scholarly journals Credit expansion, the prisoner’s dilemma and free banking as mechanism design

2021 ◽  
pp. 133-174
Author(s):  
Ludwig M.P. van den Hauwe
Keyword(s):  
Mechanism Design ◽  
Prisoner's Dilemma ◽  
Banking Sector ◽  
A Priori ◽  
Banking System ◽  
Prisoner’S Dilemma ◽  
Implicit Assumption ◽  
Free Banking ◽  
Fractional Reserve ◽  
Game Theoretic

Despite the distinctive character of the Austrian approach to «microfoundations for macroeconomics», the literature on free banking contains a number of arguments which make use of game-theoretic concepts and models such as the well-known Prisoner’s Dilemma model. While there can be no general a priori presumption against the possible usefulness of game-theoretic concepts for Austrian theorizing, in the context of the debate on free banking such concepts and models have been used with varying degrees of perspicacity. One example which is elaborated in the paper is concerned with the interaction configuration between independent banks in a fractional-reserve free banking system, which has sometimes been modeled as a One-Shot Prisoner’s Dilemma game. This conceptualization does not provide a sufficient argument for the in-concert overexpansion thesis, nor for the thesis that fractional-reserve free banking will tend to lead to the establishment of a central bank. The author drops the implicit assumption that there exists a one-to-one correspondence between the outcome matrix and the utility matrix. When it is acknowledged that banks in a fractional-reserve free banking system need not necessarily adopt a «myopic», self-regarding perspective but may recognize the long-run harmony of interests between the banking sector and society at large, a different conceptualization and a different matrix representation emerge. Key words: Economic Mechanism Design; Business Cycle Theory; Prisoner’s Dilemma; Free Banking. JEL codes: D01, E31, E32, E42, E52, E58, E66, G18, K39. Resumen: A pesar del carácter distintivo del enfoque austríaco de las «microfundaciones para la macroeconomía», la literatura sobre la banca libre contiene algunos argumentos que recurren a los conceptos y modelos de la teoría de juegos tales como el conocido modelo Dilema del Prisionero. A pesar de que no puede existir una presunción a priori sobre la posible utilidad de conceptos de la teoría de juegos para las teorías austríacas, en el contexto del debate sobre la banca libre tales conceptos y modelos han sido manejados con distintos grados de perspicacia. Un ejemplo elaborado en el documento comenta la configuración de interacción entre los bancos independientes en un sistema de banca libre con reserva fraccionaria, que a veces ha sido modelado como un juego de Dilema del Prisionero One-Shot. Esta conceptualización no ofrece suficientes argumentos para la tesis de la sobreexpansión in-concert, ni para la tesis de que un sistema de banca libre con reserva fraccionaria tendería a la creación de un banco central. El autor abandona la asunción implícita de que existe una correspondencia de uno a uno entre la matriz de resultado y la matriz de utilidad. Al reconocerse que los bancos en un sistema de banca libre con reserva fraccionaria no deben adoptar necesariamente una perspectiva «miope» y egoísta, pero pueden reconocer la armonía de intereses a largo plazo entre el sector bancario y la sociedad en general, surgen una conceptualización y representación de la matriz distintas. Palabras clave: Diseño de mecanismo económico; Teoría del ciclo económico; Dilema del Prisionero; Banca libre. Códigos JEL: D01, E31, E32, E42, E52, E58, E66, G18, K39.

scholarly journals Unanswered quibbles: George Selgin still gets it wrong with fractional reserve free banking

2021 ◽  
Author(s):  
Philipp Bagus ◽  
David Howden
Keyword(s):  
Banking System ◽  
Real Income ◽  
Jel Classification ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Credit Expansion ◽  
Investment Projects ◽  
Fractional Reserve ◽  
Monetary Equilibrium ◽  
El Sistema

