Klingon Bastards

On Twitter:
1)

.@GarettJones Banking crises are not new, so how can we stop history repeating itself? #PalgraveChat

— Palgrave Economics (@PalgraveEcon) November 19, 2015

2)

>@PalgraveEcon Worst case scenario is we have to live with crises: Humans are faddish, bubble-prone. (1/2) #PalgraveChat

— Garett Jones (@GarettJones) November 19, 2015

3)

>@PalgraveEcon Best case scenario is that we can make the financial system (not just banks!) more robust to shocks. (2/2) #PalgraveChat

— Garett Jones (@GarettJones) November 19, 2015

4)

Good trick, if you can pull it off. https://t.co/J20VO9t6qg

— Cold November Duck (@Spivonomist) November 19, 2015

5)

>@Spivonomist Indeed, good policy is hard to pull off, between policy commitment issues, lags, and knowledge problems. #PalgraveChat

— Garett Jones (@GarettJones) November 19, 2015

6)

Good thing we enjoy a high-IQ society. If anyone can get the job done, it's bright people working in functioning institutions. @GarettJones

— Cold November Duck (@Spivonomist) November 19, 2015

7)

@Spivonomist All options are bad, it's a matter of degree: It's the Kobayashi Maru all the way down! #PalgraveChat pic.twitter.com/GS7Pwwt9Vu

— Garett Jones (@GarettJones) November 19, 2015

8)

@GarettJones I still wonder how meta that simulation is meant to be in-universe.

— Cold November Duck (@Spivonomist) November 19, 2015

That last tweet of mine there (I'm Spivonomist) demands a little explanation.

In case you aren't a Trek fan, the Kobayashi Maru is a computer simulation given to last-year Starfleet officer candidates. With the original programming, it is an unwinnable scenario. Your ship receives a distress call from an allied vessel. If you choose to respond, you are quickly ambushed and destroyed. If you ignore the call, your ally is annihilated. There is no classic Pareto-enhancing victory strategy.

Except to cheat.

That's what Kirk did: cheated. Both in the original Roddenberry film and in the Abrams reboot, James Tiberius Kirk surreptitiously rewrote the code for the simulation and emerged victorious over the Klingon (presumably Romulan after the Khitomer Accords were signed) foes. In the Abrams reboot, I think the screenplay suggested that the cheating itself was part of the test. Or if not, by the time Picard's crew was tooling around, it surely would be.

If this test is as meta as I hope, it checks for lateral thinking and a willingness to bend the rules. In 1982, when Wrath of Khan introduced the test, Kirk's cheating came across as sincere cheating. In 2009, the cheating seemed part of the game. If the metaphor was meant to extend to the nexus of politics and financial markets, Jones is right on the money. Even Hollywood sees that the Commanding Heights are big-time cheaters, and so long as the consequences are still beneficial, the audience should be okay with it.

I think Roddenberry [ed. Adam Gurri reminds me that it was Nick Meier, not Gene Roddenberry who wrote and directed Wrath of Khan. Thank you, Adam. ed. add.: via GJ Jack Sowards coined the term Kobaysahi Maru after his neighbors] would have been appalled. There's a certain type for whom the rules are sacrosanct. Cheat not lest ye be cheated. Tinkering with the architecture of big-time institutions is risky on scales I think even pretty well educated people probably don't comprehend very well. And our political and commercial elites have been tinkering for many decades, with no plan to stop. If Jones is right, and I see no good reason to dispute his point, the real trick is to make sure any further tinkering is done with the grave lessons of good public choice economics in mind.

And like I tweeted, this is a very good trick if you can pull it off.

American Exceptionalism vs. The Precautionary Principle: Refugee Edition

"For every complex problem there is an answer that is clear, simple, and wrong."
- H. L. Mencken

Among the many objections to more liberal immigration policy, one stands out as more difficult to debunk than others. On questions of immigrants bringing with them crime, dependency, disease, or Communism, the empirical evidence shows that these are unambiguously overblown concerns. If anything, ordinary immigrants on average tend to be more industrious, healthy, independent, and conscientious than native-born Americans, again on average. It should be immediately clear why with a little reflection. Uprooting to travel to a foreign land is ambitious. The timid, the callow, the craven, the risk-averse will be marginally more likely to accept a mediocre BATNA and stay home. Emigration is an act of courage, of hope. Under normal circumstances, that is.

The objection of which I speak is of culture. Not of superficial culture, like driving courtesy or a tolerance for spicy food, but rather the deep appreciation for Enlightenment ideals that somehow still sort of drags its gutshot corpse through a post-William Jennings Bryan America. Will immigrants help keep the torch of free speech alive? Will they maintain a healthy skepticism of centralized political authority? Will they resist the urge to flaccidly permit the quartering of troops in civilian homes? Will they insist on procedural due process? Will they cherish the precepts of strictly delineated federalized power? Specifically,, will they support and defend American constitutional jurisprudence at rates comparable with natives?

