Can Prisoner’s Dilemma Explain the Outcomes of the Greek Debt Crisis?
http://www.bbc.com/news/magazine-33254857
Many are familiar with the current Greek debt crisis which began in 2010 and Greece’s inability to pay back its debt obligations aggregated from the Eurozone Great Recession (2007-08). The reason for this lack in finances stemmed from the fact that government debt levels were misreported by the Greek government.
This article relates to Networks because this situation is one where many believe that Game Theory can be applied since both players maintain outcomes that are dependent upon each other player’s choices. Based on the principles of Game Theory, some agree that it may be possible to predict Greece’s financial outcome. First, however, we need to setup the game with players, strategies, and outcomes. The two players in this situation are Greece and its Eurozone partners and there are three possible strategies that can be taken with corresponding payoffs (Greece, Eurozone):
1) Eurozone accepts Greece’s plan to incorporate new taxes on the wealthy and the vary the amount given out for pensions, thus, not having to make spending cuts and writing off some of its debt. The Eurozone, by accepting would inherit some loss on holdings from the Greek debt and would have to be less stringent with its budgetary guidelines, however, the union would continue to operate unscathed. The payoff for this would be (1, ¾).
2) Eurozone rejects the plan and Greece accepts its exit from the Eurozone. The rest of the union would remain intact and operate as normal. The payoff for this would be (0, 1).
3) Eurozone rejects the plan and Greece is forced to leave, which potentially leads to the fall of the Eurozone union. This is a loss for both plays, thus, the payoff would be (0, 0).
The full payoff matrix is illustrated below:
Based on the above payoff matrix we notice that Greece’s best response to whatever strategy the Eurozone decides is to Accept, thus making Accept Greece’s dominant strategy. Eurozone receives the best outcome if it rejects the plan and Greece exits the union altogether. However, because the obvious choice for Greece is to accept, then Eurozone’s best response is to Accept as well. Hence, our Nash Equilibrium in the Greek Debt Crisis seems to be (1, ¾) or (Accept, Accept).
However, prisoner’s dilemma may not be the only game theory game that comes into play in this situation. Some suggest that instead this can be seen as a simple game of chicken between Greece and Germany. Both countries have a quite bit to lose with Greece losing all financial stability and Germany looking at a potential recession period. Others view this as a diner’s dilemma with the Eurozone throwing extra money into circulation and lowering the worth of the currency (in turn increasing prices on items), however in turn solving the bond issue as well as increasing spending opportunities. This begs the question, is the Euro even worth saving with the time, money, and effort being sacrificed over this argument.
In the end several bailout plans were devised and one was finally agreed upon, on July 13, 2015, by both the Greek citizens and the Eurozone union. Further negotiations need to be resolved in coming days, however, the entire situation ended with both parties choosing the Nash Equilibrium (or a similar outcome bracket).