communication networks in markets abstract this paper proposes and tests experimentally a dynamic model of bargaining to analyze decentralized markets where buyers and sellers obtain information about past deals through their social network there is a unique equilibrium in which every individual obtains the same outcome independent of their network position and this outcome depends on the peripheral least connected individuals in the network the main testable predictions are that networks with high density and or low variability in the number of connections across individuals allow their members to obtain a better deal these predictions are tested in a lab experiment through 4 treatments that vary the network that subjects are assigned to the results of the experiment lend support to the theoretical predictions subjects converge to an outcome that is independent of their network position and they fare better if they are assigned to a network that is dense and or has low variability in number of connections across members

aspiration adaptation in the ultimatum minigame abstract two agents recurrently play a 2 2 version of the ultimatum game each player sticks to his past action if it was satisfactory relative to an endogenous aspiration level and otherwise abandons it with positive probability this type of satisficing behavior is shown to yield efficiency in the limit it does not favor a specific distribution of surplus and can give an explanation for the incidence of equitable offers in practice numerical investigations link a player s character as captured by the model parameters to his average bargaining success results indicate that it is beneficial to be persistent and stubborn i e slow in adapting aspirations and switching actions in response to major dissatisfaction also it is an advantage to be capricious i e to experience large and frequent perturbations of aspiration level and to discriminate only little between minor and major dissatisfaction

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

introduction imperfect information and rural credit markets puzzles and policy perspectives rural credit markets have been at the center of policy intervention in developing countries over the past forty years many governments supported by multilateral and bilateral aid agencies have devoted considerable resources to supplying cheap credit to farmers in a myriad of institutional settings the results of many of these interventions have been disappointing and one explanation for this must be that they were based on an inadequate understanding of the workings of rural credit markets the articles in this symposium issue are devoted to empirical and theoretical investigations of rural credit markets in the framework of the imperfect information paradigm the authors show how this framework is useful not only in explaining puzzling features of these markets but also in providing a policy perspective to assess the successes and failures of specific interventions

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

competitive behavior in market games evidence and theory we explore whether competitive outcomes arise in an experimental implementation of a market game introduced by shubik 1972 market games obtain pareto inferior strict nash equilibria in which some markets are closed we find that subjects do not coordinate on autarkic nash equilibria but favor more efficient nash equilibria in which all markets are open as the number of subjects participating in the market game increases the nash equilibrium they achieve approximates the associated walrasian equilibrium of the underlying economy motivated by these findings we investigate theoretically whether evolutionary forces lead to walrasian outcomes in market games we introduce a strong version of evolutionary stable strategies sess f orfinite populations our concept requires stability against deviations by coalitions of agents a small coalition of trading agents is sufficient for pareto improving trade to be generated in addition provided that agents lack market power nash equilibria corresponding to approximate competitive outcomes constitute the only approximate sess

conventional contracts intentional behavior and logit choice equality without symmetry abstract when coordination games are played under the logit choice rule and there is intentional bias in agents non best response behavior we show that the egalitarian bargaining solution emerges as the long run social norm without intentional bias a new solution the logit bargaining solution emerges as the long run norm these results contrast with results under non payoff dependent deviations from best response behavior where it has previously been shown that the kalai smorodinsky and nash bargaining solutions emerge as long run norms we complement the theory with experiments on human subjects results of which suggest that non best response play is payoff dependent and displays intentional bias this suggests the egalitarian solution as the most likely candidate for a long run bargaining norm

an equilibrium queuing model of bribery it is sometimes argued that bribery is inefficient because bureaucrats may cause delays for attracting more bribes this hypothesis is examined in the context of a queue where customers having different values of time are ranked by their bribe payments to the queue s server the nash equilibrium strategies of the customers are derived it is shown that the server is unlikely to slow down the allocation process when bribery is allowed the model does not have stringent informational requirements and the equilibrium outcome minimizes the average value of time costs of the queue it also suggests a useful auctioning procedure

