This note is a part of my Zettelkasten. What is below might not be complete or accurate. It
is also likely to change often.
One way of reaching a paretto-optimal outcome from the Tragedy of the commons game is for the participants to come to a unanimously fair agreement about the terms of cooperation and have an enforceable contract using an external arbitrator. The cost of the external arbitration is shared by the participants.
Using the same example as Garrett from Tragedy of the commons, the herders should negotiate before the herding begins. They have to discuss the various tactics for sharing the carrying capacity of the meadow and the cost of enforcing their agreement (which is shared among the participants).
The unanimous condition is necessary for Fairness. If any participant finds the contract unfair, they can refuse to participate, forcing further negotations and requiring a equal sharing of the sustainable yeild. The participants determine the terms of the contract and the external agent steps in to only enforce its terms.
Having such a game creates a dominant strategy that is close to pareto optimal (the ideal outcome still being cooperate-cooperate without any cost of external arbitration).
This mechanism of having a negotiated contract is used in:
The limitations of this include: