New book by Dixit and Nalebuff

Avinash Dixit and Barry Nalebuff have a new book out, The Art of Strategy. I saw a pre-release copy and it is as good an introduction in game theory as you are going to get.

Anyhow, on the book’s website is a fun set of games to actually try.

One thought on “New book by Dixit and Nalebuff”

  1. The Economists who thought up Emissions Permits Trading Systems did not use Strategic Thinking as described in this book. The idea that we can control emissions by inventing an artificial product called Emissions Permits and expect it to work effectively is an example of Wishful Thinking. Any system that requires several years to design and needs a thick rule book simply gives people many ways to “play the game” to defeat the rules. There will be a proportion of people (and countries) who will look for ways to get around the rules and keep burning fossil fuels. The better the system works the more people will try to “beat the system”. Once others start to see that some people are getting away with breaking the spirit of the agreement then the more others will feel justified in breaking the rules. We see it happening already in Australia with Garnaut who keeps saying that the rest of the world has to join up otherwise we are all doomed. That immediately gives everyone an excuse to delay or to find other reasons not to start. The list of excuses can go on and that is why there is a general feeling that “Trading Emissions Permits is unlikely to work but we have to sign up because it is the only game in town”.

    There is another game in town called Energy Rewards and it has been designed using Strategic Thinking.

    The first design principle is that most people want to reduce emissions and most are willing to cooperate in achieving that aim but they are not willing to do anything unless others cooperate. This the multiparty prisoner’s dilemma or Tragedy of the Commons. The second principle is that we want few rules in the system and that we must make it easy to detect rule breakers and there is almost certain punishment when they are discovered.

    The system has been designed around these two ideas.

    So let us Reward people whose activities produce few emissions. Let us also require people to volunteer to accept Rewards. Let us Reward people by the inverse of how much mains electricity they consume as a surrogate for greenhouse emissions. Let us also put the onus on how mains consumption is measured on the person themselves. That is people have to say how much mains electricity is their responsibility and they do this by dividing up meter readings amongst different groups of people in a way that they agree. How this is done is up to the people concerned – the only rule is that all metered mains electricity has to be assigned to someone. If we can show that one or more people break the rule then the punishment is for the rule breakers not to receive Rewards for a period of time.

    Let another rule be that Rewards have to be spent in an open market place on ways to reduce greenhouse emissions. Let the merchants in the market place specify how their product or service reduces emissions and let that be part of the contract when sold. If it is shown that the product does not reduce emissions then the person and all organisations with whom that person is associated are no longer allowed to accept Rewards as payment. Very simple rules, very easy to detect infringements and very simple almost certain punishment.

    The Tragedy of the Commons is overcome by Rewarding people not to produce greenhouse emissions (by not consuming energy) but requiring them to spend their Rewards in ways to reduce emissions. Enforcement is achieved by excluding those who do not play by the rules that they define. Detection is achieved by making it in the interests of parties who play by the rules to detect and report others who cheat.

    Will it work?

    Our modelling shows that an investment of $27 Billion dollars in Rewards over the next ten years will achieve a replacement of all fossil burning mains electricity generation capacity with renewables with no increase in the price of electricity. At the end of ten years we will have renewable energy plants that will generate electricity at less than half the running costs of existing fossil burning energy plants. We also know that the $27 billion is likely to be least cost because we have spent the money through a market place which is an efficient way to allocate resources.

    The system can be implemented tomorrow for little cost to the government. Rewards can be created by the Reserve Bank simply issuing as many as required. They will know how many we can usefully spend by observing the market price of Rewards. This will not cause general inflation but if too many are issued there will be inflation of Rewards money.

    It is my guess that we be able to issue a lot more Rewards than $27 Billion over the ten years and we will replace most burning of fossil fuels and Australia will start to take greenhouse gases out of the atmosphere. I also think other countries will quickly copy the approach because it gives Australia a competitive advantage because we will have abundant supplies of low cost energy.

    I may be wrong but it does not hurt to take out a little insurance and try another game and not leave everything to Emissions Trading.


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