Experimental study of cursed equilibrium in a signaling game

The laboratory experiment described in this paper provides evidence on play in signaling games in the context of electoral competition. In this game, voters must infer the preferred policy of each candidate from the candidate’s choice of whether to announce (truthfully) his preferred policy or to take no position. Bayesian voters would put high probability on a candidate having an extreme policy preference after observing him take no position, but cursed voters would not fully appreciate the informational content of the decision to take no position. Stated beliefs reveal substantial uncertainty about other players’ strategies. Based on estimates of a structural model of cursed equilibrium allowing for heterogeneity in the degree of cursedness, 32% of choices between candidates are consistent with Bayesian updating, 32% imply no inferences about others’ types after observing their actions, and the remainder indicate partial updating. Though the experiment also includes treatments with subjects in both roles, these estimates are based on interactions with programmed candidates, implying that uncertainty about others’ rationality and strategic sophistication is not driving the result. We also find that the quantal response error structure in which errors depend on payoff differences cannot explain the pattern of errors that subjects make.     

DISPLAYING UNCERTAIN INFORMATION ABOUT PROBABILITY: EXPERIMENTAL EVIDENCE

Different from previous experiments that used three representations of uncertain information for probabilities: best estimate, interval and sets of probabilities, we use visual display to represent different levels of uncertainty through varying amount of probabilistic information provided to subjects. Results confirm that the individuals’ willingness to pay is higher when a larger amount of information is available. Further, individuals are found uncertainty averse for high probability of gain and uncertainty seekers for low probability of gain. Similarities in results across different representations of uncertainty indicate that the representation tested here is a viable method for communicating uncertainty to decision makers.     

On the provision of incentives in finance experiments

Monetary incentives are a procedural pillar in experimental economics. By applying four distinct monetary incentive schemes in three experimental finance applications, we investigate the impact of an incentive scheme’s salience on results and elicit subjects’ perception of the experienced scheme. We find (1) no differences in results between salient schemes but a significant impact if the incentive scheme is non-salient. (2) The number of previous participations has a significant impact on the perception of the incentive scheme by subjects: it strongly correlates with subjects’ motives for participation, positively contributes to subjects’ understanding of the incentive scheme, but has no influence on subjects’ motivation within the experiment. (3) Subjects favor more salient over less- or non-salient schemes in the gain domain and negatively evaluate high salience in the loss domain.     

Is post-smoking-cessation weight-gain a significant trigger for relapse?

While the Surgeon General's Consumer Guide lists weight-gain as an important relapse trigger, the 2001 Surgeon General's Report on Women and Smoking concludes, paradoxically, that actual weight-gain during cessation does not appear to predict relapse. This dichotomous view reflects longstanding scientific uncertainty about the role of weight-gain in triggering relapse. This scientific uncertainty, which stems from mixed clinical trial results, is problematic for insurance coverage decisions such as state Medicaid programme decisions to cover or exclude smoking-cessation and weight-control pharmaceuticals. Analysts hypothesize that selection bias may explain the inconsistency between the negative clinical results and the persistent view that weight-gain triggers relapse, if weight-concern is both a key determinant of the transition from ‘smoker’ to ‘ex-smoker,’ and a key moderating variable in the relationship between weight-gain and relapse. We therefore use the nationally representative 1997 National Longitudinal Survey of Youth (NLSY97) to test the relapse-trigger hypothesis, and conclude that post-smoking-cessation weight-gain triggers relapse among weight-concerned white women, but it is associated with quitting success among Hispanic women. In addition, our results do not support the hypothesis that the mixed clinical trial results reflect selection bias based on weight-concern.     

