learning to believe in sunspots a number of authors have shown that competitive economies may possess sunspot equilibria that is rational expectations equilibria in which purely extrinsic uncertainty affects equilibrium prices and allocations 2 such results demonstrate that it does not require a lack of faith in the rationality of market participants to believe that competitive markets may be subject to purely speculative fluctuations driven solely by expectations 3 the mere existence of sunspot equilibria as solutions to a system of marketclearing conditions however might not be judged sufficient to indicate that competitive markets with rational participants could ever be subject to speculative instability the sunspot equilibria represent states of affairs in which agents act differently in the case of different realizations of the sunspot variable and it is rational for each agent to do so but it might be thought unlikely that the beliefs of all the participants in the market could ever come to be coordinated so as to bring about an equilibrium of that kind it is rational to believe that sunspots convey information about future states of affairs once the economy is in a sunspot equilibrium but why would rational agents ever begin to believe in such a thing so as to create the conditions under which the belief is rational in order to address such a question one must go beyond the mere statement of the conditions for equilibrium and discussion of what states of affairs satisfy them one must specify an explicit dynamic process according to which the beliefs of agents adjust when out of equilibrium any exercise of this kind is necessarily unsatisfactory as there is no univocal meaning for the postulate of rational behavior outside of an equilibrium it may well be the case that

minimum effort coordination games stochastic potential and logit equilibrium abstract this paper revisits the minimum effort coordination game with a continuum of pareto ranked nash equilibria noise is introduced via a logit probabilistic choice function the resulting logit equilibrium distribution of decisions is unique and maximizes a stochastic potential function in the limit as the noise vanishes the distribution converges to an outcome that is analogous to the risk dominant outcome for 2 2 games in accordance with experimental evidence logit equilibrium efforts decrease with increases in effort costs and the number of players even though these parameters do not affect the nash equilibria journal of economic literature classification numbers c72 c92

modelling long run scenarios this paper intends to draw overall lessons from a long term study on co2 emission in france a country with a rather low energy gdp ration and in which transition to non fossil based production of electricity has been achieved more generally it points out the importance of possible bifurcation effects and draws methodological and policy implications from these statements it discusses modelling approaches to the linkages between energy and the rest of economy and addresses the issue of difficulties in cost assessment analysis in the presence of several baseline scenarios finally it proposes a more encompassing definition of no regrets policies

behavioral demand effects when buyers anticipate inventory shortages abstract firms often worry about how buyers will react when there is an inventory shortage but the anticipation of facing a shortage may also impact buyer behavior in this paper we use a combination of theoretical modeling computational methods and laboratory experiments to understand buyers search behavior in markets where there is potential for either a costly or costless inventory shortage when inventory shortages are costly to buyers we find their equilibrium purchasing strategy generates a newsvendor problem among the firms in turn experimental data suggests buyer behavior can be explained by prospect theory better than by standard assumptions of fully rational expected utility maximizing agents indicating that potential inventory shortages generate loss aversion among buyers and there is systematic mis identification of the probability with which they will be able to procure an item using computational methods we find firms are able to extract more surplus from behavioral buyers via higher prices than would be predicted by the standard model on the other hand when inventory shortages are not costly to buyers the effect of behavioral biases on the part of buyers is not relevant but in this case there can be a benefit to reducing inventory via a reduction in price competition

war of attrition evidence from a laboratory experiment on market exit i introduction young industries often undergo a process of shakeout gort and klepper 1982 and klepper 1996 attracting excess firms and gradually shedding them over time more mature industries are likewise often forced to contract in the face of recession or product specific negative demand shocks when an overcrowded industry is forced to shrink which firms exit and which ones survive the conventional answer in economics is that overcrowded industries tend to shed inefficient firms and retain efficient ones we might call this survival of the most efficient a process analogous to natural selection that can adaptively improve the efficiency of industries over time nelson and winter 1982 fudenberg and tirole 1986 model firms exit decisions in overcrowded duopoly markets as wars of attrition and show that the intuition of survival of the most efficient has merit even if firms have little information regarding their costs relative to their competitors however the equilibrium of their game is complex involving a solution to a system of differential equations since neither fortune 500 chief executive officers in the naturally occurring markets nor undergraduate participants in laboratory markets deliberately solve differential equations when deciding whether or not to exit a declining market it is an open question as to how well fudenberg and tirole s rational reconstruction of the exit decision corresponds to the facts of how people make such decisions we report the results of a laboratory experiment designed to answer this question nearly 200 subjects in 16 sessions participated in a total of 3 800 wars of attrition based on fudenberg and tirole s model at the beginning of each period subjects were randomly paired and given a private cost draw that usually induced negative net per second payoffs in a shared market and positive net payoffs per second in monopoly subjects then decided in real time whether and when to exit the market never to return monotonic equilibrium strategy functions predict higher cost inefficient participant exit at an earlier time than their lower cost competitor that is the relatively efficient competitor survives in the market we find that fudenberg and tirole s model organizes our data surprisingly well especially considering its complexity we observe exit by the higher cost firm in 76 of cases when differences between the costs faced by firms are substantial the rate of efficient exit rises to nearly 100 the data on exit times are likewise quite close to the point predictions particularly in the crucial higher portion of the cost distribution that generally governs exit times the median deviation from equilibrium exit times falls to zero by the end and on average subjects earn payouts identical to those predicted in equilibrium our design permits tests of two other conjectures in fudenberg and tirole first our data supports fudenberg and tirole s core comparative static prediction that a decrease in the ex ante likelihood of actually being in a war of attrition leads to an increase in the speed of exit 1 second half of our sessions use costs framed as fixed costs suffered while in the market and half use costs framed as opportunity costs earned by exiting the market there is no evidence that this treatment variable affects exit behavior this isomorphism between gains and losses predicted by standard theory stands in stark contrast to evidence from previous individual decision making experiments suggesting asymmetries in how people react to potential losses and potential gains although wars of attrition have an important place in the game theoretic literature there are surprisingly few experimental studies directly relating to them 2 3 bilodeau childs and mestelman 2004 study a three player full information war of attrition framed as a volunteer game and report widespread failure of equilibrium predictions the predicted volunteer in a subgame perfect nash equilibrium only volunteers 41 of the time

