Changing the Game: Status-Quo Inertia, Institutional Design, and Equilibrium Transition

TL;DR

This paper examines how institutional inertia affects the success of economic interventions, emphasizing that changing the game itself is often more effective than marginal incentive tweaks.

Contribution

It introduces a framework analyzing equilibrium inertia and demonstrates that modifying the feasible action space can more effectively shift entrenched equilibria.

Findings

Price-based interventions often fail due to status-quo inertia.

Removing strategic options can significantly alter equilibrium outcomes.

Changing the game structure is more effective than marginal incentive reforms.

Abstract

Many economic interventions are designed as marginal changes in incentives. Yet in environments shaped by coordination, institutional persistence, and path dependence, such reforms often leave behavior largely unchanged. This paper studies interventions in games when equilibrium selection displays status-quo inertia: if the pre-intervention equilibrium remains a Nash equilibrium after policy, it continues to be selected. In that environment, price-based interventions and simple option expansion may fail even when they improve welfare in a partial-equilibrium sense. By contrast, interventions that modify the feasible action space, especially deletion and replacement interventions, can be substantially more effective because they remove the strategic basis for persistence. We develop a simple framework, derive general results, provide complete proofs, and illustrate the economics with examples from climate transition, platform regulation, financial reform, and industrial modernization. The analysis highlights a basic policy lesson: when inefficient equilibria are institutionally entrenched, the central problem is often not how to price the existing game more finely, but how to change the game itself.