Inefficient Social Conventions in Backward Economies

When adopted by each member in a society contracts become conventions: they are focal points that solve coordination problems. This paper develops an evolutionary model with two distinct finite populations of players (landlords and landless) in which players from different populations are repeatedly matched within a period to play a stage game. Choices over the three strategies available (fixed rental, share-cropping and wage contracts) are affected by bounded rationality. In particular, players assume their opponents to carry on playing the action they adopted the previous period (inertia hypothesis) so that mimic the most successful strategy played by their own population mates turns out to be the best strategy (miopia hypothesis). Experimentation allows players to innovate towards the preferred strategy every period. The calculation of the eigenvector related to the unit eigenvalue of the Markov matrix stresses that by better solving the collective action problems and decreasing their attachment to habits, landless can change the status quo towards the desired contract. The analysis of the relative dimensions of the basins of attractions highlights that the long-run equilibrium is likely to be the contract preferred by landlords, unless economic incentives are tuned up in order to drive the society to adopt an alternative one.