Expectations and optimal monetary policy: A stability problem revisited

A landmark result in the optimal monetary policy design literature is that fundamental-based interest rate rules invariably lead to rational expectations equilibria (REE) that are not stable under adaptive learning. In this paper, we make a novel information assumption that private agents cannot observe aggregate fundamental shocks, and use simple linear forecasting rules for learning. We find that with fundamental-based rules, there exist limited information equilibria that are stable under learning. Moreover, there are multiple equilibria. Learning can be used as a selection tool to identify a unique equilibrium.     

Heterogeneity and the Voluntary Provision of Public Goods

We investigate the effects of heterogeneity and incomplete information on aggregate contributions to a public good using the voluntary contribution mechanism. The non-linear laboratory environment has three-person groups as partners under varying conditions of information and communication. Bergstrom, Blum and Varian predict that increasing heterogeneity will have no effect on aggregate contributions in a no-communication environment. Ledyard conjectures a positive effect of incomplete information, a negative effect of heterogeneity, and a positive interaction of heterogeneity and incomplete information. We find that incomplete information has a small but significant negative effect. Heterogeneity has a positive effect on aggregate contributions, but its effects interact unexpectedly with communication. In a no-communication environment, heterogeneity in two dimensions (endowment and preferences) increases contributions substantially while heterogeneity in a single dimension (endowment or preferences) has little effect. In the communication environment we find the reverse. We also find a positive interaction between heterogeneity and incomplete information. Thus we reject the Bergstrom, Blume and Varian invariance result and provide mixed evidence on Ledyard's conjectures.     

Let the experts decide? Asymmetric information,abstention, and coordination in standing committees

We examine abstention when voters in standing committees are asymmetrically informed and there are multiple pure-strategy equilibria – swing voterʼs curse (SVC) equilibria where voters with low-quality information abstain and equilibria when all participants vote their information. When the asymmetry in information quality is large, we find that voting groups largely coordinate on the SVC equilibrium which is also Pareto optimal. However, we find that when the asymmetry in information quality is not large and the Pareto optimal equilibrium is for all to participate, significant numbers of voters with low-quality information abstain. Furthermore, we find that information asymmetry induces voters with low-quality information to coordinate on a non-equilibrium outcome. This suggests that coordination on “letting the experts” decide is a likely voting norm that sometimes validates SVC equilibrium predictions but other times does not.     

Polling games and information revelation in the Downsian framework

We investigate the incentives faced by poll respondents when candidates use polling data to inform their selection of policy platforms. Focusing on models with a unidimensional policy space, single peaked preferences and two office-seeking candidates observing a summary statistic from polls that ask respondents their preferences, we find that for most environments honest poll response cannot occur in a perfect Bayesian equilibrium. However, simple partially-revealing equilibria exist when the poll only asks respondents which party or candidate they prefer. When the candidates learn the sample average or see all the data, there are partially revealing equilibria that mimic those of the binary message game. Interpretation of polling data requires knowledge of the equilibrium played as the meanings of poll responses are endogenously determined. The analysis suggests that naive use of polling data may be misleading.     

CONTRIBUTIONS AND ELECTIONS WITH NETWORK EXTERNALITIES

This paper develops a model of campaign contributions and electoral competition. Contributors have separable preferences over policy and the electoral success of the candidate they support, as in influence buying. Policy preferences are single peaked over a single policy dimension. A candidate's chances of victory are increasing in the relative size of her war chest. In equilibrium, potential contributors balance incentives to donate to a candidate that is desirable on policy grounds and ensuring that they back the likely winner. With exogenous candidate positions, we find conditions under which, in equilibrium, contributors donate to the candidate that is less desirable on policy grounds solely because they consider the candidate viable . We also find that there is a degree of indeterminacy, wherein multiple equilibria inducing different lotteries over the final policy often exist. With endogenous candidate locations, we find that while median policies are always supportable as equilibrium, it is often the case that any pair of candidate locations is supportable in equilibrium. These results suggest that in settings with substantial influence buying, median policy interests may not be represented.     

Regulating collateral-requirements when markets are incomplete

In this paper we examine the effects of default and collateral on risk sharing. We assume that there is a large set of assets which all promise a risk less payoff but which distinguish themselves by their collateral requirements. In equilibrium agents default, the assets have different payoffs, and there are as many linearly independent assets available for trade as there are states of the world. We derive necessary and sufficient conditions for equilibria to be Pareto-efficient in the presence of uncertainty. We explore some examples for which the collateral equilibrium allocation is identical to the Arrow–Debreu allocation, either when agents have a high preference for the durable good, or when the endowment distribution of the durable good is relatively homogeneous. We examine a series of examples to understand which collateral-levels prevail in equilibrium and under which conditions there is scope for regulating margin-requirements, that is, restricting the sets of tradable assets through government intervention. In these examples equilibrium is always sub-optimal but regulation never leads to a Pareto-improvement. While the competitive equilibria are constrained efficient, there do exist regulations which make large groups of agents in the economy better off. These regulations typically restrict all trades to take place in the low-collateral loans and benefit the poor and the rich agents in the economy through their effects on the equilibrium interest rate and the equilibrium prices of the durable goods.     

