dens) and oer higher ‘cds entin (ation, ethnic groups), and these mula fzoups alo nrat Indl in tun aces Bounng of erating Eel, The proces of dferenal ception is pic talig places tea level simultaneously wis indvdoal, emo idea ag ov and wn Foren tin om ee bebo ke Jing Bard or being lid back, for example) ate being copied or ab done by individual, while song fr the organitatnal sates Of the more profitable ens ae being copie whe the east Prot, r Spocteout Oner + 65 21 Some process unde the evolution of bkaiors Lael of eetion Replat Teal (Growp of indus Teored obasars Soa aig (confor Emulation of ther soup ir renfornment len- conventions ala tg, bot mopoe) Selaon of unracent- ful groupe ‘Genes Diller eeprodocive Bilis extinction of ute success, dt ‘acts groups, re ‘eed nee of ‘subjugated populations table cms ae failing. Thus, what i epliated (or nt) may be ras of inivdls such ae thee preferences or belies; butte insiutions and ‘other groupleel characterise of firms, ethnic communities, oF ma tions are also subjec 10 diferent replication. An adequate theory ‘must illuminate the process by which goup struceure emerges in 2 pop ‘lation of individuals, how the boundaries among the resulting higher level enites are maintained, and hov they pats out of existence, The Simultaneous working of differential epiation at mote than one level, ‘alld mallee election oe group selection), produces whats termed ' coevoluionary process governing the dynamic trajectories ofboth in- Aividual and group level characteristics. (An example ~the eoevolution of individual preferences and group structures 8 provided in chapter 13) “Table 2.1 summarizes the varieties ofthe processes inteoduced above, istnguishing between the replicator (the tats being copied) and the levels of selection (che unis among which the implicit compesion for success in replication takes place) A replicator is someshing that is cop pens and jl ate repeats a ae ida peeraces and bail, and group-level conventions and other intstions, ‘Explaining behaviors and istuton by zetereceto diferent re cation may seem an obvious tautology. True ferential replication tn accounting system invaluable aba check On the logic of complex “ngument. Buti s also an analytical framework ofeing insights that are nlikely to emerge from other perspectives. Ofcourse, making good ‘his claim wil require an account of the replication process sll ‘whether it be the proitsased reglaion ofthe survival or demise af Firms wih dering organirtional structures, the dilfrenial biological(86 + Chaps 2 fimes or cultural emulation of individuals with ditering behavior pters the diffusion oc demise of socey-leelinsituions through the process of intergroup coafic, or rome other selection prot ‘An example will dluminate some of the datincive fexutes of che cvoltionary approach. [RESIDENTIAL Seanecariows Aw EvouuTioNany Paocess Hoow might an’ evolutionary social scientist explain the cocnstnce of preferences for malc-zacial neighborhoods with the observtion shat few neighborhoods are integrated? Hece isan exaple one that ils teaes some characteristic outcomes of evolutionary modeling: miele ‘quilria and the historical contingency of outcomes, the pattern of local homogeneity and global becerogensty andthe long tet pers tence of Partoinfror outcome, Consider a single neighborhood fone ‘of many) in which ll housing units are equally deiable to all embers ‘of che popelaton. Individuals! preferences for living in this neighbor. hood depend solely onthe racial composicon ofthe neighborhood. In this neighborhood and in che surounding population, “greens” prefer to live in a mited neighborhood in which they outnumber the “blaes™ bya smal fraction, and “blues” corespondingy donot prefer sercea- tion but would eather not be outnumbered by the "greens." I wil ex. res these preferences bythe pic, and py tae greens and blues spectively, would be willing 0 pay fora house in the neighborhood, ‘ach depending on the fraction of homes in th neghbochoed occupied by greens, © 101). The following equations area way to exprest the preerences described above (ce figure 2.1) Pall) = i + 8) — yf + 8 + p af) = HAF — 8) — Alf — a) + p ea) with 8 ¢ (04) where p is postive constant sefecting the invisie ‘ale of the idencal homes. Differentiating both functions with respect to fand sting the eeu equal ero, wesc thatthe ideal neighbor hood for greens (cha which masimies py) composed of He 8 ‘ens, while blues prefer «neighborhood with Yi ~'® geen, As the Aterence between the optnul neighborhoods (that for whch they vou pay the highest ec os home) ofthe greens and he sues 2, Tl efer to 8 as the extent of dcrninatory castes othe two eyes ul fer beeen she vo groups, one grou might noe caze shout {he rail compotion at al of couse) {wl nota oe sof the ‘eghbochood to nity so T can refer indilferenly to the fraction of ‘ens andthe mumbo of rens Spontaneous Ones + 67 Suppose that during each tne period some faction a of both the greens andthe blues inthis neighbochood consider sling their house 0 3 member of the surrounding population Prospective buyess from ove side the neighboriood visi the neighborhood in proportion tothe car fent composition of the neighborhood, The fraction of prospective buyers who ace green is thus f. Prospective buyers and sles ate rane domly matched imagine that the house hunting wstort fst knock om the door of randomly selected house, Thus in any period the expected suber of greens secking to sll theichoose who aze contacted by a house-hunting ble is aft ~ f). Each peospecive vel meets just one buyer pec period, cher making a sale or not, the probability of making the sale depending on the diference benween the buyers valuation of the home and the seller’ valuation if dhe former exceeds the later, Both given by eq, (2-1), Thus, fa blue considering selling meets a green and fs such that py > ps then te probability that a sle wil take place is Bipg ~ ps where Bisa postive constant relating the price difference 0 the probability ofa sale We are interesed inthe evolution ove time ofthe distribution of ‘pis in the neighborhood: Assuming the neighbochood is lage enough 0 that we can take the expected values to bea close appeoximation of realized values, and using 2 peme (fo indicate “next pec” we can mite fas a function of ft take account of the fact that in any period some ofthe greens may sell toa hive while some of the blues may sel 0 2 green. Thas| P= f= aft ~ PesBins ~ pg) + at ~ fips Py ~ pad 22) where o4 = 1 iF p> py and ie zero otheenite and py = 1 if P= Po and i x0 otherwise. (Obviously, py + pg = 1) The euation shay be read as follows: the expected faction gucen next period isthe faction tren this period minus any grens who sold toa Sue (the second tem ‘on the right hae sie), plus any bluce who sold to a green {the thd term), The second team on the right hand side, for exasple isthe loss ‘of greens through sales to Maes af isthe numberof greens secking to sell ofthese (1'~ f) will be matched with «blue, and ite Dues pice caceeds che greens price, che sale wil take place with probably ley ~ py). The third tex may be merpeeted analogously, the case {that green pies exceed lue pies, inthis eat bes sling to grees. Using pp + Py > 1, we can reaerange the equation a5 follows Af =f’ ~ f= aft ~ ABE, ~ B0) 23) from which it s lear that Af = 0 i 25 = pr (no sales take place ‘among those prospective buyers and sellers of diferent types who do mere because buyers do not value the homes more than sles). Note01 © racion ofthe homes owned by gins Figure 2.1. Spontaneous seegstian ia ardent omni. The smo fe ‘ios giveth maniac vate a Mu ad a ren wiling 0 py for a ose oo 2 faction off the Faction of the community tats gree: Note ther bos {eens and bites peter an inegratd ighochon coving wi thet own Se a comply seegaed commun that Af = 0 abo if = 0 orf = 1 (the ncighbortond i vited only by prospective buyers ofthe same ype at the homogeneous population Already there). Equation (2.3) scaled 3 “replicator dynamic equation.” ‘With some father rearranging i can be fewrtten in the sometimes ‘more convenient form &f = afBip, ~ p) whete p is the average price orp = fie 1 — Ape {X saonacy value of fis 2 sable equiliriom if an exogenous change in produces (hy the dynamic described ine. 2.3) 2 A o the opposite ‘gn, that si af < OIF this ineguaiy holds, a change in fi sell correcting Figure 21 ilastrater thie mode. Iepection of the figure (oF ‘Tit calculation) confirms that a