nep-gth New Economics Papers
on Game Theory
Issue of 2008‒09‒20
nine papers chosen by
Laszlo A. Koczy
Budapest Tech and Maastricht University

  1. Competitive Behavior in Market Games: Evidence and Theory By John Duffy; Alexander Matros; Ted Temzelides
  2. The Average Tree Solution for Cooperative Games with Communication Structure By P. Jean-Jacques Herings; Gerard van der Laan; Dolf Talman; Zaifu Yang
  3. Strategic Play and Risk Aversion in One-Shot Normal-Form Games: An Experimental Study By Asen Ivanov
  4. Revenues in Discrete Multi-Unit, Common Value Auctions: A Study of Three Sealed-Bid Mechanisms By Ahlberg, Joakim
  5. Participation and Decision Making: A Three-person Power-to-take Experiment By Max Albert; Vanessa Mertins
  6. Capitalism and Economic Growth: A Game-Theoretic Perspective By Leong, Chee Kian
  7. Delayed Action and Uncertain Targets. How Much Will Climate Policy Cost? By Carlo Carraro; Valentina Bosetti; Alessandra Sgobbi; Massimo Tavoni
  8. Delayed Participation of Developing Countries to Climate Agreements: Should Action in the EU and US be Postponed? By Carlo Carraro; Valentina Bosetti; Alessandra Sgobbi; Massimo Tavoni
  9. An agent-based model of payment systems By Galbiati, Marco; Soramaki, Kimmo

  1. By: John Duffy; Alexander Matros; Ted Temzelides
    Abstract: We explore whether competitive outcomes arise in an experimental implementation of a market game, introduced by Shubik (1972). Market games obtain Pareto inferior (strict) Nash equilibria, in which some, and possibly all, markets are closed. We find that subjects do not coordinate on autarkic Nash equilibria, but favor more efficient `full` Nash equilibria in which all markets are open and there is a large volume of trade. We further find that as the number of agents participating in the market game increases, the full Nash equilibria they achieve come closer to approximating the associated Walrasian equilibrium of the economy. Motivated by these findings, we investigate theoretically whether evolutionary forces lead to Walrasian outcomes in such games. We introduce a strong version of evolutionary stable strategies (SESS) for finite populations. Our concept requires stability against deviations by coalitions of agents. A small coalition of trading agents is sufficient for Pareto improving trade to be generated. In addition, provided that agents lack market power, Nash equilibria corresponding to approximate competitive outcomes constitute the only approximate SESS.
    JEL: C72 C73 C92 D51
    Date: 2008–09
  2. By: P. Jean-Jacques Herings (Maastricht University); Gerard van der Laan (VU University Amsterdam); Dolf Talman (Tilburg University); Zaifu Yang (Yokohama National University)
    Abstract: We study cooperative games with communication structure, represented by an undirected graph. Players in the game are able to cooperate only if they can form a network in the graph. A single-valued solution, the average tree solution, is proposed for this class of games. Given the graph structure we define a collection of spanning trees, where each spanning tree specifies a particular way by which players communicate and determines a payoff vector of marginal contributions of all the players. The average tree solution is defined to be the average of all these payoff vectors. It is shown that if a game has a complete communication structure, then the proposed solution coincides with the Shapley value, and that if the game has a cycle-free communication structure, it is the solution proposed by Herings, van der Laan and Talman (2008). We introduce the notion of link-convexity, under which the game is shown to have a non-empty core and the average tree solution lies in the core. In general, link-convexity is weaker than convexity. For games with a cycle-free communication structure, link-convexity is even weaker than super-additivity.
    Keywords: Cooperative game; graph structure; single-valued solution; core; convexity; spanning tree
    JEL: C71
    Date: 2008–09–04
  3. By: Asen Ivanov (Department of Economics, VCU School of Business)
    Abstract: Based on subjects’ play and stated beliefs in ten one-shot normal-form games, we study behavior along the two general dimensions “naive vs. strategic” and “risk neutral vs. risk averse”. We also investigate how behavior varies depending on whether (A) subjects play without interference from belief elicitation, (B) subjects state beliefs while playing, or (C) subjects choose between lottery tickets instead of between actions in a game. With our games and graduate subjects, we find that under (A) a small minority of subjects is naive and a minority is risk neutral. However, these findings are not robust to changing the games or the subject population. Regarding the comparative statics across (A), (B) and (C), we find that naive behavior diminishes from (A) to (B) to (C) and that considerably more subjects are risk neutral under (B) than under (A) or (C). The latter is interpreted in terms of ambiguity aversion.
