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A Game Theory Interpretation of the Post-Communist Evolution

A Game Theory Interpretation of the Post-Communist Evolution

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JOURNAL OF ECONOMIC ISSUES Vol. XLV No. 1 March 2011 ISSN 00213624/2011 $9.50 + 0.00 DOI 10.

2753/JEI0021-3624450103

A Game Theory Interpretation of the Post-Communist Evolution
Dimiter Ialnazov and Nikolay Nenovsky

Abstract: Our hypothesis is that both the transition phases and the diversity of trajectories of post-communist countries are the result of a significant difference in actors’ strategic behavior. If we apply game theory to the socioeconomic context of post-communist evolution, this difference reflects the two main models of cooperation, namely the prisoner’s dilemma and the stag hunter. The prisoner’s dilemma, which becomes the dominant strategy under the conditions of high social heterogeneity and broken informational channels, implies that it is profitable not to cooperate. Under the stag hunter model — a model involving a common goal and a common project — cooperative strategies are more advantageous. The various post-communist countries in different transition phases can be approximated to either one of those two games — the prisoner’s dilemma or the stag hunter. The alternation of the games is conditional on the existence of external and internal social anchors. Keywords: cooperation, game theory, post-communist evolution, social anchoring JEL Classification Codes: B52, P20, P30, P50

How could we explain the difficulties faced by the former socialist countries in the early phase of the transition? Why did some countries have poorer results (Bulgaria and Romania), whereas others did relatively better (the Baltic and Central European countries) in the 1990s? And how do we account for the problems that emerged in the new member states after the subsidies from the European Union’s (EU) structural

Dimiter Ialnazov is an associate professor of Economics at Kyoto University (ialnazov@econ.kyoto-u.ac.jp) and Nikolay Nenovsky is a professor of Finance, Le STUDIUM, Université d'Orléans (nenovsky@gmail.com) and associated researcher at ICER (Torino). This paper was presented at the Journée d’Etudes organized by GERME (Université Paris Diderot) and CEMI (EHESS), “Bulgarie-Roumanie, trois ans après l’adhésion: quels modèles de capitalisme ?” November 2009, Paris, and at the LEO seminar, March 2010. Discussions with Boris Gurov, Kiichiro Yagi, Enrico Colombatto, Yorgos Rizopoulos, Eric Magnin, Bernard Chavance, Dorina Roska, Jelio Vladimirov, Diana Pop, Petia Koleva and Sebastian Ille, as well as the comments of the two anonymous referees contributed to clarifying and improving the ideas in this study.

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©2011, Journal of Economic Issues / Association for Evolutionary Economics

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Dimiter Ialnazov and Nikolay Nenovsky

and agricultural funds started flowing in? The past two decades after the disintegration of the former socialist bloc have made it possible to find better answers to these questions and create a larger number of more in-depth analyses. Over the past 20 years, the evolution of the post-communist countries has revealed some patterns and groupings, which are of special interest to the scholars interested in the diversity of transition paths or trajectories as part of the larger discussion on the varieties of capitalisms (Amable 2005; Hall and Soskice 2001). The post-communist transition can be analyzed with the help of various approaches and theoretical models. In fact, there is an extensive literature that employs the familiar neoclassical model (also known as the cost-benefit model). This literature understands the transition as a simple and clear-cut move to some wellknown final state. In recent years, the neoclassical model has been modified and enriched with the inclusion of non-economic factors such as initial conditions, institutions, and some political and cultural variables. There have also been attempts to apply empirical and econometric methods to the analysis of these non-economic factors. Although we welcome the variety of publications that try to overcome the neoclassical paradigm, in our view, most of these attempts are too simplified and even misleading. Notwithstanding these problems, the diversity of approaches helps to build a multi-perspective view of transition, as each of them brings in some theoretical truth and practical benefits.1 In this study we intend to contribute to the theoretical and methodological diversity of the field by proposing a novel approach  a game interpretation of the transition and of the variety of post-socialist trajectories. As suggested by the literature on trust and social capital, countries vary according to the relative strength of cooperation among their economic actors and the achievements of a given country may depend in part on the degree of their cooperation. This cooperation metaphor is, however, seldom used to analyze the successes and failures of transition countries. Indeed, the processes of cooperation have long been within sight of the social sciences and there are numerous studies on cooperative behavior. What we believe to be lacking is exactly the application of cooperation models (within the scope of the “big” game models) to the analysis of the post-communist transition. Furthermore, although currency pegs, the euro, or the EU itself are often mentioned as kind of anchor-like mechanisms, which stabilize the expectations and coordinate the behavior of actors, the relationship between external and internal social anchors, on the one hand, and the emergence and evolution of cooperation, on the other,2 is an important issue that has also been rarely studied.3 In short, our main hypothesis is that the phases of transition and the variety of post-socialist trajectories across countries could be explained by the difference in the prevailing strategies of actors, which reflect models of cooperative and noncooperative behavior. Cooperative behavior is conditional on the existence of external and internal social anchors. A social anchor may emerge for various reasons, most often as a result of a deep crisis. The crisis comes as a resolution of long-existing conflicts and largely non-cooperative actions. An anchor makes it possible to increase the actual value of the future, hence of cooperative strategies. It helps avoid the “trap

