Nash implementation in production economies

Summary This paper provides a general way to incorporate private ownership production economies into the implementation of the Walrasian correspondence. We present two mechanisms, both of which permit agents to behave strategically with respect to their initial endowments, preferences, and production possibility sets. The first mechanism deals with the case of endowment destruction, the second deals with the case of endowment withholding. We show that each mechanism Nash implements the Walrasian correspondence. In addition, both mechanisms are individually feasible, balanced, continuous and only require the transmission of prices and quantities of goods as messages.This paper is based on Chapters 2 and 3 of my dissertation submitted to the University of Minnesota. I want to thank E. Green, J. Jordan, M. Richter, H. Weinberger and especially L. Hurwicz for their many helpful suggestions and comments.     

Equilibrium in a decentralized market with adverse selection

Summary. This paper deals with trade volume and distribution of surplus in markets subject to adverse selection. In a model where two qualities of a good exist, I show that if trade is decentralized (i.e. conducted via random pairwise meetings of agents), then all units of the good are traded, and all agents have positive ex-ante expected payoffs. This feature is present regardless of the quality distribution, and persists in the limit as discounting is made negligible. This offers a sharp contrast to models of centralized trade with adverse selection (Akerlof, Wilson). Received: April 2, 2001; revised version: March 29, 2002 RID="*" ID="*" This research was funded by a grant from UQAM. I wish to thank Roberto Serrano and seminar participants at UQAM, Queen's University at Kingston, the 2001 CEME General Equilibrium Conference (Brown University), and the 2001 North American Summer Meeting of the Econometric Society (University of Maryland) for comments.     

Recommended play and correlated equilibria: an experimental study

This study reports a laboratory experiment wherein subjects play a hawk–dove game. We try to implement a correlated equilibrium with payoffs outside the convex hull of Nash equilibrium payoffs by privately recommending play. We find that subjects are reluctant to follow certain recommendations. We are able to implement this correlated equilibrium, however, when subjects play against robots that always follow recommendations, including in a control treatment in which human subjects receive the robot “earnings.” This indicates that the lack of mutual knowledge of conjectures, rather than social preferences, explains subjects’ failure to play the suggested correlated equilibrium when facing other human players. We are grateful for financial support provided by the Purdue University Faculty Scholar program and the Asociación Méxicana de Cultura, as well as for the valuable research assistance provided by Shakun Datta and Marikah Mancini. We received helpful comments from Shurojit Chatterji, David Cooper, Arthur Schram, Ricard Torres, an anonymous referee, and from conference and seminar participants at Royal Holloway, the University of Amsterdam, Purdue University, the Economic Science Association and the Society for the Advancement of Economic Theory.     

The role of externalities and information aggregation in market collapse

We examine the role that belief, network externality, and information aggregation play in inefficient market collapses. After receiving consecutive negative shocks, some ex-ante identical Bayesian agents will be discouraged about the unknown state of the market they invest; therefore, they will stop investing. This decision will have two effects: first, it will cause agents to aggregate information through social/observational learning; second, it will decrease the network externality effect. We show that there might be an inefficient market collapse if the externality effect diminishes too much, and the cost of re-entry to the market is too high. We also analyze the effects of strategic delay and experimentation on the exit decision of the agents. I especially thank Thomas D. Jeitschko, Matthew Mitchell, B. Ravikumar Ted Temzelides. I also thank anonymous referees, an associate editor, John Conlon, Larry Samuelson, Troy Tassier, Stephen Williamson, and seminar participants of the University of Saskatchewan, Georgia Tech, Concordia University, University of Manitoba, Iowa Alumni Workshop, Midwest Economic Theory Conferences held at Indiana Bloomington, and Notre Dame, and 1st International Conference on Business, Management and Economics organized by Yasar University.     