The negative side of inflation targeting: revisiting inflation uncertainty in the EMU

ABSTRACT

This article tests the Friedman–Ball hypothesis for the European Monetary Union (EMU) countries, using a GARCH methodology. The empirical results show a positive relationship between inflation and inflation uncertainty, largely supportive of the Friedman–Ball hypothesis. Furthermore, the ECB’s price stability mandate is found to have asymmetric, if not limited, effects on inflation uncertainty since 1999, with the findings different for the so-called peripheral countries when compared to the core. For the majority of the EMU countries, shifts away from the 2% target served to increase inflation uncertainty. The credibility of the ECB since the financial crisis, in attempting to meet its 2% inflation target has seen inflation uncertainty increase for some, likely driven by inflation failing to re-anchor. Furthermore, recent periods of deflation are found to generate inflation uncertainty, with short-term price variability increasing in line with observed negative price growth for the majority of the EMU countries. The results are supportive of a U-shaped relationship between inflation and inflation uncertainty. Using spline techniques, we formally provide support for such a U-shaped relation where inflation uncertainty broadly increases below a certain threshold for each country’s inflation rate. Asymmetric effects across countries are found in the level of this threshold.     

Optimal management of an ecosystem with an unknown threshold

We consider an ecosystem with two distinct equations of motion that are separated by a threshold value of the state variable. We find that increasing uncertainty (both uncertainty embedded in the natural system and uncertainty of the decisionmaker about the location of the threshold) can lead to nonmonotonic changes in precaution: a reduction in uncertainty can first increase and then decrease optimal precautionary activity. This nonmonotonicity can help to explain why regulators often give conflicting arguments about optimal abatement policies in the face of uncertainty. For example, some regulators argue for an immediate reduction in pollutant loading until uncertainty about the underlying process is reduced while others call for no costly reductions in pollutant loading until the same uncertainty is reduced. These statements can be consistent even if both sides agree on both economic objectives and the system dynamics, but have different priors on the uncertainty involved.     

Not quite the best response: truth-telling,strategy-proof matching,and the manipulation of others

Following the advice of economists, school choice programs around the world have lately been adopting strategy-proof mechanisms. However, experimental evidence presents a high variation of truth-telling rates for strategy-proof mechanisms. We crash test the connection between the strategy-proofness of the mechanism and truth-telling. We employ a within-subjects design by making subjects take two simultaneous decisions: one with no strategic uncertainty and one with some uncertainty and partial information about the strategies of other players. We find that providing information about the out-of-equilibrium strategies played by others has a negative and significant effect on truth-telling rates. That is, most participants in our within-subjects design try and fail to best-respond to changes in the environment. We also find that more sophisticated subjects are more likely to play the dominant strategy (truth-telling) across all the treatments. These results have potentially important implications for the design of markets based on strategy-proof matching mechanisms.     

Nerves of steel? Stress,work performance and elite athletes

There is a notable shortage of empirical research directed at measuring the magnitude and direction of stress effects on performance in a controlled environment. One reason for this is the inherent difficulties in identifying and isolating direct performance measures for individuals. Additionally, most traditional work environments contain a multitude of exogenous factors impacting individual performance, but controlling for all such factors is generally unfeasible (omitted variable bias). Moreover, instead of asking individuals about their self-reported stress levels, we observe workers’ behaviour in situations that can be classified as stressful. For this reason, we have stepped outside the traditional workplace in an attempt to gain greater controllability of these factors using the sports environment as our experimental space. We empirically investigate the relationship between stress and performance, in an extreme pressure situation (football penalty kicks) in a winner take all sporting environment (FIFA World Cup and UEFA European Cup competitions). Specifically, we examine all the penalty shootouts between 1976 and 2008 covering in total 16 events. The results indicate that extreme stressors can have a positive or negative impact on individuals’ performance. On the other hand, more commonly experienced stressors do not affect professionals’ performances.     

Does self-regulation work? Experimental evidence of the reputational incentives of Self-Regulatory Organizations

Self-regulation (SR) is a common way of enforcing quality in markets (such as banking, financial services and several professions) and in a variety of public and private organizations. We provide experimental evidence of the reputational incentives of self-regulatory organizations (SROs) to publicly disclose versus cover-up fraud in an incomplete information environment. We find that observed behaviour is generally consistent with Bayesian equilibrium when subjects are informed about the relative likelihood of fraud detection by a ‘vigilant’ versus a ‘lax’ SRO type. In particular, a fraud disclosure equilibrium is supported when subjects are informed that the ‘vigilant’ SRO is more likely to detect fraud; otherwise, a cover-up equilibrium is supported. However, when subjects are not informed about the relative likelihood of fraud detection by the SRO types (as expected in real SR situations), no equilibrium is strongly supported. Our results suggest that in practice, the reputation-based incentives for effective SR may be inherently ambiguous and weak.     

