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American Economic Association

Learning from Schelling's Strategy of Conflict


Author(s): ROGER B. MYERSON
Source: Journal of Economic Literature, Vol. 47, No. 4 (DECEMBER 2009), pp. 1109-1125
Published by: American Economic Association
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Journal of Economic Literature 2009, 47:4, 1109-1125
http:www.aeaweb.org/articles.php?doi=10.1257/jel.47.4.1109

Learning from Schelling s


Strategy of Conflict
Roger B. Myerson*

Thomas Schelling s Strategy of Conflict is a masterpiece that should be recognized as


one of the most important and influential books in social theory. This paper reviews
some of the important ideas in Strategy of Conflict and considers some of the broader
impact that this book has had on game theory, economics, and social theory. By
his emphasis on the critical importance of information and commitment in strate-
gic dynamics, Schelling played a vital role in stimulating the development of non-
cooperative game theory. More broadly, Schellings analysis of games with multiple
equilibria has redefined the scope of economics and its place in the social sciences.
(JEL D74, F51, H56)

1. Introduction strategic threats and promises. Chapter 3,


"Bargaining, Communication, and Limited
War," examines how people achieve coor-
Thomas C.
Conflict Schelling's
(Harvard Strategy
University of
Pressdination in games that have multiple equi-
1960) is a masterpiece that should be rec-
libria. Throughout, Schelling probes these
ognized as one of the most important andquestions by logical thought experiments
about problems of conflict and cooperation
influential books in history of social science.
Indeed, in just the first three chapters, among people who are intelligent and ratio-
Schelling introduced enough ideas to revo- nally motivated by individual self-interest.
lutionize social theory. Chapter 1, entitled This paper reviews some of Schellings
"The Retarded Science of International important ideas in this book and considers
Strategy," begins with a call for a new some of the broader impact that this book
theory of interdependent decisions to has pro-
had on the theory of social science. I first
vide a framework for analyzing problems of
examine the vital role that Schelling played
conflict and deterrence that arise in inter- in the development of noncooperative game
national relations. Chapter 2, "An Essaytheory by his emphasis in Strategy of Conflict
on Bargaining," considers basic questionson the critical importance of information and
about how people achieve commitment tocommitment in strategic dynamics. Then,
more broadly, I consider how Schellings
analysis of games with multiple equilib-
* Myerson: University of Chicago. Originally prepared
for a conference held at the University of Maryland in
ria has redefined the scope of economics
honor of Thomas C. Schelling on September 29, 2006. and its place in the social sciences. For

1109

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1110 Journal of Economie Literature, Vol. XLVII (December 2009)

complementary perspectives on Schelling's equilibrium as a general solution concept.


important contributions, see also Richard For any game in normal form, a Nash equi-
Zeckhauser (1989), Vincent P. Crawford librium is a prediction of a feasible strategy
(1991), and Avinash K. Dixit (2006). for each player such that each player s strat-
egy maximizes his own expected payoff given
2. Schelling's Impact on the what is predicted for the other players. In the
Development of Game Theory 1950s, however, most work in game theory
continued to follow von Neumann's empha-
The development of game theory meth- sis on cooperative coalitional-form analysis.
odology has been greatly influenced by (For a contemporary perspective on the lim-
Schelling's work even though he has ited role of Nash-equilibrium analysis, see R.
approached game theory more as an outsider Duncan Luce and Howard Raiffa 1957, pp.
or critic. Schelling s style is to teach by care- 104-05, 180.) Nash equilibrium became the
fully considering specific examples rather dominant analytical methodology in game
than by formulating general mathematical theory only after Nash s ideas were extended
theories, and chapter 1 in Strategy of Conflict by John C. Harsanyi and Reinhard Selten
includes a negative assessment of game the- and others in the 1960s and 1970s.
ory's practical applicability in 1960. But, as But what started Harsanyi and Selten
one of those who like to formulate general thinking about noncooperative game theory
mathematical theories, I want to argue here a decade after Nash? In Harsanyi 's published
that the development of general models in work, the first indication of his interest in non-
game theory after 1960 was decisively influ- cooperative game theory is a footnote where,
enced by Schelling's Strategy of Conflict. in response to Schelling s criticism, Harsanyi
To understand Schelling s impact on game (1961, p. 181) promised to extend his theory of
theory, we must first review some basic ideas rational bargaining to noncooperative games.
of game theory. Any analytical discipline In a parallel intellectual development, Selten
needs some general framework to make (1964, p. 626) noted, at the end of a paper
connections between different applications. about general values for cooperative games,
Game theory has developed to provide a gen- that Schelling (1960) raised important ques-
eral framework for analysis of rational incen- tions about how people can commit them-
tives in social systems. Modern game theory selves to promises or threats but that such
began with John von Neumann's (1928) defini- problems of commitment had been assumed
tion of three general ways to represent games away in the general cooperative approach to
(see also Myerson 1999). Von Neumann first game theory. As Harsanyi and Selten subse-
defined games in a general dynamic extensive quently noted in their book (1988, p. 365),
form but then he argued that any extensive- "the great strategic importance of an ability
form game can be reduced to a one-stage or inability to make firm commitments was
normal form, in which players simultaneously first pointed out by Schelling (I960)." (Selten
choose strategies that are plans of action for 1965 includes a similar remark.) So when we
all observable contingencies. He then further look for a link between Nash's early work and
reduced multiplayer games to a simpler coali- Harsanyi and Seitens subsequent develop-
tionalform that specifies only the total worth ment of noncooperative game theory in the
that each set of players could cooperatively 1960s, what we find is Schelling's Strategy of
guarantee themselves. Conflict. And Harsanyi and Selten were only
The argument for normal-form generality two of the many readers who were deeply
led John Nash (1951) to see noncooperative influenced by Strategy of Conflict.

