bubbles and experience an experiment we investigate the occurrence of bubble crash pricing patterns in laboratory financial markets with a mixture of experienced and inexperienced traders we find that even with a minority of experienced traders bubbles are substantially abated

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

uncertainty and incentives in crisis bargaining game free analysis of international conflict we study two different varieties of uncertainty that countries can face in international crises and establish general results about the relationship between these sources of uncertainty and the possibility of peaceful resolution of conflict among our results we show that under some weak conditions there is no equilibrium of any crisis bargaining game that has voluntary agreements and zero probability of costly war we also show that while uncertainty about the other side s cost of war may be relatively benign in peace negotiations uncertainty about the other side s strength in war makes it much more difficult to guarantee peaceful outcomes along the way we are able to assess the degree to which particular modeling assumptions found in the existing literature drive the well known relationship between uncertainty the incentive to misrepresent and costly war we find that while the theoretical connection between war and uncertainty is quite robust to relaxing many modeling assumptions whether uncertainty is about costs or the probability of victory remains important

the armed peace a punctuated equilibrium theory of war according to a leading rationalist explanation war can break out when a large rapid shift of power renders unbelievable a rising state s promise to compensate its declin ing opponent causing the latter to attack preventively this mechanism does not provide a complete and coherent explanation of war because it does not specify how inefficient fighting resolves this commitment problem we present a complete information model of war as a sequence of battles and show that although opportunities for a negotiated settle ment arise throughout the very desirability of peace creates a commitment problem that undermines its likelihood because players have incentives to settle as soon as possible they cannot credibly threaten to fight long enough if an opponent launches a surprise at tack this decreases the expected duration and costs of war and causes mutual deterrence to fail fighting s sheer destruction improves the credibility of these threats by decreasing the benefits from continuing the war equilibrium fighting may involve escalating costs that exceed the value of the stakes by the time peace is negotiated and that leave both players worse off than when the war began

unleashing animal spirits self control and overpricing in experimental asset markets one explanation for overpricing on asset markets is a lack of traders self control we implement the first experiment to address the causal relationship between self control and systematic overpricing on financial markets our setup detects some of the channels through which low individual self control could transmit into irrational exuberance in markets our data indicate a large direct effect of reduced self control on market overpricing low self control traders report stronger emotions after the market

probability judgment error and speculation in laboratory asset market bubbles in 12 sessions conducted in a typical bubble generating experimental environment we design a pair of assets that can detect both irrationality and speculative behavior the specific form of irrationality we investigate is the probability judgment error associated with lowprobability high payoff outcomes independently we test for speculation by comparing prices of identically paying assets in multiperiod versus single period markets we establish that aggregate irrationality measured in one dimension probability judgment error is associated with aggregate irrationality measured in another bubble formation

it is not just confusion strategic uncertainty in an experimental asset market to what extent is the observed mispricing in experimental asset markets caused by strategic uncertainty and by confusion we address this question by comparing subjects initial price forecasts in two market environments one with six human traders and the other with one human and five computer traders we find that both strategic uncertainty and confusion contribute equally to the median initial forecast deviation from the fundamental value the effect of strategic uncertainty is greater for subjects with a perfect score in the cognitive reflection test and it is not significant for those with low scores

thar she bursts reducing confusion reduces bubbles to explore why bubbles frequently emerge in the experimental asset market model of smith suchanek and williams 1988 we vary the fundamental value process constant or declining and the cash to asset value ratio constant or increasing we observe high mispricing in treatments with a declining fundamental value while overvaluation emerges when coupled with an increasing c a ratio a questionnaire reveals that the declining fundamental value process confuses subjects as they expect the fundamental value to stay constant running the experiment with a different context stocks of a depletable gold mine instead of stocks significantly reduces mispricing and overvaluation as it reduces confusion jel c91 d14 g11 g12

bubbles crashes and endogenous uncertainty in linked asset and product markets in laboratory asset markets subjects trade shares of a firm whose profits in a linked product market determine dividends treatments vary whether dividend information is revealed once per period or in real time and whether the firm is controlled by a profit maximizing robot or human subject the latter variation induces uncertainty about firm behavior bridging the gap between laboratory and field markets our data replicate well known features of laboratory asset markets e g bubbles suggesting these are robust to a market based dividend process compared to a sample of previous experiments both real time information revelation and endogenous uncertainty impede the bubble mitigating impact of experience

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

fees and the efficiency of tradable permit systems an experimental approach the paper presents the results of an economic experiment in which the effects of fees on allocative efficiency of tradable utilization permits e g pollution permits are explored laboratory subjects university students play the roles of firms whose generic product requires a specific input or permits scarcity is exogenously introduced by a fixed supply of tradable production permits three treatments are compared no fee imposed n a fixed tax per permit t and partial retraction of permits and subsequent redistribution by auction a treatments t and a represent two different ways of imposing fees which are designed to be revenue equivalent our results indicate that after controlling for deviation of permit prices from a prediction based on fundamentals fees have an impact on distribution of permits interestingly a fixed tax enhances efficiency compared to the case of no fees while retraction and reallocation by auction tends to reduce efficiency apparently subjects decision making is affected by the imposition of fees but how and to what extent depends on the method used