Robustness to strategic uncertainty

We introduce a criterion for robustness to strategic uncertainty in games with continuum strategy sets. We model a player's uncertainty about another player's strategy as an atomless probability distribution over that player's strategy set. We call a strategy profile robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence of strategy profiles in which every player's strategy is optimal under his or her uncertainty about the others. When payoff functions are continuous we show that our criterion is a refinement of Nash equilibrium and we also give sufficient conditions for existence of a robust strategy profile. In addition, we apply the criterion to Bertrand games with convex costs, a class of games with discontinuous payoff functions and a continuum of Nash equilibria. We show that it then selects a unique Nash equilibrium, in agreement with some recent experimental findings.     

Audit Misperception, Tax Compliance, and Optimal Uncertainty

The purpose of this paper is to shed light on the role of taxpayers’ misperceptions in determining compliance behavior. This paper also analyzes the effect of increased randomness on evasion, revenue, and welfare. Whether or not individuals choose to evade taxes depends on the perceived audit probability and on the fraction of honest taxpayers in the population. When individuals know the precise probability of audit, the model becomes in effect a game of coordination, a situation that gives rise to multiple equilibria. This paper incorporates audit misperception by introducing a small amount of uncertainty about the true audit probability. With the introduction of this uncertainty, we verify that there is a unique equilibrium cutoff point, such that each taxpayer evades if and only if his perceived signal falls below this cutoff. It is argued that this unique equilibrium outcome fares better than others in explaining empirical and experimental observations. We also find that, when reducing uncertainty has no cost, the optimal uncertainty is generally indeterminate, even when including zero uncertainty. Finally, we show that, when reducing uncertainty is costly, eliminating all uncertainty can never be optimal. In the limit as this cost vanishes, the optimal uncertainty is unique, meaning that introducing a small amount of enforcement cost resolves the indeterminacy problem.     

Environmental uncertainty,foresight and strategic decision making: An integrated study

This paper explores how the foresight practices and techniques that might be used for coping with environmental uncertainty are coordinated throughout large corporations and how their results are used for supporting strategic decision making. Based on an in-depth and multiple study of several companies, we analyse the main characteristics of environmental uncertainty - complexity and dynamism - that shape companies’ approaches to strategic foresight and uncertainty management. We explore the impact of growing complexity and dynamism on these approaches and the role of prediction and control in their design and implementation. We outline a conceptual framework for strategic foresight activities - and their relationships with decision making under uncertainty - as a planned learning process about the future which enables managers not to know opportunities and threats in advance, but to detect them more promptly and to react more effectively as soon as they start emerging.     

Do the central bank actions reduce interest rate volatility?

This paper investigates how Central Bank of Brazil (CBB) actions influence market uncertainty. We consider two kinds of actions: the monetary policy decision about the interest rate target and the pure communication event of this decision published one week later. Unlike related papers, we measure the market uncertainty by the implied volatility extracted from interest rate options. Implied volatility is more suitable than physical volatility to assess economic effects since it encompass market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both the decisions about the target rate and the communication event reduce the interest rate volatility.     

Vertical product differentiation under demand uncertainty

In this paper, I examine a quality-then-price game in a fully covered market where firms are uncertain about consumer tastes regarding quality. The equilibrium is characterized under the fixed costs and variable costs of quality improvement, respectively. It is shown that the uncertainty is a differentiation force, and the quality differentiation increases more under variable costs than under fixed costs. In addition, an increase in uncertainty leads to higher profits and higher social welfare regardless of whether under fixed or variable costs. This result contrasts with the lower welfare in the Hotelling model with uncertainty. Finally, an analysis of the case of partial market coverage with uncertainty completes this paper.     

