On choosing which game to play when ignorant of the rules

This paper suggests a theory of choice among strategic situations when the rules of play are not properly specified. We take the view that a “strategic situation” is adequately described by a TU game since it specifies what is feasible for each coalition but is silent on the procedures that are used to allocate the surplus. We model the choice problem facing a decision maker (DM) as having to choose from finitely many “actions”. The known “consequence” of the ith action is a coalition from game f _i over a fixed set of players \(N_i\cup\{d\}\) (where d stands for the DM). Axioms are imposed on her choice as the list of consequences (f ₁,..., f _m ) from the m actions varies. We characterize choice rules that are based on marginal contributions of the DM in general and on the Shapley Value in particular.     

On the performance of rule-based contribution schemes under endowment heterogeneity

We experimentally test different rule-based contribution mechanisms in a repeated 4-player public goods game with endowment heterogeneity and compare them to a VCM, distinguishing between a random and an effort-based allocation of endowments. We find that endowment heterogeneities limit the efficiency gains from these rule-based contribution schemes under random allocation. Under effort-based allocations, substantial efficiency gains relative to a VCM occur. These are largely driven by significant reductions of contributions in VCM, while the rule-based mechanisms generate stable efficiency levels, even though falling short in realizing the maximal efficiency gains. Our results indicate that the procedure of endowment allocation impacts the perception of what constitutes a fair burden sharing.     

Enforcement and environmental quality in a decentralized emission trading system

Should the powers of monitoring compliance and allocating tradeable emissions allowances be appointed to a unique supranational regulator or decentralized to several local regulators? To answer this question, we develop a two stage-two country game where environmental regulators set the amount of emission allowances and the level of monitoring effort to achieve full compliance while the regulated firms choose actual emissions and the number of permits to be held. Various, possibly conflicting, spillovers between countries arise in a decentralized setting. We show that decentralization is socially harmful if no asymmetry among institutional settings is introduced and can be suboptimal even when decentralization features lower monitoring costs than a centralized setting. Lower monitoring costs are therefore necessary, but not sufficient, to justify decentralization. Also, our analysis reveals that welfare can be higher under decentralization even if the corresponding environmental quality is worse than under centralization. Indeed, better environmental quality is sufficient but not necessary for higher welfare under decentralization. Finally, we discuss how these results can provide a theoretical rationale for the recent evolution of the EU ETS design.     

Online networks,social interaction and segregation: an evolutionary approach

There is growing evidence that face-to-face interaction is declining in many countries, exacerbating the phenomenon of social isolation. On the other hand, social interaction through online networking sites is steeply rising. To analyze these societal dynamics, we have built an evolutionary game model in which agents can choose between three strategies of social participation: 1) interaction via both online social networks and face-to-face encounters; 2) interaction by exclusive means of face-to-face encounters; 3) opting out from both forms of participation in pursuit of social isolation. We illustrate the dynamics of interaction among these three types of agent that the model predicts, in light of the empirical evidence provided by previous literature. We then assess their welfare implications. We show that when online interaction is less gratifying than offline encounters, the dynamics of agents’ rational choices of interaction will lead to the extinction of the sub-population of online networks users, thereby making Facebook and similar platforms disappear in the long run. Furthermore, we show that the higher the propensity for discrimination of those who interact via online social networks and via face-to-face encounters (i.e., their preference for the interaction with agents of their same type), the greater the probability will be that they all will end up choosing social isolation in the long run, making society fall into a “social poverty trap”.     

Algebra of Integrated Time Series: Evidence from Unit Root Analysis

It is argued if x_t ~ I(1) and y_t ~ I(1), then running a regression x_t on y_t would produce spurious results because e _t would generally be I(1). However, there may exist a ‘b’ such that e _t  = x _t - by _t is I(0), then running a regression x _t on y _t would not produce spurious results. This special case of two integrated time series is known in the literature as cointegration. In this particular case, x _t and y _t are said to be cointegrated. In our review of the development of the concept of cointegration, we identified that the underlying reason for this special case to arise is the proposition that if x _t  ~ I(d _x ), y _t  ~ I(d _y ), then z _t  = bx _t  + cy _t  ~ I(max(d _x ,d _y )). In this research, we offer evidence against this proposition.     

