Abreu–Matsushima Mechanisms: Experimental Evidence

Abreu–Matsushima mechanisms can be applied to a broad class of games to induce any desired outcome as the unique rationalizable outcome. We conduct experiments investigating the performance of such mechanisms in two simple coordination games. In these games one pure-strategy equilibrium is “focal”; we assess the efficacy of Abreu–Matsushima mechanisms for implementing the other pure-strategy equilibrium outcome. Abreu–Matsushima mechanisms induce some choices consistent with the desired outcome, but more choices reflect the focal outcome. Moreover, “strengthening” the mechanism has a perverse effect when the desired outcome is a Pareto-dominated risk-dominated equilibrium.Journal of Economic LiteratureClassification Number: C7.     

Forward and backward dynamics in implicitly defined overlapping generations models

In dynamic economic models derived from optimization principles, the forward equilibrium dynamics may not be uniquely defined, while the backward dynamics is well defined. We derive properties of the global forward equilibrium paths based on properties of the backward dynamics. We propose the framework of iterated function systems (IFSs) to describe the set of forward equilibria and apply the IFS framework to a one- and a two-dimensional version of the overlapping generations (OLG)-model. We show that if the backward dynamics is chaotic and has a homoclinic orbit (a “snap-back repeller”), the set of forward equilibrium paths converges to a fractal attractor. Forward equilibria may be interpreted as sunspot equilibria, where a random sunspot sequence determines equilibrium selection at each date.     

Don’t let your robots grow up to be traders: Artificial intelligence, human intelligence, and asset-market bubbles

Researchers who have examined markets populated by “robot traders” have claimed that the high level of allocative efficiency observed in experimental markets is driven largely by the “intelligence” implicit in the rules of the market. Furthermore, they view the ability of agents (artificial or human) to process information and make rational decisions as unnecessary for the efficient operation of markets. This paper presents a new series of market experiments that show that markets populated with standard robot traders are no longer efficient if time is a meaningful element, as it is in all asset markets. While simple two-season markets with human subjects reliably converge to an efficient equilibrium, markets with minimally intelligent robot traders fail to attain this equilibrium. Instead, these markets overshoot the equilibrium and then crash below it. In addition to firmly establishing the role of trader intelligence in asset-market equilibrium, these experiments also provide insights into why bubbles and crashes are consistently observed in many asset-market laboratory experiments using human subjects.     

Games with Imperfectly Observable Commitment

[1]claims that, in models of commitment, “the first-mover advantage is eliminated when there is aslightamount of noise associated with the observation of the first-mover's selection.” We show that the validity of this claim depends crucially on the restriction to pure strategy equilibria. The game analyzed by Bagwell always has a mixed equilibrium that is close to the Stackelberg equilibrium when the noise is small. Furthermore, an equilibrium selection theory that combines elements from the theory of[7]with elements from the theory of [6], actually selects this “noisy Stackelberg equilibrium.”Journal of Economic LiteratureClassification Number: C72.     

On the methodology of the holistic experiment: An approach to the conceptualization of large-scale social experiments

Presupposing Churchman's and Ackoff's definitions of a system, the notion of a holistic experiment is defined. A holistic experiment is an experiment on a nonseparable system for the purpose of determining the properties (measures of effectiveness) of the systems components. The basic problem of a holistic methodology is that of conceptualization: (1) the conceptualization of the systems “components,” (2) the conceptualization of the “teleological” standard that defines the systems components; and (3) the assessment of the degree of systems “separability.” Various guidelines for conceptualization are offered. These guidelines derive from such disparate disciplines of knowledge as the sociology of knowledge, the psychology of science, the philosophy of science, law, epistemology, ethics, and systems science. It is argued that the problem of defining an adequate methodology for holistic systems constitutes an “ill-structured” problem. The methodology for dealing with ill-structured problems is not the same as the methodology for dealing with well-structured problems. To date, the methodology of the management sciences has been overwhelmingly preoccupied with well-structured problems. Large-scale social experiments require a fundamentally different approach.     

Green consumers and public policy: On socially contingent moral motivation

“Green” consumers appear to accept individual responsibility for the provision of public goods. The propensity to take such responsibility may depend on beliefs about others’ behavior, even for consumers motivated by internalized moral norms, not by social sanctions. This effect can produce multiple equilibria with either high or low demand for “green” products. Permanent increases in green consumption may be achieved by imposing temporary taxes or subsidies, or through advertising that influences beliefs about others’ behavior or about external effects. If a tax is interpreted as taking responsibility away from the individual, however, taxes can reduce the influence of moral motivation.     

Stable alliance formation in distributional conflict

This paper develops a positive analysis of alliance formation, building on a simple economic model that features a “winner-take-all” contest for control of some resource. When an alliance forms, members pool their efforts in that contest and, if successful, apply the resource to a joint production process. Due to the familiar free-rider problem, the formation of alliances tends to reduce the severity of the conflict over the contestable resource. Despite the conflict that arises among the winning alliance's members over the distribution of their joint product, under reasonable conditions, this effect alone is sufficient to support stable alliance formation in a noncooperative equilibrium.     

Self-referential thinking and equilibrium as states of mind in games: fMRI evidence

Sixteen subjects' brain activity were scanned using fMRI as they made choices, expressed beliefs, and expressed iterated 2nd-order beliefs (what they think others believe they will do) in eight games. Cingulate cortex and prefrontal areas (active in “theory of mind” and social reasoning) are differentially activated in making choices versus expressing beliefs. Forming self-referential 2nd-order beliefs about what others think you will do seems to be a mixture of processes used to make choices and form beliefs. In equilibrium, there is little difference in neural activity across choice and belief tasks; there is a purely neural definition of equilibrium as a “state of mind.” “Strategic IQ,” actual earnings from choices and accurate beliefs, is negatively correlated with activity in the insula, suggesting poor strategic thinkers are too self-focused, and is positively correlated with ventral striatal activity (suggesting that high IQ subjects are spending more mental energy predicting rewards).     

War and peace: Third-party intervention in conflict

This paper develops a simple sequential-move game to characterize the endogeneity of third-party intervention in conflict. We show how a third party's “intervention technology” interacts with the canonical “conflict technologies” of two rival parties in affecting the sub-game perfect Nash equilibrium outcome. From the perspective of deterrence strategy, we find that it is more costly for a third party to support an ally to deter a challenger from attacking (i.e., to maintain peace or acquiescence), as compared to the alternative case when the third party supports the ally to gain a disputed territory by attacking (i.e., to create war), ceteris paribus. However, an optimally intervening third party can be either “peace-making”, “peace-breaking”, or neither depending on the characteristics of the conflict and the stakes the third party holds with each of the rival parties.     

Is a Unique Cournot Equilibrium Locally Stable?

We consider a homogeneous product oligopoly, where the Cournot equilibrium is regular and unique. We show that for a duopoly, a unique Cournot equilibrium is always locally stable. For a “n” firm asymmetric cost oligopoly a unique Cournot equilibrium is locally stable under very general conditions. The sufficient conditions for local stability of a unique Cournot equilibrium are much less restrictive than what the existing literature suggests. For a symmetric cost oligopoly the unique Cournot equilibrium is almost always locally stable, except for a perverse case. Journal of Economic Literature Classification number: L13.     

Fashion statement

We study bilateral matching under private information about agents' characteristics. Assortative matching is the only equilibrium outcome in the absence of private information. When an information friction is present, the matching process can be improved if a payoff-irrelevant variable which we term “fashion” is introduced. Informed agents choose to adopt fashion as a signaling device. If success in matching is observed, other agents can imitate the signal. Thus, for fashion to be useful, it must constantly change. If there are more than two types of agents, both “high” and “low” fashion are needed to facilitate assortative matching.     

Run equilibria in the Green–Lin model of financial intermediation

We study the Green–Lin model of financial intermediation [E.J. Green, P. Lin, Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1–23] under a more general specification of the distribution of types across agents. We derive the efficient allocation in closed form. We show that, in some cases, the intermediary cannot uniquely implement the efficient allocation using a direct revelation mechanism. In these cases, the mechanism also admits an equilibrium in which some (but not all) agents “run” on the intermediary and withdraw their funds regardless of their true liquidity needs. In other words, self-fulfilling runs can arise in a generalized Green–Lin model and these runs are necessarily partial, with only some agents participating.     