On exchange rates and efficiency

Summary This paper analyzes an exchange economy in which several assets serve as stores of value and where agents have completely heterogeneous preferences and endowments. It describes the set of perfect foresight equilibria in which all assets have positive prices. There are international policies with determinate exchange rates if the world economy satisfies a strong efficiency criterion. Also, the corresponding equilibrium allocations are in the core of the world economy for certain international policies. Hence, a system of fixed exchange rates can support efficient allocations to the extent that countries agree on a division of seigniorage in the creation of international reserves.I would like to thank an annonymous referee, Suchan Chae, Mike Woodford, Ken Kasa, Helen Popper, Kathryn Marshall, and seminar participants at the University of Kansas, the Federal Reserve board, the 1990 meetings of the Western Economic Association, the University of Western Ontario, the University of Chicago, the University of Pennsylvania, Purdue University, and Victoria University of Wellington for comments on earlier drafts.     

Welfare analysis of a market with pairwise meetings and asymmetric information

Summary We study the welfare properties of a market with pairwise meetings and asymmetric information, establishing an equivalence between asymptotically expost individually rational and asymptotically (ex-ante, interim and ex-post) efficient equilibrium sequences.We thank Andreu Mas-Colell, Eric Maskin, and Thomas Sjöström for having raised the question which led to the writing of this paper. We are grateful to Nicholas Yannelis and two anonymous referees for helpful comments.     

The good,the bad and the ugly: agent behavior and efficiency in open and closed organizations

Current literature has largely ignored the fact that some organizations are highly selective when admitting new agents while others are more open. In addition, some organizations audit or sort agent behavior within the organization more aggressively than others. One might expect a priori that closed, highly selective, organizations would always be more efficient because they screen out the worst types, which could lead to better agent behavior. We show that this is not the case. Specifically, when agent behavior in equilibrium is uniform across organizations (i.e., when the number of agents behaving the same way is identical), closed organizations are inefficient. However, when agent behavior varies across organizations, closed organizations may or may not be inefficient, depending on net payoffs to the organization and the agents. Our analysis implies that organizations should choose the open type when screening or sorting costs are high, when there is a high frequency of good agent types in the population, when agent misbehavior does not reduce output significantly, and when penalties for misbehavior are large. The paper has benefitted from useful comments by David Flath, Charles Knoeber, Claudio Mezzetti, two anonymous referees and participants of the Spring 2005 Midwest Economic Theory meetings at Vanderbilt University, the 2005 meetings of the Society for the Advancement of Economic Theory in Vigo, Spain, the 2005 conference on Research in Economic Theory and Econometrics in Syros, Greece, and workshops at North Carolina State University, Texas A&M University and McGill University.     

Evolution of Interdependent Preferences in Aggregative Games

We study the evolution of preference interdependence in aggregative games which are symmetric with respect to material payoffs but asymmetric with respect to player objective functions. We identify a class of aggregative games whose equilibria have the property that the players with interdependent preferences (who care not only about their own material payoffs but also about their payoffs relative to others) earn strictly higher material payoffs than do the material payoff maximizers. Implications of this finding for the theory of preference evolution are discussed. Journal of Economic Literature Classification Numbers: C72, D62.     

PREFERENCES UNDER IGNORANCE

A decision maker (DM) makes choices from different sets of alternatives. The DM is initially ignorant of the payoff associated with each alternative and learns these payoffs only after a large number of choices have been made. We show that, in the presence of an outside option, once payoffs are learned, the optimal choice rule from sets of alternatives can be rationalized by a DM with strict preferences over all alternatives. Under this model, the DM has preferences for preferences while being ignorant of what preferences are “right.”     

Children Crying at Birthday Parties. Why?

We consider the problem of dividing a non-homogeneous one-dimensional continuum whose endpoints are topologically identified. Examples are the division of a birthday cake, the partition of a circular market, the assignment of sentry duty or medical call. We study the existence of rules satisfying requirements of efficiency, fairness (no-envy), and immunity to misrepresentation of preferences (strategy-proofness). This work, supported by NSF under grant SES. 0214691, was presented at Laval University, at the May 2004 Israeli-Turkish Conference on Economic Design at Bilgi University, at the July 2004 Meeting of the Society for Economic Design at the University of Mallorca, and at the July 2004 Seventh International Meeting of the Society for Social Choice and Welfare at Osaka University. I thank Julius Barbanel, Steven Brams, Youngsub Chun, Bettina Klaus, Toyotaka Sakai, and Chun-Hsien Yeh for their comments.     

