On not doing due diligence: Bagus and Howden on free banking

In their recent article in the Quarterly Journal of Austrian Economics, Bagus and Howden (2010) present “quibbles” with fractional-reserve free banking. Specifically, they raise what they call “unaddressed issues” in this system, with a particular emphasis on Selgin (1988). We deem their arguments to be more substantial than “quibbles” and see them as part of a longstanding debate about fundamental aspects of monetary theory. We respond to their objections and attempt to specify how debate between the two sides might proceed more productively.     

Corporate social responsibility and the ‘game of catallaxy’: the perspective of constitutional economics

The paper examines the issue of corporate social responsibility (CSR) from the perspective of constitutional economics, focusing on the distinction between a political community’s constitutional choice of the rules of the “market game,” and the market players’ sub-constitutional choice of strategies within these rules. Three versions of CSR-demands are identified and discussed, a “soft,” a “hard”, and a “radical” version. The soft version is concerned with the issue of how “socially responsible” corporations ought to play the market game within existing rules. The hard version is about how the rules of the market ought to be changed in order to induce “socially responsible” corporate behavior. And the radical version questions the compatibility of CSR and the logic of the market game, calling in effect for adopting some alternative economic regime.

Detrimental externalities, pollution rights, and the “Coase theorem”

This paper, which builds on Chipman (The economist’s vision. Essays in modern economic perspectives, 131–162, 1998), analyzes a simple model formulated by Hurwicz (Jpn World Econ 7:49–74, 1995) of two agents—a polluter and a pollutee—and two commodities: “money” (standing for an exchangeable private good desired by both agents) and “pollution” (a public commodity desired by the polluter but undesired by the pollutee). There is also a government that issues legal rights to the two agents to emit a certain amount of pollution, which can be bought and sold with money. It is assumed that both agents act as price-takers in the market for pollution rights, so that competitive equilibrium is possible. The “Coase theorem” (so-called by Stigler (The theory of price, 1966) asserts that the equilibrium amount of pollution is independent of the allocation of pollution rights. A sufficient condition for this was (in another context) obtained by Edgeworth (Giorn Econ 2:233–245, 1891), namely that preferences of the two agents be “parallel” in the money commodity, whose marginal utility is constant. Hurwicz (Jpn World Econ 7:49–74, 1995) argued that this parallelism is also necessary. This paper, which provides an exposition of the problem, raises some questions about this result and provides an alternative necessary and sufficient condition.     

Dominated choices in a simple game with large stakes

This paper examines data from the Norwegian television game show Joker, where contestants make well-specified choices under risk. The game involves very large stakes, randomly drawn contestants, and ample opportunities for learning. Central models of risk choice, including expected utility theory, give a simple prediction of choice under weak conditions, as one decision is always first-order stochastically dominating. We document frequent, systematic and costly violations of dominance. Many contestants appear to have a systematic expectation bias that can be related to Tversky and Kahneman’s (Cogn. Psychol. 5(2):207–232, 1973) “availability heuristic”. In addition, contestants seem to make systematic calculation errors that are well captured by the so-called Fechner model.     

The role of ethics and product personality in the intention to purchase organic food products: a structural equation modeling approach

The aim of the present study is to examine the role of ethical dimensions and product personality in the purchasing intention of organic food products. The Prospect method (Caprara et al. in Test Psicomet Metodol 7(3–4):113–128, 2000), which integrates the Five factors model of personality (cf. Digman in Annu Rev Psychol 41(1):417–440, 1990) and the Theory of planned behavior (Ajzen in Organ Behav Hum Decis Process, 50(2):179–211, 1991) extended to an ethical dimension, was employed, by using a Structural Equation Modeling approach. Results showed that moral norms—i.e., personal beliefs regarding what is right or wrong (Parker et al. in Br J Soc Psychol, 34(2):127–137, 1995)—can be considered the main motivator of purchasing intention, and they are, in turn, affected by subjective norms and product personality traits of Naturalness and Authenticity. Marketing implications for firms operating in the organic food industry are discussed, in their intent to shift from a “niche” market to a broader diffusion of these products.     

