stochastic stability in a double auction abstract in a k double auction a buyer and a seller must simultaneously announce a bid and an ask price respectively exchange of the indivisible good takes place if and only if the bid is at least as high as the ask the trading price being the bid price with probability k and the ask price with probability 1 k we show that the stable equilibria of a complete information k double approximate an asymmetric nash bargaining solution with the seller s bargaining power decreasing in k note that ceteris paribus the payoffs of the seller of the one shot game increase in k nevertheless as the stochastically stable equilibrium price decreases in k choosing the seller s favorite price with a relatively higher probability in individual encounters makes him worse off in the long run

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

adjustment dynamics and rational play in games when a given strategic situation arises repeatedly the possibility arises that equilibrium predictions can be justified by a dynamic adjustment process we examine myopic adjustment dynamics a class that includes replicator dynamics from evolutionary game theory simple models of imitation models of experimentation and adjustment and some simple learning dynamics we present a series of theorems showing conditions under which behavior that is asymptotically stable under some such dynamic is strategically stable in the sense of kohlberg and mertens this behavior is thus as if the agents in the economy satisfied the extremely stringent assumptions that game theory traditionally makes about rationality and beliefs journal of economic literature classification number c72

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

why sunk costs matter for bargaining outcomes an evolutionary approach abstract two bargaining parties play the nash demand game to share a pie whose size is determined by one party s investment decision various investment levels are subgame perfect adding the investment decision to young s evolutionary bargaining model yields the following long run outcome efficient investment prevails and the investor s share of the pie approximates die maximum of i the smallest share that induces efficient investment even if the investor expects to appropriate the available pie from every inefficient investment and ii half of the pie the result favors forward induction to subgame consistency and equity theory to hold ups journal of economic literature classification numbers c78 l14

property rights and investments an evolutionary approach abstract when contracts are not enforceable or property rights are not clearly defined individuals may lack an incentive to carry out costly investments even when they are socially efficient some recent contributions such as ellingsen and robles 2002 prove that this problem may be less dramatic than standard economic models would suggest they propose evolutionary models in which only efficient equilibria can be stochastically stable in this paper we show that these results are not robust with respect to the introduction of individual heterogeneity when individuals have different cost functions stochastically stable states may be inefficient even when they induce a positive suboptimal level of investment

is there a hold up problem most literature on the hold up problem starts from the assumption that ex post bargaining outcomes are insensitive to prior investment costs we argue that this approach is unsatisfactory if the bargaining procedure is relatively symmetric it typically admits multiple perfect equilibria some of which give the investor a high enough payofi to sustain e cient investment even if the bargaining procedure is asymmetric and rigged against the investor there may be investment if agents are driven by moral concerns or if communication creates commitment laboratory experiments indicate that communication is necessary and su cient for agents to coordinate on e cient outcomes when the bargaining game is symmetric when the bargaining game is rigged against the investor the hold up problem is mitigated but not eliminated by moral behavior communication is quite credible and we flnd that promises are more believable than threats

culture compliance and confidentiality taxpayer behavior in the united states and italy the experimental economics center and the department of economics of the andrew young school of policy studies georgia state university atlanta ga and the center for experimental economics at fondazione university ca foscari italy

an evolutionary model of bargaining abstract individuals from two populations of bargainers are randomly matched to play the nash demand game they make their demands by choosing best replies based on an incomplete knowledge of the precedents and occasionally they choose randomly there is no common knowledge over the long run typically one division will be observed almost all of the time this stochastically stable division is close to the nash solution when all agents in the same population are alike when the populations are heterogeneous a generalization of the nash solution results if there is some mixing between the two populations the stable division is fifty fifty journal of economic literature classification number c78

individual morality and reputation costs as deterrents to tax evasion abstract empirical evidence suggests some taxpayers never evade evasion increases with the tax rate and evasion decisions are interdependent these findings are not easily explained by the existing theory which models evasion as an independently made amoral gamble this paper uses nonpecuniary costs of evasion to reconcile theory with evidence once individuals are assumed to differ by an honesty characteristic taxpayers dichotomise into groups the more honest of which responds to a tax change as the evidence suggests a further extension is to introduce an endogenous reputation cost this suggests a positive relationship between the number of evaders and the tax rate

