é
e
ISINAPSYS
[ Organizacién que Aprende
Chinese Dynasties Learning Lab Il.
Published for:
The 32nd International Conference of the System Dynamics
Society, Delft, Netherlands
July 20 — July 24, 2014
Good Governance in a Complex World
AUTHORS
Pedro Dagoberto Almaguer Prado. Ing. pedrodago@gmail.com Author
Beatriz Eugenia Navarro Vazquez, Lic. bety.5505@gmail.com Collaborator
Ruth Raquel Almaguer Navarro ruth_ran@hotmail.com Desing
Ramiro Luis Almaguer Navarro, Lic. rmalmaguer@gmail.com System Modeling
Pedro Dagoberto Almaguer Navarro, Lic. pan.dago82@gmail.com Collaborator
(eyes)
February 25, 2014
Abstract
This paper models an economy of farmers, bandits and soldiers. In addition to the economic factors
affecting the economy studied by Saeed and Pavlov (2008), and the effects of two psychological factors
broadly categorized as exposure to violence and group identity studied by (Saeed, Pavlov, Skorinko,
Smith‘), we have added to the model, the ability to review the impact of the phenomenon of collusion
between soldiers and bandits, and the effects in the policies of population dynamics and policies related
to changing the parameters representing the productivities and behavioral scaling factors in the
economy, which has often been observed both in history and in some developing countries, and we
have adding control checks for limiting collusion. We have also developed a storytelling to explain step
by step, how the model was created and enriched, also we have developed an interactive presentation
of the history, in iBook format for iPad and Mac, and we have created Chinese Dynasties learning lab II,
that can be accessed from the web, allowing users to run the simulation easily, especially to review the
impact of their decisions and to avoid as far as possible, the unintended consequences of any change,
before they can be implemented in real level.
Keywords: system dynamics, political economy, human behavior, iPad, collusion, simulation,
psychology, and public policy.
Index
Introduction
1. Generic structure of resource allocation.
2. Our contribution to the model.
3. Steps for developing the learning lab.
Complete model
4. Steady state - normalization constants in detail.
5. Governance & control checks for limiting loot, corruption and collusion...
Behavioral influences sector. 6
6. Redesigning the mathematical calculation of all policies. 7
Note: See detailed equations in Appendix A uf
Graphical representation of indicators of freedom and economic health
Chinese dynasties learning lab II
7. Learning lab.
8. Introduction
9. Population
10. Sensitivity parameters.
11. Collusion between soldiers and bandits. 10
S 'y of results 10
12. Governance 11,
13. Model & Storytelling 11
14. Dashboard 12
Experiments with the model 12
Graphical results - Raise farmer productivity & effective policy sets for
addressing peace agendas and sustainability. 13
Storytelling 14
Interactive presentation in iBook format for iPad. 14
Conclusion 15
15. Future vision: Chinese dynasties learning lab III. 16
16. Special Thanks. 16
Apendix A: Model equations. 17
17. All policies and the initial population 17
18. Behavioral influences. 18
19. Political economy 19
20. Steady state 22
Bibliography 23
Author and collaborator: 24
List of figures
Figure 1: Chinese dynasties learning lab II, with collusion, human behavior,
governance and control checks. (Adapted from Saeed and Pavlov (2008))
Figure 2: Full model- include collusion, governance, economic & behavioral influences,
and control checks for limiting loot, corruption & collusion. (Adapted from Saeed and
Pavlov (2008)) 5
Figure 3: Normalization constants (C1, C2 & C3), ensures that the index is equal one in
the steady state. 5
Figure 4: How to calculate help to farmers, bandits & governance, external assistance
to actors to limiting loot, corruption & collusion. 6
Figure 5: Human behavior, psychologic influences, and soldier prestige. (Saeed,
Pavlov, Skorinko, Smith), (Saeed et. al 2013) 6
Figure 6: All policies sector and initial population of agents, the mathematical
calculation of all policies. 7
Figure 7: Graphical representation of indicators of freedom and economic health........ m
Figure 8: Manifestations of a generic political system. “Adapted from Saeed et. al.
2013”, 7
Figure 9: Raise farmer productivity and effective policy sets for addressing peace
agendas and sustainability. 13
Figure 10: Raise farmer productivity and effective policy sets in detail. The best
marked in yellow.
Figure 11: Future vision - Chinese Dynasties Learning Lab III. Our next article
Figure 12: Author and collaborator:
Introduction
Over the four millennia of Chinese history, at least thirty three distinct political
regimes, or dynasties, ruled the country (Rodzinski, 1984: 437). A regime succession
was usually accompanied by a decline in economic well-being of the country and
general lack of order. The succeeding dynasty would typically improve the economic
situation and restore order but eventually follow its predecessor’s path of decline.
Historians of China have dubbed the country’s fluctuations in political and economic
conditions a dynastic cycle.
When history is written with one foot pointing visualizing the future, as in the case of
this Chinese Dynasties Learning Lab II, is impressive learning obtained and this can be
extended and implemented for the good of the a variety of organizations, including
political economies, educational institutions, markets and firms. Above all, these ways
allow us to discover new routes to address peace agendas and sustainable
development.
Generic structure of resource allocation.
_ Human | Information
"behavior — effect
*
, ~ ‘ \
Prestige Psychological
f influences
Control Social 7 Asocial
resources Flow a resources Flow b resources
be, 4 ‘ >>.
3= f + at,
i 6! «—_—t — |
— f & * Lie
L »
Social Economic i
“ i Asocial
Taxes Collusion use influences ge
4 B
"
External . —-—=#Welfare}——_Limiting corruption
assistance loot & collusion
Figure 1: Chinese dynasties learning lab II, with collusion, human behavior, governance and control checks.
(Adapted from Saeed and Pavlov (2008)
Our contribution to the model.
1. We have enriched the logic that shares resources among farmers, soldiers and
bandits.
2. We've improved the standardization of formulas used by the original model,
to expand the scope of their calculations.
3. We have added to the model, the ability to review the impact of the
phenomenon of collusion between soldiers and bandits, in the policies of
population dynamics and policies related to the sensitivity analysis of
parameters, which has often been observed both in history and in some
developing countries (Economist, 2005).
4. We have developed a storytelling to explain step by step, how the model was
created and enriched, and especially to show easily, the underlying structure of
the model, and the mathematics of their calculations.
5. We have developed an interactive presentation of the history, in iBook format,
for iPad and Mac.
6. We created Chinese Dynasties learning lab, that can be accessed from the web,
allowing users to run the simulation easily, especially to review the impact of
their decisions and to avoid as far as possible, the unintended consequences of
any change, before they can be implemented in real level.
Steps for developing the learning lab.
Step2 step4 stepS
Convert ? ° Step6
Step1 Design Developing implement
Describe Descuptan alternative learning tab f;
‘Rice to educate pele ia
policiesand
and
structure
debate
Bes policies
ae And rate and
equations structures
By Jay W. Forester
Complete model
gees 25, rr
Desired 68 ‘change. Oe a State
et control
number (Frecacms Pe Threat
of soldier” Health "SAT Ss
Y* to-society
et ~ a
ps oA as Soldier,» Aan fs git
recruitment > recruitms
ibe ‘and a
Baska ane io)
[men ole ape 3
EO oatciors Farmers ‘
Cope J LR at
soldier foie SW for O
: Farmer SW for psych |
/ ‘and of farmer sion
Bandit
infusion
SW Soldier infusion influence
[ & Brecage! oO \
Land P4 Soldier O ‘Sw for Farmer
\ \ elasticity \. “Producer / relative pr economic relative
\ 9 of farmers’ income influences \_income/
Tax |
\ need © Tecuehee Perceived whe
cane disposable
Labor: uid income per farmer / me
Help \ elasticity cI Chng in SWE!
soldiers oly: =O} ‘disposable income aaa | collusion
eS governance r chat per bandit ve '@
oO ; g it 7 Aandi. Cols
‘ ee disposable incomé State SW for
~ a sppropiatiot Sel
Soldiers Ta Free per farmer, $ help
L J aa ie et ae Bandit posable Oe,
Py ate ee i ineoine new”
Dispogabie Perceive “incor eben me ee Bodies
of farmers
income per sepoesn Eeareene Se Or ‘
soldi¢r income per soldier ae, Noman as peal ask L fase
= fer bandit fisposable \
farmer income, per bancit rere
+
income
chng in Soldier; Perceived : Soldies Help Health A
disposable income relive disposable state swor SOUS anatts NY
per soldier income “income per bandit contro! limiting loot cs
‘ol checks
Figure 2: Full model- include collusion, governance, economic & behavioral influences, and coni
for limiting loot, corruption & collusion. (Adapted from Saeed and Pavlov (2008))
Steady state - normalization constants in detail.
Productivity of
Farmers initial
Productivity of
bandits initial
Land
elasticity
parrots Bandit disposable
income steady
@ state
Producer of cibilieck
Labor farmers tee
elasticity steady state
Tax collection @
Figure 3: Normalization constants (C1, C2 & C3), ensures that the index is equal one in the steady state..
Governance & control checks for limiting loot, corruption and collusion.
Land Productivity of
initial Farmers initial
a , Productivity of
Bandits andits initial
External
Land assistance
pecs to bandits
cr ae panier Bandit disposabla Help
A " income steady i.
bandits
pone 1 state \
(>? Producer of
\
Typical loot
Labor farmers
per bandit
elasticity Steady state initial
Tax collection Cost per ee
soldier initial xternal
steady ra
Help pemenias
lp farmers ‘0 farmers
, soldiers External
c2 Cfo ° oe
Figure 4: How to calculate help to farmers, bandits & governance, external assistance to actors to limiting
loot, corruption & collusion.
Behavioral influences sector.
Rise in oe to change Conscious
perceived _ Perceived sensitivity en y p> sensitivity
yielencel Gislence violence time to a "to violence
a 4 =e) form normal
perception
~~ Unconsciou! External Change in
Actual Time to form normal i clase, sensitivity
violence perception of violence ; i
violence Bandit Farmer
‘\ bj urge to urge to
@ External ange ghange:
Threat Violence |nformation ref wt Group
tosociety perthreat effect identity of
bandits
Group
Bandits
ee
Total workforce
Figure 5: Human behavior, psychologic influences, and soldier prestige. (Saeed, Pavlov, Skorinko, Smith),
(Saeed et. al 2013)
The behavioral influences sector captures the psychological effects of violence and
group identity. The behavioral sector feeds into the political economy sector and
collusion by affecting agents’ desires to change their status.
Redesigning the mathematical calculation of all poli
pulse P1 pulse P2
P4 Change
pulse P3
Pol 6
Change ; P6 Change
owe All policies and the initial As
Pol 1 © @ Oo
Change Initial Initial Initial
Pl P2 : i ion p i
First Pl First ‘es 2 First of farmers of soldiers of bandits
P5
Data Data
P4 PS
P6 a Pe: #
Data Data
P6 P7
Figure 6: All policies sector and initial population of agents, the mathematical calculation of all policies.
Note: See detailed equations in Appendix A
Graphical representation of indicators of freedom and economic
health
Equilibrium
2+ 2
x= = "
3 | Middle S eae
+ Rule
Q Q
3 3
a 4 fal 1
:
ul 5 : ul 5 Authoritarian
Fs Middle Fol Rule
a a
oO oO
0 1 2
Low HIGH Low HIGH
ECONOMIC LEGITIMACY ECONOMIC LEGITIMACY
Figure 7: Graphical representation of indicators of anifestations of a generic political
freedom and economic health. system. “Adapted from Saeed et. al. 2013”.
Chinese dynasties learning lab II
Learning lab
&
Die 2013
Collaborators:
Lic. Beatriz E. Navarro Vazquez
g Lic. Pedro D. Almaguer Navarro
‘es Lic. Ramiro L. Almeguer Navarro
JSINAPSYS Designed by:
é Lic. Ruth R. Almaguer Navarro. 7
[Omenmeceacnm Aprende (3)
Introduction
Population Sensitivity Collusion ‘Governance Model ‘Simulation
Introduction . Laaanieal
|- Abstract 2
Z|
; Bo
2. Over the four millennia of Chinese history g
SC AVAIADITY ahd Tse OT PesoUreSs artects TsttUTOnAl
performance
4. Metaphorical model
5. Rulers and bendits compete for the wealth of farmers.
6, Models of the dynastic cycle captured the population
7, Dynastic cycle is a generic structures
B. Computer model
3. Indexes of Freedoms and economic legitima
Conclusion
6B isinacsys
ECONOMIC LEGITIMACY.
culls
ECONOMIC LEGITIMACY
Model: Leeming Lab of Chinese Dynasties
Population
Introduction
Population
FREEDOMS
458 4 ts18 2
ECONOMIC LEGITIMACY
oaon eee
Sensitivity parameters.
Governance
QD isinepss ECONOMIC LEGITIMACY | Model: Leeming Lab of Chinese Dynasties
Collusion between soldiers and bandits.
Introduction Population Sensitivity Governance Wedel Simulation
Without Collusion With Collusion
Population
infusion
Sensitivity
parameters
ECONOMIC LEGITIMACY ECONOMIC LEGITIMACY
& isnapsys Wodai: Learing Lab of Chinese Gynastos)
We have extended the model presented by Saeed and Pavlov | 2006, adding the phenomenon of
collusion between soldiers and bandits, in general, regardless of the policy implemented, it is observed
that the phenomenon of collusion affects a decreased in economic performance, although improving
freedoms of citizens. The latter result seems counterintuitive, perhaps due to the type of education
given to the soldiers, with outstanding learning values such as loyalty, discipline, honesty, civic
behavior and other, perhaps when detected the ph of coll among his coll some
resign from their position and pass to the side of the farmers, this leads eventually to a smaller number
of soldiers and greater perceived freedom.