A Game Theory Interpretation of the Post-Communist Evolution

43

of the present” or of non-cooperation  a situation familiar to social researchers from the works of Jon Elster ([1989] 1993, 61). The prisoner’s dilemma, which becomes the dominant model under the situation of high social heterogeneity and noisy environment, implies that it is profitable not to cooperate. In comparison, the stag hunter model involves a common goal, a common project, and a state of interdependency where one actor needs the cooperation of others to realize the common project. Under the stag hunter model, it is beneficial to cooperate. In our view, the various post-communist countries in different transition phases approximate either one or the other game. A transition country that starts from a prisoner’s dilemma type of situation may shift to the cooperative game as a result of the emergence and operation of social anchors. In many former socialist countries the early phase of the transition was characterized by: 1) lack of a clear vision of the future or a common social project, 2) a great diversity of new socioeconomic actors, and 3) the collapse of the information channels of the old systems. We believe that the prisoner’s dilemma is the proper model to analyze this phase. Later on, after a deep economic crisis and as the perspective of EU membership starts looming large on the horizon, the stag hunter model becomes more appropriate for analytical interpretation. To sum up, the post-communist transition is a succession of large-scale social games, either common for a group of countries or varying from country to country and from period to period. Cooperation and Success of Reforms Let us start with analysis of the relationship between the degree of cooperation and the achievements of reforms. Both theoretical models and empirical studies point to a positive relationship between cooperation4 (based on trust and social capital) in a particular community or nation and the achievements of that community or nation in terms of quality of life or wellbeing. Where cooperative, “good” strategies are called to life and prove to be constructive, these may come to be accepted over time by the majority of economic actors and become an integral part of the social game. In other words, cooperation starts reproducing itself. Conversely, where non-cooperative, “bad” strategies get the upper hand, these may spill over like a contagious disease to the entire society and start reproducing themselves as well. The prisoner’s dilemma is a situation where the normal egoism of economic actors, amidst the lack of moral restrictions and proper institutions, can turn into opportunism running through the entire society especially in periods of transformation (Elster [1989] 1993, 77). It is not by chance that Adam Smith has stressed the need of certain moral or social restrictions for the success of free-market capitalism. Societies where such restrictions are relatively weaker may fall into an institutional trap, (North 1990; Polterovich 2008).5 Possibly, the way out of such traps may be closely related to the burst of a deep crisis, which serves to “pull” or “push” a society out of its bad dynamics.

