Foundations of Game Theoretic Understanding of Socio-Economic Phenomena; A Network of Excellence in Economic Theory
Prepared by Myrna Wooders, Department of Economics, University of Warwick Gibbet Hill Road, Coventry, CV4 7AL, UK
Applicable Instrument: Network of Excellence Sub-Thematic Priority most relevant to the topic: 1.1.7 Citizens and Governance in a Knowledge-based society Other relevant Sub-Thematic Priorities: 1.1.7.i Knowledge-based society and social cohesion 1.1.7.ii Citizenship, democracy and new forms of governance
Summary: This EoI is for a network in game theory and economic theory, including evolutionary approaches. While the proposal relates to applications of theory, the main motivation and thrust is in a network of excellence in pure theory. Like research in theoretical physics or on the human genome, fundamental game theory and economic theory is not primarily motivated by immediate applications or by current policy issues. Instead, it is motivated by scientific intellectual curiosity. Because this curiosity arises from a quest towards a deeper understanding of the world around us, it is anticipated, however, that there will be applications of great significance – recall that the multi-billion dollar outcomes of auctions of spectrum in the US were guided by game theory. In addition, fundamental scientific theory, because of its search for understanding that will have broad consequences and transcend national boundaries, is appropriately funded by at the European Union level. The network aims to embrace the leading researchers in economic theory and game theory and strengthen Europe’s position as a leader in economic research..
Motivation; Need and Relevance. Along with standard techniques and concepts of economic theory and econometrics, arguably game theory now provides the most important set of concepts and techniques in the tool kit of the social scientist. 1 Besides in auctions of public property such as spectrum, these tools appear in such diverse settings as the analysis of voting behavior, the risk-taking behavior of participants in “Who wants to be a millionaire”, and European Union issues of tax competition and coordination between countries within the EU. Using the concepts of game theory, economic theory and also, to a more limited extent, evolutionary theory, research is currently in progress on all these topics plus a number of others, including competition policy and regulation, trade policy, educational policy, banking and finance. Citizen participation in influencing governmental policies and `big business’ – multi-national corporations, outside the jurisdiction of any particular nation – through protest movements and other forms of voluntary organizations is also being analyzed using both game theory and techniques and insights from economic theory. The importance of game theory and economic theory is witnessed by a long list of Nobel Laureates, including George Akerlof, Kenneth Arrow, Gerard Debreu, John Harsanyi, John Nash, Reinhard Selten, Amartya Sen, Michael Spence. Joseph Stiglitz and William Vickrey.
Applications are important, but no application of the tools of economics and game theory, except perhaps with a bit of luck or the insights of an experienced and intuitive practitioner, can be better than the theory on which it is based. Evidence-based policy requires hypotheses to test and theories to interpret and understand the evidence. The contributions of the Nobel Laureates and those of many other researchers are fundamental. The tools already developed have had diverse applications, but still a number of questions remain. To treat the new
1 Another fundamental part of economics is empirical research and its econometric foundations. These are distinct from the activities of our proposed research but we wish to note their importance. questions that arise in modern, knowledge-based, multi-jurisdictional and multilevel societies, it is imperative that the fundamentals of game theory and economic theory are continually challenged and advanced.
This EoI proposes a network uniting a number of game theorists and economic theorists in a collaborative endeavor to advance these areas of research and provide the tools and techniques needed for the analysis of modern society. This research will contribute primarily to the theme proposed by the EU, “Citizens and Governance in a Knowledge-Based Society”. It will also contribute to the theme “Sustainable Development, Global Change and Ecosystems”, since some of the issues involved concern strategic and multi-level decision- making. The research may also contribute indirectly to other themes since, whenever interactive decision-making is a factor, game theory may be relevant.2 While some of the research proposed by this network contributes to these themes directly, the primary contribution of game theory is to provide concepts, tools and techniques to be used in applications.
A second ambition of the network is to establish Europe as the internationally recognized leader in game theory and the foundations of economic theory. For a position of leadership in economic science, strong expertise in theory is essential. This is especially true for basic research since it transcends geographical boundaries and is not limited to a particular time period. The proposed network already includes some of the world leaders in game theory and economic theory; the training and collaboration of the network members will build on this. In addition, the network aims to include researchers earlier in their careers who have exhibited excellence in research but are still relatively junior. If funded, the network will seek to embrace all of Europe’s leading scientists in economic and game theory.
