the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

non transitive choice event splitting effects or framing effects recent studies have examined possible causes of the robust empirical failure of the transitivity axiom of expected utility theory by pitting regret aversion against alternative explanations such as event splitting effects these tests show that cycles replicate when the latter are controlled but are sensitive to changes in problem representation the control for event splitting effects however does not rule out their contribution to cyclical choices in some circumstances an experiment is reported which investigates this possibility cyclical choices are observed that cannot be due to event splitting effects but appear attributable to within event and between act evaluations of decision problems plus framing effects

moving forward one step at a time we reply to john duffield s critique of the rational design project a special issue of international organization that explains the features of international institutions from a game theoretic perspective the project was deliberately limited to the analysis of explicit and observable institutional arrangements and focused on the specific institutional properties of centralization membership scope control and flexibility its empirical contribution relies on case studies but it is significantly amplified by the tight connections provided by a common theoretical perspective that is oriented toward testing a set of specific conjectures about institutional design the results raise further issues of measurement and cross case comparisons that provide valuable lessons for future work on institutional design although all of these research design choices are worth revisiting and questioning as duffield does the initial results of the rational design project show that it provides a good basis from which to explore alternative research design decisions

why are some international agreements informal verbal contracts samuel goldwyn once said aren t worth the paper they re written on yet informal agreements and oral bargains suffuse international affairs they are the form that international cooperation takes in a wide range of issues from exchange rates to nuclear weapons take monetary affairs for instance except for the regional european monetary system there have been no formal comprehensive agreements on exchange rates since the downfall of the bretton woods system in 1971 a prolonged effort to resurrect the pegged rate system failed although new treaties were drawn up and duly signed private financial markets simply overwhelmed these official efforts and central bankers eventually conceded the point the one comprehensive agreement since then concluded in 1976 in jamaica merely ratified a system of floating rates that had emerged unplanned for the past fifteen years monetary arrangements have been a succession of informal agreements of indefinite duration most recently the plaza communique and the louvre accord designed to cope with volatile currency movements the bretton woods system itself depended on such agreements in its declining years it was held together by the tacit agreement of european central banks not to convert their major dollar holdings into gold the system fell apart when germany and france abandoned that commitment they did so because they believed that the united states had abandoned its own tacit commitment to restrain inflation and to avoid large current account deficits

actions versus prospects the effect of problem representation on regret suppose that you must choose between lotteries s safer and r riskier shown in the top half of figure 1 there are 100 possible states of the world and the consequence of s and r are indicated for each state the states of the world with the consequence win 8 000 are separate from the states with the consequence win 20 000 you may find s less appealing knowing that if you choose it and one of the states 71 100 occurs you would have received 20 000 had you picked r suppose that you must choose between lotteries s and r shown in the bottom half of figure 1 though the prospects probability distribution of consequences of s and r are identical to those of s and r the states of the world with positive payoffs overlap you may find s more appealing knowing that if you choose it and one of the states 1 30 occurs you would have received 20 000 had you picked r but s pays an 8 000 consolation prize a series of papers by graham loomes 1988a b 1989 and chris starmer and robert sugden 1989 provides evidence that in evaluating identical prospects the juxtaposition of consequences against different states of the world has a systematic effect on choice under uncertainty as predicted by regret theory david e bell 1982 peter c fishburn 1982 loomes and sugden 1982 1987a regret effects violate expected utility theory and all other prospect based theories of choice all of the laboratory evidence of regret or juxtaposition effects however has been generated under the problem representation in figure 1 the matrix of state contingent consequences while loomes 1988b p 468 argues that evidence of regret effects indicates that prospect based theories may all be failing to capture an important element in decision making under uncertainty this paper suggests that the experimental evidence of regret effects observed so far is specific to the matrix problem representation nearly 400 subjects completed versions of two questionnaires in which choice problems were presented in different formats the juxtaposition of consequences sways choices but only under the matrix presentation the first questionnaire indicates that regret effects are not observed when statecontingent consequences are described by ticket numbers rather than a matrix the second questionnaire indicates that if the matrix format is changed slightly to a simple proportional format subjects apparently compare prospects and ignore the juxtaposition of consequences regret theory predicts that choice depends on the juxtaposition of consequences but regret effects should be invariant to different representations of state contingent consequences