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If we apply the above logic to the post-communist transition, the latter may be viewed as a large-scale social game whose profit/loss matrix is the product of a complex interaction of diverse actors having varying power resources. Different patterns of interaction among economic actors reflect the existence or lack of cooperation. The emergence of cooperative or non-cooperative strategies, as well as the extent to which they are winning or not, depends on the institutional environment, i.e., the matrix of social rules in which the actors operate. This matrix is formed in a complex evolutionary way. It is clearly not exogenously generated. Yet, for our analytical purposes we may assume that at the start of the game it is something given, a thing-in-itself. Assuming the existence of the matrix as something given at a certain point of time does not cancel the need for analyzing its formation and diversity across countries. The next analytical step in our causal chain is the link between the appearance of cooperation and the existence of the two main social models. The emergence and resilience of cooperative behavior can be analyzed with the help of the abovementioned stag hunter and prisoner’s dilemma models. These models represent two archetypal games, which have been the object of research on situation-type strategic interactions (Gurov 2007). The models also point to a strategic interdependence, which according to the main characteristics of the game  exits, interactions, etc.  lead to the prevalence of either cooperative or non-cooperative strategies. To the best of our knowledge, these models have not been used as “analytical metaphors” in the analyses of transition processes. Below we provide a brief description of the two game models. Jean-Jacques Rousseau was the first to discuss this type of social situation in 1754. The stag hunter is a game, which contains a discrepancy between, on the one hand, a substantial yet uncertain profit, if you cooperate (i.e., catch a stag but stay at your designated hunting post), and on the other, a small yet sure profit if you do not cooperate (i.e., catch a hare after leaving your post). The game’s matrix is defined in a way that the cooperative strategy always proves winning (see quadrant [4, 4] in Figure 1). In Figure 1, the strategies of player 1 are shown horizontally, and those of player 2 vertically. The cooperative strategy is designated with К, and the non-cooperative with NK.6 The stag hunter is a game with a common purpose and a common project in the situation of interdependence among the players. The game also implies that there is a binding agreement enabling the emergence of cooperation. As we discuss further, this binding agreement may serve as an anchor whose task is exactly to create a state of interdependence among the players. The prisoner’s dilemma is a situation studied by John Nash and others. It is an extremely popular archetype of a game showing the difficulties of generating cooperative action. The matrix is defined in a way to demonstrate the failure of cooperative action. Individually profitable behavior leads to a negative collective outcome. Regardless of the choice of the other player, it is always advantageous to defect, i.e., not to cooperate and behave in an opportunistic manner (see quadrant [-4, -4] in Figure 2). This game model is typical of the various types of exchange (monetary, economic, social) in a very risky and uncertain environment.7 Predatory or exploitive

A Game Theory Interpretation of the Post-Communist Evolution Figure 1. Stag Hunter’s Payoff Matrix
player 2 K NK

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K player 1 NK

4,4

0,2

2,0

2,2

K — cooperative strategy NK — non-cooperative strategy

player 1 — strategies of are shown horizontally player 2 — strategies of are shown vertically

Figure 2. Payoff Matrix of the Prisoner’s Dilemma
player 2 K NK

K player 1 NK
K — cooperative strategy NK — non-cooperative strategy

-2,-2

-8,0

0,-8

-4,-4

player 1 — strategies of are shown horizontally player 2 — strategies of are shown vertically

strategies prove rewarding in such an environment.8 In fact, predatory strategies coincide with survival strategies, meaning that to exploit and to be exploited in this case are identical types of behavior. Computer simulations of the cooperative/non-cooperative types of strategies done by Boris Gurov (2007) have shown the following results. The prisoner’s dilemma proved to be a very unstable game with several attraction pools, whereas the stag hunter turned out to be a game where the pools of attraction of individual strategies (either cooperative or opportunistic) were much more stable. Under the stag hunter, it is very likely that cooperation will emerge. Moreover, under the stag hunter the heterogeneity of the players does not have any significant impact on the efficiency of various strategies. Even in a heterogeneous, noisy environment, cooperative

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strategies demonstrate good results according to Gurov’s simulations. The prisoner’s dilemma proves extremely unstable under the conditions of heterogeneity and noise in communication. Overall, we can assume that: 1) the existence of a common project and a common goal, 2) the lack of noise and the availability of good communications, and 3) a relatively more homogeneous structure make cooperation much more likely to materialize. If we go back to the post-communist transition, we notice that the phases of the transition in general and the trajectories of the individual countries could be approximated to the aforementioned game models. Such approximation can be made only by taking into account the concrete historical situation. For instance, we argue that the socialist society had an imposed-from-the-above common project, e.g. building socialism, which over time started to exhaust its potential. The fall of communism meant the collapse of the relatively homogeneous, socially uniform society as well. In the initial phase of transition, society went through a quick disintegration that triggered fast growing differentiation in both material and professional terms. Accordingly, the immediate situation after the fall of communism best fits the prisoner’s dilemma model. The first phase of the transition was characterized by liberalization, heterogeneity, the emergence of new or previously unknown actors, and the lack of a clear common project for the future. In many former socialist countries the society was sharply divided in both the interpretation of the communist past and the understanding of what is desired in the future. In other words, many features typical of the prisoner’s dilemma situation were present. We could add the breakdown of old information structures, i.e., the existence of a high noise environment. During the early transition period, the present (actual) value of the future was extremely low, and the present was valued much more highly. “Today” was more important than “tomorrow.” In our view, this explains why non-cooperative, opportunistic strategies prevailed in the period until t1 (as illustrated in Figure 3). Further discussion requires a brief explanation of Figure 3, which shows the evolution of the present (discounted) value PV of two future projects A and B. Here we extend Elster’s PV model ([1989] 1993, 60-62) by applying it to the postcommunist transformation in Bulgaria. Actors can choose between A — a short-term, close-at-hand project, which by definition pays off less, and B — a remote in time, longterm project, which is much more profitable. Our assumption is that А stands for non-cooperative (NK), opportunistic strategies, while B stands for cooperative strategies (K). An illustration and explanation of Jon Elster’s model is provided in the Appendix. As a result of certain events (a deep crisis) or expectations of other events (EU membership), a change in actor preferences could be observed.9 This implies a change in PV of the two projects as well as indentation of the line of either cooperative or non-cooperative behavior. As a result, the shifts to cooperative or non-cooperative behavior take place. Points t1, t2, and t3 indicate the moments of change in the expectations of economic actors regarding the present value of projects A and B. As discussed earlier, opportunistic behavior prevails (NK > K)10 during the first period —

