How Game Theory Solves Tough Negotiations: Corporate Tax Cuts, Nuclear War, and Parenting

How Game Theory Solves Tough Negotiations: Corporate Tax Cuts, Nuclear War, and Parenting

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So game theory is the science of strategic
thinking. The idea here is that any time that you’re
interacting with another person who has their own interests and is trying to achieve their
own ends, they are trying to do the best they can given what they want, you’re trying
to do the best you can given what you want, and so you’re interacting in a strategic
situation. One of you is trying to achieve what you want,
the other is trying to achieve what they want. Game theory is a mathematical theory that
attempts to make sense of how it is that people interact in these strategic situations. It was originally developed in economics in
order to try to understand economic behavior like why people buy certain things or why
they’re willing to work for certain wages, but later on it was expanded and applied to
a variety of different situations including biology, international relations, and even
interpersonal relations like friendships and parenting and family relations. So one of the big problems that parents constantly
confront when they’re raising two kids is that the kids will sometimes compete with
one another in order to get out of doing family chores, leaving them to the siblings. But the problem is, of course, the other kid,
the sibling or friend, is going to figure that out too and so will try and shirk as
well. In the end the parents are left for a messy
room, the kids are upset with one another, and nobody is happy. One of the things that game theory has tried
to deal with are these types of situations—they’re sometimes called social dilemmas or prisoner’s
dilemmas. These are situations where each individual
has a private incentive to do something, but when both of them follow their private incentives
the group or the two siblings are worse off than if they had ignored their private incentives
and just worked together. One of the seminal discoveries in this area
is that by teaching kids or countries, or anyone for that matter, that you can break
up that interaction into a bunch of little, small interactions where you can cooperate
with the other one—but just on condition that the other one cooperated with you before. You can change a bad social dilemma into a
positive interaction. This was put to its biggest use during the
Cold War. Reagan and Gorbachev negotiated the START
treaty with one another, and one of the big problems that they had is: how can you be
sure that while you’re eliminating nuclear weapons your adversary is also eliminating
nuclear weapons? So rather than saying, “We’re just going
to get rid of some large percentage of our nuclear weapons and hope that the USSR would
do so as well,” they broke up the interaction into a bunch of little, tiny ones. So the USSR would eliminate just a few nuclear
weapons, then the U.S. would eliminate just a few nuclear weapons. They would check, and then they would go onto
the next stage, and then each would eliminate a few more, and they would go onto the next
stage. This process of taking a big interaction and
breaking it down into little, small parts is one that we can use all over our lives,
including in parenting. So rather than Mom or Dad coming into the
room and saying to the kids, “Clean up the room,” and then leaving, Mom and Dad can
come up and say, “Here’s the deal: each of you take turns putting away one toy, and
you make a deal with one another: ‘If you put away your toy I’ll put away mine.’” And by taking the big interaction, cleaning
up the room, and breaking it into a series of small interactions you make it feasible
for the kids to cooperate with one another in a way that wasn’t really possible before
when you just left them with one big chore where they had to decide whether they wanted
to do it or not. One popular proposal that’s often occurred
in tax debates is that we ought to lower our corporate tax rate in order to encourage companies
that have located their assets offshore to bring them back into the United States. The idea here is that if we lower our corporate
tax rate to be competitive with other countries then corporations don’t have a reason to
move their money offshore. The danger here is that if we lower our corporate
tax rate then another country might lower their corporate tax rate, and as a result
we end up in a race to the bottom, each country lowering their rate to compete with the other
one until eventually we end up with a corporate tax rate of zero or near zero, or at least
so low that we barely make any money. If only we could get together with all the
other countries and agree to fix our corporate tax rate at a kind of uniform number and not
to compete with one another, all countries would be better off. No company would have an incentive to move
their assets off shore, but countries wouldn’t lose out on the income from the higher corporate
tax rate. The difficulty here, of course, is that international
cooperation is a hard thing to do. The Nobel Prize-winning economist Elinor Ostrom
did a history of social dilemmas and prisoner’s dilemmas, and found that there are lots of
different strategies that people have used over time in order to prevent races to the
bottom and competitions of this form. The traditional economic story about social
dilemmas and prisoner’s dilemmas has been, there are kind of two solutions. One solution is the completely libertarian
solution where you just privatize everything and you make everyone own everything. The other is to have a single government that
controls everything. The problem in international relations is
neither of these are really feasible. There’s no way that we can privatize individual
corporations and give their ownership to individual countries, but nor can we have a world government
that specifies what the corporate tax rate in every single country would be. What Elinor Ostrom found in her historic study
of these types of social dilemmas was that over history, people have found very sophisticated
strategies that involve complicated checks and balances, agreements and structures that
allow them to solve these problems without going to either extreme. We suggest that there might be ways of modifying
these individual small institutional arrangements in order to try to develop a series of international
agreements where individual countries could have mechanisms to punish those countries
who lower their corporate tax rate so we don’t have to just trust that other countries are
going to follow through on their promises.