Summary of results
Policies applied to population infusion
Thus another lesson to be learn is that expansion beyond the state afforded by resources will always
lead to a suboptimal condition, no matter what path of growth is adopted.
Policies applied for soldier & bandits
The policies applied to soldiers or bandits, will always lead to a suboptimal condition, no matter what
path of growth is adopted.
Policies applied for farmers
The new homeostasis depends, of course, on the degree of technological growth achieved or the volume
of additional resources acquired for farmers, or grows both simultaneously. The system comes to a new
balance ata higher level of legitimacy and freedoms than the initial level.
10
Governance
Introduction Population. Sensitivity Collusion Wedel
Helps
Governance
ime 2 solders Treads
External i
assistance of 2 an
farmers cee 7
External acs
assistance }
of bandits : boa K7
Collusion between soldiers U/™!
—_ 104AM Fri, sl 17,2054
2 Population
& tsinapsys Modet Leaming Leb of Chinese Dynasties
Model & Storytelling
Governance Simulation
Introduction Population Sensitivity.
Generic Structure with collusion between Soldiers and Bandits
Human | _information
_ “behavior” — effect
/ * . .
F =: ‘
Z \ Psychological >.
ra | factors *
Cantret -—~ Social /~ y Asocial
fesourber” P resources Flowb resources
, .
| & ————
a ¢
\ # } }
\ Social Econo f
‘ oC ‘conomic E
‘ ; Asocial
Takes Colkision “use influences “tice
‘\ ,
External, ____*Welfarej—_—_Limiting corruption
assistance loot & collusion
\sinapsys Model: Learning Lab of Chinese Dynasties
11
Dashboard
Introduction Popuiation ‘Sensitivity Collusion Governance Model
Population infusion
¥ y Sold Fi Bandits
Seeese oe oS
a Freedoms Health v. Economic Health: 1-2-3-4-5-6-7~ [ie lial
4; a Sensttivity Paremeters
Productivity. Lend
g of farmers
Fresdome Health
Typical loot Productivity | Cost per
perbandt ofbandits | soldier
pot Fels
Pase2 Foonemie Health 10:45 a4 Fri, dul 11, 2014] [ial
je Uniledfonomie & freedoms heath 2
Néeé 2? a
Collusion |Psychological| Soldier | Limiting | Liming |Govemance| Help Help
ni prestige collusion loot farmers bandits
Srloresnonowttanae erst Si iorpneh iene Sete orimmecatsin SNrantnglen eter everest ames
GB Isinopsys Model: Learing Lab of Chinese Dynasties
Experiments with the model
I The model is initialized in equilibrium which is disturbed in two ways for simulation
experiments:
a) by infusing a fixed number of additional members into the various population stocks.
b) by changing the parameters representing the various productivities and scaling factors.
IL. and activating progressively the assumptions about of:
Engagement - connecting to leadership (Future development)
Economic influences - rational economic behavior
Collusion between soldiers and bandits.
Psychological influences - human behavior. Specifically, exposure to violence, sense of
belonging and group identity affect people's decisions regarding the role they select for
themselves.
5. Soldier prestige - The prestige of being a soldier is embodied in the "farmer urge to change
"that encourages soldier recruitment and "soldier urge to change", which discourages soldier
attrition.
6. Limiting collusion - control checks for limiting collusion.
7. Limiting loot - control checks for limiting corruption and loot.
8. Governance - the writ of government. External assistance to soldiers, for strengthen law and
order institutions.
9. Help farmers - external assistance to farmers.
10. Help bandits - external assistance to bandits.
PWNe
While the first set of experiments is primarily aimed at understanding the internal dynamics of
the resource allocation system, the later sets provide insights into the key entry points for change.
All sets can, however, be interpreted in terms of the related policy interventions.
12
Graphical results - Raise farmer productivity & effective policy sets for addressing peace
agendas and sustainability.
s Freedoms Health v. Economic Health: 1-2-3-4-S-6-7-8-
boy be |0. Raise farmer
5. (4)+ Collusion oes, \productivity with only
between soldiers % ‘economic influence 4. (3}+govt control
&bandits oy e 4 (checks Corruption
i ¥ A and loot
=
Fs * 3. (2)
Fy ‘ és soldier importance
3s
= |
< | }
| 6.(5}+Contro!_1.(0)+with | 2.(1)+strengthen
check ical gi
collusion influence
0.80
T
1.00 1.30 1.60
Page 1 Economic Health 1:48 PM Wed, Jan 29, 2014
aer ? Freedoms vs Econornie Health
Figure 9: Raise farmer productivity and effective policy sets for addressing peace agendas and
sustainability.