half-Bue-balf-green composition of the neghborond isan equim (3f = 0, because p, = Py), but eis not stable (because da > 0) soa small chance displacement ofthe Fraction from the fify-fityeisrbution wil not be selecarecting but ‘ther will cumolate, leading toa completly segegated peighboraood. Notice, roo, that for 8 = Ye both greens and bins would prefer the meat neighborhood ro che sepreseed ostcome, even if the sepega- ton resulted in only “their types ving it he neighborhood. [Te above ‘at be confirmed by checking that pal) ~ px) > Bal) = Pa) ‘Thus she segregated sable equllbria that we expt to be the Only — —a Spontncous Onder + 69 orable outcomes of this imteacton are Pareto inferior to ase of ine- fated seighborhood compositions that are unsstainable a6 sable suilbra inthis model. Remarkably, his result holds even i 8 is arbie teally smal; complete segregation resus even if the ovo groups have ‘rally ideasica tastes and the optinal neighborhood for both is very lose to fifty. Finally, confirming that complete segregation [of eh ther ype) i a stable equibvium i easy. Thar, neighborhoods will be Iecally homogeneous while otherwise identical neighbothoods will be composed entirely of the other group, exiting global Beterogeniy. ‘When composition a neighborhood wil exhibit wil be histoncally con ingot ifthe recent past, wa les than f*, ve woud expect 0nd 0, for example. “The coordination flare aisingin thie case comes about becaste when a household decides to lve ina community, its choice affects the wel- being of residents in the community to wich it moves a well athe ‘one it ef. The composition ofa commusty shut both the “commod- liy® thatthe family is choosing and the unintended product of the choices of all familes. Theres 20 reaion why the resulting outcome will be efcien, whetes sorting is based on preferences foe racial com Poston, as hee, for highly educated neighbors (Benabou 1993) ot for Ieighbors who are homeowners (Hoff and Sea 2002), or for other rea T have modeled the process of marker equilbration by explicitly ‘racking the resls of seca interactions (eho meet whom, and what 4b they do) Individuals made use of only loca! knowledge they id ‘not seek out the very best deal, they simply made a transaction with Positive probability as long asi was mutaly beneficial and nor over: ‘wise The racial composition ofthe neighborhood was detemined by 2 Feplcaion procear that determined the occupation of residences by members of ene or anaher group. The dynamice of neighborhood com Poston was derived by studying which esdences replicated their wn ‘hip pattern and which ones switched, Inchaper 61 will contrast his Social interaction approach to modeling market with the Walrasan ‘model MopsLiNe rue Evouwriow oF Besavion Like the racial composition ofthe acghboshood, the dieabutions of individual behavioral rales of institutional characteistis of groups ia'a population and thes evoluion overtime depends on which tet are opie and which ae abandoned, “Test” are any characteristic of a0 individual or group that may be adapted by others, abandoned, ore:70 + Chaper2 tained IF the children of Catholics ae likely 0 eetsin thee parents ‘eligi andthe clon of Protestants ar nt, the faction of Catholis Jn the population wall re (assuming that all famles have the same number of eldeen and cht these are the only wa sypes in the popola: Son). If firms recognizing a rade union among it employees fail a 2 higher rate than nonunion is, andi new fms tend to copy the more profitable firms, union density wil fal Dillerenvial epication may result from people or organizations deio- ‘ecately seeking f acquze tat, rules, and soon that have proven st ‘eifel to others. Diflerentil epliaton, however nay alse fake place ‘through Iss instrumental mest: the process of copying may be dex scribed by 2 conformist tronision process secordng t0 which the replication of wats Is frequency dependent, the mote prevalent ait in 4 population being favored." And though sometimes called “sponta: ‘eous," the process of diferent replication may work through the coercive exercise of power by nations, lasses, or organizations a when those who lose wars are constrained eo adope the cultuce, shoal, and conistions of