A Partial List of Research Themes (A) Cooperation with complete information. Two of the main issues in this theme are the ‘Nash Programme,’ that is, how bargaining and negotiation may lead to a cooperative outcome, and the related problem of variable threats. One objective is to extend existing models of multi-person bargaining games to include variable threats and to thus deepen our understanding of the effects of variable threats on bargaining outcomes; in a world of changing alliances on multiple issues, such understanding is vital.
Coalition and network formation is central to any bargaining situation. Since these are relatively new and important areas of research, we wish also to understand these topics on their own. Applications include decentralized markets and trade, labor markets, local provision of public goods, communication networks, and kinship structures, among many others. Prior models in the literature involving networks with many participants have sought conditions under which perfect competition will be attained. Even with many sellers of a product, however, if a product is subject to ‘network externalities,’ then any ‘competitive’ outcome may be very unstable, with the dynamics leading perhaps to monopoly; such a result would constitute a major breakthrough and underpin a better understanding of stability considerations.
(B) Cooperation with incomplete information. In (A) above it is assumed that all players have complete information—and thus, the same information. While the complete information case is important to our understanding of strategic behavior, it is more realistic to assume that players have private information on the fundamentals of the collective decision problem at hand. When individuals, nations, or unions of nations, do not know the objectives of others and yet a cooperative outcome is desired, how might this be achieved? Obviously, players with asymmetric information cannot coordinate efficiently without communication. At the same time, strategic behavior will often lead to misrepresentation of information. Hence, when information is asymmetric, players can benefit from communication and can effectively coordinate only through incentive compatible mechanisms (ICM), i.e., communication games designed in such a way that misrepresenting information is unprofitable. In practical terms, we need to understand how to set up organizations and systems so that economic actors, seeking to further their own self-interests, will promote the social good. The ‘social good’ could be the profits of the firm, the creativity and output of the network, the installation of desirable social policies, and so on. The theoretical issues involved are deep and have long captured the interest of some of the most eminent economic theorists.
Since the implementers of a mechanism may not have precise information about the details of the situation, one objective of the network is to design mechanisms that are robust to deviations in the underlying situations.
2 For example, ‘Food Quality and Safety’ is, in practice, affected by a number of decision-makers who each have their own personal goals – for example, profits or re-election or promotion in academia or family well-being.
2 (C) Equilibrium concepts: The most fundamental problems of strategic interaction and coordination are about equilibrium itself: on what equilibrium do players coordinate, and how? In a Nash equilibrium, individuals take as given and fixed the behavior of other individuals and no individual perceives any possible gain from changing his behavior. But it is intuitive (and may correspond to the reader’s own experiences) that individuals do indeed consider how others might respond. Subtle and deep conceptual issues are involved. To illustrate the sort of issues involved, consider the following: In the analysis of games, both in game theory and in interactive decision making, where the decisions of one player affect another player and that player’s decision making, it is crucial to describe what each player would think and do in any given partial history. What would she think if the ‘inconceivable’ actually happened? How would she revise her beliefs? Research investigating such issues is in its infancy but the research promises to deepen our understanding of human interactions in situations of cooperation and conflict.
Concepts such as the Nash equilibrium are based on rationality assumptions on behaviour. A quite different motivation underlies the evolutionary approach. With this approach, equilibrium is simply a situation that persists, that cannot be overturned by mutant behavior. Similar concepts are used in biology. What is particularly interesting to the social scientist is when evolutionary approaches and other approaches, based on rationality arguments, coincide.
Our aim is to better understand existing concepts of equilibrium and to develop other concepts that may fit particular situations better than the current concepts. We also will test the "reasonableness" of the predictions of equilibrium concepts in specific economic models, for example, voting models, games and networks with many participants, general equilibrium models with and without incomplete information, and evolutionary models. Also, models based on historical observations present interesting situations that may be amenable to game-theoretic understanding and serve as tests of the reasonableness of equilibrium concepts. The prediction approach is practical: The «bottom line», from the viewpoint of application, is how well various equilibrium concepts fare in models of social interaction. One objective here is to examine equilibrium outcomes in models of political economy. In particular, we’re interested in “strategic” rather than “sincere” voting and strategic behavior of candidates, such as strategic agenda-setting and differential use of instruments, party positioning and strategic campaign spending, for example. An objective is to develop a tractable model integrating these issues. We are also interested in learning behavior of voters and the evolution of public spiritedness. To further understand the relationship between evolutionary (or learning) outcomes and game-theoretic equilibrium, we plan to develop evolutionary models of economies with clubs and also of market games. Since these provide an excellent framework to develop and/or test solution concepts, we also plan to study exchange economies and economies with clubs/local public goods with incomplete information. In addition, we propose to test the implications of equilibrium in the context of games with many players, where the peculiarities of individualistic behavior appear to become less relevant.