Raise farmer productivity and effective policy sets in detail.
No | Leadership & | Economic | Collusion | Psychological | Soldier | Limiting [Limiting] Governance] Help | Help
prestige | collusion | _loot farmers | bandits
) Vv
1 v v
2 v v v v
3 v v v
5 v v v v v
Le] Pv [uw {Tov [Pv [uv jtov | | |
Figure 10: Raise farmer productivity and effective policy sets in detail. The best marked in yellow.
13
Storytelling
Interactive presentation in iBook format for iPad.
14
Conclusion
When history is written with one foot pointing visualizing the future, as in the case of
this learning laboratory of Chinese Dynasties, is impressive learning obtained and this
can be extended and implemented for the good of the a variety of organizations,
including political economies, educational institutions, markets and firms.
The distinctive feature of our model is the presence of three resources framed as
metaphorical populations of farmers, bandits and soldiers. These three classifications
of people are present now and in the future, and are unavoidable, as they are part of
human nature. Our model, formalizes systems in which some resources are used for
productive activities, some resources are engaged in parasitic/ asocial activities and
then some resources are allocated to attempts to limit the parasitic/ asocial activity.
We must learn to work with these three species together, it is not possible to
eliminate its effect, and we can only learn how to control their operation.
We have extended the model presented by (Saeed, Pavlov, Skorinko, Smitht), we have
added to the model, the ability to review the impact of the phenomenon of collusion
between soldiers and bandits, and the effects in the policies of population dynamics
and policies related to changing the parameters representing the productivities and
behavioral scaling factors in the economy, which has often been observed both in
history and in some developing countries, and we have also adding control checks for
limiting collusion.
The collusion, in general, regardless of the policy implemented, it is observed that
affects a decreased in economic performance, although improving freedoms of
citizens. The latter result seems counterintuitive, perhaps due to the type of education
given to the soldiers, with outstanding learning values such as loyalty, discipline,
honesty, civic behavior and other, perhaps when detected the phenomenon of
collusion among his colleagues, some resign from their position and pass to the side of
15
the farmers, this leads eventually to a decrease in the number of soldiers and greater
perceived freedom.
Future vision: Chinese dynasties learning lab III.
The impacts of leadership and engagement of the working groups.
Leaderships>—__, Human Information
beavis effect
x g¢# be ay oy
ff Se
Ae he aT
Prestige Engagement \rsycnological \.
f a a %
/ _—_ \ Se \
Vs i ye = .
Control ft Social —~/\, S Asocial
™
resou ces F wa i resources’ \\ Flow “res tices
eo ee
»J 4
f / /
/ [ \ ;
Social Economic
Taxes Collusion use influences aon
a ® 9 use
K \ \ - a
oe SS \ pf git”
Mi, ‘, % i ee
PSS Ny e wee
External a Welfareg—— Limiting corruption
assistance loot & collusion
Figure 11: Future visién - Chinese Dynasties Learning Lab Il. Our next article.
Special Thanks
I want to thank significantly, to Pal I. Davidsen, Professor of Department of Geography,
University of Bergen, Norway. For his guidance, advice and feedback on how to write
this article.
16
Apendix A: Model equations.
All policies and the initial population
Change_P1=5
Change_P2=5
Change_P3=5
Change_P4 = 0.2
Change_P5 = 0.2
Change_P6 = 0.2
Change_P7 = 0.2
Change_P8 = 0.2
Data_P4 = 1.2
Data_P5 = 100
Data_P6 = 0.5
Data_P7 = 0.5
Data_P8 = 1.5
First_pulse_P1=0
First_pulse_P2 = 0
First_pulse_P3 = 0
Initial_population_of_bandits = 10
Initial_population_of_farmers = 100
Initial_population_of_soldiers = 10
P1 = if Pol_1=1 then pulse(Change_P1,First_pulse_P1,1000) else 0
P2 = if Pol_2=1 then pulse(Change_P2,First_pulse_P2,1000) else 0
P3 = if Pol_3=1 then pulse(Change_P3,First_pulse_P3,1000) else 0
P4 = Data_P4*(1+(if Pol_4=1 then Change_P4 else 0))
P5 = Data_P5*(1+(if Pol_5=1 then Change_P5 else 0))
P6 = Data_P6*(1+(if Pol_6=1 then Change_P6 else 0))