winner. “The deals ofthe wansmisson proces are important, and wll ake Lup these and oer more complicated cases in sublequent chapters when [Fimodel how economic and othe instittions shape the evolution of preferences, Here T model an important, if oes simple cace in which successful behaviors are coped. This is the proces of payoff monotonic ‘pdatng, namely, the class of tansmission mechanisms with the pop ey that behaviors with above-average payotie ae adopted hy ekhets and thus increase their share ofthe population. Valo assume that ind ‘ideals are randomly paired to inet, Let theze be one of two mutually exclusive sats (x andy) preset in cach member of a large population’ ‘The wats may be adherence ro fering behavioral rules, food tastes, o any darable apes of behavior that afectspayolls. Ths x might be “pice goods a their margin] ont" “work hard," have an additonal child” "reciprocate gis” ot “eat a heathy breakfast each day.” The tat ysepreseat a atematve rule in each case. The model i readily extended to populations with more than fo tis. I model the evolution of cultural tats, nasal, those that ace acquired chrough learning (om parent, others inthe previous generation, pes, et) athe than trough genti inheitnce | Sone tom fr hinkg canons wanninon ingore of’ o Sand Sth 985) 288 Howe Tf oe of ona wp sSelaper The cena of deal tn aa nding he oe pened he sage seve Sea G99 ad pron mee ly Se Seontaneous Order + 71 “Thus, the mode! below repesens behavioral updating 38 a process of ‘thing from one wait to another eather than the differential produc tion of ofispring, (But the model Below is eadly adapted othe case of {vei transmission of tits, as 1 will show inthe Hawk Dove example Eelow:) ask how many copies of exch trait are made at the end of exch period. (An individual who leaves no copies in the next period has itched «9 another tai one wh eaves two copie hss eeaed hi, teat and been copied by anothe) Notice tha she individual ive fr ver and are simpy bearers ofthe eit its the eles themselves cat will be more or les succesful in generating copes. normalize de sie ofthe population to unity. ‘The structure of che eansmsson proces is this: individuals imple iment the strategy dictated by their eat ima game that assigns payofs to each depending on thee and others’ behaviors, Following this the tents are replicated withthe traits whose beaters gained higher payoff tmakiag relanvely more copies and thas generating 2 new population lnequency of the traits. Sappese members of the population ae rane domly pated to interact n asymmetrical two-person game, che payatss fof which are denoted (i ) the payoft to playing trait against 3 playing patter For any population frequency ofthe xt, Pe (0,1) the expected payoffs are thus ‘balp) = pots, =) + (1 — plate, 9) Po Byp) = Peo, 2) + (= plas) Read the fst equation: *With probability p an x-pértom i pire with another arperson gaining payotf n(x x) and with probably (1 ~ p) ispsred witha y-peson gaining payott x, 9." [Av the Beginning of each period, vomne fraction ofthe population, ‘© (0, 1}, may update thei Wait upon exposure toa "eltaral model” [a compedtor, teacher, a coworker, or a neighbor, for example. The ‘emainder of the population doesnot update izespectte oftheir expe riences. The fact hat not all members ofthe population age in updating rode captures the fact that we typically adope behavior — often during adolescence ~ and then retain them ove a period of time. OF cours the Updating concerning some tats may be very fequent~ prefered man- nt of dees, for example while we update other traits daly very ceca sonally~zeigon, for example. How quickly we update, ke ehe other aspects ofthe leaning process being modeled, is not given bur sell responds to evoletonay peessues, but we simplify hereby abstracting from the endogenous aatre of the updating proces elk. 1 the cultural model and the indkvidual have the stme tat tix recsined by the individual; thi will happen with probabiles p and (1 py forthe xs and 75, respectively (bth che model and the indvid-7» Chaper? ual produce a single eeplia —themselres—in the next period). Buri she individual andthe model have diferent tats then the individual re tun o replaces the erie onthe bass of she