Extensive Form Games with Uncertainty Averse Players

Nash equilibrium presumes that the beliefs of a player are represented by a probability measure. Motivated by the Ellsberg Paradox and relevant experimental findings demonstrating that this representation of beliefs may be unrealistic, this paper generalizes Nash equilibrium in finite extensive form games to allow for preferences conforming to the multiple priors model developed by Gilboa and Schmeidler [Journal of Mathematical Economics, 18 (1989), 141–153]. The implications of this generalization for strategy choices and welfare are studied. Journal of Economic Literature Classification Numbers: C72, D81.     

Noncooperative Equilibrium and Chamberlinian Monopolistic Competition

This paper addresses the existence of equilibrium for a nonatomic Bertrand game in a Chamberlinian environment. We reformulate O. Hart′s model (Rev. Econ. Stud. 52, 1985, 529–546) as a nonatomic game and show that under dispersion of tastes and continuity of the tastes density, there exists a pure-strategies ε-equilibrium where prices exceed marginal cost. Unlike Hart′s model there is no need to impose uniformity (or even independence) on the distribution of the m-tuple of differential commodities that consumers care about. Moreover, demand curves are allowed to vary across firms and in equilibrium firms may earn profits. Journal of Economic Literature Classification Numbers: B21, D43, L13.     

Coordination, “Magic,” and Reinforcement Learning in a Market Entry Game

Previous experimental studies have documented quick convergence to equilibrium play in market entry games with a large number of agents. The present study examines the effect of the available information in a 12-player game in an attempt to account for these findings. In line with the prediction of a simple reinforcement learning model (Roth and Erev, 1995,Games Econ. Behav.8, 164–212), quick convergence to equilibrium is observed even given minimal information (unknown payoff rule). However, in violation of the basic model, information concerning other players' payoff increases the number of entrants. The information effect can be described by a variant of the basic reinforcement learning model assuming that the additional information changes the player's reference point.Journal of Economic LiteratureClassification Number: C7, C92.     

Private Value Allocations in Large Economies with Differential Information

We consider a Radner-type (e.g., Radner, 1968, Econometrica36, 31–58) pure exchange economy with differential information and a continuum of agents. We show that under appropriate assumptions the set of Aumann–Shapley private value allocations in such an economy coincides with the set of Radner competitive equilibrium allocations. Journal of Economic Literature Classification Numbers: C71, D51, D82.     

Non-Additive Beliefs and Strategic Equilibria

This paper studies n-player games where players' beliefs about their opponents' behaviour are modelled as non-additive probabilities. The concept of an “equilibrium under uncertainty” which is introduced in this paper extends the equilibrium notion of Dow and Werlang (1994, J. Econom. Theory64, 305–324) to n-player games in strategic form. Existence of such an equilibrium is demonstrated under usual conditions. For low degrees of ambiguity, equilibria under uncertainty approximate Nash equilibria. At the other extreme, with a low degree of confidence, maximin equilibria appear. Finally, robustness against a lack of confidence may be viewed as a refinement for Nash equilibria. Journal of Economic Literature Classification Numbers: C72, D81.     

Non-Walrasian Labor Markets and Real Business Cycles

The standard real business cycle literature mainly focuses on Walrasian models designed to fit the U.S. institutional framework. Differences between the United States and Europe, mostly evident in the labor market, suggest that a purely Walrasian model may be inappropriate for the study of European business cycles. I present a stochastic version of the dynamic general equilibrium model of Daveri and Maffezzoli (2000, “A Numerical Approach to Fiscal Policy, Unemployment and Growth in Europe,” Econometrics and Applied Economics Working Paper 2000-4, IEP, Università Bocconi), where unemployment is generated by monopolistic unions, and calibrate it to reproduce several long-run features of the Italian and U.S. economies. This framework is then compared with an indivisible labor model built on Hansen (1985, Journal of Monetary Economics16, 309–328) and Rogerson and Wright (1988, Journal of Monetary Economics22, 501–515). I focus on the impulse response functions, the standard business cycle statistics, and the ability to reproduce the cyclical components of the main macroeconomic variables. The main results are as follows: (i) the impulse response functions of the monopoly union (MU) model show a higher degree of overall persistence; (ii) the business cycle statistics are similar; (iii) the MU model enjoys a statistically significant advantage in reproducing the Italian business cycle, but not that of the United States. Journal of Economics Literature Classification Numbers: E32, E24, J23, J51.     