bargaining and learning while fighting much of the existing formal work on war models the decision to go to war as a game ending costly lottery this article relaxes this assumption by treating war as a costly process during which the states run the risk of military collapse the model also allows for uncertainty over either the cost of fighting or the distribution of power the analysis makes four contributions to the growing costly process literature i the present model provides a more general treatment of the learning process that occurs when states are uncertain about the distribution of power ii it explicitly compares the bargaining and learning processes for the two different sources of uncertainty iii it suggests a way to empirically distinguish wars arising from these two sources and iv it shows that the equilibrium dynamics of informational accounts of war may be quite sensitive to the underlying bargaining environment through which information is conveyed

the bubble game an experimental study of speculation we propose a bubble game that involves sequential trading of an asset commonly known to be valueless because no trader is ever sure to be last in the market sequence the game allows for a bubble at the nash equilibrium when there is no cap on the maximum price we run experiments both with and without a price cap structural estimation of behavioral game theory models suggests that quantal responses and analogy based expectations are important drivers of speculation

persistence mean reversion and non linearities in emissions evidence from the brics and g7 countries the ministerio de economia y competitividad eco2014 55236 juncal cunado gratefully acknowledges financial support from the ministerio de economia y competitividad eco2014 55496

information power and war ultimatum bargaining models of international interactions suggest that when conflict is costly and the actors are fully informed the probability of conflict goes to zero however conflict occurs with some positive probability when the challenger is uncertain about the defender s reservation value i employ a simple ultimatum game of bargaining to evaluate two traditional power centric theories of world politics balance of power and power transition theory the formal and empirical analyses demonstrate that as states approach power parity information asymmetries are greatest thus enhancing the probability of militarized conflict uncertainty is a central cause of conflict emergence and is correlated with the distribution of observable capabilities recognizing the relationship between the distribution of power and the uncertainty offers a more sophisticated interpretation of power centric explanations of world politics

the principle of convergence in wartime negotiations if war results from disagreement about relative strength then it ends when opponents learn enough about each other learning occurs when information is revealed by strategically manipulable negotiation behavior and nonmanipulable battlefield outcomes i present a model of simultaneous bargaining and fighting where both players can make offers and asymmetric information exists about the distribution of power in the markov perfect sequential equilibrium making and rejecting offers has informational value that outweighs the one provided by the battlefield however states use both sources of information to learn and settle before military victory the principle of convergence posits that warfare ceases to be useful when it loses its informational content and that belief in defeat victory is not necessary to terminate initiate hostilities thus the standard puzzle in international relations that seeks to account for prewar optimism on both sides may not be that relevant

the impact of monetary policy on stock market bubbles and trading behavior evidence from the lab we investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets we introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of smith et al 1988 treatment groups face a variable interest rate policy which depends on asset prices while control groups are subjected to a constant interest rate we observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles however we find that announcing the possibility of reserve requirements significantly reduces bubbles

the chinese warrants bubble in 2005 2008 over a dozen put warrants traded in china went so deep out of the money that they were almost certain to expire worthless nonetheless each warrant was traded more than three times each day at substantially inflated prices this bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities this sample allows us to examine a set of bubble theories in particular our analysis highlights the joint effects of short sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature jel g12 g13 o16 p34

digital options and efficiency in experimental asset markets abstract in asset markets extraordinary price run ups bubbles followed by crashes back to levels closer to fundamental values have been shown to adversely affect the real economy leading to inefficient resource allocation and underinvestment conversely derivative markets contribute to price discovery and lead to informationally more efficient prices in the market for the underlying asset we combine these observations and test experimentally whether digital options a type of derivative that has recently been introduced to a wider audience via online prediction markets can reduce price bubbles in a laboratory setting we find that subjects do not use the derivative market to improve their expectations of future asset prices and analyze this result

relative performance incentives and price bubbles in experimental asset markets we study experimental markets in which participants face incentives modeled upon those prevailing in markets for managed funds each participant s portfolio is periodically evaluated at market value and ranked by relative performance as measured by short term paper returns those who rank highly attract a larger share of new fund inflows in an environment in which prices are typically close to intrinsic value the effect of these incentives is mild however in an environment in which markets are prone to bubble mispricing is greatly exacerbated by relative performance incentives and becomes even more pronounced with experience

to see is to believe common expectations in experimental asset markets abstract we experimentally manipulate agents information regarding the rationality of others in a setting in which previous studies have found irrationality to be present namely the asset market experiments introduced by smith et al 1988 recent studies suggest that mispricing in such markets may be an artefact of confusion which can be reduced by training subjects to understand the diminishing fundamental value we reconsider this view and propose that when it is made public knowledge that training has occurred this may also reduce uncertainty over the behavior of others and facilitate the formation of common expectations our design disentangles the direct effect of training from the indirect effect of its public knowledge and our results demonstrate a distinct and statistically significant effect of public knowledge over and above that of training alone