Joint misrepresentation with bribes

We study the problem of assigning objects to buyers. Monetary transfers are allowed. Each buyer’s preference space contains, but is not limited to, the linear additively separable preferences. A rule maps each preference profile to an allocation. We are concerned about the possibility that a group of buyers may engage in the following kind of manipulation: They make side payments internally and then carry out a joint misrepresentation. A rule is strongly group strategy-proof if no group can gain by engaging in such operations. We also consider several other appealing requirements. We find that the posted-price rules are the only one that satisfies non-triviality, non-imposition, envy-freeness, and strong group strategy-proofness.     

Tops-only domains

In this paper we consider the standard voting model with a finite set of alternatives A and n voters and address the following question: what are the characteristics of domains \({\mathcal D}\) that induce the property that every strategy-proof social choice function \({f: {\mathcal D}^n \rightarrow A}\) satisfying unanimity, has the tops-only property? We first impose a minimal richness condition which ensures that for every alternative a, there exists an admissible ordering where a is maximal. We identify conditions on \({\mathcal D}\) that are sufficient for strategy-proofness and unanimity to imply tops onlyness in the general case of n voters and in the special case, n = 2. We provide an algorithm for constructing tops-only domains from connected graphs with elements of A as nodes. We provide several applications of our results. Finally, we relax the minimal richness assumption and partially extend our results.     

Mixture periodic GARCH models: theory and applications

This paper discusses mixture periodic GARCH (M-PGARCH) models that constitute very flexible class of nonlinear time series models of the conditional variance. It turns out that they are more parsimonious comparatively to MPARCH models. We first provide some probabilistic properties of this class of models. We thus propose an estimation method based on the expectation-maximization algorithm. Finally, we apply this methodology to model the spot rates of the Algerian dinar against euro and US dollar. This empirical analysis shows that M-PGARCH models yield the best performance among the competing models.     

Indirect higher order beliefs and cooperation

This study experimentally examines the role of indirect higher order beliefs in sequential psychological games. We consider a three-player sequential game in which the first and third players do not interact sequentially, but only through an intermediary, the second player. We posit that the third player’s decision to cooperate depends on his indirect higher order belief, namely, his belief about what the first player believes the second player would choose. We employ pre-play communication between the first and third players as a way to influence the third player’s indirect higher order belief. The evidence demonstrates that communication can effectively induce cooperation from the third player by shaping his indirect higher order belief.     

Persistency of Turkish export shocks: a quantile autoregression (QAR) approach

This study analyzes the persistency of total and disaggregated Turkish exports for different shock magnitudes using the quantile autoregression (QAR) method in line with Koenker and Xiao (J Am Stat Assoc 99:775–787, 2004). The results suggest that the persistence of shocks are not similar across different quantiles of Total Exports and disaggregated export sectors, indicating an asymmetry in the case of negative and positive shocks across different export sectors. The persistency behavior of Total Exports as well as Food and Beverages, Chemicals, Basic Metals, Raw Materials, Motor Vehicles and Radio & TV exports are asymmetric to negative versus positive shocks, which cannot be captured by traditional unit root tests. Thus, sound interpretation of QAR results is necessary for policy makers to identify shock characteristics and thereby pursue appropriate policies for overcoming adverse impacts on the economy.     