The Role of Absolute Continuity in “Merging of Opinions” and “Rational Learning”

D. Blackwell and L. Dubins (1962, Ann. Math. Statist.38, 882–886) showed that opinions merge when priors are absolutely continuous. E. Kalai and E. Lehrer (1993, Econometrica61, 1019–1045) use this result to show that players in a repeated game eventually play like a Nash equilibrium. We provide an alternative proof of merging of opinions that clarifies the role of absolute continuity while casting doubt on the relevance of the result. Persistent disagreement, the opposite of merging, allows the construction of a sequence of mutually favorable “bets.” By a law of large numbers, both agents are certain they will win these bets on average. This certain disagreement violates absolute continuity. Journal of Economic Literature Classification Numbers: C11, C69, C72, D83.     

Labor market distortions and China's WTO accession package:: an applied general equilibrium assessment

The economic implications of China's accession to the World Trade Organization have been analyzed using applied general equilibrium techniques. We explore the consequences of trade reform in the presence of labor market distortions. A formal model of imperfect labor mobility is incorporated into a large-scale, stochastic applied general equilibrium framework with which the consequences of China's trade reform for net welfare are considered. The simulations suggest that distortions in China's labor market, including imperfect labor mobility, rural-urban migration, dual urban markets and surplus rural labor, have significant effects on trade liberalization outcomes and in some cases produce unexpected second-best results. Journal of Comparative Economics 31 (4) (2003) 774–794.     

Substantive Rationality and Backward Induction

S. Modica and A. Rustichini (1994, Theory and Decision37, 107–124) provided a logic for reasoning about knowledge where agents may be unaware of certain propositions. However, their original approach had the unpleasant property that nontrivial unawareness was incompatible with partitional information structures. More recently, Modica and Rustichini (1999, Games Econ. Behav.27, 265–298) have provided an approach that allows for nontrivial unawareness in partitional information structures. Here it is shown that their approach can be viewed as a special case of a general approach to unawareness considered by R. Fagin and J. Y. Halpern (1988, Artificial Intelligence34, 39–76). Journal of Economic Literature Classification Numbers: D80, D83.     

Russia's accession to the WTO: the potential for trade increase

This paper investigates the impact of institutions on trade and estimates the potential for trade increase between the Commonwealth of Independent States (CIS) and the European Union (EU). The latter is computed from a gravity equation using the procedure introduced by Hausman and Taylor [1981. Panel Data and Unobservable Individual Effects. Econometrica 49 (6) 1377–1398]. We find that CIS trade is still characterized by a large trade diversion effect, which implies that trade with non-CIS countries could increase considerably in the long run. Another source of deepening the level of the European trade integration comes from the convergence of institutions towards the EU standards in light of Russia's application to join the WTO. Journal of Comparative Economics 32 (4) (2004) 680–699.     

Rational Choice and the Condorcet Jury Theorem

In a recent paper, Austen-Smith and Banks (1996,Amer. Polit. Sci. Rev.90, 34–45), criticize the current literature on the Condorcet jury theorem as neglecting the behavioral underpinnings of decision-making. They leave open the question whether allowing mixed strategies would sustain the conclusions of the Condorcet jury theorem. In this paper, it is shown that these conclusions can hold in equilibrium. In other words, “a rational choice foundation for the claim that majorities invariably ‘do better’ than individuals” is derived. (Journal of Economic LiteratureClassification Number: D72.     

Privatization and Price Liberalization: Comparative Analysis

Two transition paths from a mixed to market economy are investigated: a gradual increase in state retail prices and a gradual decrease of the state sector's share of the economy. The analysis is carried out in the framework of a general equilibrium model of a mixed economy with production. It is shown that, for a representative agent, privatization is better than price liberalization during the entire transition period regardless of individual preferences. For an economy with heterogeneous agents the conclusion remains valid for rich agents, but it is indeterminate for poor agents.J. Comp. Econom.,June 1997,24(3), pp. 313–334. Central Institute of Economics and Mathematics, Moscow 117418, Russia.     

p-Best response set and the robustness of equilibria to incomplete information

In this paper, we use p-best response sets—a set-valued extension of p-dominance—in order to provide a new sufficient condition for the robustness of equilibria to incomplete information: if there exists a set S which is a p-best response set with , and there exists a unique correlated equilibrium μ^* whose support is in S then μ^* is a robust Nash equilibrium.     