the evolutionary stability of cooperation is cooperation without central authority stable if so how robust is it despite what might be the conventional wisdom the evolution of cooperation did not solve this problem deductively in fact results obtained later by others seem to have contradicted the book s main message reexamining this exceptionally influential work yields a new picture part of axelrod s evolutionary story turns out to be false but the main intuition that retaliatory strategies of conditional cooperation are somehow advantaged proves correct in one specific and significant sense under a standard evolutionary dynamic these strategies require the minimal frequency to stabilize hence they support the most robust evolutionary equilibrium the easiest to reach and retain moreover the less efficient a strategy the larger is its minimal stabilizing frequency hobbesian strategies of pure defection are the least robust our main theorems hold for a large class of games that pose diverse cooperation problems prisoner s dilemma chicken stag hunt and many others

evolutionary bargaining with intentional idiosyncratic play abstract we study equilibrium selection in stochastic evolutionary bargaining games in which idiosyncratic play is intentional instead of random in contract games the stochastically stable state selected by intentional idiosyncratic play is the nash bargain rather than the usual kalai smorodinsky solution

adaptive dynamics in games played by heterogeneous populations consider a population of agents who play a game through repeated interactions and adapt their behavior based on information about other agents previous behavior the standard way of modeling such a process is to assume that everyone in the population is governed by the same adaptive rule e g best response imitation or the replicator dynamic this paper studies heterogeneous populations of agents in which some agents are best responders others are conformists they do what the majority does and still others are nonconformists they do the opposite of what the majority does unlike deterministic best reply processes which in 2 2 games converge to nash equilibrium these heterogeneous processes may have limit cycles moreover limit cycles may exist even when the proportion of non best responders is arbitrarily small we show how to analyze the asymptotic behavior of such processes through a suitable generalization of bendixson stability theory combined with stochastic approximation theory journal of economic literature classification numbers c44 c73 d83

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

evolutionary learning in signalling games we study equilibrium selection by evolutionary learning in monotone two type signalling games the learning process we study extends that introduced by young 1993 econometrica61 57 84 to deal with incomplete information and sequential moves it thus involves stochastic trembles for vanishing trembles the process gives rise to strong selection among sequential equilibria if the game has separating equilibria then in the long run only play according to the so called riley equilibrium will be observed frequently journal of economic literature classification number c72

open for innovation or bribery to secure bank finance in an emerging economy a model and some evidence abstract in an emerging economy like china characterized by scarce financial resources excessive red tape and rampant corruption firms are advised to bribe bank officials to grease the wheels of bank lending in order to secure the fund they need for innovation business venturing and growth drawing on the literature on corruption and open innovation we develop a model to illustrate that bribery fails to ease bank lending when red tape is endogenous whereas openness for innovation smooths bank lending no matter whether red tape is exogenous or endogenous openness for innovation is more effective than bribery in helping a firm reduce red tape to secure bank finance based on a dataset of chinese firms provided by the world bank our findings strongly support the argument we find that openness for innovation has a positive relationship with both the access to bank finance and the size of bank finance whereas bribery is related to neither supplementary tests further suggest that the positive relationship is mainly driven by private firms and manufacturing firms our findings help firms make decisions to select an effective and yet socially responsible approach to securing bank finance

the evolution of exchange abstract stochastic stability is applied to the problem of exchange we analyze the stochastic stability of two dynamic trading processes in a simple housing market in both models traders meet in pairs at random and exchange their houses when trade is mutually beneficial but occasionally they make mistakes the models differ in the probability of mistakes when all mistakes are equally likely the set of stochastically stable allocations contains the set of efficient allocations when more serious mistakes are less likely the stochastically stable states are those allocations always efficient with the lowest envy level

extractive bribe and default in subsidized credit programs abstract we present a dynamic model of subsidized credit provision to examine how asymmetric information exacerbates inefficiency caused by corruption if a borrower and a corrupt official interact with symmetric information credit terms can be so designed that corruption will affect only the borrower s profit but not repayment with private information on the borrower s productivity this result changes because of dynamic information rents the official may induce one type of the borrower to default the government can improve the repayment rate but will have to under provide credit in contrast some allowance of default permits a greater supply of credit

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

on countervailing incentives abstract this paper extends and unifies previous work on optimal contracts under countervailing incentives shedding light in particular on the relation between countervailing incentives and pooling inflexible rules our main result is that the nature of the optimal contract depends crucially on whether the agent s utility is quasiconcave or quasiconvex in the private parameter the optimal contract is separated in the former case and it may entail pooling in the latter case journal of economic literature classification number d82

decentralized trade random utility and the evolution of social welfare abstract we study decentralized trade processes in general exchange economies and house allocation problems with and without money the processes are affected by persistent random shocks stemming from agents maximization of random utility by imposing structure on the utility noise term logit distribution one is able to calculate exactly the stationary distribution of the perturbed markov process for any level of noise we show that the stationary distribution places the largest probability on the maximizers of weighted sums of the agents intrinsic utilities and this probability tends to 1 as noise vanishes

stochastic stability under logit choice in coalitional bargaining problems abstract this study examines a dynamic process of n person coalitional bargaining problems we investigate the evolution of social conventions by embedding a coalitional bargaining setting in a dynamic process in each period a group of players may make some coalitional move that is forming a new team or negotiating the division of a surplus players revise their coalitions and surplus divisions over time in the presence of stochastic noise which leads players to make a suboptimal decision under a logit specification of choice probabilities we find that the stability of a core allocation decreases in the wealth of the richest player furthermore stochastically stable allocations are core allocations that minimize the wealth of the richest player

hybrid modelling of long term carbon reduction scenarios for the uk this paper summarizes the development of a new hybrid markal macro m m energy system model for the uk this hybrid model maintains the technological and sectoral detail of a bottom up optimisation approach with aggregated energy demand endogeneity and gdp impacts from a single sector neoclassical growth model the uk m m model was developed for underpinning analysis of the uk s groundbreaking mandatory long term 60 carbon dioxide co2 emissions reduction target hybrid modelling illustrates that long term uk co2 emission reductions are feasible however there are endemic uncertainties notably a trade off between behavioural and technological decarbonisation options with resultant energy system impacts in the requirements for zero carbon electricity uk m m model sensitivity runs further illustrate the range of energy system interactions including the deployment of the uk s limited co2 storage capacity alternate timing of power vs transport sectoral reductions the relative ease of switching between electricity generation portfolios and substitution opportunities between natural gas and coal the macro economic cost impacts range from 0 3 to 1 5 reduction in uk gdp by 2050 with higher cost estimates strongly influenced by pessimistic assessments of future low carbon technologies however cost impacts from the uk m m model are likely to be in the lower range for stringent co2 reduction pathways as the simplicity of the reduced form macro linkage omits competitiveness and transitional impacts on the uk economy c 2008 elsevier b v all rights reserved

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

clever agents in young s evolutionary bargaining model in the models of young 1993 econometrica61 57 84 1993 j econ theory59 145 168 boundedly rational individuals are recurrently matched to play a game and they play myopic best replies to the recent history of play it could therefore be an advantage to instead play a myopic best reply to the myopic best reply something boundedly rational players might conceivably also do we investigate this possibility in the context of young s j econ theory59 145 168 bargaining model it turns out that cleverness in this respect indeed does have an advantage in some cases however if all individuals are equally informed about past play in a statistical sense then the nash bargaining solution remains the unique long run outcome when the mutation rate goes to zero journal of economic literature classification numbers c70 c78

delayed formal credit bribing and the informal credit market in agriculture a theoretical analysis abstract the paper presents a theory of interest rate determination in the informal credit market in backward agriculture the market for informal credit is created by the delay in disbursement of formal credit the delay is controlled by the official of the formal credit agency and he is bribed by the farmer to reduce the delay the official and the moneylender play a non cooperative game in choosing the bribing rate and the informal interest rate respectively the informal sector interest rate and the effective formal sector interest rate incorporating the bribe are equal in equilibrium agricultural price and credit subsidy policies may raise the interest rate in the informal credit market

persistence of power repeated multilateral bargaining with endogenous agenda setting authority abstract we extend a simple repeated multilateral bargaining model to allow successful agenda setters to hold on to power as long as they maintain the support of a majority of other committee members theoretically and experimentally we compare this endogenous power environment with a standard random power environment in which agenda setters are appointed randomly each period although the theoretical analysis predicts that the two environments are outcome equivalent the experimental analysis shows substantial differences in behavior and outcomes across the games the endogenous power environment results in the formation of more stable coalitions less equitable budget allocations the persistence of power across periods and higher long run inequality than the random power environment we present evidence that the stationary equilibrium refinements traditionally used in the literature fail to predict behavior in either game