P7 = Data_P7*(1+(if Pol_7=1 then Change_P7 else 0))
P8 = Data_P8*(1+(if Pol_8=1 then Change_P8 else 0))
Pol_1=0
Pol_2=0
Pol_3 =0
Pol_4=0
Pol_5=0
Pol_6=0
Pol_7=0
Pol_8=0
17
Behavioral influences
Conscious_sensitivity_to_violence(t) = Conscious_sensitivity_to_violence(t - dt) +
(Change_in_sensitivity_to_violence) * dt
INIT Conscious_sensitivity_to_violence = 1
INFLOWS:
Change_in_sensitivity_to_violence = (Unconscious_sensitivity_to_violence-
Conscious_sensitivity_to_violence) /Time_to_change_sensitivity
Perceived_violence(t) = Perceived_violence(t - dt) + (Rise_in_perceived_violence) * dt
INIT Perceived_violence = 1
INFLOWS:
Rise_in_perceived_violence = (Actual_violence-
Perceived_violence) /Time_to_form_perception_of_violence
Actual_violence = Threat_to_society*Violence_per_threat
Bandit_urge_to_change = Conscious_sensitivity_to_violence/Group_identity_of_bandits
External_reference = 1
External_ref_wt = 1
Farmer_urge_to_change = Conscious_sensitivity_to_violence/
Group_identity_of_farmers
Group_identity_of_bandits = 1/((Bandits/Total_workforce) /
(INIT(Bandits) /INIT(Total_workforce)))
Group_identity_of_farmers = 1/((Farmers/Total_workforce) /
(INIT(Farmers)/INIT(Total_workforce)))
Group_identity_of_soldiers = 1/((Soldiers/Total_workforce) /
(INIT (Soldiers) /INIT(Total_workforce)))
Information_effect = 1
Soldier_urge_to_change = Conscious_sensitivity_to_violence/
Group_identity_of_soldiers
Time_to_form_normal_perception = 5
Time_to_change_sensitivity = 2
Time_to_form_perception_of_violence = 1/Information_effect
Total_workforce = Farmers+Soldiers+Bandits
Unconscious_normal_violence = SMTH3(((1-External_ref_wt)*Perceived_violence+
External_ref_wt*External_reference),Time_to_form_normal_perception)
Unconscious_sensitivity_to_violence = Perceived_violence/
Unconscious_normal_violence
Violence_per_threat = 1
18
Political economy
Bandits(t) = Bandits(t - dt) + (Bandit_recruitment_and_attrition + Bandit_infusion) * dt
INIT Bandits = Initial_population_of_bandits
INFLOWS:
Bandit_recruitment_and_attrition = ((1/init(Farmers))*(Farmers* (if
SW_for_psych_influence=1 then Farmer_urge_to_change else 1) /((if
Sw_for_economic_influences=1 then Farmer_relative_income else 1)*State_control) ))-
((1/init(Bandits) )*(Bandits*(if SW_for_psych_influence=1 then Bandit_urge_to_change
else 1)*(if Sw_for_economic_influences=1 then Farmer_relative_income else
1)*State_control))
Bandit_infusion = P3
Farmers(t) = Farmers(t - dt) + (Farmer_infusion - Bandit_recruitment_and_attrition -
Soldier_recruitment_and_attrition) * dt
INIT Farmers = Initial_population_of_farmers
INFLOWS:
Farmer_infusion = P1
OUTFLOWS:
Bandit_recruitment_and_attrition = ((1/init(Farmers))*(Farmers* (if
SW_for_psych_influence=1 then Farmer_urge_to_change else 1)/((if
Sw_for_economic_influences=1 then Farmer_relative_income else 1)*State_control) ))-
((1/init(Bandits) )*(Bandits*(if SW_for_psych_influence=1 then Bandit_urge_to_change
else 1)*(if Sw_for_economic_influences=1 then Farmer_relative_income else
1)*State_control))
Soldier_recruitment_and_attrition = ((1/init(Farmers))*Farmers*(if
SW_soldier_prestige=1 then Farmer_urge_to_change else
1)*(1/(Soldiers/Desired_number_of_soldiers))*(if SW_for_collusion=1 then
1/Soldier_relative_income else 1))-((1/init(Soldiers))*Soldiers* (if
SW_soldier_prestige=1 then Soldier_urge_to_change else 1)
*(Soldiers/Desired_number_of_soldiers)* (if SW_for_collusion=1 then
Soldier_relative_income else 1))
Perceived_disposable_income_per_bandit(t) =
Perceived_disposable_income_per_bandit(t - dt) +
(Chng_in_disposable_income_per_bandit) * dt
INIT Perceived_disposable_income_per_bandit = 1
INFLOWS:
Chng_in_disposable_income_per_bandit = (Disposable_income_per_bandit-
Perceived_disposable_income_per_bandit)/2
Perceived_disposable_income_per_farmer(t) =
Perceived_disposable_income_per_farmer(t - dt) +
(Chng_in_disposable_income_per_farmer) * dt
INIT Perceived_disposable_income_per_farmer = 1
INFLOWS:
Chng_in_disposable_income_per_farmer = (Disposable_income__per_farmer-
Perceived_disposable_income_per_farmer)/2
19
Perceived_disposable_income_per_soldier(t) =
Perceived_disposable_income_per_soldier(t - dt) +
(Chng_in_disposable_income_per_soldier) * dt
INIT Perceived_disposable_income_per_soldier = 1
INFLOWS:
Chng_in_disposable_income_per_soldier = (Disposable_income_per_soldier-
Perceived_disposable_income_per_soldier)/2
Soldiers(t) = Soldiers(t - dt) + (Soldier_infusion + Soldier_recruitment_and_attrition) *
dt
INIT Soldiers = Initial_population_of_soldiers
INFLOWS:
Soldier_infusion = P2
Soldier_recruitment_and_attrition = ((1/init(Farmers))*Farmers*(if
SW_soldier_prestige=1 then Farmer_urge_to_change else
1)*(1/(Soldiers/Desired_number_of_soldiers))*(if SW_for_collusion=1 then
1/Soldier_relative_income else 1))-((1/init(Soldiers))*Soldiers* (if
SW_soldier_prestige=1 then Soldier_urge_to_change else 1)
*(Soldiers/Desired_number_of_soldiers)* (if SW_for_collusion=1 then
Soldier_relative_income else 1))
Bandit_appropiation = Loot_per_bandit*Bandits
Bandit_disposable_income = (Bandit_appropiation+ Nonlegit_produce_by_bandits)+
(if SW_for_help_bandits=1 then Help_bandits else 0)
Bandit_disposable_income_net = if SW_for_collusion=1 then
Bandit_disposable_income*(1- Extortion) /(if SW_for_limiting_collusion=1 then
State_control else 1) else Bandit_disposable_income
Cost_per_soldier = P8
Desired_number_of_soldiers = Threat_to_society*(Tax_collection/ Cost_per_soldier)
Disposable_income_per_bandit = Bandit_disposable_income_net/Bandits
Disposable_income_per_farmer = ({100/95}C1)*(Farmer_disposable_income/
Farmers)
Disposable_income_per_soldier = ({10/15}C2)*(Tax_collection/Soldiers)
Economic_Health = ({10/120}C3)*(Producer_of_farmers/ Bandit_disposable_income)
Economic_well_being_of_a_farmer = Perceived_disposable_income_per_farmer/
Normal_farmer_income
Extortion = 0.2
Farmer_disposable_income = (Producer_of_farmers - Tax_collection -
Bandit_disposable_income_net)+(if SW_for_help_farmers=1 then Help_farmers else 0)
Farmer_relative_income = Perceived_disposable_income_per_farmer/
Perceived_disposable_income_per_bandit
Freedoms_Health = ((init(Soldiers)+init(Bandits) )/init(Farmers))*
(Farmers/(Soldiers+Bandits))
Labor_elasticity = 1-Land_elasticity
Land = PS
Land_elasticity = 0.7
Loot_per_bandit = (Economic_well_being_of_a_farmer*Typical_loot_per_bandit)/ (if
SW_for_limiting_loot=1 then State_control else 1)
20
Nonlegit_produce_by_bandits = Bandits*Productivity_of_bandits
Normal_farmer_income = 1
Producer_of_farmers = Productivity_of_farmer*(Land“Land_elasticity)*
(Farmers*Labor_elasticity)
Productivity_of_bandits = P7
Productivity_of_ farmer = P4
Soldier_collusion_income = Bandit_disposable_income-Bandit_disposable_income_net
Soldier_relative_income = Perceived_disposable_income_per_soldier/
Perceived_disposable_income_per_bandit
State_control = ((init(Farmers)+init(Bandits) )/init(Soldiers))*Soldiers/
(Farmers+Bandits)
SW_for_collusion = 0
Sw_for_economic_influences = 1
SW_for_governance = 0
SW_for_help_bandits = 0
SW_for_help_farmers = 0
SW_for_limiting_collusion = 0
SW_for_limiting_loot = 0
SW_for_psych_influence = 1
SW_soldier_prestige = 0
Tax_collection = (Tax_need*Economic_well_being_of_a_farmer+
Soldier_collusion_income)+ (if SW_for_governance=1 then Help_soldiers else 0)
Tax_need = Soldiers*Cost_per_soldier
Threat_to_society = ((init(Farmers)+init(Soldiers)) /init(Bandits) )*Bandits/
(Farmers+Soldiers)
Typical_loot_per_bandit = P6
21
Steady state
Bandit_disposable_income_steady_state = init(Bandits)*
(Typical_loot_per_bandit_initial+ Productivity_of_bandits_initial)
C1 = init(Farmers) /(Producer_of_farmers_steady_state-Tax_collection_steady_state-
Bandit_disposable_income_steady_state) {100/95}
C2 = (init(Soldiers) /Tax_collection_steady_state){10/15}
C3 = Bandit_disposable_income_steady_state/Producer_of_farmers_steady_state
{10/120}
Cost_per_soldier_initial = 1.5
External_assistance_to_bandits = 0.2
External_assistance_to_farmers = 0.2
External_assistance_to_soldiers = 0.2
Help_bandits =
Bandit_disposable_income_steady_state*External_assistance_to_bandits
Help_farmers = (Producer_of_farmers_steady_state-Tax_need_steady_state-
Bandit_disposable_income_steady_state)*External_assistance_to_farmers
Help_soldiers = External_assistance_to_soldiers*Tax_need_steady_state
Land_initial = 100
Producer_of_farmers_steady_state = Productivity_of_Farmers_initial*
(Land_initial’ Land_elasticity)*(init(Farmers)*Labor_elasticity)
Productivity_of_bandits_initial = 0.5