In this article we reply to George Selgin’s counterarguments to our article «Fractional Reserve Free Banking: Some Quibbles». Selgin regards holding cash as saving while we focus on the real savings necessary to maintain investment projects. Real savings are unconsumed real income. Variations in real savings are not necessarily equal to variations in cash holdings. We show that a coordinated credit expansion in a fractional reserve free banking (FRFB) system is possible and that precautionary reserves consequently do not pose a necessary limit. We discuss various instances in which a FRFB system may expand credit without a prior increase in real savings. These facets all demonstrate why a fractional reserve banking system —even a free banking one— is inherently unstable, and incentivized to impose a stabilizing central bank. We find that at the root of our disagreements with Selgin lies a different approach to monetary theory. Selgin subscribes to the aggregative equation of exchange, which impedes him from seeing the microeconomic problems that the stabilization of «MV» by a FRFB system causes. Key words: Free banking, fractional reserve, monetary equilibrium, credit expansion, economic cycle. JEL Classification: B53, E32, E42, E5, G18, H11, K39, P3, P34. Resumen: En este artículo respondemos a George Selgin, que a su vez respondió a nuestro artículo «Fractional Reserve Free Banking: Some Quibbles». Selgin considera que los saldos de tesorería son ahorros, mientras nosotros nos fijamos en los ahorros reales necesarios para mantener proyectos de inversion. Ahorros reales son ingresos reales no consumidos. Variaciones en los ahorros reales no necesariamente coinciden con las variaciones en los saldos de tesoreria. Mostramos que una expansión crediticia coordinada es posible en un sistema bancario de reserva fraccionaria (FRFB) y que las reservas prudenciales no constituyen necesariamente un limite a la expansión co - ordinada. Discutimos varios escenarios en los que el sistema FRFB puede expandir los créditos sin un aumento previo en los ahorros reales. Todas estas facetas muestran que un sistema bancario de reservas fraccionarias —incluso uno de banca libre— es inherentemente inestable y produce incentivos para imponer un banco central estabilizador. Mostramos que el origen de nuestras diferencias con Selgin está en un enfoque diferente a la teoría monetaria. Selgin es partidario de la ecuación de intercambio que es muy agregada y que le impide ver los problemas microeconomicas que la estabilización de «MV» por parte del sistema FRFB produce. Palabras clave: Banca libre, reserva fraccionaria, equilibrio monetario, expansión crediticia, ciclo económico. Clasificación JEL: B53, E32, E42, E5, G18, H11, K39, P3, P34.

scholarly journals Money, Banking, and Financial Markets

2019 ◽  
Vol 87 (5) ◽  
pp. 2049-2086 ◽  
Author(s):  
David Andolfatto ◽  
Aleksander Berentsen ◽  
Fernando M Martin
Keyword(s):  
Central Bank ◽  
Financial Markets ◽  
Dynamic Model ◽  
Banking System ◽  
Free Banking ◽  
Lender Of Last Resort ◽  
Fractional Reserve ◽  
Deposit Contracts ◽  
Liquidity Insurance ◽  
Meaningful Role

Abstract The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997, Journal of Political Economy105, 928–956) model of banking and financial markets with the Lagos and Wright (2005, Journal of Political Economy113, 463–484) dynamic model of monetary exchange—a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable in government money, where the terms of bank deposit contracts are affected by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. Among other things, the model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.

scholarly journals Games of Two Halves: Non-Experimental Evidence on Cooperation, Defection and the Prisoner’s Dilemma

2018 ◽  
Vol 10 (3) ◽  
pp. 285-312
Author(s):  
Stephen Dobson ◽  
John Goddard
Keyword(s):  
Experimental Evidence ◽  
Prisoner's Dilemma ◽  
Prisoner’S Dilemma ◽  
Theoretic Model ◽  
Cooperative Behaviour ◽  
Strategic Choices ◽  
Early Stages ◽  
Soccer Teams ◽  
Game Theoretic ◽  
Game Theoretic Model

We develop a stylized two-period game-theoretic model of the strategic choices made by soccer teams when selecting between defensive and attacking team formations, and between non-violent and violent styles of play. Cooperative behaviour during the early stages of matches is typically superseded by non-cooperation during the latter stages. The propensity for violent play to take place in the latter stages of soccer matches is interpreted as novel non-experimental evidence that players typically resort to mutually detrimental non-cooperative forms of behaviour when the payoffs assume a prisoner’s dilemma structure.

Free-Rider Problems in the Production of Collective Goods

1987 ◽  
Vol 3 (2) ◽  
pp. 245-273 ◽  
Author(s):  
Jean Hampton
Keyword(s):  
Prisoner's Dilemma ◽  
Prisoner’S Dilemma ◽  
Free Rider ◽  
Collective Good ◽  
Free Rider Problem ◽  
Collective Goods ◽  
Partial Analysis ◽  
Collective Action Problems ◽  
Game Theoretic ◽  
Willingness To Contribute

There has been a persistent tendency to identify what is called “the freerider problem” in the production of collective (or public) goods with the prisoner's dilemma. However, in this article I want to challenge that identification by presenting an analysis of what are in fact a variety of collective action problems in the production of collective goods. My strategy is not to consult any intuitions about what the free-rider problem is; rather I will be looking at the problematic game-theoretic structures of various situations associated with the production of different types of collective goods, thereby showing what sorts of difficulties a community concerned with their voluntary production would face. I call all of these dilemmas free-rider problems because in all of them certain individuals find it rational to take advantage of others' willingness to contribute to the good in a way that threatens its production. Some readers may feel that the term ‘free-rider problem’ is so identified with the prisoner's dilemma that my extension of the term in this way “jars”; if so, I invite them to coin another word for the larger phenomenon. My aim is not to engage in linguistic analysis but to attempt at least a partial analysis of the complicated structure of collective good production.