Equilibrium selection through incomplete information in coordination games: an experimental study

We perform an experiment on a pure coordination game with uncertainty about the payoffs. Our game is closely related to models that have been used in many macroeconomic and financial applications to solve problems of equilibrium indeterminacy. In our experiment, each subject receives a noisy signal about the true payoffs. This game (inspired by the “global” games of Carlsson and van Damme, Econometrica, 61, 989–1018, 1993) has a unique strategy profile that survives the iterative deletion of strictly dominated strategies (thus a unique Nash equilibrium). The equilibrium outcome coincides, on average, with the risk-dominant equilibrium outcome of the underlying coordination game. In the baseline game, the behavior of the subjects converges to the theoretical prediction after enough experience has been gained. The data (and the comments) suggest that this behavior can be explained by learning. To test this hypothesis, we use a different game with incomplete information, related to a complete information game where learning and prior experiments suggest a different behavior. Indeed, in the second treatment, the behavior did not converge to equilibrium within 50 periods in some of the sessions. We also run both games under complete information. The results are sufficiently similar between complete and incomplete information to suggest that risk-dominance is also an important part of the explanation.      

An equilibrium closure result for discontinuous games

For games with discontinuous payoffs Simon and Zame (Econometrica 58:861–872, 1990) introduced payoff indeterminacy, in the form of endogenous sharing rules, which are measurable selections of a certain payoff correspondence. Their main result concerns the existence of a mixed Nash equilibrium and an associated sharing rule. Its proof is based on a discrete approximation scheme “from within” the payoff correspondence. Here, we present a new, related closure result for games with possibly noncompact action spaces, involving a sequence of Nash equilibria. In contrast to Simon and Zame (Econometrica 58:861–872, 1990), this result can be used for more involved forms of approximation, because it contains more information about the endogenous sharing rule. With such added precision, the closure result can be used for the actual computation of endogenous sharing rules in games with discontinuous payoffs by means of successive continuous interpolations in an approximation scheme. This is demonstrated for a Bertrand type duopoly game and for a location game already considered by Simon and Zame. Moreover, the main existence result of Simon and Zame (Econometrica 58:861–872, 1990) follows in two different ways from the closure result.     

Policy Bias Equivalence under Common Agency

This paper studies interest group influence on policy making. Lobbying occurs in a first price auction where an interest group wins with certainty, if her bid exceeds the loser’s bid by the policy maker’s valuation for the socially best policy. Otherwise the latter implements the privately known best policy. In equilibrium the size of the policy maker’s valuation does not matter for the size of the policy bias. The idea is to construct a “reference game” and to shift the support of the equilibrium mixed strategies into the original game, without altering the structure of the densities.     

Different employment of capitals in vertically integrated sectors: Smith after the Austrians

The Austrian notion of stages of production and the related principle of the greater productivity of roundabout methods, plus the neo-Austrian notions of vertical integration and vertical division of labour, are utilized in this paper in an attempt to reconstruct Smith’s convoluted arguments on the different employment of capitals in chapter 5, book 2, of the Wealth of Nations. Smith’s arguments are first clarified in the light of the two concepts of capital (money capital and productive capital), of the two aspects of productive labour (living labour and dead labour) and of the two viewpoints (of an individual and of society) on which Smith’s theory is based. The results of this clarification are then used to prove that, independently of Smith’s own words but in consistency with his theory, the notions of “quantity” and “productivity” of productive labour have a “vertical”, as well as a “horizontal”, dimension so that they fit both the input–output scheme and the Austrian framework of time-consuming methods of production.     

Should economists count?—The Dickensian view

This paper considers Charles Dickens’ charge that by relying too exclusively on statistics, political economists simply cannot understand the human dimension of the questions they examine and the policies they propose to reform economic conditions. Particular attention, is paid to three of Dickens’ writings: his 1836 “Full Report of the First Meeting of the Mudfog Association for the Advancement, of Everything;” his 1853 Christmas story, “The Chimes;” and finally, his 1854 novelHard Times, where these questions were a central theme.     

A “Super” Folk Theorem for dynastic repeated games

We analyze dynastic repeated games. These are repeated games in which the stage game is played by successive generations of finitely-lived players with dynastic preferences. Each individual has preferences that replicate those of the infinitely-lived players of a standard discounted infinitely-repeated game. Individuals live one period and do not observe the history of play that takes place before their birth, but instead create social memory through private messages received from their immediate predecessors. Under mild conditions, when players are sufficiently patient, all feasible payoff vectors (including those below the minmax of the stage game) can be sustained by sequential equilibria of the dynastic repeated game with private communication. In particular, the result applies to any stage game with n  ≥  4 players for which the standard Folk Theorem yields a payoff set with a non-empty interior. We are also able to characterize fully the conditions under which a sequential equilibrium of the dynastic repeated game can yield a payoff vector not sustainable as a subgame perfect equilibrium of the standard repeated game. For this to be the case it must be that the players’ equilibrium beliefs violate a condition that we term “inter-generational agreement.” A previous version of this paper was circulated as Anderlini et al. (2005). We are grateful to Jeff Ely, Leonardo Felli, Navin Kartik, David Levine, Stephen Morris, Michele Piccione, Andrew Postlewaite, Lones Smith and to seminar audiences at Bocconi, Cambridge, CEPR-Guerzensee, Chicago, Columbia, Edinburgh, Essex, Georgetown, Leicester, LSE, Northwestern, Oxford, Rome (La Sapienza), Rutgers, SAET-Vigo, Stanford, SUNY-Albany, UCL, UC-San Diego, Venice and Yale for helpful feedback.     