The good news, is that yes, they will! I'll spare you the econometrics, but there's no statistically significant difference between immigrants and natives on issues of censorship and firearm ownership rights. In fact, when you control for education and IQ, immigrants actually beat natives on these issues. (source: author's analysis of GSS data 1974-2012)

The bad news is that everyone, immigrants and natives alike show an almost shocking disregard for the foundations of our national claim to natural liberty. Given the choice, only one in four respondents would preserve the freedom of expression, written or spoken, across a mere four categories of potentially bilious speech. In other words, we have met the enemy of the first amendment, and he is us.

But this is for ordinary immigration, under ordinary circumstances. Normal immigration builds character in a healthy nation, inviting hale, hardworking, determined men and women to our shores to truck, barter, and exchange with us and create a better life for them and theirs. This arrangement is to the mutual benefit of immigrant and host alike. Refugees are unlike ordinary immigrants in that they are compelled to migration thanks to especially gruesome BATNA. Death squads, systematic rape, homes incinerated, and mass exile will stir even the lumpiest of lumpenprole to pack up the ol' bindle and hit the long road to salvation.

It's this group that is utterly out of sample. I urge you to be skeptical of claims one way or the other about the desirability of permanently hosting refugees with an eye towards assimilation and eventual citizenship. If you'll permit a bit of #gertruding, the morality of providing aid and succor to displaced resident of war-torn nations is plainly obvious: giving aid to the afflicted is an almost universally-recognized moral and ethical duty. However, this duty is unrelated to the economic and cultural benefits of routine peaceful immigration.

The Precautionary Principle would tell us to refuse refugees entry for two reasons:
1) There is no assurance that their entry would not irrevocably corrupt American culture and the institutions that arise from that culture.
2) It is impossible to credibly commit to policies that would maintain refugees as non-citizen residents. (bleg: what's your favorite quick-n-dirty intro to the folk theorem you like to use in your undergrad courses?)

Refugees present a difficult conundrum not forwarded by ordinary immigration. As with difficult conundrums of all stripes, the Mencken quote above applies. How to fulfill the humanitarian demands of charity and sanctuary without risking the golden goose eggs is an enormously thorny question. But it is one not made any easier by conflating it with an immigration debate. The two are only superficially related.

No Extra Credit for You!

An interesting exercise.  I may try this in the fall for my large "Intro to PE" class, especially since there is no risk of actually having to give out any extra credit given how people will react.

The story.

The bottom line:  The "question"... Click for an even more self-interested answer.

The obvious response is that in classes that are small, and communicate, they have some chance of solving this.  But in large classes, with anonymous responses and secret scoring....not much risk to the prof., I'd say...

The End of Poverty Will Be Downloaded at 14kbps

Meet the Ghost Gunner, a home milling machine. Billed as your one-stop shop to craft AR-15 lower receivers, it's a lump of metal and code that turns raw metal into machines of killing. From the site:

Ghost Gunner is a general purpose CNC mill, built upon a large body of open source work, including the gshield 3 axis motion hardware, the grbl g-code parser and motion controller, and popular microcontrollers. All GhostGunner schematics and design files will be published into the public domain, and anyone can program anything for the machine.

FedEx and UPS have elected to decline shipping the device. I understand why. It doesn't take particularly sophisticated game theory to pick out the implied threat posed by the ATF. "Nice shipping company you got there, pal. It'd be a real shame if we found contraband in your trucks."

But think of what the Ghost Gunner really is: an amateur, with no knowledge whatsoever of metallurgy, engineering, design, or gunsmithing can take a pile of scrap and make something useful out of it. Tech like this eliminates the highest barrier for the home manufacturer: expertise. The machine knows the proper milling technique. The machine runs the lathe. The machine knows the proper annealing soak temperature gradients.

Imagine that you're a farmer in rural Uganda. There's an antique tractor rusting at the corner of a field that you haven't been able to get replacement parts for thanks to supply route disruptions courtesy of the local tinpot warlord. Luckily for you, a foreign rogue piloting a nighttime zeppelin airdropped a repurposed Ghost Gunner into the center of the village complete with software to crank out all the pump/compressor/belt wheel/alternator casings you'll need to get your tractor running again. All you have to do is feed in the scrap metal and Bob's your uncle.

Yes, yes. I'm simplifying of course. But a big part of what leads to economic development is what economists call "capital deepening." Airlifting a two million dollar John Deere combine into rural Africa is a waste of perfectly good machinery because to get to the point where such a device can be used properly, farmers need extensive supply chains, commercial infrastructure (roads, rails, &c), and the expertise to use and maintain the thing properly. To get to that point, folks need to be able to start small, to be able to cheaply get their existing gear into working order and to upgrade appropriately (recall your Smithian sympathy & Hayekian humility: "appropriate" in this instance cannot be dictated from afar, as the local residents know best the constraints of their particular situation). Ghost Gunner and similar devices drastically reduce the cost of capital improvements. Demand curves still slope down, people.