50 thoughts on “How Game Theory Solves Tough Negotiations: Corporate Tax Cuts, Nuclear War, and Parenting”

  1. Another Economist coming with a theory time to grab my popcorn and see all the Lemmings accept it as a science and reality.

  2. Game theory is really great but it only really works in a world where everybody perfectly understands game theory and agrees to follow the rules.

  3. Really good video. I really liked both the kids clearing up a room and race to the bottom/corporate tax examples. Thank you for sharing this video BT.

  4. Well what do you know! The two extreme positions have been shown to not work, and what has been shown to work is middle-of-the-road cooperation, through hard work and meticulous, complex negotiation!

  5. After watching this video I was reminded why I subscribe to this channel… Keep it up..!

    i.e. Yay to theory and philosophy – Boo to politics and rhetoric.

  6. Matt Ridley's book The Origins of Virtue has a pretty good discussion on how animals behave when multiple "games" are played in sequence. As long as the other person cooperates in the first game, we're typically pretty open to cooperating in future ones.

  7. Why not have a system that meets people's needs directly rather than letting everyone fight for what they can get. A new system

  8. His logic falls down for me regarding corporation tax. The problem is the tax itself, not the strategy for implementation, it's a tax on 'profits', which in an increasingly a globalised economy have become an even more nebulous thing, subject to the manipulations of accountants.
    Why do governments need to 'make money' from taxation as he puts it? Governments with their own sovereign currency are the only body that can create net new money, taxation in fact destroys that money – it's chief functions are to create demand for the currency, to control inflation and to effect incentives in the market. The idea companies should 'pay their share' is poorly formulated. The profit incentive is essential to the market, so at what point do we decide these are excessive? When they are precisely those garnered from excessive monopoly power that limits competition.
    As it is the largest corporations who are most able to avoid a corporation tax, the effect is to increase monopoly power as their effective rate is lower. So as a tax, it has precisely the opposite desired effect.
    Sensible taxes should fall primarily on land which cannot easily be avoided (and makes up at least 1/3 of GDP), and other government created monopoly rights and licences. There is no need for international horse trading on what is lousy form of taxation, co-operation would only be needed over intellectual property rights which is a much smaller nut to crack.

  9. A world government would recognize resource levels which would properly adjust restriction(carbon) when necessary, and also may hasten a global consensus to further cooperations. Possibly the only way humans will build structures larger than downtown buildings, by allowing qualifying nations all to build project together.

  10. Does anyone else find the constant negotiation, manipulation, and game playing in work and personal relationships to be exhausting? I'm so tired of this crap.

  11. The only reason why countries do not just privatize everything is that we have career politicians that want wealth power and influence that they have not earned.

  12. the flaw- why not break your agreements up in to small agreements – opponent moves first and then you always do not move. and find another mark

  13. The Game Theory concept, in specific, that Roger Myerson is discussing here is a Nash Equilibrium.

    I do wonder why he chose not to mention that.


  15. If only all companies could get together and make sure no company moved to a country with a tax, we could make more money… Union theory ? But it's better with competition theory. Also in good government theory 😉 Otherwise the customers get ripped off and cheated theory :0

  16. This is so wrong. Parenting sure, but you can’t apply parenting to final finance and foreign relations. What you’re advocating for doesn’t work. It’s not new thinking. And it’s certainly not “Big”

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