(D) Strategic and non-strategic, price-taking behaviour and large economies. The theory of ‘perfect competition’ has origins in the writings of Adam Smith. According to this theory, when the numbers of participants in the economy is large and each individual acts in his own self-interest, then the economic outcome has desirable optimality properties. The model of a perfectly competitive economy provides a base line against which variations to the model can be compared. Recently, the perfectly competitive model has been significantly extended with the theory of economies with local public goods, clubs, and social networks. To describe economic activity in modern economies with many economic actors, multiple levels of governance, multi-national firms and socio-economic networks that transcend political boundaries, new models of large economies are required, perhaps especially ones with networks varying in size from small family networks to large international networks of more or less loosely aligned groups of firms or individuals (Greenpeace, for example, or the anti- WTO and anti-globalization protestors). Such models would be useful to apply, for example, to questions of international governance and competition policy in modern, knowledge based and internationally networked societies. Moreover, there are still numerous questions to be addressed concerning general equilibrium in ‘small’ economies.
(E) Issues in Social Choice Theory: Social choice deals with the normative foundations of public policy. The central theme is a critical examination of the “proper” ethical goals and targets of public policy. Prominent topics that are at the forefront of current research - and ones in which researchers belonging to the network are actively engaged- include population policy (with obvious implications for immigration), the trade-offs between equity and efficiency, and the ethical measurement of poverty and inequality. A related set of issues, also being actively
3 pursued in the network is concerned with delineating those policy objectives which can be implemented or achieved in an environment of asymmetric information – in particular when the policy maker does not possess relevant information about the individual agents.
Excellence. The network will build on substantial excellence in Europe in the areas of game theory and economic theory. Most of the larger nodes in the network include individuals whose research in these areas has been recognized by election as Fellows of the Econometric Society, arguably the most prestigious society in economics. With other internationally recognized European leaders in game theory and economic theory, the expertise of European researchers in total is formidable; the scientific expertise for a network of excellence is ready and available. But, because European universities tend to be smaller than American ones and European excellence in theory is thinly spread across a number of institutions, the excellence of Europeans in this area may not have the recognition it deserves. By uniting European game theorists, the network will heighten and firmly establish the reputation of European economic and game theorists for excellence in research.
Integration and Structuring Effects. There is substantial co-operation in the field of game and economic theory. The nodes listed in this proposal already constitute a network of linked nodes through collaborations of individual team members, both short and longer visits of researchers between nodes, through doctoral programmes and through jointly organized workshops and conferences.
We plan to have at least one workshop per year involving all nodes and treating all our themes and other, more specialized workshops treating only a subset of themes. In general, workshops will be designed to allow opportunities for informal discussions among small groups and collaborators. This "free time" will enable prior collaborations to continue or be renewed. Also, we will encourage collaboration between the post-doctoral students and more experienced researchers in the network. We plan to institute a mentoring system for each post-doctoral student in the network so that the learning experience is enhanced and the transition from student to independent researcher is smoother. To integrate European scientists working in economic and game theory as broadly as possible, we will seek out and invite participation from researchers working in Member and Associated States.
Concerning other communication between teams, a joint project of the University of Illinois and the University of Warwick, with working title Free the Knowledge, is currently underway to develop software to meet the needs of networked researchers – both small networks and large. This technology will enable the network to host research papers in progress so that they are available for comment by all members of the network while still not publicly available. Comments may also be posted for the benefit of the authors of research papers and for other team members. The Scientific Director of each node will take responsibility for ensuring that the node's research is placed on the website (accessible by members of the team) and the Coordinator will take responsibility for network Working Papers (to be accessible by scientists internationally). The research of the network that is ready for publication as preprints (or working papers) will be made widely available both on the web sites of the nodes in the network and through the Illinois-Warwick web project.
Our strategy for integrating less experienced researchers into the network project will be through interactions and scientific exchange at workshops, through collaborative research, and through the post-doctoral fellowships. Post-doctoral students, especially those of the less-experienced team members, will also visit other institutions in the network, possibly for one or two weeks or for several months at a time, to benefit from the experience of other researchers and to enable them to contribute more to their host institutions. In addition, we plan to hold a summer school each year so that all the students connected with the network can benefit from more specialized expertise of senior researchers in the network.
