Achieving an Efficient and Fair Equilibrium Through Taxation

TL;DR

This paper introduces a taxation mechanism framework that aligns individual incentives with social efficiency and fairness in strategic games by adjusting tax rates and exemptions, applicable across various game types.

Contribution

It proposes a novel taxation framework with flat tax rates and exemption rules to induce efficient and fair equilibria in a broad class of static strategic games.

Findings

A flat tax rate achieves efficiency in static strategic games.

Tax exemption rules can enforce fairness criteria like Max-min fairness.

Framework successfully applied to Prisoners' Dilemma.

Abstract

It is well known that a game equilibrium can be far from efficient or fair, due to the misalignment between individual and social objectives. The focus of this paper is to design a new mechanism framework that induces an efficient and fair equilibrium in a general class of games. To achieve this goal, we propose a taxation framework, which first imposes a tax on each player based on the perceived payoff (income), and then redistributes the collected tax to other players properly. By turning the tax rate, this framework spans the continuum space between strategic interactions (of selfish players) and altruistic interactions (of unselfish players), hence provides rich modeling possibilities. The key challenge in the design of this framework is the proper taxing rule (i.e., the tax exemption and tax rate) that induces the desired equilibrium in a wide range of games. First, we propose a flat tax rate (i.e., a single tax rate for all players), which is necessary and sufficient for achieving an efficient equilibrium in any static strategic game with common knowledge. Then, we provide several tax exemption rules that achieve some typical fairness criterions (such as the Max-min fairness) at the equilibrium. We further illustrate the implementation of the framework in the game of Prisoners' Dilemma.