3 - Law and Economics in a World of Dragons

Summary

INTRODUCTION

Nobel Prize-winning economist Elinor Ostrom's seminal thesis was that even when placed in an environment without government, individuals are nevertheless capable of developing alternative institutions that successfully turn conflict into cooperation. In her book Governing the Commons, Ostrom writes, “The central question in this study is how a group of principals who are in an interdependent situation can organize and govern themselves to obtain continuing joint benefits when all face temptations to free-ride, shirk, or otherwise act opportunistically” (Ostrom, 1990). She goes on to detail several real-world examples of such self-organization, including the self-governance of communally owned lands in Törbel, Switzerland, dating back to the 1500s, irrigation practices near Valencia that have survived for hundreds of years, and similar institutions in the Philippines dating back to at least the seventeenth century, among others. Following Ostrom, a number of authors have since contributed to a broader strand of the literature on self-governance (Milgrom, North, and Weingast, 1990; Ellickson, 1991; Bernstein, 1992; Greif, 1993; Clay, 1997; Zerbe and Anderson, 2001; Anderson and Hill, 2004; Dixit, 2004; Skarbek, 2011; Fike, 2012; Leeson, 2007, 2012).

This literature is relevant wherever government-enforced law and order are largely absent, for example, for a large part of human history (see, for instance, Benson, 1988; Leeson and Stringham, 2005; Posner, 1980), on the fringes of society (Ellickson, 1991; Leeson, 2007, 2012; Skarbek, 2011, 2012), and everywhere a “new frontier” emerges before the government has had a chance to get involved (for example, Anderson and Hill, 2004). Counterintuitively, this latter category is perhaps most relevant today, where a rapidly expanding new frontier has so far gone mostly unnoticed in the law and economics literature: the world of virtual online societies. This chapter contributes to the earlier literature by providing a modern case study of the emergence of cooperative rules for self-governance to solve economic problems in virtual online environments. In particular, I examine the emergence and subsequent employment of the set of commonly understood and privately generated rules known collectively as “Dragon Kill Points,” or “DKP,” in MMO games and which were first introduced to economists in 2007 through an appreciative paper by Castronova and Fairfield (2007).