Why Hobbes' State of Nature is Best Modeled by an Assurance Game

Utilitas ◽  
2009 ◽  
Vol 21 (3) ◽  
pp. 297-326 ◽  
Author(s):  
MICHAEL MOEHLER
Keyword(s):  
Game Theory ◽  
Prisoner's Dilemma ◽  
Prisoner’S Dilemma ◽  
The State ◽  
The Third ◽  
Law Of Nature ◽  
State Of Nature ◽  
Game Theoretic ◽  
Assurance Game ◽  
Third Law

In this article, I argue that if one closely follows Hobbes' line of reasoning in Leviathan, in particular his distinction between the second and the third law of nature, and the logic of his contractarian theory, then Hobbes' state of nature is best translated into the language of game theory by an assurance game, and not by a one-shot or iterated prisoner's dilemma game, nor by an assurance dilemma game. Further, I support Hobbes' conclusion that the sovereign must always punish the Foole, and even exclude her from the cooperative framework or take her life, if she defects once society is established, which is best expressed in the language of game theory by a grim strategy. That is, compared to existing game-theoretic interpretations of Hobbes, I argue that the sovereign plays a grim strategy with the citizens once society is established, and not the individuals with one another in the state of nature.

scholarly journals Decentralized Job Scheduling in the Cloud Based on a Spatially Generalized Prisoner’s Dilemma Game

2015 ◽  
Vol 25 (4) ◽  
pp. 737-751 ◽  
Author(s):  
Jakub Gąsior ◽  
Franciszek Seredyński
Keyword(s):  
Prisoner's Dilemma ◽  
Job Scheduling ◽  
Prisoner’S Dilemma ◽  
Theoretic Model ◽  
Global Scheduling ◽  
Game Theoretic ◽  
Job Scheduling Problem ◽  
Selfish Agents ◽  
Specific Number ◽  
Spatial Prisoner’S Dilemma

Abstract We present in this paper a novel distributed solution to a security-aware job scheduling problem in cloud computing infrastructures. We assume that the assignment of the available resources is governed exclusively by the specialized brokers assigned to individual users submitting their jobs to the system. The goal of this scheme is allocating a limited quantity of resources to a specific number of jobs minimizing their execution failure probability and total completion time. Our approach is based on the Pareto dominance relationship and implemented at an individual user level. To select the best scheduling strategies from the resulting Pareto frontiers and construct a global scheduling solution, we developed a decision-making mechanism based on the game-theoretic model of Spatial Prisoner’s Dilemma, realized by selfish agents operating in the two-dimensional cellular automata space. Their behavior is conditioned by the objectives of the various entities involved in the scheduling process and driven towards a Nash equilibrium solution by the employed social welfare criteria. The performance of the scheduler applied is verified by a number of numerical experiments. The related results show the effectiveness and scalability of the scheme in the presence of a large number of jobs and resources involved in the scheduling process.

scholarly journals The Uneasy Case for Fractional- Reserve Free Banking

2021 ◽  
pp. 143-196
Author(s):  
Ludwig van den Hauwe
Keyword(s):  
Business Cycle ◽  
Institutional Analysis ◽  
Banking System ◽  
Invisible Hand ◽  
Free Banking ◽  
Monetary Reform ◽  
Fractional Reserve ◽  
Palabras Clave ◽  
Banking Business ◽  
The Business Cycle