Capital growth in a global warming model: will China and India sign a climate treaty?

Global warming is now recognized as a significant threat to sustainable development on an international scale. One of the key challenges in mounting a global response to it is the seeming unwillingness of the fastest growing economies such as China and India to sign a treaty that limits their emissions. The aim of this paper is to examine the differential incentives of countries on different trajectories of capital growth. A benchmark dynamic game to study global warming, introduced in Dutta and Radner (J Econ Behav Organ, 2009), is generalized to allow for exogenous capital accumulation. It is shown that the presence of capital exacerbates the “tragedy of the common”. Furthermore, even with high discount factors, the threat of reverting to the inefficient “tragedy” equilibrium is not sufficient to deter the emissions growth of the fastest growing economies—in contrast to standard folk theorem like results. However, foreign aid can help. If the slower growth economies—like the United States and Western Europe—are willing to make transfers to China and India, then the latter can be incentivized to cut emissions. Such an outcome is Pareto improving for both slower and faster growth economies.     

Enumeration of Nash equilibria for two-player games

This paper describes algorithms for finding all Nash equilibria of a two-player game in strategic form. We present two algorithms that extend earlier work. Our presentation is self-contained, and explains the two methods in a unified framework using faces of best-response polyhedra. The first method lrsnash is based on the known vertex enumeration program lrs, for “lexicographic reverse search”. It enumerates the vertices of only one best-response polytope, and the vertices of the complementary faces that correspond to these vertices (if they are not empty) in the other polytope. The second method is a modification of the known EEE algorithm, for “enumeration of extreme equilibria”. We also describe a second, as yet not implemented, variant that is space efficient. We discuss details of implementations of lrsnash and EEE, and report on computational experiments that compare the two algorithms, which show that both have their strengths and weaknesses.     

Returns of Small Growth Stocks: An Empirical Analysis

I investigate the mean reversion tendency of small growth stocks. Using a carefully articulated research design employing established and empirically tested principles, my findings should support or refute the anecdotal evidence that small growth stocks make superior investments. The primary motivation for the study springs from the documented differential preference among investors for value and growth stocks. Despite evidence that value stocks tend to outperform growth stocks, investors retain strong interest in growth stocks. Yet in examining the performance of Business Week’s (BW), smaller capitalization companies (called “Hot Growth Companies”) with respect to the overall financial market, Bauman et al. [2002] found positive excess returns in the pre-publication period but negative excess returns in the post-publication period. A limitation of their study is that their analyses relied on only three criteria: sales, BW rank and return on capital, which do not represent completely a firm’s financial health. I replicate Bauman et al.’s study but use a more robust and representative variable set to test the mean reversal hypothesis — Forbes’ financial criteria — and I focus on six variables. In the current study, I look at 4,200 companies listed in Forbes from 1980 to 2000. The results of the expanded study substantiate Bauman et al.’s [2002] study showing that there are positive excess returns in the pre-publication period, but negative excess returns in the post-publication period. An expanded future study will look at five additional variables to see if they make a significant difference on the effects of the returns of small growth stocks.     

Specialists and citizens all: A reply to Boettke,Koppl, and Holcombe

Peter Boettke (2007) argues that economists need not act pluralistically in order for pluralism to thrive in the marketplace of economic ideas. From a market process perspective, Boettke sees intellectual diversity and openness as catallactic outputs, not inputs—emergent by-products of academic specialization and trade. To expect individual scholars to behave in a pluralistic manner is unnecessary and “completely inappropriate” since it detracts from their central task: “to commit themselves to an approach and pursue it doggedly, even in the face of great doubt and resistance by one’s peers” (Boettke 2007). This paper proposes a Smithian revision of Boettke’s position. The author argues that scholarly pluralism is best understood as a constitutional rule of academic life—a virtue ethic that promotes learning and intellectual freedom by mitigating tyranny and autarky in the republic of science. Drawing from the writings of Adam Smith, Friedrich Hayek, Deirdre McCloskey, Bruce Caldwell, James Buchanan, Don Lavoie, and Boettke himself, the author argues that scholarly pluralism has been, and continues to be, a necessary condition for the flourishing of Austrian economists as free, responsible, efficacious thinkers.     