Code for new blueprints can be published cheaply and easily by the many, many, many civic-minded engineers throughout the world. These plans can be downloaded cheaply and easily even at throttled rates by bargain-basement ISPs.

It's easy enough for me to be a scold to do-gooder, affluent Westerners who seek to ban sweatshop labor, it's much harder to actually improve the BATNA of the world's poorest. Open source hackers building cottage manufactoriums are doing just that. Instead of hobbling them by refusing to ship their wares, we should be buying them up and giving them away to the world's disenfranchised.

Swiper No Swiping or: How I Learned to Stop Worrying and Love the Game Theoretic Analysis of Hookup Culture

"It is a truth universally acknowledged, that a single man in possession of a good fortune must be in want of a wife."

-J. Austen, Pride and Prejudice

I gather from the kids these days that mobile phone applications have replaced seedy dive bars as the go-to venue for taking a spin on the ol' genital mashing lottery¹. "Swipe right" is the "hey baby" of 2014. To credit technology for the apparent rise of casual sexual encounters is perhaps a bit premature. To illustrate why, let's swipe right on some elementary game theory.

Consider a single player. Call her Ann. Ann finds herself at the start of her sexual career and is faced with two options:
a) Participate in the casual sex market
b) Participate in the marriage market
Since this is ~elementary~ game theory, omit from consideration opting out altogether, or exotic choices like... well, use your imagination.

Before that choice, Ann was secretly assigned by Nature to one of two types.
Type L (for licentious). There is no penalty for choosing (a) after type is revealed. There is a penalty for choosing (b) after type is revealed.
Type D (for demure). There is a penalty for choosing (a) after type is revealed. There is no penalty for choosing (b) after type is revealed.

My conscience urges me to point out that what I'm about to do is methodologically suspect. I am going to assign numbers to utility. Doing this covertly drafts several stealth assumptions into this model, some of which I find terribly implausible. I excuse myself by noting that I'm doing a comparative statics problem here, rather than utility comparison. On the margin, you can (probably) toss out assumptions of well-ordered convex utility functions and still get similar results. Whether or not the model holds up when tested at extreme parameter values is questionable. So as far as a bit of insight into why some people might marginally choose regrettable mating decisions, this might be useful, if not entirely accurate.

My conscience temporarily sated, let's define a few structural parameters.

First, we need Ann's type assignment probability. Remember that Ann doesn't know what her type is as she makes her choice over (a) or (b). Only afterwards will she find out. Let's call this probability α. With Pr = α, Ann is Type L, and with Pr = (1-α), Ann is Type D.

Next, we'll want a parameter for a successful casual sex match. With Pr = β, Ann finds a partner for the evening. With Pr = (1-β), she spends the night alone.

Next, let's define γ as Ann's discount rate. For arithmetic purposes, this is just a multiplier that lets us compare payoffs earned in the future to payoffs earned now. For social science purposes, this is a contentious mess. Empirically decomposing the inputs to individual discount rates is a hassle, and even when aggregating, it's hard to measure, and harder yet to isolate specific treatment effects. Over a person's lifespan the discount rate can change wildly, some of it because of normal lifecycle reasons, some of it for cohort reasons, some cultural, some from exogenous shock, some for psychological reasons, some from conformity, some idiosyncratic. Beware stories that attempt to reduce discount rates to a monocause. I include this here for discussion, but I'll omit it from the model since I don't want to make things too intractable. Not yet anyway. Maybe in a follow-up post.

Finally, we'll need a parameter for the probability that Ann will participate successfully in the marriage market. Let's use ω. With Pr = ω, Ann marries. With Pr = (1-ω), Ann ends up with cats. Lots of cats.

At the risk of drifting into differential equations territory, β and ω are both partially functions of [potential partners'] α parameters. That is to say, the more people in the {temporary mating|marriage} market, the higher the probability of finding a match in that market. For the purposes of this exercise, assume that participants know which market they are in and that no participants attempt to participate in both markets at the same time. Modeling infidelity is another exercise entirely.

Let's say that a successful booty call yields v and a successful marriage yields w units of pleasure. Failure of either one yields 0.

If Ann is Type L, she'll pay a penalty of -c for successfully participating in the marriage market, no penalties otherwise.
If Ann is Type D, she'll pay a penalty of -d for successfully participating in the casual sex market, no penalties otherwise.

With Pr = α, Ann earns a payoff of:
β*v + (1-β)*(0) for playing (a)
and
ω*w + (1-ω)*(0) + ω*(-c) for playing (b)
With Pr = (1-α), Ann earns a payoff of:
β*v + (1-β)*(0) + β*(-d) for playing (a)
and
ω*w + (1-ω)*(0) for playing (b)

Ann is therefore indifferent between playing (a) and (b) when
α(β*v + (1-β)*(0)) + (1-α)(β*v + (1-β)*(0) + β*(-d)) = α(ω*w + (1-ω)*(0) + ω*(-c)) + (1-α)(ω*w + (1-ω)*(0))

simplified:
βv - βd + αβd = ωw - αωc

If βv - βd + αβd > ωw - αωc, Ann will play (a). Casual sex.
If βv - βd + αβd < ωw - αωc, Ann will play (b). Marriage market.