experience and confidence in an internet based asset market experiment the experience effect in asset markets is one that was thought to be settled as subjects gained experience with the interface and each other they typically exhibit fewer instances of mispricing and at lower magnitudes but questions regarding trading experience are not easy to address in the lab with the typical subject pool since the kind of experience one can typically generate in the lab is experience with the experimental environment itself not with external environments however in virtual worlds asset markets are highly evolved providing a subject pool with skilled and experienced traders that can be accessed via the internet this study compares experimental asset markets with participants recruited from virtual world trading groups to experimental markets with participants recruited from the virtual world at large i further examine trader performance and trading behavior within markets the findings indicate that asset markets with virtual world participants recruited from trading groups are more prone to exhibit bubbles than are markets with virtual world participants recruited at large within condition experienced traders are less likely to follow fundamentals and more likely to engage in strategies that result in loss of earnings excess confidence is rejected as an explanation for this pattern as confidence is found to be related to higher earnings and fundamental value trading strategies

peace war and the balance of power every possible relation between the distribution of power and the likelihood of war has been defended somewhere in the literature on international politics war is least likely if power is distributed equally war is least likely if power is distributed unequally and the distribution of power has no effect on the likelihood of war i try to settle this dispute by examining the effect of expectations about the outcome of war on the choice between war and negotiation i argue that each of these mutually contradictory propositions can be derived from some plausible set of premises and thus that which one is correct depends on which set of premises best describes a situation the most important factors affecting the relation between the distribution of power and the likelihood of war are 1 whether the terms of a compromise agreement that might be accepted in lieu of war affect the distribution of power between the antagonists and therefore the probability that the agreement will be enforced and 2 how many states interests will be affected by the outcome

on booms that never bust ambiguity in experimental asset markets with bubbles we study the effect of ambiguity on the formation of bubbles and on the occurrence of crashes in experimental asset markets a la smith suchanek and williams 1988 we extend their framework to an environment where the fundamental value of the asset is ambiguous we show that when the fundamental value is ambiguous asset prices tend to be lower than when it is risky although bubbles form in both the ambiguous and the risky environments additionally bubbles do not crash in the ambiguous case whereas they do so in the risky one these findings regarding depressed prices and the absence of crashes in the presence of ambiguity are in line with recent theoretical work stressing the crucial role of ambiguity to account for surprisingly low equity prices high returns as well as herding in asset markets

bargaining enforcement and international cooperation neoliberals and their neorealist critics have debated the relative importance of two main obstacles to international cooperation problems of cheating and enforcement and problems of relative gains by contrast i argue that problems of international cooperation have a common strategic structure in which a third distinct obstacle plays a crucial role almost regardless of the issue area states must first resolve the bargaining problem of agreeing on terms before they can implement and begin to enforce an agreement furthermore the bargaining and enforcement problems interact using a game model i show that if states must bargain to determine the deal to be enforced the shadow of the future cuts two ways a high expectation of continued interactions may make enforcing the agreement easier but it can also give states an incentive to bargain harder delaying agreement in hopes of getting a better deal empirical evidence from trade and arms control negotiations suggests that this mechanism may help to explain the costly standoffs that are often observed in international politics and are problematic for received neoliberal theories

stochastic convergence in per capita co2 emissions an approach from nonlinear stationarity analysis abstract this paper studies stochastic convergence of per capita co 2 emissions in 28 oecd countries for the 1901 2009 period the analysis is carried out at two aggregation levels first for the whole set of countries joint analysis and then separately for developed and developing states group analysis a powerful time series methodology adapted to a nonlinear framework that allows for quadratic trends with possibly smooth transition between regimes is applied this approach provides more robust conclusions in convergence path analysis enabling a robust detection of the presence and if so the number of changes in the level and or slope of the trend of the series b inferences on stationarity of relative per capita co 2 emissions conditionally on the presence of breaks and smooth transitions between regimes and c estimation of change locations in the convergence paths finally as stochastic convergence is attained when both stationarity around a trend and convergence simultaneously hold the linear approach proposed by tomljanovich and vogelsang 2002 is extended in order to allow for more general quadratic models overall joint analysis finds some evidence of stochastic convergence in per capita co 2 emissions some dispersion in terms of convergence is detected by the group analysis particularly among developed countries this is in accordance with per capita gdp not being the sole determinant of convergence in emissions with factors like search for more efficient technologies fossil fuel substitution innovation and possibly industry outsourcing also having a crucial role

secessionism and minority protection in an uncertain world abstract with the changing political and economic circumstances confronting their countries regionally concentrated minorities have been facing a strategic problem important aspects of which can be stylized as a situation in which a minority leader is uncertain about the costs of secession for her community this paper shows that this uncertainty is a central cause of secession using a model which incorporates both policies to appease secessionist aspirations and informational asymmetries in a situation of asymmetric information in which the policy maker is better informed about the consequences of separation than the minority leader signaling incentives make secession the unique equilibrium outcome whether mutually advantageous compromises exist or not we also show that the ruling majority may seek to maintain political unity by pre committing to minority protection rules which prevent bluffing by the informed policy maker additionally the model generates comparative statics results on the question of which states are most likely to adopt constitutional rules protecting the minorities living within their borders

underreaction to fundamental information and asymmetry in mispricing between bullish and bearish markets an experimental study abstract in contrast to existing literature we implement experimental asset markets with fluctuating fundamental values following a stochastic process therefore we can measure traders behavior in both bullish and bearish markets we observe underreaction of price changes to changes in fundamental value which induces overvaluation in bearish and undervaluation in bullish markets we also find an asymmetry between markets with bullish fundamental values and those with bearish ones as the former markets show a higher degree of informational efficiency the reason for the observed underreaction lies in the relatively large volatility of the underlying fundamental value process

