A folk theorem for Bayesian games with commitment

The set of all Bayesian–Nash equilibrium payoffs that the players can achieve by making conditional commitments at the interim stage of a Bayesian game coincides with the set of all feasible, incentive compatible and interim individually rational payoffs of the Bayesian game. Furthermore, the various equilibrium payoffs, which are achieved by means of different commitment devices, are also the equilibrium payoffs of a universal, deterministic commitment game.     

Do people make strategic commitments? Experimental evidence on strategic information avoidance

Game theory predicts that players make strategic commitments that may appear counter-intuitive. We conducted an experiment to see if people make a counter-intuitive but strategically optimal decision to avoid information. The experiment is based on a sequential Nash demand game in which a responding player can commit ahead of the game not to see what a proposing player demanded. Our data show that subjects do, but only after substantial time, learn to make the optimal strategic commitment. We find only weak evidence of physical timing effects.     

Optimal intensity targets for greenhouse gas emissions trading under uncertainty

Uncertainty is an obstacle for commitments under cap and trade schemes for emission permits. We assess how well intensity targets, where each country’s permit allocation is indexed to its future realized GDP, can cope with uncertainties in international greenhouse emissions trading. We present some empirical foundations for intensity targets and derive a simple rule for the optimal degree of indexation to GDP. Using an 18-region simulation model of a cooperative, global cap-and-trade treaty in 2020 under multiple uncertainties and endogenous commitments, we show that optimal intensity targets could reduce the cost of uncertainty and achieve significant increases in global abatement. The optimal degree of indexation to GDP would vary greatly between countries, including super-indexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-to-one indexation) would also improve the overall outcome, but to a lesser degree and not in all individual cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty and the potential for more stringent environmental commitments could justify the increased complexity and other potential downsides of intensity targets.      

Commitment and choice of partner in a negotiation with a deadline

This paper analyses the effects of partially revocable endogenous commitments of a seller in a negotiation with a deadline. In particular, we examine when commitment is a source of strength, a source of inefficiency and when it does not affect the bargaining outcome at all. We show that when commitment possesses a minimum amount of irrevocability this crucially determines the bargaining outcome. In the bilateral bargaining case, commitment becomes a source of inefficiency since it causes a deadline effect. In the choice of partner framework, however, the deadline effect disappears and there is an immediate agreement and, moreover, commitment becomes a source of strength since it increases the seller's equilibrium payoff by triggering off competition between the buyers.     

Time inconsistency problems and commitments of monetary and fiscal policies

Within a policy game, where monetary and fiscal authorities are subject to a time inconsistency problem vis-à-vis a monopoly-union, we provide additional support for commitments of either authority: monetary commitment moderates fiscal time inconsistency problems, and fiscal commitment moderates monetary time inconsistency problems. In contrast with the benefits of commitments, a regime of coordinated monetary and fiscal policy may turn out to be counterproductive.Comments and suggestions from Torben M. Andersen and one anonymous referee are gratefully acknowledged. Errors and omissions are, of course, my own responsibility.     

Earnings management behaviors under different economic environments: Evidence from Japanese banks

This paper investigates Japanese banks' earnings management behavior under three distinct economic environments: (1) high-growth with asset price bubble economy (1985–1990); (2) stagnant growth with financial distress economy (1991–1996); and (3) severe recession with credit crunch economy (1997–1999). Using bank balance sheet information of 78 Japanese banks, we find that earnings management behavior by Japanese banks differ considerably across the three periods. Our results indicate that banks used security gains as a means to manage earnings throughout all three periods. We also find that banks used loan loss provisions to manage earnings; however, this behavior is only prevalent during the first two periods. Due to the fact that banks faced record-high non-performing loans during the latter severe recession period, banks on average may have been restrained from using loan loss provisions to smooth income and/or to replenish regulatory capital. Consistent with previous studies, we find that the Japanese banks significantly lowered their lending with increased provisions.     

Optimal food price stabilisation policy

This paper proposes a framework for designing optimal food price stabilisation policies in a self-sufficient developing country. It uses a rational expectations storage model with risk-averse consumers and incomplete markets. Government stabilises food prices by carrying public stock and by applying a state-contingent subsidy/tax to production. The policy rules are designed to maximise intertemporal welfare. The optimal policy under commitment crowds out all private stockholding activity by removing the profit opportunity from speculation. The countercyclical subsidy/tax to production helps price stabilisation by subsidising production in periods of scarcity and by taxing it in periods of glut. It contributes little to welfare gains, most of which come from stabilisation achieved through public storage.     

