No-harm principle, rationality, and Pareto optimality in games

Mill's classic argument for liberty requires that people's exercise of freedom should be governed by a no-harm principle (NHP). In this paper, we develop the concept of a no-harm equilibrium in $n$-person games where players maximize utility subject to the constraint of the NHP. Our main result is in the spirit of the fundamental theorems of welfare economics. We show that for every initial `reference point' in a game the associated no-harm equilibrium is Pareto efficient and, conversely, every Pareto efficient point can be supported as a no-harm equilibrium for some initial reference point.