DANIEL G. ARCE M. CORRELATED STRATEGIES AS INSTITUTIONS ABSTRACT. Two institutions that are often implicit or overlooked in noncooper- ative games are the assumption of Nash behavior to solve a game, and the ability to correlate strategies. We consider two behavioral paradoxes; one in which maximin behavior rules out all Nash equilibria (‘Chicken’), and another in which minimax supergame behavior leads to an ‘inefficient’ outcome in comparison to the unique stage game equilibrium (asymmetric ‘Deadlock’). Nash outcomes are achieved in both paradoxes by allowing for correlated strategies, even when individual behav- ior remains minimax or maximin. However, the interpretation of correlation as a public institution differs for each case. KEY WORDS: Correlated equilibrium, institutions, coherence/arbitrage, mini- max, maximin, conflict inflation. CORRELATED STRATEGIES AS INSTITUTIONS At present there is a great deal of ambiguity as to what is meant by institutions and social norms in games of strategy. For exam- ple, Schotter (1981) defines an institution as a Nash equilibrium that results from an infinitely repeated game (supergame), whereas Kandori (1992) instead argues that supergame outcomes character- ize social norms. In contrast, Hargreaves-Heap (1989) finds that the supergame approach itself relies heavily on exogenous informational and institutional structures. These background institutions or infor- mation sets are often the factors that bring issues such as reputation or commitment to life. 1 In this paper institutions are defined to be the ‘rules of the game.’ Obvious strategic institutions include contracts, property rights, game forms (extensive, strategic, coalitional), and strategies. Our purpose is to focus on two institutions that are either implicit or overlooked in the analysis of noncooperative games. These are the assumption of Nash (best response) behavior to solve a game, and the ability to coordinate strategies through correlation. For example, consider the assumption of Nash behavior – the predominant noncooperative solution concept. In the games ‘Chick- Theory and Decision 42: 271–285, 1997. c 1997 Kluwer Academic Publishers. Printed in the Netherlands.