Wednesday, November 09, 2005

Argentina's crisis in the game theoretical perspective

This week I have a group task of discussing Argentina's 2001 crisis. Each group is assigned a role to play: as the government, IMF, opposition party or private sector. It's quite an interesting exercise; we learn the crisis in a game theoretical perspective.

Consider stage 1: between the government and the IMF. The government's strategy is to do reform or do nothing. The IMF can either support (bailout) or leave. Hence the possible outcomes were reform-support (best case), reform-leave (on your own), no reform-support (moral hazard), and no reform-leave (crisis).

It was basically a dynamic game, because the Argentina-IMF interaction has been ongoing since the Tequila crisis, even before. Interestingly, according to papers by Andra Powell and Frederico Sturzenegger, there was no pure strategy Nash Equilibrium in that game. Only mixed strategy Nash equilibrium: each party was just randomizing between actions. The equilibrium prior to 2001, however, was reform and support.

Nevertheless, in 2001 Argentina deviated from the equilbrium when the government rejected the Lopez-Murphy plan. This deviation led to IMF to change the strategy. In the end, the equilibrium moved to the southeast corner, which is no reform and no support a.k.a. crisis.

Then in the second stage, the actors were the big private business and the opposition. Private sector can either pull out or stay and support the government. The opposition can either overthrow the government or not.

Note that all the games here were played simultaneously, which makes the case interesting. According to Powell, actually there were multiple equilibria for this game. It just happened that Argentina ended in the 'bad' equilibrium. But everything could have been avoided basically, and the country could be in the 'good' equilibrium. Well, it was a just a counterfactual now.

One thing I am curious now is: did all players have a focal point at that time? Or was it a true case of mixed strategy?

1 comment:

  1. Well, for one thing: it is quite common in nature for dynamic systems to eventually stabilize, which is consistent with the expert you quoted who says that there are multiple equilibrium states. However, one equilibrium state may be better than another. So I would say that the issue is not which of the combinations will stabilize, but rather which one leads to the best equilibrium. No?

    An interesting blog btw. I have linked it from my own.