Secure implementation experiments: Do strategy-proof mechanisms really work?

Strategy-proofness, requiring that truth-telling is a dominant strategy, is a standard concept used in social choice theory. Saijo, Sjöström and Yamato [Saijo, T., Sjöström, T., Yamato, T., 2003. Secure implementation: Strategy-proof mechanisms reconsidered. Working paper 4-03-1. Department of Economics, Pennsylvania State University] argue that this concept has serious drawbacks. In particular, many strategy-proof mechanisms have a continuum of Nash equilibria, including equilibria other than dominant strategy equilibria. For only a subset of strategy-proof mechanisms do the set of Nash equilibria and the set of dominant strategy equilibria coincide. For example, this double coincidence occurs in the Groves mechanism when preferences are single-peaked. We report experiments using two strategy-proof mechanisms. One of them has a large number of Nash equilibria, but the other has a unique Nash equilibrium. We found clear differences in the rate of dominant strategy play between the two.     

Composition of Government Budget, Non-Single Peakedness, and Majority Voting

In this paper we study whether majority voting equilibria exist when preferences over public policies are not single peaked. The government levies a proportional income tax. Tax revenue is used to finance a uniform lump-sum transfer and public education. Individuals vote on the composition of the government budget. We show that the single-crossing property cannot be invoked to establish existence of a majority voting equilibrium. In a simple parametric example we find that cycles are pervasive.     

Secure implementation experiments: Do strategy-proof mechanisms really work?

Strategy-proofness, requiring that truth-telling is a dominant strategy, is a standard concept used in social choice theory. Saijo, Sjöström and Yamato [Saijo, T., Sjöström, T., Yamato, T., 2003. Secure implementation: Strategy-proof mechanisms reconsidered. Working paper 4-03-1. Department of Economics, Pennsylvania State University] argue that this concept has serious drawbacks. In particular, many strategy-proof mechanisms have a continuum of Nash equilibria, including equilibria other than dominant strategy equilibria. For only a subset of strategy-proof mechanisms do the set of Nash equilibria and the set of dominant strategy equilibria coincide. For example, this double coincidence occurs in the Groves mechanism when preferences are single-peaked. We report experiments using two strategy-proof mechanisms. One of them has a large number of Nash equilibria, but the other has a unique Nash equilibrium. We found clear differences in the rate of dominant strategy play between the two.     

Unequal Contributions from Symmetric Agents in a Local Interaction Model

The main findings of the theory on the private provision of public goods under the assumptions of symmetric agents and normality are that (1) there exists a unique Nash equilibrium in which everybody contributes the same; and (2) this pattern is stable. We show that these findings no longer hold in a context characterized by local interaction. In this context, it is always possible to find preferences satisfying the assumption of normality such that the symmetric Nash equilibrium is unstable, and there exist asymmetric Nash equilibria which are locally stable.     

Equilibrium existence and approximation of regular discontinuous games

Many conditions have been introduced to ensure equilibrium existence in games with discontinuous payoff functions. This paper introduces a new condition, called regularity, that is simple and easy to verify. Regularity requires that if there is a sequence of strategies converging to s* such that the players’ payoffs along the sequence converge to the best-reply payoffs at s*, then s* is an equilibrium. We show that regularity is implied both by Reny’s better-reply security and Simon and Zame’s endogenous sharing rule approach. This allows us to explore a link between these two distinct methods. Although regularity implies that the limits of e{\epsilon}-equilibria are equilibria, it is in general too weak for implying equilibrium existence. However, we are able to identify extra conditions that, together with regularity, are sufficient for equilibrium existence. In particular, we show how regularity allows the technique of approximating games both by payoff functions and space of strategies.     

The inflation game

We study a game where households buy consumption goods to preempt inflation. This game features a unique equilibrium with high (low) inflation, whenever money supply is high (low). For intermediate levels of money supply, there exist multiple stable equilibria where inflation is either high or low. Equilibria with moderate inflation, however, do not exist, and can thus not be targeted by central banks. That is, depending on agents' equilibrium play, money supply is always either too high or too low for moderate inflation. Finally, we find that inflation rates of durable goods, such as houses, cars, luxury watches, or furniture, are useful leading indicators for changes in overall inflation.     

