Production, trade, prices, exchange rates and equilibration in large experimental economies

We study market equilibration in laboratory economies that are larger and more complex than any that have been studied experimentally to date. Complexity is derived from the fact that the economies are “international” in economic structure with multiple input, output, and foreign exchange markets in operation. The economies have twenty-one markets and due to the fact that they have roughly fifty agents, the economies are characterized by several hundred equations. In spite of the complexity and interdependence of the economy, the results demonstrate the substantial power of the general equilibrium model of perfect competition to predict the direction of movement of market-level variables. Empirical patterns in the convergence process are explored and described.     

A note on cheap talk and burned money

Austen-Smith and Banks [Cheap talk and burned money, J. Econ. Theory 91(1) (2000) 1-16] study how money burning can expand the set of pure cheap talk equilibria of Crawford and Sobel [Strategic information transmission, Econometrica 50(6) (1982) 1431-1451]. I identify an error in the main Theorem of Austen-Smith and Banks, and provide a variant that preserves some of the important implications. I also prove that cheap talk can be influential with money burning if and only if it can be influential without money burning. This strengthens a result of Austen-Smith and Banks, but uncovers other errors in their analysis. Finally, an open conjecture of theirs is proved correct.     

Irreversible investment and Knightian uncertainty

When firms make a decision about irreversible investment, they may not have complete confidence about their perceived probability measure describing future uncertainty. They may think other probability measures perturbed from the original one are also possible. Such uncertainty, characterized by not a single probability measure but a set of probability measures, is called “Knightian uncertainty.” The effect of Knightian uncertainty on the value of irreversible investment opportunity is shown to be drastically different from that of traditional uncertainty in the form of risk. Specifically, an increase in Knightian uncertainty decreases the value of investment opportunity while an increase in risk increases it.     

A step beside the maximin path: Can we sustain the economy by following Hartwick's investment rule?

If sustainability is interpreted as the requirement to sustain consumption or utility at an optimal level, a maximin objective appears to be relevant. The sustained economy is characterized by an optimal investment following Hartwick's investment rule. This paper examines how the sustainability of a production-consumption economy with a non-renewable resource is modified in the neighborhood of the maximin path, i.e. when the consumption and the resource price are not optimal. A Sustainable Consumption Indicator is introduced in order to characterize the sustainability of constant consumption paths, defined as deviations from the maximin path. We describe how an over-consumption jeopardizes future sustainability.     

Nonlinearities and heterogeneity in environmental quality: An empirical analysis of deforestation

We use a panel data set of 59 developing countries over the 1972–1994 period to study the deforestation process. Relying on both parametric and semiparametric models, we examine nonlinearities and heterogeneity in the deforestation process. We first study the existence of an Environmental Kuznets Curve (EKC) and then analyze determinants of deforestation. Our data sample provides no evidence of an EKC. We also find that political institution failures may worsen the deforestation process in developing countries.     

Stable matchings and preferences of couples

Couples looking for jobs in the same labor market may cause instabilities. We determine a natural preference domain, the domain of weakly responsive preferences, that guarantees stability. Under a restricted unemployment aversion condition we show that this domain is maximal for the existence of stable matchings. We illustrate how small deviations from (weak) responsiveness, that model the wish of couples to be closer together, cause instability, even when we use a weaker stability notion that excludes myopic blocking. Our remaining results deal with various properties of the set of stable matchings for “responsive couples markets”, viz., optimality, filled positions, and manipulation.     

Unilateral production restrictions in a dynamic duopoly

This paper examines a dynamic game of exploitation of a productive asset by a duopoly. A closed-loop Nash equilibrium of the game is constructed and used to analyze the effects of a unilateral production restriction. Surprisingly, such unilateral action may result in a decrease of the long-run asset's stock. We also exhibit production restrictions that can result simultaneously in an increase of the asset's stock and the long-run profits of the firm that is being imposed the production restriction. Moreover, a unilateral decrease of the production of one firm can induce its rival to also decrease its production.     

Equilibrium binding agreements: a comment

To construct their Equilibrium Binding Agreements, Ray and Vohra (J. Econ. Theory, 73 (1997) 30-78) define a concept of an equilibrium between coalitions and prove its existence for any coalition structure. We show that this result crucially depends on the quasi-concavity of the utility functions, which in turn depends on the type of mixed strategies used by the coalitions. When coalitions use uncorrelated mixed strategies utility functions may not be quasi-concave and an equilibrium may not exist. However, if coalitions use correlated strategies, an equilibrium always exist.     

Clever agents in adaptive learning

Saez-Marti and Weibull (J. Econom. Theory 86 (1999) 268) investigate the consequences of letting some agents play a myopic best reply to the myopic best reply in Young's (J. Econom. Theory 59 (1993) 145) bargaining model, which is how they introduce “cleverness” of players. I analyze such clever agents in general finite two-player games and show Young's (Individual Strategy and Social Structure, Princeton University Press, Princeton, NJ, 1998) prediction to be robust: adaptive learning with clever agents does select the same minimal curb set as in the absence of clever agents, if their population share is less than one. However, the long-run strategy distribution in such a curb set may vary with the share of clever agents.     

The intraday liquidity management game

We use a game theoretical framework to analyze the intraday behavior of banks with respect to settlement of interbank claims in a real-time gross settlement setting. The game played by banks depends upon the intraday credit policy of the central bank and it encompasses two well-known game theoretical paradigms: the prisoner's dilemma and the stag hunt. The former arises in a collateralized credit regime where banks have an incentive to postpone payments when daylight liquidity is costly, an outcome that is socially inefficient. The latter arises in a priced credit regime where the postponement of payments can be socially efficient. Banks are risk neutral, but we show that most of the results are unaffected by risk aversion.