Trust and trustworthiness reputations in an investment game

Trust is an essential component of good social outcomes and effective economic performance. Reputation on the trusteeʼs past behavior in the same role has proven to be greatly effective at raising the level of trust. In this study, we show that providing information on the trusteeʼs past behavior as the trustor is equally effective as a reputation system. In fact, people still find it worthwhile to invest in a reputation as a trusting person, even though the immediate payoff for trusting is poor. This confirms the role of indirect reciprocity as a strategic notion based on reputation, whereby pro-social actions by one person towards a second person are sanctioned by a third party.     

Entry and espionage with noisy signals

We analyze the effect of industrial espionage on entry deterrence. We consider a monopoly incumbent who may expand capacity to deter entry, and a potential entrant who owns an Intelligence System. The Intelligence System (IS) generates a noisy signal based on the incumbentʼs actions. The potential entrant uses this signal to decide whether or not to enter the market. The incumbent may signal-jam to manipulate the likelihood of the noisy signals and hence affect the entrantʼs decisions. If the precision of the IS is commonly known, the incumbent benefits from his rivalʼs espionage. Actually, he benefits more the higher is the precision of the IS while the spying entrant is worse off with an IS of relatively high quality. When the IS quality is private information of the entrant, the incumbent is better off with an IS of high expected precision while the entrant benefits from one of high quality. In this case espionage makes the market more competitive.     

Disutility and constrained quality choice in self-selection problems

This paper analyzes the self-selection problem in a monopoly market where (i) consumer types are characterized by both utility of service and disutility of interrupted service and (ii) qualities (reliabilities) are interdependent. We derive behavior of a profit-maximizing monopolist in offering self-selection menu of price and reliability and in choosing capacity investment. We further analyze welfare distortions of the monopolistic behavior. The major findings are: (i) depending on the magnitude of utility and disutility, either consumer type may end up with zero surplus, (ii) the possibility of inefficient production may lead to idle capacity, and (iii) depending on the consumer preference structure, the monopolist's investment is lower than, equal to, or higher than the socially optimal level.     

Abstention and signaling in large repeated elections

I consider a two period model of repeated elections in which politicians update their beliefs about the preferences of the voters after the first period election and set second period policies accordingly. When voting is costless, a positive fraction of voters abstains for any finite population, but abstention vanishes in the limit of an arbitrarily large election. I demonstrate that in large elections, a single vote changes second period policies by an amount exponentially large compared to the probability of influencing the first period election if the probabilities with which voters vote for the two candidates differ. Using this, I prove that the limiting voting behavior in the first election is independent of the first period policy choices of the candidates. The incentive to vote to signal oneʼs preferences thus dominates the incentive to vote to increase the chances of electing oneʼs preferred candidate.     

The complexity of the consumer problem

A literal interpretation of neo-classical consumer theory suggests that the consumer solves a very complex problem. In the presence of indivisible goods, the consumer problem is NP-Hard, and it appears unlikely that it can be optimally solved by a human. Two implications of this observation are that (i) households may imitate each other’s choices; (ii) households may adopt heuristics that give rise to the phenomenon of mental accounting.     

Using food prices and consumption to examine Chinese cost of living

This paper considers two approaches to examining potential bias in China's consumer price index: (i) inferring true changes in cost of living from consumer behaviour; and (ii) creating alternative price indices to compare with official indices. For (i), our semi‐parametric estimates agree with the recent finding of a large understatement in increases to the true cost of living. For (ii), we focus on food prices and explore potential causes of bias. We find some evidence of a new‐good bias. China's large‐scale migration also causes changes in the cost of living that are not reflected in the consumer price index.     

How to win a large election

We consider the optimization problem of a campaign trying to win an election when facing aggregate uncertainty, where agentsʼ voting probabilities are uncertain. Even a small amount of uncertainty will in a large electorate eliminate many of counterintuitive results that arise when voting probabilities are known. In particular, a campaign that can affect the voting probabilities of a fraction of the electorate should maximize the expected difference between its candidateʼs and the opposing candidateʼs share of the fractionʼs potential vote. When a campaign can target only finitely many voters, maximization of the same objective function remains optimal if a convergence condition is satisfied. When voting probabilities are certain, this convergence condition obtains only at knife-edge combinations of parameters, but when voting probabilities are uncertain the condition is necessarily satisfied.     