    Keywords: games, experiments, beliefs, risk aversion, ambiguity aversion
    JEL: C72 C92 C51 D81 D84
    Date: 2008–09
  4. By: Ahlberg, Joakim (VTI)
    Abstract: We propose in this paper a discrete bidding model, both on quantities and in pricing. It has a two-unit demand environment where subjects bid for contracts with an unknown redemption value, common to all bidders. Prior to bidding, the bidders receive private signals of information on the (common) value. Both the value and the signals are drawn from a known discrete affiliated joint distribution. <p> The relevant task for the paper is to compare equilibrium strategies and the seller's revenue between the three auction formats. We find that, among the three auction formats below with two players, the Vickrey auction always gives the most revenue to the seller, where the discriminatory auction becomes second and the uniform auction last. We also find that, in equilibrium, bidders bid the same amount on both items in the discriminatory auction; a phenomenon we do not notice in either of the other two auction formats. There, different amount of demand reduction is encountered.
    Keywords: Multi-Unit Auction; Common Value Auction; Discrete Auction; Game Theory
    JEL: C72 D44
    Date: 2008–09–10
  5. By: Max Albert (Justus Liebig University Giessen, Dept of Economics); Vanessa Mertins (Saarland University, Dept of Economics)
    Abstract: It is often conjectured that participatory decision making may increase acceptance even of unfavorable decisions. The present paper tests this conjecture in a three-person power-to-take game. Two takers decide which fraction of the responder's endowment to transfer to themselves; the responder decides which part of the endowment to destroy. Thus, the responder can punish greedy takers, but only at a cost to herself. We modify the game by letting the responder participate in takers' transfer decision and consider the eect of participation on the destruction rate. We nd that participation matters. Responders destroy more if they (1) had no opportunity to participate in the decision making process and (2) are confronted with highly unfavorable outcomes. This participation eect is highly signicant for those responders (the majority) who show negative reciprocity (i.e., destroy more when takers are greedier).
    Keywords: fairness, participatory decision making, power-to-take game, procedural fairness, reciprocity
    JEL: C72 C91 D72
    Date: 2008
  6. By: Leong, Chee Kian
    Abstract: Why has capitalism prevailed as an institution in promoting economic growth despite its apparent unfairness? In this paper, we argue that within a neoclassical framework, capitalism is fairer compared to collectivism due to the absence of a rationally acceptable collective solution. This is demonstrated using a dynamic game with a vote-maximizing government(G) and profit-maximizing representative firm(F). In this GF game, collectivism or cooperation between the players appears to trump capitalism at the aggregate level. Developing countries operating below the steady state may be better off cooperating as they will enjoy positive long term economic growth and profit growth once their capital stock exceeds the steady state level. But this requires them to sacrifice short term growth and possible inequity as the firm's profits grow. Developed countries operating above the steady state will find the cooperative solution attractive since both economic growth and profit growth will be positive. So, from an aggregate level, collectivism or cooperation performs better than capitalism. However, a fair imputation of cooperative or collective solutions which is rationally acceptable for all players does not exist. In every stage of development, the firm always finds it rationally unacceptable to cooperate because the profits earned by the firm under the feedback Nash equilibrium always dominate the profits under cooperation. On the other hand, the government only finds the cooperative solution to be rationally acceptable when the economy is above the steady state. Hence, collectivist cooperation between the government and the firm are not rationally acceptable for both and a fair equilibrium cannot be attained with collectivism.
