How much expected surplus do we want Putin to have?

My Bloomberg column is on another topic altogether, starting with bank runs, but this part I can reframe in terms of principal-agent theory.  We want to squeeze Putin so hard that he “cries Uncle”, yet without eliminating his surplus so much that he takes a lot of extra risk.  Hard to achieve both of those ends at the same time!  Here is one bit reflecting that dilemma:

For a point of contrast on how decentralized incentives operate on each side, consider the nuclear alert ordered by Putin on Sunday. The chance of Russian nuclear weapons being ordered into actual use is small. But Putin faces a dilemma as he attempts to manipulate the decentralized systems of the Russian military. If he gave an order for a nuclear strike on a Ukrainian city, would the Russian military obey it? Whoever did would know they could be liable for war crimes.

The outcomes here are impossible to forecast, but the uncertainty works in favor of the Ukrainians. If it became known that Putin ordered a nuclear strike and was ignored, for example, he would become the proverbial “paper tiger” rather quickly and might lose power altogether.

These decentralized mechanisms potentially shift the entire logic of the war. Russia has to win fairly quickly, or these and other forces will increasingly work against it. Ukraine thus can fight for a military stalemate, but Russia cannot. The Russian forces must take increasing levels of risk, even if those risks have what decision theorists call “negative expected value” — that is, they serve as desperate gambles and on average worsen the Russian situation.

Of course that makes the war increasingly dangerous, and not just for the Ukrainians. If Putin is afraid the forces in the field won’t always carry out his orders, for example, he may order the launch of 10 tactical nukes rather than just one.

As AK would say, “Have a nice day.”

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