INDIRECT EVOLUTION VERSUS STRATEGIC DELEGATION: A Comparison of Two Approaches to Explaining Economic Institutions

The two major methods of explaining economic institutions, namely by strategic choices or by (indirect) evolution, are compared for the case of a homogenous quadratic duopoly market. Sellers either can provide incentives for their agents to care for sales (amounts) or evolve as sellers who care for sales in addition to profits. Whereas strategic delegation does not change the market results as compared to the usual duopoly solution, indirect evolution causes a more competitive behavior. Thus the case at hand suffices to demonstrate the difference between the two approaches in explaining economic institutions. (JEL codes: C72, D21, D43) * MD: CentER for Economic Research, Tilburg University, The Netherlands, and Department of Economics, Uppsala University, Sweden. WG: Department of Economics, Humboldt University Berlin, Germany. The paper was written while WG was visiting CentER. We thank Edward Droste and Manfred Königstein for helpful comments. MD thanks the European Union's HCM-Network project "Games and Markets" organized by Helmut Bester for financial support, WG thanks CentER for hospitality. Support from the Deutsche Forschungsgemeinschaft (SFB 373) is gratefully acknowledged.