conspicuous consumption and sophisticated thinking consumers purchase conspicuous goods to satisfy not only material needs but also social needs such as prestige in an attempt to meet these social needs producers of conspicuous goods like cars perfumes and watches highlight the exclusivity of their products in this paper we propose a monopoly model of conspicuous consumption using the rational expectations framework and then examine how purchase decisions are affected by the desire for exclusivity and conformity we show that snobs can have an upward sloping demand curve but only in the presence of consumers who are weakly followers laboratory tests lend support for this model prediction and for the rational expectations framework the experimental results suggest that subjects used some degree of sophisticated thinking to arrive at their first period decisions their behavior in the subsequent trials however can be adequately captured by a purely adaptive learning mechanism we discuss the implications of consumer learning for optimal dynamic pricing policy by a monopolist

after the paris agreement measuring the global decarbonization wedges from national energy scenarios the new bottom up approach of the paris agreement calls for a better understanding of the domestic dimension of development pathways and of the implications for global emissions trajectory to this end it is of strategic importance to provide a common framework that makes it possible to identify the key decarbonization wedges at the national level and to highlight the potential benefits of international cooperation the article proposes an advanced index decomposition analysis methodology based on sectoral energy service indicators and on a specific decomposition in the power sector for quantifying the contribution of different mitigation strategies it is applied to national deep decarbonization pathways elaborated in the deep decarbonization pathway project ddpp by the sixteen largest ghg emitting countries in a global perspective the results reveal the key role of energy efficiency and decarbonization of energy carriers in the industry sector deployment of renewables in the power sector and to a lesser extent coal gas substitution and efficiency and energy decarbonization in the transport sector the analysis also calls for a deeper understanding of the role a reduction in energy service demand can play in mitigation scenarios and of the respective contribution for industry of energy efficiency and structural change

an experimental study of truth telling in a sender receiver game a recent experimental study of cai and wang 2005 on strategic information transmission reveals that subjects tend to transmit more information than predicted by the standard equilibrium analysis to evidence that this overcommunication phenomenon can be explained in terms of a tension between normative social behavior and incentives for lying we show in a simple sender receiver game that subjects incurring in costs to punish liars tell the truth more often than predicted by the logit agent quantal response equilibria whereas subjects that do not punish liars after receiving a deceptive message play on the aggregate equilibrium strategies thus we can partition the subject pool into two groups one group of subjects with preferences for truth telling and one taking into account only material incentives

on the existence of equilibrium points in a class of asymmetric market entry games sufficient conditions for the existence of equilibria in pure strategies in market entry games are provided these conditions are i a form of payoff monotonicity and ii acyclicity of a particular dominance relation defined on the set of players they do not exclude asymmetry of the players the result is applicable to asymmetric oligopoly models with technological nonconvexities such as fixed costs

bubbles crashes and endogenous uncertainty in linked asset and product markets in laboratory asset markets subjects trade shares of a firm whose profits in a linked product market determine dividends treatments vary whether dividend information is revealed once per period or in real time and whether the firm is controlled by a profit maximizing robot or human subject the latter variation induces uncertainty about firm behavior bridging the gap between laboratory and field markets our data replicate well known features of laboratory asset markets e g bubbles suggesting these are robust to a market based dividend process compared to a sample of previous experiments both real time information revelation and endogenous uncertainty impede the bubble mitigating impact of experience

leadership by example in the weak link game we investigate the effects of leadership in a four player weak link game a weak link game is a coordination game with multiple pareto ranked nash equilibria because the more efficient equilibria involve a degree of strategic uncertainty groups typically find it difficult to coordinate on more efficient equilibria we wanted to see whether leadership by example in the form of one player acting publicly before the rest of the group could help groups do better our results suggest that leadership can increase efficiency but is far from being a guarantee of success specifically in a significant number of groups we observed successful leadership and increased efficiency but in most groups efficiency was low despite the efforts of leaders we did not find any difference between voluntary leaders and leaders that are randomly assigned

technology choice and cdm projects in china case study of a small steel company in shandong province abstract corporate motives and strategies of both investing and hosting country affect the outcomes of a clean development mechanism cdm project who introduces what technology to whom and result in large differences in economic viability and the co 2 emission reductions this is particularly true for steel industry in which steel making consists of many detailed and complex processes a given strategy could produce cumulative effects of the individual technologies used leading to large energy savings overall the objective of this study is to demonstrate some analytical methods that can be used to quantitatively evaluate the impacts of technology selection on the profit performance of cdm projects specifically in this study we analyze a cdm project to introduce energy saving technology from japan to a small steel manufacturer in china s shandong province and conduct a simulation of the quantitative relationships between various technology options and profitability based on these results we examine the environmental and economic significance of technology selection for cdm projects to take this further we then reconsider the profitability of a project as typical fdi activity i e without the cdm and by comparing this outcome with the cdm case we clarify the significance and potential of the cdm

greenhouse gas models and abatement costs for developing nations a critical assessment numerous ghg policy studies are reported for developing countries most use demand driven bottom up models reported abatement costs vary significantly across countries for identical options this can cause policy conflicts such as for gef financing schemes top down macroeconomic studies for developing countries are scant their model structure assumes dynamics akin to developed market economies transitional dynamics of developing countries such as underdeveloped markets and informal activities are inadequately modelled policy analysis is thus restricted to market oriented alternatives while more relevant bifurcation scenarios along alternate development patterns are ignored alterations in model structure and policy analysis are proposed to represent the realities of developing nations

climate policies in a second best world a case study on india abstract the aim of this article is to analyze the potential for synergies between climate policies and development in a case study on india focusing on the power sector sub optimalities to do so we use imaclim r a dynamic recursive energy economy model that represents a second best world with market imperfections and short run adjustments constraints along a long term growth path the analysis suggests i global carbon pricing induces prohibitive macroeconomic costs for the indian economy even in the case of significant financial transfers associated with a global cap and trade system and a contraction and convergence in 2100 allocation scheme and ii the most cost efficient climate policies are not uniform carbon pricing only the implementation of domestic policies suited to the national context for instance targeting sub optimalities in the power sector for india allows reducing significantly the macroeconomic costs induced by international mitigation policies

