Since the dawn of modern civilization, countries and institutions have made macroeconomic policy decisions based on goals rooted in their self-interest. Yet in today’s interconnected world, many of these decisions inevitably have cross-border implications. Whether through global inflation, trade balances, or growth trajectories, these effects reveal just how interdependent economic strategies can be. And interestingly, cooperation often emerges even in the absence of formal agreements. This is where game theory, specifically the concept of non-cooperative games, offers a useful lens. How can this framework help us better understand these complex strategic interdependencies? And how does cooperation take shape in economic systems designed around independent decision-making?

What are non-cooperative games in game theory?

Within game theory, a non-cooperative game describes a situation where there are no external rules or binding agreements that force players to cooperate1. Each player is free to develop their strategy and act independently to maximize their payoff, while still taking into account what others might do. The study of non-cooperative game theory aims to understand and analyze how individual agents make strategic decisions in competitive environments, and how, in some cases, cooperation can still emerge2. One of the most prominent illustrations from a macroeconomic perspective is oligopolistic markets, where firms operate independently to stay ahead, yet remain open to collaboration through coalitions.

Core assumptions of non-cooperative games in macroeconomics

Strategic interaction

At the heart of non-cooperative games are strategic interactions between independent players, where their main goal is to make optimal decisions while evaluating the choices of others. In a macroeconomic setting, this is especially evident in policy coordination, particularly within the monetary and fiscal domains3. For example, central banks like the European Central Bank or the U.S. Federal Reserve often adjust interest rates to meet domestic objectives. However, these decisions can trigger spillover effects on exchange rates, capital flows, and inflation across global markets.

This non-cooperative dynamic was vividly illustrated with the launch of the euro in 19994. The introduction of a unified monetary currency, shared by multiple sovereign nations, reshaped the global monetary landscape and changed the game entirely. As a result, other countries had to account for the influence of this new economic bloc, leading them to make independent, yet strategically interdependent, policy decisions in response5. This is a classic example of non-cooperative game theory in action.

Rationality

Non-cooperative scenarios assume that players are rational and make decisions based on their beliefs about the strategies of others, and not through isolated judgment6. The goal behind these decisions is ultimately to pursue a clear outcome that benefits them, whether through individual or collective wellbeing, increased profitability, or overall welfare.

Fiscal policies are a clear example of this in real life. Within currency unions or federations, individual governments often pursue their fiscal expansion or austerity, anticipating the broader macroeconomic effects and likely responses of other member states. However, potential fiscal imbalances may arise when decisions are made solely based on national self-interest and without formal coordination, such as structural misalignment between revenue-raising capacities and expenditure responsibilities across different levels of government, or significant disparities in fiscal capacity among member states3.

No binding agreements

A key feature of non-cooperative games is the absence of binding agreements (e.g., enforceable contracts, etc.) between players1. This sets them apart from cooperative games, where such commitments are central. In non-cooperative settings, any cooperation that arises must be self-enforcing. It emerges only when it aligns with each player’s best interest, given their expectations about others’ strategies.

This concept is particularly evident in the realm of environmental policy, especially in the absence of universally binding treaties. Countries make independent decisions on emission reductions based on national interests. The Paris Agreement is a useful example: while the processes for submitting, reviewing, and updating climate progress are binding under international frameworks, the actual targets, known as Nationally Determined Contributions (NDCs), are self-set by each country7. Cooperation under this system is designed to be self-enforcing, driven by the shared recognition that long-term compliance serves each nation’s interest in avoiding the severe consequences of climate change.

How the Nash equilibrium solves non-cooperative challenges

The Nash equilibrium stands as the primary way game theorists analyze non-cooperative situations and predict what the outcome will be8. Conceptualized by American mathematician John Nash in 1950, the Nash equilibrium describes a situation where no player can improve their outcome by unilaterally changing their strategy9. This is because their current choice already accounts for the fixed strategies of all other players. It’s a stable state where no one has an incentive to deviate on their own, as everyone is already doing the best they can given the actions of others.

In real-world macroeconomics, Nash equilibria serve as a powerful framework for analyzing strategic policy interactions10. It helps model how each agent optimizes their choices in response to the anticipated actions of others, like when central banks set interest rates or countries decide on trade tariffs. Ultimately, it helps explain and predict how independent decisions can lead to stable, even if not always ideal, outcomes in complex economic settings.

The cooperative possibilities in a non-cooperative world

Even in macroeconomic settings where non-cooperative behavior is the norm, game theory shows that cooperation can still take shape. The non-cooperative framework is not only useful for analyzing complex economic policies, but it also helps explain how cooperation may emerge when it aligns with the long-term interests of the players involved. Even without formal agreements, decision-makers may choose to coordinate if that outcome proves to be the most beneficial, assuming the core conditions of the model are in place.

References

  1. Nash J. Non-cooperative games. Ann Math. 1951;54(2):286–95. Available from: https://doi.org/10.2307/1969529
  2. Palsule-Desai OD. Complete versus partial collusion in competing coalitions. Int Game Theory Rev. 2015;17(1):1540006. doi:10.1142/S021919891540006X.
  3. Aguirre I. Game theory notes. 2009 [cited 2025 Jun 18]. Available from:https://www.ehu.eus/iaguirre/MicroIVEnglish/NotesGames2009.pdf
  4. European Union. History and purpose of the euro [Internet]. Brussels: European Union; [cited 2025 Jun 20]. Available from:https://european-union.europa.eu/institutions-law-budget/euro/history-and-purpose_en
  5. Faure P. Monetary and fiscal policy games and effects of institutional differences between the European Union and the rest of the world. Rev Écon. 2003;54(5):937–59. Available from:https://shs.cairn.info/journal-revue-economique-2003-5-page-937?lang=en&tab=texte-integral
  6. van Damme EEC. Non-cooperative games [discussion paper]. Tilburg: Microeconomics, CentER Discussion Paper Series; 2000. Report No.: 2000-96. 17 p. Available from:https://research.tilburguniversity.edu/en/publications/non-cooperative-games
  7. United Nations Development Programme. NDCs (nationally determined contributions) to climate change: what you need to know [Internet]. New York: UNDP; [cited 2025 Jun 20]. Available from:https://climatepromise.undp.org/news-and-stories/NDCs-nationally-determined-contributions-climate-change-what-you-need-to-know
  8. Osborne MJ, Rubinstein A. A course in game theory. Cambridge (MA): MIT Press; 1994. p. 14. ISBN: 9780262150415.
  9. Holt CA, Roth AE. The Nash equilibrium: a perspective. Proc Natl Acad Sci U S A. 2004 Mar 15;101(12):3999–4002. Available from:https://doi.org/10.1073/pnas.0308738101
  10. Cornell University. History of Nash equilibrium: discovery and use today [Internet]. Ithaca (NY): Cornell University; 2023 Dec 12 [cited 2025 Jun 19]. Available from:https://blogs.cornell.edu/info2040/2023/12/12/history-of-nash-equilibrium-discovery-and-use-today/