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

information competition and markets one of the dominant characteristics of modern capitalist economies is the important role played by competition not the peculiar static form of pure price competition embodied in the arrow debreu model but rather a dynamic competition more akin to the kind of competition represented by sports contests and other races including patent races in recent years there have been several attempts to explain why firms often base the pay of their workers and managers on relative performance see for example edward lazear and sherwin rosen 1981 such compensation schemes become desirable when three conditions are satisfied a the input effort of workers managers must not be directly observable at least without cost thus firms must either expend resources to monitor inputs or devise reward structures in which compensation is a function of variables such as output or profits which are themselves functions of inputs but are less costly to observe b the relationship between input and output must be stochastic so that by observing output one cannot perfectly infer what the input was c finally the stochastic disturbances which affect the relationship between input and output of different firms must be correlated by looking at the performance of one worker relative to that of others one can make better inferences about his effort than one can make without using this information not only can competition provide a basis of comparison which enables the design of reward structures that can simultaneously provide a high level of incentives with relatively low level risk but compensation schemes based on relative performance have the further advantage of automatically adjusting incentives to changes in the economic environment we refer to this as built in flexibility in a first best world with perfect information concerning the nature of the technology but where it is still costly to monitor individuals activities the compensation scheme would vary from time to time as the environment changed such changes in the compensation scheme are costly to implement and the information required to do so is seldom available when a task is easier the individual s rewards for performing the task should be reduced if pay is based on relative performance although all individuals perform better when they exert the same level of effort their compensation is automatically adjusted thus teachers frequently grade on the curve and a significant fraction of the pay of successful salesmen often consists of bonuses based on relative performance

boundedly rational nash equilibrium a probabilistic choice approach we propose an equilibrium for n person finite games based on bounded rationality using the legit model of discrete choice theory at equilibrium each player uses appropriate choice probabilities given those used by the others rationality is parameterized on a continuum from complete rationality to uniform random choice results on the existence of equilibrium and on convergence to nash as rationality becomes perfect are similar to results due to mckelvey and palfrey we identify conditions such that for a given rationality parameter range the path of choices over time when the players use fictitious play converges to equilibrium c 1997 academic press

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

rent seeking with bounded rationality an analysis of the all pay auction the winner take all nature of all pay auctions makes the outcome sensitive to decision errors which we introduce with a logit formulation the equilibrium bid distribution is a fixed point the belief distributions that determine expected payoffs equal the choice distributions determined by expected payoffs we prove existence uniqueness and symmetry properties in contrast to the nash equilibrium the comparative statics of the logit equilibrium are intuitive rent dissipation increases with the number of players and the bid cost overdissipation of rents is impossible under full rationality but is observed in laboratory experiments our model predicts this property

games with unique mixed strategy equilibria an experimental study abstract the results of an experiment studying the choices of subjects playing mixed extensions of three variants of simple 2 2 non constant sum strictly competitive games of the same form matching pennies are presented subjects exhibited a variety of behavioral adaptive learning strategies this heterogeneity of individual behavior produced aggregate dynamics whose estimated steady states are quite different from those predicted by the nash equilibria of those stage games with asymmetrical payoff functions the observed aggregative dynamics are well accounted for both by a quantal equilibrium model of mckelvey and palfrey and by a learning model of roth and erev journal of economic literature classification number c72

appropriation and concern for resource scarcity in the commons an experimental study abstract we use an experimental linear design and a logit probabilistic choice function to model and estimate agents concern for resource scarcity although full appropriation is the dominant strategy of the basic game whatever the resource size we expect that if agents exploiting a common pool resource feel any concern for resource scarcity they would be more likely to alter their appropriation strategy the scarcer the resource stock our results show that this expectation holds and appropriation is restrained when resources are scarce further as this result could be attributed to both agents concern for resource scarcity and calculation errors in the determination of the appropriation strategies we estimate the relevance of both

why do people give testing pure and impure altruism abstract researchers measure crowd out around one level of charity output to identify whether giving is motivated by altruism and or warm glow however crowd out depends on output implying first that the power to reject pure altruism varies and second that a single measurement of incomplete crowd out can be rationalized by many different preferences by instead measuring crowd out at different output levels we allow both for identification and for a novel and direct test of impure altruism using a new experimental design we present the first empirical evidence that consistent with impure altruism crowd out decreases with output jel d64 l31

