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Game theory and mechanism design

Game theory and mechanism design study strategic interaction among decision makers and the design of rules that lead to desired outcomes. They explain cooperation, free riding and incentives in shared-risk settings. Policy Nexus stewards this page for the Nexus Consortium.

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Game theory and mechanism design on the record.

The Global Centre for Risk and Innovation
  1. 01InstitutionThe Global Centre for Risk and Innovation (GCRI)
  2. 02The methodWhat game theory and mechanism design covers
  3. 03Reference practiceGame theory informs institutional design and negotiation analysis
  4. 04In systemic risk workWhy rational actors under-invest in shared resilience
  5. 05Applied inPlatforms that apply this method
  6. 06StewardshipWho maintains this page
  7. 07SourcesWhere this page’s references lead
02The method

What game theory and mechanism design covers.

  1. 01

    Core methods

    non-cooperative game analysis; cooperative game analysis; mechanism and auction design; bargaining models; evolutionary game theory; experimental games.

  2. 02

    Data and instruments

    laboratory experiments; field behaviour data; negotiation records; market and auction data; institutional rule sets.

  3. 03

    Validation

    Predictions are tested through laboratory and field experiments and comparison with observed behaviour. Mechanism designs are piloted before scaling.

  4. 04

    Limits

    Assumptions of rationality and common knowledge often fail. Real settings involve many players and incomplete information.

  5. 05

    Use in risk decisions

    Game theory clarifies why actors underinvest in shared risk reduction and how agreements can be made self-enforcing. It informs the design of risk pools, treaties and incentive schemes.

03Reference practice

Game theory informs institutional design and negotiation analysis.

ReferenceWhat it sets
Mechanism designRules that align incentives
Transboundary water and climate negotiation analysisCooperation problems
OECD risk governance workCoordination of actors
04Process

How the process runs.

Process

Game theory and mechanism design: Operational resilience

Basel defines operational resilience as delivering critical operations through disruption; the UK PRA uses important business services and impact tolerances.

  1. 01 Services and tolerance

    1. 01Important business services or critical operationsDataset · Independent reviewerUnder PRA rules a firm identifies its important business services; Basel says critical operations. Resilience delivers them in disruption.
    2. 02Set impact toleranceStep · Independent reviewerFor each important business service the firm sets an impact tolerance, the maximum tolerable disruption.

  2. 02 Map and test

    1. 03MappingStep · Independent reviewerThe firm documents what it needs to deliver each important business service. Basel asks banks to map interconnections and interdependencies.
    2. 04Severe but plausible scenariosModel · Independent reviewerScenarios are severe but plausible disruptions. Basel names pandemics, cyber incidents, technology failures and natural disasters.
    3. 05Scenario testingExercise · Independent reviewerThe firm regularly tests whether each important business service stays within its impact tolerance in a severe but plausible disruption.

  3. 03 Fix

    1. 06Identify vulnerabilitiesStep · Independent reviewerWhere capabilities cannot meet the stated tolerance, policies should address the gap. Basel gives this task to board oversight.
    2. 07Act to remain within toleranceStep · Independent reviewerThe firm must ensure it can remain within its impact tolerance for each important business service.

  4. 04 Governing body

    1. 08Self-assessment and management body approvalDecision · Management bodyThe firm prepares and regularly updates a written self-assessment. Its management body approves the services and the self-assessment.

Outline of an external standard or method, from its public sources. It describes what the framework says, not a record of any run. It does not show that Nexus or any partner performs, certifies or approves a step. A gate is a step of the method, never a Nexus approval. The two vocabularies differ; the outline names both.

05In systemic risk work

Why rational actors under-invest in shared resilience.

Systemic resilience is partly a public good: each actor benefits from others’ investment. Game theory explains under-investment and designs mechanisms (pooling, standards, contracts) that change incentives. It is a tool for understanding, not a prediction of behaviour.

  • State assumptions about information and rationality.
  • Test mechanisms with experiments where possible.
  • Consider power asymmetries.
06Applied in

Platforms that apply this method.

07Stewardship

Who maintains this page.

Policy Nexus stewards game theory and mechanism design: it keeps this description current and reviews how the method is applied across the platforms.

08Sources

Where this page’s references lead.

The bodies and documents this page is read against. Status and editions change; each link goes to the issuing body.

09Questions

Questions and answers.

Why does one institution host every method page?
GCRI hosts the STEM Commons so that each method has one canonical description. Platforms link to it rather than repeat it, which keeps definitions consistent.
How do I suggest a correction to a method page?
Write to the integrity concern form with the passage and the reason.
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