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Myerson: Learning from Schellings Strategy of Conflict 1111

Game theorists who read Strategy of the other players are predicted to do. So
Conflict could not help noticing that, as given any game, a prediction of the play-
Schelling probed important problems of ers' behavior that is not a Nash equilibrium
strategic conflict and bargaining, none of his could not be commonly believed by all the
examples made any use of the cooperative players because, if everybody believed such
coalitional-form models that were the prin- a nonequilibrium prediction, then at least
cipal object of study in game theory of the one player would rationally prefer to choose
1950s. The coalitional form was mathemati- some other strategy, different from his pre-
cally simple but it threw out too much of the dicted strategy. That is, any scenario that is
vital strategic structure that Schelling knew not a Nash equilibrium could not be gener-
to be essential. But, in Strategy of Conflict, ally accepted as a solution for the game. This
we can find many games in normal form, remark is the basic justification for using
which Schelling analyzes by finding their Nash equilibrium as a general solution con-
Nash equilibria. cept for games. Thus, when we study a game
For other dynamic bargaining examples that has only one equilibrium, it must be the
in Strategy of Conflict, however, even nor- only rational prediction of players' behavior,
mal-form analysis seems inadequate. Von and then game theory seems very powerful.
Neumann's reduction to normal form tends A game can have many Nash equilib-
to suppress questions about information and ria, however, and then the above argument
timing in games, and Schelling regularly against disequilibrium predictions does not
argues that the information and timing of tell us what we should predict. So econo-
individuals' decisions may be crucial in our mists may feel uncomfortable with games
analysis of a dynamic bargaining game. Thus, that have multiple equilibria because the
Strategy of Conflict demonstrated both the multiplicity of equilibria seems to threaten
importance of noncooperative equilibrium our vested interest in economic determinism.
analysis and the inadequacy of doing it only But Schelling saw things differently, perhaps
in the normal form. To match the scope because he was more able to resist the siren
of Schellings analytical examples, game calls of methodological determinism.
theorists had to develop Bayesian equilib- Schelling saw that the existence of such
ria for games with incomplete information games with multiple of equilibria is a per-
(Harsanyi 1967-68), correlated equilibria vasive fact of life that needs to appreciated
for games with communication (Robert J. and understood, not ignored by economists.
Aumann 1974), and sequential equilibria for Chapter 3 of Strategy of Conflict offers a
extensive-form games (Selten 1975; David wealth of examples of games with multiple
M. Kreps and Robert Wilson 1982). These equilibria where the essential problem is
great advances in noncooperative game for players to coordinate. In such games,
theory were developed only after Schelling Schelling argued, anything in a game's envi-
(1960) showed what we really needed from a ronment or history that focuses the players'
theory of strategic conflict. attention on one equilibrium may lead them
to expect it, and so rationally to play it. This
3. The Problem of Multiple Equilibria focal-point effect opens the door for cultural
and environmental factors to influence ratio-
By definition, a Nash equilibrium is a nal behavior.
prediction of a feasible strategy for each The other obvious way to bring cultural
player such that each player's strategy maxi- effects into economic analysis would be
mizes his own expected payoff given what to assume that individual preferences are

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1112 Journal of Economic Literature, Vol. XLVII (December 2009)

culturally determined. Of course, nobody depending only on the players' payoffs in the
can deny that our tastes are influenced by game. But Schelling (1960, appendixes B and
our social environment. But, in a theoreti- C) responded that any theorist could see his
cal model where individuals' preferences are own equilibrium-selection theory as self-
endogenously determined, one might "solve" enforcing once it is generally accepted (in the
social problems by teaching the poor to love theorist's hypothetical world, at least).
poverty or by teaching the powerful to love Imagine for a moment that we tried to
social justice. Economic analysis of institu- induce people in real games to play the equi-
tions could thus be trivialized by such an librium that is selected for them by a theory
assumption that individuals could be cul- such as Harsanyi and Seitens. The play-
turally reshaped to fit institutional require- ers in these games might think that, in our
ments. So economists find it more useful to attempt to coordinate them, we were trying
assume that an exogenous selfish material- to act as leaders with some kind of author-
ism characterizes individual preferences. But ity over them. That is, they might recognize
even without an intrinsic preference for jus- something intrinsically political about our
tice, selfish materialists can be influenced by attempt to coordinate them on one equilib-
concepts of justice that operate as focal fac- rium rather than another because one of the
tors to determine focal equilibria in games basic functions of political leadership is to
with multiple equilibria. coordinate people's expectations in games
From a modern post-Nash perspective, with multiple equilibria. In this sense,
the process of negotiating joint expectations Harsanyi and Selten (1988) were trying to
of focal equilibrium may be the only sense in define a neutral political theory, based on
which players can truly "cooperate" because a new kind of natural law, which could be
the understanding of a focal equilibrium must compared in scope to the efforts of Thomas
be shared jointly by all players. As Harsanyi Hobbes (1651), albeit in a very different ana-
(1961) recognized, theories about coopera- lytical framework. Schelling's response to
tive games may then be posed as theories of Harsanyi then could be compared to David
how focal equilibria can be identified from Hume's (1748) observation that general pub-
the payoff allocations that they yield. Thus, lic opinion may be the only standard for
Schelling's focal-point effect may provide a questions of morals (unlike other areas of
new basis for cooperative game theory. philosophical inquiry) because the funda-
mental basis of social morals is in people's
The greatest theoretical effort to solve the
multiple-equilibrium problem within the need to coordinate with each other.
mathematical structure of game theory was Schelling's focal-point effect should be
by Harsanyi and Selten (1988), who labored counted as one of the most important ideas in
to find a natural rule for identifying a unique social theory. Recognizing the fundamental
equilibrium for every game. From the begin- social problem of selecting among multiple
ning of this project, Harsanyi (1961) wanted equilibria can help us to better understand
to extend individual decision-theoretic ratio- the economic impact of culture on basic
nality by adding a strong-rationality postu- social phenomena such as social relation-
late that rational behavior in games should ships, property and justice, political authority
depend only on the payoffs, not on payoff- and legitimacy, foundations of social institu-
irrelevant environmental factors. So to tions, reputations and commitment, interna-
tional boundaries in peace and war, and even
define strong rationality in games, Harsanyi
the social use of the divine. Let me review
and Selten sought a natural rule for select-
ing one unique equilibrium in every game,each with some simple examples.

