In the summer of 2011, the U.S. Congress brought the country to the edge of economic mayhem. The government was close to exceeding its borrowing authority and defaulting on its debts. Congress squabbled for weeks over a deal to raise the debt ceiling, finally reaching one just in the nick of time to stave off calamity.
That high-stakes brinksmanship had a major impact on Jack Fanning, who was then a Ph.D. student in economics at New York University. It would lead him to his specialty: game theory and theoretical models of bargaining.
In watching the debt ceiling debacle, Fanning began to wonder why it is that so many negotiations seem to go dangerously close to deadlines before deals are struck. Deadline deals happen regularly in all kinds of settings, from trade union negotiations to player trades in sports. But it was the debt standoff — in which the potential consequences of missing the deadline were so dire — that really caught his attention.
“The U.S. Congress seems to supply a vast majority of my examples of dysfunction,” says Fanning, who joins the faculty this fall as assistant professor of economics.
After perusing the bargaining literature, he wasn’t convinced that existing theoretical models properly predicted deadline deals. Most models, Fanning says, predict that if agents are acting rationally, they should generally agree toward the start of the bargaining process.
“I know that you’re rational; you know that I am,” Fanning says of the standard modeling approach. “This rationality implies we must reach a deal eventually on some terms. But knowing the outcome tomorrow if we don’t agree, means I can propose a deal today that is better for both of us and avoids delay, and so I will. This logic extends even further backward, and ultimately implies that we must reach an agreement immediately.”
But that’s clearly not how it works in the real world. So Fanning developed a new model that tweaks the assumption of rationality a bit. His model assumes that some people might be obstinate — irrevocably married to their demands and irrationally unwilling to seek common ground, even if that means no deal can be struck before the deadline.
To anyone who followed the debt ceiling talks, that kind of stance might sound a bit familiar.
In cases where there are obstinate people, Fanning says, rational people may have incentive to imitate that obstinacy in the hopes that their perceived toughness might cause the other side to give up its demands. By incorporating those dynamics into a new mathematical model, Fanning was able to produce markedly different results from traditional bargaining models.
“One of the paper’s main results is that nearly all the agreements will happen either at the start of bargaining or right up at the deadline,” Fanning said. “With some quite simple changes in assumptions, you do get these deadline effects that previously had not been well explained in the theoretical literature.”
But it’s not just dysfunction that Fanning is interested in modeling. He’s now using his game theory approach to study how trust can be built between people through repeated interactions. He’s also looking at how the reputations of Supreme Court justices might influence the court’s decisions.
Fanning has long been intrigued by the power of mathematical models to take a few very basic, simplified assumptions and reveal a truth about the real world. One of his professors at NYU likened economic modeling to the stories we learned as kids.
“He explained models as fairy tales,” Fanning said. “Like a fairy tale, your model is not true. But it should have a moral. It should tell you something that is true about the real world through its simplicity. That was an influential viewpoint for me. Models give us a way we can coherently look at the world and hopefully reveal some kind of truth that we didn’t see before.”
Fanning says he’s excited to be coming to Brown to continue his theoretical work, as well expanding into experimental economics.
“Brown is a fantastic school and the department has fantastic people,” he said. “I’m also excited about having some really good colleagues who do experimental economics here. I’d be very interested in seeing how these bargaining models hold up in controlled experiments.”
So Fanning gets some new experimental colleagues to work with, and the department gets a new professor who’s made substantial contributions to the theoretical literature on bargaining.
Sounds like a great deal for both sides.