perturbed adaptive dynamics in coalition form games abstract players adaptively learn how to bargain a characteristic function describes the available surplus the underlying bargaining game extends the nash demand game by allowing subcoalitions to reach an agreement players demands must be multiples of a money unit we show that stochastically stable allocations ssa i e allocations that are most stable to unlikely errors are a subset of the core uniqueness does not obtain even when the money unit becomes arbitrarily small nonetheless every ssa is related to the allocation that maximizes the product of players utilities over the core i e constrained egalitarian solution for tu games journal of economic literature classification numbers c71 c72 c78

adaptive play in multiplayer bargaining situations we study the dual issues of allocation and coalition formation in a model of social learning for a class of economies which can be expressed in terms of a real valued characteristic function we first show that all self perpetuating allocations realized from a simple bargaining game must be core allocations although players make simultaneous demands for surplus and only on their own behalf following this we provide a sufficient condition under which the society eventually learns to divide the surplus according to some core allocation regardless of the initial history

fictitious play property of the nash demand game we show that the nash demand game has the fictitious play property we also show that almost every fictitious play process and its associated belief path converge to a pure strategy nash equilibrium in the nash demand game

commitment and conflict in bilateral bargaining building on crawford 1982 we study a model of bilateral bargaining in which negotiators can make binding commitments at a low positive cost c our primary solution concept is iterated strict dominance if commitment attempts never fail there are three solutions in two solutions all the surplus goes to one player in the third solution there is a high probility of con ict if commitment attempts succeed with probability q 1 the unique solution entails con ict with probability q 2 when c 0 analogous results hold if the requirement of iterated strict dominance is replaced by iterated weak dominance

evolutionary game theory game theory has been developed as a theory of rational behavior in interpersonal conflict situations with economics and the other social sciences being the intended fields of application since the theory is based on an idealized picture of human rationality it is by no means obvious that it can be applied to situations in which the players cannot be attributed any intellectual capabilities however in their seminal paper the logic of animal conflict maynard smith and price showed that animal contests can be modeled as games and that game theory can be applied successfully in biology the objective of this chapter is to review some of the developments in this biological branch of game theory and to point out the distinctions and similarities with the classical branch also see parker and hammerstein 1985 the main emphasis will be on the mathematics involved lack of space prevents an extensive discussion of the underlying biological assumptions as well as an analysis of specific examples for these the reader is referred to the very stimulating book evolution and the theory of games by john maynard smith

conflict leads to cooperation in demand bargaining abstract we consider a multilateral nash demand game in which short sighted players come to the bargaining table with requests for both coalition partners and the potentially generated resource we prove that the resulting process converges with probability one to a state in which all players agree on a strictly self enforcing division of resources i e a strict core allocation highlighting group dynamics we show how the myopic actions of players may lead to the break up of groups in the short run but can ultimately bring about a situation from which a strictly self enforcing allocation can be reached

learning to play limited forecast equilibria abstract this paper provides a learning justification for limited forecast equilibria i e strategy profiles such that 1 players choose their actions in order to maximize the discounted average payoff over their horizon of foresight as given by their forecasts and 2 forecasts are correct on and off the equilibrium path the limited forecast equilibria appear to be the stochastically stable outcomes of a simple learning process involving vanishing trembles journal of economic literatureclassification numbers c72 d83

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

a theory of misgovernance this paper tries to explain why government bureaucracies are often associated with red tape corruption and lack of incentives the paper identifies two specific ingredients that together can provide an explanation the fact that governments often act precisely in situations where markets fail and the presence of agency problems within the government we show that these problems are exacerbated at low levels of development and in bureaucracies dealing with poor people we also argue that we need to posit the existence of a welfare oriented constituency within the government in order to explain red tape and corruption

a behavioural foundation for models of evolutionary drift abstract binmore and samuelson binmore k samuelson l 1999 evolutionary drift and equilibrium selection review of economic studies 66 363 393 have shown that perturbations drift are crucial to study the stability properties of nash equilibria we contribute to this literature by providing a behavioural foundation for models of evolutionary drift based on the similarity theory introduced by tversky tversky a 1977 features of similarity psychological review 84 327 352 the innovation is that we derive the similarity relations from the perception that each agent has about how well he is playing the game we obtain different models of drift depending on how we model that perception and show the conditions for each model to stabilize elements in components of nash equilibria that are not subgame perfect