Productivity_of_Farmers_initial = 1.2
Tax_collection_steady_state = init(Soldiers)*Cost_per_soldier_initial
Tax_need_steady_state = init(Soldiers)*Cost_per_soldier_initial
Typical_loot_per_bandit_initial = 0.5
22
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Author and collaborators.
é
e
ISINAPSYS
[ Organizacion que Aprende |°
BAA PBA
Pedro D. AlmaguerN. Ramiro Ll. AlmaguerN. Pedro D. Almaguer P. ce E. Navarro V. Ruth R. Almaguer N.
Collaborator Modeling Author Design
Figure 12: Author and collaborators.
24
achieve profitability, the answer is likely no. Too many hazards could occur over that period
of time that would cause the ESCO to fail. If adequate management strategies are followed
and the referenced government policies are in place, however, then it would be a good deci-
sion to invest in an ESCO with attributes similar to the one modelled.
It must be emphasized that the simulation is not reality. The model developed here is meant to
be used as a learning tool; it is not predictive. Actual value creation will vary quite widely and
be sensitive to factors outside the scope of this business model. It is possible a real ESCO
could do better than the simulated one. Further, there are many factors that are not taken into
account in the model that could cause a real venture to underperform and to have a higher
probability of failure. The simulation model does, however, provide evidence that the combi-
nation of these government policies will significantly reduce the probability of failure of ES-
CO ventures, improve the value added on investments in these companies, and consequently,
increase the odds of success (and the widespread adoption of EPC) from what they would
have been otherwise.
6. Conclusion
The development of a commercially viable and competitive market for EPC services provided
by ESCOs is considered to be a necessary way to improve energy efficiency by 20% by 2020
and thus contribute to the 20% emission reduction target for greenhouse gases, as assumed by
the European Commission (EC 2007) and the Portuguese Government, for the European Un-
ion and Portugal, respectively.
Against the initial expectations in Portugal, however, only a few firms are engaged in EPC
ventures, and many of those firms reported several difficulties (Bartoldi et al., 2014). Thus,
the usefulness of our study is to aid in understanding the critical factors involved in an ESCO
startup and the dynamic interactions among those factors to help policy makers and managers
to define effective policies, strategies, and managerial processes. Our methodological ap-
proach was to build a SD model with mathematical equations relating parameters, which al-
lows computer simulations of different effects.
From the simulation of the base case, we concluded that the overall insignificant MVA and
the low probability of success of ESCO result from the long sales cycle, which stems from the
length of time required to accumulate EPC adopters in this emergent market and then build up
revenue.
Some simulations analysed the sensitivity of ESCO performance to firm policies. The results
showed that the MVA is highly sensitive to changes in the WOM contact rate parameter,
which suggests that effective management or policy interventions should consider initiatives
that could accelerate WOM among EPC adopters and prospects. Other simulations analysed
the sensitivity of ESCO performance to public policies that promote energy services. The re-
sults showed that low interest rates, energy audit subsidies, public procurement, and demon-
stration projects produce a positive EVA sooner than in the base case. Most importantly, the
venture’s probability of failure is reduced substantially. Unsurprisingly, the interest rate re-
duction policy produced the better improvement of the simulated firm in terms of risk expo-
sure.
Finally, the simulations show that a combination of WOM acceleration policy and public pol-
icies focused on low interest rate and demonstration projects significantly increase the MVA
and reduce the probability of failure of ESCO ventures, consequently increasing the potential
for widespread adoption of EPC within a virtuous industry cycle.
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