Coordination failure: I keep hearing that markets to fail at least sometimes the biggest one so far seem to be the global warming and pollution effects on the earth.

There have been two schools of thought one that says that humans can self-regulate themselves provided they are trained and educated and the other which asserts that Humans basically can never be trusted. Hence the society needs strong institutions to sustain itself.

This is a story from one of my friend studying in a premier B-school in US. They had a situation that showcased that strong institutions are needed even in places of highest form of elitists and coordination failures are set to occur when there is information asymmetry in an unregulated market. They seemed to have a take home exam for one of their courses. They were given one week time to complete the exam but the exam should be taken in a continuous stretch of two hours (without break). The course participant is not supposed to see the question paper before he begins his 2-hrs exam. No one will monitor the person taking the exam. It was agreed that the students should not disclose or discuss the questions with each other.

Before the exam was distributed, the professor proved using game theory matrix that cheating in the exam was the dominant strategy for a student irrespective of whether other students cheat or not. Hence a self-utility maximizing rational being will always need to cheat. But he trusted everyone and expected us to prove that institutional control is unnecessary and that every one acting responsibly will produce a collective gain.

But what happened? Coordination failure.

After the papers were evaluated, the class average was abnormally high for such a tough paper. My friend said that the evaluation was lenient. For the few people who got marks way less than average, the professor called them and had asked them to rewrite the exam and awarded them grace marks to pull them closer to average. It was a nice gesture (face saving?) to save the people who honestly followed his instructions.
My guess is that the Prof is authoring some paper on institutions and society and who knows if he is going to use this experiment to support his point! After hearing this from my friend, I have started believing that when the incentive systems are not fair, don’t expect individuals to be fair. If at all people behave different from this thesis, it can be because they were ingrained with these beliefs by their culture or schools or parents or due to the environment they grew up in. Not because of their (Human) Nature? I don’t know.