A Game Theory Interpretation of the Post-Communist Evolution Figure 3. Evolution of the Present (Discounted) Value of Cooperative and Non- Cooperative Behavior in Bulgaria

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PV — present (discounted) value NK — non-cooperative strategies K — cooperative strategies 1997-2000 — crisis and EU expectation

2005 — EU membership A — a short-term project B — long-term project, t1,t2 and t3- moments of change in the expectations of economic actors

from the start of the transition to point t1. Subsequently, as a result of the crisis and the expectations of EU membership (section t1t2), the trajectory of the cooperative present value in the second period is above the trajectory of the non-cooperative present value (K > NK). The third period, i.e., the post-accession period (after t2), contains an indication that defecting and opportunistic strategies are taking the upper hand once again. Sequence of Games and the Role of the Anchor The above story could be illustrated as a sequence of games too. In particular, as shown in Figure 4, the post-communist transition may be represented as a chain of the two archetype games’ matrices. Figure 4. The Transition Seen as an Evolution of the Payoff Matrices
player 2 PD1 K NK
K player 1 NK 0,-8 -4,-4 NK 2,0 2,2 NK 1,0 1,1
NK 10,-1 -1,-1

SH1 K K 4,4 NK 0,2 K K 10,10

SH2 NK 0,1
K

K

PD2 NK -1,10

-2,-2

-8,0

5,5

PD — prisoner’s dilemma matrix SH — stag hunter

NK — non-cooperative strategies K — cooperative strategies

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As already mentioned above, the initial phase of the transition could be described by the prisoner’s dilemma matrix (PD1). In Figure 4 this is the first matrix from the left. The matrix is defined so as to indicate the overall decline in living standards after the collapse of the planned economy. It represents the prisoner’s dilemma with negative (-) results of the game. This transition phase naturally ends up in a crisis because very little new value is generated, while the wealth created over the socialist era drastically diminishes as a result of redistribution struggles. Apart from the so-called “transition recession,” almost all former socialist countries had a second wave of economic crises in the mid-1990s.11 In our view, the economic crises in Bulgaria (1996/1997) and Romania (1997 to 1999)12 combined with the prospect of EU membership have led to a shift in the overall matrix in a positive (+) direction. As a result of the emergence of a new common project, the present value of the future increased and the prevailing social game was transformed into the stag hunter (SH1). It is important to note here that ordinary people viewed their country’s EU membership as an opportunity for a more even and fairer distribution of social wealth. People expected the net benefits from EU membership to be shared widely across the society, in contrast with the socialization of losses during the initial phase of transition. Moreover, people expected that EU membership would bring better possibilities for travel, jobs, and in general a rise in the standards of living. In other words, EU membership as a common social project, or a common goal, gathered together the expectations and actions of the majority of the population. Going back to Figure 4, as cooperative behavior becomes more and more attractive, the payoff matrix takes the form of SH2 where the decision to cooperate is rewarded even higher (10, 10). The increase of attractiveness is obtained either by bigger losses if one sticks to opportunistic and cheating behavior or through larger benefits if one cooperates and follows good practices. This influences the parameters of the configurations (0, 1), (1, 0), as well as the profit guaranteed by opportunism (1, 1). But, as we know, history never ends. Right after joining the EU, the attraction power of the common social project called “EU membership” declined or even disappeared. The subsidies from the EU structural and agricultural funds created conditions for a new social differentiation and new struggles for wealth redistribution. The collective memories of the early phase of transition when a small group of people illegally amassed and embezzled social wealth are being revived. The societies of many new member states once again tend to bifurcate into the matrix  a new one, different from PD1  of the prisoner’s dilemma. Figure 4 illustrates this trend with the last matrix (PD2), where the attractiveness of cooperative behavior diminishes (5, 5) and opportunistic cheating becomes relatively more attractive again (-1, 10), (-10, 1). While it is not possible to predict the direction of future evolution, we believe that there is a need for a new common project or a new social anchor. Before further considering the role of the social anchor, two groups of theoretical issues need to be discussed: 1) the transition from SH to PD, and 2) the role of social values and beliefs in this transition.

