Fundamental theory of institutions: a lecture in honor of Leo Hurwicz

We follow Hurwicz in considering fundamental questions about social institutions. Hurwicz’s concept of incentive compatibility may help clarify old debates about socialism, where such questions arose. Moral hazard models show disadvantages of socialism, while adverse selection models may delimit its advantages. We review Hurwicz’s general theory of how institutions can be enforced in larger games, suggesting curb sets as an alternative enforcement theory that admits focal point effects. Finally, we consider specific problems of leadership and trust in establishing sovereign political institutions, where high officials can be deterred from abuse of power only by promises of large future rewards, which a leader must be credibly committed to fulfill.