stability and the distribution of power the relation between stability and the distribution of power is an important and long debated problem in international relations theory the balance of power school argues that an even distribution of power is more stable while the preponderance of power school argues that a preponderance of power is more stable empirical efforts to estimate this relation have yielded contradictory results this essay examines the relation between stability and the distribution of power in an infinite horizon game theoretic model in which two states are bargaining about revising the international status quo the states make offers and counteroffers until they reach a mutually acceptable settlement or until one of them becomes so pessimistic about the prospects of reaching an agreement that it uses force to impose a new settlement the equilibrium of the game contradicts the expectations of both schools and offers an explanation for the conflicting empirical estimates in the model stability is greatest when the status quo distribution of benefits reflects the expected distribution of benefits that the use of force would impose

guns butter and anarchy a state in the international system implicit in realism must allocate its limited resources between satisfying its intrinsically valued ends and the means of military power i formalize this guns versus butter problem in a simple infinite horizon model in which two states must continually decide how to allocate their resources and whether to attack the other state the analysis establishes sufficient conditions to ensure the existence of an equilibrium in which neither state attacks shows that there is a strictly pareto dominant pair of peaceful equilibrium payoffs characterizes the unique peaceful markov perfect equilibrium that yields them and describes the comparative statics of the equilibrium allocations more broadly the analysis also suggests that the notion of anarchy has little if any substantive significance distinctively related to international politics and that the problem of absolute and relative gains is superfluous

military coercion in interstate crises in an international crisis states make demands backed by threats to use force although these threats can be explicit in diplomatic communications they will not generally carry much weight unless substantiated by some show of force military measures designed to convey the commitment to resort to arms if one s demands are not satisfactorily met to have an impact this commitment must be credible it must be in one s interest to carry out the threat if the opponent refuses to comply in an environment where states possess private information about their valuations capabilities or costs credibility can be established by actions that a state unwilling to fight would not want or would not dare to take military moves such as arms buildups troop mobilizations and deployments to the potential zone of operations can alter incentives in a crisis by changing one s expected payoff from the use of force these are tacit bargaining moves that can restructure the strategic context thereby creating and possibly signaling one s commitments while undermining those of the opponent how can states use the military instrument to establish commitments and how does the nature of the instrument affect their ability to communicate them credibly to their adversaries there are two distinct mechanisms for credible signaling in economic models information can be transmitted reliably by sinking costs actors burn money to reveal that they value the disputed issue even more in contrast theories of interstate crisis bargaining usually rely on choices that increase the difference between backing down and fighting actors tie their hands by running higher risks of war to reveal their resolve the first mechanism involves costs that actors pay regardless of outcome and the second involves costs that actors pay only if they fail to carry out some threat or promise

expectations and bubbles in asset pricing experiments abstract we present results on expectation formation in a controlled experimental environment in each period subjects are asked to predict the next price of a risky asset the realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts in most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously these bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or positive feedback expectations of the participants we also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy

the effect of short selling and borrowing on market prices and traders behavior this paper studies the influence of allowing borrowing and short selling on market prices and traders forecasts in an experimental asset market we verify although not statistically significantly so that borrowing tends to increase asset overvaluation and price orecasts while short selling tends to reduce these measures we also show that a number of results on beliefs traders types cognitive sophistication and earnings obtained in earlier experimental studies in which borrowing and short selling are not possible generalize to markets with borrowing and short sales

the effect of short selling on bubbles and crashes in experimental spot asset markets a series of experiments illustrate that relaxing short selling constraints lowers prices in experimental asset markets but does not induce prices to track fundamentals we argue that prices in experimental asset markets are influenced by restrictions on short selling capacity and limits on the cash available for purchases restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner a simulation model based on delong et al 1990 generates average price patterns that are similar to the observed data asset market bubbles are persistent deviations of prices from fundamentals to the extent that bubbles exist they can influence investment levels and the allocation of capital and thereby have considerable economic effects in recognition of their potential importance the question of the existence and pervasiveness of bubbles has been a focus of extensive empirical investigation see e g shiller 1981 blanchard and watson 1982 diba and grossman 1988 and west 1988 these studies yield mixed results regarding the empirical relevance of bubble phenomena one source of the differences in conclusions may be that because the fundamental value of the assets cannot be observed tests of the presence of bubbles are joint tests with the particular specification of the process guiding the evolution of fundamentals also being tested the availability of short selling is widely believed to make bubble formation less likely one rationale for such a belief is the notion that the cause of asset market bubbles is a constraint on the ability of traders to speculate on future downward price movements see e g miller 1977 jarrow 1980 diamond and verrecchia 1987 or figlewski and webb 1993 in the absence of short sales traders may sell only the shares in their portfolios the availability of short sales relaxes this constraint in this paper we study empirically the effect of allowing short sales on both the incidence and magnitude of market bubbles we choose a setting in which the fundamental value of the asset is clearly and unambiguously defined and known at all times and bubbles typically occur namely we use the experimental environment that smith suchanek and williams 1988 introduce while

