equilibrium in justifiable strategies a model of reason based choice in extensive form games i explore the idea that people care about the justifiability of their decisions in the context of two person extensive games each player justifies his strategy s with a belief b of the opponent s strategy which is consistent with the play path and maximally plausible according to some exogenous criterion we say that s is justifiable if against the ex post criticism that some other strategy s outperforms s against b the player can argue that playing s would have exposed him to similar criticism in the opposite direction under a simplicity based plausibility criterion this concept implies systematic departures from maximizing behaviour in familiar games

inward versus outward growth orientation in the presence of country risk the purpose of this paper is to model the role of trade dependency in determining the access of a developing economy to the international credit market and its desirable growth strategy with full integration of capital markets the choice with respect to the inwardness of a technology is irrelevant investment will be channeled to the more productive sectors independently of their trade inwardness with limited capital market integration a given investment will generate two effects the first is the standard direct productivity effect that is associated with the change in future output the second is the trade dependency externality generated by the change in future bargaining outcomes due to the change in the trade dependency of the nation with partial integration investment that increases trade dependency is desirable if the credit markets are disjoint due to partial defaults higher trade dependency is disadvantageous thus higher trade dependency generates a positive externality with partial integration of capital markets and a negative externality with disjoint credit markets we show that credit market integration is determined by the size of the indebtedness relative to the trade dependency as reflected by the repayment burden that is supported by the bargaining outcome the repayment bargaining outcome is determined by the sectoral composition of the economy and by the effective size of the developing and the developed economies this abstract was borrowed from another version of this item

alternating bid bargaining with a smallest money unit abstract in a seminal paper ariel rubinstein has shown that impatience implies determinateness of the two person bargaining problem in this note we show that this result depends also on the assumption that the set of alternatives is a continuum if the pie can be divided only in finitely many different ways for example because the pie is an amount of money and there is a smallest money unit any partition can be obtained as the result of a subgame perfect equilibrium if the time interval between successive offers is sufficiently small we also show that for a fixed discount rate all subgame perfect equilibrium payoffs of the discrete game converge to the solution obtained by rubinstein if the smallest money unit tends to zero

nonlinear expectations in speculative markets evidence from the ecb survey of professional forecasters chartist and fundamentalist models have proven to be capable of replicating stylized facts on speculative markets in general this is achieved by specifying nonlinear interactions of otherwise linear asset price expectations of the respective trader groups this paper investigates whether or not regressive and extrapolative expectations themselves exhibit significant nonlinear dynamics the empirical results are based on a new data set from the european central bank survey of professional forecasters on oil price expectations in particular we find that forecasters form destabilizing expectations in the neighborhood of the fundamental value whereas expectations tend to be stabilizing in the presence of substantial oil price misalignment

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

bargaining and reputation the paper develops a reputation based theory of bargaining the idea is to investigate and highlight the influence of bargaining postures on bargaining outcomes a complete information bargaining model a la rubinstein is amended to accommodate irrational types who are obstinate and indeed for tractability assumed to be completely inflexible in their offers and demands a strong independence of procedures result is derived after initial postures have been adopted the bargaining outcome is independent of the fine details of the bargaining protocol so long as both players have the opportunity to make offers frequently the latter analysis yields a unique continuous time limit with a war of attrition structure in the continuous time game equilibrium is unique and entails delay consequently inefficiency the equilibrium outcome reflects the combined influence of the rates of time preference of the players and the ex ante probabilities of different irrational types as the probability of irrationality goes to zero delay and inefficiency disappear furthermore if there is a rich set of types for both agents the limit equilibrium payoffs are inversely proportional to their rates of time preference

bargaining with deadlines and imperfect player control anecdotal and experimental evidence suggests that bargaining sessions subject to deadlines often begin with cheap talk and rejected proposals agreements if they are reached at all tend to be concluded near the deadline we attempt to capture and explain these phenomena in a strategic bargaining model that incorporates a bargaining deadline the possibility of strategic delay and a lack of perfect player control over the timing of offers imperfect player control is generated by an exogenous uniformly distributed random delay in offer transmission our model has a symmetric markov perfect equilibrium unique at almost all nodes in which players adopt strategic delay early in the game make and reject offers later on and reach agreements late in the game if at all in equilibrium players miss the deadline with positive probability the expected division of the surplus is unique and close to an even split