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Myerson: Learning from Schellings Strategy of Conflict 1113

table l

A Game with Good and Bad Equilibria


{The stag-hunt game)

2 friendly 2 aggressive

1 friendly 50, 50 0, 40

1 aggressive 40, 0 20, 20

l's payoff, 2's payoff

4. Personal
Relationships,
Economists have Soc s
Pathologies, and Cultural
a Nash Roots of
equilibrium
by another Nash e
be predicted
Consider the game in table 1, bywhou
ers 1 and 2 must simultaneously
this Pareto constrai
pendent choices odology,
about whetherthen we t
pleasant or
each other in a friendly prediction
aggressi
good
player 2 is expected to(50, 50) equil
be friendly,
1 can maximize allhis other
payoff equilibri
by bei
also, as 50 > 40.odological
But if player assum2 i
to be aggressive,the then player
possibility of1
mize his payoff gies where
by being peopl
aggress
bad equilibrium.
0. Similarly player 2's best respon S
played
friendly if player in a contex
1 is expected to
expectations
but 2 s best response is to be andagg
is expected to beers in similar So
aggressive. situ
b
being friendly isior becomes
a Nash the n
equilibrium
a good expected payoff
each player allocation
should
But both players being aggressiv
expectation by ful
Nash equilibrium, yielding
player the ex
can improv
off allocation (20,
The 20), which is wor
pathology of
players. (In addition,
here is there
a socialis pat
a r
their each
equilibrium in which mutualplayerexpe
ha
improve
pendent probability 2/3 of individua
being fr
As the strategies' names
requires suggest
a social ch
ferent equilibria here can
generally be inte
held soci
representing, in Nowa simple
imagine model,
two
kinds of interpersonal
of which relation
is inha
players here can rationally
matched have
in pairs t
Suppose
relationship, but that
they can peop
just as
culturally
have an unfriendly dispos
aggressive re
equilibrium
even though it makes but,w
them both o

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1114 Journal of Economic Literature, Vol XLVII (December 2009)

players are culturally disposed to focus on equilibrium. Such coordinated social change
the bad equilibrium. Then we have a simple requires some form of socially accepted lead-
model of impoverishment that is purely cul- ership and, thus, it may depend on factors
tural in origin. By modeling local culture as a that are essentially political.
focal factor rather than as a factor that affects
individuals' preferences, we can meaning- 5. Property Rights and Justice
fully compare payoffs across the two islands
because moving from one island to the other Ownership and transfer of property rights
would not change a player s preferences. The are central concerns of economic theory but
two islands have the same economic funda- the social mechanisms that sustain property
mentals but the economic outcomes are worse rights are rarely modeled (see Dixit 2004).
on the second island because the cultural Economists regularly assume that transac-
expectations are different. All individualstions costs are negligible, and indeed trans-
on both islands are equally rational but anfer of valuable property is often effected by
individual on the poor island who tried to fixa signature on paper or by a simple hand-
the problem by acting as if he were on the shake. How can the ownership of assets be
rich island would reduce his own payoff from transferred merely by a signal that is com-
20 to 0. If we want to cure the poverty of monly witnessed by two or more people
the second island, we must get everyone'swithout any substantial movement or trans-
attention there and somehow get them all formation of the assets themselves? Such
to focus instead on the better equilibrium. ease of economic transactions can be read-
Such pathological social expectations can be ily understood when we see the allocation
changed only by someone who is perceived property rights as a focal equilibrium in a
of
as an authority or leader and who can iden- more fundamental ownership game that has
tify a better Nash equilibrium for them. multiple equilibria. Then public words could
Of course the social problems of povertyindeed transfer property by changing the
actually arise in complex social systems social focus from one equilibrium to another
where different equilibria are much harder in the ownership game.
to identify than in this simple example. In a For a simple example of an ownership
game that has many equilibria, there are typ-game, consider the game in table 2, where
ically many more strategy combinations thatV and c are given positive numbers (say,
are not Nash equilibria. A would-be reformerV - 99, c = 1). Each of the two players inde-
who wants to improve social welfare by
pendently decides whether to claim a valu-
changing people's behavior to a better equi-
able asset that lies physically close to both of
librium must take care to identify a socialthem. The payoff from winning the asset is
plan that is, in fact, a Nash equilibrium so
V, but the cost of fighting for it against a rival
that nobody can profit by unilaterally deviat-claimant is c.
ing from the plan. If a leader tries to change This game has three Nash equilibria. There
people's expectations to some plan that is is an equilibrium in which player 1 claims and
not a Nash equilibrium, then his exhorta-2 defers, yielding payoffs V for player 1 and
tions to change behavior would be under-0 for player 2. This equilibrium corresponds
mined by rational deviations. The point of to the social understanding that player 1
this example is that, even when the better "owns" the asset. But the game also has an
equilibrium is well understood, there stillequilibrium in which player 2 claims and
remains a nontrivial social problem of how toplayer 1 defers, yielding payoffs 0 for player
1 and V for player 2, and this equilibrium is
change everyone's expectations to the better

