Economic Governance: A General Introduction

Economic governance addresses how societies can overcome fundamental coordination failures rooted in strategic interaction. Three major challenges lie at its core: protecting property rights, enforcing contracts, and solving collective action problems. In the absence of credible rules or enforcement mechanisms, individuals have little incentive to invest, cooperate, or contribute to public goods. Property rights are undermined when potential investors fear expropriation, leading to a hold-up problem where the dominant strategy is inaction and theft, resulting in inefficient outcomes. Similarly, contracts between private parties, such as buyers and sellers, are vulnerable to opportunism when neither side can trust the other to uphold its end of the agreement—producing a classic prisoner's dilemma with mutual defection as the equilibrium. Collective action problems, involving larger groups, amplify these failures: whether it's saving for unemployment, participating in political movements, or coordinating social norms, each individual faces incentives to free-ride, leading to under-provision of public goods. These recurring dilemmas, often modeled in game theory, highlight the role of institutions in shifting outcomes from inefficient equilibria toward cooperative and welfare-enhancing solutions. Effective governance, therefore, consists in designing rules, norms, and enforcement mechanisms that alter payoffs and expectations, making cooperation rational and stable across a variety of social and economic settings.

[https://www.learnioe.org/video/economic-governance-a-genera-introduction](See more...)