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

modeling international climate change negotiations more responsibly can highly simplified game theory models provide reliable policy insights abstract in a recent article in this journal entitled game theory and climate diplomacy decanio and fremstad 2013 provide an interesting treatment of a range of simple game theoretic characterizations of international climate negotiations the authors use the nash and maxi min stability definitions to analyze 25 two by two ordinal games which they recognize as possible game theoretic characterizations of climate negotiations between two players e g great powers or coalitions of states the authors main conclusion that the prisoner s dilemma might not be the best description of climate negotiations game is consistent with the findings of others who have studied two by two conflicts over natural commons bardhan 1993 madani 2010 sandler 1992 taylor 1987 nevertheless given the importance of the climate change issue as well as the potential effects of our actions on the state of the environment and the well being of future generations i would like to address some gaps in their analysis which result in it having limited usefulness for policy purposes of course all models are simplified representations of reality full of limitations essentially all models are wrong but some are useful box and draper 1987 so the practical question is how wrong do they have to be to not be useful box and draper 1987 models limitations need to be carefully considered when interpreting them or applying their results to policy but some models are too simple to provide useful policy advice

what makes cheap talk effective experimental evidence in some environments a player only learns the choice of another player if he or she undertakes a risky choice while costless preplay communication cheap talk has been found to be effective in experimental coordination games participants have typically learned both own payoffs and the other player s action are both of these components necessary for cheap talk to be effective in our 22 stag hunt game the safe choice always yields the same payoff so that information about payoffs does not always identify the other player s action we vary whether information is provided about the other person s play and whether costless one way messages can be sent before action choices are made we find that information provision about the other person s play increases coordination when there are messages but otherwise has no effect d 2004 published by elsevier b v

ten little treasures of game theory and ten intuitive contradictions this paper reports laboratory data for games that are played only once these games span the standard categories static and dynamic games with complete and incomplete information for each game the treasure is a treatment in which behavior conforms nicely to predictions of the nash equilibrium or relevant refinement in each case however a change in the payoff structure produces a large inconsistency between theoretical predictions and observed behavior these contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others decisions

financial contagion and the wealth effect an experimental study abstract we design a laboratory experiment to test the importance of wealth as a channel for financial contagion across markets with unrelated fundamentals in a sequential global game we analyze the decisions of a group of investors that hold assets in two markets we consider two treatments that vary the level of diversification of these assets across markets in both treatments we find evidence of financial contagion when investors have completely diversified portfolios we provide evidence of contagion due to a wealth effect for certain ranges of fundamentals we show that a decrease in wealth from the investment in the first market makes withdrawals more likely in the second thereby increasing the probability of a crisis when portfolio diversification is small then social imitation is relevant in explaining contagion

time is money time pressure incentives and the quality of decision making many decisions in economics and finance have to be made under severe time pressure furthermore payoffs frequently depend on the speed of decision making as for instance when buying and selling stocks in this paper we examine the influence of time pressure and time dependent incentive schemes on the quality of decision making in an experimental beauty contest game we find that convergence to equilibrium is faster and payoffs are higher under low time pressure than under high time pressure interestingly time dependent payoffs under high time pressure lead to significantly quicker decision making without reducing the quality of decisions

indicator properties of the paper bill spread lessons from recent experience a feature of u s postwar business cycle experience that is by now widely documented is the tendency of the spread between the respective interest rates on commercial paper and treasury bills to widen shortly before the onset of recessions by contrast the paper bill spread did not anticipate the 1990 1991 recession empirical work presented in this paper supports two not mutually exclusive explanations for this departure from past experience first at least part of the paper bill spread s predictive content with respect to business cycle fluctuations stems from its role as an indicator of monetary policy but the 1990 1991 recession was unusual in postwar u s experience in not being immediately precipitated by tight monetary policy second movements of the spread during the few years just prior to the 1990 1991 recession were strongly influenced by changes in the relative quantities of commercial paper bank cds and treasury bills that occurred for reasons unrelated to the business cycle this lat

a theoretical analysis of altruism and decision error in public goods games abstract we formalize an equilibrium model in which altruism and decision error parameters determine the distribution of contributions for linear and quadratic public goods games the equilibrium density is exponential for linear games and normal for quadratic games our model implies i contributions increase with the marginal value of the public good ii total contributions increase with the number of participants iii mean contributions lie between the nash prediction and half the endowment these predictions which are not implied by a nash analysis are consistent with laboratory data maximum likelihood estimates of altruism and error parameters are significant and plausible

one two three infinity newspaper and lab beauty contest experiments beauty contest is a game in which participants have to choose typically a number in 0 100 the winner being the person whose number is closest to a proportion of the average of all chosen numbers we describe and analyze beauty contest experiments run in newspapers in uk spain and germany and find stable patterns of behavior across them despite the uncontrollability of these experiments these results are then compared with lab experiments involving undergraduates and game theorists as subjects in what must be one of the largest empirical corroborations of interactive behavior ever tried we claim that all observed behavior across a wide variety of treatments and subject pools can be interpretedas iterative reasoning level 1 reasoning level 2 reasoning and level 3 reasoning are commonly observed in all the samples while the equilibrium choice level maximum reasoning is only prominently chosen by newspaper readers and theorists the results show the empirical power of experiments run with large subject pools and open the door for more experimental work performed on the rich platform offered by newspapers and magazines

mixed equilibria are unstable in games of strategic complements in games with strict strategic complementarities properly mixed nash equilibria equilibria that are not in pure strategies are unstable for a broad class of learning dynamics

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

behavioral economics for environmental policy abstract the predictions of widely prescribed global and country level environmental policies at present are based mainly on mainstream economic models which treat individual actors to be unboundedly rational in their decision making in recent years however behavioral and experimental economists have found that the individual actors in many circumstances act within a bounded rationality framework suggesting that predictions based on the unbounded rationality models would be less valid while some of mainstream economists have already started adopting the bounded rationality based models in their academic discourse many environmental economists seem to be reluctant to use these alternative models of rationality in their research and policy prescriptions this paper highlights the implications of using bounded rationality models in environmental research in general and policymaking in particular

equilibria in large games with continuous procedures abstract we study existence of equilibria in large games where players use boundedly rational procedures the equilibria are different from nash equilibria the difference persists even when players use procedures for which the observations gathered in any period are used to evaluate the payoff from different actions

non insurance markets loss size manipulation and competition experimental evidence the common view that buyer power of insurers may effectively counteract provider market power critically rests on the idea that consumers and insurers have a joint interest in extracting price concessions however in markets where the buyer is an insurer the interests of insurers and consumers to reduce prices may be importantly misaligned the positive dependence between loss size and the insurer s expected profits limits the insurer s incentives to reign in loss sizes in markets with small initial loss sizes insurers may try to raise these in order to create demand for insurance after having defined insurance and non insurance markets based on the initial loss size we develop theory to show that insurers with buyer power have incentives to create insurance markets insurer competition will push their profits to zero but markets do not return to the initial non insurance state this constitutes a welfare loss we design experimental insurance markets to test our theory and find support monopolistic insurer subjects in non insurance markets increase loss sizes to establish insurance markets insurer competition eliminates profits but not the loss size to uninsured consumers this provides an additional reason to be careful in granting insurers buyer power jel classification c92 d81 g22 i11 l13

socially optimal pricing with rivalry and economies of scale this article examines the nature of economically efficient tariffs when there exists rivalry among firms that produce imperfectly substitutable outputs with economies of scale and that operate under a viability constraint pricing principles are derived and related to the rules developed in the literature for the regulated monopolist for some firms excess profits may prevail at efficient prices and the form of the inverse elasticity rule is altered in markets with rivalry however the standard efficient pricing rules and increased welfare results if regulators are empowered to implement lump sum interfirm payments a numerical example is provided

overcoming coordination failure in a critical mass game strategic motives and action disclosure abstract we study whether coordination failure is more often overcome if players can disclose their actions at a lower cost in an experiment subjects first choose their action and then choose whether to disclose this action to other group members and disclosure costs are varied between treatments we find that no group overcomes coordination failure when action disclosure costs are high but half of the groups do so when the costs are low simulations with a belief learning model can predict which groups will overcome coordination failure but only if it is assumed that players are either farsighted risk seeking or pro social to distinguish between these explanations we collected additional data on individual preferences and the degree of farsightedness we find that in the low cost treatment players classified as more farsighted more often deviate from an inefficient convention and disclose this action while the effect of risk and social preferences is not significant

alternative models of individual behaviour and implications for environmental policy abstract most insights of environmental economics are in line with the standard neoclassical economic model of rational behaviour formulated in terms of maximization of utility in general or of profits in particular the standard theory of environmental policy is a case in point however the maximization hypothesis and its methodological foundation have been criticized on many grounds related to a lack of either logical or empirical content moreover over the years a great many alternative models of behaviour have been proposed both criticism and alternatives are surveyed here attention is devoted to relevant insights from the philosophy of science the notion of methodological individualism and other criticism the alternative behavioural models include bounded rationality and satisficing lexicographic preferences habitual behaviour incommensurability and multicriteria evaluation and various models of behaviour under uncertainty major implications of the criticism and alternative models of individual behaviour for environmental policy theory are outlined

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

promoting the role of farmer based organizations for value chain integration the tension between a program s targeting and an organization s investment strategy we use new data on 500 farmer based organizations fbos in ghana and regression analysis to reveal determinants of collective investments and the case of the millennium development authority s mida agricultural program in ghana to demonstrate that development programs offering hard incentives may be counterproductive in promoting collective action we show that when a program sets criteria for participation and offers in cash and in kind support to selected fbos it may promote rent seeking and crowd out equity capital formation this is so because fbos may have formed for the sole purpose of benefitting from incentives offered by the program and thus lack an economic justification which is an important condition for progression through the cooperative life cycle further by setting stringent participation criteria the program may end up selecting younger organizations while it is the more consolidated organizations that are able to connect to business development services bds and engage in more offensive collective action