Intergenerational Redistribution with Short-lived Governments

We study the politics of intergenerational redistribution in an overlapping generations model with short-lived governments. The successive governments—who care about the welfare of the currently living generations and possibly about campaign contributions—are unable to pre-commit the future course of redistributive taxation. In a stationary politico-economic equilibrium, the intergenerational transfer in each period depends on the current value of the state variable and all expectations about future political outcomes are fulfilled. We find that there exist multiple stationary equilibria in many political settings. Steady-state welfare is often lower than it would be in the absence of redistributive politics.     

Competitive signalling

With imperfect information about product quality there are incentives for buyers to make use of proxy variables as “signals”, and hence for sellers to invest in the activity of signalling. Received theory suggests that there are plausible circumstances under which there exist a whole family of potential “signalling equilibria” each of which successfully distinguish quality differences.In this paper it is shown that from the family of “equilibria” only one, the Pareto-dominant member, survives plausible experimentation by buyers. With moderately more sophisticated experimentation it is further shown that there is no competitive equilibrium.     

Electoral competition with privately-informed candidates

This paper formulates and analyzes a general model of elections in which candidates receive private signals about voters' preferences prior to committing to political platforms. We fully characterize the unique pure-strategy equilibrium: After receiving her signal, each candidate locates at the median of the distribution of the median voter's location, conditional on the other candidate receiving the same signal. Sufficient conditions for the existence of pure strategy equilibrium are provided. Though the electoral game exhibits discontinuous payoffs for the candidates, we prove that mixed strategy equilibria exist generally, that equilibrium expected payoffs are continuous in the parameters of the model, and that mixed strategy equilibria are upper hemicontinuous. This allows us to study the robustness of the median voter theorem to private information: Pure strategy equilibria may fail to exist in models “close” to the Downsian model, but mixed strategy equilibria must, and they will be “close” to the Downsian equilibrium.     

Policy Consequences of Multiple Equilibria and the Indeterminacy of Economic Outcomes in a Boundedly Rational World: Closing the System with Non-Economic Variables1

In the conventional economic wisdom, the notion of unique equilibria that are efficient and Pareto optimal dominates the modeling discourse. Hebert Simon proposed an alternative analytical framework where the notion of multiple and sustainable equilibria is critical. Multiple equilibrium is the crucial stylized fact of economic life that requires better understanding and modeling. Of particular significance, Simon touched on the importance of institutions and differential power relationships in affecting economic outcomes. But this modeling approach was not well developed by Simon. Following from his contributions, further develop the notion of multiple equilibria especially in the realm of production with an emphasis on x-efficiency theory. I bring to bear the importance of institutional parameters (including power relationships), culture, norms, ethics, and moral sentiments to the determination of economic outcomes. In the model developed here, boundedly rational decision-makers’ choices are contextualized and constrained by complex environmental factors. No one choice is either inevitable or economically efficient. A multiplicity of outcomes is possible and sustainable inclusive of those that are suboptimal. Much depends on individual preferences and institutional design. This has significant implication for institutional design and policy.     

Edgeworth and Lindahl–Foley equilibria of a General Equilibrium Model with Private Provision of Pure Public Goods

In this paper, we propose a definition of Edgeworth equilibrium for a private ownership production economy with (possibly infinitely) many private goods and a finite number of pure public goods. We show that Edgeworth equilibria exist whatever be the dimension of the private goods space and can be decentralized, in the finite and infinite dimensional cases, as Lindahl–Foley equilibria. Existence theorems for Lindahl–Foley equilibria are a by‐product of our results.     

The possibility of mixed-strategy equilibria with constant-returns-to-scale technology under Bertrand competition

Abstract. We analyze the Nash equilibria of a standard Bertrand model. We show that in addition to the marginal-cost pricing equilibrium there is a possibility for mixed-strategy equilibria yielding positive profit levels. We characterize these equilibria and find that having unbounded revenues is the necessary and sufficient condition for their existence. Hence, we demonstrate that under realistic assumptions the only equilibrium is marginal-cost pricing.     

Preference revelation and monopsony

(1) Johnson demonstrated the formal equivalence between the free-rider problem and monopsony. (2) Vickrey's method for eliminating the inefficiencies resulting from monopsony (monopoly) works by converting simple monopsonists (monopolists) into perfectly discriminating monopsonists (monopolists). (3) We show that three recently proposed solutions to the free-rider problem have the same rationale, i.e. they use ‘Clarke taxes’ to convert Johnson's simple monopsonists into perfectly discriminating monopsonists. The three mechanisms are those of: (i) Clarke and Groves; (ii) Groves and Ledyard; and (iii) Arrow. The relationships between these mechanisms, and between each of them and monopsony, are analyzed diagrammatically.     

Strategic tariffs, tariff jumping, and heterogeneous firms

The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition.