the price effects of liquidity shocks a study of the sec s tick size experiment abstract do stock prices of publicly listed companies respond to changes in transaction costs using the sec s pilot program that increased the tick size for approximately 1 200 randomly chosen stocks we find a stock price decrease between 1 75 and 3 2 for small spread stocks affected by the larger tick size relative to a control group we find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease we study channels of price variation due to changes in expected returns information risk investor horizon and liquidity risk the evidence suggests that trading frictions affect the cost of capital

comparing behavioral models using data from experimental centipede games the centipede game posits one of the most well known paradoxes of backward induction in the literature of experimental game theory given that deviations from the unique subgame perfect nash equilibrium generates a pareto improvement several theoretical models have been employed in order to rationalize this kind of behavior in this social dilemma the available explanations range from social preferences including fairness altruism or cooperation motives errors in playing inability to perform backward induction or different depths of reasoning in the present study we use the blavatskyy s theoretical contribution and relax the assumptions of expected utility maximization and risk neutral attitudes to test an alternative explanation we compare various probabilistic decision theory models in terms of their descriptive in sample and predictive out of sample fit performance using data from experimental centipede games we find that introducing non expected utility preferences to the quantal response equilibrium model along with a nonlinear utility function provides a better explanation compared to alternative specifications such as the level k or the quantal response equilibrium model with altruistic motives jel c72 c92 d81 d82

rational choice a survey of contributions from economics and philosophy this paper looks at the philosophical foundations of rational choice theory it is argued that l savage s expected utility axioms cannot be defended as requirements of instrumental rationality in part because of their implications for the description of consequences then it is argued that common knowledge of rationality does not imply that rational game players must be in nash equilibrium and for some games is an incoherent concept finally the suggestion that rational choice theory is self defeating is examined in relation to coordination games where the theory cannot explain the role of salience and the concept of resolute choice copyright 1991 by royal economic society

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

reliant behavior in the united states and japan yoshiharu mataga japanese economic success is often attributed to culturally reinforced psychological conditioning that promotes interpersonal reliance cooperation and a group interest orientation this article provides direct experimental evidence on differences in behavior among future businesspeople in the united states and japan utilizing a simple two person extensive form game of perfect information introduced by selten 1975 we provide evidence that contrary to some views the japanese can be less reliant on the behavior of others and are more likely to take actions at variance with group welfare in some settings thus popular explanations of japanese economic achievements may require further exploration jel a14 f00 m14 p52 i introduction the role of culture in economic behavior is an important but controversial topic although it is widely believed that cultural influences affect economically relevant behavior such effects can present difficulties for conventional economic theory discussions of the differences between the united states and japan in the business sphere provide a good example of both the high degree of academic and popular interest in this topic and the complexities involved in obtaining useful characterizations a common popular conclusion in the japan versus united states debate is that japanese business practices differ fundamentally from united states practices and that these differences stem from dissimilar sociological conditioning in the two countries while united states or western culture stresses individualism personal initiative and risk taking the japanese are said to place a higher value on consensus cooperation favoritism toward within group peers and stability 1 therefore a citizen in japan may be more interested in how he or she fits into the social context and his or her relationship with others 2 these contrasting orientations are assumed to manifest themselves in different patterns of behavior having economic implications this article offers a direct controlled experimental test of potentially significant differences in behavior between future japanese and american businesspeople utilizing a simple two person game of perfect information we examine the degree to which united states and japanese business students make differing assessments of the reliability of the behavior of their compatriots and we provide evidence on the implications of these assessments for observed behavior our simple game template introduced by selten 1975 was the focus of a study by beard and beil 1994 and allows comparison of a kind of behavior reliance on maximizing play by others that may have important economic implications in our usage reliance means merely that one player assigns a sufficiently high probability to self interested behavior by other players to induce the first player to take actions that are desirable only when others maximize their own monetary payoffs thus reliance differs from trust as usually defined in gam e theory and the former appears considerably weaker our experiments use as subjects business students in roughly comparable american and japanese universities and we offer nontrivial immediate money payoffs to participants in order to solicit serious efforts on their parts several versions of the basic experiment are conducted to establish payoff dominance and evaluate hypotheses on subject behavior our findings are quite surprising first subjects in both the united states and japan are loath to rely on others maximizing behavior even when that behavior is as in the united states highly reliable second contrary to the assumptions underlying some analysis of japanese business practices subjects in japan appear less reliant than their united states counterparts the article is divided into five sections section ii provides a literature review on the role of culture in u

