Self-confidence and strategic behavior

We suggest that overconfidence (conscious or unconscious) is motivated in part by strategic considerations, and test this experimentally. We find compelling supporting evidence in the behavior of participants who send and respond to others’ statements of confidence about how well they have scored on an IQ test. In two-player tournaments where the higher score wins, a player is very likely to choose to compete when he knows that his own stated confidence is higher than the other player’s, but rarely when the reverse is true. Consistent with this behavior, stated confidence is inflated by males when deterrence is strategically optimal and is instead deflated (by males and females) when luring (encouraging entry) is strategically optimal. This behavior is consistent with the equilibrium of the corresponding signaling game. Overconfident statements are used in environments that seem familiar, and we present evidence that suggests that this can occur on an unconscious level.     

EMPLOYMENT,DETERRENCE, AND CRIME IN A DYNAMIC MODEL*

Using maximum likelihood techniques and monthly panel data we solve and estimate an explicitly dynamic model of criminal behavior where current criminal activity impacts future labor market outcomes. We show that the threat of future adverse effects in the labor market when arrested acts as a strong deterrent to crime. Moreover, such forward‐looking behavior is estimated to be important. Hence, policies that weaken this deterrence will be much less effective in fighting crime. This suggests that prevention is more powerful than redemption since anticipated redemption allows criminals to look forward to negating the consequences of their crimes.     

Farsightedness in a Coalitional Great Fish War

We explore the implications of the farsightedness assumption on the conjectures of players in a coalitional Great Fish War model with symmetric players, derived from the seminal model of Levhari and Mirman (Bell J Econ 11:649–661, 1980). The farsightedness assumption for players in a coalitional game acknowledges the fact that a deviation from a single player will lead to the formation of a new coalition structure as the result of possibly successive moves of her rivals in order to improve their payoffs. It departs from mainstream game theory in that it relies on the so-called rational conjectures, as opposed to the traditional Nash conjectures formed by players on the behavior of their rivals. For values of the biological parameter and the discount factor more plausible than the ones used in the current literature, the farsightedness assumption predicts a wide scope for cooperation in non-trivial coalitions, sustained by credible threats of successive deviations that defeat the shortsighted payoff of any prospective deviator. Compliance or deterrence of deviations may also be addressed by acknowledging that information on the fish stock or on the catch policies actually implemented may be available only with a delay (dynamic farsightedness). In that case, the requirements are stronger and the sizes and number of possible farsighted stable coalitions are different. In the sequential move version, which could mimic some characteristics of fishery models, the results are not less appealing, even if the dominant player or dominant coalition with first move advantage assumption provides a case for cooperation with the traditional Nash conjectures.     

Decentralization and the shadow economy: Oates meets Allingham–Sandmo

This article studies the impact of decentralization on the shadow economy. We argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels: (1) decentralization enhancing public sector efficiency (efficiency effect), and (2) decentralization reducing the distance between bureaucrats and economic agents, which increases the probability of detection of shadow economic activities (deterrence effect). Using various measures of fiscal, political and government employment decentralization in a cross-section of countries, we find the deterrence effect to be of more importance. The deterrence effect is stronger, the lower the degree of institutional quality. We find no robust evidence of the efficiency effect.     

Learning by trial and error

A person learns by trial and error if he occasionally tries out new strategies, rejecting choices that are erroneous in the sense that they do not lead to higher payoffs. In a game, however, strategies can become erroneous due to a change of behavior by someone else. We introduce a learning rule in which behavior is conditional on whether a player experiences an error of the first or second type. This rule, called interactive trial and error learning, implements Nash equilibrium behavior in any game with generic payoffs and at least one pure Nash equilibrium.     

Communication in Repeated Games with Private Monitoring

The paper considers repeated games where each player can be observed by only a subset of the other players, and where players can make public announcements about the behavior of the players they observed. We address the following question: What is the minimal level of observability that is required to obtain efficient outcomes? The main result is that the limit set of sequential equilibrium payoffs, when the discount factor tends to one, contains the set of individual rational payoffs whenever each player is observed by at leasttwoother players.Journal of Economic LiteratureClassification Number: C73.     

