Social ties in the market goods game

One of the most interesting aspects of economics is the study of the impact of social ties and interactions on the economic behaviour of individuals. The basic question is whether individuals in reality behave fully rationally in the theorist sense of the word. In everyday life, do all participants in the game (market, social life) coldly calculate payoffs and choose a dominant strategy, or is there room for social consensus and it is possible that they sacrifice narrowly defined self-interest for the common good (i.e. can the outcome of the game be a Pareto optimum that is not a Nash equilibrium; more generally, must the outcome of the actual game always be a Nash equilibrium)? The question is not new, as the issue of the influence of social interaction on the behaviour of homo economicus was already considered by Adam Smith. Nor is the question strictly theoretical, as various administrative and financial institutions would give much to be able to predict, preferably on the basis of some inexpensive research, what an individual’s economic decisions will be1. Consider a model in which the social relationship between two individuals is measured by how much one party cares about the welfare of the other. For multi-period models, it can be assumed that such relationships depend on success in social interactions, in our case: the joint provision of a public good.