monopolizing violence and consolidating power governments in weak states often face an armed opposition and have to decide whether to try to accommodate and contain that adversary or to try to consolidate power and monopolize violence by disarming it when and why do governments choose to consolidate power and monopolize violence how fast do they try to consolidate power when does this lead to costly fighting rather than to efforts to eliminate the opposition by buying it off we study an infinite horizon model in which the government in each period decides how much to offer the opposition and the rate at which it tries to consolidate its power the opposition can accept the offer and thereby acquiesce to the government s efforts to consolidate or it can fight in an attempt to disrupt those efforts in equilibrium the government always tries to monopolize violence when it has coercive power against the opposition where roughly coercive power is the ability to weaken the opposition by lowering its payoff to fighting whether the government consolidates peacefully or through costly fighting depends on the size of any contingent spoils which are benefits that begin to accrue from an increase in economic activity resulting from the monopolization of violence and the higher level of security that comes with it when contingent spoils are small the government buys the opposition off and eliminates it as fast as is peacefully possible when contingent spoils are large the government tries to monopolize violence by defeating the opposition militarily jel codes d02 d74 h1 copyright 2013 oxford university press

the informational efficiency of experimental asset markets a fundamental difficulty in devising any test of general efficient market hypotheses is the specification of the relevant public and private information sets of traders without a consensus as to reasonable empirical specifications tests of the hypotheses remain minimal or controversial in this study we examine the efficiency of experimental asset markets in which one may unambiguously identify the public and private information sets of traders we focus on how market efficiency is affected by the presence of futures markets in settings that incorporate different types of uncertainty and inside information our experimental results support four conclusions 1 market outcomes tend to evolve toward strong form informationally efficient equilibria whether or not futures markets and or event uncertainty are present 2 the presence of futures markets clearly stabilizes spot prices 3 the presence of futures markets tends to speed the evolution of asset markets to more efficient equilibria where there

bargaining in the shadow of war when is a peaceful resolution most likely this article derives the optimal bargaining strategies of the belligerents when each side has private but incomplete information about the expected outcome of a war should it take place i show that the aggressor s demand curve can be below the defender s offer curve that wars are possible even when both sides are jointly pessimistic and that the relative cost of a war can radically alter the types of disputes that end in war a simple diagram provides the intuition for most of the major propositions

nonspeculative bubbles in experimental asset markets lack of common knowledge of rationality vs actual irrationality we report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets in a setting in which speculation is not possible bubbles and crashes are observed the results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation but rather by behavior that itself exhibits elements of irrationality much of the trading activity that accompanies bubble formation in markets where speculation is possible is due to the fact that there is no other activity available for participants in the experiment

rationalist explanations for war realist and other scholars commonly hold that rationally led states can and sometimes do fight when no peaceful bargains exist that both would prefer to war against this view i show that under very broad conditions there will exist negotiated settlements that genuinely rational states would mutually prefer to a risky and costly fight popular rationalist and realist explanations for war fail either to address or to explain adequately what would prevent leaders from locating a less costly bargain essentially just two mechanisms can resolve this puzzle on strictly rationalist terms the first turns on the fact that states have both private information about capabilities and resolve and the incentive to misrepresent it the second turns on the fact that in specific strategic contexts states may be unable credibly to commit to uphold a mutually preferable bargain historical examples suggest that both mechanisms are empirically plausible

a bargaining model with incomplete information about time preferences etude d un jeu de negociation strategique sequentiel avec information incomplete caracterisation d une classe d equilibres sequentiels appeles equilibres sequentiels de negociation et demonstration de l unicite de cet equilibre

margin short selling and lotteries in experimental asset markets the robustness of bubbles and crashes in markets for assets with finite lives is perplexing this paper reports the results of experimental asset markets in which participants trade two assets in some markets price bubbles form in these markets traders pay higher prices for the asset with lottery characteristics i e a claim on a large unlikely payoff however institutional design has a significant impact on deviations in prices from fundamental values particularly for an asset with lottery characteristics price run ups and crashes are moderated when traders finance purchases of the assets themselves and are allowed to short sell

are co2 emission levels converging among industrial countries time paths of carbon dioxide emissions intwenty one industrial countries are examinedfrom 1960 1997 to test for stochastic andconditional convergence both panel unit roottests and cross section regressions areperformed overall we find significantevidence that co2 emissions haveconverged

bubbles and information an experiment a symmetric distribution of information although omnipresent in real markets is rarely considered in experimental economics we study whether information about imminent future dividends can abate bubbles in experimental asset markets we find that markets with asymmetrically informed traders have significantly smaller bubbles than markets with symmetrically informed or uninformed traders hence fundamental values are better reflected in market prices implying higher market efficiency when some traders know more than others about future dividends this suggests that bubbles are abated when traders know that a subset of them have an edge in information over others this paper was accepted by brad barber teck ho and terrance odean special issue editors

the bull of wall street experimental analysis of testosterone and asset trading growing evidence shows that biological factors affect individual financial decisions that could be reflected in financial markets testosterone a chemical messenger especially influential in male