Casual sex is increasing in the probability of a successful right-swipe and costs of regrettable marriage; decreasing in social stigma against licentiousness and the probability of a happy marriage. Reverse that for marriage market participation.

And this gets interesting when we consider that the probability parameters are something of a commons. The more people that participate in the casual sex market, the greater the probability that Ann will find a match for any given attempt. If, ex post, Ann is a Type D attempting an (a) strategy, she would prefer to have had incentives encouraging her to pursue a (b) strategy instead. Similarly, if Ann is a Type L attempting a (b) strategy, she'd regret settling down and probably be a bit disgruntled that her society had provided her incentives to marry that schlub Jasper (no relation to the Peanut Butter Kid).

Think of "traditional" marriage and everything that goes along with it as a set of institutions that attempt to avert the regrets of licentiousness. The tradeoffs are the foregone opportunities of short-term associations. Knocking down that Chestertonian fence can reveal that if Ann is a Type D living the life of a Type L, the costs could be quite real and quite salient.

There's an interesting tragedy in there. If identifying type ex ante is either very costly or downright impossible, and if Ann's incentive structure is the product of human action, but not human design, a semi-stable equilibrium emerging from the joint and several negotiations between human minds, what is her optimal strategy? Which parameters should she try to strengthen? Which should she try to weaken? She can't choose her culture. Can she choose her discount rate? Can she select her cultural filters? By choosing the non-dominant strategy, does she run afoul of a concentrated costs-diffuse benefits dilemma? How can she overcome this problem? What would you do?


¹ Apologies for the horrific idiom. Blame it on my low blood sugar.

Skeeball: Euvoluntary?

Zach W. notes an oddity with carnival games (link).

Mom could buy a stuffed animal for a fraction of the price of the minimum number of carnival tickets you'd need to win the thing. And that's the best case scenario. Many (most?) carnival games are flat-out rigged.

But people still buy their tickets. Why? Wouldn't it be more efficient to just buy the crappy t-shirt with plain old cash?

Or is there more to the transaction? What else is the carny offering? The chance for a loved one to signal prowess? The chance for a kid to have some fun overcoming a contrived challenge? Fun?

Judging by dollars and cents, there's no way a carnival game could be euvoluntary. Thank goodness that's not how people actually reckon the value of their time and attention.

Microtransactions

Warning: salty language.


Question: are microtransactions euvoluntary? Coercive? The psychology is similar to addiction: tease players with a little shot of dopamine just out of reach, then charge them for the pleasure of fulfilling an artificial goal. The early egregious examples of DLC shenanigans were patently absurd (functionless horse armor in TES IV), but as this video demonstrates, developers (ahem EA) have turned the corner, turning microtransactions into devious exploitation devices.

And, correctly, Nerd^3 echoes Tullock. To avoid getting caught in this web, don't start playing in the first place.

Is there good, properly euvoluntary microtransactions? Sure. Add-on campaigns fit the bill. The DLC for Borderlands 2 is a perfect example. The DLC for Bioshock Infinite would also count if the doors for Burial At Sea Part I weren't broken (but I digress).

There's almost certainly no single perfect business model here. It seems to me that game developers are prone to the same sort of heuristic errors that plague the rest of us. Think of the above video as evidence of supply-side bubble formation. Wait for the worm to turn, people.

Noah Smith is an Austrian Economist

Which of the following statements is true?

1. Absence makes the heart grow fonder.
2. Out of sight, out of mind.

Both of these are common aphorisms, and I'd wager that you, my esteemed reader, have found more than one occasion to deploy each one, and with nothing but the utmost sincerity. Context matters, obviously. Whether you sit in your FSU dorm room pining for your beloved back home in Pensacola, or if you're hitting the Panama City beach looking for some brief company depends heavily on the nature of the underlying relationship. On the game, if you will.

I'd like to close out the S&T series by exploring the one remaining game type: the non-cooperative, asymmetric game. Here's a sample one-shot game matrix: P1 (the Sovereign) chooses between Oppression (O) and Liberty (L). P2 (the constituent) chooses between Comply (C) and Revolt (R). This gives us the first two elements in the game, all that's left is the hard stuff. Stuff like modeling payoffs. Try this one to start with.

	C	R
O	10,5	8,-5
L	10,6	-5,4

Here, there's a unique Nash Equilibrium, for the purposes of illustrating the game. The NE is (Oppress, Comply). But the payoffs are not symmetrical. The sovereign gets more than the constituent. More what? It's standard practice in economics to hand-wave that question away as unanswerable. More perks of power, more wealth, more status, more access to mating opportunities, more whatever it is that slakes the inscrutable desires of elites' hearts. NB: some of the payoff split is rivalrous, some isn't. Positional goods and status rankings are axiomatically aspirational only*.

