Game Theory

I am currently carrying out some research creating elements of discrete game play from real world research and decision making, and this has meant a refresher in some of the toy games of Game Theory and wondering if in certain fields, such as climate change, there can be a Nash Equilibrium? Anyway, I reckon there may be a paper or two in the work we are currently carrying out, so we will see. Certainly in traditional climate change negotiation there has been a strong undercurrent of the most famous of toy games the "Prisoner's Dilemma" with politicians viewing climate change as antithetical to a strong economy, something which I think Sir Nicholas Stern pulled apart nicely in the Stern Report on the Economics of Climate Change.

Ian and I had a great debate with Dr Cameron Hepburn a while back on the application of Big Pig Little Pig (otherwise known as Boxed Pigs) in negotiations. Now I am not an expert on Game Theory, so hopefully I can get this right!

If you are not familiar with the toy game then I quote the following extract from an Economics exam question (http://www.kevinhinde.com/Micro2/ec425test2002.pdf):

Big Pig and Little Pig are put in a box with a button at one end and a shute that dispenses food into a trough at the other. The pigs have two possible strategies, Press Button and Wait at the trough. If both pigs choose Wait they each get 4 units of food. If both pigs press the button then they each get 5 units of food. If Little Pig presses the button and Big Pig waits at the trough, then Big Pig gets 10 units of food and Little Pig gets 0. Finally, if Big Pig presses the button and Little Pig waits, then Big Pig gets 4 units of food and Little Pig gets 2.

How does this related to international climate change negotiations? Well Big Pig is a highly industrialised nation (e.g. the USA, UK, Germany) and little pig is a developing nation. And the trough in this case is "reducing carbon emissions". "Press" in this case means "Act to reduce carbon emissions" and "Wait" in this case means "Do nothing". The units of food are units of economic growth.

Each pig wants to reduce their carbon emissions, but preferably only after the other pig has done so because any reduction of emissions is viewed as being in opposition to that holy grail of modern capitalism, the economy. So what does the big pig do? Well the big pig's strategy is entirely dependent on what he thinks the little pig will do and in effect that decision is based on another toy game, that of Chicken. In this case is who will blink first and cut emissions as they approach the cliff of climate change?.

The problem with many of these games is that they assume there is an equilibrium and that equilibrium might be to do nothing, or at least do nothing until the last possible moment after your competitor has acted.

But that is to deny the fundamental reality that there is no Nash Equilibrium here and that "no action" is actually an actively destructive response.