preference anomalies preference elicitation and the discovered preference hypothesis there is wide ranging evidence much of it deriving from economics experiments of anomalies in behaviour that challenge standard preference theories this paper explores the implications of these anomalies for preference elicitation methods because methods that are used to inform public policy such as contingent valuation are based on standard preference theories their validity may be called into question by the anomaly data however on a new interpretation these anomalies do not contradict standard theory but are errors in stated preference that can be expected to disappear as people become more experienced in relevant decision environments we explore the evidence for this interpretation and what implications follow for preference elicitation methodology

social connectedness improves co ordination on individually costly efficient outcomes we study the impact of social ties on behavior in two types of asymmetric coordination games social ties are varied by making players interact with partners from different in groups fellow members of their own sports team members of their sports club students of their university subjective social ties are further measured by direct questionnaires we find that smaller and more salient in groups lead to significantly more group beneficial choices the same effect is observed for players that report high values of their subjective social ties we discuss the implication of these results for theories assuming that socially tied individuals follow some group beneficial reasoning

equilibrium and reinforcement learning in private information games an experimental study abstract this paper examines the abilities of standard game theoretic solution concepts static nash equilibrium and a simple model of individual learning to describe subject behavior in an experiment involving private information games with mixed strategy nash equilibrium outcomes the experimental data are compared in several ways with the predictions of static nash equilibrium and the quite different predictions of the learning model which is based on the models of roth and erev 1995 games and economic behavior special issue nobel symposium vol 8 pp 164 212 nash equilibrium does not adequately describe subject behavior whereas the learning model performs well in describing aspects of the evolution in behavior over time

progress in behavioral game theory i s game theory meant to describe actual choices by people and institutions or not it is remarkable how much game theory has been done while largely ignoring this question the seminal book by von neumann and morgenstern the theory of games and economic behavior was clearly about how rational players would play against others they knew were rational in more recent work game theorists are not always explicit about what they aim to describe or advise at one extreme highly mathematical analyses have proposed rationality requirements that people and firms are probably not smart enough to satisfy in everyday decisions at the other extreme adaptive and evolutionary approaches use very simple modelsmostly developed to describe nonhuman animals in which players may not realize they are playing a game at all when game theory does aim to describe behavior it often proceeds with a disturbingly low ratio of careful observation to theorizing this paper describes an approach called behavioral game theory which aims to describe actual behavior is driven by empirical observation mostly experiments and charts a middle course between over rational equilibrium analyses and under rational adaptive analyses the recipe for behavioral game theory i will describe has three steps start with a game or naturally occurring situation in which standard game theory makes a bold prediction based on one or two crucial principles if behavior differs from interested readers familiar with game theory should read crawford 1997 whose approach is more eclectic than mine he concludes p 236 that most strategic behavior can be understood via a synthesis that combines elements from each of the leading theoretical frameworks traditional game theory evolutionary game theory and adaptive learning with a modicum of empirical information about behavior behavioral game theory adds psychological interpretations to this synthesis

transaction costs communication and spatial coordination in payment for ecosystem services schemes agricultural producer participation and spatial coordination of land use decisions are key components for enhancing the effective delivery of ecosystem services from private land however inducing participation in payment for ecosystem services schemes for coordinating land management choices is challenging from a policy design perspective owing to transaction costs associated with participation this paper employs a laboratory experiment to investigate the impact of such costs on participation and land use in the context of an agglomeration bonus ab scheme the ab creates a coordination game with multiple nash equilibria related to alternative spatially coordinated land use patterns the experiment varies transaction costs between two levels high and low which affects the risks and payoffs of coordinating on the different equilibria additionally an option to communicate is implemented between neighbors arranged on a local network to facilitate spatial coordination results indicate a significant difference in participation and performance under high and low transaction costs with lower uptake and performance when transaction costs are high these effects are however impacted by transaction costs faced in the past communication improves both ab participation rates and performance with the effect being greater for participants facing high transaction costs

strategies and evolution in the minority game a multi round strategy experiment abstract minority games are a stylized description of strategic situations with both coordination and competition these games are widely studied using either simulations or laboratory experiments simulations can show the dynamics of aggregate behavior but the results of such simulations depend on the type of strategies used so far experiments provided little guidance on the type of strategies people use because the set of possible strategies is very large we therefore use a multi round strategy method experiment to directly elicit people s strategies between rounds participants can adjust their strategy and test the performance of possible new strategies against strategies from the previous round strategies gathered in the experiment are subjected to an evolutionary competition the strategies people use are very heterogeneous although aggregate outcomes resemble the symmetric nash equilibrium the strategies that survive evolutionary competition achieve much higher levels of coordination

an evolutionary interpretation of van huyck battalio and beil s experimental results on coordination this paper proposes an adaptive interpretation of the results of some recent experiments with repeated tacit coordination games these experiments revealed several behavioral regularities including a systematic discrimination between strict nash equilibria in certain games that appear to be driven by strategic uncertainty and are not explained by traditional equilibrium refinements the observed patterns of discrimination correspond closely to predictions based on maynard smith s notion of evolutionary stability an adaptive model in the spirit of the evolutionary dynamics but recognizing the important differences between learning in human populations and evolution promises to yield a unified explanation of the results journal of economic literature classification numbers 020 026

learning a mixed strategy equilibrium in the laboratory abstract this paper examines a laboratory game with no pure strategy equilibrium and one mixed strategy equilibrium a simple adaptive model describes players strategy adjustments reasonably well as long as predictable adjustments are not easily exploited by others consistent with theory these adjustments do not lead players to equilibrium when predictable adjustments are made more easily exploited players deviate from adaptive adjustments in order to avoid exploitation and exploit others these deviations cause players to converge more strongly to equilibrium these results confirm both the predictive power of adaptive models in some settings and the instability of mixed strategy equilibria

a quantal response equilibrium model of order statistic games abstract this paper applies mckelvey and palfrey s games econ behav 10 1995 6 notion of quantal response equilibrium to a class of order statistic coordination games closely related to those studied by van huyck et al am econ rev 80 1990 234 quart j econ 106 1991 885 and van huyck et al evidence on learning in coordination games manuscript texas a m university 1996 and those recently analyzed by anderson et al games econ behav 34 2001 177 with quadratic effort costs the limiting qre as the noise goes to zero in their games is the most efficient equilibrium this result contrasts with anderson et al s conclusion for order statistic games with linear effort costs and allows a fuller assessment of the qre s success in describing the limiting outcomes in van huyck et al s experiments