nonconvex factor adjustments in equilibrium business cycle models do nonlinearities matter recent empirical analysis has found nonlinearities to be important in understanding aggregated investment using an equilibrium business cycle model we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs we find that while such costs lead to nontrivial nonlinearities in aggregate investment demand equilibrium investment is effectively unchanged our finding based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity is robust to the introduction of shocks to the relative price of investment goods

coordination and collaboration regimes in an anarchic world the study of regimes can contribute to our understanding of international politics only if regimes represent more than international organizations and less than all international relations the conceptualization of regimes developed here accepts the realist image of international politics in which autonomous self interested states interact in an anarchic environment yet there are situations in which rational actors have an incentive to eschew unconstrained independent decision making situations in which individualistic self interested calculation leads them to prefer joint decision making regimes because independent self interested behavior can result in undesirable or suboptimal outcomes these situations are labeled dilemmas of common interests and dilemmas of common aversions to deal with these states must collaborate with one another or coordinate their behavior respectively thus there are different bases for regimes which give rise to regimes with different characteristics coordination is self enforcing and can be reached through the use of conventions collaboration is more formalized and requires mechanisms both to monitor potential cheating and to insure compliance with the regime the article elucidates the assumptions of such an interest based approach to regimes assimilates alternative explanations into this framework and develops the implications for regime maintenance and change

the rational design of international institutions international institutions are central features of modern international relations this is true of trade international debt and financial restructuring and even national security once the exclusive realm of pure state action it was certainly true of the two major military engagements of the 1990s the wars in kosovo and the persian gulf as international institutions have gained prominence in the political landscape they have increasingly become prominent topics for study the sharpest debate among researchers has been theoretical do international institutions really matter missing from this debate is a sustained inquiry into how these institutions actually work we shift the focus by posing researchable questions about how they operate and how they relate to the problems states face we begin with a simple observation major institutions are organized in radically different ways some are global essentially open to all states others are regional with restricted memberships some institutions give each state an equal vote whereas others have weighted voting and sometimes require supermajorities institutions may have relatively strong central authorities and significant operating responsibilities or be little more than forums for consultation some arrangements for example most bilateral treaties have no formal organizational structure these are plentiful because states have a striking tendency to codify their relationships in formal legal arrangements why do these differences exist do they really matter both for members and for international politics more generally do they affect what the institutions themselves can do we focus on these large questions of institutional design

design in context existing international agreements and new cooperation this research note highlights an important element missing from rational design theories of international agreements institutional context the presence or absence of existing and prior agreements between prospective partners in new cooperation if as rational design theorists argue agreement design is deliberate strategic and directed toward enhancing contracting parties ability to credibly commit to future cooperation then prior design successes should influence the terms of additional cooperation we test for this omitted variable problem in three agreement design outcomes ex ante limitations on agreement duration exit clauses and dispute settlement provisions through an augmentation and reanalysis of data from a key study in the rational design literature barbara koremenos s contracting around international uncertainty we show institutional context is positively correlated with inclusion of ex ante time limitations in negotiated agreements and negatively correlated with the inclusion of exit clauses and third party dispute settlement provisions institutional context also mediates and conditions the effects of the explanatory variable at the heart of existing rational design theories uncertainty about the future distribution of gains from cooperation our findings show that the collective appeal of particular design features varies not only with the nature of underlying strategic problems but also with degrees of shared institutional context

does flexibility promote cooperation an application to the global trade regime do flexibility provisions in international agreements clauses allow ing for legal suspension of concessions without abrogating the treaty promote coop eration recent work emphasizes that provisions for relaxing treaty commitments can ironically make states more likely to form agreements and make deeper conces sions when doing so this argument has particularly been applied to the global trade regime the general agreement on tariffs and trade gatt and its successor the world trade organization wto yet the field has not produced much evidence bearing on this claim our article applies this claim to the global trade regime and its chief flexibility provision antidumping in contrast to prior work this article explic itly models the endogeneity and selection processes envisioned by the theory we find that states joining the wto are more likely to adopt domestic antidumping mech anisms likewise corrected for endogeneity states able to take advantage of the regime s principal flexibility provision by having a domestic antidumping mecha nism in place are significantly more likely to 1 join the wto 2 agree to more tightly binding tariff commitments and 3 implement lower applied tariffs as well