Economic Consequences of Political Approval Management in Comparative Perspective

We develop a dynamic, stochastic, computable general equilibrium model of political approval management and fiscal policy in order to analyze how political approval management affects United States' Presidential and United Kingdom's parliamentary business cycles. We find that governments in both systems respond to declining political approval by pursuing suboptimal fiscal policies that stimulate household consumption expenditures. Relative to a baseline optimal policy, we estimate that politically motivated fiscal policy reduces aggregate output in the United Kingdom and United States by 0.35 and 0.20%, respectively. Moreover, we find that most of the difference in output costs can be explained by differences between the American and British polities. J. Comp. Econ., December 2001, 29(4), pp. 692–721. University of Arizona, 401 McClelland Hall, Tucson, Arizona 85721; Department of Political Science, University of Minnesota, 1414 Social Sciences Building, Minneapolis, Minnesota 55455. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: P52, N31, E32.     

Probability Logic for Type Spaces

Using a formal propositional language with operators “individual i assigns probability at least α” for countably many α, we devise an axiom system which is sound and complete with respect to the class of type spaces in the sense of Harsanyi (1967–1968, Management Science, 14 159–182). A crucial inference rule requires that degrees of belief be compatible for any two sets of assertions which are equivalent in a suitably defined natural sense. The completeness proof relies on a theorem of the alternative from convex analysis, and uses the method of filtration by finite sub-languages. Journal of Economic Literature Classification Numbers: D80, D82.     

Projecting soviet energy requirements using a vintage capital model

A Solow-type vintage capital model with capital utilization is used to estimate the long-term average embedded rate of improvement in energy efficiency of Soviet fixed-capital commissionings: 2.6% per year. The results are combined with planned Soviet capital stock growth to forecast cap Soviet energy requirements through 1990. The implied Soviet capital utilization goals call for greater energy savings than have been achieved in the past. The results also identify an upper bound for rates of hidden inflation contained in Soviet capital commissionings data. It appears an estimate such as S. Cohn's 1% (Soviet Stud. 33, 2:269–299, 1981) is far more likely than A. Nove's 6 to 7% (Soviet Stud. 33, 1:142–145, 198 1).     

The inequality–growth nexus in the short and long run: Empirical evidence from China

This paper argues that the conventional approach of data averaging is problematic for exploring the growth–inequality nexus. It introduces the polynomial inverse lag (PIL) framework so that the impacts of inequality on investment, education, and ultimately on growth can be measured at precisely defined time lags. Combining PIL with simultaneous systems of equations, we analyze the growth–inequality relationship in postreform China, finding that this relationship is nonlinear and is negative irrespective of time horizons. Journal of Comparative Economics 34 (4) (2006) 654–667.     

Nominal wage contracts, labor adjustment costs and the business cycle

Previous work of monetary dynamic stochastic general equilibrium models with nominal rigidity a la Taylor, particularly the Cho–Cooley model, was abandoned in favor of the New-Keynesian analysis due to the model's failure to deliver business cycle statistics that match the U.S. economy along some key dimensions. In this paper, we take a step in revitalizing the Cho–Cooley avenue of research. We add empirically plausible labor adjustment costs into a model with nominal wage rigidity and find that with labor adjustment costs our model is able to overcome some of the shortcomings otherwise present in the Cho–Cooley framework, specifically high standard deviations of real variables and a countercyclical productivity.     

Evolution in Finitely Repeated Coordination Games

I apply a version of Kandori et al. (1993, Econometrica, 61, 29–56) and Young's (1993, Econometrica, 61, 57–84) evolutionary dynamic to finitely repeated coordination games. The dynamic is modified by allowing mutations to affect only off path beliefs. I find that repetition within a match leads agents to sacrifice current payoffs in order to increase payoffs in later stages. As a consequence, evolution leads to (almost) efficiency. Journal of Economic Literature Classification Number: C79.