Some Implications of Uncertainty in a Small Open Economy

Consider a small open economy which produces two commodities, the first a consumers' good and the second a producers' good, by means of a conventional no-joint-products technology. Suppose that one of the two production functions is subject to a random multiplicative disturbance and that factors of production must be allocated to the two industries before the realization of the random variable. It is known that if in the absence of uncertainty production is incompletely specialized then the same is true under uncertainty although the average output of the uncertain industry is lower. In the present paper we suppose that each of the two production functions is subject to a random multiplicative disturbance but restrict our attention to three particular cases: the polar cases of perfect correlation, positive and negative, and the intermediate case of zero correlation. It is shown that in none of these cases does there exist an obvious and complete analogue of the above proposition but that in each case something definite can be said, either about the possibility of complete specialization under uncertainty or about the effect of uncertainty on the allocation of factors (but not about both).     

Robust determinants of health care expenditure growth

Our aim is to disclose robust explanatory variables for health care expenditure (HCE) growth by introducing to this field of research a method that is especially well suited for situations of ‘model uncertainty’: the Extreme Bounds Analysis (EBA). We analyse data for 33 OECD countries over the period 1970–2010 and include – as far as it is statistically feasible – all macroeconomic and institutional determinants of HCE growth in the EBA that have been suggested in the literature. Furthermore, we analyse to what extent outliers in the data influence the results. Our results confirm earlier findings that GDP growth and a variable representing Baumol’s ‘cost disease’ theory emerge as robust and statistically significant determinants of HCE growth. Depending on whether or not outliers are excluded, we find up to six additional robust drivers: the growth in expenditure on health administration, the change in the share of inpatient expenditure in total health expenditure, the (lagged) government share in GDP, the change in the insurance coverage ratio, the growth in land traffic fatalities and the growth in the population share undergoing renal dialysis.     

Money illusion and coordination failure

Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inferior equilibrium; however, if we lift the veil of money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of money illusion: even though money illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of money illusion are found when strategic uncertainty prevails.     

贸易自由化是如何影响我国出口产品质量的？*--基于贸易政策不确定性下降的视角

传统理论认为贸易自由化会促进出口产品的质量升级,但我国加入W TO后的情况却并非如此。文章基于贸易政策不确定性的视角,利用我国加入W TO前后美国对我国产品进行关税调整这一自然实验,通过倍差法分析了贸易自由化对我国出口产品质量的影响。研究表明：（1）在贸易自由化的过程中,贸易政策不确定性的下降会拉低我国的出口产品质量,且这一结论在改变质量测度方法、控制成本效应以及使用不同的产品属性、贸易对象和样本的情况下依然稳健;（2）贸易政策不确定性主要是通过广延边际上的质量调整降低了我国出口产品的总体质量,即在贸易政策不确定性下降幅度越大的产品中,有越多的生产低质量产品的企业进入出口市场;（3）在集约边际上,存续企业并未针对贸易政策不确定性的下降做出及时的产品质量调整,从而无法改变我国的产品质量在短期内下降的趋势。文章为我国如何在推行贸易自由化的同时实现出口产品质量升级提供了启示。     

What do you want to know? Information acquisition and learning in experimental Cournot games

This paper presents an experiment designed to study firms’ behavior and market dynamics, when information about the market structure and opponents’ actions is difficult to acquire and process. Our experimental software controls the information acquisition process of the subjects. Paying attention not only to what players do, but also to what they know, it is possible to better understand the cognitive processes guiding their choices and, consequently, the impact of the informational structure on their behavior. According to our results, Best-Response Dynamics is the main component of subjects’ learning process. We also find that, when subjects look at the strategies individually adopted by their competitors, they tend to imitate the most successful behavior, which drives the market towards a more competitive outcome.     

Financial Uncertainty and Business Investment

The paper contributes to the empirical analysis of financial uncertainty and investment from a Post Keynesian perspective. The paper uses the volatility of the exchange rate, the volatility of the stock market index, and the real gold price as indicators for financial uncertainty. An increase in the volatility of a variable is a sufficient, but not a necessary condition for an increase in uncertainty regarding this variable. The effects of changes in uncertainty on investment are investigated econometrically for the United States, the United Kingdom, the Netherlands, Germany and France. Financial uncertainty, we find, has significant negative effects in the US and the Netherlands.