In lay terms, what we have here is a dictator's dilemma: as Sovereign, I want to preserve (or improve) this NE for the repeated version of the game, which could mean a few things. It could mean promoting productive capacity, it could mean (as in Cheung's example) intertemporally sharing the role of Sovereign, or it could mean throwing enough meat to the clerisy that they refrain from meaningful jawboning in their papers and pamphlets.

So in this post, Noah makes what amounts to a praxeological observation: a system's longevity alone lends us insufficient information to know whether the stresses in the game above are enough for an equilibrium shift. To know whether the Lindy effect has any analytical bite, you need a better model of the underlying game. Generalize that matrix up there, find the comparative statics, and then compare stabilizing forces with destabilizing forces. Do that, and then you can use the institution's longevity as a guide to its expected durability. Is America's GINI coefficient destructive? How about the growing police state? Interminable wars? Ideological rifts? Will these overpower patriotic sentiment?

Too early to tell.


post scriptum
I hope that this series of posts, casual as they are, helps you think about how constitutions are, um, constituted. Thinking about the differences in payoff structures and ex post enforcement have helped me understand under what circumstances the "social contract" might actually be a valid, useful concept. It also helps illuminate the deep, central role of rhetoric in ordering society. The comparative statics in this sucker are handy for grasping the roots of regime change, and of upstream rents, like education or law enforcement. If you're interested in tackling Buchanan's challenge to public choice scholars, you could probably do worse than thinking more carefully about some of these issues and including them in your work.

Cheers!

*You almost have to admire the moral cojones of nationalistic egalitarians. By advocating for both immigration restrictions and in-country wealth distribution, they forward the moral position that Americans' ability to access the luxury goods market is more important than Haitians' ability to access the supermarket. 

A Game of Institutions Book 3: The Sanctioners' Dilemma

Recall from last chapter the proposition I encouraged you to consider: though the reasoning may be fallacious or rooted in vice, people may be motivated by payoff asymmetries and previously-accumulated earnings. Let's consult our simplified table of game archetypes to see where we might look next.

	Cooperative	Non-Cooperative
Symmetrical	Coordination (Euvoluntary)	PD (Coercive-Voluntary)
Asymmetrical	BoS (Voluntary)	Hawk-Dove (Coercive)

In S&T, recall that euvoluntary constitutions require no ex post enforcement to maintain cohesion. I used the example of low-exit-cost partnerships to illustrate these. I think that some of the Ostroms' examples would qualify too. But once we start shuffling around the box above, we move away from the euvoluntary conditions toward... something else. I do hope you're willing to forgive me for staying in the "symmetrical" row rather than the "cooperative" column, but since I just got done posting about the Amish, I trust you'll be willing to bear with me.

Exclaves fascinate me. Pseudo-enclaves even more so. In the case of the Amish, we've got an extra layer of governance embedded (loosely) in the ordinary federal structure. But here's the fascinating bit. Unlike a Olsonian stationary bandit, the Amish lil' leviathan generates inalienable quasi-rents. After all, there's really no technology that allows a taxing authority to expropriate the warm sense of belonging to a community or the fellowship of hearth and kin. 

But, ha ha, there's quite obviously a private incentive to shirk. Amish individuals can obtain higher private utility by flaunting the rules of their society. Of course, since the SPNE of this is for everybody to shirk, it is in the constitutional interest to have an enforcement mechanism. And what could be better than yanking the club card? Credibly threaten to revoke the quasi-rents of family and community, and hey-yo, the decision calculus changes. Elementary economics.

Now, I'm not 100% sure that this sits squarely in the corner of the PD box, but at least in terms of expected utility, it's my understanding that Amish communities are marginally more egalitarian than, say, old world Europe. I'm sure that some families are more influential or wealthier than others, but the Amish Church itself lacks the hierarchy that characterizes the Catholic or Orthodox Churches. The local bishop is the community leader, but it's an unpaid, elected post. I'm not enough of an expert to know whether or not hereditary elites are common, but at least nominally, the Amish value the virtues of thrift, temperance, piety, prudence, and industry. Good work makes good people. An expression of Nicomachean ethics. Again, from an outsider's perspective, it seems as if envy within the community isn't as big a component of private motivation as it is among the English.

So yes. Shunning is coercive. But it has to be in a game that generates inalienable quasi-rents. No other punishment option is either appropriate or in the choice set. Besides, if it was rough enough for Socrates to guzzle hemlock, it's severe enough to keep wayward flock members in line.

A parting note: I had originally planned to calculate and share with you the comparative statics for all these games, but soon I discovered that LaTeX editors are both a pain in the rump to use and don't display for butt in my reader, so if you were looking forward to more "math", I'm afraid I'll have to disappoint you. Sorry.