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Myerson: Learning from Schellings Strategy of Conflict 1115

TABLE 2
A Game Among Rival Claimants to a
Valuable Asset Worth V

2 claims 2 defers

1 claims -c-c V, 0

1 defers 0, V 0, 0

l's payoff, 2's payof

our modelregret
of 2 owning
this eq
tion, the game
the has a sy
expectati
in which make
each 2 antic
player ind
izes, claiming
ingwith
hereproba
woul
deferring with
Thus probabil
Schellin
each player gets
to an expe
understan
0. (Notice that
can 0 = (-
influenc c
+ c)) The symmetric
people are moe
interpreted as a social
interest with s
rights are The behavior of selfish materialists can be
ill-defined.
(We could decisively influenced by justice
extend the as a socialgam
both concept claim
players that designates the focal
or equilib-bot
they will rium in such games
play of multiple equilibria.
again, rep
when someone defers
With such a multiple-equilibrium wh
model of
This repeatedownership, it isgame easy to see how the alloca- has
equilibria in which
tion of property rights can be influenced the by
in the symmetric
symbolic rituals like a verbal promise randoover a
each round handshake,
after as these rituals can change the
the fi
payoffs socially expectedthe
after equilibrium of firstthe claim-
the game ating game.
first round is
table 2, with When they start
the from a symmetricsame state t
ria for theirwhere neither player seems more likely to
first-round p
Plato's Republic (book
claim, the players might ask a mutual friend 1
nition of justice
to arbitrate for them, and perhaps as such an givin
is due to him. In
arbitrator might decide in favor of one this
player s
expectation or the other byof who
tossing a coin. When the arbi- sh
should defer
trator's decision in this
or coin toss has designated ga
If any 1 (say) as the player
shared who should claim here,
cultural co
gests that this1 focal arbitration
should can become a self-ful-claim
in this game,
filling prophecy,then enforced merely by 2'sthe fear
nally play that
that her claiming would cause equilib
conflict and

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1116 Journal of Economic Literature, Vol. XLVII (December 2009)

by Is confidence that his claim will not be 6. Legitimate Authority and the
contested. Thus, the word of a recognized Foundations of the State
authority or focal arbitrator can allocate
valuable property rights without any enforce- The many coordination games in chapter 3
ment mechanism other than people's desire of Strategy of Conflict teach us to see games
to avoid costly conflict. with multiple equilibria as an important part
Of course, the loser in such an arbitration of the world. In such a world, strategic coor-
might prefer that they revisit the question dination with other people becomes one of
by going to another arbitrator or by tossing the principal necessities of life on which peo-
another coin. If some social leader is seen as ple's welfare depends.
a higher authority than their mutual friend, For example, imagine a chain of islands,
then the friend s judgment could be annulled each of which is inhabited by people who are
and reversed by a judgment from the leader. randomly matched every day into pairs who
So the players can be coordinated in this way play the rival-claimants game in table 2 above
only if they have a shared perception of who (as in Myerson 2004). On one primitive island
has jurisdiction over their case and when his where social differentiation is lacking, every-
judgment is final. one might play the symmetric randomized
To focus attention on one equilibrium equilibrium in which high frequency of con-
with no higher appeal, it would be best to flict dissipates all of the expected resource
consult the highest possible authority. If value V, and so everyone's expected payoff
the players share a cultural understanding there would be 0. But expected payoffs could
that certain unpredictable processes may be positive on another island where people
be used by the fundamental divine spirit of have cultural notions of justice and owner-
the universe to answer questions, and that ship that tell them who should claim and who
this divinity cannot be bothered about the should defer in some of these rival-claimant
same question more than once, then a rec- games. Where property rights are unclear,
ommendation that is based on such a sacred people might gather in occasional assemblies
randomization can serve as a focal coordi- to approve new rules for identifying which
nation device that cannot be appealed to
player should claim in more of these matches;
and, thus, the focal-point effect can explain
any higher arbitrator. Then the oracle's rec-
ommendations can be self-enforcing, with- the natural development of legislative assem-
out any further intervention by the divine blies. Furthermore, the players might agree
spirit, provided that the recommendations on a leader who can perform general focal
to the players form an equilibrium. Thus,arbitrations to assign claiming rights for all
the focal-point effect can admit a sociallymatches where traditional property rights or
significant role for oracles and divinationother social rules do not apply. Common rec-
as an effective foundation for social coordi- ognition of such rules and authority is all that
nation. Indeed, when we look for effective is needed to make their designated equilibria
focal factors, what can command people's become self-enforcing prophecies in these
attention more than the overall pattern of games with multiple equilibria.
the whole universe? This divine pattern can Now suppose that the players' payoffs in
serve as a focal determinant, however, only this model can be interpreted as resources
when players have a shared understanding that increase people's long-term reproduc-
about it can it be interpreted into a selec- tive fitness. Then an anarchic island where
tion among the set of Nash equilibria of these resources are wasted in the symmetric
their game. equilibrium would sustain a much smaller