Fictitious play in games: The transition between periodic and chaotic behaviour

In the 1960s Shapley provided an example of a two-player fictitious game with periodic behaviour. In this game, player A aims to copy B's behaviour and player B aims to play one ahead of player A. In this paper we generalise Shapley's example by introducing an external parameter. We show that the periodic behaviour in Shapley's example at some critical parameter value disintegrates into unpredictable (chaotic) behaviour, with players dithering a huge number of times between different strategies. At a further critical parameter the dynamics becomes periodic again, but now both players aim to play one ahead of the other. In this paper we adopt a geometric (dynamical systems) approach. Here we prove rigorous results on continuity of the dynamics and on the periodic behaviour, while in the sequel to this paper we shall describe the chaotic behaviour.     

Dissertation abstract: “Essays in applied economics on the intervention of a third player in agency relationships”

Agency theory has established that appropriate incentives can reconcile the diverging interests of the principal and the agent. Focusing on three applications, this dissertation evaluates the empirical relevance of these results when a third party interacts with the primary contract. The analyses provided rely on either laboratory or natural experiments. First, corruption is analyzed as a two-contract situation: a delegation contract between a Principal and an Agent and a corruption pact concluded between this Agent and a third player, called Briber. A survey of the recent microeconomic literature on corruption first highlights how corruption behavior results from the properties of those two agreements. We thereafter show that the Agent faces a conflict in reciprocities due to those two conflicting agreements. The resulting delegation effect, supported by observed behavior in our three-player experimental game, could account for the deterrence effect of wages on corruption. Second, health care is governed by contradictory objectives: patients are mainly concerned with the health provided, whereas containing health care costs is the primary goal of health care administrators. We provide further insights into the ability of incentives to balance these two competing objectives. In this matter, our theoretical and econometric analysis evaluates how a new mixed compensation scheme, introduced in Quebec in 1999 as an alternative to fee-for-services, has affected physicians’ practice patterns. Free switching is shown to be an essential feature of the reform, since it implements screening between physicians. Finally, the demand for underground work departs from the traditional Beckerian approach to illegal behavior, due to the dependence of benefits from illegality on competitors’ behavior. We set up a theoretical model in which the demand for underground work from all producers competing on the same output market is analyzed simultaneously. We first show that competition drastically undermines the individual benefits of tax evasion. At equilibrium, each firm nonetheless chooses evasion with a positive probability, strictly lower than one. This Bertrand curse could then account for the “tax evasion puzzle” i.e. the overprediction of evasion in models that ignore market interactions. We thereafter show that allowing firms to denounce competitors’ evasion is not likely to solve this curse—by providing a credible threat against price cuts, it fosters illegal work. Empirical evidence from a laboratory experiment confirms these predictions. Without denunciation, experimental firms often choose evasion whereas evasion benefits are canceled out by competition. When introduced, denunciation is rarely used by firms, but the threat makes evasion profitable. JEL Classification K42, I18, D21, C25, C91     

Can Punishment Generate Specific Deterrence Without Updating? Analysis of a Stated Choice Scenario

This study explores the specific deterrence generated by punishment in the context of regulatory violations with a focus on the distinction between upward revisions to future punishment parameters—likelihood and severity—and the experience of being penalized. In order to avoid the pitfalls of empirically analyzing actual choices made by regulated entities, e.g., measuring entities’ beliefs regarding the likelihood and size of future penalties, our study examines behavior associated with a stated choice scenario presented within a survey distributed to the environmental managers of facilities regulated under the US Clean Water Act. This choice of respondents strengthens the external validity of our empirical results. Based on a variety of statistical methods, our empirical results strongly and robustly reject the standard hypothesis that specific deterrence stems solely from upward revisions to punishment parameters while supporting the alternative hypothesis of experiential deterrence, whereby facilities focus on recent experiences to shape their compliance behavior.     

