Applications of Game Theory in Modern Economic Policy Design

Abstract

Game theory, a mathematical framework for analysing strategic interactions, has emerged as a vital tool in modern economic policy design. This abstract explores the diverse applications of game theory within economic policymaking, emphasizing its relevance for understanding competitive behaviours, resource allocation, and negotiation strategies among various economic agents. The principles of game theory help policymakers anticipate the actions of firms and individuals in response to regulatory changes, market conditions, and institutional frameworks. Notably, concepts such as the Nash equilibrium and competitive equilibria provide insights into the outcomes of strategic decisions made by multiple actors in oligopolistic markets. Furthermore, game theory aids in the design of incentive structures, guiding interventions in sectors such as finance, environmental policy, and public goods provisioning. By elucidating the interconnectedness of player's strategies and payoffs, game theory facilitates the formulation of robust policies that promote cooperation and mitigate the risks of undesirable outcomes. Ultimately, the integration of game-theoretic approaches into economic policy design fosters a more nuanced understanding of complex interactions, enabling effective responses to contemporary economic challenges.