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Myerson: Learning from Schellings Strategy of Conflict 1117

population than another island where people effect. Our island of rival-claimant matches is
have systems of rules and authority to coor- a simple model of how the power of a leader
dinate them on better equilibria. If players to allocate property rights can be derived
from highly populated islands can colonize purely from a general common recognition
underpopulated islands, taking with them of his focal-arbitration authority.
their cultural system of focal-equilibrium Focal factors that bestow such coordina-
selection, then an archipelago of such islands tion power on a leader may be called legiti-
should eventually be inhabited only by peo- macy (or charisma when they are intrinsic to
ple who have systems of authority to coordi- the leaders personality). By the focal-point
nate them efficiently in matches where there effect, the selection of legitimate leadership
are multiple equilibria. So, from a Darwinian in any society can depend on its particular
competition among cultures, we derive a gen- culture and history, such as a local tradition
eral principle that every successful society of identifying a particular family as royal.
must have well-developed concepts of justice Focal arbitration power is power to rede-
and authority that enable their members to fine property rights, which of course may be
identify efficient focal equilibria in most of profitable for the focal arbitrator himself. But
the games that they commonly play. a society's generally understood rules for rec-
Such models offer a new perspective on the ognizing leaders can impose constraints on
nature of politics and the state. We may see what a leader must do if he wants to retain
political leaders as general focal arbitrators his generally recognized position of author-
for games throughout society where other ity. Thus, constitutional constraints on lead-
cultural norms do not apply or require inter- ers can be effected when their legitimation
pretation. In our model, such focal coordina- is understood to be granted conditionally on
tion power could be vested in any individual, their maintaining some standard of appropri-
provided only that each matched pair must ate behavior. Such forms of constitutionalism
share a common understanding about who may exist even in societies that do not have
has jurisdiction over their case. As Russell written constitutional documents or demo-
Hardin (1989) has observed, severe costs of cratic elections.
anarchy can make the process of constitut- In any society, it is vital to maintain a broad
ing a state into a game with multiple equilib- general agreement about who has legitimate
ria. So the problem of agreeing about social authority in any situation. Thus, from my
leadership remains as a social coordination earlier remarks about the focal power of the
problem, but it is the coordination problem divine, we can see why societies may find it
to solve all other coordination problems. useful or even essential to call for frequent
In response to Hobbesian theories of an testimony that the local system of rules and
original social contract being the founda- authority is compatible with the divine pat-
tion of the state, Hume (1748) argued that tern of the universe. Although coordination
the foundations of political power generally within a society can be improved by such
depend, not on any prior consent of the pop- belief in the universal nature of its principles
ulation, but merely on a common recognition of justice and legitimate authority, such uni-
by the population. That is, the establishment versalization of local law and authority makes
of a sovereign government may be effected it harder for people in one society to recog-
by a generally shared perception or belief of nize the different forms of justice and author-
the population. From our perspective, we ity in other societies (see Myerson 2006).
can see Hume's argument as a fundamental That is, the same forces that help people to
application of Schellings (1960) focal-point achieve consistent coordinated expectations

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1118 Journal of Economic Literature, Vol. XLVH (December 2009)

in a successful society can become forces for Then an institutional reform and its induced
inconsistency of expectations across societies changes in people's behavior can be under-
in international relations. Indeed, in interna- stood in this framework as a change from one
tional conflicts throughout history, people on focal equilibrium to another. Indeed, with-
each side have regularly failed to understand out multiple equilibria, it would be difficult
the other side's perception of justice in their to understand how a revolutionary change of
conflict. national institutions can dramatically change
so much in a nation where the population
7. General Theory of Institutions and resources have not substantially changed
Enforced in Larger Games in any material aspects.
It might seem, then, that this perspective
Leonid Hurwicz (2008), in the culmination could be summarized by saying that dif-
of his long analytical inquiry into the design ferent institutions correspond to different
of economic systems and institutions, raised equilibria in a larger game of life; but this
the basic question of how institutional rules proposition cannot be technically correct. If
are enforced. Game theorists regularly con- a chess match were understood as an equilib-
sider institutions as games, so that an insti- rium in a larger game of life, then that equi-
tutional reform can be analyzed as a changelibrium would specify each player's strategy
in the chess game itself. But people can be
in the rules of a game. But at a deeper level,
we should also ask how such institutional in a chess match without playing optimally.
games can be reformed or established in theBeing in the chess match only means that the
first place. Having found focal coordination
players are choosing strategies that are con-
problems at the foundations of the state, sistent with the rules of chess, not that they
we should recognize the essential role of are choosing their best strategies.
Schelling's focal-point effect in such analysis. In Hurwicz's (2008) framework, estab-
To ask game-theoretically how an insti- lishing an institution means ruling out cer-
tution is established, we must consider the
tain strategies that are feasible in the true
institution as a game that is embedded in game a of life but are "illegal" under the rules
larger and more fundamental game, which of the institution. So, given a normal-form
Hurwicz (2008) calls the true game. Thegame that describes the true game of life,
embedded institution differs from the true an institution would be described by listing
game in that some feasible strategies in the the nonempty set of strategies for each player
true game are not allowed in the institution. that are legal in the institution. Then we may
For example, when two people are matched say that the institution's rules are rationally
in a game of chess, typically each of them enforceable iff the utility-maximizing best
is physically able to grab the other's king at responses for any player are always legal
any time but is deterred from chess-illegal strategies whenever the other players are all
moves by the damage such behavior could do expected to use legal strategies (possibly with
to one's reputation in the larger game of life. randomization). With this definition, the
So the chess game seems supported by some legal strategies of an enforceable institution
kind of reputational equilibrium in the larger must form what Kaushik Basu and Jrgen W.
true game of life. Weibull (1991) have called a curb set in the
To provide a framework in which different larger true game. (See also Myerson 2009.)
institutions could be established with differ- In a large game, the set of strategy profiles
ent patterns of individual behavior, the larger may contain many different subsets that are
true game must have multiple equilibria. curb sets in this sense of being closed under

