"Races to the bottom can be described in game theory by the prisoner's dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate.
An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits.
However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the "defector" (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and thus collects less revenue overall. The optimal option for all governments would be an agreement to maintain tax harmonization" (http://en.wikipedia.org/wiki/Race_to_the_bottom).
As an aside, Robert Axelrod's famous and fascinating book "The Evolution of Cooperation" (http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation) on game theory and the "prisoner's dilemma" presents an algorithm called "Tit for Tat" (http://en.wikipedia.org/wiki/Tit_for_tat) that describes an approach to interaction that promotes generosity and forgiveness while not to being exploitable, and it so simple that it can be understood by everyone (which is to say, it's easy for others to understand your actions and adapt theirs to yours so that you both get the most benefits).
Comments
"Races to the bottom can be described in game theory by the prisoner's dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate. An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits.
However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the "defector" (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and thus collects less revenue overall. The optimal option for all governments would be an agreement to maintain tax harmonization" (http://en.wikipedia.org/wiki/Race_to_the_bottom).
As an aside, Robert Axelrod's famous and fascinating book "The Evolution of Cooperation" (http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation) on game theory and the "prisoner's dilemma" presents an algorithm called "Tit for Tat" (http://en.wikipedia.org/wiki/Tit_for_tat) that describes an approach to interaction that promotes generosity and forgiveness while not to being exploitable, and it so simple that it can be understood by everyone (which is to say, it's easy for others to understand your actions and adapt theirs to yours so that you both get the most benefits).