Since a few decades several sub-disciplines within economics have witnessed a reorientation towards institutional analysis. This development has in particular also affected the fields of macroeconomics and monetary theory where it has led to several proposals for far-reaching financial and monetary reform. One of the more successful of these proposals advocates a fractional-reserve free banking system, that is, a system with no central bank, but with permission for the banks to operate with a fractional reserve. This article exposes several conceptual flaws in this proposal. In particular several claims of the fractional-reserve free bankers with respect to the purported working characteristics of this system are criticized from the perspective of economic theory. In particular, the claim that a fractional-reserve free banking system would lead to the disappearance of the business cycle is recognized as false. Furthermore an invisible-hand analysis is performed, reinforcing the conclusion that fractional-reserve free banking is incompatible with the ethical and juridical principles underlying a free society. Key words: monetary and banking regimes, comparative institutional analysis, fractional-reserve free banking, business cycle, invisible hand. Clasificación JEL: B53, E32, E42, E5, G18, H11, K39, P3, P34 Resumen: Desde hace algunas décadas varias subdisciplinas de la economía se ven reorientadas hacia el análisis institucional. Este desarrollo ha afectado más específicamente también a los campos de la macroeconomía y la teoría monetaria donde ha llevado a varias propuestas de reformas financieras y monetarias de gran alcance. Una de las propuestas más exitosas aboga por una banca libre con reserva fraccionaria, o sea un sistema sin banco central en el cual, sin embargo, los bancos puedan operar con una reserva fraccionaria. Este artículo comenta varios defectos conceptuales de dicha propuesta. Más específicamente, varias alegaciones de los banqueros de la banca libre con reserva fraccionaria relativas a las supuestas características operativas de este sistema se critican partiendo de la teoría económica. Más en particular, se denuncia como errónea la alegación de que una banca libre con reserva fraccionaria llevaría a la desaparición del ciclo económico. Además, se realiza un análisis de mano invisible lo cual refuerza la conclusión que la banca libre con reserva fraccionaria es incompatible con los principios éticos y jurídicos propios de una sociedad libre. Palabras clave: banca libre con reserva fraccionaria, ciclo económico, mano invisible.

Universalizing and the we: endogenous game theoretic deontology

2020 ◽  
pp. 1-16
Author(s):  
Paul Studtmann ◽  
Shyam Gouri Suresh
Keyword(s):  
Nash Equilibrium ◽  
Prisoner's Dilemma ◽  
Autonomous Agents ◽  
Prisoner’S Dilemma ◽  
The Other ◽  
Pareto Improvement ◽  
Moral Framework ◽  
Interacting Agents ◽  
Game Theoretic

Abstract The Nash counterfactual considers the question: what would happen were I to change my behaviour assuming no one else does. By contrast, the Kantian counterfactual considers the question: what would happen were everyone to deviate from some behaviour. We present a model that endogenizes the decision to engage in this type of Kantian reasoning. Autonomous agents using this moral framework receive psychic payoffs equivalent to the cooperate-cooperate payoff in Prisoner’s Dilemma regardless of the other player’s action. Moreover, if both interacting agents play Prisoner’s Dilemma using this moral framework, their material outcomes are a Pareto improvement over the Nash equilibrium.

scholarly journals Evolutionary successful strategies in a transparent iterated Prisoner’s Dilemma

2019 ◽  
Author(s):  
Anton M. Unakafov ◽  
Thomas Schultze ◽  
Igor Kagan ◽  
Sebastian Moeller ◽  
Alexander Gail ◽  
...  
Keyword(s):  
Prisoner's Dilemma ◽  
Prisoner’S Dilemma ◽  
Relative Timing ◽  
Partial Explanation ◽  
High Transparency ◽  
Sequential Game ◽  
Iterated Prisoner's Dilemma ◽  
Game Theoretic ◽  
Evolutionary Simulations ◽  
Iterated Prisoner’S Dilemma

AbstractA Transparent game is a game-theoretic setting that takes action visibility into account. In each round, depending on the relative timing of their actions, players have a certain probability to see their partner’s choice before making their own decision. This probability is determined by the level of transparency. At the two extremes, a game with zero transparency is equivalent to the classical simultaneous game, and a game with maximal transparency corresponds to a sequential game. Despite the prevalence of intermediate transparency in many everyday interactions such scenarios have not been sufficiently studied. Here we consider a transparent iterated Prisoner’s dilemma (iPD) and use evolutionary simulations to investigate how and why the success of various strategies changes with the level of transparency. We demonstrate that non-zero transparency greatly reduces the set of successful memory-one strategies compared to the simultaneous iPD. For low and moderate transparency the classical “Win – Stay, Lose – Shift” (WSLS) strategy is the only evolutionary successful strategy. For high transparency all strategies are evolutionary unstable in the sense that they can be easily counteracted, and, finally, for maximal transparency a novel “Leader-Follower” strategy outperforms WSLS. Our results provide a partial explanation for the fact that the strategies proposed for the simultaneous iPD are rarely observed in nature, where high levels of transparency are common.

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