nep-gth New Economics Papers
on Game Theory
Issue of 2007‒07‒07
twelve papers chosen by
Laszlo A. Koczy
University of Maastricht

  1. Best-reply matching and the centipede game. By Gisèle Umbhauer
  2. An Overview of Coalition & Network Formation Models for Economic Applications By Marco Marini
  3. Pure self-confirming equilibrium By Azrieli, Yaron
  4. Linking of Repeated Games. When Does It Lead to More Cooperation and Pareto Improvements? By Pierre von Mouche; Henk Folmer
  5. Multi-Utilitarian Bargaining Solutions. By Miguel Ángel Hinojosa; Amparo Mª Mármol; José Manuel Zarzuelo
  6. Collusion via Resale By Garratt, Rod; Troger, Thomas; Zheng, Charles Zhoucheng
  7. Corrigendum: Stable Matchings and Preferences of Couples By Bettina Klaus; Flip Klijn; Toshifumi Nakamura
  8. Thinking categorically about others: A conjectural equilibrium approach By Azrieli, Yaron
  9. Why are Trade Agreements Regional? By Ben Zissimos
  10. Free riding and norms of control: self determination and imposition. An experimental comparison. By Luigi Mittone; Francesca Bortolami
  11. In Search of Stars: Network Formation among Heterogeneous Agents By Aljaž Ule; Jacob K. Goeree; Arno Riedl
  12. The Formation of Financial Networks By Ana Babus

