Tag Archives: game theory

America’s war on drugs is a tragic story. Barbaric “three strike” policies have bloated our prisons. Martial policies have put disadvantaged minorities in jail for smoking weed. As you probably know, we lead the world not just in innovation, but also incarceration.

And that’s just the tip of this iceberg. It costs twice America’s median income to jail an inmate for a year – and the opportunity cost is infinitely higher. From a forever-crippled labor force to poor, (surely black), children without fathers, it’s clear we’re not waging a war on poverty, but one on the impoverished.

But the real farce is we don’t have to abdicate our resolve for a drug-free youth in order to make our system fair. There’s little chance anyone will listen to me because, as we learn from the great state of Pennsylvania – the ironic home of our “Liberty” bell – jailing innocent kids is a profit-making business. 

Short of the civil libertarian revolution this country desperately needs, there are smaller steps we can take that may be amenable to the conservative parts of our legislatures – national and local.

The game theoretic solution to this war comes from former chief advisor to the Indian government, Kaushik Basu. Years ago, he controversially suggested that for a certain class of “petty corruption”, only the act of taking a corruption be made illegal. I’ve explained the beautiful logic behind this idea before:

In the spirit of Basu’s best writing, the idea behind this proposal is game theoretic in nature. India is famous for its corrupt political culture. Of course, foreigners sense this from the carefully coordinated heists like the 2G Scam. But most bribery isn’t that sexy, nor is it coordinated. It’s the undignified bribes a commoner must pay to the police officer, or water man. The gift to expedite regulatory approval. (In my case the bribe to bring our American-born Dachshund, Lego, into India without the murder of a quarantine India requires).  Basu’s argument is as follows:

  1. In a “harassment” situation, the bribe giver is humiliated and is eager to bring the taker to justice.
  2. Under today’s punitive laws he, too, is a criminal and hence must keep quiet. The taker knows this to be the case and hence does not fear punishment – especially as this information is restricted to the two involved parties.
  3. If the government were to a) legalize the act of giving a bribe and b) incentivize citizens to report illicit activity the dominant strategy for the citizen would be to report the bribe regardless.

In other words, the asymmetric punishment changes the Nash equilibrium away from officials requiring a bribe. Corrupt officials will stop asking for side payment in fear of being prosecuted in the future.

It’s easy to see how this can be adapted to America’s drug trade. The real culprits are almost always the dealers (large-scale, violent ones, not high school kids) who notoriously give free goods to potential customers to exploit addiction. Today, the FBI spends millions on sting operations to deliver evidence “beyond any reasonable doubt” against producers and dealers while wasting their richest resource, the addicts themselves.

Unfortunately, the impoverished citizens afflicted by the system are loth to speak up and report dealers for two reasons:

  1. They have an addiction, or need to distribute the promised stuff to their friends.
  2. They’re scared of being arrested.

Imagine our law amended such that:

  • Dealing (but not possession of any quantity or “probable” cause) remains absolutely illegal, punishable by whatever cruel and unusual shit the government can think of (and our government, unfortunately, is quite imaginative nowadays). You can also exempt middlemen who are reselling what they get wholesale from violent dealers. (And they, in turn, become the “moles”).
  • Purchasing and consuming all drugs (including crack and heroin) are legalized on private property. (Obviously I think we should go pure libertarian on pot…)
  • Those who correctly tip the Feds regarding a drug dealer are paid $1000 plus 2% of the civic asset forfeiture. 

Anyone with an intuitive sense of game theory can understand the huge potential from this small change. Before, users were scared to “rat” their dealer. Now, not only are they confident (because it’s explicitly legal), but have a financial incentive to work with the system.

But this isn’t even the intended effect. Drug dealers will no longer want to ply openly, because they can no longer be confident that their customer will be loyal. In fact, there’s a great chance that he won’t be. Game theorists would say that users can credibly threaten to take legal action, resulting in a subgame perfect equilibrium where drug dealers no longer operate.

Quite astonishingly, there’s good empirical evidence that this might work. A team of researchers led by Klaus Abbink, Lata Gangadharan, Utteeyo Dasgupta, and Tarun Jain tested Dr. Basu’s idea with middle-class Hyderabadi students. Of course, the situation (paying a bribe), was very different, but the game theoretic application is identical. To that end, they found that employing asymmetric penalties made customers far more willing to report corrupt officials, and said officials were far less willing to offer a bribe.

An analogous policy gives both a substantial increase in quality information for the government, and a severe decrease in drug sales across the country. No one’s denying the vast differences between Basu’s idea for India, and this adaption for America. But it is incumbent on a government that is ever-keen on stripping poor men of their liberty to at least pilot a program that will achieve the same end goal more effectively, without devastating inner city communities or minorities.

This post isn’t about the economic, social, and cultural cost of our war on drugs – that’s blatantly obvious to anyone that’s not an idiot. Rather, I hope I’ve given you a framework to think about a very real problem – drug trade and addiction – in a way that’s cheaper, more effective, and preserves the liberties enshrined in the American constitution.


Alex Jutca has this to say about a partial default via inflation:

One issue here is that Moody’s should change its own rules about what constitutes a default to include general inflation. Of course, any sovereign issuer could be immune from default by printing money to retire principal and interest owed, in nominal terms. In real terms, doing so would likely make that type of repayment extremely costly to investors. Consider the U.K. It has debt outstanding of approximately £1.4 trillion and £54 billion in currency in circulation, so you’d end up with inflation approaching Weimar Germany or Zimbabwe today.

Moreover, this sort of profligacy may work well for a one-shot end game, but, for a repeated game (in game theory parlance), the standard analysis leads to the conclusion that this would be horribly counterproductive. After seeing serial defaulter Argentina reenter capital markets, though, maybe not. The evidence of market discipline for defaulters is that the medium-term costs to sovereigns are either nonexistent or quite mild, after all.

First, as Alex acknowledges, inflation isn’t a problem right now. But this raises a very interesting question that might be particularly salient for Italy, especially given its primary surplus. The argument for Italian austerity is predicated on the need of future access to credit markets. Italy can default today, and would have quite a bit of money leftover to cut taxes or increase spending. Notably, the Monti government’s property tax is very unpopular, and increases in spending could jolt an economy that’s been stagnant for more or less twenty years.

As Alex notes, the IMF released a study which contradicts intuition: that in the long-run default has little if any economic costs, and debtors aren’t restricted from capital markets. This is to say, defaulting is a credible threat, in other words: profligacy is subgame perfect.

It’s not surprising that defaulter nations aren’t long-restricted from capital markets. As Adam Smith concluded, division of labor (and hence prosperity) is limited by the extent of a market. Capitalism is an inclusive game, and it doesn’t make sense to exclude millions because of profligate government.

For countries with high borrowing rates, this strongly raises the value of formal debt restructuring. If the market believes that the Italian government thinks it can credibly-threaten to default on its debt, one of two things can happen. Rates can soar, making default inevitable, or creditors can reach a preemptive restructuring agreement offering lower rates, lines of credit, with a promise to repay debts.

The lingering questionn, then, is how to ensure that debtors can’t credibly threaten to default on restructured loans to which it agreed? International agreements, perhaps, that formally disallow lending to violator nations.

The upshot of this, vis-a-vis the UK, is that (unlike interest rate hawks claim), Britain can credibly inflate its debt and follow easy money policies, without facing any risk of increased interest rates. Indeed, this conclusion is independent of the Keynesian argument that in a depressed economy borrowing won’t crowd-out the market for loanable funds.

Again, an indictment on the tight-money hawks.