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

forward induction in the battle of the sexes games this paper provides experimental evidence on forward induction as a refinement criterion in the basic extensive form one of the two players chooses to play a battle of the sexes game or to receive a certain payoff according to forward induction choosing to play the game is a signal about intended action though the presence of the outside option changes play we find only limited support for the forward induction hypothesis the effects of the outside option also reflect the creation of a focal point through the asymmetry created by offering the outside option to one of the two players jel c72

tariff structure of japanese electric power companies an empirical analysis using dea this research explores a marginal cost mc based pricing system using data envelopment analysis dea this dea technique is widely applied for performance analysis and efficiency measurement in public and private sectors this article does not follow such a previous research direction rather directing itself towards the new measurement of mc and ramsey prices of multiple electric power services as an important case study this research applies the proposed dea approach to examine how much the current tariffs of japanese electric power services deviate from these mc and ramsey prices this type of research has never been explored in japan even though such a research effort is needed by many policy makers and consumers it is hoped that our empirical findings can serve as a policy making basis for guiding the japanese electric power industry this study believes that this japanese experience is useful for other nations such as asia pacific countries where many public industries are regulated by their governments

network structure and strategic investments an experimental analysis abstract this paper experimentally analyzes the effect of network structures on individuals decisions in a game of strategic substitutes the theoretical basis for our experiment is the model of bramoulle and kranton 2007 as predicted we find that individuals are able to coordinate on equilibria but that coordination strongly depends on the network structure despite frequent coordination failures in graphs of size n 4 equilibrium play seems easier on network architectures with high low density and low high centrality if play converges it almost exclusively does so towards the predicted equilibria theoretical results with respect to welfare are also confirmed next to global graph structural properties we also explore the effects of local and individual factors we find that behavior on networks is affected by the number of direct neighbors but not by individuals risk attitudes apparently the global and the local structure of a network does not leave much explanatory room for individual effects that pertain to risk taking

judgemental overconfidence self monitoring and trading performance in an experimental financial market we measure the degree of overconfidence in judgment in the form of miscalibration i e the tendency to overestimate the precision of one s information and self monitoring a form of attentiveness to social cues of 245 participants and also observe their behaviour in an experimental financial market under asymmetric information miscalibrated traders underestimating the conditional uncertainty about the asset value are expected to be especially vulnerable to the winner s curse high self monitors are expected to behave strategically and achieve superior results our empirical results show that miscalibration reduces and self monitoring enhances trading performance the effect of the psychological variables is strong for men but non existent for women

an experimental study of the investment implications of bankruptcy laws in bankruptcy laws proportionality is the universal norm when allocating the liquidation value of a bankrupt firm among creditors the theoretical literature on bankruptcy proposes two prominent alternatives to proportionality the equal awards and the equal losses principles we use an experiment to analyze and compare actual creditor behavior under these three principles more specifically we test the following hypotheses replacing proportionality with equal losses increases total investment while replacing proportionality with equal awards decreases total investment under all three principles individual investment choices decrease in response to an increase in the probability of bankruptcy or an increase in risk aversion total investment difference between proportionality and either of the other two principles is independent of the probability of bankruptcy as long as both induce an interior equilibrium the results of the nonparametric tests and random effects tobit regression analyses we conduct on our experimental data offer support for all hypotheses

production efficiency and optimal pricing in intermediate good regulated industries abstract this paper reconsiders the relationship that exists between the production efficiency result of diamond and mirrlees and the ramsey rule specifically the paper considers a general equilibrium hierarchical structure of production one industry sells at least some of its output to another regulated industry a single regulatory agency must balance the budgets of all regulated industries in the aggregate so as to maximize the utility of a representative individual the ramsey rule always holds pricing rules however are far more complex the optimum may have some negative price cost margins and may not involve production efficiency

predicting u s recessions financial variables as leading indicators this paper examines the out of sample performance of various financial variables as predictors of u s recessions series such as interest rates and spreads stock prices and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators the analysis focuses on out of sample performance from one to eight quarters ahead results show that stock prices are useful with one to three quarter horizons as are some well known macroeconomic indicators beyond one quarter however the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables

experimental analysis on the role of a large speculator in currency crises abstract corsetti et al 2004 demonstrate that the presence of a large speculator in the foreign exchange market makes the remaining traders more aggressive in their speculative attacks we conduct an experiment designed to test their theoretical predictions and also use the experiment to analyze an additional aspect that has not been previously covered in the literature namely whether the entry of a large speculator and the exit of the same speculator have the same effect in magnitude on the probability of a successful speculative attack we obtain two main findings first the results support the main conclusion of corsetti et al 2004 that the presence of a large speculator makes other small speculators more aggressive second the results suggest that the effect of the entry of a large speculator on the probability of successful speculative attacks is larger than that of the exit of the same speculator

an experimental study of precautionary bidding auctions often involve goods exhibiting a common knowledge ex post risk in such auctions precautionary bidding predicts that under expected utility dara bidders reduce their bids by more than the appropriate risk premium because the degree of riskiness of an auctioned good and bidders levels of risk aversion are difficult to observe in field settings we conduct experimental auctions that allow us to identify the precautionary premium directly we find strong evidence for precautionary bidding the effect is robust to changes in experimental design features our experiment provides the first empirical demonstration of precautionary motives in a strategic setting

coordination under limited depth of reasoning this paper provides the first unified explanation of behavior in coordinated attack games under both public and private information it demonstrates that the main experimental results such as threshold strategies comparative statics and the differences in behavior under public and private information are robust predictions of limited depth of reasoning models this is in contrast to equilibrium which mispredicts the coordinating roles of public and private information the analysis has implications for understanding macroeconomic phenomena like currency attacks and debt crises which are commonly modeled using incomplete information coordinated attack games