Anonymous yes–no voting with abstention and multiple levels of approval

Symmetric (3,2) simple games serve as models for anonymous voting systems in which each voter may vote “yes,” abstain, or vote “no,” the outcome is “yes” or “no,” and all voters play interchangeable roles. The extension to symmetric (j,2) simple games, in which each voter chooses from among j ordered levels of approval, also models some natural decision rules, such as pass–fail grading systems. Each such game is determined by the set of (anonymous) minimal winning profiles. This makes it possible to count the possible systems, and the counts suggest some interesting patterns. In the (3,2) case, the approach yields a version of May's Theorem, classifying all possible anonymous voting rules with abstention in terms of quota functions. In contrast to the situation for ordinary simple games these results reveal that the class of simple games with 3 or more levels of approval remains large and varied, even after the imposition of symmetry.     

A Fisher-Brown proposition for speculative bubbles

A Fisher-Brown Proposition, that speculative bubbles occur as a result of a low interest rate, is proven in a general “sunspots” equilibrium framework.     

On optimality in collective institutional choice

Conditions are investigated under which democratic choice of the division of land between collective and “private” use and of the distribution of collective income between “needs” and “work” payments will produce a Pareto-optimal land allocation and optimal collective labor incentives. Sen's optimal rule for the degree of “needs” distribution is found to result from self-interested voting on this parameter when the distribution of labor inputs is unskewed or when votes are weighted by labor contributions. This in turn increases the optimality of land allocation, which can be further improved by a simple rental scheme. J. Comp. Econ., Dec. 1981, 5(4), pp. 392–403. Brown University, Providence, Rhode Island.     

Escaping Poverty: Risk-Taking and Endogenous Inequality in a Model of Equilibrium Growth

Recent macroeconomic models of income distribution generate equilibria characterized as poverty traps. These models specify a production indivisibility such that, due to problems of asymmetric information in credit or capital markets, poor agents are never able to acquire the resources necessary to overcome the indivisibility. In the context of an equilibrium growth model, this paper demonstrates that faced with such constraints, poor, risk-averse agents have incentives to voluntarily take on risk in the hopes of exiting poverty. Each period they remain in poverty, they sacrifice a small amount of current consumption to pool resources for this risky activity. Risk-taking, economic mobility, and the distribution of income are generated endogenously. Furthermore, beginning from identical endowments, “initial” inequality also emerges endogenously. It is shown that voluntary risk-taking eliminates many potential steady-state equilibria of this and other models—those that exhibit individual poverty traps. All agents (or dynasties) expect to escape at some future date, perhaps after an extended spell in poverty.     

Comment on “A note on the Hotelling principle of minimum differentiation: Imitation and crowd”

We argue that the minimum differentiation firm location equilibrium and the pure strategy pricing equilibrium in Di Cintio’s [Di Cintio, M., 2007. A note on the Hotelling principle of minimum differentiation: Imitation and crowd. Research in Economics 61 (3), 122–129] “Note” need not exist under the conditions claimed.     

On the Generic Finiteness of Equilibrium Outcomes in Plurality Games

In this paper we prove that for generic (noncooperative) voting games under plurality rule the set of equilibria that induce a mixed distribution over the outcomes (i.e., with two or more candidates elected with positive probability) is finite and, furthermore, each of these equilibria is regular. From that we deduce the finiteness of the set of equilibrium distributions over outcomes. Furthermore we offer an example (S. Govindan and A. McLennan, 1997, “On the Generic Finiteness of Equilibrium Outcome Distributions in Game Forms,” mimeo) that shows the impossibility of extending such results to a general framework, even just to voting games. Journal of Economic Literature Classification Numbers: C72, D72.     

Learning to Learn, Pattern Recognition, and Nash Equilibrium

The paper studies a large class of bounded-rationality, probabilistic learning models on strategic-form games. The main assumption is that players “recognize” cyclic patterns in the observed history of play. The main result is convergence with probability one to a fixed pattern of pure strategy Nash equilibria, in a large class of “simple games” in which the pure equilibria are nicely spread along the lattice of the game. We also prove that a necessary condition for convergence of behavior to a mixed strategy Nash equilibrium is that the players consider arbitrarily long histories when forming their predictions.Journal of Economic LiteratureClassification Numbers: C72, D83.