The gratuitous game theory of official support

Yesterday’s post on accountability and South Korean aid to the North got me thinking about game theory again.

gametheorys.JPG

The South Korean Ministry of Unification has a dominant strategy to lend/give/invest in North Korea for ostensibly two reasons: 1. If the MoU does not, their raison d’etre goes away.  2. South Korea will ultimately see a payoff if a development strategy works in the DPRK.

Contracting with North Korea, however, is essentially a prisoner’s dilemma (see chart above), and North Korea has the ability to cooperate or defect.  However, the North Koreans have rational expectations, so they know the Ministry of Unification has a dominant strategy to cooperate.

Therefore the Nash equilibrium is for the South to keep cooperating and for the North to keep defecting.  In a repeated game, cooperation evolves over time as trust develops and defection decreases.  Because of South Korea’s dominant strategy,however, the North never has an incentive to cooperate–so we end up with an “anti-folk theorum” where defection is the only incentive compatible outcome over time.

Addendum: The game could be radically different for private investors, however, who are in a more credible position to say “no”–leading to defect/defect moves (because South Korean investors are not as politically constrained and can recognize sunk costs).  These moves result in neither gains nor losses for either side, however, because both sides have the ability to bargain, cooperation that is mutually beneficial can evolve over time as it should.

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  • Janus

    This is the very same topic I am pursuing for my undergraduate IR thesis.

    I’ve also added that NK has an incentive to cooperate in the first round of a prisoners’ dilemma (because at this point it issues feel-good proclamations and promises of future action–both of zero cost to NK–and gets some financial (aid)/diplomatic (reduced winset for hawks) payoff in exchange.

    However in an iterative game with multiple rounds, cooperation would entail NK following through on promises of disarmament and liberalization, which are fundamentally incompatible with the nature of the regime, and so NK will (and does) inevitably defect.

    Do feel free to email me with any gaping holes in my logic before I go on and on with this for 70 pages or so… johnak-at-sas-dot-upenn-dot-edu

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