Edit: As AG notes, bishops are (can be?) selected by lot (sources I've found in a quick Google search vary, so maybe it varies by community) and more importantly, the decision to shun cannot be made lightly. There's a risk of schism, and even if there weren't, there are increasing quality-adjusted returns to network size. If the strength of your organization depends on good members, you'd want to be dang sure that truncations are well and truly in the group interest. Over-pruning a tree is as fatal as drought.

A Game of Institutions Book 2: Beautiful Railway Bridge of the Silv’ry Tay!

I might be inclined to forgive the student who claims that Public Choice is the study of political rents. Even the very basic collective choice architecture work is undergirded by constituents' desire to organize for gain. The mere act of stumbling out of the Hobbesian jungle, twigs and brambles jutting from matted thickets of body hair counts as a political rent. But not all political rents are created equal. Last time, I asked you to consider the simple case where payoffs were symmetrical and alternatives to agreements were at worst, neutral. This time, I'd like to explore what happens when we play around with the symmetry condition. I'd also like to introduce a bit of heresy. Those of you with formal educations in economics may wish to consult a physician before reading further.

First, a quick review of some elementary ideas. If math gives you the heebie-jeebies, take heart—it's just shorthand for what goes on in folks' minds. Nothing fancy.

First up, something economists call the "discount rate". Have you ever wondered why you pay interest for a loan? Or why you earn money just by socking it away in a retirement account? It's not just because the value of a dollar is dwindling each year, though that's got a little to do with it. It's chiefly because on average, delaying the satisfaction of wants is uncomfortable. All else equal, I'd rather have a new pair of shoes right now than to wait another year. If we abstract from shoes, we can better say that all else equal, I'd rather have a claim on 100 bucks' worth of stuff right now than 100 bucks' worth of stuff a year hence. In keeping with tradition, let's use standard notation. A lower-case rho is our discount rate variable, and it's just a transformation of the interest rate r we see all the time:

So, if the interest rate someone would accept is 5%, her discount rate would be .9524 or thereabouts.

Again consistent with textbook conventions, a lower-case pi will be our payoff variable in each period, and for the accumulated payoff, we'll use an upper-case pi. Therefore, in generic terms, an infinitely repeated game will have payoffs for player i of:

You'll note, of course, that I'm assuming homogeneous discount rates, which as we all know right well from the behavioral literature, is poofy-headed of me. As we continue with this series, I'll relax this assumption to show how elites can turn time preference differences to their advantage. If you need to slap leather for an aphorism in the meantime, reach for the six-shooter labeled "patience is a virtue."

The next bit we need to do before we stop for the day (mostly for the sake of length than anything) is to think about the components of the payoff. In most elementary game theory lectures, this is just some parameter used to think about how we get to some equilibrium strategy or another. But in terms of economic behavior, the elements of the payoff are what we spend a lot of time thinking about here at EE. These are the moral intuitions, biases, jealousies, irrationalities, groping uncertainty, and beautiful human error that characterizes each and every one of us in our brief, blemished corporeal time on this tarnished earth. Ahead of our next installment, think about this little heresy:

The lambda and xi parameters there are personal preferences for fairness in (a) prospect and (b) retrospect, respectively. When economists talk about this sort of stuff, some will acknowledge that (a) is of analytical concern (and often will consider it to be of normative import), but most (all?) will agree that (b) is an unforgivable logical fallacy. We call it the sunk cost fallacy, and if I had a nickel for every student who's fallen for it on a final, you can bet your bottom dollar I'd be posting this from my own private Caribbean island instead of my perch here on Fenrir's shaggy mane.

Why do I commit the sin of including a sunk cost in a payoff function? Because if it trips up college students by the truckload, imagine for a moment that it might be a pretty common fallacy among ordinary constituents. Strong enough even to be part of Zwolinski's argument in favor of BI (since this is still in the middle of being debated, I am electing to refrain from mining out the balance of the links. I do hope you understand) as a matter of practical observation. Remember that part of what we're doing here at EE is investigating the contours of commonplace moral intuitions, and that includes holding our nose and accepting the weird proposition that not everyone thinks like an economist.

Okay, so let's leave this to stew for a little while. Remember that one of the things I'm trying to model in this series is apostasy, so consider what things might look like when xi > 0. And consider this post a bridge as we move from symmetrical games of cooperation to asymmetrical games of cooperation. As we tiptoe from Locke to Rousseau.

M-m-m-my Fedora

The most powerful incantation in economists' spellbooks is "multiple equilibria." To cast this spell, all you have to do is 1) observe a stable, sub-optimal arrangement 2) flutter your hands a little bit (this part is both to impress your audience and to summon the ancient spirits) and 3) mutter something about transitional gains traps and path dependency.

I'm only half joking. The half that isn't joking really does help explain how it is the US has ludicrous agricultural policy, nonsensical occupational licensing statutes, and rabbit-hole non-violent crime prevention. The half that is joking comes from hearing too many over-eager economic polliwogs improperly citing a phenomenon that has a rigorous game theoretical definition.