Preference Evolution,Two-Speed Dynamics,and Rapid Social Change

We present a dynamic analysis of the evolution of preferences in a strategic environment. In our model, each player's behavior depends on both the game's payoffs and his idiosyncratic biases, but only the game's payoffs determine his evolutionary success. Dynamics run at two speeds at once; while natural selection slowly reshapes the distribution of preferences, players quickly learn to behave as their preferences dictate. We establish the existence and uniqueness of the paired trajectories of society's preferences and behavior. While aggregate behavior adjusts smoothly in equilibration games, in coordination games aggregate behavior can jump discretely in an instant of evolutionary time. Journal of Economic Literature Classification Numbers: C72, C73.     

THE REVELATION OF INFORMATION THROUGH THE ELECTORAL PROCESS: AN EXPLORATORY ANALYSIS*

This paper investigates the incentives for candidates to make informative campaign speeches concerning their policy intentions. Electoral competition is modeled as a game of communication in which candidates’policy preferences are private information and they compete by making pre-electoral policy announcements. An equilibrium is shown to exist in which candidates reveal their true policy intentions. We find that campaign messages are more likely to be informative, the less powerful is the elected office, the more attractive are candidates’opportunities outside of office, and the more uniform are candidates’prior beliefs as to the median voter's preferred policy.     

Expected consumer’s surplus as an approximate welfare measure

Except for a knife-edge case of preferences, the percentage error from using the change in expected consumer’s surplus (ECS) to approximate the willingness to pay for a change in the distribution of a random price is unbounded, in contrast to Willig’s (Am Econ Rev 66:589–597; 1976) famous approximation result for nonrandom prices. If the change is smooth on the space of random variables, and either the initial price is nonrandom or state-contingent payments are possible, then the change in ECS locally approximates the willingness to pay well. Unfortunately, this smoothness fails in some important applications. I thank Hector Chade, Glenn Ellison, Peter Hammond, Manuel Santos, seminar participants at Arizona State, Stanford and Yale and participants of the Midwest Economic Theory meetings at Indiana University and the 2004 Summer Econometric Meetings for comments.     

A Backward Induction Experiment

This paper reports experiments with one-stage and two-stage alternating-offers bargaining games. Payoff-interdependent preferences have been suggested as an explanation for experimental results that are commonly inconsistent with players' maximizing their monetary payoffs and performing backward induction calculations. We examine whether, given payoff-interdependent preferences, players respect backward induction. To do this, we break backward induction into its components, subgame consistency and truncation consistency. We examine each by comparing the outcomes of two-stage bargaining games with one-stage games with varying rejection payoffs. We find and characterize systematic violations of both subgame and truncation consistency. Journal of Economic Literature Classification Numbers: C70, C78.     

Matching and anonymity

This work introduces a set-theoretic foundation of deterministic bilateral matching processes and studies their properties. In particular, it formalizes a link between matching and informational constraints by developing a notion of anonymity that is based on the agents’ matching histories. It also explains why and how various matching processes generate different degrees of “informational isolation” in the economy. We illustrate the usefulness of our approach to modeling matching frameworks by discussing the classical turnpike model of Townsend.This research is supported in part by the NSF grants EIA-0075506, SES-0128039, DMS-0437210, and ACI-0325846. We thank two anonymous referees for constructive comments that improved the exposition of the paper. We also thank the participants in seminars at the University of Aarhus, Purdue University, University of Texas at Austin, and at the XI Meeting on Real Analysis and Measure Theory in 2004, the spring 2004 Midwest Economic Theory Meeting, the summer 2004 North American and European Econometric Society meetings.     

