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The way we configure our payoffs captures our underlying assumptions about the rationality and decision making processes of the players involved.
- Institutional design which changes the game the players play is useful for affecting the well-being of players. Modifying the payoffs lets us encourage potentially better behaviors.
- The assumption of the common knowledge of rationality should be applied with caution since it is not something “realistic”
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Left to their own devices, people in many situations will do what is best for them, at the expense of social efficiency