Pareto dominance

Pareto dominance is a criterion in game theory and welfare economics stating that one outcome is superior to another if at least one agent is better off and no agent is worse off. In equilibrium selection, a Pareto-dominant equilibrium — one that gives all players higher payoffs than any alternative equilibrium — is often proposed as the natural solution. Yet experimental and theoretical work shows that players frequently fail to coordinate on Pareto-dominant outcomes, especially when doing so requires trusting others to avoid safer but inferior options.

The tension between Pareto dominance and risk dominance captures a fundamental trade-off in complex systems: efficiency versus robustness. The claim that rational agents should select Pareto-dominant equilibria assumes that collective rationality follows from individual rationality — an assumption that collective action problems repeatedly falsify.