So at the risk of outing myself as a legless anurial amphibian, consider a claim I made in yesterday's post. I urged you to consider if Simpson's Paradox applied to the marriage market. It occurred to me last night that I left that comment dangling. Here's what I mean.

Under legacy (I hesitate to invoke "tradition" here because of my sensitivity to charges of parochialism) institutions, families started earlier and lasted longer. These days, in the secular west, folks are delaying marriage, decoupling (lol) sex and marriage, and raising children in single-parent homes at an increasing rate. At least, so goes it in the aggregate.

Was the old equilibrium coercive? Did the compote mashed from the fruit of pulpit-pounding, social obligation, and old-timey paternalism contain trace amounts of force? If so, was it to avoid the prowling menace of endemic foppery?

The Original Foppish Swiss Libertine

You see, what we seem to have run aground on is a peculiar, fedora-shaped reef (f/t PJS). the separating equilibrium is, borrowing from Arnold Kling, characterized by Vickies (stable, high-conscientiousness, high-IQ, 2-parent households) and Thetes (unmarried, underemployed, directionless, single-adult households). Whereas before the rift, betas were shanghaied into quasi-compulsory participation in the institution of marriage, they're now free to pursue their own interests and senses of fashion.

Ah, you say, Simpson's Paradox has us de-omit a variable for analysis. Isn't the treatment the liberalization of sorting behavior? Well, maybe. I think the interesting bit of analysis is still in the non-ergodic aethershpere, a yet-to-be-applied treatment. Namely, how will the fedora and Pinkie Pie crowd adjust to their new marginal freedom? The revealed preference theorem suggests that these folks genuinely prefer celibacy and outre pursuits to the 2.2 kids, white picket fence road more travelled, cheap talk to the contrary notwithstanding.

The abiding puzzle is this: old institutions about family life solved some sort of collective action dilemma. In their absence, we can expect a new equilibrium. How will that new equilibrium compare with the old both within subgroups and across the entire population? Is this one of those instances where moving towards more euvoluntary institutions is a mistake? What's the appropriate metric? What's the appropriate counterfactual?

#NoSolutionsOnlyTradeoffs

A Game of Institutions Book 1: Euvoluntary Coordination

I beg your indulgence for a brief series of posts. In them, I shall expand on the Shughart/Thomas piece, discussed here. Casual readers can think of this as a brief introduction to elementary game theory. For my more knowledgeable readers, think of this as some preliminary spitballing prior to an actual project.

Before I get to the specifics, I'll need to walk you through the basics of practical game theory. I apologize if this is old hat—please feel free to skip ahead if you like.

First off, the Twitter version of game theory. It's a way to analyze strategic behavior. That's it. Nothing fancy. There are three basic elements to any game: players, payouts, and choices. Most instructors will start out with 2-player games to illustrate the mechanics of finding an equilibrium solution, since it helps students moisten their feet without the risk of drowning. We can do the same here, but discussing constitutions necessarily implies more than just 2 players. Getting there will be easier if we start with the simplest case first: euvoluntary constitutions and the Coordination Game.

A (sequential) two-player CG goes a little a-something a-like this. P1 chooses to play left (L) or right (R). P2 then also chooses to play L or R. If both players play L, each earns 10. If both players play R, each earns 5. If either one plays L and the other plays R, each earn 0. Here's the payoff matrix, with P1 and P2 payoffs separated by a comma:

	L	R
L	10,10	0,0
R	0,0	5,5

The actual amounts in the cells are for illustration only. What's important here is the symmetry: P1 and P2 are equally better off by picking the same choice than by accepting their BATNA. And worthy of note for euvoluntary exchange purposes, their BATNAs are identical (nb: I know that the proper parlance would be "Best Alternative To a Coordinated Outcome, but let's just stick with our tried-and-true acronym). With symmetrical payoffs, none of the players' sense of fairness or justice is offended. We work together to produce something, then split the proceeds even-Steven.

What's the point then of a constitution? In a sequential game, I pick L, then you pick L, we're good to go. Equilibrium outcome, hooray (and yes, [R,R] is also an equilibrium outcome)! Well, if we're playing a repeated simultaneous game, it'd be nice to know beforehand what the expectations are for play. Think of it as a preliminary cheap-talk round. I say "left" you say "cool" and off we go. Recall from S&T that a euvoluntary constitution is one that does not require ex post enforcement to remain valid. This qualifies. There's no upside, no incentive to play anything but the agreed-upon action.

To make this game more interesting, you can include more players, discount rates, production functions, and whatever other bells and whistles you might like. But the core observation that no coercion is needed to reinforce the terms of the constitution remains so long as we've got symmetrical payoffs and a barren BATNA.

So what are some real-world analogs to this coordination game? Well, partnerships come to mind. Think about the default legal rules for a partnership: there's joint and several legal liability, but more to the point, any of the partners can dissolve the partnership at any time for any (or no) reason whatsoever. This is an attractive feature for firms wishing to signal euvoluntarity.