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Myerson: Learning from Schelling's Strategy of Conflict 1119

all players' best-response mappings. (Any 1 of these promises and threats is only to
pure-strategy equilibrium is a one-point influence player 2's choice of action, however,
curb set, for example.) But this multiplicity then there is no general reason to expect that
is exactly what is required for curb sets to be 1 would actually want to implement them
our basic conceptual model of enforceable after 2's action has become an accomplished
institutions, so that reforming to different fact. Thus, there is a general credibility prob-
institutional structures is possible but cannot lem for strategic promises and threats.
be achieved without broad coordination of This strategic credibility problem is
individuals in society. intrinsically dynamic, and so it is one of
The new theoretical point here is that those important problems that tended to be
Schelling's focal-point effect can be extended obscured by von Neumann's reduction of
to questions of selecting among multiple dynamic extensive games to the one-stage
curb sets, just as among multiple equilibria.normal form. In raising these questions of
In this framework, the focal-point effect canstrategic credibility, Schelling (1960) helped
help us to understand how the institutions into stimulate the return of game theorists to
any society depend on its particular history study dynamic extensive-form games.
and culture. Once everyone understands that This question of how rational agents can
everybody else will be restricting themselves commit themselves to costly threats and
to strategies in one particular institutional promises (which benefit the agent only in
curb set, it becomes rational for each indi- anticipation by their influence on others) is
vidual to stay in his or her respective por- central in chapter 2 of Strategy of Conflict.
tion of this curb set, and so legal institutionalOne easy answer to the commitment prob-
behavior is rationally enforced. lem might be to rely on contract-enforce-
ment services of the state, but such basic
8. The Problem of Credible Commitment reliance on the state only begs the question
of how state officials are committed to their
Schelling approached the theoretical ques- legal roles (punishing people if they break
tion of strategic commitment from applied contracts, but not if they don't). So we should
questions about bargaining and about deter- recognize that the problem of commitment is
rence in international relations. In bargain-fundamental to the state and all other great
ing, a threat to take one s business elsewhere institutions of society.
may be used to get a favorable price conces- Schelling probes this fundamental problem
sion. In international relations, a threat of by examining it in simple two-person games,
massive retaliation may be used by a nationwhere he shows that a player may be able to
to deter another nation from some opportu- achieve commitment by staking his reputa-
nistic intervention. tion with the other player. That is, player 1
In the general framework of a dynamic may be able to commit himself to implement
multistage game, player 1 could influence promises and threats that are costly in the
player 2's behavior at earlier stages of the
short run by an understanding that Is failure
game if Is strategic response at the later to do so would adversely change his relation-
stages would be conditional on what 2 has ship with player 2.
done earlier. Player 1 may want player 2 toFor example, consider the "prisoners'
believe that 1 will implement some promisesdilemma" game in table 3. In this game, a
player can gain (+20) by switching from
if 2 acts as 1 wishes, but that 1 will imple-
ment some threats if 2 deviates from the friendly to aggressive, but such a switch
desired plan of action. If the value for player causes the other player to lose more (-30).

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1120 Journal of Economic Literature, Vol. XLVII (December 2009)

TABLE 3

A Game with One Bad Equilibrium


(The prisoners' dilemma)

2 friendly 2 aggressive

1 friendly 30, 30 0, 50

1 aggressive 50, 0 20, 20

Is payoff, 2's payoff

So when this game is


players are friendly played
at the first-round prison- once
unique ers' dilemma;
equilibrium in and at the second roundboth
which they a
sive and they will play the
get thegood equilibrium after both
Pareto-dom
off allocation (20, 20).
were friendly at the previous round, but
Now suppose
they that
would this
play the bad equilibrium gam
if either
played twice, player was aggressive
with the at the previous round. mov
players
taneously at each
Both the good
round,
promise and the bad
both
threat le
first-round are credible because
outcome they are Nash equilibria
before they m
of the second-round
second round. In this subgame in table 1, and
two-stage g
the net second-round
1 would like to give player reward of 50 - 20 = 30
2 an i
be friendly at for first-round
the firstfriendship is enough to make
round by p
"If you are friendly each player willing at
to forego
thethe profit of
first
I will be friendly 50 - 30 = 20 from
atfirst-round
the aggression.
second
otherwise I'll (This be aggressive
argument works even with time dis- at
round." If this statement were credible and counting if the discount factor per round is
the players do not significantly discount their greater than 2/3.)
second-round payoffs, then gaining 30 from From this example, we find further reason
l's friendship at the second round should be to admit both the good and bad equilibria
worth more to player 2 than the 20 that she as potentially valid solutions for the game in
could gain from being aggressive at the first table 1. When we first considered this game
round. But unfortunately, the above state- above, I suggested that the bad (20, 20) equi-
ment is not credible, because player 1 would librium could be interpreted as a model of
have no incentive to fulfill his promise to social pathologies that we need to under-
be friendly at the second-round prisoners' stand. But in this two-stage model, the possi-
dilemma when it is the end of the game. bility of having such a bad relationship at the
But suppose instead that the first-round second round is what enables the players to
prisoners' dilemma game in table 3 will be have a good trusting relationship at the first
followed at the second round by the game in round. Thus, social relationships that seem
table 1, which has good and bad equilibria. dysfunctional in the short run might actually
In this two-stage game, there is a sequen- have a positive social function when viewed
tially rational equilibrium in which both from a longer perspective.