nonmonetary sanctions and rewards in an experimental coordination game abstract a growing body of experimental research documents that nonmonetary sanctions and rewards may be important instruments for enforcing efficient behavior this study contributes to this literature by reporting results from a laboratory experiment the experiment is designed to test whether nonmonetary sanctions or rewards alone can yield the optimal level of efficiency in a game with pareto ranked equilibria performance based disapproval and approval ratings assigned by group members are used as proxies for nonmonetary sanction and reward respectively although these ratings are costless and payoff neutral results show that expression of disapproval facilitates coordination on the most efficient equilibrium in contrast statement of approval induces subjects to converge towards the most inefficient outcome we conclude that induced approval and disapproval ratings have asymmetric behavioral effects on coordination

modelling energy systems for developing countries abstract developing countries energy use is rapidly increasing which affects global climate change and global and regional energy settings energy models are helpful for exploring the future of developing and industrialised countries however energy systems of developing countries differ from those of industrialised countries which has consequences for energy modelling new requirements need to be met by present day energy models to adequately explore the future of developing countries energy systems this paper aims to assess if the main characteristics of developing countries are adequately incorporated in present day energy models we first discuss these main characteristics focusing particularly on developing asia and then present a model comparison of 12 selected energy models to test their suitability for developing countries we conclude that many models are biased towards industrialised countries neglecting main characteristics of developing countries e g the informal economy supply shortages poor performance of the power sector structural economic change electrification traditional bio fuels urban rural divide to more adequately address the energy systems of developing countries energy models have to be adjusted and new models have to be built we therefore indicate how to improve energy models for increasing their suitability for developing countries and give advice on modelling techniques and data requirements

indicative bidding an experimental analysis indicative bidding is a practice commonly used in sales of complex and very expensive assets theoretical analysis shows that efficient entry is not guaranteed under indicative bidding since there is no equilibrium in which more qualified bidders are more likely to be selected for the final sale furthermore there exist alternative bid procedures that in theory at least guarantee 100 efficiency and higher revenue for the seller we employ experiments to compare actual performance between indicative bidding and one of these alternative procedures the data shows that indicative bidding performs as well as the alternative procedure in terms of entry efficiency while having other characteristics that favor it over the alternative procedure our results provide an explanation for the widespread use of indicative bidding despite the potential problem identified in the equilibrium analysis

after the big bang obstacles to the emergence of the rule of law in post communist societies when russia launched mass privatization it was widely believed that it would create a powerful constituency for the rule of law that didn t happen we present a dynamic equilibrium model of the political demand for the rule of law and show that beneficiaries of mass privatization may fail to demand the rule of law even if it is the pareto efficient rule of the game the reason is that uncertainty about the legal regime can lead to asset stripping and stripping can give agents an interest in prolonging the absence of the rule of law this abstract was borrowed from another version of this item

competitor orientation and the evolution of business markets competitor orientation i e the focus on beating the competition rather than maximizing profits seems to thrive in business situations despite being by definition suboptimal for profit maximizing firms our research explains how a competitor orientation can persist and even thrive in equilibrium in markets that reward only profits we apply evolutionary game theory to business markets where reputation matters we use three games that represent classic interactions in business marketing chicken to illustrate competition for product adoption the battle of the sexes channel negotiations and the prisoners dilemma pricing battles initial populations are assumed to have both profit maximizing managers and competitor oriented managers i e those who gain additional utility from beating others we demonstrate that a competitor orientation can survive in equilibrium despite selection that is based solely on profits using chicken we show that a competitor orientation thrives and can even overrun the population we use the battle of the sexes to show that a competitor orientation will overrun one population in a two sided negotiation e g all retailers in a retailer manufacturer dyad last using the prisoners dilemma we show that competitor orientation is not selected against we conclude that evolutionary profit driven selection pressures cannot be assumed to eliminate nonprofit maximizing behavior even when selection is based purely on profitability

separating the hawks from the doves evidence from continuous time laboratory games human players in our laboratory experiment received ow payos over 120 seconds each period from a standard hawk dove bimatrix game played in continuous time play converged closely to the symmetric mixed nash equilibrium under a one population matching protocol when the same players were matched in a two population protocol with the same bimatrix they showed clear movement towards an asymmetric and very inequitable pure nash equilibrium of the game these ndings support distinctive predictions of evolutionary game theory

coordination and learning behavior in large groups with asymmetric players we study a class of large group noncooperative iterated market entry games with complete information binary choices and asymmetric players in which the incentive of each player to enter the market decreases the larger the number of entrants experimental results from two different studies show remarkable coordination on the aggregate level which is accounted for successfully by the nash equilibrium solution the equilibrium solution is less successful in accounting for the differences among types of players with differential entry costs or differences among players of the same type rather the behavioral patterns observed on the aggregate level are accounted for by a reinforcement based learning model postulating an initial distribution of individual cutoff points these cutoff points are assumed to change over time at a decreasing rate as a joint function of the decision and outcome of the preceding period journal of economic literature classification numbers c7 d5 d8 2002 elsevier science usa

the effect of piracy on the market penetration of subscription software software piracy is not necessarily harmful to a software firm seeking to launch a new product when strategically managed through the use of price and protection measures piracy establishes the initial adopters of the software who in turn influence other users to buy the product we examine the role of piracy in affecting the adoption of subscription software products we present an individual level model in an adaptive population setting intended to determine the price protection mix that maximizes the discounted profit stream over the life of the software an extension for nonsubscription software is also discussed

an experimental investigation of entry cost effects in sealed bid dollar auctions abstract we experimentally study the effect of entry costs on bidding and entry behavior in common value auctions we find with entry costs players bid lower in first price and higher in second price auctions compared to no entry fee auctions

