My roommate Mia and I are both aggressively polite people. Mia is so kind that she accidentally locked herself out of the dorm room and chose to sleep on the floor instead of waking me up. Twice. However, we are not particularly good gift givers. Some economists argue that all gift-giving is inefficient, and I’m convinced I have never delivered a present that could be worth more to her than a transfer of equivalent cash. Still, because we are polite, we’ve forced each other into a prisoner’s dilemma for the past three years. If Mia buys a gift, it is my dominant strategy to buy a gift to avoid the guilt and social cost of being a bad roommate, which gives me 2 more units of utility. However, if Mia does not buy me a gift, it is still my dominant strategy to buy a gift and finally get a win in this terrible war of kindness we are waging. I receive 6 more utils by choosing this option, because she is always more thoughtful than me and quite frankly I am tired of it. Similarly, if I do not buy a gift, Mia is incentivized by a net increase of 5 utils to buy, and if I do buy a gift, she is incentivized by a net gain of 2 to still buy a present. In this way, we are pulled to an equilibrium strategy of both buying a gift, when a Pareto improvement for both of us would be if we did not buy a gift.
We have a mutual friend Kim, who is a perfect candidate for being a governing body. The three of us usually celebrate birthdays together, and if Kim said that she didn’t want to give presents one year, we would probably all breathe a sigh of relief. Unfortunately, Kim will do no such thing, and her last gift just enabled our habits. We could also create a constitution, and promise to use our time for better pursuits. However, after Mia found my sketch of the prisoner’s dilemma on the table and made me explain all of this to her, she just laughed. Unfortunately, it seems like we’ll just have to live in Pareto inefficiency as long as we live together.
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