Finally, not all the young researchers involved in the project can be expected to continue do research solely in game and economic theory; many will be drawn to applications. In addition, applications of game theory lead to new challenges to game theory. Another major strength of the network is there is substantial precedence for individuals trained to be pure theorists to also become involved in applications of theory to diverse problems – tax competition, law, and history, for example, are developing sidelines of theorists in the network.
Our research will feed into that of other networks and facilitate applications. Potential applications include negotiations, auctions, design of political institutions, coalition formation, social and economic networking. Each and everyone of these issues would be better understood if we could analyze them with the help of sharper tools,
4 and the tasks described in our proposal are be essential to this. We anticipate that our theoretical research will be useful to and enhance the research of other networks.
Communication between networks: While this proposal is clearly placed in game theory, we anticipate that there will be important and extremely valuable feedback between theory and applications. This will be heightened by the movement of researchers between nodes, which will both enrich our game-theoretic work and broaden the scope of game-theoretic tools used in applications. We also propose to make the new technology being produced by the University of Illinois and the University of Warwick available to all networks in economics (and to other EU networks, if interested). This is consistent with our view that theory, application and evidence-based policy are all related and strengthen each other.
Organization and management. A Network Director will be employed to manage the entire network. If the network is to be funded, the Scientific Directors from each node will meet to discuss how resources can best be fairly and most advantageously allocated among the nodes in the network.
Since the interchange of ideas and diverse audiences for ideas and work in progress are of major importance in developing leading-edge research, for the first two years of the project, scientists will travel throughout the network to engage in collaborative research, give seminars and advanced lectures. These will be prepared so as to be useful to young scientists. As part of this activity, each year each individual team will organize a two-day workshop for students. Summer schools will partly take advantage of the expertise of the scientific leaders of the network.
Concerning dissemination, our planned interactive web site will facilitate communication within the group. In brief, each individual within a node will be able to post research findings on his node's web site. The team's Scientific Director will be responsible for posting the research findings of his team on the website, where they will be accessible to all the team members. The facility of the web site will enable individuals to easily communicate their comments to authors of research findings and to other team members. When research papers are completed, the Network Director will ensure that they are posted as Discussion Papers, freely accessible, on the Network web site for the purpose of obtaining critical feedback from researchers internationally.
Training. The training need is substantial. As indicated above, the use of game theory has become widespread in economics and in the social sciences more generally. Potential applications are numerous and some are extremely important. Our understanding of the important issues of negotiations, auctions, design of political institutions, social and economic networking and equilibrium outcomes based in game theory in these situations can be no better than the game theoretic concepts used. Moreover, what researchers tend to use in application of game theory to economic and social problems is perhaps frequently somewhat less than they were taught. The theory itself needs further development. While current applications of the theory of games, focusing primarily on Nash equilibrium or subgame perfect equilibrium, have yielded important insights, there are some areas of application where different game theoretic approaches may yield substantially different results. Applications cry out for better understanding of the fundamentals of game theory.
The network intends to train its doctoral students and post-doctoral fellows to have the broadest exposure to the most modern approaches in game theory, including equilibrium theory. Although some may want to make their expertise available to the public or private sectors also, we intend to train all students up to the level of academic proficiency. The research and training program proposed is interdisciplinary. It is anticipated that a number of young scholars will have backgrounds in mathematics and political science.
Participants. We see the network as currently consisting of several larger nodes and some smaller ones. We also plan to establish a mechanism for individual researchers, both from economics and from other related disciplines, to join the network.
Institution Contact Person
CORE (University of Louvain la Neuve) Jean-Francois Mertens University of Tilburg (CentER) Eric van Damme Autonomous University of Barcelona Salvador Barbera
5 Universite des Sciences Sociales, Toulouse Michel Le Breton University College of London (UCL) Tilman Boergers THEMA (Cergy-Pontoise) Francoise Forges University of Bielefeld (IMW) Joachim Rosenmueller University of Maastricht Jean-Jacques Herings DELTA Gabrielle Demange CERMSEM (Paris 1) Jean-Marc Bonnisseau EUREQua (Paris 1) Hubert Kempf University of Bocconi Pierpaolo Battigalli University of Alicante Antonio Villar Carlos III University Diego Moreno New University of Lisbon Mario Pascoa University of Warwick Myrna Wooders
Acknowledgements: This presentation has benefited from comments of the contact persons listed above and especially from the collaboration of Jean-Francois Mertens, Francois Forges, Pierpaulo Battigalli, Michel Le Breton and Bhaskar Dutta.
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