Intolerable nuisances: some laboratory evidence on survivor curve shapes

The fraction of a user population willing to tolerate nuisances of size x is summarized in the survivor curve S(x); its shape is crucial in economic decisions such as pricing and advertising. We report a laboratory experiment that, for the first time, estimates the shape of survivor curves in several different settings. Laboratory subjects engage in a series of six desirable activities, e.g., playing a video game, viewing a chosen video clip, or earning money by answering questions. For each activity and each subject we introduce a chosen level \(x \in [x_{\min }, x_{\max }]\) of a particular nuisance, and the subject chooses whether to tolerate the nuisance or to switch to a bland activity for the remaining time. New non-parametric techniques provide bounds on the empirical survivor curves for each activity. Parametric fits of the classic Weibull distribution provide estimates of the survivor curves’ shapes. The fitted shape parameter depends on the activity and nuisance, but overall the estimated survivor curves tend to be log-convex. An implication, given the model of Aperjis and Huberman (SSRN, doi:  10.2139/ssrn.1672820, 2011), is that introducing nuisances all at once will generally be more profitable than introducing them gradually.     

Financial liberalization and sectoral reallocation of capital in South Africa

We examine the impact of financial reforms on efficient reallocation of capital within and between sectors in South Africa using firm-level panel data for the period 1991–2008. The measure of efficient allocation of capital is based on the Tobin’s Q. We find that financial reforms are associated with improvements in within-sector, but not between-sector allocation of capital. These results imply that for South Africa to unleash the potential for take-off that is often associated with reallocation of resources from the primitive to modern sectors, reforms that focus beyond the financial sector are necessary. While more research is necessary to determine what would fully constitute such additional reforms, our analysis shows that reforms that improve the quality of economic institutions may be a step in the right the direction.     

The scope of auctions in the presence of downstream interactions and information externalities

We scrutinize the scope of auctions for firm acquisitions in the presence of downstream interactions and information externalities. We show that no mechanism exists that allows an investor to acquire a low-cost firm under incomplete information: a separating auction implies adverse selection and relies substantially on commitment to allocation and transfer rules. A pooling auction serves as a commitment device against ex-post opportunistic behavior and alleviates adverse selection. It can earn the investor a higher expected payoff than a separating auction, even when consistency is required as to qualify for a sequential equilibrium.     

Social morality and the primacy of individual perspectives

This paper examines themes and concerns about my book, The Order of Public Reason, raised in the three essays in this symposium by Peter Boettke & Rosolino Candela, Michael Munger and Kevin Vallier. The three essays present variations on a common theme: I need to embrace deeper commitments than The Order of Public Reason acknowledges. In my estimation these proposals lead to places that I do not wish to go — nor should anyone devoted to core Hayekian insights. The goal of the book is show how a diversity of moral views can lead to a cooperative social morality while abjuring as far as possible “external” moral claims — claims that do not derive from the perspectives of cooperating individuals. The diverse individual moral perspectives, and what they understand as normative, must be the real engines of social normativity. In this essay I stress the primacy of the individual normative perspectives in generating social morality; this helps show why the urge to embrace deeper commitments should be resisted. Rather than going over the presentation in The Order of Public Reason to stress this point, I sketch a modest recasting of the analysis in terms of models of individual moral interaction.     

Spatial econometric Monte Carlo studies: raising the bar

We discuss Monte Carlo methodology that can be used to explore alternative approaches to estimating spatial regression models. Our focus is on models that include spatial lags of the dependent variable, e.g., the SAR specification. A major point is that practitioners rely on scalar summary measures of direct and indirect effects estimates to interpret the impact of changes in explanatory variables on the dependent variable of interest. We argue that these should be the focus of Monte Carlo experiments. Since effects estimates reflect a nonlinear function of both \(\beta \) and \(\rho \), past studies’ focus exclusively on \(\beta \) and \(\rho \) parameter estimates may not provide useful information regarding statistical properties of effects estimates produced by alternative estimators. Since effects estimates have recently become the focus of inference regarding the significance of (scalar summary) direct and indirect impacts arising from changes in the explanatory variables, empirical measures of dispersion produced by simulating draws from the (estimated) variance–covariance matrix of the parameters \(\beta \) and \(\rho \) should be part of the Monte Carlo study. An implication is that differences in the quality of estimated variance–covariance matrices arising from alternative estimators also plays a role in determining the accuracy of inference. An applied illustration is used to demonstrate how these issues can impact conclusions regarding the performance of alternative estimators.     