information diversity and market behavior the paper addresses two major issues raised by information diversity in a speculative market first we analyze what property of an investor s information leads to an expected speculative profit and show that independence is more important than accuracy second we consider whether the market price must become fully efficient in the sense that every investor s information is accurately discounted when traders use it rationally as an information source we prove that for any information structure there is a unique equilibrium weighting of investor beliefs at which the price is fully efficient and also every trader s expected profit is zero except for special structures however this equilibrium need not be attained in finite time much of modern capital market theory depends heavily on the assumption that investors know the expected values variances and covariances of asset returns although the assumption of homogeneous expectations is a conventional one and necessary for many theoretical results it is not one which can be offered with much confidence real world investors have access to differing information and may also disagree on the correct interpretation of widely held information when asset returns are assumed to be governed by a known probability distribution many features of trading in real world markets are eliminated from consideration there is no role for information gathering and no way for an investor to profit from having superior information indeed this term has no real meaning since all relevant information is contained in the known returns distribution speculative trading is also hard to explain without divergence of opinion a speculator who thought the market price impounded all available information would never trade against it with heterogeneous information we lose some of the neat results of standard capital market theory but new questions can be addressed about how information diversity among investors affects the markets in which they participate one issue concerns the impact of informational differences on investor profits investors who are better informed than others or are better able to evaluate widely held information should be able to earn higher returns all effort devoted to security analysis and market research depends on the belief that this is so but what makes one investor s information superior to another s beyond the circular observation that those investors with consistent profits must be better informed than those with losses do investors with inferior information however measured continually lose money until they are squeezed out of the market or can an

information diversity and market behavior a reply professor minassian has raised technical points regarding my paper which for the most part seem to be well founded though not crucial to the basic results in this reply my objective will be to discuss what these mean in the context of the model and to offer slightly revised statements of theorems 1 and 3 to eliminate the problems equation 1 which duplicates equation 9 in 1 gives the following expression for the expected profits earned by trader i from trading in a pure speculative market

coordination in the presence of asset markets markets aggregate widely dispersed information and direct resources to where they produce the greatest value friedrich a hayek 1945 adam smith 1776 these dual roles of informational and allocative efficiency help explain why asset markets are often used to guide economic activity such as production and investment many economic contexts involving production and investment are characterized by multiple equilibria john bryant 1983 jack hirshleifer 1983 russell w cooper 1999 colin camerer and marc knez 1997 jordi brandts and david j cooper 2006 when asset markets are linked to such contexts it is important to understand what role they play in aiding coordination and selecting equilibria if asset markets obtain both informational and allocative efficiency in a multiple equilibrium con text then they should coordinate the beliefs of economic agents and guide behavior to an efficient equilibrium indeed some evidence suggests that one sided auction markets may facilitate efficient coordination in an environment with multiple equi libria john b van huyck raymond c battalio and richard o beil 1993 vincent crawford and bruno broseta 1998 however the broader question of whether asset markets generally lead to efficient coordination in environments with multiple equi libria remains an open question in this paper we explore experimentally the influence of two sided futures asset markets on behavior and outcomes in an economic activity characterized by multi plicity of equilibria we use laboratory experiments where we can control impor tant features of both the market and the underlying activity and focus on situations where the outcome of the economic activity is sensitive to the behavior of small numbers of agents the economic activity in our setting consists of a coordination game with pareto ranked equilibria in which the payoff to each player is a function of her own choice or input and group output which is some order statistic such as the minimum of all players input choices see van huyck battalio and beil 1990 van huyck battalio and beil 1991 crawford 1995 players all do better if they coordinate on the highest output efficient equilibrium which is pareto optimal but they also prefer to select a lower input if they believe others will do so coordination games of this kind have been applied widely to model economic activity from the relationship between beliefs and output in macroeconomic models cooper 1999 to public good provision hirshleifer 1983 to firm production

an experimental study of uncertainty in coordination games global games and poisson games have been proposed to address equilibrium indeterminacy in common knowledge coordination games where fundamentals are commonly known by all players global games assume that agents face idiosyncratic uncertainty about economic fundamentals whereas poisson games model the number of actual players as a poisson random variable to capture population uncertainty in large games the present study investigates in a controlled setup using as controls common knowledge coordination games whether idiosyncratic uncertainty about economic fundamentals or uncertainty about the number of actual players may influence subjects behavior our findings suggest that uncertainty about the number of actual players has a more significant impact on subjects behavior than idiosyncratic uncertainty about economic fundamentals furthermore subjects behavior under poisson population size uncertainty is consistent with the theoretical prediction of poisson coordination games

modelling energy demand of developing countries are the specific features adequately captured abstract this paper critically reviews existing energy demand forecasting methodologies highlighting the methodological diversities and developments over the past four decades in order to investigate whether the existing energy demand models are appropriate for capturing the specific features of developing countries the study finds that two types of approaches econometric and end use accounting are commonly used in the existing energy demand models although energy demand models have greatly evolved since the early seventies key issues such as the poor rich and urban rural divides traditional energy resources and differentiation between commercial and non commercial energy commodities are often poorly reflected in these models while the end use energy accounting models with detailed sectoral representations produce more realistic projections as compared to the econometric models they still suffer from huge data deficiencies especially in developing countries development and maintenance of more detailed energy databases further development of models to better reflect developing country context and institutionalizing the modelling capacity in developing countries are the key requirements for energy demand modelling to deliver richer and more reliable input to policy formulation in developing countries

naked exclusion an experimental study of contracts with externalities this paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts we use the strategic environment described by rasmusen ramseyer and wiley 1991 and segal and whinston 2000 where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent when discrimination is impossible the game resembles a stag hunt coordination game in which the buyers payoffs are endogenously chosen by the incumbent seller exclusion occurs when the buyers fail to coordinate on their preferred equilibrium two way non binding pre play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller when discrimination and communication are possible the exclusion rate rises divide and conquer strategies are observed more frequently when buyers can communicate with each other exclusion rates are significantly higher when the buyers payoffs are endogenously chosen rather than exogenously given finally secret offers are shown to decrease the incumbent s power to profitably exclude

modeling energy and development an evaluation of models and concepts most global energy models are developed by institutes from developed countries focusing primarily on issues that are important in industrialized countries evaluation of the results for asia of the ipcc sres models shows that broad concepts of energy and development the energy ladder and the environmental kuznets curve can be observed in the results of the models however improvements can be made in modeling the issues that underlie these concepts like traditional fuels electrification economic structural change income distribution and informal economies given the rapidly growing importance of energy trajectories of developing countries for global sustainability the challenge for the future is to develop energy models that include all these aspects of energy and development

