Recent research papers by Roger B. Myerson
We consider a simple overlapping-generations model with risk-averse financial agents subject to moral hazard. Efficient contracts for such financial intermediaries involve back-loaded late-career rewards. Compared to the analogous model with risk-neutral agents, risk aversion tends to reduce the growth of agents' responsibilities over their careers. This moderation of career growth rates can reduce the amplitude of the widest credit cycles, but it also can cause small deviations from steady state to amplify over time in rational-expectations equilibria. We find equilibria in which fluctuations increase until the economy enters a boom/bust cycle where no financial agents are hired in booms. [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]
RETHINKING THE PRINCIPLES OF BANK REGULATION: a review of Admati and Hellwig's Bankers' New Clothes
In an important new book, Anat Admati and Martin Hellwig raise broad critical questions about bank regulation. These questions are reviewed and discussed here with a focus on how the problems of maintaining a stable financial system depend on fundamental problems of information and incentives in financial intermediation. It is argued that financial regulatory reforms can be reliably effective only when their basic principles are understood by informed citizens, and that Admati and Hellwig's book is a major contribution toward this goal, as it clearly lays out the essential case for requiring banks to have more equity.
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].
Local foundations for better governance (Nov 2014).
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]
STANDARDS FOR STATE-BUILDING INTERVENTIONS
Abstract. This paper considers the question of defining standards for democratic state-building. One may question the possibility of benevolent state-building interventions, but any hope for planning such interventions, or for holding their planners to account, requires some understanding of what should come first in building a successful democratic society. I argue that elections are not enough. Successful democratic development depends on a plentiful supply of leaders who have good reputations for using public funds responsibly in both local and national politics. If the goal of an intervention is truly to help establish a sovereign democratic state, not to install a hand-picked leadership dependent on foreign support, then interveners could be expected to foster a political reconstruction based on elected local councils and a national assembly, with parliamentary responsibility for local and national administration. [notes]
Related papers: Foundations of the state in theory and practice (Oct 2007) [notes].
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].
Local and national democracy in political reconstruction (July 2014).
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 [pnas, notes], Booth-KPMG talk, authoritarian constitutions, Zhejiang U talk, AAEA Schultz lecture, World Bank MENA talk, UCLG 2013, Oxford, Harare, Siracusa, Kinshasa,
moral hazard and macroeconomics [uc forum],
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), 2014 autobiography,
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,
my 2002 discussion on game theory with Yanis Varoufakis (who has subsequently become Finance Minister of Greece),
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.