game theoretic analysis of a bankruptcy problem from the talmud abstract for three different bankruptcy problems the 2000 year old babylonian talmud prescribes solutions that equal precisely the nucleoli of the corresponding coalitional games a rationale for these solutions that is independent of game theory is given in terms of the talmudic principle of equal division of the contested amount this rationale leads to a unique solution for all bankruptcy problems which always coincides with the nucleolus two other rationales for the same rule are suggested in terms of other talmudic principles needless to say the rule in question is not proportional division

institutional incentives in circular economy transition the case of material use in the dutch textile industry the aim of this paper is to gain insight into how requirements for transitioning to circular economy creates new organizational forms in inter firm collaborations and ultimately how they stimulate the emergence of new institutions enhancing sustainability two strands of literature one on circular economy and one on institutional analysis provide the theoretical background for this research currently a clearly formulated and unified theory on the institutions of circular economy is lacking therefore this research compares and contrasts empirical evidence from cases derived from the textile industry in the netherlands and concepts derived from institutional analysis and literature on circular economy to inductively build a cohesive conceptual framework using information from cases we identified two pathways to transition into circular economy and to manage circular material flows we define these pathways status quo arrangements sq when firms focus on optimizing up cycling technologies and infrastructure in their circular relations and collaborations and product as service arrangements pas to indicate a focus on providing products in service contracts chain coordination contracting and financial mechanisms were identified as key organizational elements for creating new pathways to transition into circular materials flows however in analyzing these elements we also highlight differences between sq and pas arrangements sq arrangements may have implications at the level of formal rules for example by creating a new industry standards for up cycled fabrics pas arrangements may have wider implications for example by reshaping ownership in service contracts and creating cascading activities moving ownership to the supply chain will result in increased responsibility for materials and will create an incentive for improving quality of products including their environmental performance this is expected to generate positive socio environmental impacts at a system level as well moreover pas arrangements may have bottom up effects at a formal institutional level resulting in alteration and creation of formal rules for example in terms of new approaches to the ownership of materials

do antitrust laws facilitate collusion experimental evidence on costly communication in duopolies bertrand supergames with non binding communication are used to study price formation and stability of collusive agreements on experimental duopoly markets the experimental design consists of three treatments with different costs of communication zero cost low cost and high cost prices are found to be significantly higher when communication is costly moreover costly communication decreases the number of messages but more importantly it enhances the stability of collusive agreements mccutcheon 1997 presents an interesting application to antitrust policy by letting the cost of communication symbolize the presence of an antitrust law that prohibits firms from discussing prices although our experimental results do not support the mechanism of mccutcheon s 1997 argument the findings point in the direction of her prediction that antitrust laws might work in the interest of firms

regulating a dominant firm unknown demand and industry structure in this article we study the optimal regulation of a dominant firm when an unregulated firm actively competes generally the existence of an active rival imposes new and binding constraints on regulatory problems we characterize optimal policies both when demands are known complete information and unknown incomplete information to the regulator optimal policies under complete information may set the price at the dominant firm above or below its marginal cost optimal policies under incomplete information may be either pooling or separating constant over a range of the prior distribution of the firm s private information and leave no information rent to the firm

measuring strategic uncertainty in coordination games this paper proposes a method to measure strategic uncertainty by eliciting certainty equivalents analogous to measuring risk attitudes in lotteries we apply this method by conducting experiments on a class of one shot coordination games with strategic complementarities and choices between simple lotteries and sure payoff alternatives both framed in a similar way despite the multiplicity of equilibria in the coordination games aggregate behaviour is fairly predictable the pure or mixed nash equilibria cannot describe subjects behaviour we present two global games with private information about monetary payoffs and about risk aversion while previous literature treats the parameters of a global game as given we estimate them and show that both models describe observed behaviour well the global game selection for vanishing noise of private signals offers a good recommendation for actual players given the observed distribution of actions we also deduce subjective beliefs and compare them with objective probabilities

does society benefit from investor overconfidence in the ability of financial market experts abstract this paper develops a securities market model in which participants beliefs diverge and prices are monotonic in beliefs relative to rational expectations i e correct and unanimous beliefs overconfidence among uninformed traders about the precision of experts information leads to pareto superior equilibria efficiency enhancing departures from rational expectations occur over a dense subset of parameter space but only for one configuration of beliefs uninformed traders must be more confident than informed experts overconfidence in the form of excessive trust in the predictive ability of experts sets off a virtuous cycle of increased trading that improves liquidity and reduces transaction costs for everyone

the new keynesian phillips curve with myopic agents abstract empirical estimations of the new keynesian phillips curve support hybrid versions with a positive weight on lagged inflation and a weight less than one on expected inflation we argue that myopic price setting of some agents explains the low weight on expected inflation the lagged term can be explained by trend extrapolation if information about the future is costly in a laboratory experiment we implement the calvo 1983 microfoundations of the phillips curve our hypotheses are supported by the experimental data about half of the subjects set optimal calvo prices while about a third is myopic