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The first group includes the questions whether the transition from SH to PD is symmetrical to the transition from PD to SH, what kind of mechanisms of SH – PD shifts are in operation, and whether the non-cooperative attractor (PD) is stronger than the cooperative one (SH). In theory, the pools of attraction of the two games should be symmetrical, and there should be a priori eternal circular dynamic between the games. But if we bring history and country specificity into the analysis, a particular country’s post-communist evolution depends on the cumulative causal path of either one of the two games. In this sense, a concrete historical evolution has an irreversible temporal dimension and can be interpreted as a process of complex structure formation in the light of Ilya Prigogine’s ideas ([1996] 2009). It is this cumulative and irreversible evolution that can explain the different trajectories of communities and countries (e.g., Switzerland, with greater accumulation of cooperative trajectories and Bulgaria, with greater accumulation of non-cooperative paths). More specifically, the SH2  PD2 shift after EU accession can be explained by the weakening strength of the external anchor, the disappearance of the common goal, and different moral hazard aspects. Of particular importance is the injection of money from the EU funds, which can be considered as an external shock, leading to strong redistribution tendencies somewhat similar to the ones experienced during the early transition. The injection of EU subsidies also brings changes in the set of relative prices, and therefore other structural changes that may affect irreversibly the future path of the economy. In light of our earlier discussion on the present value, the postEU accession era is marked by a reduction of the actual, discounted value of longterm cooperative strategies. The second group includes questions on the role of social values and beliefs. We believe these are also the result of cumulative historical development. In this sense, they may be regarded as a kind of internal social anchor that serves to coordinate expectations, interests and behavior of actors. Although not in a strictly chronologic order, the third step of the analysis is to clarify the relationship between crisis, anchor, and cooperation. Below we discuss in detail that relationship. The idea about the need of a common project is very close to the idea of an anchor, which may emerge after a crisis. But what exactly is an anchor, what are its functions, and how does it come into existence? An anchor can be viewed as an institution or a durable social rule, which plays the role of a coordination mechanism of expectations, interests and behavior of actors.13 It may decrease the noise and improve the flow and processing of information. An anchor could help to pull a community or a country out of the bad dynamics of the prisoner’s dilemma and engender a shift to the state of cooperation (the stag hunter). Furthermore, an anchor is a mechanism to change the matrix of the game, thus facilitating the alteration of actor preferences or types of behavior. It corresponds to the overall reason for a change of action, as described in Jon Elster’s model ([1989] 1993, 27).14 The society gets pulled out of the old “suboptimal” situation and the “local maximum” trap is overcome. This would not have happened in the absence of