Banking,incentive constraints,and demand deposit contracts with nonlinear returns

Summary This paper presents two results regarding banking theory: (1) demand deposit contracts are essential in providing insurance against preferences shocks, as in Diamond and Dybvig (1983), if and only if the incentive compatibility conditions bind at the social optimum; and (2) for additively separable preferences with random discount factors, demand deposit contracts have the realistic feature that the interest rate paid is an increasing function of deposit balance.This paper is based on Chapter 2 of my Ph.D. dissertation submitted to the Graduate School of The University of Minnesota. I am indebted to Neil Wallace for his advice and guidance. I thank an anonymous refree for comments on a previous version of the paper. The comments from Edward Green, Nobuhiro Kiyotaki, Antonio Merlo, and Arijit Mukherji are appreciated.     

Bertrand Games and Sharing Rules

We consider asymmetric Bertrand games with arbitrary payoffs at ties or sharing rules, and identify sufficient conditions for the zero-profit outcome and the existence of Nash equilibria. Subject to some technical conditions on non-tied payoffs the following hold. If the sharing rule is strictly tie-decreasing all players but one receive zero equilibrium payoffs, while everybody does so if non-tied payoffs are symmetric. Mixed (pure) strategy Nash equilibria exist if the sharing rule is (norm) tie-decreasing and coalition-monotone. I would like to thank Fernando Branco, the audience at Pompeu Fabra (Barcelona), ISEG (Lisbon), University of Mannheim, ESEM 2003 (Venice), EARIE 2005 (Porto), two anonymous referees, and the editor Dan Kovenock for very useful comments. This research received financial support under project POCTI/ECO/37925/2001 of FCT and FEDER.     

Construction of a state space for interrelated securities with an application to temporary equilibrium theory

Summary We construct an endogenous state space in an exchange economy with possibly infinite horizon. Every period agents trade securities whose payoffs depend on future dividends and asset prices. We reject the perfect foresight assumption on the ground that agents have not only limited knowledge of other individuals' endowments and preferences, but also limited capacity to compute equilibria. We choose instead absence of arbitrage as the principle which allows agents to determine if a system of future prices is possible. We give an alogrithm to compute the set of nonarbitrage prices every period, with both finite and infinite horizon. We then apply this endogenous structure of uncertainty to an infinite horizon temporary equilibrium model.I would like to thank Professor Donald Brown for his constant help and guidance. I have also greatly benefited from helpful discussions with Professors Jacques Drèze, Bernard Dumas, Mordecai Kurz, Carsten Nielsen, Jan Werner, and Ho-Mou Wu.     

Communication, Risk, and Efficiency in Games

This paper uses curb sets to study the evolution of effective pre-play communication in games where a single communication round precedes a simultaneous-move, complete-information game. It is shown that the effectiveness of one-sided pre-play communication is inversely related to risk in the underlying game, and to the size of the message space. If messages have somea prioriinformation content, then multi-sided communication is more effective than one-sided communication; i.e., risk and the size of the message space play no role.Journal of Economic LiteratureClassification Number: C72.     

On the rationalizability of observed consumers’ choices when preferences depend on budget sets and (potentially) on anything else

We prove that defining consumers’ preferences over budget sets is both necessary and sufficient to make every fully informative and finite set of observed consumption choices rationalizable by a collection of preferences which are transitive, complete, and monotone with respect to own consumption. Our finding has two important theoretical consequences. First, assuming that preferences depend on budget sets is illegitimate under the scientific commitments of revealed preference theory. Second, as long as consumers’ preferences are not defined over budget sets, we can assume that preferences depend on observable objects other than own consumption without compromising the logical possibility to reject the model against observation. We however point out that, despite this logical possibility, in practice it can be almost impossible to reject a model where preferences are defined over objects that depend on budget sets. As an example of this we show that if preferences are defined over consumption choices of other individuals then rationalization fails only in cases of negligible practical interest.