  1. By: Gisèle Umbhauer
    Abstract: In their paper on Best-Reply Matching (BRM), Droste, Kosfeld & Voorneveld (2003) obtained quite intuitive results for the centipede game. In this short paper we first show that these results derive from the application of their criterion to the reduced normal form of the game. Then we prove that applying their criterion to the normal form of the game leads to different results. Third we propose an extension of Droste, Kosfeld & Voorneveld’s criterion, which leads to the same results in both the reduced normal form and the normal form of a game. This extension leads to a larger set of behaviors, including the Subgame Perfect Nash equilibrium but also a limited rationality behavior that strongly sustains the continuation of the game.
    Keywords: Best-Reply Matching, centipede game, reduced normal form, normal form, Subgame Perfect Nash equilibrium.
    JEL: C72
    Date: 2007
  2. By: Marco Marini (Università di Urbino "Carlo Bo" & CREI, Roma Tre)
    Abstract: This paper presents synthetically some recent developments in the theory of coalition and network formation. For this purpose, some major equilibrium concepts recently introduced to model the formation of coalition structures and networks among players are briefly reviewed and discussed. A few economic applications are also illustrated to give a flavour of the type of predictions such models are able to provide.
    Keywords: Coalitions, Networks, Core, Games with Externalities, Endogenous Coalition Formation, Pairwise stability, Stable Networks, Link Formation
    JEL: C70 C71 D23 D43
    Date: 2007–04
  3. By: Azrieli, Yaron
    Abstract: In a Self-Confirming Equilibrium (Fudenberg and Levine, 1993A) every player obtains partial information about other players' strategies and plays a best response to some conjecture which is consistent with his information. Two kinds of information structures are considered: In the first each player observes his own payoff while in the second the information is the distribution of players among the various actions. For each of these information structures we prove that pure Self-Confirming Equilibrium exists in some classes of games. Pure Nash equilibrium may fail to exist in these classes.
    Keywords: Self-Confirming Equilibrium; Pure Equilibrium; Imperfect Monitoring.
    JEL: C72
    Date: 2007–07–04
  4. By: Pierre von Mouche (Wageningen Universiteit); Henk Folmer (Wageningen Universiteit and Rijksuniversiteit Groning)
    Abstract: Linking of repeated games and exchange of concessions in fields of relative strength may lead to more cooperation and to Pareto improvements relative to the situation where each game is played separately. In this paper we formalize these statements, provide some general results concerning the conditions for more cooperation and Pareto improvements to materialize or not and analyze the relation between both. Special attention is paid to the role of asymmetries.
    Keywords: Environmental Policy, Linking, Folk Theorem, Tensor Game, Prsioners' Dilemma, Full Cooperation, Pareto Efficiency, Minkowski Sum, Vector Maximum, Convex Analysis
    JEL: C72
    Date: 2007–05
  5. By: Miguel Ángel Hinojosa (Department of Economics, Quantitative Methods and Economic History, Universidad Pablo de Olavide); Amparo Mª Mármol (Department of Applied Economics III, Universidad de Sevilla); José Manuel Zarzuelo (Department of Applied Economics IV, Universidad del País Vasco)
    Abstract: This paper introduces and analyzes the class of multi-utilitarian solutions for cooperative bargaining problems. We show that generalized Gini solutions and inequality averse Choquet bargaining solutions are particular cases of this new multi-valued solution concept and provide a complete characterization of inequality averse multi-utilitarian solutions in which an invariance property consisting of a weakening of both the linear invariance axiom in Blackorby et al. (1994) and the restricted invariance axiom in Ok and Zhou (2000). Moreover, by relaxing the assumptions involved in the characterization, the class is extended to include equality averse multi-utilitarian solutions which are also studied in the paper.
    Keywords: Axiomatic bargaining theory, multi-valued bargaining solutions, generalized Gini solutions, inequality adverse Choquet solutions.
    JEL: C61 C78
    Date: 2007–07
  6. By: Garratt, Rod; Troger, Thomas; Zheng, Charles Zhoucheng
    Abstract: The English auction is susceptible to tacit collusion when post-auction inter-bidder resale is allowed. We show this by constructing a continuum of equilibria where, with positive probability, one bidder wins the auction without any competition and divides the spoils by optimally reselling the good to the other bidders. Such equilibria support a collusive bidding pattern without requiring the colluders to make any commitment on bidding behavior or post-bidding spoil-division. The equilibria are valid for any number of asymmetric or symmetric bidders, arbitrary reserve prices, and various resale market rules. In symmetric environments, these equilibria interim Pareto dominate (among bidders) the standard value-bidding equilibrium.
    Keywords: auction, resale, collusion, English auction
    JEL: D4
    Date: 2007–06–30
  7. By: Bettina Klaus; Flip Klijn; Toshifumi Nakamura
    Abstract: We correct an omission in the definition of the domain of weakly responsive preferences introduced in Klaus and Klijn (2005) or KK05 for short. The proof of the existence of stable matchings (KK05, Theorem 3.3) and a maximal domain result (KK05, Theorem 3.5) are adjusted accordingly.
    Keywords: Matching; Couples; Weak Responsiveness; Stability
    JEL: C78 J41
    Date: 2007–06–18
  8. By: Azrieli, Yaron
    Abstract: Inspired by the social psychology literature, we study the implications of categorical thinking on decision making in the context of a large normal form game. Every agent has a categorization (partition) of her opponents and can only observe the average behavior in each category. A strategy profile is a Conjectural Categorical Equilibrium (CCE) with respect to a given categorization profile if every player's strategy is a best response to some consistent conjecture about the strategies of her opponents. We show that, for a wide family of games and for a particular categorization profile, every CCE becomes almost Nash as the number of players grows. An equivalence of CCE and Nash equilibrium is achieved in the settings of a non-atomic game. This highlights the advantage of categorization as a simplifying mechanism in complex environments. With much less information in their hands agents behave as if they see the full picture. Some properties of CCE when players categorize `non-optimally' are also considered.
    Keywords: Categorization; Conjectural equilibrium; Large games.
    JEL: D84 D81 C72
    Date: 2007–05–14
  9. By: Ben Zissimos (Vanderbilt University)
    Abstract: This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries, a familiar problem of coordination failure arises giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, and through strategic interaction in tariff setting, regional trade agreements generate larger rent-shifting effects than non regional agreements, which countries use to coordinate on a unique equilibrium. Under naive best responses, regional agreements give way to free trade.
    Keywords: Coalition, Coordination, Trade Liberalization, Trade Agreement, Regionalism
    JEL: F02 F13 F15 C73
    Date: 2007–06
  10. By: Luigi Mittone; Francesca Bortolami
    Abstract: This is an experiment on the effect of norm application in a public good game. We want to investigate whether a control norm affects the contribution level differently, only in relation to the way in which the norm is applied in the game. We compare the amount of public good provided in two different groups. In the first group (constituent group), experimental subjects create a control norm, and then they self-apply it in a basic public good game. In the second group (control group), the norm created by the constituent group is exogenously imposed. Experimental results show a significant difference between the two public good levels considered. Self determination implies a higher level of efficiency, as compared to the exogenous one.
    Keywords: public good games, free riding, norm of control, voluntary contribution
    JEL: H41 C92
    Date: 2007
  11. By: Aljaž Ule (University of Amsterdam); Jacob K. Goeree (California Institute of Technology); Arno Riedl (University of Maastricht)
    Abstract: This paper reports results from a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the Bala-Goyal (2000) model of network formation with decay and two-way flow of benefits by allowing for agents with lower linking costs or higher benefits to others. Furthermore, agents’ types may be common knowledge or private information. In all treatments, the (efficient) equilibrium network has a “star” structure. With homogeneous agents, equilibrium predictions fail completely. In contrast, with heterogeneous agents stars frequently occur, often with the high-value or low-cost agent in the center. Stars are not born but rather develop: with a high-value agent, the network’s centrality, stability, and efficiency all increase over time. Probit estimations based on best-response behaviour and other-regarding preferences are used to analyze individual linking behavior. Our results suggest that heterogeneity is a major determinant for the predominance of star-like structures in real-life social networks.
    Keywords: Network Formation, Experiment, Heterogeneity, Private Information
    JEL: C72 C92 D82 D85
    Date: 2007–06
  12. By: Ana Babus (Erasmus University Rotterdam)
    Abstract: Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. Banks form links order to reduce the risk of contagion. The network is formed endogenously and serves as an insurance mechanism. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0.
    Keywords: Financial Stability, Network Formation, Contagion Risk
    JEL: C70 G21
    Date: 2007–06

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