crowding out voluntary contributions to public goods we test the null hypothesis that involuntary transfers for the provision of a public good will completely crowd out voluntary transfers against the warm glow hypothesis that crowding out will be incomplete because individuals care about giving our design differs from the related design used by andreoni in considering two levels of the involuntary transfer and a wider range of contribution possibilities and in mixing groups every period instead of every four periods we analyse the data with careful attention to boundary effects we retain the null hypothesis of complete crowding out in two of three pairwise comparisions but reject it in favour of incomplete crowding out in the comparison most closely akin to andreoni s design thus we confirm the existence of incomplete crowding out in some environments but suggest that the warm glow hypothesis is inadequate in explaining it

progress in behavioral game theory i s game theory meant to describe actual choices by people and institutions or not it is remarkable how much game theory has been done while largely ignoring this question the seminal book by von neumann and morgenstern the theory of games and economic behavior was clearly about how rational players would play against others they knew were rational in more recent work game theorists are not always explicit about what they aim to describe or advise at one extreme highly mathematical analyses have proposed rationality requirements that people and firms are probably not smart enough to satisfy in everyday decisions at the other extreme adaptive and evolutionary approaches use very simple modelsmostly developed to describe nonhuman animals in which players may not realize they are playing a game at all when game theory does aim to describe behavior it often proceeds with a disturbingly low ratio of careful observation to theorizing this paper describes an approach called behavioral game theory which aims to describe actual behavior is driven by empirical observation mostly experiments and charts a middle course between over rational equilibrium analyses and under rational adaptive analyses the recipe for behavioral game theory i will describe has three steps start with a game or naturally occurring situation in which standard game theory makes a bold prediction based on one or two crucial principles if behavior differs from interested readers familiar with game theory should read crawford 1997 whose approach is more eclectic than mine he concludes p 236 that most strategic behavior can be understood via a synthesis that combines elements from each of the leading theoretical frameworks traditional game theory evolutionary game theory and adaptive learning with a modicum of empirical information about behavior behavioral game theory adds psychological interpretations to this synthesis

the role of cooperation and reciprocity in structuring carbon sequestration contracts in developing countries the reduction of emissions from deforestation and forest degradation redd presents a key opportunity for developing countries to mitigate global warming and to help meet long term global climate objectives however the success of a redd strategy in a post kyoto protocol regime depends primarily on the design and implementation of a financial mechanism that is feasible and effective in providing the right incentives to land holders to manage forests in a sustainable manner that contributes to climate goals optimal redd contracts must not only properly reward agents who reduce emissions from deforestation and degradation dd but also account for technical issues such as permanence and additionality of carbon offsets in many countries national authorities may not have the institutional capacity and the proper technology for measuring the delivery of carbon offsets furthermore contract enforcement becomes complex because the effort and outcomes described in such contracts are difficult for a third party to monitor and verify therefore contracts need to provide sufficient incentives to all parties to participate and perform in the long term i e to be self enforcing however the structure of the contracts may vary depending on the presence of selfish and altruistic agents this paper studies the role of cooperation and reciprocity on the structure of carbon sequestration contracts in the context of developing countries where legal enforcement may be impractical we examine if the optimal structure of self enforcing contracts differs if the paula cordero salas is a ph d candidate and brian roe is the mccormick professor of agricultural marketing and policy aede department the ohio state university this project was supported by the world bank s development research group energy and environment team under the contract a mechanism for reducing emissions from deforestation and degradation redd a framework to design cost effective contracts

altruism and charitable giving in a fully replicated economy abstract in this paper an economy is analyzed where one group of agents the altruists cares about the well being of another group of agents the recipients it is asked how changes in the size of these groups affect the altruists charitable giving in the nash equilibrium i show that a pure group size effect i e a proportional expansion of both subgroups can lead to less free riding and to a lower degree of underprovision relative to the efficient level of charitable giving