on relative performance contracts and fund manager s incentives abstract for pension schemes mutual funds banks and other financial intermediaries large portfolio decisions are increasingly delegated to fund managers recently there has been growing concern that these managers seem to adopt extremely similar investment strategies one possible explanation for this phenomenon may be found in reward schemes based on relative performance we show how relative performance reward schemes may arise as optimal contracts our focus is the fund owners fund manager relationship in which the manager before making a portfolio decision on behalf of the owners may acquire at some cost information that is not available to the owners payment schemes based on relative performance afford the owners tighter control of their manager s activities however if two managers of different funds both accept contracts that depend on their relative as well as absolute performances then there may exist equilibria in the managers subgame that result in undesirable outcomes for the owners

equilibrium selection in sequential games with imperfect information abstract games with imperfect information often feature multiple equilibria which depend on beliefs off the equilibrium path standard selection criteria such as passive symmetric or wary beliefs rest on ad hoc restrictions on beliefs we propose a new selection criterion that imposes no restrictions on beliefs we select the action profile that is supported in equilibrium by the largest set of beliefs we conduct an experiment to compare the predictive power of the existing and our novel selection criteria in an application on vertical multi lateral contracting we find that our criterion outperforms the other selection criteria

should i stay or should i go bandwagons in the lab abstract we experimentally investigate the impact of strategic uncertainty and complementarity on leader and follower behavior using the model of farrell and saloner 1985 at the core of the model are endogenous timing irreversible actions and private valuations we find that strategic complementarity strongly determines follower behavior once a subject decides to abandon the status quo the probability that other players jump on the bandwagon increases sharply however there is a reluctance to lead when leading is a conditional best response we explain this deviation from the neo classical equilibrium by injecting some noise in the equilibrium concept we also find that cheap talk improves efficiency

risk averse behavior in generalized matching pennies games in experimental studies of behavior in 2 2 games with unique mixed strategy equilibria observed choice frequencies are systematically different from mixed strategy nash predictions this paper examines experimental results for a variety of such games and shows that a structural econometric model which incorporates risk aversion into a quantal response equilibrium explains the data very well moreover risk aversion estimates are stable across the different games and are close to those obtained from laboratory and field auction data as well as from individual lottery choice experiments

deception and misreporting in a social program we investigate empirically the extent of misreporting in a poverty alleviation program in which self reported information followed by a household visit is used to determine eligibility in the model we propose and estimate underreporting may be due to a deception motive and overreporting to an embarrassment motive we find that underreporting of goods and desirable home characteristics is widespread and that overreporting is common with respect to goods linked to social status larger program benefits encourage underreporting and discourage overreporting we also estimate the costs of lying and embarrassment for different goods and show that the embarrassment cost for lacking a good is proportional to the percentage of households who own the good jel d01 i32 i38 c25

endogenous market formation and monetary trade an experiment the theory of money assumes decentralized bilateral exchange and excludes centralized multilateral exchange however endogenizing the exchange process is critical for understanding the conditions that support the use of money we develop a traveling game to study the emergence of decentralized and centralized exchange theoretically and experimentally players located on separate islands can either trade locally or pay a cost to trade elsewhere so decentralized and centralized markets can both emerge in equilibrium the former minimize trade costs through monetary exchange the latter maximizes overall surplus through nonmonetary exchange monetary trade emerges when coordination is problematic whereas centralized trade emerges otherwise this shows that to understand the emergence of money it is important to amend standard theory such that the market structure is endogenized

payoff levels loss avoidance and equilibrium selection in games with multiple equilibria an experimental study i introduction game theoretic solution concepts carry the implication that a change in payoff levels a modification to a game by adding the same positive or negative constant to all payoffs should have no effect on behavior such changes do not affect expected payoff differences between strategies under any given beliefs about opponents actions so that best response correspondences and therefore nash equilibria pure or mixed are unaffected when the game has multiple nash equilibria game theory does not rule out the possibility that payoff level changes will lead to a change in which equilibrium is played but it does not predict when such sensitivity will be present or how it will be manifested when the game has a unique equilibrium game theory specifically predicts that changing payoff levels can have no effect so game theory is at least silent as to whether changes in payoff levels can affect players choices and at most explicitly rules out such an effect this implication relies however on the game s payoffs reflecting the true preferences of the players that is the equivalence between payoffs and expected utilities when payoffs are monetary gains or losses as in economics experiments with human subjects this equivalence cannot be taken for granted and the robustness of behavior to changes in payoff levels becomes an empirical question indeed there is evidence dating back at least to kahneman and tversky 1979 suggesting that payoff level changes can affect behavior 1 while their prospect theory was not developed specifically with payoff level effects in mind it can in some cases yield specific predictions for how they ought to affect behavior more recently cachon and camerer 1996 found that decisions in a coordination game experiment could be sensitive to changes in payoff levels when these changes affected the signs of payoffs positive payoffs became negative or vice versa they noted that their results could be explained by loss avoidance which they defined to be a tendency to avoid choices that with certainty yield negative payoffs in favor of alternatives that could yield positive payoffs 2 on the basis of this finding they conjectured that loss avoidance could be used as a criterion for equilibrium selection cachon and camerer s notion of loss avoidance is one of several ways that individuals could treat losses and gains differently in this paper we distinguish between their notion which we call certain loss avoidance and another type which we call possible loss avoidance and define as a tendency to avoid strategies that give a possible negative payoff in favor of one that gives a certain positive payoff we will sometimes use the term loss avoidance to encompass both certain and possible loss avoidance 3 the goal of this paper is to test for loss avoidance in strategic behavior in cases where payoffs are expected money payments to do so we design and conduct an experiment using a stage game well suited for such a test stag hunt a symmetric two player game with one risky action and one safe action and with multiple nash equilibria figure 1 shows three versions of stag hunt with the risky and safe actions labeled r and s these games differ only in payoff level so they are equivalent from a game theoretic standpoint as long as the payoffs represent the players preferences for example they have the same three nash equilibria the pure strategy equilibria r r and s s and a mixed strategy equilibrium in which both players choose r with probability 2 3 when these payoffs represent monetary gains and losses then despite this seeming equivalence our notions of loss avoidance make qualitative predictions regarding how individuals choices might change across the games in the high payoff game shh all payoffs are gains so neither type of loss avoidance will have an effect on behavior

an empirical analysis of information in the yield spread on future recessions in japan this article examines whether the yield spread contains information on the likelihood of future economic recessions using a probit model by taking the stability of the relationship between the yield spread and future recessions into account we also compare the accuracy of information in the yield spread with stock returns and money supply we find the following results in this article first a structural change in the relationship between the yield spread and future recessions occur at the end of 1996 second whereas the japanese yield spread contains more precise information on future recessions than stock returns and nominal money supply before the structural break we cannot predict future recessions using the yield spread after the break third the money supply does not forecast future recessions for the entire sample period

when less is more rationing and rent dissipation in stochastic contests this paper shows how to maximize revenue when a contest is noisy we consider a case where two or more contestants bid for a prize in a stochastic contest where all bidders value the prize equally we show that whenever a tullock contest yields under dissipation the auctioneer s revenue can be increased by optimally fixing the number of tickets in particular in a stochastic contest with proportional probabilities it is possible to obtain almost full rent dissipation we test this hypothesis with a laboratory experiment the results indicate that as predicted revenue is significantly higher in a lottery with rationing than in a standard lottery on the other hand an alternative rationing mechanism that does not limit total expenditures fails to increase revenue relative to a standard lottery

an entrepreneur s choice of venture capitalist or angel financing a behavioral game theoretic approach abstract we develop a game theoretic model that analyzes the effects of economic and behavioral characteristics on an entrepreneur s choice of financier venture capitalist or angel after the entrepreneur has chosen his financier the dyad faces double sided moral hazard problems in the form of ex ante effort shirking and ex post project expropriation in making his choice of financier the entrepreneur trades off the following factors the venture capitalist has higher value creating abilities than the angel however the entrepreneur anticipates a closer more empathetic and trusting relationship with the angel entrepreneur angel empathy and trust mitigates the double sided shirking and expropriation threats our model contributes to two strands of venture capitalist research the entrepreneur s choice of financier in the face of double sided moral hazard problems and the effect of behavioral factors such as empathy and trust on the creation of relational rents

public pricing under imperfect competition abstract existing literature on second best pricing assumes that regulatory control encompasses all industries subject to distortion this paper extends the theory in a game theoretic framework to incorporate market power outside the regulated sector we find that in this situation price always exceeds marginal cost in the public firm and that the profit constraint for the public firm need not be binding in addition the existence of pricing distortions outside the regulated sector can actually increase welfare

estimating bounded rationality and pricing performance uncertainty abstract this paper estimates bounded rationality in two outcome strictly competitive extensive form games of perfect information without chance moves in the baseline sessions the average subject can reason effectively to about rank 6 twelve percent of these subjects have a perfect bound on their ability to achieve the substantively rational outcome they win all simpler games and they lose all games more complicated than the estimated rationality bound most subjects do not have accurate expectations about their performance against a procedurally rational opponent usually they value the games at more than they are likely to earn if they actually play them

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

the effects of payoff magnitude and heterogeneity on behavior in 2 2 games with unique mixed strategy equilibria the logit version of quantal response equilibrium predicts that equilibrium behavior in games will vary systematically with payoff magnitudes if all other factors are held constant including the nash equilibria of the game we explore this in the context of a set of asymmetric 2x2 games with unique totally mixed strategy equilibria the data provide little support for the payoff magnitude predictions of the logit equilibrium model we extend the theoretical quantal response equilibrium model to allow for heterogeneity and find that the data fit the heterogeneous version of the theory significantly better

network structure in a link formation game an experimental study in this article we use an experiment to evaluate the performance of alternative refinements in a myersonian link formation game with a supermodular payoff function our results show that a non cooperative refinement the global games gg approach outperforms alternative cooperative refinements strong nash equilibrium coalition proof nash equilibrium and pairwise stable nash equilibrium in explaining the observed experimental behavior in the static game of complete information with three players the results are robust to some comparative statics and the gg approach shows a high predictive power under incomplete information however under repeated interaction or with a greater number of players the gg approach loses predictive power but so do the cooperative refinements the results illustrate the importance of coordination failure in practice and the need to design mechanisms to reduce this effect in practical decision making problems jel c70 c92 d20 d44 d82

social preferences and strategic uncertainty an experiment on markets and contracts this paper reports experimental evidence on a stylized labor market the experiment is designed as a sequence of three phases in the first two phases p1 and p2 agents face simple games which we use to estimate subjects social and reciprocity concerns together with their beliefs in the last phase p3 four principals who face four teams of two agents compete by offering agents a contract from a fixed menu then each agent selects one of the available contracts i e he chooses to work for a principal production is determined by the outcome of a simple effort game induced by the chosen contract we find that heterogeneous social preferences are significant determinants of choices in all phases of the experiment since the available contracts display a trade off between fairness and strategic uncertainty we observe that the latter is a much stronger determinant of choices for both principals and agents finally we also see that social preferences explain to a large extent matching between principals and agents since agents display a marked propensity to work for principals with similar social preferences

efficient ex ante stabilization of firms abstract distressed firms are vulnerable to inefficient panic based runs of their workers suppliers and customers a policymaker may try to prevent such a run by pledging to protect the interests of these stakeholders should a firm cease to do business however this promise also enables the firm to demand better terms of trade from its stakeholders which blunts the policy s effectiveness we show how to avoid such an adverse response by the use of partial countercyclical insurance under certain conditions such a scheme costlessly implements the first best outcome in the limit as the stakeholders information becomes precise we also identify least cost efficient schemes in the cases of large noise learning and duopoly

an axiomatic theory of a risk dominance measure for bipolar games with linear incentives bipolar games are normal form games with two pure strategies for each player and with two strict equilibrium points without common equilibrium strategies a normal form game has linear incentives if for each player the difference between the payoffs for any two pure strategies depends linearly on the probabilities in the mixed strategies used by the other players a measure of risk dominance between two strict equilibrium points of a bipolar game with linear incentives is characterized by 11 axioms journal of economic literature classification number c72

introduction to experimental game theory the title experimental game theory refers to experiments whose goal is to learn about general principles of strategic behavior as opposed to the performance of specific institutions twenty five years ago it would have been startling to see experimental modifying game theory in this way or to find an entire issue of an economics journal devoted to game experiments if this now seems natural it is a tribute to the increasingly

public firms as regulatory instruments with cost uncertainty we re examine the regulatory role of a public firm in an environment of private but correlated information about irndustry costs we study three regimes of mixed market interaction involving both public and private firms a symmetric bayesian nash equilibrium an asymmetric bayesian equilibrium in which the public firm is able to commit to production before the private firms and a mechanism in which the regulator designs an incentive compatible schedule for the industry we find that a public firm plays an important strategic informational role which strengthens its role as a disciplinary regulatory instrument further

characterising equilibrium selection in global games with strategic complementarities abstract global games are widely used to predict behaviour in games with strategic complementarities and multiple equilibria we establish two results on the global game selection first we show that for any supermodular complete information game the global game selection is independent of the payoff functions chosen for the game s global game embedding second we give a simple sufficient criterion to derive the selection and establish noise independence in many action games by decomposing them into games with smaller action sets to which we may often apply simple criteria we also report in which small games noise independence may be established by counting the number of players or actions

an empirical model of strategic choice with an application to coordination games abstract behavior observed in many experimental games is inconsistent with the joint hypotheses of rational play and complete information of the game i assume that the experimental session is a bayesian game of incomplete information and that the observed actions are supported by an equilibrium of this game this structure permits estimation within the theoretical model of the distribution of player characteristics which determines the equilibrium outcomes of the game the model developed for the coordination games allows a type that follows a myopic learning rule as well as strategic types with either selfish or altruistic preferences journal of economic literature classification numbers c72 c92

experimental evidence of bank runs as pure coordination failures abstract we investigate how coordination requirement measured by the coordination parameter affects the occurrence of miscoordination based bank runs in controlled laboratory environments we identify an indeterminacy region of the coordination parameter such that games with the parameter within the region have varying coordination outcomes and exhibit persistent path dependence experimental economies with the parameter above below the region stay close or converge to the run non run equilibrium switches between the two equilibria occur even with fixed economic fundamentals the experimental results are well accounted for by a version of the evolutionary algorithm that uses experimentation rates estimated from the experimental data

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

identification and estimation of dynamic games when players beliefs are not in equilibrium this article deals with the identification and estimation of dynamic games when players beliefs about other players actions are biased that is beliefs do not represent the probability distribution of the actual behaviour of other players conditional on the information available first we show that an exclusion restriction typically used to identify empirical games provides testable non parametric restrictions of the null hypothesis of equilibrium beliefs in dynamic games with either finite or infinite horizon we use this result to construct a simple likelihood ratio test of equilibrium beliefs second we prove that this exclusion restriction together with consistent estimates of beliefs at two points in the support of the variable involved in the exclusion restriction is sufficient for non parametric point identification of players belief functions as well as useful functions of payoffs third we propose a simple two step estimation method we illustrate our model and methods using both monte carlo experiments and an empirical application of a dynamic game of store location by retail chains the key conditions for the identification of beliefs and payoffs in our application are the following 1 the previous year s network of stores of the competitor does not have a direct effect on the profit of a firm but the firm s own network of stores at previous year does affect its profit because the existence of sunk entry costs and economies of density in these costs and 2 firms beliefs are unbiased in those markets that are close in a geographic sense to the opponent s network of stores though beliefs are unrestricted and potentially biased for unexplored markets which are farther away from the competitors network our estimates show significant evidence of biased beliefs furthermore imposing the restriction of unbiased beliefs generates a substantial attenuation bias in the estimate of competition effects