a prospect theory nash bargaining solution and its stochastic stability abstract we consider the long run outcomes of bargaining games when players obey prospect theory we extend the evolutionary bargaining model of young 1993 to a two stage nash demand game two players simultaneously choose whether to exercise an outside option in the first stage and play the nash demand game in the second stage which will be reached only if neither player exercises the outside option we address the influence on the stochastically stable division of reference dependent preferences where the reference point is the value of the outside option we show that the division consistently differs from the nash bargaining solution under expected utility theory inspired by this we propose a prospect theory nash bargaining solution which coincides with the stochastically stable division

bargaining under incomplete information fairness and the hold up problem in the hold up problem incomplete contracts cause the proceeds of relation speciflc investments to be allocated by ex post bargaining the present paper investigates the e ciency of incomplete contracts if individuals have heterogeneous preferences implying heterogeneous bargaining behavior and equally important preferences are private information as the sunk investment costs can thus potentially signal preferences they can in uence beliefs and consequently bargaining outcomes the necessities of signalling are shown to generate very strong investment incentives these incentives are based on the desire not to reveal information that is unfavorable in the ensuing bargaining after flnding all perfect bayesian equilibria in pure strategies the paper derives the necessary and su cient conditions under which it is optimal to invest and trade e ciently

rational beliefs or distorted beliefs the equity premium puzzle and micro survey data 1 introductionsince shiller 1982 and mehra and prescott 1985 questioned why the gap between the rates of returns from stocks and bonds is so large the equity premium puzzle has attracted the attention of many economists the numerous explanations for the puzzle that have been put forth can be categorized into three approaches the first approach is to explain the puzzle under full rationality by introducing more complex utility functions epstein and zin 1989 and weil 1989 use a utility function that breaks the tight relation between the risk aversion coefficient and the elasticity of intertemporal substitution constantinides 1990 introduces the utility function with habit formation to the literature and campbell and cochrane 1999 succeed in explaining the equity premium puzzle and stock return predictability by making use of a particular variant of habit formation the second approach is to see the puzzle as being a result of distorted beliefs while maintaining the traditional power utility function rietz 1988 shows that the puzzle can be explained if consumers believe that a disastrous situation has a higher probability of arising than the historical data imply recently cecchetti lam and mark 2000 also succeeded in matching the first and second moments of the equity premium and the predictability of stock returns by assuming that the representative consumer with the traditional power utility function has distorted beliefs of a particular kind that lead him her to expect that both expansions and contractions end more quickly than the data suggest the third approach is to see the puzzle as being a result of market frictions such as borrowing constraints and short sale constraints heaton and lucas 1996 show the potential of this approach and luttmer 1999 estimates the magnitude of such frictions using the first order conditions from utility maximization however because of the success of campbell and cochrane 1999 and cecchetti lam and mark 2000 in explaining various aspects of the asset pricing phenomena including the equity premium puzzle this paper mainly focuses on an investigation of the first two approaches with the use of survey forecasts 1 in spite of the success of both approaches the puzzle has not yet been resolved because both approaches use completely different mechanisms to explain the puzzle we still do not know which one provides a better description of the cause of the puzzle in other words because the stylized facts in the financial market can be explained by both models it is hard for economists to judge which is the correct mechanism by looking at financial and consumption data 2 hence the main purpose of this paper is to derive different implications of consumers expectations from both models and to examine which implication is supported more through an investigation of the survey forecasts because campbell and cochrane s model retains rational expectations whereas cecchetti lam and mark s model is based on distorted beliefs the two models implications for survey forecasts will differ whereas campbell and cochrane 1999 would predict that survey forecasts are rational cecchetti lam and mark 2000 would claim that forecasts are excessively pessimistic over expansions and excessively optimistic over contractions using the livingston survey forecasts for the standard and poor s 500 index which is managed by the federal reserve bank of philadelphia this paper conducts a test of these implications to check whether the expected excess returns from the survey forecasts are rational a panel data model allowing a four dimensional structure for forecast errors individual bias business cycle effect aggregate shocks and idiosyncratic errors is analyzed 3the test results seem to support the model of cecchetti lam and mark 2000 the expected equity premium implied by the survey forecasts is on average lower than the actual realized equity premium during the sample period