TESTING THE QUANTAL RESPONSE HYPOTHESIS

We develop a nonparametric test for consistency of player behavior with the quantal response equilibrium (QRE). The test exploits a characterization of the equilibrium choice probabilities in any structural QRE as the gradient of a convex function; thereby, QRE‐consistent choices satisfy the cyclic monotonicity inequalities. Our testing procedure utilizes recent econometric results for moment inequality models. We assess our test using lab experimental data from a series of generalized matching pennies games. We reject the QRE hypothesis in the pooled data but cannot reject individual‐level quantal response behavior for over half of the subjects.     

An experimental analysis of ultimatum bargaining

There are many experimental studies of bargaining behavior, but suprisingly enough nearly no attempt has been made to investigate the so-called ultimatum bargaining behavior experimentally. The special property of ultimatum bargaining games is that on every stage of the bargaining process only one player has to decide and that before the last stage the set of outcomes is already restricted to only two results. To make the ultimatum aspect obvious we concentrated on situations with two players and two stages. In the ‘easy games’ a given amount c has to be distributed among the two players, whereas in the ‘complicated games’ the players have to allocate a bundle of black and white chips with different values for both players. We performed two main experiments for easy games as well as for complicated games. By a special experiment it was investigated how the demands of subjects as player 1 are related to their acceptance decisions as player 2.     

Gender pairings and accountability effects

We conduct an experiment to investigate how the gender composition of an audience interacts with the gender of a player thereby shaping her/his degree of responsibility in decision-making. Together with the measures of accountability based on decision theory, we employ two physiological measures, blood pressure and heart rate variability, which allow us to disentangle the separate effects of stress and accountability. Our results show that men are more sensitive to changes in the gender composition of the audience; specifically, men lower their accountability when paired with a female audience. By contrast, women display a level of accountability that does not change with gender pairing. Finally, we find that the variation in blood pressure has a significant but small effect only on men's behavior.     

Gambling in contests

This paper presents a strategic model of risk-taking behavior in contests. Formally, we analyze an n-player winner-take-all contest in which each player decides when to stop a privately observed Brownian motion with drift. A player whose process reaches zero has to stop. The player with the highest stopping point wins. Unlike the explicit cost for a higher stopping time in a war of attrition, here, higher stopping times are riskier, because players can go bankrupt. We derive a closed-form solution of a Nash equilibrium outcome. In equilibrium, highest expected losses occur at an intermediate negative value of the drift.     

A Common Pool Resource Game with Sequential Decisions and Experimental Evidence

We describe a common pool resource game in which players choose how much of the stock to extract in a sequential manner. There are two choices and one represents taking a larger proportion of the stock than the other. After a player makes a choice, the remaining stock grows at a constant rate. We consider a game with a finite number of alternating moves. It is shown that changes in the larger proportion of the stock that the players are allowed to take and the growth rate affect equilibrium, but have little effect on behavior in the laboratory. In addition to observing more cooperation than predicted, we observe that parameters that are strategically irrelevant affect behavior. The results of this research might help policy makers in developing adequate policies to prevent overexploitation of some natural renewable resources.     

Marginal Subsidies in Tullock Contests

In a general Tullock contest, we examine a situation where a limited resource can be used to provide marginal subsidies to either player (weak or strong), or to increase the prize directly. We show that to maximize total effort, subsidizing the weak/strong player is preferred when the contest is sufficiently accurate/inaccurate. This result generalizes to n‐player lottery contests. In a lottery contest (Tullock contest with ), we derive the optimal scheme for a full range of resource: when the resource is small, it is optimal to only subsidize the weak player; when it is large, both players should be subsidized simultaneously.     