Consider this, then. Marriage, under no-fault divorce, is closer to the default rules for partnership than it was under a statutory harm regime. That is to say that the rules for divorce we have now are more euvoluntary than they were prior to 1969. If you believe Wolfers and Stevenson (and you should, their econometrics are impeccable), domestic violence rates and suicide dropped precipitously because of no-fault divorce, with no long-term impact on overall divorce rates (yes, there was a spike at the time of the regime change, but you can think of that as pent-up demand). But what if the more-euvoluntary institutional rules were in fact unfit for marriage? Marriage rates in the US began to tank in the 1970s, and the median age of first-time married couples has risen (CDC and Census). If you believe Charles Murray, these trends rend asunder the tissue paper of society. Let's ditch the normative assumptions and take at face value both the Wolfers/Stevenson claims and the Murray conclusion. Is it possible then to have an increasingly euvoluntary institution that produces decreasingly euvoluntary outcomes? Another way to think about this is whether or not we can have instances of private goods that add up in a separating equilibrium to a public bad.

If that smells a little bit like a false dichotomy, it's because it probably is. There are other ways to discourage single parenthood (on the margin, naturally) while preserving liberal freedom of association. Reconsidering the move away from virtue ethics towards Kantian moral imperatives or naked utilitarianism might be a good place to start. Aspirational sentiments in fiction might be another. Solving great social problems is off-topic here, I merely wish you to consider if Simpson's Paradox need apply to institutional choice, and if it does, what are the implications for default rules?

Okay, so I didn't get all that heavy into the game theory in this post. For forthcoming posts in this series (under the 'S&T' tag), I'll make things a little bit more rigorous. I'd like to get to where we're estimating comparative statics for an n-player game, including terms for fairness preferences. I hope to convince you that this approach can help explain why we see the sorts of big institutions we have, and if I do my job right, that both Locke and Rousseau can be correct about the origins of the state.

Sounds fun, doesn't it?

A Game Theoretical Approach to Institutions for Collective Action

ICYMI, the Shughart and Thomas piece (here) really is quite good indeed. As an eagle-eye view of the literature on institutional choice, they cover quite a bit of ground, from Leeson's œuvre on pirate compacts to Buchanan, Tollison, Shughart & al.'s club goods theories to the Ostroms' contributions on commons governance to the formal high constitutional theories of Tiebout, Buchanan, and Hirschman. If you wanted a good place to find the peaks in the constitutional formation literature, this is it.

But that's not what piqued my interest. What they've done is propose a fascinating taxonomy that runs very closely to an idea that's been rattling around my attic for at least a year. You see, underpinning competing theories of constitutional formation are typically game theoretic models. Usually what you'll see are claims that constitutions help people solve coordination problems. But occasionally, someone will forward the proposition that what's being solved is a repeated PD.

Well, which is it?

By proposing a euvoluntary-voluntary-coercive continuum, S&T tell the discerning reader "it depends". And that furthermore, the degree to which the game departs from balanced cooperation determines its euvoluntarity. Why is this important? A few reasons.

1. Euvoluntary things, be they exchange or institutional choice, tend not to offend. Both characteristics of fairness and justice are satisfied when arrangements are euvoluntary, so parties external to the arrangement are unlikely to interfere with the terms of the constitution, at least on behalf of the signatories. 
2. Euvoluntary institutional arrangements should be stable. No need for ex post enforcement suggests that everyone is happy, there's no incentive to shirk, and therefore there should be no reason to dissolve the arrangement. (Hint to Adam G: this is where you come in)
3. Voluntary arrangements are better than none at all, but they could signal some durable payoff asymmetries. Moving from a coordination game to a Battle of the Sexes game means that the coordinating mechanism necessarily privileges some parties more than others. Hence the ex post enforcement as the constituents might want to jockey to obtain the greater payout. This is your Hume. This is your McCloskey. Oh man, I'm going to get in trouble for that, aren't I?
4. To the extent that voluntary arrangements lead to the generation of local elites, dissolution (or reform) pressures may mount over time from within and paternalistic expropriation pressures may mount from without. This is where I think Tiebout has the most bite, but it has to be a Tiebout tempered with Coase: departing or adjusting a voluntary constitutional arrangement is unlikely to be cheap.
5. Coercive constitutions are where your Hobbes, your North, your Olson work. This is pretty familiar territory, and I think it's probably fair to say that the assumption of non-cooperative games underpins what most folks think of the organizing principles of nation-states. And I think that's probably a fair model. A Hawk-Dove game is pretty much the proper way to model crime.
6. More to the point, this is the proper way to model revolution, or at least to answer the question why some organizations are stable while others topple almost as soon as they are established. Good comparative institutional analysis can be illustrated clearly and concisely with basic game theory.

So, that's why I really like the paper. It puffs some good wind into the sails hoisted by Buchanan in his '63 address at the Southerns. Public Choice scholars should be able to generate several handsful of hypotheses by skimming those points above. As for me, I'd be tickled to just expand this post into a piece. I think there's some meat there.