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an anchor because small steps cannot take us across the downturn section. As pointed out earlier, the role of an anchor is to increase the present value of the future by extending the time horizon of economic actors. The extension of actors’ time horizon goes hand in hand with the emergence of cooperative strategies and the increase of their expected profitability. Another major characteristic of an anchor is its role of tying hands, burning bridges, and overcoming the “weakness of will” phenomenon, typical of unstable societies such as the post-communist ones. According to Elster, “second best rationality” is the situation when actors are able to predict the adverse consequences of their weakness of will and construct in advance certain constraints on their future behavior ([1989] 1993, 46). Examples of anchors abound in the fields of monetary policy and economic development. For instance, IMF (International Monetary Fund) stabilization programs, the Maastricht criteria for euro-zone membership, and single currencies such as the euro could be viewed as anchors. Turning to the post-communist transition, currency boards in the Baltics and Bulgaria, i.e., fixed exchange rate regimes where the central bank is restricted by law to lend to the government or refinance the commercial banks have played a significant role in coordinating actor expectations and changing actors’ type of behavior. In spite of their practical importance, anchors have rarely been analyzed and we still lack an analytical framework for their theoretical interpretation. Some discussion of external anchors is available from Abdelal (2001), Berglöf and Roland (1997), Ialnazov (2003), and Roland and Verdier (1999). In addition, anchors can be classified into internal and external, endogenous and exogenous, although this classification is done here provisionally and a much more in-depth analysis is needed. Furthermore, the mechanism of appearance of anchors is of great significance too. Are they the spontaneous result of the interaction of numerous actors, or do they emerge as the outcome of conscious action by the key players? Overall, the truth is somewhere in the middle, and in many cases a deep crisis is required for an anchor to emerge. The crisis changes the matrix of the “old” game by rendering it negative (-) and pulling it downwards. The appearance of an anchor, in turn, creates expectations for a new, positive (+) matrix, where the majority of actors benefit from an alteration of their prevalent type of behavior. Thus, the interaction of crises and anchors creates the possibility for shifts in the social game.15 As discussed above, the game may shift from the prisoner’s dilemma to the stag hunter, or in other words, from opportunism to cooperation. In our view, the theory of anchors should also distinguish between (external) anchors for small countries such as Bulgaria and Romania, and internal ones for big countries like Russia. Although the shift of the game from the prisoner’s dilemma to the stag hunt occurred in Russia again after a deep crisis (e.g., the 1997 financial crisis), the transformation of actor behavior took place as a result of other, mostly domestic factors. One is certainly the coming to power of Vladimir Putin in 1999. Another is the end of the post-privatization distribution of ownership and control. According to Andrei Yakovlev (2004), the behavior of the new owners of the

A Game Theory Interpretation of the Post-Communist Evolution

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privatized Russian enterprises changed from opportunistic, predatory, and short-term type to a more responsible, long-term type at the end of the 1990s to the early 2000s. He explains that shift with the end of the post-privatization distribution of ownership and control, which led to a lengthening of the time horizons of Russian corporate actors (396-397). In general, the model we propose can be illustrated as in Figure 5. Figure 5. Cause-Effect Relations in the Post-Communist Evolution Model

Preferences, resources

Prisoner’s dilemma (noncooperation, no common goal)

Crisis

Reforms, Institutional changes

Stag hunter (cooperation, common goal)

Anchor (external, internal)

During the initial phase of the post-communist transition, the country’s economy is locked in the prisoner’s dilemma state, where non-cooperative strategies prevail. This leads to a deep crisis, which along with the pre-accession EU conditionality plays the hands tying or overcoming the “weakness of will” roles of an anchor. Consequently, the social game is transformed into the stag hunter and a number of structural and institutional reforms are implemented. However, after a certain adjustment period the preferences of economic actors, as well as their present and potential resource possibilities change again. The possibility to gain from the redistribution of EU subsidies combines with the weakening of the power of the external anchor after the country’s accession to the EU. Eventually, opportunistic and non-cooperative strategies again become relatively more attractive. Concluding Remarks We have presented here the dialectics of the post-communist evolution from the perspective of the two game archetypes, the prisoner’s dilemma and the stag hunter. Our theoretical model is still at an early stage and is obviously in need of further development in many aspects. Nevertheless, we believe it gives a good starting point for understanding the post-communist transition. Of course, many issues remain unresolved. First, the game matrix and the illustrations that we have offered in this particular case are designated exogenously, while in real life the matrix structure is endogenous and a product of evolution itself.

