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Perverse Incentives in Strategic Interactions Involving an International Development Cooperation Agency (Technical Appendix)

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Type: Working Paper
Author: Gardner, Roy; Waller, Christopher J.
Date: n.d.
Agency: Swedish International Development Cooperation Agency, Sweden
URI: https://hdl.handle.net/10535/5207
Sector: Theory
Subject(s): game theory
international development
foreign aid
common pool resources
tragedy of the commons
Abstract: "A strategic interaction is any interaction between two or more actors, whose outcome depends on the strategies chosen by those actors. Strategic interactions pervade everyday life, in the form of economic transactions, political campaigns, legal cases, and social interactions—to name a few. The interactions between an International Development Cooperation Agency (IDA) and its own government, as well as the governments and officials of target recipient nations, are strategic. A game is any strategic interaction which is governed by rules and is characterized by a well-defined and publicly verifiable outcome. This definition narrows the scope of strategic interactions considerably. Without rules, almost anything can happen. The players can choose practically any strategy, and the chaos that results can be impossible to analyze. Without a well-defined outcome, it may not be possible to know how a game ended, or even that it ended—like playing basketball without keeping score and without a clock. Again, without public verifiability, it may not be possible for different analysts to agree on what happened—like playing soccer where the referee has the game clock, and no one else can see it. With the structure implicit in a game, one can erect an entire mathematical theory of games. This theory has proved useful in its own right—we now have a much improved understanding of literal games like Chess, Poker, and Blackjack. The theory has proved just as useful as a model of human affairs, especially in economics and political science, but increasingly in anthropology, sociology, psychology, and biology as well. The goal of this Technical Appendix is to usefully model the strategic interactions involving an IDA as a game. A major finding of the last half century of IDA activity is that perverse incentives pervade such activity, and often vitiate its results. Notable failures, such as Sweden/Tanzania and USA/Zaire serve to highlight the problem of perverse incentives. We use game theory to explain this major finding. Then we use the results of our game theory analysis to inform policy recommendations to IDA."

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