commentary john nash and evolutionary game theory abstract john nash s work laid the foundations for evolutionary game theory as well as the theory of games with rational agents the nash bargaining solution emerges as a natural solution concept in both of these settings

clever agents in adaptive learning abstract saez marti and weibull j econom theory 86 1999 268 investigate the consequences of letting some agents play a myopic best reply to the myopic best reply in young s j econom theory 59 1993 145 bargaining model which is how they introduce cleverness of players i analyze such clever agents in general finite two player games and show young s individual strategy and social structure princeton university press princeton nj 1998 prediction to be robust adaptive learning with clever agents does select the same minimal curb set as in the absence of clever agents if their population share is less than one however the long run strategy distribution in such a curb set may vary with the share of clever agents

learning to be fair abstract we study the process of equilibrium selection in games when players have social preferences of the type discussed among others by rabin 1993 and segal and sobel 2007 to this end we employ a standard noisy version of the best response dynamics we obtain several results concerning some popular games such as the prisoner s dilemma and the battle of the sexes we show that reciprocity may have a negative effect on the equilibrium selection process when players are sufficiently concerned with reciprocity the stochastically stable equilibrium in the battle of the sexes is inefficient at the same time the cooperative equilibrium in the prisoner s dilemma is never stochastically stable

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

evolutionary stability in a reputational model of bargaining a large and growing literature on reputation in games builds on the insight that the possibility of one or more players being boundedly rational can have significant effects on equilibrium behavior this literature leaves unexplained the presence of behavioral players in the first place as well as the particular forms of irrationality assumed and the population shares of the various types in this paper we endogenize departures from rationality on the basis of an evolutionary stability criterion under the assumption that rational players incur a cost which reflects the greater sophistication of their behavior this cost may be arbitrarily small within the context of a reputational model of bargaining we show that evolutionary stability necessitates the presence of behavioral players it also places significant joint restrictions on the set of behavioral types that can coexist their respective population shares and the long run population share of rational players

stochastic adaptation in finite games played by heterogeneous populations we analyze stochastic adaptation in finite n player games played by heterogeneous populations containing best repliers better repliers and imitators individuals select strategies by applying a

corruption extortion and evasion corruption evasion and the abuse of power and the possibility thereof are pervasive features of economic activity a prominent instance is tax collection this paper examines the implications of corruptibility and the potential abuse of authority for the effects and optimal design of potentially non linear tax collection schemes amongst the findings are that the distributional effects of evasion and corruption are unambiguously regressive under the kinds of schemes usual in practice and collecting progressive taxes without inducing evasion or corruption may require that inspectors be paid commission on high income reports but not on low with the cost of this potentially creating what seems to be a previously unnoticed trade off between equity and efficiency

learning to like what you have explaining the endowment effect the endowment effect describes the fact that people demand much more to give up an object than they are willing to spend to acquire it the existence of this effect has been documented in numerous experiments we attempt to explain this effect by showing that evolution favors individuals whose preferences embody an endowment effect the reason is that an endowment effect improves one s bargaining position in bilateral trades we show that for a general class of evolutionary processes strictly positive endowment effects will survive in the long run

bureaucratic corruption and endogenous economic growth there appears to be significant diversity in the incidence of bureaucratic corruption across countries at different stages of economic development and under different political and economic regimes little theoretical or empirical analysis has been offered however on the link between corruption government and growth the paper attempts to fill the void through equilibrium models of endogenous growth balanced growth is derived as a balancing act between accumulating human capital which engenders growth and accumulating political capital which mainly assures bureaucratic power the analysis focuses on the interplay between investment in these two types of capital and its implications for long term growth under alternative political regimes some propositions are tested and confirmed empirically

countervailing incentives in agency problems abstract we analyze countervailing incentives in agency problem countervailing incentives exist when the agent has an incentive to understate his private information for some of its realizations and to overstate it for others when countervailing incentives arise pooling generally characterizes the equilibrium contract furthermore performance is distorted both above and below efficient levels in addition the agent s rents generally increase with the realization of his private information over some ranges and decrease over other ranges we demonstate that the creation of countervailing incentives can enhance aggregate welfare