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

bargaining without a common prior an immediate agreement theorem in sequential bargaining models without outside options each player s bargaining power is ultimately determined by which player will make an offer and when this paper analyzes a sequential bargaining model in which players may hold different beliefs about which player will make an offer and when excessive optimism about making offers in the future can cause delays in agreement the main result states that despite this if players will remain sufficiently optimistic for a sufficiently long future then in equilibrium they will agree immediately this result is also extended to other canonical models of optimism

externalities incentives and failure to achieve national objectives in decentralized economies abstract this paper studies why decentralized economies often fail to achieve national objectives we assume that the central government allocates its tax revenues among a large number of decision makers provincial authorities or ministers decision makers are facing a soft budget constraint because of limited monitoring by the central authorities spending in excess to allocations fuels inflation cooperation to limit aggregate spending occurs when no decision maker can benefit by opportunistic behavior adverse macroeconomic shocks are shown to reduce the likelihood that decentralized decision makers will cooperate in order to achieve national objectives debt relief can induce higher investment because it can promote a shift from opportunistic behavior to cooperation

rationalizable strategic behavior the notion of equilibrium proposed by nash 19 has come to play a dominant role in economic applications of noncooperative games while analyses of nash equilibria have unquestionably contributed to our understanding of economic behavior it would be unreasonably optimistic to maintain that nash solved the problem of noncooperative strategic choice there is a small literature beginning with ellsberg 6 and a much larger oral tradition which argues that nash behavior is neither a necessary consequence of rationality nor a reasonable empirical proposition in this paper i take the view that although there may be various reasons why an agent might select a nash strategy the notion of an equilibrium has little intrinsic appeal within a strategic context when an agent reaches a decision in ignorance of the strategies adopted by other players rationality consists of making a choice which is justifiable by an internally consistent system of beliefs rather than one which is optimal post hoc this point of view is not original indeed most serious justifications of the nash hypothesis embrace such an approach arguing that agents will expect the game to yield a nash outcome and consequently will choose their equilibrium strategies nevertheless when we think in terms of maximizing utility subject to expectations rather than realizations it becomes clear that the nash hypothesis far from being a consequence of rationality arises from certain restrictions on agents expectations which may or may not be plausible depending upon the game being played we are then quite naturally led to ask are there any restrictions of individuals expectations and hence choices which are required by rationality alone rather than by subjective plausibility this paper is concerned with defining justifying characterizing and refining a criterion for rational strategic choice which i label rationalizability

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

tough negotiations bilateral bargaining with durable commitments abstract we offer a tractable model of tough negotiations and delayed agreement the setting is an infinite horizon bilateral bargaining game in which negotiators can make strategic commitments to durable offers commitments decay stochastically but uncommitted negotiators can make new commitments the game s unique markov perfect equilibrium outcome takes the form of a war of attrition negotiators initially commit to incompatible offers but agreement occurs once a negotiator s commitment decays if commitments decay more quickly the terms of the agreement become more equal in expectation more patient committed and less risk averse negotiators obtain a larger fraction of the surplus

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

gambling over public opinion we consider bargaining environments in which public opinion provides leverage by making compromises costly two parties make initial demands before knowing the public opinion if deadlocked they can bargain again after public opinion forms but suffer reputation costs if they compromise i e scale back their demands we show that in equilibrium parties may choose to make incompatible demands initially and gamble over public opinion even though one or both parties must bear a cost later we characterize when deadlocks arise and how this affects the welfare of the public in a representative two party democracy compared to a direct democracy

optimal value commitment in bilateral bargaining we study the role of commitment as a source of strategic power in a non cooperative bargaining game two impatient players bargain about the division of a shrinking surplus under a standard bargaining protocol in discrete time with constant recognition probabilities before bargaining a player can commit to some part of the surplus this commitment remains binding until the surplus has shrunk below the amount that the player is committed to intuitively one cannot remain committed to something which has become impossible the model offers insight on the relative importance of proposal power and commitment for the bargaining outcome in a version of the game where both players may simultaneously choose their commitments the equal split emerges from within a range of equilibrium divisions as a focal point which is robust to changes in the model parameters 2012

grand corruption instead of commitment reconsidering time inconsistency of monetary policy abstract this paper suggests that inflation may be affected differently by grand corruption compared to its positive nexus with petty corruption in an extended barro and gordon 1983a model grand corruption may serve as a quasi commitment device a cheating expropriating government may actually deter a monetary authority from cheating reneging furthermore rogoff s 1985 conservative central banker has an unambiguously beneficial effect she reduces the inflationary bias even more while also rendering fiscal policy more effective the model nests the standard fiscal monetary interaction logic with and without expropriation as well as the diametrical symbiosis result obtained by dixit and lambertini 2003a

rationalizable strategic behavior and the problem of perfection this paper explores the fundamental problem of what can be inferred about the outcome of a noncooperative game from the rationality of the players and from the information they possess the answer is summarized in a solution concept called rationalizability strategy profiles that are rationalizable are not always nash equilibria conversely the information in an extensive form game often allows certain unreasonable nash equilibria to be excluded from the set of rationalizable profiles a stronger form of rationalizability is appropriate if players are known to be not merely rational but also cautious what constitutes rational behavior in a noncooperative strategic situation this paper explores the issue in the context of a wide class of finite noncooperative games in extensive form the traditional answer relies heavily upon the idea of nash equilibrium nash 17 the position developed here however is that as a criterion for judging a profile of strategies to be reasonable choices for players in a game the nash equilibrium property is neither necessary nor sufficient some nash equilibria are intuitively unreasonable and not all reasonable strategy profiles are nash equilibria the fact that a nash equilibrium can be intuitively unattractive is well known the equilibrium may be imperfect introduced into the literature by selten 20 the idea of imperfect equilibria has prompted game theorists to search for a narrower definition of equilibrium while this research some of which will be discussed here has been extremely instructive it remains inconclusive theorists often agree about what should happen in particular games but to capture this intuition in a general solution concept has proved to be very difficult if this paper is successful it should make some progress in that direction the other side of the coin has received less scrutiny can all non nash profiles really be excluded on logical grounds i believe not the standard justifications for considering only nash profiles are circular in nature or make gratuitous assumptions about players decision criteria or beliefs the following discussion of these points is extremely brief due to space constraints more detailed arguments may be found in pearce 18

crude awakening behind the surge in oil prices the first few months of 2008 saw crude oil prices breach one barrier after another they topped 100 a barrel for the first time on feb 19 then rose past 103 76 about two weeks later surpassing the previous inflation adjusted peak established in 1980 in april and early may oil prices pushed past 110 and then 120 a barrel and beyond these milestones reflect a new era in oil markets after the tumult of the early 1980s prices remained relatively tame for two decades in both real and nominal terms this long stretch of stability ended in 2004 when oil topped 40 a barrel for the first time then embarked on a steep climb that continued into this year modern economies run on oil so it s important to understand how recent years with their surging prices differ from the preceding two decades a good starting point is strong demand which has pushed world oil markets close to capacity new supplies haven t kept up with this demand fueling expectations that oil markets will remain tight for the foreseeable future a weakening dollar has put upward pressure on the price of a commodity that trades in the u s currency and because a large share of oil production takes place in politically unstable regions fears of supply disruptions loom over markets these factors have fed the steady sometimes swift rise of oil prices in recent years their persistence suggests the days of relatively cheap oil are over and the global economy faces a future of high energy prices how they play out will shape oil markets and determine prices for years to come

a non cooperative bargaining game with risk averse players and an uncertain finite horizon abstract for an alternating offer bargaining game with an uncertain horizon the equilibrium payoff to a player is greater the less risk averse is he relative to his opponent as the horizon becomes infinite in length the equilibrium partition converges to the nash bargaining solution

voluntary contributions to a joint project with asymmetric agents we revisit admati and perry 1991 s model of voluntary contributions to a joint project their main result that equilibrium contributions are small appears not to be robust to the introduction of asymmetries

a bargaining model based on the commitment tactic abstract this paper studies a one shot simultaneous move bargaining game each bargainer makes a partial commitment a share of the unit size cake that she would like to get which can later be revoked at some cost to the player the payoffs are defined in part by the nash bargaining solution where the feasible utility set is affected by the players partial commitments under certain assumptions on the two cost of revoking functions we establish that the model has a unique nash equilibrium it is shown that a player s equilibrium share of the cake is strictly increasing in her marginal cost of revoking a partial commitment an application of our model selects a unique equilibrium in nash s demand game journal of economic literature classification number c78