the logit equilibrium a perspective on intuitive behavioural anomalies costs associated with deviations from the nash equilibrium these payoff asymmetry effects are incorporated in an approach that introduces noisy behavior via a logit probabilistic choice function in the resulting logit equilibrium behavior is characterized by a probability distribution that satisfies a rational expectations consistency condition the beliefs that determine players expected payoffs match the decision distributions that arise from applying the logit rule to those expected payoffs we prove existence of a unique symmetric logit equilibrium and derive comparative statics results the paper provides a unified perspective on many recent laboratory studies of games in which nash equilibrium predictions are inconsistent with both intuition and experimental evidence

simultaneous decision making in competitive and cooperative environments we experimentally investigate simultaneous decision making in two contrasting environments a competitive environment a contest and a cooperative environment a voluntary contribution mechanism we find that the cooperative nature of the voluntary contribution mechanism spills over to the contest decreasing sub optimal overbidding in the contest however contributions to the public good are not affected by simultaneous participation in the contest there is a significant negative correlation between decisions made in competitive and cooperative environments i e more cooperative subjects tend to be less competitive and vice versa this correlation can be rationalized by heterogeneous social preferences towards inequality but not by bounded rationality theory

economic science an experimental approach for teaching and research economics experiments have been used to study theories and policies that are often difficult to evaluate with data from naturally occurring markets this paper is a selective summary of my work in the main areas of experimental economics markets individual decisions games and public choice the discussion pertains both to scientific discoveries and teaching innovations

efficiency of nonpoint source pollution instruments an experimental study in nonpoint source pollution problems the regulator does not observe each polluter s individual emission which prevents him from using the conventional policy instruments therefore new instruments have been designed to regulate this type of pollution in an experiment we compare the efficiency of some of these instruments an input based tax an ambient tax subsidy an ambient tax and a group fine we assume that polluters themselves are affected by environmental damages a control session without any regulation is also carried out in order to study the status quo situation our experimental data show that the input tax and the ambient tax are very efficient and reliable and the group fine is fairly efficient and reliable these instruments improve social welfare with respect to the status quo on the contrary the ambient tax subsidy decreases social welfare with respect to the status quo and its effect is very unreliable

the effect of foreign competition on forecasting bias this paper studies the effect of foreign competition on the extent of forecasting bias i focus on two biases often described in the behavioral economics literature overoptimism and excessive belief in trends using data from firm level surveys in five african countries i show that firms that do not face foreign competition generate forecasts of sales growth that have greater trend and optimism biases than firms that have foreign competitors i further provide evidence that these erroneous forecasts have real effects on firms inventory management

distance without direction restoring credibility to a much loved construct in this commentary we build on shenkar s 2001 award winning critique of cultural distance arguing that most distance constructs in fact suffer the same flaws because they oversimplify the relationship between countries overlook their subjective and context specific nature and pay insufficient attention to the mechanisms through which distance operates the idea of distance however has intrinsic value moreover its considerable appeal and undeniable effectiveness have made it a well entrenched construct therefore we see merit in redressing its weaknesses and offer several suggestions for doing so these include allowing for the influence of firm level characteristics that either moderate the effects of distance or render distance at least in part subjective with varying consequences for different mnes maintaining directionality by distinguishing between distance and the tendency toward a particular characteristic and acknowledging asymmetry and conceptualizing the effects of distance and the mechanisms through which it operates more carefully by drawing on concepts and measures from a variety of disciplines by offering ways to strengthen both its theoretical foundations and measurement we hope to enhance the usefulness of one of international business theory s most central constructs

noisy directional learning and the logit equilibrium we specify a dynamic model in which agents adjust their decisions toward higher payoffs subject to normal error this process generates a probability distribution of players decisions that evolves over time according to the fokker planck equation the dynamic process is stable for all potential games a class of payoff structures that includes several widely studied games in equilibrium the distributions that determine expected payoffs correspond to the distributions that arise from the logit function applied to those expected payoffs this logit equilibrium forms a stochastic generalization of the nash equilibrium and provides a possible explanation of anomalous laboratory data