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

the economics of convention c onventions regulate much of economic and social life yet they have received surprisingly little attention from economists by a convention we mean a pattern of behavior that is customary expected and self enforcing everyone conforms everyone expects others to conform and everyone has good reason to conform because conforming is in each person s best interest when everyone else plans to conform lewis 1969 familiar examples include following rules of the road adhering to conventional codes of dress and using words with their conventional meanings conventions with direct economic implications include species of money and credit industrial and technological standards accounting rules and forms of economic contracts indeed it would scarcely be an exaggeration to say that almost all economic and social institutions are governed to some extent by convention the main feature of a convention is that out of a host of conceivable choices only one is actually used this fact also explains why conventions are needed they resolve problems of indeterminacy in interactions that have multiple equilibria indeed from a formal point of view we may define a convention as an equilibrium that everyone expects in interactions that have more than one equilibrium the economic significance of conventions is that they reduce transaction costs imagine the inconvenience if whenever two vehicles approached one another the important exceptions are sugden 1986 and ullman margalit 1977 the interested reader might also refer to the symposium on social norms that appeared in the fall 1989 issue of this journal with articles by sugden 1989 and elster 1989

search theory competitive equilibrium and the nash bargaining solution abstract we investigate a canonical search theoretic model without entry two agents are randomly matched with a long side being rationed the matched agents face a pair of randomly drawn non transferable payoffs and then choose whether or not to form a partnership subject to a small probability of exogenous break down as this probability and friction vanish the nash bargaining solution emerges as the unique undominated strategy equilibrium outcome if the mass of each party is the same if the size of one party is larger than the other the short side extracts the entire surplus a sharp contrast to rubinstein and wolinsky 1985 16

barriers to energy efficiency in industrial bottom up energy demand models a review the goal of this paper is to review bottom up models for industrial energy demand with a particular focus on their capability to model barriers to the adoption of energy efficient technologies the integration of barriers into the models is an important prerequisite for a more detailed and realistic modeling of policies for energy efficiency particularly with the emergence of more and more varying policy instruments it also becomes crucial for the models to take account of these policies as well as the barriers they address in a more realistic way our review revealed that despite the broadly evident existence of market failures and barriers for energy efficient technologies they are only partly and in a rather aggregated form considered in today s bottom up models the state of the art bottom up model is based on an explicit representation of the technology stock and considers the costs of energy efficiency options in detail but with regard to barriers most models only make use of an aggregated approach like an adjusted discount rate while some models do not even consider technology costs and energy prices but instead use exogenous technology diffusion rates other more advanced models took first steps towards considering barriers in more detail the latter allows differentiation between multiple parameters that influence technology adoption still even in the most advanced models only a few of the observed barriers are explicitly considered at the same time new approaches to considering barriers like uncertainty or the slow spread of information are being developed in other disciplines we conclude the paper by summarizing promising ways to improve representation of barriers in bottom up models

recontracting and stochastic stability in cooperative games abstract an evolutionary style model of recontracting is given which guarantees convergence to core allocations of an underlying cooperative game unlike its predecessors in the evolution learning literature this is achieved without assumptions of convexity of the characteristic function or a reliance on random errors the stochastic stability properties of the model are then examined and it is shown that stochastically stable states solve a simple and intuitive minimization problem which reduces to maximizing a rawlsian swf for a common class of utility functions in contrast to previous analyses the stochastically stable state is unique for a broad class of utility functions

the dynamics of corruption with the ratchet effect this paper provides a simple model of corruption dynamics with the ratchet effect as in shleifer and vishny 1993 we consider the sale of government property entry permit by government officials as the prototype of corruption activities in a dynamic version of the shleifer vishny model corrupt officials have ex post the incentive to price discriminate entrepreneurs based on the entry decisions made in an earlier period we show that the inability of government officials to commit to future money demands induces the ratchet effect in that entrepreneurs have incentives to delay entry in order to receive a discount in the permit price later the ex post opportunism erodes the official s extortion power and reduces his revenues from selling permits even though the dynamic setting leaves the corrupt official with less extortion power we cannot rule out the possibility that the official s ability to apply dynamic discrimination decreases the intertemporal aggregate social welfare we also explore the effect of the official s tenure stability on the extent of corruption this allows us to identify circumstances under which the often observed practice of job rotation can help mitigate corruption