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Second, the problem of how to define the players is crucial for understanding the concrete results of the games. In our study, we have not delved into important details such as whether the players are individuals or groups. Third, we are aware of the controversy on the effects of a crisis. Whether a crisis brings about a better or a worse state of the economy remains an issue open for discussion. It is impossible to say a priori that a crisis’ outcome is always beneficial and stimulating. Fourth, it is rather unclear whether cooperation per se is always something positive. Fifth, while the logical chain from the prisoner’s dilemma to the stag hunter seem more or less clear, the mechanisms of turning the pendulum from the stag hunter to the prisoner’s dilemma are still under investigation. And finally, it remains to be seen whether our theoretical model offers any possibilities for quantification and further empirical verification. The unresolved issues mentioned above could be the starting line for possible future analyses. We are totally aware of the restrictions of our theoretical model. Our purpose is to show that game theory interpretation, in particular the cooperation metaphor, gives a good analytical possibility for the analysis of post-communist economies, and its application should therefore be deepened and expanded. Appendix Jon Elster’s Model

The choice between the two projects — А (short-term) and В (long-term) — is made at the moment when A is available. Configuration (i) shows that the more distant in time a project is, the higher its present value. Actor’s preferences at a given point in time are the result of his/her choice between PVB and PVА. Under configuration (i) the present value of the future diminishes at an even (invariable) pace, i.e. the relationship between the value of the future and of the present is equal at any point in time. The choice and actor preferences are stable at any point in time. However, things are different under configuration (ii). The present value declines quickly initially, then slowly, with a reversal of preferences taking place near point A. Although logic and rationality would dictate choosing the more interesting of the two projects (B), in the last moment, just before reaching point A, the actor changes his/her preferences and chooses A. This reversal of choice occurs as a result of weakness of will and inability to control one’s choice. Source: Elster [1989] 1993, 60-62.

A Game Theory Interpretation of the Post-Communist Evolution Notes

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Among the diverse literature on the post-communist transformation, we would like to give special credit to the ideas put forward by Abdelal (2001), Aslund (2002), Beck and Laeven (2005), Bohle and Greskovits (2007), Chavance (2008), Colombatto (2002), Csaba (2007), Gaidar (2007), Marangos (2002), Oleynik (2001), Olson (2000), Pejovich (2003), Polterovich (2008), Sandholtz and Taagepera (2005), and Yakovlev (2006). 2. On the role of the European Union as an external anchor of transition reforms, see for instance Ialnazov (2003), Roland (2000), and Tabellini (2007). Some of the literature on EU conditionality also deals with the issues of social anchoring. 3. See Ialnazov (2003) and Nenovsky (2009). 4. In general, cooperation could be defined as “mobilization of resources by two or more individuals towards a common purpose” (Gurov 2007). 5. The “institutional trap” (institutsionalnaia lovushka) is a stable but inefficient social equilibrium where actors choose a norm of behavior (or an institution) among numerous possibilities (see Polterovich 2008). 6. The game is defined in a matrix form, called “normal form,” where players’ moves are assumed to be concurrent. It is also possible to create the so-called extensive form (like trees), which would be closer to reality (e.g., players taking turns), although in this particular case it does not make a fundamental difference. 7. Later, Axelrod (1984) developed his theory of the emergence of cooperation among egoistic actors under the prisoner’s dilemma through iterated tit-for-tat strategies. A number of authors like Gurov (2007) dispute both Axelrod’s methodology and his results by demonstrating that the appearance of cooperation is a much more sophisticated and complex process. 8. We could add that in the prisoner’s dilemma natural selection in the present is what matters, while in the stag hunter configuration the future is of greater importance and plays the role of an anchor. 9. In fact, the analytical framework could be much more complicated. For instance, actors can shift toward cooperative behavior without changing their fundamental preferences for opportunism. This theoretical differentiation could be explored in future research. 10. In the prisoner’s dilemma situation, non-cooperative, defecting and opportunistic strategies are highly profitable, which is proved by numerous examples from the practice of the post-communist transition (see for instance Oleynik 2001 and Yakovlev 2006). In fact, almost all former socialist countries experienced this initial prisoner’s dilemma state to various degrees and time length. 11. See Barisitz (2008) and Nenovsky (2009). 12. See Berlemann and Nenovsky (2004). 13. The analytical reasoning on anchor and anchoring could also be carried out by using the social judgment theory. See www.brocku.ca/MeadProject/Sherif/Sherif_1958b.html, accessed November 17, 2010. Similar reasoning could be carried out by using the traditional model of optimization, whereby the common cause (the anchor) is seen as a change in both budget constraints and/or the utility preference curve. In such a case, the anchor “pulls out” the whole optimization scheme either simultaneously (constraints and preferences), or through internal cause-effect links between them. 14. Analytical scheme to interpret monetary regime evolution has been proposed by Nenovsky and Rizopoulos (2003, 2004).

1.

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