mandatory minimum contributions heterogeneous endowments and voluntary public good provision abstract in a public good experiment with heterogeneous endowments we investigate if and how the contribution level as well as the previously observed fair share rule of equal contributions relative to one s endowment hofmeyr et al 2007 keser et al 2014 are influenced by minimum contribution requirements we consider three different schedules fixmin requiring the same absolute contributions relmin requiring the same relative contributions and progmin requiring minimum contributions that progressively increase with the endowment we find that minimum contributions exert norm giving character and may lead to an increase in average group contributions this is especially true for the progressive schedule on the individual level this schedule leads to higher relative contributions by the wealthier players and thus violates the fair share norm on the group level it leads to the highest contribution level and the lowest inequality in total profits as measured by the gini index

promises and conventions an approach to pre play agreements abstract i analyze how informal agreements can be sustained by moral emotions with regard to a large class of two player games specifically i assume that people feel guilty if they breach an agreement and that the guilt increases according to the degree of the harm inflicted on the other a central insight is that it is easier to sustain efficient informal agreements if actions are strategic complements than if they are strategic substitutes i complement this general insight by studying two specific cases where negotiators face uncertainty about the breach of the agreement i show that while the optimal agreement in a game with strategic substitutes must compromise on surplus maximization and efficiency the optimal agreement in a game with sufficiently strong strategic complements tends to maximize both the surplus and the probability of compliance especially if the game is symmetric

contributions in linear public goods experiments with stranger matching two motivations we investigated why subjects contribute to the public good in a linear public goods game with stranger matching in this experiment subjects were asked to determine their contributions to the publ

anomalous behavior in a traveler s dilemma the notion of a nash equilibrium has joined supply and demand as one of the two or three techniques that economists instinctively try to use first in the analysis of economic interactions moreover the nash equilibrium and closely related game theoretic concepts are being widely applied in other social sciences and even in biology where evolutionary stability often selects a subset of the nash equilibria many people are uneasy about the stark predictions of the nash equilibrium in some contexts where the extreme rationality assumptions seem implausible kaushik basu s 1994 traveler s dilemma is a particularly convincing example of a case where the unrelenting logic of game theory is at odds with intuitive notions about human behavior the story associated with the dilemma is that two travelers purchase identical antiques while on a tropical vacation their luggage is lost on the return trip and the airline asks them to make independent claims for compensation in anticipation of excessive claims the airline representative announces

reciprocity and wage undercutting it is well documented that employers refuse to hire workers who o er their services at less than the prevailing wage the received explanation is that workers are motivated by reciprocity they desire to reward kindness and punish hostility to refuse an outsider s underbid is viewed as a kind choice that is met with good e ort a low wage is viewed as an insult that is met with shirking we have developed a general theory of reciprocity which in this paper is applied to a wage setting game played by an employer and two workers we show that when workers are motivated by reciprocity equilibrium behaviour accords well with the aforementioned stylized facts 2000 elsevier science b v all rights reserved jel classixcation d63 e24 j41

psychic distance and organizational performance an empirical examination of international retailing operations we develop a reconceptualization and operationalization of psychic distance that broadens the concept we then empirically test this operationalization and investigate the relationship between psychic distance and organizational performance our results suggest that psychic distance as a summary construct explains a significant proportion of the variance in financial performance and strategic effectiveness however disaggregation of the construct substantially increases its explanatory power the results also support a psychic distance paradox where psychic distance has a positive relationship with organizational performance

adaptation and performance in foreign markets evidence of systematic under adaptation past empirical studies have yielded no consistent relationship between strategy adaptation and firm performance these inconclusive results may be partially due to a bias amongt managers to under adapt their host market strategies this paper presents the results of the second stage of a longitudinal study identifying a potential status quo bias among exporters leading to systematic under adaptation

the voluntary provision of a pure public good with diminishing marginal returns in experiments investigating the voluntary provision of a pure public good participants consistently allocate resources to this good when the nash prediction is to allocate nothing this paper explores the robustness of this result when the nash prediction calls for a division of resources between the private and public goods we consider how a change in individual resource endowments and supplemental earnings information affect allocations to the public good results indicate that under both the high and low endowment conditions groups continue to allocate more resources than the nash prediction however providing participants with detailed instructions that describe the declining marginal benefit to the public good leads to a significant decrease in allocations to the public good