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Myerson: Learning from Schellings Strategy of Conflict 1121

Similar equilibria can be constructed for have become known as the folk theorem of
games where the prisoners' dilemma game repeated games.
in table 3 is repeated any finite number From this perspective, we may return to
of times and then is followed by one final the question of how high state officials can
round of the game in table 1. For any such become committed to act according to their
repeated game, there is an equilibrium in legal and constitutional roles that are vital to
which both players will be friendly as long the foundations of the state. The straightfor-
as neither has been aggressive at any past ward answer is that such a high official can
round, but if either ever deviated to act expect to enjoy a privileged social position if
aggressively then both would be aggressive he fulfills his legal and constitutional respon-
thereafter. (With discount factor greater sibilities but could lose these privileges if he
than 2/3, this construction can also be does not (see Gary S. Becker and George
applied to an infinitely repeated version of J. Stigler 1974). His possession of this high
the prisoners' dilemma game in table 3.) In office and its advantageous social relation-
such equilibria, each player effectively moti- ships can be understood as a focal equilib-
vates the other's good behavior by promising rium of a fundamental social coordination
friendly responses to the other's friendship game that has multiple equilibria because
and threatening aggressive responses to the there are other people who could hold this
other's aggression. Of course, aggressive office instead. The key is that effective pos-
behavior at all rounds is also an equilibrium session of a valuable high office requires gen-
of such games. Indeed, the good equilibria eral social recognition and each member of
here are sustained by threats of switching to society wants to recognize a powerful official
a bad equilibrium. who is recognized by everyone else. Thus,
So the existence of multiple equilibria is constitutional rules depend on general social
essential here. Each player's appropriate understanding of how legitimate holders of
behavior in equilibrium is motivated by a high office are identified.
combination of promises and threats by oth-
ers. But if a player's deviation to inappro- 9. Deterrent Strategies and Mutually
priate behavior would not actually change Recognized Boundaries
anything materially in the subgame that
follows, then different promises and threats As an application of the above ideas about
can all be credible in the subgame only if it credible strategic commitment, let us follow
has multiple equilibria. Thus, the problem of Schelling and consider again the question of
making threats and promises credible brings how a nation can commit itself to a deter-
us to further appreciate the importance of rent strategy that is intended to deter other
multiple equilibria in games. nations from opportunistic aggression. Such
These different equilibria may be inter- a deterrent strategy must threaten some
preted as different kinds of relationships punishment against such aggressors but it
among the players. In long-term social situa- must also promise some better treatment for
tions where people have many opportunities others who abstain from such aggression. A
to observe each others' actions and respond credibility problem arises if either the pun-
to them, an individual can be credibly com- ishment or the better treatment would some-
mitted to a strategy by an expectation that times not be in the nation's short-run interest.
any deviation from this strategy could cause But if the long-run costs of not deterring
an adverse change in his relationship with aggression would be sufficiently large, then
others. Generalized versions of this logic the long-run advantages of a reputation for

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1122 Journal of Economic Literature, Vol. XLVH (December 2009)

acting according to this deterrent strategy cultural factors that can influence focal equi-
can make it worthwhile for this nation to pay librium selection may be critical in defining
the short-run costs of threats and promises. what kind of deterrent strategy would actu-
The key is that the nation must have a repu- ally be credible.
tation for acting according to a specific deter- A classic example is the Melian debate in
rent strategy and that the nation would risk Thucydides's History of the Peloponnesian
losing this reputation if it ever deviated from War. Here the critical question was whether
this deterrent strategy. Athens had a reputation for subjugating all
Notice that the critical reputation here is islands in the Aegean Sea or a reputation
how this nation is perceived by those other for subjugating all islands settled by ethnic
nations that it wants to deter because it is Ionians. Either interpretation of Athens's
their behavior that is supposed to change ifreputation could be maintained in an equi-
the nation deviated from the deterrent strat- librium, with the understanding that many
egy. Thus, Schelling discovered the paradoxi-islands would simultaneously throw off
cal fact that an effective deterrent strategy Athens s imperial yoke if it ever lost its rep-
requires coordination with the adversaries utation. The people of Melos, being ethnic
who are supposed to be deterred by it. We Dorians, advocated the second interpreta-
are familiar with the need to coordinate with tion and hoped that the Athenians would
our allies in international conflict but the accept it. But the Athenians felt compelled
importance of coordinating with our adver-to destroy Melos, even though it ultimately
saries is less intuitive. Our strategy will not required a costly punitive expedition,
have the desired deterrent effect if it is not because they believed that the other islands
generally understood and recognized by our would inevitably focus on the first interpreta-
potential adversaries. Furthermore, we can- tion and so would rise in revolt if Melos were
not be credibly held to a deterrent strategy spared.
unless our potential adversaries understand From this perspective, Schelling teaches us
it in detail and can judge our correct imple- to see international boundaries as rich game-
mentation of it. If the terms of our deterrent theoretic phenomena. Each nation needs to
strategy are vague or ambiguous, then in any maintain a reputation for vigorously defend-
specific case we would be tempted to deny ing its boundary. In equilibrium, a nation can
our obligation to fulfill any costly promise be motivated to react strongly against even a
or threat. Rational foundations for inter- tiny violation of its boundary by the fear that
national law of war (jus ad bellum) can be a weaker response could refocus the world
derived from this basic argument that the on another equilibrium in which this nation
strategic conditions for deterrent militarywould surrender much more territory with-
responses need to be generally recognizedout a fight. But if neighbors see their shared
and verifiable. boundary differently, then one's defensive
Of course a nation may have many differ- reaction may be interpreted as an aggressive
ent strategies which, if anticipated by others,
provocation by the other, stimulating a worse
could all have the same desired deterrent counterreaction. So to enjoy the blessings of
effect. Thus, the problem of sustaining a in a world where all nations feel obliged
peace
credible deterrent strategy is a problem toofvigorously defend their boundaries, every-
one needs to agree on the exact location
negotiating a focal equilibrium in a dynamic
game that has multiple equilibria, where of all these boundaries. Thus, the world is
divided by a focal equilibrium of a coordina-
the other players include potential adversar-
ies around the world. All the historical and
tion game, where even small disagreements

