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A Role for an International Institution: A One-Shot Game-Theoretic Approach

Published online by Cambridge University Press:  17 August 2016

Fernando Pacheco
Fernando Pacheco*
Affiliation:
Universidade Católica Portuguesa
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Abstract

In this paper we use a two-country model of flexible exchange rates to analyse strategic interdependence. Values for the policy instruments are selected from discrete sets, increasing the likelihood of a non-unique Nash equilibrium. Communication between the policy makers becomes very important; we define international institutions as communication devices, since their mission in the context of our model (we are in a one-shot game) is indeed the exchange of some information, either policy proposals or recommendations. We discuss two such devices: direct communication (for instance, a telephone line), and communication through a mediator (an international parliament) that makes policy recommendations to both countries, which are not necessarily followed. The conclusion is that these devices may increase actual or expected welfare levels and ease agreement between decision makers, even in a world where Nash equilibria are efficient.

Type
PART ONE: Theoretical Contributions
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 51 , Issue 3-4 , December 1985 , pp. 241 - 254
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1985 

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Footnotes

*

I am grateful to A. Steinherr, my thesis supervisor, who greatly inspired my research. I also thank C. Bean, E. de Souza, E. Perée and M. Steel for many helpful comments and suggestions. All errors and shortcomings are my own. The Calouste Gulbenkian Foundation provided financial support, which is gratefully acknowledged.

References

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