tick size share prices and stock splits minimum price variation rules help explain why stock prices vary substantially across countries and other curiosities of share prices companies tend to split their stock so that the institutionally mandated minimum tick size is optimal relative to the stock price a large relative tick size provides an incentive for dealers to make markets and for investors to provide liquidity by placing limit orders despite its placing a high floor on the quoted bid ask spread a simple model suggests that idiosyncratic risk firm size and visibility of the firm affect the optimal relative tick size and thus the share price in stock markets around the world the average price per share differs substantially the median u s stock for example sells for about 40 a typical london stock sells for about 5 7 50 and a typical hong kong share is about 2 furthermore when stock prices rise above a country s usual trading range firms often split their stocks to restore prices to that range why are these price ranges so different among countries these trading ranges can be remarkably stable over time during the half century from 1943 to 1994 the s p composite index increased over 1 500 percent yet the average new york stock exchange nyse share price was

why trading speed matters a tale of queue rationing under price controls we show that queue rationing under price controls is one driver of high frequency trading uniform tick sizes constrain price competition and create rents for liquidity provision particularly for securities with lower prices the time priority rule allocates rents to high frequency traders hfts because of their speed advantage an increase in relative tick size defined as uniform tick sizes divided by security prices increases the fraction of liquidity provided by hfts but harms liquidity we find that the message to trade ratio is a poor cross sectional proxy for hfts liquidity provision stocks with more liquidity provided by hfts have lower message to trade ratios received september 15 2015 editorial decision october 7 2017 by editor robin greenwood

rationality in extensive form games let us adopt the classical point of view that a theory of games is a description of rational behavior consequently equipped with a book entitled theory of games any individual in any strategic situation need only consult the book to make a rational decision one of the questions to address in this context is indeed whether or not strategies other than those provided by backward induction can ever appear in such a book in offering an answer we shall also explore the logical limits within which any theory of games must operate

is the general public licence a rational choice open source projects are networks of developers distributors and end users of non proprietary created knowledge goods it has been argued that this form of organization has some advantages over the firm or market coordination i show that for sufficiently convex and modular projects proprietary licences are not able to sustain sequential knowledge production which however can be carried out if the project is run on the open source basis

catering through nominal share prices we propose and test a catering theory of nominal stock prices the theory predicts that when investors place higher valuations on low price firms managers respond by supplying shares at lower price levels and vice versa we confirm these predictions in time series and firm level data using several measures of time varying catering incentives more generally the results provide unusually clean evidence that catering influences corporate decisions because the process of targeting nominal share prices is not well explained by alternative theories in frictionless and efficient stock markets there is no optimal nominal pershare stock price a firm s board of directors may choose to split to manage the nominal share price and number of shares outstanding but cannot change its overall market value through these means yet boards typically do manage their firms nominal share price rather than watch it passively drift with returns theories offered to explain share price management include arguments that trading costs depend on nominal prices dolley 1933 angel 1997 that splits signal inside information brennan and copeland 1988 asquith healy and palepu 1989 and ikenberry rankine and stice 1996 or that prices in certain ranges simply constitute a market norm from which there is little gain to deviating rozeff 1998 weld et al 2009 in this paper we propose a catering theory of nominal share prices we define catering as the managerial behavior of increasing the supply of a characteristic that investors appear to be paying a premium for even though that characteristic does not increase fundamental value the catering theory of nominal share prices thus posits that the supply of securities of different price ranges is partly a response to investor demand for securities of different price ranges managers increase the supply of low priced securities

stock splits signaling or liquidity the case of adr solo splits abstract stock splits should have no effect on firm value in perfect capital markets yet stock prices increase on split announcements the two traditional explanations are information signaling and improved liquidity for shares that trade at lower prices we investigate these explanations by studying splits of american depositary receipts adrs that are not associated with splits in their home country stock and which represent unique illustrations of the effect of liquidity we interpret our findings as supportive of the liquidity explanation of stock split announcement effects