Prior Commitment and Uncertainty in Complex Economic Systems: Reinstating History in the Core of Economic Analysis

Conventional ‘neoclassical’ economics is very useful in understanding how prices are determined but less so as a general basis for understanding the economic behaviour we observe. What is not taken into account is that economic systems are dissipative structures that are complex, but incompletely connected, networks of rules. It is explained why a degree of prior commitment in decision‐making is inevitable in complex economic systems and the implications of this are examined. It is argued that economic analysis must begin with the reality that choices are made in relation to pre‐existing commitments, both with regard to economic structures built in the past and to prevailing systems of belief, when deciding what to do in a future characterised by uncertainty. It is explained how conventional economic incentives can be dealt with in such a complex historical context building upon the neoclassical perspective of Alfred Marshall over a century ago. It is argued that econometric modelling remains viable and useful in understanding behaviour in complex economic systems. It is shown how we can design and interpret time series econometric modelling from a complex systems perspective.     

Bilateral commitment

We consider non-cooperative environments in which two players have the power to gradually and unilaterally rule out some of their actions. Formally, we embed a strategic-form game into a multi-stage game, in which players can restrict their action spaces in all but the final stage, and select among the remaining actions in the last stage. We say that an action profile is implementable by commitment if this action profile is played in the last stage of a subgame-perfect equilibrium path. We provide a complete characterization of all implementable action profiles and a simple method to find them. It turns out that the set of implementable profiles does not depend on the length of the commitment process. We show, furthermore, that commitments can have social value in the sense that in some games there are implementable action profiles that dominate all Nash equilibria of the original game.     

The Economic Emergence of Women: Bergmann's Six Commitments

I suggest in this essay that Barbara Bergmann's approach to the economics of women is characterized by six striking dimensions, or what I call 'commitments', namely: (1) a willingness to incorporate values into her analysis openly; (2) a commitment to applied economics - economic analysis that supports policy change that will improve women's and children's lives; (3) a commitment to empirical economics, i.e. to data collection and data-based analysis; (4) a commitment to communication with the public; (5) a commitment to the truth even if it challenges convenient orthodoxy; (6) a commitment to focus on how change can occur - to be positive not defeatist. A review of these six commitments, I demonstrate, reveals that they are held together by the first one, her willingness to incorporate values into her scholarly work openly.     

Partially revocable commitments in a negotiation with a deadline

[Fershtman, C., Seidmann, D., 1993. Deadline effects and inefficient delay in bargaining with endogenous commitment. Journal of Economic Theory 60, 306–321] showed that the presence of an irrevocable endogenous commitment with a fixed deadline results in the so called deadline effect. In this paper we analyse the effects of partially revocable endogenous commitments of a seller in an infinite horizon negotiation in which a deadline can arise with positive probability. We obtain that when the commitment possesses a sufficiently large revocable part not only the inefficient delays disappear and an immediate agreement is reached but also the commitment has a value. On the other hand, when the commitment possesses a minimum amount of irrevocability, there exist inefficient delays in equilibrium and the commitment continues to having a value.     

Gains from commitment in monetary policy: Implications of the cost channel

Many empirical studies find robust evidence that marginal cost of production directly depends on the nominal rate of interest. This relationship induces a cost channel for monetary policy transmission. Although the empirical literature provides ample evidence for a cost channel, studies that evaluate the welfare gains from monetary policy commitment have so far entirely ignored its presence. This study shows that, overlooking the cost channel, one significantly underestimates the welfare gains from monetary policy commitment. I find that there is a robust positive relationship between the size of the cost channel and welfare gains from monetary policy commitment. Using a version of the new Keynesian model calibrated to the US economy, I find that failure to take into account the presence of a cost channel leads to an understatement of the gains from monetary policy commitment by an amount equivalent to a 0.48 percentage points permanent cut in quarterly inflation.     

Hidden impact? Household saving in response to a poor-area development project

The possibility that poor households may prefer to save the income gains from a development project raises concerns about how well standard evaluation methods–using data collected over relatively short periods–can capture the true welfare impacts. By the widely used difference-in-difference method, the Southwest China Poverty Reduction Project had little current impact on the proportion of people in beneficiary villages consuming less than US$1/day—despite a public outlay of US$400 million. However, the program had much larger impacts on incomes than consumptions. Uncertainty about the project's future impact probably made it hard for participants to infer the gain in permanent income, so they saved a high proportion of the current income gains.     

Strategic R&D Commitment and the Gains from Trade

This paper examines how trade liberalization affects innovation, profits and welfare in a model of reciprocal markets when firms pre‐commit to research and development (R&D). We establish that the equilibrium is not always unique and show that, with trade, R&D commitment leads to higher levels of innovation, lower profits, higher consumer surplus and higher welfare than when R&D is chosen simultaneously to output levels. Furthermore, if the effectiveness of R&D is sufficiently high, trade always yields higher welfare than autarky, implying that R&D commitment may significantly enhance the welfare gains from trade liberalization.     

