Effects arising through investments in social status
We all have a supply of investment opportunities. If we apply a rational decision making model, it is safe to assume that people will use investments funds available to them (both their own funds as well as funds raised on the capital market) to carry out such investment opportunities based on their respective rates of return. They will thus carry out those investment opportunities that offer higher rate of return compared to interest rate.
Now, let us assume that by investing in social status, it is possible to prevent the utilization of an investment opportunity by those, who cannot afford such investment. The effect of such situation will be an increase of the return from the investments in social status. Based on this, it is possible to draw three conclusions:
- An investment in social status has non-Pareto consequences for the bearers of investment opportunities (i.e. those, who cannot utilize funds into investments in social status, will be worse off).
- An investment in social status reduces social effectiveness (significant reduction of effects generated within the economic environment in case of the utilization of investment opportunities).
- An investment in social status will pay off to those, who make such investment, provided the effect of such investment as a result of higher share in the return of the given investment opportunity – as opposed to a situation, where the investment does not limit the utilized investment opportunities – exceeds the costs of the relevant investment in social status.
Effects arising as a result of activities of social networks derived from investments in social status:
The scope of the primary effects is given by the difference between the expected average payoff, or between the payoff in the together acceptable equilibrium point (as appropriate), and the payoff the relevant player gets within the winning coalition. In order for a player to become (remain) a member of a winning coalition, he/she must make certain effort or act in a certain manner, as appropriate. It is then necessary to analyze, how the expected average payoff (payoff in the jointly acceptable equilibrium point) differs from the net payoff a player gets within the winning coalition (i.e. payoffs within the winning coalition minus all costs of a player associated with his/her participation in the winning coalition). In case it is possible to identify the costs of a player associated with his/her participation in the winning coalition, it is also possible to identify the ways of increasing such costs, through regulation or organization, thus at least partly eliminating investments in social status and their non-Pareto consequences.
Effects arising as a result of violations of the generally accepted principles
In this case, it is possible to derive from the game Tragedy of the Commons. In case there is a risk that a player might be detected and punished with a certain probability, it is possible to analyze under what conditions players opt to violate the principles. It is possible to use the existing literature - e.g. work of E. Ostrom.
However, existing analyses usually do not consider the role of the structures based on mutual covering of violations of the generally accepted principles. These analyses rely on the premise that a player, who decides to violate (or already directly violates) the generally acceptable principles, compares the benefits (utility) and costs associated with such violations, whereas the analyses that rely on the examination of such benefits and costs sometimes include proposals for reducing such benefits and increasing the costs. However, the analyses usually do not include, as one of the potential benefits, the fact that – by violating the generally accepted principles - a player wishes to take part in a structure based on such violations, because he/she derives benefits from the participation in such structure. Furthermore, the analyses do not really consider the possibility that other players might actively seek out players, who wish to violate (or are already violating) the generally accepted principles in order to create a social network with them or to involve them in an existing network (also see the following section).
(To be continued)