A Game Model of Economic Behavior in an Institutional Environment

A game model proposed here helps to reveal a relation between institutions (i.e. norms and rules used in a society) and decisions of private agents. Players in the game are a government and numerous private agents. Activities of the private agents (the second player) are modeled as paths in an oriented graph with a finite set of nodes. The government (the first player) establishes and announces an institutional system — a set of actions (e.g. taxes, incentives etc.) on the arcs of the graph. A move of a private agent yields her and the government gains depending on the institutional system created by the government. The players try to maximize discounted sums of utilities given discount factors and horizons. The government has no information about a precise number and initial positions of the private agents. The basic question is: can the government establish a consistent institutional system corresponding to a Nash equilibrium? We show that in a specific case of myopic private agents a consistent institutional system does exist. A constructive proof is provided. A case of an almost myopic government is considered in detail. A possible application of the game model is a problem of effectiveness of the government control in science and R&D sector in Russia which became actual in connection with a reform started by the Russian government recently.