How can we achieve Pareto Efficiency in games like the Prisoner’s Dilemma? In Game Theory, the Nash Equilibrium is the outcome of a game if both players act in their best interest, and an outcome is Pareto Efficient if no other outcome is better for both players. In many games, the Nash Equilibria are not Pareto Efficient, leading to inefficiencies in micro scale market transactions, but also overall macro scale effects, such as negative externalities like climate change or pollution. There have been many attempts to solve the issue, from repeating the game to introducing cooperation—yet most are ineffective as they rely on the game organizer to corroborate the solution.

To address this, I will look at the effects of legally binding contracts as a mechanism to a solution. I will investigate the theoretical basis for using legally binding contracts, and test the theory through experimental data. I expect that the legally binding contracts will be effective, potentially offering a solution to both micro and macro scale inefficiencies.