'basement 4 Working Paper Alfred P. Sloan School of Management How People Interact toward a General Theory of Externalities

This paper treats reciprocal externalities as a special case of how people interact. Two-person two-choice games are used to construct a theory and taxonomy of interactions and to show that separability of objective functions (utility, cost, or profit) is sufficient, but not necessary, for the existence of dominant strategies. The model is generalized to Nx2 games and applied to tax evasion, rural development, optimal saving and social norms.