evolutionary stability and nash equilibrium in finite populations with an application to price competition abstract schaffer schaffer m e 1988 evolutionarily stable strategies for a finite population and a variable contest size journal of theoretical biololgy 132 469 478 proposed a concept of evolutionary stability for finite population models that has interesting implications in economic models of evolutionary learning since it is related to perfectly competitive equilibrium the present paper explores the relation of this concept to nash equilibrium in particular classes of games including constant sum games games with weak payoff externalities and games where imitative decision rules are individually improving an illustration of the latter is provided in the context of bertrand oligopoly with homogeneous product which allows for a characterization of the set of evolutionarily stable prices

learning information and sorting in market entry games theory and evidence previous data from experiments on market entry games n player games where each player faces a choice between entering a market and staying out appear inconsistent with either mixed or pure nash equilibria here we show that in this class of game learning theory predicts sorting that is in the long run agents play a pure strategy equilibrium with some agents permanently in the market and some permanently out we conduct experiments with a larger number of repetitions than in previous work in order to test this prediction we find that when subjects are given minimal information only after close to 100 periods do subjects begin to approach equilibrium in contrast with full information subjects learn to play a pure strategy equilibrium relatively quickly however the information which permits rapid convergence revelation of the individual play of all opponents

green investment and coordination failure an investors perspective abstract to achieve the goal of keeping global warming well below 2 c private investors have to shift capital from brown to green infrastructures and technologies and provide additional green investment in this paper we present a game theoretic perspective on the challenge of triggering such investments the question of climate change mitigation is often related to the prisoner s dilemma a game with one nash equilibrium however the authors perceive investment for mitigation and adaptation as a coordination problem of selecting among multiple equilibria to illustrate this we model a non cooperative coordination game related to the stag hunt with a brown equilibrium with lower payoffs that can be achieved single handedly and a green equilibrium with higher payoffs that requires coordination as multiple experiments show in such games actors often fail to coordinate on a payoff dominant equilibrium due to uncertainty thus we discuss how uncertainty could be reduced along two options one that concerns a change in the payoff structure of the game and another that concerns subjective probabilities

conventions and local interaction structures experimental evidence we present a series of experimental coordination games with a payoff dominant and a risk dominant nash equilibrium we examine in how far local interaction structures have effects on players strategy choices our three major observations are the following first local interaction with open neighborhoods along a circle leads to less coordination on the payoff dominant equilibrium than interaction in closed neighborhoods see also keser ehrhart and berninghaus economics letters 1998 second when players are allocated around a circle the neighborhood size has in the long run no effect on the players strategy choices third with the same neighborhood size players allocated on a lattice tend less than players allocated around a circle to coordinate on the payoff dominant equilibrium this is true although the players are given exactly the same instructions

noisy equilibrium selection in coordination games abstract by perturbing symmetric coordination games a la bryant bryant j 1983 quarterly journal of economics 98 525 528 we derive unique solutions the noise proof equilibria our results agree with the experimental findings in van huyck et al van huyck j b r c battalio and r o beil 1990 american economic review 80 234 248 and have an interesting connection with the notion of potential we also briefly discuss median games

an experimental analysis of unanimity in public goods provision mechanisms the paper reports on an experimental investigation of four methods of allocating public goods the two basic processes studied are direct contribution and a public goods auction process both of these processes are studied with and without an additional unanimity feature the results suggest that the auction process outperforms direct contribution the effect of unanimity is to decrease the efficiency of both processes much of the paper is focused on an analysis of these results

burning money and pseudo first mover advantages an experimental study on forward induction abstract the mere potential for one player to burn money prior to play has been shown in theory to be an effective device to select this player s most preferred outcome e g in the battle of the sexes game j econ theory 48 1989 476 j econ theory 57 1992 36 in this study we assess the behavioral relevance of this theoretical claim it is shown that its validity depends on whether the game is played in extensive or normal form in extensive form games first movers benefit substantially from having the opportunity to burn money in advance the effect is much weaker in the normal form game however in two control treatments first movers who can select between two related games gain an advantage although standard forward induction arguments do not have any bite these results suggest that we need to make further theoretical advances to understand the role of physical timing and first mover advantages in games

modeling the psychology of consumer and firm behavior with behavioral economics abstract marketing is an applied science that tries to explain and influence how firms and consumers behave in markets marketing models are usually applications of standard economic theories which rely on strong assumptions of rationality of consumers and firms behavioral economics explores the implications of the limits of rationality with the goal of making economic theories more plausible by explaining and predicting behavior more accurately while maintaining formal power this article reviews six behavioral economics models that are useful to marketing three models generalize standard preference structures to allow for sensitivity to reference points and loss aversion social preferences toward outcomes of others and preference for instant gratification the other three models generalize the concept of game theoretic equilibrium allowing decision makers to make mistakes encounter limits on the depth of strategic thinking and equilibrate by learning from feedback the authors also discuss a sp

an explanation of anomalous behavior in models of political participation this paper characterizes behavior with noisy decision making for models of political interaction characterized by simultaneous binary decisions applications include voting participation games candidate entry the volunteer s dilemma and collective action problems with a contribution threshold a simple graphical device is used to derive comparative statics and other theoretical properties of a quantal response equilibrium and the resulting predictions are compared with nash equilibria that arise in the limiting case of no noise many anomalous data patterns in laboratory experiments based on these games can be explained in this manner

business culture and tax evasion why corruption and the unofficial economy can persist abstract this paper shows that business and tax inspection culture can create multiple equilibria in bad equilibria high cheating and corruption increases in penalties or auditing can have perverse impacts and increase cheating the source of the multiple equilibria is the externalities created by business and tax inspection cultures as tax evasion and corruption become more common they become more acceptable and their cost is lowered a third externality that between firms and inspectors is the source of the perverse effect more cheating by firms is good for bribe taking inspectors and more bribe taking inspectors are good for cheating firms

expert information and majority decisions this paper shows theoretically and experimentally that hearing expert opinions can be a double edged sword for collective decision making we present a majoritarian voting game of common interest where committee members receive not only private information but also expert information that is more accurate than private information and observed by all members in theory there are bayesian nash equilibria where the committee members voting strategy incorporates both types of information and access to expert information enhances the efficiency of the majority decision however there is also a class of potentially inefficient equilibria where a supermajority always follow expert information and the majority decision does not aggregate private information in the laboratory the majority decisions and the subjects voting behaviour were largely consistent with those in the class of inefficient equilibria we found a large efficiency loss due to t he presence of expert information especially when the committee size was large we suggest that it may be desirable for expert information to be revealed only to a subset of committee members

