Game Theory and Social Dilemmas

Strategic Interaction: Game Theory

• Game theory is an analytical tool, not a theory
• Assumes rational actors who act strategically
• Analyzes why agreements aren't always reached, and which outcomes are more likely
• Developed in the 1970s (e.g., John Nash, A Beautiful Mind)
• Focuses on social interactions where each actor's behavior impacts everyone else's outcomes

Social Dilemmas

• Economic and political actors often interact, affecting each other's actions and outcomes, leading to gains and conflict.
• Coordination can be difficult even when people want it
• Game theory helps understand these interactions.
• People sometimes pick suboptimal choices to avoid other people hurting them
• These lead to negative outcomes despite incentives to cooperate, sometimes referred to as "social dilemmas." (e.g., traffic jams; climate change)
• Three types of social dilemmas:

Social Dilemma 1: Public Goods

• Public goods are non-excludable (everyone can use them once they are available) and non-rival (consumption by one person doesn't reduce availability for others).
• Examples of public goods include utilities, lighthouses.
• People often benefit without contributing called "free riding."
• Solutions typically involve public provision & payment (taxes) due to incentives inhibiting cooperation.

Social Dilemma 2: Tragedy of the Commons

• Common-pool resources, shared by a group, are often subject to unsustainable exploitation by individuals pursuing short-term gains.
• Free riding is a key issue. If individuals reduce their impact, they bear the cost but the benefit is shared with other non-contributors.
• Examples include overfishing, pollution, overgrazing.

Social Dilemma 3: Joint Goods

• Examples of joint goods are those goods that can only be enjoyed if actors cooperate.
• Management and employees in companies, for instance, need each other.
• Issues arise when distributing the benefits of cooperation.
• Power struggles over these distributions are common.

Game Types and Core Concepts

• Invisible Hand: Actors maximize benefits without specific strategy. Cooperation arises due to specialization and mutual gains. It frequently arises in markets (e.g., free trade)
• Prisoner's Dilemma: Introduces negative consequences of cooperation (even with high benefits) and assumes no communication. Actors experience pressure to not cooperate even if mutual cooperation would be beneficial
• Coordination: Actors' choices are affected by other actors' choices, and outcomes can arise from different initial positions. Example: choosing the same language for software development
• Tragedy of the Commons: Cooperation needed for the collective good but individual incentives may make it difficult (e.g., need for government action in regulating common resources)

Elements of a Game

• Players: Individuals or groups involved in the interaction.
• Feasible strategies: Actions each player can take.
• Information: What each player knows when making decisions.
• Payoffs: Outcomes based on combinations of actions.

Best Response/Dominant Strategies

• Best response: Strategy that gives a player the highest possible payoff, given the strategies of others.
• Dominant strategy: Action that yields the highest possible payoff for a player, regardless of what the other players do.
• A dominant strategy equilibrium occurs when each player's dominant strategy leads to a specific outcome

Nash Equilibrium

• A Nash equilibrium is a set of strategies where each player's strategy is a best response to the strategies chosen by all other players.
• It may not always be the best possible outcome for everyone involved.

Conflicts Over Which Equilibrium Occurs

• If there are multiple possible outcomes (Nash Equilibria) conflicts over which will happen are common, due to differing interests over how mutual benefits (e.g. climate change cooperation) are distributed.

Psychological Bias & Game Theory Gaps

• People don't always act rationally, and psychological biases can impact outcomes and decisions
• Imperfect information & cognition
• Loss aversion (potential losses are weighed more highly than potential gains)
• Discounting (future outcomes are discounted)
• Social preferences (caring about others, inequality aversion)

Tools to Overcome Social Dilemmas

• Repeated interactions: Over successive periods, individuals tend to behave better by cooperating, as they anticipate future repercussions for not cooperating (e.g. tit-for-tat)
• Fewer number of players. It's easier for cooperation to emerge when few actors involved as the costs of defection are higher and easier to monitor.
• Monitoring, enforcement, and institutions: Mechanisms that enforce rules & hold people accountable for following social rules that incentivize cooperation
• Social norms and persuasion. Norms of fairness and appropriate behavior to enforce cooperation.

Bargaining to Resolve Problems and the Future

• The availability of alternative solutions can impact how willing actors are to agree
• Finding appropriate mechanisms or institutions (to create credible commitments) can be important in bargaining contexts for the future.

Next Steps

• Policy approaches will be discussed as possible remedies to situations where cooperation is difficult.
• Policy examples discussed will be to address social dilemmas, including market failure, institutions, & public provision.

This quiz explores the concepts of game theory and social dilemmas, focusing on strategic interactions among rational actors. It examines why agreements are often unachievable and discusses the implications of public goods and cooperation dilemmas. Test your understanding of these crucial concepts that impact social and economic interactions.