Rationality and Society

How do people keep order in weak states? Formal institutions provide law and order in rich societies, but are feeble and capricious in much of the developing world. Instead, people turn to informal, group-based order that operates through reputation and contingent cooperation. Such order requires people to police social boundaries and contributions, looking for costly signals of membership and commitment to weed out mimics and shirkers. Data from Yemen show that people rely on tribes for security and dispute resolution under customary law. Yemenis use a prominent symbol of tribalism, the iconic tribal dagger, to communicate their affiliations and commitments to their customary responsibilities. Yet people vary in how well they understand the semiotic system, and the accuracy of the link between dagger-wearing and tribalism improves with sophistication. While the most knowledgeable Yemenis reveal their tribal types with the dagger, the least knowledgeable communicate nothing at all.

Governance rules are efficient mechanisms in the sense that they increase people’s welfare. They emerge even when the state is unable or refuses to create and enforce them. We study a situation in which this demand for governance manifests itself through the emergence of property rights in illicit drug markets: a privately-provided governance. Specifically, we propose a model for property rights emergence in illicit drug markets as predicted by the theory on governance provided by prison gangs. It is studied a situation in which an agreement among criminals, resembling property rights enforceability on its allocative effect, can emerge in illicit drug markets. Our Mechanism Design approach shows that a change inside the prison system, from a competitive environment to the hegemony of a group of criminals, implies the equilibrium in illicit markets to shift from warfare to peace: the hegemonic group is shown to desire to promote the collusive agreement when it is able to do so. This contrasts with the equilibrium under no hegemony, in which the possibility to conquer consumers/territories drives violence up to a positive level. The novel empirical perspective implied by the model is explored using data from Brazil, a context for which the theory of governance provided by prison gangs has been pointed as a key explanation.

Escalation is a key characteristic of many consumption behaviors that has not received theoretical attention. This paper aims to propose both a definition and a theoretical treatment of escalation in consumption. We define escalation as a subject’s attempt to obtain “more” or engage in consumption behaviors that are “more intense” on a measurable, quantitative or qualitative, objective or subjective, scale (more difficult ski slopes, stronger drugs, harder sex, better restaurants etc.), even if the subject preferred less intense consumption behaviors in the past. Further, this evolution in behavior also occurs if the budget constraint does not change. We will find endogenous and exogenous theoretical microfoundations for escalation in models of hedonic adaptation, desire for novelty, acquisition of consumption skills, rising aspirations, positional effects, and envy. However, we will also discuss the possibility that the tendency to escalate is a specific innate behavior inherent to human nature. Finally, we will propose a preliminary theoretical formalization of such behavior and indicate the possible implications of taking escalation into adequate consideration.

JEL codes: B52, D11, D90, D91, I31