anarchy in the laboratory and the role of the state abstract a recent literature on the economics of conflict provides conditions under which groups of individuals divide up between producers and predators an anarchic equilibrium as well as conditions under which a government agent is empowered to make collective action choices that can completely deter predation we test these theoretical predictions in a laboratory experiment in the absence of a government agent groups of subjects choose actions consistent with the anarchic equilibrium the introduction of a government agent charged with maximizing the consumption of producers enables subjects to achieve nearly perfect coordination on the pareto superior equilibrium where all individuals choose to be producers

evolution and long run equilibria in coordination games with summary statistic payoff technologies abstract this note applies the evolutionary dynamic of kandori mailath and rob econometrica61 1993 29 65 to class coordination games that the entire population plays simultaneously in these games payoffs and best replies are determined by a symmary statistic of the population strategy profile as in crawford econometrica63 1995 103 144 a simple characterization of the set of long run equilibria analogous to the one given by kandori mailath and rob for random pairing is provided journal of economic literatureclassification number c79

evolution to equilibrium in an asymmetric oligopoly with differentiated goods abstract we present results on finite population evolutionarily stable strategies esss and stochastically stable states for a model of evolution with an imitative rule of strategy choice in an asymmetric oligopoly with differentiated goods and two groups of firms one group of low cost firms and one of high cost firms the firms play price setting and quantity setting oligopoly games under linear demand functions we will show that the stochastically stable state in a price setting oligopoly and that in a quantity setting oligopoly coincide

information diversity and market behavior a comment in figlewski 1 the author construct s a model of a purely speculative market in which speculation on price changes is the only motive for trading and the return for investors as a group is zero even though each trader possesses information which he believes will allow him personally to make a profit p 90 lines 8 12 1 this zero sum game of commodity speculation is played over several successive periods in each period information is released the market opens and a market clearing price is established by tatonnement so that investors know what the market price pm will be before they trade and thereby obtain additional information about other traders estimates of p the ultimate endof period commodity spot price they use this information to update their expectations and all trading by the ith investor is ultimately based on forecasts conditioned on both 4ji trader i s information set and pm p 91 paragraph 2 of course investor i believes he has information that pm does not accurately reflect which will allow him to earn a speculative profit trading against the market p 91 paragraph 3 figlewski presents four theorems in his paper the major result of his paper is theorem 1

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

evolution with changing mutation rates this article considers the robustness of long run equilibria when mutation rates are not assumed to be constant over time particular attention is paid to the case where mutation rates decline to zero in the limit it is found that if behavior is ergodic then it corresponds to the long run equilibrium for the game however conditions for ergodicity become increasingly restrictive as population size increases journal of economic literatureclassification number 72

coordination and local interaction experimental evidence abstract subjects repeatedly played a three player coordination game with a payoff dominant and a risk dominant equilibrium subjects interacting in fixed groups quickly coordinated on the payoff dominant equilibrium while those interacting with their neighbors around a circle eventually coordinated on the risk dominant equilibrium

global inspection games abstract in the tax evasion game a typical example of inspection game audits are costly and audit probabilities are determined by the tax agency based on the tax returns submitted by taxpayers we find that if taxpayers incomes are correlated e g when they are subject to a common shock the optimal audit probability for low declarations is an increasing function of the average declaration as the latter is an informative signal of the realized level of income since a taxpayer s optimal declaration is an increasing function of the probability of an audit the optimal auditing rule creates incentives for taxpayers to coordinate their declarations the resulting coordination game features multiplicity of equilibria and thus strategic uncertainty about the equilibrium that will be selected when we add a source of fundamental uncertainty about the type of agency taxpayers face the situation can be realistically modeled as a global game further and unlike the coordination game before it yields a unique and usually interior equilibrium which is consistent with empirical evidence and supported by the data collected in a computerized experiment the model can be applied to other inspection games of economic interest such as the regulation of industries and the allocation of welfare benefits among others

equilibrium play in large group market entry games coordination behavior is studied experimentally in a class of noncooperative market entry games featuring symmetric players complete information zero entry costs and several randomly presented values of the market capacity once the market capacity becomes publicly known each player must decide privately whether to enter the market and receive a payoff which increases linearly in the difference between the market capacity and the number of entrants or stay out payoffs for staying out are either positive giving rise to the domain of gains or negative giving rise to the domain of losses the major findings are substantial individual differences that do not diminish with practice aggregate behavior that is organized extremely well in both the domains of gains and losses by the nash equilibrium solution and variations in the population action strategies with repeated play of the stage game that are accounted for by a variant of an adaptive learning model due to roth and erev 1995

adaptive learning vs equilibrium refinements in an entry limit pricing game signalling models are studied using experiments and adaptive learning models in an entry limit pricing game even though high cost monopolists never play dominated strategies the easier it is for other players to recognise that these strategies are dominated the more likely play is to converge to the undominated separating equilibrium and the more rapidly limit pricing develops this is inconsistent with the equilibrium refinements literature including cho kreps intuitive criterion and pure bayesian adaptive learning models an augmented adaptive learning model in which some players recognise the existence of dominated strategies and their consequences predicts these outcomes

between group competition enhances cooperation in resource appropriation games abstract cooperation in public goods games increases in the presence of between group competition in this study we validate the effect of between group competition in a different social dilemma a resource appropriation game unlike the voluntary contributions setting group performance in this game increases with the exercise of a passive choice not appropriating units in an open access resource we conducted an incentivized experiment using 276 undergraduate students in which groups of four subjects played a resource appropriation game different groups within a session were ranked in each round according to the group s aggregate payoff this ranking determined a group performance multiplier which increased the payoffs in groups ranked above the median and decreased the payoffs in groups below the median the multipliers were small enough to keep the individual benefits from appropriation larger than the individual benefits from a higher payoff multiplier derived from an improvement in group ranking by not appropriating the resource unit we found that implementing this small group performance multiplier decreased the average appropriation by 31 this efficiency enhancing device generated a 19 percentage point increase in overall earnings in a given session

individual learning and social rationality abstract classical game theory assumes that players have a coherent model of the game in which they are engaged that they make optimum plans assuming that everyone else makes optimum plans and that all of this is common knowledge evolutionary game theory postulates instead that players have limited understanding of their environment only modest reasoning ability and no common knowledge surprisingly a fair amount of classical solution theory survives with this change of perspective we show how high rationality solutions can emerge in low rationality environments provided the evolutionary process has sufficient time to unfold