论战略承诺管理

在战略管理中,战略承诺被人们广泛应用。但由于战略承诺管理没有形成较完整的理论体系,人们在认识和应用中存在误区。对企业管理人员来说,明晰的战略承诺管理模式对做出有效的战略承诺是至关重要的。构造了战略承诺过程管理模式,并提出了战略承诺管理应遵循的原则。     

Group identity in a network formation game with cost sharing

This paper introduces the choice of group identity, which is comprised of characteristics and commitments to these characteristics, in a network formation model where links costs are shared. Players want to link to the largest group given that linking costs for players of the same (different) characteristic are decreasing (increasing) in their commitments. The equilibrium concepts used are Nash equilibrium as well as one that looks for stability allowing for bilateral negotiations. Conditions are shown under which the endogenous choice of characteristics and commitments allow for multiple groups with segregated or connected networks. When group identity is partly endogenous, such that characteristics are fixed and players only choose commitment, it is shown that the equilibrium population commitment profile dictates whether the resulting network is segregated or connected. When group identity is fully endogenous, it is shown that multiple groups and segregated networks are possible equilibrium outcomes but such outcomes are not stable unless the group size additionally affects the costs of link formation.     

Committing and reneging: A dynamic model of policy regimes

Actual policy decisions are made in real time and are not irrevocable, but most policy modeling has largely neglected these mundane factors. In an environment of uncertainty, the ability to switch policies adds an option value to the choice problem. This “option to wait” makes the incumbent regime relatively more attractive (compared to the traditional once-and-for-all analysis), as does increased uncertainty, which increases the value of the option. Furthermore, because the commitment decision takes place in real time, policy choice displays hysteresis.     

Sentimental fools: a critique of Amartya Sen’s notion of commitment

Commitment is problematic because one sometimes pursues it against one’s interest. To solve it, the paper proposes a distinction between ‘non-binding’ and ‘binding’ commitments. Non-binding commitment is about ambition, such as becoming a great chef, which bolsters welfare in the pecuniary sense as well as self-respect. In contrast, ‘binding commitment’ is about honesty. While it diminishes welfare, it augments self-integrity. The neoclassical view reduces both commitments to interest, while the multiple-self approach separates both commitments from interest. The separation permits the confusion of sentimental fools, who enter commitments without regard to interest, with rational sentimentalists, who take interest into consideration.     

Exchange rates forecasting: local or global methods?

Exchange rates forecasters usually assume that local methods (nearest neighbour) dominate the global ones (neural networks or genetic programming, for example). In this article, first, we use different generalizations of the standard nearest neighbours to predict the dynamic evolution of the Yen/US$ and Pound Sterling/US$ exchange rates one-period ahead. Second, we compare our results with those employing global methods such as neural networks, genetic programming, data fusion and evolutionary neural networks. Finally, we find out the existence of predictable structures τ?periods ahead. Our results reveal a slightly but significant forecasting ability for one-period ahead which is lost when more periods ahead are considered, and no important predictive differences between local and global methods have been found.     

Why we need a commitment approach to environmental policy

The principal reason why economists have advocated environmental policies based on incentives is that their conception of business behavior derives from the neoclassical model of the firm. Businesses certainly do respond to profit incentives, but firms' behavior is also greatly influenced by socio-political considerations and their organizational capabilities. In recent years, a significant group of businesses that are highly innovative, competitive and socially responsible has emerged. These are not the firms that policy makers envisioned when they formulated command and control and market incentive environmental policies, i.e., control-oriented policies. Because of this, there is a need for new types of environmental policies. Thus, the first purpose of this paper is to propose a new class of environmental policies. The second purpose is to explain why the neoclassical model is deficient as a basis for environmental policy and to explicate the nature of a more appropriate model.Control-oriented policies were designed for firms that behave like neoclassical firms. For high performance organizations (HPOs), what is needed is the opposite of control-oriented policy. What is needed is an environmental policy that takes advantage of HPOs commitment, responsibility, and trustworthiness. The appropriate policy should take into account that overall environmental performance is a product not just of firm behavior but of the whole environmental system of which firms are a part. What is needed is a commitment approach to environmental policy.A commitment approach (CA) to environmental policy is first of all not a control-oriented policy. A CA is a nonregulatory approach in which firms are self-regulated. The CA is only for firms that are able to 1) make a commitment to high environmental performance and 2) develop the capabilities to meet these commitments. The environmental protection (EP) agency that administers the CA would be charged with selecting the particular “high commitment” (HC) firms that would be subject to the policy. Low and intermediate commitment firms would presumably continue to be regulated under the usual control-oriented environmental policies. The selected HC firms would be eligible for government technical assistance and information. In addition, the EP agency could aid the functioning of the environmental systems (ES) in which HC firms are embedded by, for example, providing education and information to these businesses' stakeholders. Finally, it would be necessary for the EP agency to accomplish periodic assessments of how ESs performance departs from the ideal and how these systems' operations require rectification.