May 29, 2012 | Quote

The Weekly Wrap — May 25, 2012

How to incentivize bad behavior for the greater good: Last year, Mark Dubowitz, a Washington-based advocate of regime change in Iran, was mulling a conundrum with a colleague — how to clamp painful oil sanctions on Tehran while harming no one else. They knew that members of both political parties opposed cutting off Iranian access to the global export market if it meant an oil-price surge. And that, since everyone thought a price spike was inevitable, nothing was consequently done as oil revenue continued to flow freely into Tehran. So Dubowitz and Reuel Marc Gerecht, his colleague at the Foundation for Defense of Democracies, looked for an improbable, sanitized cordoning of fiscal pain. That's when they hit an apparent brainstorm — a simple form of game theory that they thought would work.

The game went like this: You divide players into the “white hats” and the “black hats.” Global players likely to honor sanctions (the white hats) would be incentivized to do just that — completely stop buying Iranian oil. But nothing would be done to discourage global players likely to ignore the sanctions from following those very dastardly instincts (the black hats, primarily China, but also India and perhaps another country or two). If everything worked right, Iran — selling only to this latter, much narrower band of tough-bargaining buyers — would wield much-diminished pricing leverage. It would consequently be forced to yield substantial discounts, putting great pressure on the regime's ability to finance itself.

In November, Dubowitz and Gerecht distributed the idea as a confidential, 32-page white paper to the White House and Congress, in addition to European capitals, titled “Oil Market Impact of Sanctions Against the Central Bank of Iran.” Synthesizing the idea in an op-ed in the New York Times, the pair argued that to move Iran, one needed “to learn how to leverage greed.” As Dubowitz told me over palak paneer and dal yesterday, “You give market power to the black hats and allow them to push down the price to earn money.”

As we know, the current sanctions regime closely resembles the devilishly clever white paper — you get obstinate forces and inveterate violators of norms to do what you want by appealing precisely to their baser instincts. Which made me wonder — what other big problems might be solved using the same logic?

Read the full article here.


Iran Iran Sanctions