Week 4: Significance and Experimentation

Hello everyone!

Welcome back to my blog! Today, I will be explaining a bit more of the mathematics behind the model, while going through the new work that I have done this week.

One potential criticism of the effectiveness of the framework is as follows: In order to do the contract, you need to make legally binding decisions; however, if you could make legally binding decisions, you would just mutually agree upon choosing the Pareto efficient result.

To resolve this concern, we can dive back into the math of the situation. Instead of abstractly viewing the prisoner’s dilemma as a payoff matrix, we can also view it in terms of the costs and benefits of decision making.

For example, consider a real life example, such as global warming. In two densely forested countries, governments may have a decision to cut down the trees to make room for more economic development, or keep the trees, helping preserve the climate of the globe. In this simplified scenario, let’s say that the economic benefits of cutting down the forests amounts to $3 million, but you cause $5 million in environmental damages to the other country.

It is pretty easy to see that this boils down to a very similar prisoners’ dilemma situation, where both countries are incentivized by the prisoner’s dilemma to cut down their trees. Yet, presuming that we use a similar contract as previously, we do not need to know what the decision of the other country is in order to fulfill our side of the bargain—a much stronger premise than simply agreeing upon both choosing one particular decision.

This problem with simply agreeing upon choosing a single decision gets compounded when the model is more complicated; whether its because there are more players (or in this case, countries) participating in the game, or whether its because the payoffs yield a more complicated game. And all of these issues can be remedied using these contracts, giving a way to definitively enforce cooperation even when the decisions of other parties are not known.

Beyond continuing to dive into the math, I also began to work towards conducting an experiment last week. I wrote up instructions for the game, and by the end of the next two weeks, I am planning to have finished developing the mathematical foundations of my ideas, and to also be ready to conduct the experiment.

Thanks for tuning in today, make sure to catch the blog next week for more details about the progress of the blog!