Recent research papers by Roger B. Myerson
A MODEL OF MORAL-HAZARD CREDIT CYCLES
(March 2010, revised July 2012)
This paper considers a simple model of credit cycles driven by moral hazard in financial intermediation. Investment advisors or bankers must earn moral-hazard rents, but the cost of these rents can be efficiently spread over a banker's entire career, by promising large back-loaded rewards if the banker achieves a record of consistently successful investments. The dynamic interactions among different generations of bankers can create equilibrium credit cycles with repeated booms and recessions. We find conditions when taxing workers to subsidize bankers can increase investment and employment enough to make the workers better off. [notes]
Related papers: Moral-hazard credit cycles with risk-averse agents (March 2013) [notes].
(July 2012) coauthored with Jörgen Weibull
When people recurrently interact in familiar settings, social conventions may develop so that people tend to disregard alternatives outside the conventional norm. For rational players to usually restrict attention to a block of strategies, no player should prefer to deviate from the block when others are likely to act rationally and conventionally inside it. We explore concepts that formalize this idea for finite normal-form games. Settled equilibria are Nash equilibria with support in a minimal block that can be conventionally accepted in such a sense. This refinement has cutting power in many games and excludes mixed equilibria of simple coordination games. We prove general existence of settled equilibria that are proper and thus induce sequential equilibria in all extensive-form games with the given normal form. We also provide a psychological micro-model that leads to proper equilibrium. [notes]
REVIEW OF ADMATI AND HELLWIG'S BANKERS' NEW CLOTHES
CONSTITUTIONAL STRUCTURES FOR A STRONG DEMOCRACY
For democracy to prosper in Pakistan, structural reforms to strengthen democratic competition could be vital. This paper considers some suggested reforms, using ideas from economics of oligopolistic competition and game theory. Successful democracy is based on a flexible system of strong political parties and a plentiful supply of politicians who have good reputations for responsible democratic leadership. Unimpeded parliamentary responsibility for government helps develop strong parties. National parties should be able to nominate candidates in all elections, including local elections and tribal areas. For a flexible party system, members of the National Assembly should be free to form new parties, not restricted by sanctions against floor-crossing. With federalism, provincial and local democracy also reduce political entry barriers, as politicians can prove their qualifications for higher office by responsible service at lower levels of government. Electing responsible local councils by approval-voting open-list proportional representation can strengthen the local base of democratic leadership in all communities. In single-seat districts of provincial and national assemblies, the use of runoff elections would allow more flexible party competition. [notes]
Related papers: Local Foundations for Strong Democracy in Pakistan (July 2009).
Breaking the Countercyclical Pattern of Local Democracy in Pakistan (April 2010) with Ali Cheema and Adnan Q Khan.
Democratic decentralization and economic development (Jan 2013) [notes].
We consider a simple political-economic model where capitalist investment is constrained by the government's temptation to expropriate. Political liberalization can relax this constraint, increasing the government's revenue, but also increasing the ruler's political risks. We analyze the ruler's optimal liberalization, where our measure of political liberalization is the probability of the ruler being replaced if he tried to expropriate private investments. Poorer endowments can support a reputational equilibrium with more investment, even without liberalization. So we find a resources curse, where larger resource endowments can decrease investments and reduce the ruler's revenue. The ruler's incentive to liberalize can be greatest with intermediate resource endowments. Strong liberalization becomes optimal in cases where capital investments yield approximately constant returns for national output. Mobility of productive factors that complement capital can increase incentives to liberalize, but equilibrium prices may adjust so that liberal and authoritarian regimes co-exist. [notes]
FOUNDATIONS OF THE STATE IN THEORY AND PRACTICE: READING BREMER AND THE COUNTERINSURGENCY FIELD MANUAL
Abstract. Paul Bremer's book about Iraq and the US Army's Counterinsurgency Field Manual express theories about the foundations of the state. Bremer emphasizes the primary importance of a national constitution. The Field Manual emphasizes local security operations and effective governance to establish the government's legitimacy. From economic problems of agency, I argue that the foundations of the state depend critically on political leaders' reputations for rewarding and judging government officials. This perspective suggests that the chances for successful democracy are increased when there are more opportunities for different political leaders to develop reputations for responsible governance and effective use of patronage. [notes]
Related papers: A Field Manual for the Cradle of Civilization: Theory of Leadership and Lessons of Iraq (Sept 2008) [notes].
Rethinking the Fundamentals of State-Building (Oct 2010). [prism, notes].
Standards for State-Building Interventions (Mar 2012).
