Strategic Robustness in Bi-level System-of-systems Design

Robust designs protect system utility in the presence of uncertainty in technical and operational outcomes. Systems-of-systems, which lack centralized managerial control, are vulnerable to strategic uncertainty from coordination failures between partially or completely independent system actors. This work assesses the suitability of a game-theoretic equilibrium selection criterion to measure system robustness to strategic uncertainty and investigates the effect of strategically robust designs on collaborative behavior. The work models interactions between agents in a thematic representation of a mobile computing technology transition using an evolutionary game theory framework. Strategic robustness and collaborative solutions are assessed over a range of conditions by varying agent payoffs. Models are constructed on small world, preferential attachment, and random graph topologies and executed in batch simulations. Results demonstrate that systems designed to reduce the impacts of coordination failure stemming from strategic uncertainty also increase the stability of the collaborative strategy by increasing the probability of collaboration by partners; a form of robustness by environment shaping that has not been previously investigated in design literature. The work also demonstrates that strategy selection follows the risk dominance equilibrium selection criterion and that changes in robustness to coordination failure can be measured with this criterion.

Financial Risk Capacity

Financial crises are particularly severe and lengthy when banks fail to recapitalize after bearing large losses. We present a model that explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets with information asymmetries. Large equity losses force banks to tighten intermediation, which exacerbates adverse selection. Adverse selection lowers bank profit margins, which slows both the internal growth of equity and equity injections. This mechanism generates financial crises characterized by persistent low growth. The lack of equity injections during crises is a coordination failure that is solved when the decision to recapitalize banks is centralized. (JEL D82, E32, E44, G01, G21, G32, L25)

Understanding the governance of sustainability pathways: Hydraulic megaprojects, social-ecological traps, and politicized networks of action situations

To enable robust and just sustainability pathways, we need to understand how social-ecological systems (SES) respond to different governance configurations, considering their historical, institutional, political and power conditions. We advance a robust methodological tool for the integrated analysis of those conditions, focusing on SES traps and building on an existing case study: the Doñana region (Guadalquivir estuary, SW Spain), an estuary-delta SES. Doñana is characterized by institutional rigidity for water resources and wetland conservation governance and, more generally, by a SES rigidity trap. Here, we focus on a relatively recent hydraulic megaproject involving deep dredging in the Guadalquivir estuary, finally canceled due to its broad negative socioeconomic and environmental repercussions. Our methodological development consists of a novel combination of the politicized version of the Institutional Analysis and Development (pIAD) framework and the Networks of Action Situations (NAS) approach. Our analysis reveals a governance configuration characterized by strategic interactions among key actors posing no new large socioeconomic or environmental risks in the short term. This pattern is however vulnerable due to an underlying coordination failure and sub-optimal equilibrium situation, which emerge from a pattern of uncooperative behavior that cannot be explained without considering discourse inertia and power dynamics. Deep dredging could have led to a sudden fall of governance into a below sub-optimal equilibrium and regime shift toward a lock-in trap posing high sunk and trajectory-shifting costs. Currently, the game is on for achieving a shift to a high ‘blue equilibrium’ and launching a robust sustainability pathway through collective action.

Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies

Violations of Tinbergen’s rule and strategic interaction undermine stabilization policies in a New Keynesian model with the Bernanke-Gertler accelerator. Welfare costs of risk shocks are large because of efficiency losses and income effects of costly monitoring, but they are much larger under a simple Taylor rule (STR) or a Taylor rule augmented with credit spreads (ATR) than with a Taylor rule and a separate financial rule targeting spreads. ATR and STR are tight money-tight credit regimes responding too much (little) to inflation (spreads). The Nash equilibrium of monetary and financial policies is also tight money-tight credit but it dominates ATR and STR. (JEL E12, E31, E44, E43, E52, E63)