bubbles and experience an experiment with a steady inflow of new traders we revisit the effect of traders experience on price bubbles by introducing either one third or two thirds steady inflow of new traders in each of four consecutive experimental asset markets we find that bubbles are still reduced in the treatments with a steady inflow of new traders but at a slower pace compared to the baseline treatment in which new traders are only introduced in the last market our analysis of individual trading behavior shows that the slower abatement of bubbles in the inflow treatments can be attributed mainly to the inexperienced traders who make more mistakes than experienced traders

futures contracting and dividend uncertainty in experimental asset markets prices in experimental asset markets tend to bubble and then crash to dividend value at the end of the asset s useful life explanations for this phenomenon are 1 that participants cannot form reliable future price expectations or 2 dividend risk aversion we report the results of experiments to test these hypotheses in one experimental series a futures market is introduced so that participants can obtain information on future share prices in another series of experiments the per period dividend is known with certainty the futures market treatment reduced the bubble the certain dividend treatment had little effect on the character of bubbles with inexperienced traders copyright 1995 by university of chicago press

mean reversion in co2 emissions the need for structural change this paper examines stochastic convergence of national and relative per capita co emissions for a wide range of nations it demonstrates that nearly all series are mean reverting once allowance is made for non linearity and the presence of serial correlation the policy implications are far reaching since the implication is that mitigation can be accomplished only through structural changes that alter the deterministic paths of emissions

momentum and overreaction in experimental asset markets abstract price volatility and investor overreactions are commonplace in experimental asset markets understanding the price dynamics in these markets is crucial for designing successful new trading institutions we report on a series of experiments to test the predictions of a new momentum model using a dynamical systems approach this model is then pitted against several standard models to predict prices as well as against expert human forecasters the comparative results suggest that each model has its advantages and regions of best performance overall the best predictive methods are the momentum model and expert human forecasters

market power in tradable emission markets a laboratory testbed for emission trading in port phillip bay victoria abstract in theory competitive emission permit markets minimize total abatement costs permit markets are often imperfectly competitive however and may be thin and dominated by large firms the dominant firm s could exercise market power and increase other firms costs of pollution control while reducing their own emission control costs this paper reports a testbed laboratory experiment to examine whether a dominant firm can exercise market power in a permit market organized using the double auction trading institution our parameters approximate the abatement costs of sources in a proposed tradable emissions market for the reduction of nitrogen in the port phillip watershed in victoria australia we vary across treatments the initial allocation of permits to sources so that in one treatment the seller of permits is a monopolist and in another treatment the market is duopolistic we also vary the information that subjects have about the number and abatement costs of their competitors we find that prices and seller profits are higher and efficiency is lower on average in the monopoly sessions compared with the duopoly sessions but the differences are not substantial and are not statistically significant due to pronounced variation across sessions moreover prices profits and transaction volumes are usually much closer to the competitive equilibrium ce than the monopoly equilibrium

price bubbles gender and expectations in experimental asset markets abstract this paper reports results of laboratory markets for a risky asset with a flat fundamental value that equates expected dividends to the return on a safe asset subjects were sorted by gender in an unobtrusive manner and bubbles in this setting are pervasive and of comparable magnitude for both genders in contrast a robustness check done with a declining fundamental value did generate larger bubbles for groups of males elicited price forecasts tend to trail share prices as they rise and exceed prices as they fall a pattern that is tracked by a double adaptive forecasting model

persistent fighting and shifting power three striking features about both interstate and civil war are 1 there are often periods of persistent fighting 2 fighting commonly ends in negotiated settlements as well as in militarily decisive outcomes and 3 fighting sometimes recurs this article links these features to shifts in the distribution of power and to the fact that one of the functions of fighting is to forestall adverse shifts the analysis centers on a simple model of state consolidation the equilibrium displays these features fighting occurs when the distribution of power is shifting rapidly the factions avoid fighting and cut deals when the distribution of power shifts slowly or is stable fighting resumes if the distribution of power again begins to shift rapidly the analysis also shows that state consolidation can occur without fighting if the process is sufficiently slow fighting now rather than later can also reduce the total cost of fighting

the effect of reliability content and timing of public announcements on asset trading behavior financial markets are overwhelmed by daily announcements we use experimental asset markets to assess the impact of releasing public messages with different levels of reliability on asset prices subjects receive qualitative announcements in predetermined trading periods that are either preset by the experimenter randomly selected or determined by past asset market prices we find that messages can play a significant role in bubble abatement or rekindling the preset message the price is too high decreases the amplitude and duration of bubbles for inexperienced subjects announcements that depend on the actual level of mispricing reduce bubble magnitude meanwhile a preset or random message the price is too low prevents experienced subjects from abating bubbles we account for the effect of public messages by showing that they significantly reduce inconsistent irrational trading behavior

a test of the modigliani miller invariance theorem and arbitrage in experimental asset markets modigliani and miller show that the total market value of a firm is unaffected by a repackaging of asset return streams to equity and debt if pricing is arbitrage free we investigate this invariance theorem in experimental asset markets finding value invariance for assets of identical risks when returns are perfectly correlated however exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated in which case the law of one price is violated discrepancies shrink in consecutive markets but persist even with experienced traders in markets where overall trader acuity is high assets trade closer to parity

differentiated assets an experimental study on bubbles i introduction the bubble and crash phenomenon in experimental asset markets first reported in smith suchanek and williams 1988 has been shown to be rather robust to various manipulations in the experimental design see e g king et al 1993 porter and smith 1995 van boening williams and lamaster 1993 1 in all these markets an asset with a life of 15 or 30 periods is traded the asset pays a common dividend to all holders at the end of each trading period and the dividend structure is common knowledge to all traders rather than tracking the fundamental value which is derived from the expected dividend for the number of periods remaining prices tend to exhibit a prolonged boom and crash pattern in a vast majority of the markets studied in the literature note that the bubble and crash phenomenon has also been observed in a setting where two assets are traded in two separate double auction markets simultaneously fisher and kelly 2000 study rate of return parity in such an environment the main treatment variable that they consider is the expected dividends of the assets in some treatments the two assets pay exactly the same expected dividend whereas in some others one asset pays twice as much they find that bubbles not only exist in both markets but also positively correlate with each other childs and mestelman 2006 manipulate the expected dividend as well as the variance of the dividends their findings are consistent with fisher and kelly s in that bubbles occur in both markets and that rate of return parity receives less support as the assets become more differentiated the main objective of this paper is to continue the research line initiated by fisher and kelly 2000 and investigate if and how differences in assets characteristics affect investors trading strategies and as a result the magnitude of bubbles motivated by empirical evidence which suggests that bond markets are in general less susceptible to the dramatic boom and crash price pattern we first construct a bond market like laboratory environment where investors are free to trade assets that can be differentiated not only from their dividend payments but also from their maturity periods 2 the research questions we ask are as follows does the existence of multiple assets that can be differentiated from their dividends and or maturities help reduce mispricing and if so why to tackle these questions we adopt a 2 x 2 design in which an asset called x has a 30 period life duration and pays on average 7 francs per period as a dividend these intrinsic characteristics are fixed in all treatments the characteristics of an alternative asset called y on the other hand vary depending on the treatment it pays either the same expected dividend as x or twice as much in terms of its life duration it lasts either 30 or 15 periods as a result we have the following four treatments for this set of the experiment sdursdiv baseline sdurddiv ddursdiv and ddurddiv where s d dur and div stand for same different duration and dividend respectively if we assume that traders have common and rational expectations we would expect prices to follow fundamental values in both markets but since the evidence of the bubble and crash phenomenon is so overwhelming in the literature we feel that evaluating a hypothesis of no bubbles is a bit insensitive instead we propose the following hypothesis for evaluation hypothesis 1 price deviations from the fundamental in either x or y market do not depend on if and how the two assets are intrinsically different we also evaluate the relative price between the two assets against the prediction of rate of return parity as in fisher and kelly 2000 and childs and mestelman 2006 the null hypothesis that we advance for evaluation is stated as follows hypothesis 2 deviations from the prediction of rate of return parity do not depend on if and how the two assets are intrinsically different

a model of spoils politics accounts of state failure in the developing world frequently highlight a logic of spoils politics in which a government and an opposing faction vie for control of the state and the accompanying spoils attempts to buy the opposition off play a key role in this logic and an informational problem often complicates these efforts because of limited transparancy the government generally has a better idea about the actual size of the spoils than the opposition does we formalize this aspect of spoils politics as a signaling game in which the government has private information about the size of the spoils and tries to co opt the opposition by offering a share of the spoils the opposition can accept the offer or reject it by fighting consistent with the strong empirical finding that the probability of civil war is higher when income is low the probability of breakdown increases as the size of the spoils decreases we also study the effects of uncertainty the opposition s military strength the cost of fighting and power sharing agreements on the probability of fighting

a simple testable model of double auction markets abstract we propose a model of price formation in double auction markets which employs the strong simplifying assumption that agents neglect strategic feedback effects and regard themselves as playing a game against nature agents otherwise are strict expected utility maximizers employing bayesian updating procedures we prove the optimality of simple aggressive reservation price strategies in our general model and propose a parametric form that yields very detailed and computable predictions of market behavior

convergence in co2 emissions a spatial economic analysis with cross country interactions abstract this research analyzes the evolution of co2 emissions per capita in a sample of 141 countries during the period 1970 2014 the study develops a spatially augmented green solow model by taking into consideration technological externalities and interdependence in the process of production which ultimately implies that co2 emissions in an economy are affected by the economic characteristics in neighboring countries the empirical model predicts convergence in co2 emissions among countries which is examined by means of modern dynamic spatial panel econometric techniques the multimodal distribution of the co2 emissions is consistent with the existence of three spatial clubs the space time dynamics of the three clubs are analyzed by means of the local directional moran scatterplot and spatial panel model with heterogeneous parameters our analysis reveals the hypothesis of spatial convergence clubs is more consistent with the data than the hypothesis of conditional convergence

thar she blows can bubbles be rekindled with experienced subjects we report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and error elimination among participants in a laboratory asset market and its effect on price bubbles our answer to the title question is yes we impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium and this treatment rekindles a bubble however in replications of that same challenging environment across three experience levels we discover that the environment yields a rare residual tendency to bubble even in the third experience session therefore a caveat must be placed on the effect of twice experienced subjects in asset markets in order for price bubbles to be extinguished the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters experience including possible error elimination is not robust to major new environment changes in determining the characteristics of a price bubble jel c91 d83