Social orders,and a <Emphasis Type="Italic">weak</Emphasis> form of the Hayek–Friedman Hypothesis

This paper contributes to a theoretical underpinning of the economic freedom–political freedom relationship. We use the theory of social orders (North et al. in Violence and social orders: a conceptual framework for understanding recorded human history, Cambridge University Press, Cambridge, 2009) to look at the Hayek–Friedman Hypothesis (HFH), which leads us to propose a novel interpretation. The core insight of our weak interpretation of the hypothesis is that economic freedom is a necessary condition for maintaining political freedom in open access order countries (countries with high levels of both freedoms), i.e., once achieved, political freedom needs economic freedom to be stable; but the HFH is not relevant for limited access orders (rent-seeking-dominated orders). We find empirical support for the weak interpretation with canonical correlations and conditional logit regressions, using a panel database for 122 countries for the period 1980–2011.     

Unintended Effects of Targeting an Environmental Rebate

When designing schemes such as conditional cash transfers or payments for ecosystem services, the choice of whom to select and whom to exclude is critical. We incentivize and measure actual contributions to an environmental public good to ascertain whether being excluded from a rebate can affect contributions and, if so, whether the rationale for exclusion influences such effects. Treatments, i.e., three rules that determine who is selected and excluded, are randomly assigned. Two of the rules base exclusion on subjects’ initial contributions. The third is based upon location and the rationales are always explained. The rule that targets the rebate to low initial contributors, who have more potential to raise contributions, is the only rule that raised contributions by those selected. Yet by design, that same rule excludes the subjects who contributed the most initially. They respond by reducing their contributions even though their income and prices are unchanged.     

Human agency and convergence: Gaus’s Kantian Parliamentarian

Public reason is justified to the extent that it uses (only) arguments, assumptions, or goals that are allowable as “public” reasons. But this exclusion requires some prior agreement on domains, and a process that disallows new unacceptable reasons by unanimous consent. Surprisingly, this problem of reconciliation is nearly the same, mutatis mutandis, as that faced by micro-economists working on general equilibrium, where a conceit—tâtonnement, directed by an auctioneer—was proposed by Leon Walras. Gaus’s justification of public reason requires the “as if” solution of a Kantian Parliamentarian, who rules on whether a proposal is “in order.” Previous work on public reason, by Rousseau, Kant, and Rawls, have all reduced decision-making and the process of “reasoning” to choice by a unitary actor, thereby begging the questions of disagreement, social choice, and reconciliation. Gaus, to his credit, solves that problem, but at the price of requiring that the process “knows” information that is in fact indiscernible to any of the participants. In fact, given the dispersed and radical situatedness of human aims and information, it is difficult for individuals, much less groups, to determine when norms are publicly justified or not. More work is required to fully take on Hayek’s insight that no person, much less all people, can have sufficient reasons to endorse the relevant norm, rule or law.     

Combination of “combinations of <Emphasis Type="Italic">p</Emphasis> values”

We investigate the impact of an uncertain number of false individual null hypotheses on commonly used p value combination methods. Under such uncertainty, these methods perform quite differently and often yield conflicting results. Consequently, we develop a combination of “combinations of p values” (CCP) test aimed at maintaining good power properties across such uncertainty. The CCP test is based on a simple union–intersection principle that exploits the weak correspondence between two underlying p value combination methods. Monte Carlo simulations show that the CCP test controls size and closely tracks the power of the best individual methods. We empirically apply the CCP test to explore the stationarity in real exchange rates and the information rigidity in inflation and output growth forecasts.