Competition,R&D and innovation: testing the inverted-U in a simultaneous system

To address the relationship between innovation and competition we jointly estimate the opportunity, production, and impact functions of innovation in a simultaneous system. Based on Swiss micro-data, we apply a 3-SLS system estimation. The findings confirm a robust inverted-U relationship, in which a rise in the number of competitors at low levels of initial competition increases the firm’s research effort, but at a diminishing rate, and the research effort ultimately decreases at high levels of competition. When we split the sample by firm types, the inverted-U shape is steeper for creative firms than for adaptive ones. The numerical solution indicates three particular configurations of interest: (i) an uncontested monopoly with low innovation; (ii) low competition with high innovation; and (iii) a ‘no innovation trap’ at very high levels of competition. The distinction between solution (i) and (ii) corresponds to Arrow’s positive effect of competition on innovation, whereas the difference between outcomes (ii) and (iii) captures Schumpeter’s positive effect of market power on innovation. Simulating changes of the exogenous variables, technology potential, demand growth, firm size and exports have a positive impact on innovation, while foreign ownership has a negative effect, and higher appropriability has a positive impact on the number of competitors.     

SEQUENTIAL EXPERT ADVICE: SUPERIORITY OF CLOSED‐DOOR MEETINGS

Two career‐concerned experts sequentially give advice to a Bayesian decision maker (D). We find that secrecy dominates transparency, yielding superior decisions for D. Secrecy empowers the expert moving late to be pivotal more often. Further, (i) only secrecy enables the second expert to partially communicate her information and its high precision to D and swing the decision away from first expert's recommendation; (ii) if experts have high average precision, then the second expert is effective only under secrecy. These results are obtained when experts only recommend decisions. If they also report the quality of advice, fully revealing equilibrium may exist.     

Complementing Cournot’s analysis of complements: unidirectional complementarity and mergers

We study the price and welfare effects of a merger of firms producing unidirectional complements: a firm is producing a product (called an optional good) that is valuable only if it is consumed with the other product (called a base good) produced by another firm. Under the assumption that there are two types of consumers: (i) those who consume one unit of the base good only or nothing (having zero valuation of the optional good), and (ii) those who consume one unit of the composite good or nothing, we show that a merger of the two firms raises the price of the base good, resulting in lower consumer surplus for the former consumer group, if and only if the average willingness to pay in the latter consumer group is sufficiently low. This result is in sharp contrast to Cournot’s (Researches into the mathematical principles of the theory of wealth, 1838) classical implication that a merger of firms producing strict complements makes all consumers strictly better off.     

Cheap talk with two senders and complementary information

This paper studies a cheap talk model in which two senders having partial and non-overlapping private information simultaneously communicate with an uninformed receiver. The sensitivity of the receiverʼs ideal action to one senderʼs private information depends on the other senderʼs private information. We show that the sendersʼ information transmissions exhibit strategic complementarity: more information transmitted by one sender leads to more information being transmitted by the other sender.     

The effect of environmental uncertainty on the tragedy of the commons

We model a common pool resource game under environmental uncertainty, where individuals in a symmetric group face the dilemma of sharing a common resource. Each player chooses a consumption level and obtains a corresponding share of that resource, but if total consumption exceeds a sustainable level then the resource deteriorates and all players are worse-off. We consider the effect of uncertainty about the sustainable resource size on the outcome of this game. Assuming a general dynamic for resource deterioration, we study the effect of increased ambiguity (i.e., uncertain probabilities pertaining to the common resourceʼs sustainable size). We show that whereas increased risk may lead to more selfish behavior (i.e., to more consumption), increased ambiguity may have the opposite effect.     

Welfare effects of monetary policy in an economy with vertical production and trade: An analysis based on the perspective of local currency pricing

By incorporating the factor of firms' asymmetric price setting behavior into the two-country model with vertical production and trade, we analyze how one country's monetary policy affects the welfare of both countries. We show that an expansionary monetary policy has (i) a beggar-thyself effect if the ratio of the non-expanding country's intermediate goods firms that set their export prices in the local currency is significantly low and (ii) a prosper-thy-neighbor effect in our model regardless of the ratio of either country's intermediate goods firms that set their export prices in the local currency.     

On the effects of joint bidding in independent private value auctions: An experimental study

This article explores the effect of a subset of symmetric bidders joining to bid together. Possible applications include mergers, collusion and joint-bidding arrangements. The change produces a “strong” party with a more advantageous value distribution than the remaining “weak” bidder(s). The predicted effects include inefficiency, a decrease in the sellerʼs revenue, and higher biddersʼ payoffs. Under risk neutrality, the members of the strong party benefit less than the weak bidders. The prediction is reversed when the bidders are sufficiently risk-averse. These hypotheses are tested experimentally. Contrary to the theory, joint bidding increases efficiency and the sellerʼs revenue decreases by less than expected. Strong bidders benefit more than weak bidders indicating that incentives to bid jointly may be greater than hypothesized. Additionally, the experiment assesses the effect of group decision-making. A Nash equilibrium prediction for individual–group differences based on differences in risk attitudes is not supported by the data.     

