The Economics of Self-Governance in Online Virtual Societies

Robert S. Cavender

Advisor: Richard E Wagner, PhD, Department of Economics

Committee Members: Peter T. Leeson, Virgil H. Storr

Enterprise Hall, #400
April 16, 2015, 12:00 PM to 08:30 AM


Online games have exploded in popularity over the past twenty years alone, from just over 50,000 active participants by 1997 to over 22 million worldwide as of 2011. It is becoming more and more apparent that virtual reality worlds are not only here to stay, but provide for us the opportunity to explore a new empirical frontier in economic development. And as with any new frontier, the accompanying questions pertinent to its economic development are numerous. The broad economic question that these chapters seek to address is the following: given the notable absence of the usual sorts of government intervention prevalent in most advanced economies, how do individuals in online virtual societies go about establishing the institutions necessary for economic exchange?


The first chapter deals with a particular set of private-order laws called "Dragon Kill Points" that have emerged to enable individuals in several online environments to engage in long-term contractual cooperation. Where in past cases of self-governance individuals are able to rely on the threat of simple ostracism to induce cooperation, in the relatively populous and anonymous world of online virtual societies such a mechanism is often not so readily effective. Indeed, even exceptional solutions that have emerged to induce cooperation in cases where simple ostracism has proven impossible - solutions like religion, superstition, or threat of violence - prove difficult to employ successfully in online societies characterized by cultural diversity, modernity, and real-world anonymity. This chapter examines how individuals make use of the voluntarily-adopted legal system of Dragon Kill Points to successfully establish property rights, allocate economic goods, and engage in contractual exchange in an environment utterly different from those examined in the relevant literature thus far.


The second chapter further explores the question of whether and how individuals may sustain economic cooperation absent government by examining the large, persistent online virtual world of EVE Online. In this world, as with many online games, not only is attacking other individual players openly allowed, but in fact the chance for a large number of individuals to simultaneously engage in virtual thievery and "murder" all in the absence of government is considered one of the most attractive features to subscribing players. This therefore represents one of the most challenging cases to be made for the possibility of economic cooperation. Nevertheless, and contrary to what some of the previous literature might suggest, I find that individuals in this virtual economy manage to effectively establish property rights and engage in contractual exchange through the combined use of a simple reputation mechanism and self-policing.


The third and final chapter examines the spontaneous emergence of a commonly accepted medium of exchange in the online game Path of Exile and uses the empirical example as a vehicle through which to compare and contrast two distinct models purporting to define the economic role of money. While at its inception the game's online trade consisted primarily of inefficient barter, within two years extremely stable and universally-understood prices and exchange ratios existed, and a set of commonly accepted media of exchange had emerged naturally out of a much larger set of trade items. I find that with respect to the emergence of money even in this contemporary example, Menger's more "informal" analysis remains superior in terms of its descriptive and predictive account thereof in comparison to Kiyotaki and Wright's more modern, search-theoretic approach.​