The Achievements and the Future of Game

Theory: A User's Perspective

Avinash DixitPrinceton University

Summary overview Some game-theoretic applications

were analyzed implicitly for a long time.

Game theory is now the dominant mode of thinking in most of economics, and increasing in other social sciences.

There is a continuum from abstract theory to its uses, with feedback and contributions in both directions.

Previous implicitly game theoretic literature

Cournot, Bertrand examples of Nash eq

Edgeworth – shrinking contract curve Social choice theory

Arrow, Sen International economics

Johnson et al (tariff wars) Information economics

Akerlof, Spence, Stiglitz

Increasingly explicit game theoretic formulations

Gradual developments in 1960s and 70s: Debreu-Scarf (cooperative game) Wilson on auctions Hurwicz, Gibbard et al implementation Nash bargaining solution in labor Extensive form bargaining, Rubinstein

etc.More in specific fields to follow

Microeconomics / IO More general, richer view of

competition Many dimensions of competition

strategyThese other variables are not just shifters of

demand and cost curves! Perfect competition is not price-taking,

but “expected-utility-taking” Max { E[Π] | E[U] U*}, = 0 by entry yields Max { E[U] | E[Π] 0} = U*

Industrial organization Repeated games

Implicit collusion, chain-store paradox Feedback on theory – Abreu-Pearce-

Stacchetti etc. Two-stage games

Location and price competition Entry deterrence

Commitment (Spence, Dixit) Private information (Milgrom-Roberts)

Feedback on theory - refinements

Labor economics Bargaining (applications in many fields)

Raiffa – Art and Science of Negotiation Search theory

“Decisions” aspect of Luce and Raiffa Matching theory and applications

Gale-Shapley, Roth et al Most of this field is empirical

Game theorists can try to use the rich data

Macro and public economics

Games with one large player (govt) and many small players (private sector) Mechanism design in taxation

(Mirrlees) regulation (Baron-Myerson) Dynamic inconsistency, optimal

policies with and without commitment, relation to perfectness. Role of delegation

International Economics Strategic trade policy

Two-stage games of governments & firms

Trade liberalization agreementsSelf-enforcement constraintsNeed for multilateral enforcement

Monetary and fiscal cooperationDecision-making in common central bankIntraction with national fiscal authorities

Political economy Strategic voting, agenda manipulation

May not be realistic in mass electionsBut important in committees, legislaturesRich data allows testing, estimation

DelegationWhy? Information acquisitionLimits – Agency problemsHow – Mechanism design

Power indexesShapley-Shubik, Banzhaf

Institutions Attaining mutually preferred social

outcomes as equilibria of individual behavior

Formal (law) not perfect Non-governmental, self-enforcing,

enforcement by third parties Creating focal points for assurance games Resolving prisoners’ dilemmas by

Information collection and dissemination Enforcing good behavior: norms and sanctions

Order without law

http://www.youtube.com/watch?v=eC4BN9kInXg

Law without order

http://www.youtube.com/watch?v=H2JFL1Sk21Y

The next 50 years?

Behavioral decision and game theory Comparing findings from lab and field,

pinpointing the right mix in each context Degrees of credibility

Can this be handled in Harsanyi model Games without common knowledge

Incomplete awareness

Basic research is a never-ending process

“Grook” by Piet Hein

Problems worthy of attack Prove their worth by hitting back