Candidate strategies in primaries and general elections with candidates of heterogeneous quality

I consider a model in which candidates of differing quality must win a primary election to compete in the general election. I show that there is an equilibrium in which Democrats choose liberal policies and Republicans choose conservative policies, but higher quality candidates choose more moderate policies than lower quality candidates. In this equilibrium, higher quality candidates choose more moderate policies if they have a larger quality advantage or there is less uncertainty about the median voterʼs ideal point in the general election, and the candidates in a given primary choose closer policies to one another when there is a smaller quality difference between the candidates in a primary. I further show that if the candidates have policy motivations, then a low quality candidate may strategically choose to enter a primary even if running for office is costly and the candidate will lose the primary election with certainty in equilibrium.     

Market Power and Emissions Trading: Theory and Laboratory Results

Policymakers are concerned with market power being exploited by dominant firms in emission permit markets. Two types of market power may emerge: simple and exclusionary manipulation. Simple manipulation should result in reduced pollution‐control cost relative to command‐and‐control regulation. Exclusionary manipulation may result in increased cost. The paper reports results of an economic experiment to determine whether (i) such opportunities are successfully exploited when a dominant firm has the opportunity to do so, and (ii) the resulting outcomes are serious enough to merit consideration by regulators. Market power outcomes emerge and market efficiency is far below predicted levels.     

Existence of equilibria in countable games: An algebraic approach

Although mixed extensions of finite games always admit equilibria, this is not the case for countable games, the best-known example being Waldʼs pick-the-larger-integer game. Several authors have provided conditions for the existence of equilibria in infinite games. These conditions are typically of topological nature and are rarely applicable to countable games. Here we establish an existence result for the equilibrium of countable games when the strategy sets are a countable group, the payoffs are functions of the group operation, and mixed strategies are not requested to be σ-additive. As a byproduct we show that if finitely additive mixed strategies are allowed, then Waldʼs game admits an equilibrium. Finally we extend the main results to uncountable games.     

Consumers and experts: an econometric analysis of the demand for water heaters

Consumers can accumulate product information on the basis of a combination of searching, product advertising and expert advice. Examples of experts who provide product information include doctors advising patients on treatments, motor mechanics diagnosing car problems and recommending repairs, accountants recommending investment strategies, and plumbers making recommendations on alternative water heaters. In each of these examples, the transactions involve the sale of goods and services where the seller is at the same time an expert providing advice on the amount and type of product or service to be purchased. In the case of water heaters, the plumber advising a consumer on their choice of water heater will most likely also install the appliance. Because of the information asymmetry there is potentially a strategic element in the transmission of information from expert to consumer. This paper reports on an econometric investigation of the factors that determine the choices made by consumers and the recommendations made by plumbers and the extent to which plumbers act in the best interests of their customers. The empirical work is made possible by the availability of stated preference data generated by designed experiments involving separate samples of Australian consumers and plumbers. We find some evidence that the average plumber’s advice deviates from maximizing utility of the average consumer in a direction that increases the plumber’s profit margins.     

The minimum approval mechanism implements the efficient public good allocation theoretically and experimentally

We propose the minimum approval mechanism (MAM) for a standard linear public good environment with two players. Players simultaneously and privately choose their contributions to the public good in the first stage. In the second stage, they simultaneously decide whether to approve the otherʼs choice. Both contribute what they choose in the first stage if both players approve; otherwise, both contribute the minimum of the two choices in the first stage. The MAM implements the Pareto-efficient allocation in multiple solution concepts including backward elimination of weakly dominated strategies (BEWDS), limit logit agent quantal response equilibrium, subgame perfect minimax regret equilibrium, level-k thinking, and diagonalization heuristics. Moreover, the MAM is unique under plausible conditions. Overall, contributions in the MAM experiment averaged 94.9%. Quantifying subjectsʼ responses to the questionnaire reveal heterogeneous reasoning processes and highlight the importance of developing mechanisms that implement the desired social choice outcome in multiple solution concepts.     

Social norms and trust among strangers

We study the development of a social norm of trust and reciprocity among a group of strangers via the “contagious strategy” as defined in Kandori (1992). Over an infinite horizon, the players anonymously and randomly meet each other and play a binary trust game. In order to provide the investors with proper incentives to follow the contagious strategy, there is a sufficient condition that requires that there exists an outside option for the investors. Moreover, the investorsʼ payoff from the outside option must converge to the payoff from trust and reciprocity as the group size goes to infinity. We show that this sufficient condition is also a necessary condition to sustain any sequential equilibrium in which the trustees adopt the contagious strategy. Our results imply that a contagious equilibrium only supports trust if trust contributes almost nothing to the investorsʼ payoffs.