Conventions and institutions in coordination problems

This survey article starts with a game-theory interpretation of coordination problems that occur in an economy. Three types of games are discussed in which the degree of coordination versus conflict varies. It is shown that game-theoretic techniques for equilibrium selection or securing the highest pay-off outcome do not always suffice, which raises the need for exogenous information. Norms, such as conventions and institutions, may provide this information. The emergence and persistence of norms as well as the relationship between the type of game and the type of norm are discussed. After a discussion on conventions and rationality, some notions from institutional Economics are introduced, in which institutions are explained as a way to deal with limited and costly information. Some applications are given in the last section