competitive bluffing an examination of a common practice and its relationship with performance bluffing a common and consequential form of competitive behavior has been comparably ignored in the management literature even though misleading one s rivals is suggested to be an advantageous skill in a multifaceted and highly competitive environment to address this deficiency and advance scholarship on competitive dynamics our study investigates the moral reasoning behind competitive bluffing and using a simulated market entry game examines the performance effects of bluffing findings suggest that decision makers views on the ethicality of bluffing competitors differ from their beliefs on the ethicality of misleading other organizational stakeholders analysis also indicates that decision makers who view competitor bluffing as more ethical less unethical are more willing to engage in competitive bluffing finally while bluffing is often thought to be an effective business practice results show that in the context of repeated interaction bluffing is not conducive to high levels of performance and in fact can have undesirable consequences

auctions as coordination devices this paper develops an economic argument relating auctions to high market prices at the core of the argument is the claim that market competition and bidding in an auction should be analyzed as part of one game where the pricing strategies in the market subgame depend on the bidding strategies during the auction i show that when there are two licenses for sale the only equilibrium in the overall game that is consistent with the logic of forward induction is the one where firms bid an amount almost equal to the profits of the cooperative market outcome and follow a cooperative pricing strategy in the market game resulting in high prices with three or more licenses the auction format co determines whether or not the forward induction argument works

genetic algorithms and inflationary economies abstract this paper studies overlapping generations economies in which agents use genetic algorithms to learn correct decision rules the results of computer simulations show that a genetic algorithm converges to the unique monetary steady state in case of a constant money supply policy and to the low inflation stationary equilibrium in case of a constant real deficit financed through seignorage features of the genetic algorithm adaptation are compared to the performance of other learning algorithms and to the behavior observed in experiments with human subjects in the same olg environments

coordination in oligopoly the private and social efficiency of two behavioral coordination mechanisms is examined in this paper in cournot oligopoly firms prefer immediate coordination on the nash equilibrium interpreted as a preplay communication over the best reply dynamics and fictitous play which converge to the equilibrium but with delay interpreted as a decentralized learning process in bertrand oligopoly firms prefer the learning process these results indicate that firms have incentives to create institutions such as trade associations or informal meetings to facilitate coordination of production capacities but not prices moreover quantity agreements may even increase social welfare

asset markets as an equilibrium selection mechanism coordination failure game form auctions and tacit communication abstract in this paper we explore the possibility that asset markets provide a means of tacit communication which may allow subjects to coordinate on the payoff dominant equilibrium in an underlying coordination game we find that the existence of a market price for the right to play does communicate information about the equilibrium selection problem specifically behavior never converged to the efficient outcome when subjects were endowed with the right to participate but always converged to the efficient outcome when subjects purchased the right to participate journal of economic literature classification numbers c720 g120

does auctioning of entry licences induce collusion an experimental study we use experiments to examine whether the auctioning of entry rights affects the behaviour of market entrants standard economic arguments suggest that the licence fee paid at the auction will not affect pricing since it constitutes a sunk cost this argument is not uncontested though and this paper puts it to an experimental test our results indicate that an auction of entry licences has a significant positive effect on average prices in oligopoly but not in monopoly these results are consistent with the conjecture that entry fees induce players to take more risk in pursuit of higher expected profits in oligopoly entry fees increase the probability that the market entrants coordinate on a collusive price path in monopoly taking more risk does not make sense since average prices are already close to the profit maximizing price

learning mixed equilibria we study learning processes for finite strategic form games in which players use the history of past play to forecast play in the current period in a generalization of fictitious play we assume only that players asymptotically choose best responses to the historical frequencies of opponents past play this implies that if the stage game strategies converge the limit is a nash equilibrium in the basic model plays seems unlikely to converge to a mixed strategy equilibrium but such convergence is natural when the stage game is perturbed in the manner of harsanyi s purification theorem journal of economic literature classification number c72

cournot versus walras in dynamic oligopolies with memory abstract this paper explores the impact of memory in cournot oligopolies where firms learn through imitation of success as suggested in alchian j polit econ 57 1950 211 and modeled in vega redondo econometrica 65 1997 375 as long as memory includes at least one period the long run outcome corresponds to any quantity between the cournot one and the walras one the evolutionary stability of the walrasian outcome relies on interfirm comparisons of simultaneously observed profits i e whether a firm earns more than others in a given period whereas the stability of the cournot nash equilibrium is derived from intertemporal comparisons of profits for each given firm i e whether a deviation pays off for that firm

communication and efficiency in competitive coordination games costless pre play communication has been found to effectively facilitate coordination and enhance efficiency in games with pareto ranked equilibria we report an experiment in which two groups compete in a weakest link contest by expending costly efforts allowing intra group communication leads to more aggressive competition and greater coordination than control treatments without any communication on the other hand allowing inter group communication leads to less destructive competition as a result intra group communication decreases while inter group communication increases payoffs our experiment thus provides an example of an environment where communication can either enhance or damage efficiency this contrasts sharply with experimental findings from public goods and other coordination games where communication always enhances efficiency and often leads to socially optimal outcomes

analysing the cost of an oecd environmental tax to the developing countries abstract most studies on the global warming issue neglect the impact of proposed measures eg carbon tax on the economies of the developing countries in their analyses in this paper an attempt has been made to bridge this gap by using a standard econometric model the major possible impacts of an oecd carbon tax on developing countries under different policy options were examined implementing a carbon tax policy could set serious restrictions to the developmental efforts of the developing countries the role of non commercial energy use vis a vis global warming was also investigated the need for a global perspective when designing effective environmental policies is inevitable

arms races and conflict experimental evidence we study escalation and aggression in an experimental first strike game in which two participants play multiple rounds of a money earning task in each round both players can spend money to accumulate weapons the player with more weapons can spend money to strike against the other player which almost totally eliminates the victim s earnings potential and removes their capacity to strike weapons can serve as a means of deterrence in four treatments we find that deterrence is strengthened if weapon stocking cannot be observed that a balance of power is effective in maintaining peace and that mutually beneficial trade decreases the risk of confrontation but not necessarily the likelihood of costly arms races