a non cooperative bargaining model with strategically timed offers abstract rubinstein s alternating offers bargaining model is enriched by allowing players to choose when and whether or not to make an offer time is continuous and players make offers whenever they wish it is assumed that upon making an offer players must wait a fixed amount of time before making another it is shown that if players can react arbitrarily quickly to their opponent s offers then all subgame perfect equilibrium outcomes are rubinstein like in particular efficient however if it takes time to react then some delay can be supported this potential delay becomes arbitrarily large as reaction times increase journal of economic literature classification numbers c78 c72

bargaining with revoking costs abstract a simple two stage bilateral bargaining game is analyzed the players simultaneously demand shares of a unit size pie if the demands add up to more than one the players simultaneously choose whether to stick to their demand or accept the other s offer while both parties sticking to their offers leads to an impasse accepting a lower share than the original demand is costly for each party the set of pure strategy subgame perfect equilibria of the game is characterized for continuously differentiable payoff and cost functions strictly increasing in the pie share and the amount conceded respectively higher cost functions are shown to improve bargaining power the limit equilibrium prediction of the model as the cost functions are made arbitrarily high selects a unique equilibrium in the nash demand game that corresponds to a proportional bargaining solution of kalai 1977

common belief and the theory of games with perfect information abstract the statement it is common belief that player i is bayesian rational where bayesian rational means an expected utility maximizer is defined for two person games with perfect information it is shown that in most such games it is not possible for a theory so postulate the bayesian rationality of all players and to be common belief this bears directly upon the salience of standard solution concepts such as subgame perfect and sequential equilibria as well as upon the extensive form rationalizability theories of d bernheim econometrica 52 1984 1009 1028 and d pearce econometrica 52 1984 1029 1050 which rely heavily on the common belief of bayesian rationality journal of economic literature classification number c72

the competitive externalities and the optimal seignorage this study analyzes the inflation tax in an economy with several competing decisionmakers who can effectively print more money via the central bank the author derives the sequential rational expectation equilibrium and shows that the presence of competing decisionmakers increases the inflation rate and may put the economy on the wrong side of the inflation tax laffer curve the analysis is interpreted for a country consisting of several states or provinces where the centralized government system is weak similar results apply to the case of competing ministers in an economy where the central bank is weak copyright 1992 by ohio state university press

deadline effects and inefficient delay in bargaining with endogenous commitment abstract bilateral sequential negotiators delay agreements until a deadline if a player that rejects an offer is subsequently committed not to accept any poorer proposal and if the common discount factor is close enough to one journal of economic literature classification numbers c7 c78 j52

bargaining with history dependent preferences abstract two impatient players bargain over a pie of size one according to the infinite alternating offers procedure players payoffs depend not only on the outcome but also on the process of the bargaining specifically they prefer impasse to any agreement that gives them lower discounted utility than would have been derived from accepting earlier offers we characterize the essentially unique subgame perfect equilibrium path which consists of gradual concessions the more patient players are the longer it takes them to reach an agreement when players become infinitely patient the efficiency loss is substantial yet the equilibrium division converges to the nash solution

alternating offer bargaining with endogenous commitment abstract we revisit the classical alternating offer bargaining model further assuming that players cannot reduce their proposals during the game in equilibrium players have history dependent strategies and do not necessarily reach an agreement immediately in the first stage

opec s kinked demand curve abstract asymmetric effects of oil prices on the macroeconomy imply multiple equilibrium prices for opec i estimate world demand for crude oil non opec supply and the effects of changes in price on world gdp using quarterly data covering 1973 to 2010 if opec s marginal cost is 20 bbl in 2014 iii and its discount rate is zero estimated equilibrium prices are 44 88 bbl multiple equilibria incent opec to tolerate unstable prices which because of the asymmetry lower world gdp both policies that increase responsiveness to price and policies that lower net demand to opec narrow and lower the range of equilibrium prices but the former are more effective at doing so opec responds to changes in the discount rate in the opposite way from competitive producers so policies that secure oil related property rights in opec countries and other policies that lower opec s discount rate narrow and lower the range of equilibrium prices monetary policy is more effective at accelerating or slowing macroeconomic activity the larger is opec s market share

simultaneous offers and the inefficiency of bargaining a two period example abstract it is shown that the pareto optimal outcomes in a two period simultaneous move bargaining model violate forwards induction rationality when the players are sufficiently patient this bargaining model describes a situation where a principal is represented by an agent whose flexibility is restricted hence a bargaining process with such agents can create costly delays the result also provides another example of the power of forwards induction and stability