experiments on electronic double auctions and abnormal trades the flash crash experienced by u s markets in may 2010 provided stark evidence that a large trade can have a powerful influence we explore the impact of an unusual trade on behavior in experimental bubbles markets we chose the experimental design proposed by smith suchanek and williams 1988 because replication shows it produces markets prone to mispricing after several rounds of trading our markets receive a large quantity order at an extreme price in a standard double auction bubble market pricing is unaffected by an abnormal order however with increased uncertainty about the underlying economic value of the asset over pricing weakens on arrival of a negative price shock

futures markets cognitive ability and mispricing in experimental asset markets we study the effect of a futures market in which contracts maturing in the last period of the life of the asset can be traded our experiment has two treatments one in which a spot market operates on its own and a second treatment in which a spot and a futures market are active simultaneously futures markets lower spot prices but increase price volatility the futures markets themselves exhibit considerable overpricing individuals with higher cognitive reflection test crt scores achieve greater earnings and tend to sell in the overpriced futures market while traders with lower crt scores make purchases in the futures market greater average crt score among a group of traders is associated with better price discovery when no futures market is present but there is no such relationship in the presence of a futures market modified measures of crt which take into account different types of incorrect responses are introduced

does volatility matter expectations of price return and variability in an asset pricing experiment abstract we present results of an experiment on expectation formation in an asset market participants in our experiment must provide forecasts of the stock future return to computerized utility maximizing investors and are rewarded according to how well their forecasts perform in the market in the baseline treatment participants must forecast the stock return one period ahead in the volatility treatment we also elicit subjective confidence intervals of forecasts which we take as a measure of perceived volatility the realized asset price is derived from a walrasian market equilibrium equation with non linear feedback from individual forecasts our experimental markets exhibit high volatility fat tails and other properties typical of real financial data eliciting confidence intervals for predictions has the effect of reducing price fluctuations and increasing subjects coordination on a common prediction strategy

anchoring in experimental asset markets we investigate the relationship between anchoring and the emergence of bubbles in experimental asset markets we show that setting a visual anchor at the fundamental value fv in the first period only is sufficient to eliminate or to significantly reduce bubbles in laboratory asset markets if no fv anchor is set bubble crash patterns emerge our results indicate that bubbles in laboratory environments are primarily sparked in the first period if prices are initiated around the fv they stay close to the fv over the entire trading horizon our insights can be related to initial public offerings and the interaction between prices set on pre opening markets and subsequent intra day price dynamics

a review of bubbles and crashes in experimental asset markets this paper discusses the literature on bubbles and crashes in the most commonly used experimental asset market design introduced by smith et al it documents the main findings based on the results from 41 published papers 3 book chapters and 20 working papers

prediction markets in the laboratory prediction markets are becoming an ever more popular method for aggregating disparate information companies use prediction markets to forecast sales release dates and other internal activities recently several well known economists have argued that government ought to eliminate impediments to unleashing the power of prediction markets broadly this survey paper looks at the laboratory experiments which provide part of the scientific justification for using prediction markets these systems work because people who have private knowledge can use this insider information in the market but doing so causes the price to reflect these data starting with early experiments that show markets can under certain circumstances aggregate information we discuss the robustness of prediction markets to various design features we also discuss places where performance does not match rhetoric and briefly look at experimental comparisons of alternative information aggregating institutions another issue consistently raised regarding the implementation of prediction markets is the degree to which traders can manipulate prices and thus the information gleaned by following a series of experiments on manipulation we present the circumstances that are and are not sufficient for manipulation attempts to be successful finally we offer suggestions on where we believe future experiments are needed in this area

goliath s curse coercive threats and asymmetric power states typically issue compellent threats against considerably weaker adversaries yet their threats often fail why expanding on a standard model of inter national crisis bargaining i argue that a theory of reputation building can help shed light on this puzzle the model casts reputation as a strategic problem showing that challengers issuing compellent threats have incentives to anticipate the reputation costs that target states incur when appeasing aggressors if challengers can recognize these costs and offset them with side payments or smaller demands then even reputation conscious targets will acquiesce i argue however that military strength contributes to information problems that make challengers more likely to underesti mate their targets reputation costs and insufficiently compensate them in this way military power can undermine the effectiveness of compellent threats the logic is illustrated by the 1939 russo finnish crisis and the argument s implications for the study of coercive diplomacy are explored

markets as information gathering tools the academic literature wall street commentary and even daily news reporting reflect a belief that markets can anticipate events the current movements in the stock market are interpreted as reflecting the likelihood that the federal reserve system will change interest rates futures markets are interpreted as reflecting the best estimates of things to come movements in individual stock prices are thought to anticipate earnings reports or the probability of a merger or buyout if we want to know about future weather in the south we should study the orange juice futures the academic journals are filled with the concept of rational expectations in which current prices are supposed to reflect the sum of all knowledge in the system prices according to this theory are a statistic that indicates the aggregation of information about underlying states of the economy those who are outsiders to the information in the system become insiders by simply observing the economic activity

strategic delay in bargaining this paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable we find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength under some specifications of the parameters delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction this delay does not vanish as the minimal time between offers becomes small