Coordinating Public Good Provision by Mediated Communication

We examine a setup where two agents allocate a fixed budget between public goods in two areas. The agents may be biased to one area, which is their private information. Without communication, the funds are allocated inefficiently, resulting in gaps and duplication in public good provision. Direct communication between the agents is ineffective and cannot resolve the coordination failure even when the potential biases are negligible. Coordination can be improved by a mediator who filters the information communicated by the agents. Our results can throw light on how to improve coordination of humanitarian aid by an appropriately designed information management system. (JEL D82, D83, H41, H84)

Behavioral and Experimental Macroeconomics and Policy Analysis: A Complex Systems Approach

This survey discusses behavioral and experimental macroeconomics, emphasizing a complex systems perspective. The economy consists of boundedly rational heterogeneous agents who do not fully understand their complex environment and use simple decision heuristics. Central to our survey is the question of under which conditions a complex macro-system of interacting agents may or may not coordinate on the rational equilibrium outcome. A general finding is that under positive expectations feedback (strategic complementarity)—where optimistic (pessimistic) expectations can cause a boom (bust)—coordination failures are quite common. The economy is then rather unstable, and persistent aggregate fluctuations arise strongly amplified by coordination on trend-following behavior leading to (almost-)self-fulfilling equilibria. Heterogeneous expectations and heuristics switching models match this observed micro and macro behavior surprisingly well. We also discuss policy implications of this coordination failure on the perfectly rational aggregate outcome and how policy can help to manage the self-organization process of a complex economic system. (JEL C63, C90, D91, E12, E71, G12)

Disease-economy trade-offs under alternative pandemic control strategies

Public policy and academic debates regarding pandemic control strategies note potential disease-economy trade-offs, and often prioritize one outcome over the other. Using a calibrated, coupled epi-economic model of individual behavior embedded within the broader economy during a novel epidemic, we show that targeted isolation strategies can avert up to 91% of individual economic losses relative to voluntary isolation strategies. Notably, the economic savings from targeted isolation strategies do not impose an additional disease burden, avoiding disease-economy trade-offs. In contrast, widely-used blanket lock-downs do create sharp disease-economy trade-offs and impose substantial economic costs per additional case avoided. These results highlight the benefits of targeted isolation strategies for disease control, as targeted isolation addresses the fundamental coordination failure between infectious and susceptible individuals that drives the recession. Our coupled-systems framework uses a data-driven approach to map economic activities to contacts, which facilitates developing effective control strategies for future novel pathogens. Implementation of this framework can help control disease spread and potentially avert trillions of dollars in losses.

Signalling boosts the evolution of cooperation in repeated group interactions

Many biological and social systems show significant levels of collective action. Several cooperation mechanisms have been proposed, yet they have been mostly studied independently. Among these, direct reciprocity supports cooperation on the basis of repeated interactions among individuals. Signals and quorum dynamics may also drive cooperation. Here, we resort to an evolutionary game-theoretical model to jointly analyse these two mechanisms and study the conditions in which evolution selects for direct reciprocity, signalling, or their combination. We show that signalling alone leads to higher levels of cooperation than when combined with reciprocity, while offering additional robustness against errors. Specifically, successful strategies in the realm of direct reciprocity are often not selected in the presence of signalling, and memory of past interactions is only exploited opportunistically in the case of earlier coordination failure. Differently, signalling always evolves, even when costly. In the light of these results, it may be easier to understand why direct reciprocity has been observed only in a limited number of cases among non-humans, whereas signalling is widespread at all levels of complexity.

Information Transmission under the Shadow of the Future: An Experiment

We experimentally examine how information transmission functions in an ongoing relationship. Where the one-shot cheap-talk literature documents substantial overcommunication and preferences for honesty, the outcomes in our repeated setting are more consistent with uninformative babbling outcomes. This is particularly surprising, as honest revelation is supportable as an equilibrium outcome in our repeated setting. We show that inefficient outcomes are driven by a coordination failure on how to distribute the gains from information sharing. However, when agents can coordinate on the payment of an “information rent,” honest revelation emerges. (JEL C92, D83)