does evolution solve the hold up problem abstract the paper examines the theoretical foundations of the hold up problem at the first stage one agent decides on the level of a relationship specific investment there is no contract so at the second stage the agent must bargain with a trading partner over the surplus that the investment has generated we show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on the choice of equilibrium concept in particular we prove the following two results i if bargaining proceeds according to the nash demand game any investment level is subgame perfect but only a particular efficient outcome is stochastically stable ii if bargaining proceeds according to the ultimatum game with the trading partner as proposer only the minimal investment level is subgame perfect but any investment level is stochastically stable journal of economic literature classification numbers l14 c78

seminonparametric estimation of conditionally constrained heterogeneous processes asset pricing applications the overidentifying restrictions of the intertemporal capital asset pricing model are usually rejected when tested using data on consumption growth and asset returns particu larly when additively separable constant relative risk utility is attributed to the representa tive agent this article investigates the extent to which specification error can explain these rejections the empirical strategy is limited information maximum likelihood in conjunc tion with seminonparametric expanding parameter space representations for both the law of motion and utility we find that consumption growth and asset returns display conditional heterogeneity but this fact does not account for rejection of the overidentifying restrictions as might be anticipated from the work of hansen singleton and others using generalized method of moments methods we also find that expansion of the parameter space in the direction of nonseparable utility causes the overidentifying restrictions to be accepted our estimation strategy provides information on the manner in which the restrictions distort the law of motion in particular imposition of additively separable constant relative risk aversion utility causes the conditional variance of consumption growth to be overpredicted the conditional covariance of asset returns with consumption growth to be overpredicted and an equity premium imposition of nonseparable seminon parametric utility causes distortion in these same directions though the distortions are much smaller which is consistent with the outcomes of the tests of the restrictions

habit formation as a resolution to the equity premium puzzle what is in the data what is not the consumption based asset pricing model of lucas 14 defines a theoretical relationship between streams of consumption and equilibrium asset prices since data of both aggregate consumption and asset prices are available the theory can be tested empirical tests of the lucas model using standard time separable utility functions indicate mismatches between the theory and the data for example in the gmm generalized method of moments estimation of hansen and singleton 9 overidentifying constraints implied by the model were rejected mehra and prescott 16 demonstrated the difficulty of explaining a particular statistic the theoretical expected equity premium the yield differential between stocks and risk free bonds is much higher than the observed one if a standard utility function is used they called the mismatch the equity premium puzzle to improve the performance of the model several authors have relaxed the time separability of preferences in a stimulating paper constantinides 1 argued that the equity premium puzzle can be resolved through the assumption of habit formation the idea is that consumption in the past reduces utility in the present because it establishes habits his model can match the observed mean and the variance of both the equity premium and the consumption growth rate the match of the low moments is consistent with the bound tests of heaton 11 gallant hansen and tauchen 7 and hansen and jagannathan 10 on the other hand gmm estimations using monthly aggregate consumption of nondurable goods and leisure by eichenbaum hansen and singleton 3 and that using consumption of nondurable goods and durable goods by dunn and singleton 2 and eichenbaum and hansen 4 showed that if current utility depends on current and past consumption then current utility increases in past consumption i e consumption has local durability the opposite of that implied by habit formation a particularly strong result was obtained by gallant and tauchen 6 they estimated a general form of utility functions with a general law of motion of data and found that the source of the time non separability is local durability since it is known that local durability

hold up and the evolution of investment and bargaining norms abstract the purpose of this paper is to explore the evolution of bargaining norms in a simple production problem with two sided relationship specific investments and competition the puzzle we wish to address is why efficient bargaining norms do not evolve even though there exist efficient sequential equilibria conditions under which stochastically stable bargaining conventions exist are characterized and it is shown that there is a hierarchy of norms with a stochastically stable division rule that is independent of the long run investment strategy due to this independence efficient sequential equilibria are not in general stochastically stable this result may help us understand why institutions such as firms may be needed to ensure efficient relationship specific investments