a payoff uncertainty explanation of results in experimental centipede games abstract this paper investigates how well a simple two sided incomplete information game with a full support prior can be used to explain non nash equilibrium outcomes observed in the centipede game experiments i estimate the variance of the uncertainty about preferences in several versions of the model select two models and compare these models to the estimation results of the altruism model and the quantal response models it is shown that the two selected models have a better fit than the one parameter altruism and quantal response models and that the estimated variance can explain all qualitative features of these experimental results journal of economic literature classification numbers c72 c19 c 44 c91

rationing and rent dissipation in the presence of heterogeneous individuals this paper discusses the implications of rationing by waiting when consumers have different time costs and personal valuations the joint distribution function of time costs and personal valuations is used to characterize market equilibrium it is argued that under certain conditions an increase in the variance of time costs will reduce the dissipation of rent furthermore it is shown that introducing a secondary market for a rationed good does not necessarily improve welfare because total surplus under rationing by waiting depends more on the variance than on the level of time costs and personal valuations the model is also used to discuss other institutions that involve rent seeking activities such as the patent system and import quotas

endogenous participation in charity auctions abstract data from a recent field experiment suggests that differences in participation rates are responsible for much of the variations in charity auction revenues across formats we provide a theoretical framework for the analysis of this and other related results the model illustrates the limits of previous results that assume full participation and introduces some new considerations to the choice of auction mechanism it also implies however that the data cannot be explained in terms of participation costs alone there must exist mechanism specific obstacles to participation

backward induction normal form perfection and explicable equilibria a weakening of d kreps and r wilson s 1982 notion of sequential rationality is presented the motivation stems from the difficulty in justifying sequentially rational behavior in subgames reachable only through a violation of sequential rationality although the present notion of weak sequential rationality is based upon extensive form considerations it bears a close relation to r selten s 1975 normal form perfect equilibria backward induction outcomes can be achieved in generic games of perfect information with additional restrictions on beliefs an example with imperfect information shows that sequential rationality is not the consequence of equilibrium play and the absence of incredible threats copyright 1992 by the econometric society

how not to raise money we show that standard winner pay auctions are inept fund raising mechanisms because of the positive externality bidders forgo if they top another s high bid revenues are suppressed as a result and remain finite even when bidders value a dollar donated the same as a dollar kept this problem does not occur in lotteries and all pay auctions where bidders pay irrespective of whether they win we introduce a general class of all pay auctions rank their revenues and illustrate how they dominate lotteries and winner pay formats the optimal fund raising mechanism is an all pay auction augmented with an entry fee and reserve price

equilibrium play and adaptive learning in a three person centipede game the two person centipede game is one of the most celebrated paradoxes of backward induction in complete information extensive form games an experimental investigation of a three person centipede game shows that the paradoxical results are strongly affected by the size of the stakes when the number of players in the game is increased from two to three and the game is played for unusually high stakes with group composition being randomly changed from trial to trial the paradox is considerably weakened as players approach equilibrium play with multiple iterations of the stage game when the game is played with low stakes there is no evidence for equilibrium play or learning across iterations of the stage game an adaptive learning model that assumes updating of the individual probabilities of choice outperforms alternative static and dynamic models in accounting for the major results observed in the high stake experiment

admissibility in games suppose that each player in a game is rational each player thinks the other players are rational and so on also suppose that rationality is taken to incorporate an admissibility requirement that is the avoidance of weakly dominated strategies which strategies can be played we provide an epistemic framework in which to address this question specifically we formulate conditions of rationality and mth order assumption of rationality rmar and rationality and common assumption of rationality rcar we show that i rcar is characterized by a solution concept we call a self admissible set ii in a complete type structure rmar is characterized by the set of strategies that survive m 1 rounds of elimination of inadmissible strategies iii under certain conditions rcar is impossible in a complete structure