an explanation of anomalous behavior in models of political participation this paper characterizes behavior with noisy decision making for models of political interaction characterized by simultaneous binary decisions applications include voting participation games candidate entry the volunteer s dilemma and collective action problems with a contribution threshold a simple graphical device is used to derive comparative statics and other theoretical properties of a quantal response equilibrium and the resulting predictions are compared with nash equilibria that arise in the limiting case of no noise many anomalous data patterns in laboratory experiments based on these games can be explained in this manner

the spite dilemma spite or no spite is there a dilemma abstract contributions from five voluntary contribution public goods laboratory sessions do not converge to the conventional equilibrium at which the individually rational action for each subject coincides with the collectively rational action deviations are not explained by the value orientations of the participants

an experimental study of jury decision rules we present experimental results on groups facing a decision problem analogous to that faced by a jury we consider three treatment variables group size three or six number of votes needed for conviction majority or unanimity and pre vote deliberation we find evidence of strategic voting under the unanimity rule a large fraction of our subjects vote for a decision analogous to conviction even when their private information indicates a state analogous to innocence this is roughly consistent with the game theoretic predictions of feddersen and pesendorfer although individual behavior is explained well by the game theoretic model there are discrepancies at the level of the group decision contrary to feddersen and pesendorfer in our experiments there are fewer outcomes analogous to incorrect convictions under unanimity rule than under majority rule in the case of no deliberation we simultaneously account for the individual and group data using quantal response equilibrium

does psychic distance moderate the market size entry sequence relationship an analysis of 924 foreign market entries made by a sample of chinese exporters reveals that psychic distance moderates the relationship between foreign market size and entry sequence in doing so this study challenges the extant hypothesis that the establishment of foreign operations conforms to a simple pattern of increasing psychic distance to markets the findings also reveal that psychic distance is asymmetrical in nature and that assessments made by sellers and their buyers are inherently inequivalent

on the empirical content of quantal response equilibrium the quantal response equilibrium qre notion of mckelvey and palfrey 1995 has recently attracted considerable attention due largely to its widely documented ability to rationalize observed behavior in games played by experimental subjects we show that this ability to t the data as typically measured in this literature is uninformative without ap riori distributional assumptions a qre can match any distribution of behavior by each player in any normal form game we discuss approaches that might be taken to provide valid empirical evaluation of the qre and discuss its potential value as an approximating empirical structure

altruism spillovers are behaviors in context free experiments predictive of altruism toward a naturally occurring public good abstract this paper addresses the external validity of experiments investigating the characteristics of altruism in the voluntary provision of public goods we conduct two related experiments that allow us to examine whether individuals who act more altruistically in the context free environment are also more likely to act altruistically toward a naturally occurring public good we find that laboratory behavior can be predictive of contributions toward naturally occurring goods but not in a uniform way in fact parametric measures of altruism do a poor job of predicting which subjects are most likely to contribute to a naturally occurring public good

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

psychic distance and performance of mncs during marketing crises when multinational corporations face foreign marketing crises the psychic distance between the home and host country represents a distinct challenge this paper examines the curvilinear relationship between psychic distance and firm performance during marketing crises and the moderating role of marketing capabilities we test our hypotheses using an event study on a panel dataset of 217 firms based in 19 countries facing crises in 41 host countries the results show that 1 marketing crises are most harmful when the host country is either very close or far away and 2 firms can mitigate this effect with marketing capabilities

the effects of competition on executive behavior economists presume that competition spurs a firm to be more efficient by forcing it to reduce its agency problems this article investigates this presumption it finds that the effects of competition on executive behavior can be decomposed into four effects each of which is of potentially ambiguous sign theory thus offers no definitive defense of this presumption this article also derives sets of conditions under which increased competition has the presumed effect of reducing agency problems in some sets important conditions are that increased competition reduce the executive s expected income and that agency goods e g shirking be normal goods for the executive the article shows that an increase in the shareholder bargaining strength can both reduce the agency problem and make it more sensitive to competition