    Keywords: Fairness; Dynamic Games; Economic Growth; Capitalism
    JEL: D63 O49
    Date: 2008
  7. By: Carlo Carraro (Department of Economics, University Of Venice Cà Foscari); Valentina Bosetti (Fondazione Eni Enrico Mattei and CMCC); Alessandra Sgobbi (Fondazione Eni Enrico Mattei and CMCC); Massimo Tavoni (Fondazione Eni Enrico Mattei, Catholic University of Milan and CMCC)
    Abstract: Despite the growing concern about actual on-going climate change, there is little consensus about the scale and timing of actions needed to stabilise the concentrations of greenhouse gases. Many countries are unwilling to implement effective mitigation strategies, at least in the short-term, and no agreement on an ambitious global stabilisation target has yet been reached. It is thus likely that some, if not all countries, will delay the adoption of effective climate policies. This delay will affect the cost of future policy measures that will be required to abate an even larger amount of emissions. What additional economic cost of mitigation measures will this delay imply? At the same time, the uncertainty surrounding the global stabilisation target to be achieved crucially affects short-term investment and policy decisions. What will this uncertainty cost? Is there a hedging strategy that decision makers can adopt to cope with delayed action and uncertain targets? This paper addresses these questions by quantifying the economic implications of delayed mitigation action, and by computing the optimal abatement strategy in the presence of uncertainty about a global stabilisation target (which will be agreed upon in future climate negotiations). Results point to short-term inaction as the key determinant for the economic costs of ambitious climate policies. They also indicate that there is an effective hedging strategy that could minimise the cost of climate policy under uncertainty, and that a short-term moderate climate policy would be a good strategy to reduce the costs of delayed action and to cope with uncertainty about the outcome of future climate negotiations. By contrast, an insufficient short-term effort significantly increases the costs of compliance in the long-term.
    Keywords: Uncertainty, Climate Policy, Stabilisation Costs, Delayed Action
    JEL: C72 H23 Q25 Q28
    Date: 2007
  8. By: Carlo Carraro (Department of Economics, University Of Venice Cà Foscari); Valentina Bosetti (Fondazione Eni Enrico Mattei and CMCC); Alessandra Sgobbi (Fondazione Eni Enrico Mattei and CMCC); Massimo Tavoni (Fondazione Eni Enrico Mattei, Catholic University of Milan and CMCC)
    Abstract: This paper analyses the cost implications for climate policy in developed countries if developing countries are unwilling to adopt measures to reduce their own GHG emissions. First, we assume that a 450 CO2 (550 CO2e) ppmv stabilisation target is to be achieved and that Non Annex1 (NA1) countries decide to delay their GHG emission reductions by 30 years. What would be the cost difference between this scenario and a case in which both developed and developing countries start reducing their emissions at the same time? Then, we look at a scenario in which the timing of developing countries’ participation is uncertain and again we compute the costs of climate policy in developed and developing countries. We find that delayed participation of NA1 countries has a negative impact on climate policy costs. Economic inefficiencies can be as large as 10-25 TlnUSD. However, this additional cost wanes when developing countries are allowed to trade emission reductions from their baseline emission paths during the 30-year delay period. Thus, irrespective of whether NA1 countries are immediately assigned an emission reduction target or not, they should nonetheless be included in a global carbon market. Technology deployment is also affected by the timing of developing countries’ mitigation measures. Delayed NA1-country participation in a climate agreement would scale down the deployment of coal with CCS throughout the century. On the other hand, innovation in the form of energy R&D investments would be positively affected, since it would become crucial in developed countries. Finally, uncertainty about the timing of NA1-country participation does not modify the optimal abatement strategy for developed countries and does not alter policy costs as long as a global carbon market is in place.
    Keywords: Delayed Action, Climate Policy, Stabilisation Costs, Uncertain Participation
    JEL: C72 H23 Q25 Q28
    Date: 2007
  9. By: Galbiati, Marco (Bank of England); Soramaki, Kimmo (Helsinki University of Technology)
    Abstract: This paper lays out and simulates a multi-agent, multi-period model of an RTGS payment system. At the beginning of the day, banks choose how much costly liquidity to allocate to the settlement process. Then, they use it to execute an exogenous, random stream of payment orders. If a bank's liquidity stock is depleted, payments are queued until new liquidity arrives from other banks, imposing costs on the delaying bank. The paper studies the equilibrium level of liquidity posted in the system, performing some comparative statics and obtaining: i) a liquidity demand curve which links liquidity to delay costs and ii) insights on the efficiency of alternative system configurations.
    Keywords: Payment systems; liquidity; RTGS; agent-based modelling; learning; fictitious play.
    JEL: C79
    Date: 2008–08

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