auctions with price proportional benefits to bidders after some auctions including amish estate sales and buyer rings knockout auctions each bidder receives a share of the revenue generated by the auction we show that in the symmetric case equilibrium bids in both first price sealed bid auctions and oral auctions increase as each bidder s share increases in the case of independent signals oral auctions result in higher expected equilibrium prices than do first price sealed bid auctions journal of economic literature classification number d44

trade execution costs and market quality after decimalization this study assesses trade execution costs and market quality for nyse and nasdaq stocks before and after the 2001 change to decimal pricing several theoretical predictions are confirmed quoted bid ask spreads declined substantially on each market with the largest declines for heavily traded stocks the percentage of shares receiving price improvement increased on the nyse but not on nasdaq however those trades completed at prices within or outside the quotes were improved or disimproved by smaller amounts after decimalization and trades completed outside the quotes saw the largest reductions in trade execution costs as a class effective bid ask spreads as a percentage of share price arguably the most relevant measure of execution costs for smaller trades averaged 0 33 on a volume weighted basis after decimalization for both nyse and nasdaq stocks there is no evidence of systematic intraday reversals of quote changes on either market as would be expected if decimalization had damaged liquidity supply

behavior in the centipede game a decision theoretical perspective the centipede game is a two player finite game of perfect information where a unique subgame perfect nash equilibrium appears to be intuitively unappealing and descriptively inadequate this paper analyzes behavior in the centipede game when a traditional game theoretical assumption that players maximize expected utility is relaxed we demonstrate the existence of a descriptively adequate subgame perfect equilibrium under two standard decision theoretical assumptions first players choose under uncertainty in a probabilistic manner as captured by embedding a core deterministic decision theory in a model of probabilistic choice second players adopt non linear decision weights and overweight the likelihood of rare events as captured for example by rank dependent utility or prospect theory

games of perfect information predatory pricing and the chain store paradox the thesis of this paper is that finite noncooperative games possessing both complete and perfect information ought to be treated like one player decision problems that is players ought to assign at every move subjective probabilities to every subsequent choice in the game and ought to make decisions via backward induction this view is in contrast with the gametheoretic approach of nash equilibrium after expanding on this view for games in the abstract in sections 2 and 3 attention is turned in section 4 to an example due to reinhard selten called the chain store paradox which possesses the flavor of a situation involving a predatory pricing monopolist it is argued that for the chain store game the decision analytic approach leads under certain assumptions to more realistic outcomes than the standard nash equilibrium approach

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

tick size price grids and market performance stable matches as a model of market dynamics and equilibrium abstract the tick size in a financial market is the minimum allowable difference between ask and bid prices by the rules of each exchange no transactions can occur within the tick interval the impact of tick size is an ongoing controversy which we study by experimental methods whose simplicity helps distinguish among competing models of complex real world securities markets we observe patterns predicted by a matching cooperative game model because a price grid interferes with a competitive equilibrium and restrictions on order flow interfere with information aggregation the matching model provides predictions when the competitive model cannot although their predictions are the same when a competitive equilibrium does exist our experiments examine stable allocations average prices timing of order flow information flow and price dynamics larger tick size invites more speculation which in turn increases liquidity however increased speculation leads to inefficient trades that otherwise would not have occurred

discrete pricing and market fragmentation a tale of two sided markets security trading now fragments into more than ten almost identical stock exchanges in the united states we show that discrete pricing is one economic force that prevents the consolidation of trading volume the uniform one cent tick size minimum price variation imposed by the sec s rule 612 leads to more dispersed trading for lower priced securities when a security reverse splits its price increases and relative tick size one cent divided by the price decreases we find that reverse splits consolidate trading of securities using securities with identical underlying fundamentals that do not reverse split as the control group

on the effects of group identity in strategic environments abstract we examine differences in behavior between subjects interacting with a member of either the same or different identity group in both a centipede game and a series of stag hunt games we find evidence that subjects interacting with outgroup members are more likely to behave as though best responding to uniform randomization of the partner we conclude that group identity not only affects player s social preferences as identified in earlier research but also affects the decision making process independent of changes in the utility function

prudence in bargaining the effect of uncertainty on bargaining outcomes abstract we investigate the outcome of bargaining when a player s pay off from agreement is risky we find that a risk averse player typically increases his equilibrium receipts when his pay off is made risky this is because the presence of risk makes individuals behave more patiently in bargaining strong analogies are drawn to the precautionary saving literature we show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk averse player may be better off receiving a risky pay off than a certain pay off

an experimental investigation of rating market regulation abstract we introduce a simple game theoretical model that captures the main aspects of the repeated interaction between an issuer and a credit rating agency it involves up front payments of issuer fees and direct publication of requested ratings due to pecuniary injuries for untruthful ratings the credit rating agency should always report truthfully in the subgame perfect equilibrium knowing this the issuer should never request a rating conducting laboratory experiments we find that behavior significantly deviates from the equilibrium prediction in favor of a cooperative solution issuers frequently do request ratings which is often reciprocated with untruthful good ratings

subgame perfect cooperation in an extensive game abstract we propose a new solution concept for games in extensive form that incorporates both cooperation and subgame perfection from its definition and properties the new solution concept named the subgame perfect core is a refinement of the core of an extensive game in the same sense as the set of subgame perfect nash equilibria is a refinement of the set of nash equilibria to further characterize the subgame perfect core we show that each subgame perfect core payoff vector can be implemented as a non cooperative solution as it is a subgame perfect nash equilibrium payoff vector of an extensive form game that is closely related to the original game we also motivate and introduce a related concept of subgame perfect strong nash equilibrium of an extensive game that is coalition proof

the nominal share price puzzle the average nominal share prices of common stocks traded on the new york stock exchange have remained constant at approximately 35 per share since the great depression as a result of stock splits it is surprising that u s firms actively maintained constant nominal prices for their shares while general prices in the economy went up more than tenfold this is especially puzzling given that commissions paid by investors on trading ten 35 shares are about ten times those paid on a single 350 share we review potential explanations including signaling and optimal trading ranges and find that none of the existing theories are able to explain the observed constant nominal prices we suggest that the evidence is consistent with the idea that customs and norms can explain the nominal price puzzle

a response to glazer and rosenthal we are most grateful to glazer and rosenthal for the attention they have paid to our work abreu and matsushima 1992a b c in the process of criticizing our mechanism they have provided an elegant exposition of it which usefully supplements our own efforts the criticisms themselves we feel are misplaced and based on a close reading but narrow interpretation of our results glazer and rosenthal seek to show that in our mechanisms the iterative removal of strictly dominated strategies is or indeed ought to be controversial in terms of conventional decision theory the iterative logic is impeccable when iterative deletion leads to a unique profile that profile is the unique rationalizable profile the unique nash equilibrium and so on of course the logic of iterative dominance entails common knowledge of rationality the theoretical coherence of this assumption has been questioned in the context of backward programming in extensive form games see luce and raiffa 1957 pp 80 81 rosenthal 1981 basu 1988 reny 1992a 1992b bonanno 1991 binmore 1987a 1987b and gul 1989 among others these paradoxes of common knowledge of rationality have been highlighted in stylized examples such as the finitely repeated prisoners dilemma and rosenthal s centipede game which in fact has been a seminal inspiration for this recent literature 2 but our mechanisms are simultaneous there is no opportunity to demonstrate irrationality strategic or otherwise and therefore no scope to rationalize iteratively dominated behavior from a decision theory perspective the glazer and rosenthal critique might therefore be viewed as an elaborate revival of the indefensible claim that players in a one short prisoners dilemma will choose not to confess because they are both better off doing so than by both playing their dominant strategies within the standard game theory paradigm there is really nothing more to be said before turning to issues of bounded rationality we note that the glazer and rosenthal critique is essentially premised on the existence of a countervailing focal point but what is a focal point the notion is notoriously vague and we are aware of no widely accepted definition 3 this is not to deny that in very simple and particular games certain behavior may be focal frequently focalness is identified with a pareto dominating equilibrium and this is the point of view glazer and rosenthal seem to adopt 4 this is implicit in their acknowledgement that when the social choice function does satisfy pareto optimality our objection loses much of its immediate

buybacks with costly participation abstract posted price offers and first price auctions along with the multi unit discriminatory auction extension are two widely used mechanisms for allocating conservation contracts the choice between the two typically hinges on the trade off between the posted price s simplicity and the potential revenue gains of the auction in this paper we introduce a novel mechanism that attempts to bridge the gap between the performance of posted price offers and auctions a two price and lottery schedule combines the simplicity of the former with some of the flexibility of the latter using a model that incorporates agents cognitive and information costs of bidding we analyze how the ranking of allocative efficiency and cost effectiveness between the mechanisms varies as the wedge of participation costs increases when the number of bidders is endogenously determined by participation costs bid shading associated with a lack of competition in the auction compromises its cost effectiveness vis a vis the posted price and the lottery schedule we use data from three recent buybacks for fishing licenses conducted in maryland to calibrate our model and identify conditions under which the two price schedule outperforms the other mechanisms

demons and repentance abstract this paper presents a new explanation for the stability of cartels for a large class of repeated cournot duopoly games with discounting strategies are constructed which have the property that cheating on the cartel is followed by repentance it is shown than these repentance strategies are subgame perfect equilibrium strategies and that in the presence of demons infrequently irrational behavior on the part of both players they lead to pareto superior expected discounted payoffs in comparison with either friedman s trigger strategies or abreu s stick and carrot strategies

what happened to the three legged centipede game abstract in the last two decades several frameworks have been proposed to analyze the question of whether common knowledge of rationality is sufficient to justify the play of backward induction bi in games of perfect information three strands of literature have addressed this issue the literature on equilibrium refinements the literature on knowledge based epistemology and the literature on interactive epistemology this paper surveys seminal frameworks within the first two strands of research and assesses the extent to which they provide a satisfactory solution to the problem these approaches are illustrated using a three legged version of rosenthal s centipede game which is the classical example in the literature the paper argues that some of these frameworks provide sensible answers to the riddle of bi or at least succeed in bringing the paradox to another level the paper also points at consistency problems in the body of refinements of nash equilibrium revealed by the surveyed literature

jumping and sniping at the silents does it matter for charities abstract despite its popularity as a fundraiser for charities very little research has been done on the bidding and revenue properties of the silent auction this paper examines the consequences of two behaviors common in silent auctions jump bidding and sniping in laboratory experiments with endogenous participation our results suggest that deliberative jumping the result of impatient bidders attempting to telescope time tends to increase revenue while deliberative sniping by experienced bidders tends to decrease it we also show that when charities can encourage jumping and discourage sniping silent auctions can perform as well as their sometimes more entertaining but more expensive alternative the english auction

charitable motives and bidding in charity auctions research on bidding in auctions has generally relied on the assumption of self interested bidders this work relaxes that assumption in the context of charity auctions because understanding charitable motives has important implications for auction design and charities fundraising strategies this study investigates bidders specific types of charitable motives and the strength of these motives we carry out three controlled field experiments consisting of real life auctions conducted on a local internet auction site we use a novel design in which we simultaneously run charity and noncharity auctions for identical products and vary the percentage donated to charity results show that auctions with proceeds donated to charity lead to significantly higher selling prices a result due to a higher bidding by bidders with charitable motives rather than to increased bidder entry we also find that increased prices only occur when the charitable donation is a percentage of the auction revenue and that a fixed charitable donation associated with each auction has no effect on prices furthermore we find that prices are increasing in the percentage donated to charity we find considerable support for a model of voluntary shill like bidding where charitable bidders try to increase proceeds in charity auctions we also find that auctions with 25 of revenue donated to charity had higher net revenue than noncharity auctions hence companies may be able to use charity auctions as part of a corporate social responsibility strategy and at the same time increase profitability even though they donate part of the proceeds to charity

modelling cognitively bounded rationality an evaluative taxonomy abstract since its origins in the 1950s the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches this paper presents a taxonomy by which these approaches can be categorized and understood evaluating each approach against a range of important criteria at a time when the foundations of economic theory are being re examined this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory and also of the desirable characteristics of models that incorporate it

iterated reasoning and welfare enhancing instruments in the centipede game abstract this paper investigates the effectiveness of two instruments designed to defer termination in the centipede game an insurance against termination by the opponent and an option to offer the opponent a bonus for not terminating the game the rational prediction in both cases is passing until close to the end empirically however only the bonus option is used by the subjects the results indicate that subjects readily understand the strategic effect of the bonus which once offered renders passing until close to the end the strictly dominant strategy for both players yet they fail to realise the slightly more involved strategic signal entailed in the insurance namely that passing until close to the end is a strictly dominant strategy for an insured player the results are compatible with the common finding that the majority of people exhibit only a limited degree of iterated reasoning

the share price puzzle we document substantial variation in the prices of common stocks in u s markets due to firms selecting particular price ranges for their shares cross sectional evidence indicates that variables consistent with merton s model of capital market equilibrium explain roughly two thirds of this variation in share prices in addition measures of trading range and share price appreciation predict stock splits and the investor base of firms that split their stock increases compared to other firms we conclude that firms manage share price levels to increase the value of the firm

competition for exclusive customers comparing equilibrium and welfare under one part and two part pricing this paper compares one part pricing and two types of two part pricing in a general discretecontinuous choice model providing more extensive welfare results than prior literature under two part pricing rms may set xed fees with or without unit price commitment when unitprice commitment is present both xed fees and unit prices are set before consumers choose their exclusive suppliers in the absence of unit price commitment consumers choose exclusive suppliers based on known xed fees and anticipated future unit prices resulting in high unit prices consistent with models of aftermarket monopolization of the three possible pricing policies we nd that two part pricing with unit price commitment is rms dominant unilateral pricing policy and it also yields the highest joint pro ts under appropriate demand assumptions in terms of both consumer and social welfare two part pricing without unit price commitment is dominated by the other pricing policies with su ciently elastic usage demand and su ciently small customerspeci c xed costs one part pricing produces the highest consumer and social welfare but the lowest rm pro ts of the three pricing policies jel classi cation l1 d4 keywords two part pricing aftermarket monopolization bertrand competition discrete continuous random utility model

checkmate exploring backward induction among chess players it is difficult to overstate the profound impact that game theory has had on the economic approach and on the sciences more generally for that reason understanding how closely the assumptions that underpin game theoretic analysis conform to actual human decision making is a question of first order importance to economists in this spirit backward induction represents one of the most basic concepts in game theory backward induction played a prominent role in reinhard selten s 1965 development of perfect equilibrium and it has helped to shape the modern refinement literature although backward induction is a cornerstone of game theory existing empirical evidence suggests that economic agents engage in backward induction less frequently than theorists might hope backward induction has fared especially poorly in the centipede game which was introduced by robert w rosenthal 1981 and has since been extensively analyzed ken binmore 1987 robert j aumann 1988 philip j reny 1988 david m kreps 1990 geir b asheim and martin dufwenberg 2003 the original centipede game is a two player finite move game in which the subjects alternate choosing whether to end the game or to pass to the other player the subject s payoff to ending the game at a particular node is greater than the payoff he receives if the other player ends the game at the next node but less than the payoff earned if the other player elects not to end the game the player making the final choice gets paid more from stopping than from passing and thus would be expected to stop if the opponent will stop at the last node then conditional on reaching the penultimate node the player maximizes his earnings by stopping at that node following this logic further backward induction leads to the unique subgame perfect equilibrium the game is stopped at the first node as pointed out in prior research

rationality nash equilibrium and backwards induction in perfect information games we say that a player is certain of an event a if she assigns probability 1 to a there is common certainty cc of a if the event a occurred each player is certain of a each player is certain that every other player is certain of a and so forth it is shown that in a generic perfect information game the set of outcomes that are consistent with common certainty of rationality ccr at the beginning of the game coincides with the set of outcomes that survive one deletion of weakly dominated strategies and then iterative deletion of strongly dominated strategies thus the backward induction outcome is not the only outcome that is consistent with ccr in particular cooperation in rosenthal s 1981 centipede game and fighting in selten s 1978 chainstore game are consistent with ccr at the beginning of the game next it is shown that if in addition to ccr there is cc that each player assigns a positive probability to the true strategies and beliefs of the other players and if there is cc of the support of the beliefs of each player then the outcome of the game is a nash equilibrium outcome