four score and seven years from now the date delay effect in temporal discounting we describe a new anomaly in intertemporal choice the date delay effect discount rates that are imputed when time is described using calendar dates e g on october 17 are markedly lower than those revealed when future outcomes are described in terms of the corresponding delay e g in six months date descriptions not only reduce discount rates but also affect the implied shape of the discount function when inferred from intertemporal choices between options referenced by calendar dates the discount function appears markedly less hyperbolic we discuss potential psychological bases of the date delay effect its implications and other modes of temporal reference

situation structure and institutional design reciprocity coercion and exchange states experiencing negative externalities caused by other states behaviors have incentives to devise international institutions to change those behaviors the institutions states create to counter incentives to defect vary in whether and how they expand institutional scope to accomplish that goal when facing symmetric externalities states tend to devise narrow institutions based on issue specific reciprocity when facing asymmetric externalities or upstream downstream problems states tend to broaden institutional scope using linkage strategies when victims of an externality are stronger than its perpetrators the resulting institutions if any are devised are likely to incorporate the negative linkage of sanctions or coercion when victims are weaker exchange institutions relying on the positive linkage of rewards are more likely we illustrate the influence of situation structure on institutional design with three cases international whaling ozone layer depletion and rhine river pollution

multilateralizing trade and payments in postwar europe europe s postwar shift to multilateral trade and payments arrangements was complicated by three factors distributional problems and uncertainty about the state of the world made european governments reluctant to adopt multilateral arrangements without financial support from the united states an enforcement problem made u s policymakers reluctant to finance a european multilateral trading system the severity of these problems was reduced by institutional designs that combined flexibility centralization and particular decision rules centralization and flexibility reduced uncertainty and softened distributive conflict centralization and particular decision rules solved the enforcement problem that u s policymakers faced

regret theory a bold alternative to the alternatives in their famous 1982 paper in this journal loomes and sugden introduced regret theory now more than 30 years later the case for the historical importance of this contribution can be made

three strikes and you re out reply to cooper and willis cooper and willis 2003 is the latest in a sequence of criticisms of our methodology for estimating aggregate nonlinearities when microeconomic adjustment is lumpy their case is based on reproducing our main findings using artificial data generated by a model where microeconomic agents face quadratic adjustment costs that is they supposedly find our results where they should not be found the three claims on which they base their case are incorrect their mistakes range from misinterpreting their own simulation results to failing to understand the context in which our procedures should be applied they also claim that our approach assumes that employment decisions depend on the gap between the target and current level of unemployment this is incorrect as well since the gap approach has been derived formally from at least as sophisticated microeconomic models as the one they present on a more positive note the correct interpretation of cooper and willis s results shows that our procedures are surprisingly robust to significant departures from the assumptions made in our original derivations

testing for regret and disappointment in choice under uncertainty much of the experimental evidence concerning violations of von neumann morgenstern expected utility theory has been collected fr om experiments designed with conventional theory in mind and does not provide direct tests of alternative models such as regret theory and disappointment theory this paper reports and discusses recent evidence produced by an exp erimentspe cifically designed to test for the impacts of regret and disappointment and to indicate their relative importance copyright 1987 by royal economic society

further evidence of the impact of regret and disappointment in choice under uncertainty a preliminary experimental study of the relative impact of regret and disappointment on individual choice under uncert ainty is followed up and extended in various ways taken in conjuncti on with the earlier work the new results provide further evidence of the limitations of von neumann morgenstern expected utility theory a nd indicate the potential power of the alternative models discussed it is argued that there is sufficient weight of evidence to encourage further systematic investigation copyright 1988 by the london school of economics and political science