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Myerson: Learning from Schellings Strategy of Conflict 1123

can be very costly for all concerned. The vital but have been rarely analyzed by econo-
focal-point effect explains how the location mists. One reason may be that, when we for-
of international boundaries can be arbitrarily mulate a fundamental model of how assets
dependent on accidents of history that would are owned, if this ownership game had one
otherwise have no relevance today. unique equilibrium then it would be hard
to justify the common economic assumption
10. A Reconstruction of Social Theory that ownership can be costlessly transferred
from one individual to another. But when the
Thus, the scope of rational-choice analy- fundamental ownership game has multiple
sis, which has long been fundamental to equilibria, then symbolic documents that
economics, has been significantly broadened transfer ownership can function by changing
by Thomas Schelling's Strategy of Conflict. the focal equilibrium.
Schelling showed that practical insights into Schelling's questions about credible stra-
global conflict can be gained by viewing our tegic commitment also offer deep insights
adversaries as intelligent rational decision- into the foundations of social institutions and
makers like ourselves, and by logically analyz- the importance of social coordination among
ing our rational decisions and theirs together multiple equilibria. The problem of individ-
in a common framework that takes account ual commitment is inextricably connected to
of how people's preferences and information the problem of committing social institutions
may differ. The general framework for such to act according to rules of law. People may
analysis of interdependent decisions is the look to institutions of law to enforce indi-
subject of noncooperative game theory, and vidual contracts and commitments, but the
its development was significantly accelerated lawful action of any social institution itself
and redirected after 1960 by the impact of depends on its officials and agents being
Schelling's book. individually committed to their institutional
Schelling's emphasis on games with mul- roles. Schelling showed how an individual's
tiple equilibria also transformed the rela- problem of commitment can be solved by a
tionship between economic analysis and reputational equilibrium in which the indi-
other areas of social theory. Recognizing vidual is generally perceived to have a favor-
the problem of social coordination in games able reputation that he could lose by deviating
with multiple equilibria may require us to from expected norms of behavior. But there
abandon a simple faith in economic deter- may be many ways to draw the reputational
minism, but it opens the door to admit tradi- boundaries that are to be maintained, and so
tional concerns of sociology into the domain the construction of credible strategic com-
of economic analysis. Schelling's focal-point mitment again depends on social coordina-
effect enables us to better understand how tion within culturally accepted principles.
the cultural environment can affect ratio- So, in the development of a credible deter-
nal economic behavior, even when people inrent strategy in international relations or in
different cultures have the same individual the creation of a new constitutional democ-
goals and desires. Different kinds of social racy, a rational economic analysis must take
relationships, individual reputations, and account of the decisive importance of tradi-
social positions can be understood as alterna- tional cultural perceptions.
tive equilibria in an economic model. Thus, basic questions of political theory
Within the traditional domain of econom- can be understood in terms of the general
ics, questions about how property rights are focal coordination problem. We have seen
enforced have been widely recognized as how the powers of legislative assemblies,

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1124 Journal of Economic Literature, Vol. XLVII (December 2009)

political leaders, and judges in their jurisdic- has a stronger claim on our attention than the
tions can all be derived from a fundamental divine pattern of the entire universe. Thus,
focal arbitration power, that is, the power coordination in a society can be strength-
to create general expectations about which ened when it culturally portrays local forms
equilibrium will be played in a game with of law and authority as derived from univer-
multiple equilibria. The problem of iden- sal divine principles.
tifying who are leaders in a society is itself Even today, in the early twenty-first cen-
a coordination problem where the outcome tury, this author still sees much in the daily
must depend on cultural concepts of legiti- news that calls for broader application of
macy. Hume's observation that the founda- ideas that Schelling formulated in 1960. A
tions of political power generally depend on credible deterrent strategy to protect our
a common recognition by the population can nations' security requires a national reputa-
be understood as an application of Schelling's tion for resolve against provocation and for
(1960) focal-point effect. These fundamental restraint in the absence of provocation; and
political problems of constituting the state our adherence to this strategy must be rec-
and selecting political leaders can be seen as ognized by our adversaries and judged in
the social coordination problem to solve all a multinational forum. The restoration of
other social coordination problems. peace and security in a country that we have
This perspective suggests the elements invaded must depend first and foremost on
of a general theory of social change. In any the legitimation of its new leadership accord-
successful society, social rules are enforced ing to that society's deeply rooted norms and
by high-status individuals whose privileged traditions. As we affirm the great universal
status depends on their acting according to principles that underlie the system of jus-
these rules in a reputational equilibrium. At tice and authority in our nation, we should
the top of this high-status group, there must not assume that our nation's use of military
be some social leaders who have generally force does not need to be judged by other
recognized authority for focal arbitration in nations, nor should we assume that our pro-
various domains, where they can adjudicate jection of authority in a foreign land will be
disputes and coordinate plans that go beyond compatible with the principles of legitima-
the scope of established rules. These individ- tion which prevail there. And we still need
uals would have achieved their current social to learn Schelling's basic lesson that, in a
status by criteria that were defined by social realistic analysis of international conflict, we
rules and leaders' judgments in the past. But should consider our adversaries as rational
a publicly expressed consensus among these intelligent decisionmakers whose interests
focal leaders could modify the social rules are different from ours but with whom we
for the future. In this sense, the essential share a fundamental problem of coordinat-
state of a society at any point in time may be ing mutual strategic expectations.
embodied in its recognized leaders and their
reputations.
The focal-point effect may even offer a References

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