The control of game form recognition in experiments: understanding dominant strategy failures in a simple two person “guessing” game

This paper focuses on instructions and procedures as the reasons that subjects fail to behave according to the predictions of game theory in two-person “guessing game” (beauty contest game) experiments. In this game, two individuals simultaneously choose a number between 0 and 100. The winner is the person whose chosen number is the closest to 2/3 of the average of the two numbers. The weakly dominant strategy is zero. Because of the simplicity of the game, the widespread failure of subjects to choose the weakly dominant strategy has been interpreted as evidence of some fundamental inability to behave strategically. By contrast, we find that subjects’ behavior reflects a lack of understanding of the game form, which we define as the relationships between possible choices, outcomes and payoffs. To a surprising degree, subjects seem to have little understanding of the experimental environment in which they are participating. If subjects do not understand the game form, the experimental control needed for testing game theory is lost. The experiments reported here demonstrate that the failure to act strategically is related to how the game is presented. We test how well subjects are able to recognize the game under a variety of different presentations of the game. Some subjects fail to recognize the game form when it is presented abstractly. When the game is transformed into a simple isomorphic game and presented in a familiar context, subjects do choose weakly dominant strategies. While our results confirm the ability of subjects to make strategic decisions, they also emphasize the need to understand the limitations of experimental subjects’ ability to grasp the game as the experimenter intends. Given these limitations, we provide suggestions for better experimental control.     

Evolution of networks—an experimental analysis

It is the main aim of our paper to study network formation in experimental setups in discrete and continuous time. Our design is inspired by the theoretical model on network formation by Bala and Goyal (Econometrica, 68(5): 1181–1229, 2000) as well as the experiments by Callander and Plott (J. Public Econ., 89: 1469–1495, 2005) and Falk and Kosfeld (IEW Working Paper, University of Zürich, Zürich, Switzerland, No. 146, 2003). In particular, we analyze the role of star-shaped networks which are strict Nash-equilibria of the corresponding network formation game. Our experimental results show that strict Nash networks prove to be a good indicator for predicting network formation, particularly in continuous time. In explaining our results, it turns out that, among others, the complexity in coordinating on stars, the inequity aversion against unequal payoff distribution in the network, and the groups’ degrees of activity are the most important determinants for the formation of strict Nash networks.      

Still unanswered quibbles with fractional reserve free banking

Anthony Evans and Steven Horwitz readily admit that their own understanding of monetary theory is imperfect, and do not even “attempt a rebuttal of [our] claims.” George Selgin accepts that some of the arguments we put forward in Bagus and Howden (2010) make for “interesting theory”. He fails to rebuff our claim that precautionary reserves are unable to constrain credit creation in a fractional reserve free banking system. While calling for us to provide historical evidence to validate the quibbles we put forward, Selgin himself overstates the evidence. He also claims that we have distorted what he has written, and that we use incorrect monetary theory. These allegations are false.     

From contract to mental model: Constitutional culture as a fact of the social sciences

This paper develops the concept of constitutional culture—the attitude, thoughts, and feelings about constitutional constraints and the nature, scope, and function of constitutionalism. Constitutional culture is approached as a complex emergent phenomenon bridging Hayekian cognitive and institutional insights. It can be studied as a mental model, a series of expectations and understandings about the constitutional order, how it is, and how it ought to be. The “map” and “model” approach from Hayek’s Sensory Order (1952) is employed to understand how individuals and (cautiously) groups of individuals at the national level approach constitutionalism. This paper goes beyond the more traditional one-size-fits-all approach where all individuals respond uniformly to incentives, as provided by the constitution qua contract. Instead, constitutionalism is tied up in the individual’s vision of the world, that is, what Hayek (1948) labels “the facts of the social sciences.” The paper concludes with four areas where constitutional culture can further the insights of constitutional political economy: comparative political economy, constitutional stickiness, constitutional maintenance, and the new development economics.     

Global environment and dynamic games of environmental policy in an international duopoly

This paper examines a differential game model of international pollution control in which polluting oligopolists compete in a third country market. Two alternative policy instruments (emission taxes and command-and-control regulations) are considered. A tougher emission policy in the home country enhances the foreign firm’s competitiveness because of the static “rent-shifting” effect. The foreign country also enjoys a future improvement of the global environmental quality by “free riding” on the home country’s emission reduction effort. Because of these strategic effects, the levels of environmental policy determined in the noncooperative policy game are distorted away from the socially optimal level. Moreover, the emission tax game produces a more distortionary outcome than that in the command-and-control game; it generates more pollution and lower welfare.