plant level irreversible investment and equilibrium business cycles this paper evaluates the importance of microeconomic irreversibilities for aggregate dynamics using a real business cycle rbc model characterized by investment irreversibilities at the establishment level the main finding is that investment irreversibilities do not play a significant role in an otherwise standard realbusiness cycle model even though investment irreversibilities are crucial for establishment level dynamics aggregate fluctuations are basically the same under fully flexible or completely irreversible investment jel e22 e32

microeconomic adjustment hazards and aggregate dynamics the basic premise of this paper is that understanding aggregate dynamics requires considering that agents are heterogeneous and that they do not adjust continuously to the shocks they perceive we provide a general characterization of lumpy behavior at the microeconomic level in terms of an adjustment hazard function which relates the probability that a unit adjusts to the deviation of its state variable from its moving target we characterize rich cross sectionally dependent aggregate dynamics generated by nonconstant hazards we present an example based on u s manufacturing employment and job flows and find that increasinghazard models outperform constant hazard partial adjustment models in describing aggregate employment dynamics

the politics of dispute settlement design explaining legalism in regional trade pacts dispute settlement mechanisms in international trade vary dramatically from one agreement to another some mechanisms are highly legalistic with standing tribunals that resemble national courts in their powers and procedures others are diplomatic requiring only that the disputing countries make a good faith effort to resolve their differences through consultations in this article i seek to account for the tremendous variation in institutional design across a set of more than sixty post 1957 regional trade pacts in contrast to accounts that emphasize the transaction costs of collective action or the functional requirements of deep integration i find that the level of legalism in each agreement is strongly related to the level of economic asymmetry in interaction with the proposed depth of liberalization among member countries

institutions for flying how states built a market in international aviation services in the aftermath of world war ii states created a complex set of bilateral and multilateral institutions to govern international aviation markets national governments concluded bilateral agreements to regulate airport entry and capacity and delegated to the airlines through the international air transport association iata the authority to set fares and the terms of service in international markets the resulting mixture of public and private institutions produced a de facto cartel that lasted for more than thirty years consistent with the rational design framework put forth by barbara koremenos charles lipson and duncan snidal i argue that the institutions states created reflect the bargaining and incentive problems generated by international aviation markets this case provides support for four of the rational design conjectures and slightly contradicts three others

non transitive preferences over gains and losses although transitivity is often regarded as an indispensable principle of rational choice under uncertainty some decision models allow nontransitive preferences one of these regret theory is consistent with a particular pattern of choice cycles when payoffs are nonnegative and the opposite pattern of cycles when payoffs are nonpositive this paper presents evidence from an experiment designed to test these implications of regret theory copyright 1992 by royal economic society

aggregate employment dynamics building from microeconomic evidence this paper studies quarterly employment flows of approximately 10 000 u s manufacturing establishments the authors use establishments hours week to construct measures of the deviation between desired and actual employment and use these as the establishments main state variables the main findings are 1 microeconomic adjustment functions are nonlinear with plants adjusting disproportionately to large shortages 2 adjustments are often either large or nil suggesting the presence of nonconvexities in the adjustment cost technologies 3 the bulk of average employment fluctuations is accounted for by aggregate rather than reallocation shocks and 4 microeconomic nonlinearities amplify the impact of large aggregate shocks copyright 1997 by american economic association

coordination versus prisoners dilemma implications for international cooperation and regimes the study of political institutions in general and international cooperation in particular has been beneficially influenced by the prisoners dilemma pd game model but there is a mistaken tendency to treat pd as representing the singular problem of collective action and cooperation by relaxing the assumptions of 2 2 games and developing an alternate model of the coordination game i show how some cooperation problems have very different properties from those found in pd the analytical results of the two games are compared across several important dimensions number of strategies available number of iterations of the game numbers of players and the distribution of power among them the discussion is illustrated with specific problems of international cooperation and the implications of alternative cooperation problems for the formation and performance of international regimes are explored the basic solutions for pd and coordination have divergent ramifications for the institutionalization stability and adaptability of regimes and for the role of hegemony in the international system however the coordination model does not replace the pd model but complements and supplements it as a way to understand the diversity of political institutions these results are widely applicable to areas of politics beyond international relations

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

do non expected utility choice patterns spring from hazy preferences an experimental study of choice errors individuals often have only incompletely known preferences when choosing between pair wise gambles particular presentations of the choice problem may then passively encourage the use of some choice method to clarify the preference different presentational displays can then lead to choice patterns predicted by one or other generalised expected utility theory when a preference is not or cannot be constructed choices will be arbitrary i run an experiment that uses three different presentational displays and incorporates a strength of preference indicator the experiment investigates regret theory as an example of a generalised expected utility theory as preference strength is found to vary by display regret effects event splitting effects and choice reversals are all found to be display dependent it is suggested that the evidence is best explained by assuming incomplete eu preferences which are clarified by constructive heuristics rather than some generalised expected utility model coupled with an error term

applying regret theory to investment choices currency hedging decisions we apply regret theory an axiomatic behavioral theory to derive closed form solutions to optimal currency hedging choices investors experience regret of not having chosen the ex post optimal hedging decision hence investors anticipate their future experience of regret and incorporate it in their objective function we derive a model of financial decision making with two components of risk traditional risk volatility and regret risk we find results that are in sharp contrast with traditional expected utility loss aversion or disappointment aversion theories we discuss the empirical implications of our model and its ability to explain observed hedging behavior

the limits of rational design the rational design of international institutions special issue of io autumn 2001 makes a significant contribution to the theoretical literature on international institutions it is important however to recognize the limits of both the rational design project in its current form and the conclusions that can be drawn from the special issue about the project s usefulness and validity this article evaluates the project on its own terms as a rationalist attempt to explain variation in international institutions i identify three significant sets of limitations those of the scope of the project those of the analytical framework and those of the efforts that are made to evaluate the framework through empirical analysis although the first set of limitations is largely a matter of choice the last two raise questions about how much of an advance the special issue in fact represents nevertheless these shortcomings are not absolute they can be remedied through further theoretical and empirical research

rational design looking back to move forward in this article we summarize the empirical results of the rational design project in general the results strongly support the rational design conjectures especially those on flexibility and centralization some findings are inconclusive in particular those addressing scope or point toward a need for theoretical reformulation in particular the membership dimension we also address the broader implications of the volume s findings concentrating on several topics directly related to institutional design and its systematic study first we consider the trade offs in creating highly formalized models to guide the analysis second our discussion of the variable control is a step toward incorporating power more fully and explicitly in our analysis we also consider how domestic politics can be incorporated more systematically into international institutional analysis finally we initiate a discussion about how and why institutions change particularly how they respond to changing preferences and external shocks we conclude with a discussion of the forward looking character of rational design

modeling the forms of international cooperation distribution versus information the problems of distribution and information impede international cooperation they arise when actors select how they will cooperate an exploration of the interaction between these problems using a limited information model of cooperation leads to six conclusions first leadership solutions to coordination problems always exist but leadership here is very different from hegemonic provision of public goods second actors can cooperate in the face of anarchy even without a shadow of the future third diffuse reciprocal strategies arise naturally in coordination problems fourth norms and institutions are intertwined within successful cooperation fifth the form of cooperation on an issue varies with the relative importance of distribution and information finally and most important distributional and informational problems interfere with each other arrangements to cooperate can successfully address one but not both of these problems

loosening the ties that bind a learning model of agreement flexibility how can states credibly make and keep agreements when they are uncertain about the distributional implications of their cooperation they can do so by incorporating the proper degree of flexibility into their agreements i develop a formal model in which an agreement characterized by uncertainty may be renegotiated to incorporate new information the uncertainty is related to the division of gains under the agreement with the parties resolving this uncertainty over time as they gain experience with the agreement the greater the agreement uncertainty the more likely states will want to limit the duration of the agreement and incorporate renegotiation working against renegotiation is noise that is variation in outcomes not resulting from the agreement the greater the noise the more difficult it is to learn how an agreement is actually working hence incorporating limited duration and renegotiation provisions becomes less valuable in a detailed case study i demonstrate that the form of uncertainty in my model corresponds to that experienced by the parties to the nuclear non proliferation treaty who adopted the solution my model predicts