evolutionary stability with equilibrium entrants abstract the strategy that upsets a potential evolutionarily stable strategy may in itself be very unstable or may differ from the candidate strategy only in irrelevant ways this paper develops a solution concept addressing these difficulties we lood for a set of nash equilibria such that small groups of entrants whose members are satisfied with their entry cannot take the population out of the set such a set is robust to the iterated removal of weakly dominated strategies depends only on the reduced normal form and has the never a weak best response property for generic two person extensive form games such sets generate payoffs consistent with proper equilibria

a dynamic model of equilibrium selection in signaling markets in his work on signaling spence proposed a dynamic model of a market in which a buyer revises prices in light of experience and in which sellers with private information about their types choose utility maximizing signals given these prices we follow spence s suggestion of introducing perturbations into the resulting dynamic process in a broad class of markets our model selects a separating equilibrium outcome if and only if the equilibrium outcome satisfies a version of the undefeated equilibrium concept whereas a pooling equilibrium outcome is selected if and only if the equilibrium outcome is both undefeated and satisfiesd1

social esteem versus social stigma the role of anonymity in an income reporting game abstract this paper aims at experimentally testing the role of different non monetary dis incentives on tax compliance participants were subjected to different experimental conditions where the role played by anonymity differed as expected anonymity does play an important role in the decision to pay taxes in addition we found that a negative non monetary incentive increases tax compliance more effectively than a positive non monetary incentive we also found that the effect of these non monetary incentives is mitigated when too much information is made available results show that when evasion is made public tax fraudsters are willing to pay in order to keep their dishonest behaviour undisclosed and to avoid public shame interestingly we found a misalignment on the impact of stigmatization namely that the judgement of an individual s evasion is perceived by the individual more harshly than a judgement made by the said individual regarding evasion carried out by other parties

signaling future actions and the potential for sacrifice we consider extensions of games where some players have the option of signaling future actions by incurring costs the main result is that in a class of games if one player can incur costs then forwards induction selects her most preferred outcome surprisingly the player does not have to incur any costs to achieve this the option alone suffices however when all players can incur costs one player s attempt to signal a future action is vulnerable to a counter signal by the opponent this vulnerability to counter signaling distinguishes signaling future actions from signaling types

hold up and intergenerational transmission of preferences we present an overlapping generations model with cultural transmission of preferences in which players face in each period a simplified hold up problem in our model both the distribution of preferences in the population and the investment policies in the long run influence one another and are determined endogenously and simultaneously in the stable steady state of the economy there is a mixed distribution of preferences where both selfish and other regarding preferences are present in the population moreover the presence of a significant fraction of individuals with other regarding preferences alleviates post contractual opportunism and improves efficiency in the investment decisions 2003 elsevier b v all rights reserved

do ethics matter tax compliance and morality in this article we argue that puzzle of tax compliance can be explained at least in part by recognizing the typically neglected role of ethics in individual behavior that is individuals do not always behave as the selfish rational self interested individuals portrayed in the standard neoclassical paradigm but rather are often motivated by many other factors that have as their main foundation some aspects of ethics we argue that it is not possible to understand fully an individual s compliance decisions without considering in some form these ethical dimensions specifically we argue here that there is much direct and indirect evidence that ethics differ across individuals and that these differences matter in significant ways for their compliance decisions we then put this in the larger context of the inability of the standard neoclassical paradigm to explain compliance of at least some individuals and we suggest several possible avenues by which theory can be expanded to incorporate ethics we conclude by arguing that a full house of compliance strategies is needed to combat tax evasion strategies that include the traditional enforcement paradigm suggested by and consistent with neoclassical theory a less traditional service paradigm that recognizes the important role of a kinder and gentler tax administration in encouraging compliance and importantly a new trust paradigm that is built on the foundation of ethics in which the tax administration must recognize that it can erode the ethics of taxpayers by its own decisions

a fairness approach to income tax evasion abstract the tax that a taxpayer wishes to evade is determined on the basis of his perception of the fairness of his fiscal treatment with respect to both governmental supply of public goods and the perceived behaviour of other taxpayers the coercive powers of the state and the taxpayer s attitude toward risk determine the extent to which this desired level is undertaken in practice this approach is able to produce implications for the relationship between public expenditure tax rates and tax evasion which are more consistent with empirical evidence than the results of the conventional portfolio choice approach