Game theory and sovereign wealth funds

Abstract

Purpose – The purpose of this article is to assess strategies available to recipient states for managing the putative risks posed by sovereign wealth funds (SWFs) in the context of global, liberalized, and capital markets. Design/methodology/approach – The paper employs a game theory analysis in assessing these risks. Four basic scenarios are outlined whereby recipient states may interact with SWFs: “unselfish recipient state – unselfish SWF” (Option 1); “unselfish recipient state – Selfish SWF” (Option 2); “Selfish Recipient State – unselfish SWF” (Option 3); and “Selfish Recipient State – Selfish SWF” (Option 4). Findings – In the light of this analysis, and the balance of risks which the authors perceive recipient states are exposed to in practice, the authors claim that recipient states ought, rationally, to adopt a selfish regulatory strategy irrespective of the strategy which SWFs adopt in practice. Originality/value – This claim does not deny the importance of voluntary international measures – such as the “Santiago principles” – in the way SWFs are regulated. Rather, it seeks to show that according to a game theory analysis, and an attempted application of that analysis in practice, undue reliance by recipient states on international “soft law” regulatory initiatives to regulate SWF activity (which constitutes the current international consensus) is strategically unwise.