Global Security Policies against Terrorism and the Free Riding Problem: An Experimental Approach

The World Trade Center attack has shed light on the urgent need to implement preventing measures against terrorism and to enhance cooperation in the global security system for all countries. However, international coordination cannot be taken for granted. It is often ineffective and likely to fail for several reasons. Perhaps the more prominent reason to explain failure in coordination is that collective actions against terrorism may suffer from the well‐known free riding problem. In this paper we experimentally investigate cooperation dilemma in counterterrorism policies by measuring to what extent international deterrence policy may suffer from free riding. In our game, contributions to the group account do not aim to increase the production of the public good but instead seek to decrease the probability that a stochastic event destroys the good. A country could choose to free ride by investing nothing in the international deterrence policy and instead invest all its resources in its own national protection or even choose to ignore totally terrorism by investing on alternative projects. We also look at the effects of institutions that allow sanctioning and rewarding of other countries to facilitate coordination on deterrence policy. We find that, in absence of institutional incentives and after controlling for risk aversion, most of countries defect by investing very weakly in collective actions against terrorism while largely investing to protect themselves. In contrast, the introduction of punishment/reward incentive systems improves significantly the contribution level to the collective security account.     

Imitation and selective matching in reputational games

This paper investigates imitation and selective matching in reputational games with an outside option. We identify two classes of such games, ultimatum and trust games. By selective matching we mean that short-run players have the possibility of selecting the long-run player they play against. We find that selective matching (unlike random matching) favors the equilibrium associated to reputation in the ultimatum game, but not in the trust game.     

Police Violence and the Underreporting of Crime

This paper examines the relationship between police violence and the reporting of crime. Utilizing original data from a large‐scale household survey conducted in Costa Rica from October 2013 to April 2014 (n = 4,200), we find that the observation of police violence significantly reduces citizens’ willingness to report crime. The implications of this finding are explored using a game‐theoretic model of crime, crime reporting, and police misconduct. The model reveals that although the prospect of police violence against criminals may generate a degree of deterrence for criminal behavior, permissiveness toward police violence also raises expectations about the likelihood of police abuse against law‐abiding citizens. Consistent with our empirics, this reduces citizens’ propensity to report crime, thereby fostering a climate of impunity for criminal activity.     

Strategic bypass deterrence

In liberalized network industries, competitors can either compete for service using the existing infrastructure (access) or deploy their own capacity (bypass). We revisit this make-or-buy problem making two contributions to the literature. First we analyze both the profit maximizing behavior of an incumbent and the welfare maximizing behavior when the entrant chooses between access and bypass. Second, we extend the baseline model studied in the literature by allowing for fixed costs of network installation. By analogy to the literature on strategic entry deterrence, we distinguish three régimes of blockaded bypass, deterred bypass and accommodated bypass depending on the entrant’s unit cost. We show that the make-or-buy decision of the entrant is not necessarily technologically efficient: when bypass is chosen, it is always the cheapest option but access may be chosen when it is not cost effective.     

Sophisticated Experience-Weighted Attraction Learning and Strategic Teaching in Repeated Games

Most learning models assume players are adaptive (i.e., they respond only to their own previous experience and ignore others' payoff information) and behavior is not sensitive to the way in which players are matched. Empirical evidence suggests otherwise. In this paper, we extend our adaptive experience-weighted attraction (EWA) learning model to capture sophisticated learning and strategic teaching in repeated games. The generalized model assumes there is a mixture of adaptive learners and sophisticated players. An adaptive learner adjusts his behavior the EWA way. A sophisticated player rationally best-responds to her forecasts of all other behaviors. A sophisticated player can be either myopic or farsighted. A farsighted player develops multiple-period rather than single-period forecasts of others' behaviors and chooses to “teach” the other players by choosing a strategy scenario that gives her the highest discounted net present value. We estimate the model using data from p-beauty contests and repeated trust games with incomplete information. The generalized model is better than the adaptive EWA model in describing and predicting behavior. Including teaching also allows an empirical learning-based approach to reputation formation which predicts better than a quantal-response extension of the standard type-based approach. Journal of Economic Literature Classification Numbers: C72, C91.