MORAL HAZARD IN HIGH OFFICE AND THE DYNAMICS OF ARISTOCRACY (revised Dec. 2010)
Abstract: We consider a model of governors serving a sovereign prince, who wants to deter them from corruption and rebellion. Governors must be penalized when they cause observable crises, but a governor's expected benefits must never go below the rebellion payoff, which itself is better than what any candidate could pay for the office. Governors can trust the prince's promises only up to a given credit bound. In the optimal incentive plan, compensation is deferred until the governor's credit reaches this bound. Each crisis reduces credit by a fixed penalty. When a governor's credit is less than one penalty from the rebellion payoff, the governor must be called to court for a trial in which the probability of dismissal is less than 1. Other governors must monitor the trial because the prince would prefer to dismiss and resell the office. A high credit bound benefits the prince ex ante, but in the long run it generates entrenched governors with large claims on the state. Low credit bounds can cause the prince to apply soft budget constraints, forgiving losses and tolerating corruption for low-credit governors. (Former title: "Leadership, trust, and power: dynamic moral hazard in high office") [notes].
FUNDAMENTAL THEORY OF INSTITUTIONS: a lecture in honor of Leo Hurwicz (revised March 2008)
Abstract: We follow Hurwicz in considering fundamental questions about social institutions. Hurwicz's concept of incentive compatibility may help clarify old debates about socialism, where such questions arose. Moral-hazard models show disadvantages of socialism, while adverse-selection models may delimit its advantages. We review Hurwicz's general theory of how institutions can be enforced in larger games, suggesting curb sets as an alternative enforcement theory that admits focal-point effects. Finally, we consider specific problems of leadership and trust in establishing sovereign political institutions, where high officials can be deterred from abuse of power only by promises of large future rewards, which a leader must be credibly committed to fulfill. (Presented at the 2006 North American summer meetings of the Econometric Society). [notes]
LEARNING FROM SCHELLING'S 'STRATEGY OF CONFLICT'
Abstract: Thomas Schelling's Strategy of Conflict (1960) is a masterpiece which should be recognized as one of the most important and influential books in social theory. This paper reviews some of the important ideas in Strategy of Conflict and considers some of the broader impact that this book has had on game theory, economics, and social theory. By his emphasis on the critical importance of information and commitment in strategic dynamics, Schelling played a vital role in stimulating the development of noncooperative game theory. More broadly, Schelling's analysis of games with multiple equilibria has redefined the scope of economics and its place in the social sciences. [notes]
Abstract: A successful deterrent strategy requires a balance between resolve and restraint, and this balance must be recognized and understood by adversaries. So for forceful actions to have their intended deterrent effect, they should be framed by a process of communication with potential adversaries that establishes mutually recognized limits and rules about when force will be used and when it will not be used. Simple game models are used to develop the basic logic of effective credible deterrent strategies. [notes]
FEDERALISM AND INCENTIVES FOR SUCCESS OF DEMOCRACY
(revised Aug. 2005)
Abstract: Success and failure of democracy are interpreted as different equilibria of a dynamic political game with costs of changing leadership and with incomplete information about politicians' virtue. Unitary democracy can be frustrated when voters do not replace corrupt leaders, because any new leader would probably also govern corruptly. But federal democracy cannot be consistently frustrated at both national and provincial levels, because provincial leaders who govern responsibly could build reputations to become contenders for higher national office. Similarly, democracy cannot be consistently frustrated in a democratization process that begins with decentralized provincial democracy and only later introduces nationally elected leadership. [notes]
FUNDAMENTALS OF SOCIAL CHOICE THEORY
Abstract: This paper offers a short introduction to some of the fundamental results of social choice theory. Topices include: Nash implementability and the Muller-Satterthwaite impossibility theorem, anonymous and neutral social choice correspondences, two-party competition in tournaments, binary agendas and the top cycle, and median voter theorems. The paper begins with a simple example to illustrate the importance of multiple equilibria in game-theoretic models of political institutions.
Basel talk, ES 2009, Knight lecture, Laffont lecture [notes], Bonn, Frankfurt, Sackler [notes], Booth-KPMG talk, authoritarian constitutions, Zhejiang U talk, AAEA Schultz lecture,World Bank MENA talk,
moral hazard and macroeconomics, ,
notes on sequential equilibria of infinite games,
rough notes for a short course on political economics from 7/2007 (and from 7/2005),
2007 prize lecture and biography (at Nobelprize.org),
talk at Harvard following Jeffrey Sachs 4/2008,
Stony Brook talk on foundations of political institutions 7/2006,short overview,
overview of political economics for a conference at Northwestern U. 5/2005,
notes on virtual utility and interim bargaining,
justice, institutions, multiple equilibria,
bipolar multicandidate elections with corruption,
comparison of electoral systems, incentives to cultivate favored minorities,
an interview on game theory,
political economics and the Weimar disaster,
history of Nash equilibrium,
survey of information on local democracy in developing countries (by S. Ghosh).
- bankers.xls, rabankers.xls
Also available here: a thesis on psycholinguistics of reading by Rosemarie F. Myerson.