risk dominance and perfect foresight dynamics in n player games abstract in perfect foresight dynamics an action is linearly stable if expectation that people will always choose the action is self fulfilling a symmetric game is a pim game if an opponent s particular action maximizes the incentive of an action independently of the rest of the players this class includes supermodular games games with linear incentives and so forth we show that in pim games linear stability is equivalent to u dominance a generalization of risk dominance and that there is no path escaping a u dominant equilibrium existing results on n player coordination games games with linear incentives and two player games are obtained as corollaries

the health of farmer based organisations in ghana organisational diagnostics and governance implications abstractin this paper we use primary data on 500 ghanaian fbos collected through semi structured interviews and risky dictator games rdg to test the validity of the cooperative life cycle theory and formulate a measure of cooperative health we first define cooperative health as the alignment of heterogeneity in risk preferences and the effectuation of collective investments we then use cluster and correlation analysis to categorize fbos on the basis of their health and correlate these typologies with various performance indicators our findings reveal that organizational health is generally low as there are only a few organizations that manage to provide member farmers with both risk sharing and cost saving opportunities further healthier fbos experience stronger growth in membership while health is lower in fbos that have been established for the purpose of benefitting from external incentives

perspectives on positive political economy this volume serves as an introduction to the field of positive political economy and the economic and political processes with which it is concerned this new research tradition is distinct from both normative and historical approaches to political economy grounded in the rational actor methodology of microeconomics positive political economy is the study of rational decisions in a context of political and economic institutions more analytical than traditional approaches it is concerned with the derivation of principles and propositions against which real world experience may be compared its focus is on empirical regularities and its goal is theoretical explanation the field has focused on three main areas of research models of collective action constraints on competitive market processes and the analysis of transaction costs developments in all of these areas are covered in the book the first part of the volume surveys the field while the second part displays positive political economy at work examining a variety of subjects the final part contains essays by leading political economists on the theoretical foundations of the field

on the investment implications of bankruptcy laws axiomatic analysis of bankruptcy problems reveals three major principles i proportionality pro ii equal awards ea and iii equal losses el however most real life bankruptcy procedures implement only the proportionality principle we construct a noncooperative investment game to explore whether the explanation lies in the alternative implications of these principles on investment behavior our results are as follows i el always induces higher total investment than pro which in turn induces higher total investment than ea ii pro always induces higher egalitarian social welfare than both ea and el in interior equilibria iii pro induces higher utilitarian social welfare than el in interior equilibria but its relation to ea depends on the parameter values however a numerical analysis shows that on a large part of the parameter space pro induces higher utilitarian social welfare than ea

the term spread as a monthly cyclical indicator an evaluation abstract this paper evaluates the monthly term spread as a predictor of the growth rates of the u s industrial production index and whether or not a month is classified as recessionary using techniques previously applied to quarterly data

natural resources and the tradeoff between authoritarianism and development abstract why do african and middle eastern countries seem cursed by an abundance of natural resources yet usa australia and norway seem blessed a growing literature has argued that the benevolence or malignance of natural resources depends upon the quality of institutions this paper offers a new explanation based on associational freedom and its interaction with the political system the model predicts that natural resources have an adverse impact on economic performance and transition to democracy in authoritarian regimes but not in democracies it also predicts that repression of associational freedom will be increasing in natural resources in authoritarian regimes i test the model s predictions using fixed effects regressions on an international panel from 1975 to 2000 and find support

strategic loan defaults and coordination an experimental analysis this paper experimentally studies the impact of bank and borrower fundamentals on loan repayment we find that solvent borrowers are more likely to default strategically when the bank s expected strength is low although loan repayment is a pareto dominant nash equilibrium borrowers are also less likely to repay when other borrowers expected repayment capacity is low regardless of banks fundamentals we show that changes in expectations about bank and borrower fundamentals change the risk dominance properties of the borrowers coordination problem and that these changes subsequently explain strategic defaults for the individual borrower loss aversion and negative past experiences reduce repayment suggesting that bank failure can be contagious in times of distress

risk attitudes and the stag hunt game a stag hunt game with the risky and safe actions has two pure nash equilibria that are pareto rankable the risky action leads either to the pareto superior equilibrium high payoff or to out of equilibrium low payoff depending on the opponent s action both players may want to obtain high payoff but uncertainty about the opponent s action may prevent them to take such strategic risk this paper investigates how information about the risk attitude of an opponent affects a player s action choice in the stag hunt game i find that although a subject s propensity to choose the risky action depends on her opponent s risk attitude it does not depend on her own risk attitude

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

on the benefits from rigid labour markets norms market failures and social insurance the common view that far reaching labour market deregulation is the only remedy for high european unemployment is too simplistic first the evidence suggests that deeply rooted social customs are

naked exclusion in the lab the case of sequential contracting in the context of the naked exclusion model of rasmusen ramseyer and wiley 1991 and segal and whinston 2000b we examine whether sequential contracting is more conducive to exclusion in the lab and whether it leads to lower exclusion costs for the incumbent than simultaneous contracting we find that an incumbent who proposes exclusive contracts to buyers sequentially is better able to deter entry than an incumbent who proposes contracts simultaneously in contrast to theory this comes at a substantial cost for the incumbent