payofi enjoyed by the wo in the previous peiod. The payoftsexpeience by the cultural model td the inva! depend on the parecula peng experienced by the ‘vo and hence vary with the population frequency of each tt. Of ‘ours, the individual could sample from the payotf experiences of 9 larger group rather than simply comparing his own payoffs wth the model’ but this would make lise dference at chiy point. Ifthe ind ‘ial switches then the model has made to replicas, and the individ al nose. (I chapter 11, Tus shis model to study the emergence end spread of individual propery sights.) Consider a eutueal model (a y-person) and an individual x-person, who experienced payoffs B, and B, respect, the previous period {these will not generally be equal tb, and be, respectively, dve 10 matching nose) A sal diference in payots need not adace a switch fr even be noticed, 40 we say that with probability B(B, ~ B.) the ‘person will switch If By <2, If B, = By the individual does noe [pete The coeticient Bisa poicive constant reflecting the greater cf fect on switching of relatively lange payoft diferences, sealed so that the probability of switching varies over the unit intecval: Leting Pye = 1 Hake payoff ofthe y-person excods that of the x perton and zero oth- rise and taking expected values (the population is large, we ean weit the expected population frequency with wait in ime f+ 1, dee noted by Py a8 P= P~ op0) ~ plpyoalby ~ by) + ep = pid ~ Ppa, = by) ast “This expresion may be read a follow: in any petiod ther ae paper sont, and a fraction ofthese, w, il be eligible for updating, each of these wp persons will be paired with « pode with probabiley (= ph and wit probability p»,B(5, ~ by) the information they 26 {gure shout payot wil lead them to rwitch. Oeeting the 3 losin this manne, some ofthe yundividuals wil encounter x-ovels and by an analogous peocess will convert to s-pesons, Reazanging, we can rewrite eg. 2.5) 8 Ap =P ~ p= wpll — PIB, ~ 6) 26) From eq, (2.6) can be sen thatthe direction and pace of updating spends onthe value of pin ovo wayt Fir, {1 p), the variance of ‘he wai measures the umber of persone who will be pared wah 3 ‘person, extreme vales ofp making this very unlikely. Second (wating Spontaneous Onder = 73 isos mae a ens dd of te on Expreion wl) ~ ears the er of pon pay and sccby on uptng Noe hanger alu of wand ea cer ffcton n updating mode and favidal stching mare responsive ro foal cirencesseceleate the dynamic when be by. Weng BE ph, + (d= iby atthe populace avermpe pay (26) fove compactly expel | Ap = wphib, ~ by 6) hich the general form faplcable to any number of tas) of the serene relator dam way of meng dame seme fovmaled by Taylor and Joke (1978) wh wade spleabty nPop. tltion biology and the evoluonary social wiencen! ‘se (20) kes cy there a6 two nosey componets in thie ana of evoionatychinge:sorance and feet rephcaton. nance, repented by the tem plt = p)y i eer bees the tore nearly homogencos a population slower wl be the evo onary proces. Noe that it) reaches a maximum for p=, {om evenly divided popssoon wil masini he ato change ny Telling edhe inluencer consant: Dien relation —somctines termed slcton mis represented by the term Bibl) Bp. The rent of diferent repcaton or selec ree wl be mek {Smal faction ofthe population in updsing mode, puyol ier nee ae smal, orf the response to payltfencs anal. Eq. 2a) or 28) Ges a comple dscrpin othe reevantonedinet Sonal dame syste here ae fn wo tai he ae sae ths sppcion, name, al pone oscme, i sey of the ater harp aay cae er the uni eral Fo hi eto the eel ing dana ayaten termed “onenestona.” Note that, (26) sent tote expreston describing te Aya of thee Bete redo hong marke. 23) Toe every vale of P the replicator casation gives the mapping ap = ph whee the fincion teed 8 vector fi eines for each satin the state pce the recon and veloc of change hese We ace gery imtereed in haowing the sates?" such at ip") cred satonary ates a cll est pts oc 9 rel pote of ehe dynamic) and he aby proper of thee wats, deen) "hae eard thsi sgnon nce er san concn ie be cue nany he pon tobe deed be og flo se shee ‘Stun tne no ean rng dot meen» er ae Fre isepeuton The conins ond dec tne mui ile vos, ‘Bah oem way at apna fo what now wel 989)