I am considering hypotheses here, to see how game theory might apply, so don’t think of this is an actual description of the situation.
As an economist, what struck me was the quick and extreme cut-off of Qatar by the Saudis and six other supporting parties. In the simplest versions of principal-agent theory, we think of most incentives as being applied continuously and varied in small doses: was Qatar’s behavior the day before the Qatar embargo/boycott really so different than the day of and after? So why did it happen this way? I can think of a few possibilities:
1. The boycott is like suddenly firing misbehaving workers. For morale reasons, you don’t want to keep them around on lesser terms, because they will be destructive. This hypothesis implies that the cut-off of Qatar is a permanent one.
2. Demonstrations of power require large, discrete events. If the Saudis had simply tweaked the incentives facing Qatar, the Qatar citizenry might not have distinguished the effects of that tweak from random noise. This hypothesis suggests that once the Saudis have made their point, and received Qatari concessions, the cut-off will be lifted or at least modified.
Note that along this game path, Qatar may not wish to “fold” immediately, as that could make them an ongoing puppet of the Saudis, all too easily manipulated. And indeed Qatar still has significant open markets for its natural gas.
3. Donald Trump’s meeting with the Saudis gave them an unexpected green light, either explicitly or implicitly, and thus the sudden receipt of this new information motivated their sudden switch in behavior.
During my recent trip to the Middle East I stated that there can no longer be funding of Radical Ideology. Leaders pointed to Qatar – look!
— Donald J. Trump (@realDonaldTrump) June 6, 2017
#3 still may be consistent with either #1 or #2.
4. The Saudis actually are playing a game with Iran, not so much with Qatar. What appears to be a big, sudden snap to the Qataris is actually just a smallish, mid-sized tweak in the incentives being applied to Iran. Qatar, because it is so small, feels a high degree of collateral damage.
5. The punishment space is multi-dimensional. Once “duration of punishment” is viewed as a variable, even a big punishment applied for a short period of time can be viewed as a marginal tweak. In this sense there is no paradox.
6. The Saudis view the Qataris as the ones who made a “discrete break” from the previous equilibrium, by paying a $1 billion ransom to Iranian and al Qaeda-linked forces, to induce the release of some kidnapped royal family members. Discrete breaks are inefficient, but perhaps you have to respond to one discrete break with another, precisely because they are inefficient.
7. Ian Bremmer mentioned on Twitter that 90% of the Qatari food supply is imported, 40% of it from Saudi, and now that is at risk. There are some countries for which a partial degree of agricultural subsidies and protectionism may make sense, for national security reasons. In any case, the degree of allowed smuggling reintroduces the notion of a smoother punishment space.
In a rational actor model (ha), this cut-off would be lifted in about a week from now.