nep-gth New Economics Papers
on Game Theory
Issue of 2010‒01‒10
seventeen papers chosen by
Laszlo A. Koczy
Budapest Tech and Maastricht University

  1. Nash equilibria of games with monotonic best replies By Filippo L. Calciano
  2. Belief-free equilibria in games with incomplete information: characterization and existence By Lovo, Stefano; Tomala, Tristan; Hörner, Johannes
  3. Epistemically stable strategy sets By Geir B. Asheim; Mark Voorneveld; Jörgen Weibull
  4. Rotten Kids with Bad Intentions By Nick Netzer; Armin Schmutzler
  5. How to use Rosen's normalised equilibrium to enforce a socially desirable Pareto efficient solution By Jacek B. Krawczyk; Mabel Tidball
  6. Inequity and Risk Aversion in Sequential Public Good Games By Sabrina Teyssier
  7. Dealing with the aversion to the sucker’s payoff in public goods game By Douadia Bougherara; Sandrine Costa; Gilles Grolleau; Lisette Ibanez
  8. Social Comparisons and Reference Group Formation: Some Expermental Evidence By Ian McDonald; Nikos Nikiforakis; Nilss Olekalns; Hugh Sibly
  9. Do Spouses Cooperate? And If Not: Why? By Cochard François, Couprie Helene, Hopfensitz Astrid
  10. Distributive Justice and Bargaining Solutions By Nejat Anbarci; Ching-jen Sun
  11. Underinvestment in public goods: The influence of state depended investment costs By Nikos Ebel; Benteng Zou
  12. Contracting Under Reciprocal Altruism By Shchetinin, Oleg
  13. Preferences and Beliefs in a Sequential Social Dilemma: A Within-Subjects Analysis By Blanco, Mariana; Engelmann, Dirk; Koch, Alexander K.; Normann, Hans-Theo
  14. Plurality versus proportional electoral rule: which is most representative of voters? By Amedeo Piolatto
  15. The Impact of Distributional Preferences on (Experimental) Markets for Expert Services By Rudolf Kerschbamer; Matthias Sutter; Uwe Dulleck
  16. Liquidity Constrained Competing Auctions By Richard Dutu; Benoit Julien; Ian King
  17. A Tale of Two Externalities: Environmental Policy and Market Structure By Ana Espinola-Arredondo; Felix Munoz-Garcia

  1. By: Filippo L. Calciano
    Abstract: We introduce notions of increasingness for the best reply of a game that capture properly the intuitive idea of complementarity among players’ strategies. We show, by generalizing the fixpoint theorems of Veinott and Zhou, that the Nash sets of our games with increasing best replies are nonempty complete lattices. Hence we extend the class of games with strategic complementarities.
    Keywords: Complementarity, supermodular games, fixpoint theorem, Nash equilibria
    JEL: C60 C70 C72
    Date: 2009
  2. By: Lovo, Stefano; Tomala, Tristan; Hörner, Johannes
    Abstract: In this paper, the authors characterize belief-free equilibria in infinitely repeated games with incomplete information with N \ge 2 players and arbitrary information structures. This characterization involves a new type of individual rational constraint linking the lowest equilibrium payoffs across players. The characterization is tight: we define a set of payoffs that contains all the belief-free equilibrium payoffs; conversely, any point in the interior of this set is a belief-free equilibrium payoff vector when players are sufficiently patient. Further, we provide necessary conditions and sufficient conditions on the information structure for this set to be non-empty, both for the case of known-own payoffs, and for arbitrary payoffs.
    Keywords: repeated game with incomplete information; Harsanyi doctrine; belief-free equilibria
    JEL: C72 C73
    Date: 2009–10–10
  3. By: Geir B. Asheim (Department of Economics, University of Oslo - University of Oslo); Mark Voorneveld (SSE - Department of Economics - Stockholm School of Economics); Jörgen Weibull (SSE - Department of Economics - Stockholm School of Economics, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)
    Abstract: This paper provides a definition of epistemic stability of sets of strategy profiles, and uses it to characterize variants of curb sets in finite games, including the set of rationalizable strategies and minimal curb sets.
    Keywords: Epistemic game theory; epistemic stability; rationalizability; closedness under rational behavior; mutual p-belief.
    Date: 2009–12–09
  4. By: Nick Netzer (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We examine a “Rotten Kid” model (Becker 1974) where a player with social preferences interacts with an egoistic player. In contrast to previous models, we assume that social preferences are intention-based rather than outcome-based. In a very general multi-stage setting we show that any sequential reciprocity equilibrium must involve mutually unkind behavior of both players, endogenously generating negative emotions rather than positive altruism. In a large class of two-stage games that includes principalagent and gift-giving games, this prevents equilibrium from being materially Pareto efficient. Compared to the subgame-perfect equilibrium without social preferences, efficiency is still generally increased. On the other hand, the materialistic player has lower whereas the reciprocal player has higher material payoffs, so that reciprocity does not increase equity: For sufficiently strong reciprocity concerns, the materialistic player ends up with a negligible share of the gains from trade.
    Keywords: Reciprocity, Psychological Games, Moral Hazard, Gift Giving
    Date: 2009–12
  5. By: Jacek B. Krawczyk; Mabel Tidball
    Abstract: We consider a situation, in which a regulator believes that constraining a complex good created jointly by competitive agents, is socially desirable. Individual levels of outputs that generate the constrained amount of the externality can be computed as a Pareto efficient solution of the agents' joint utility maximisation problem. However, generically, a Pareto efficient solution is not an equilibrium. We suggest the regulator calculates a Nash-Rosen coupled-constraint equilibrium (or a “generalised” Nash equilibrium) and uses the coupled-constraint Lagrange multiplier to formulate a threat, under which the agents will play a decoupled Nash game. An equilibrium of this game will possibly coincide with the Pareto efficient solution. We focus on situations when the constraints are saturated and examine, under which conditions a match between an equilibrium and a Pareto solution is possible. We illustrate our findings using a model for a coordination problem, in which firms' outputs depend on each other and where the output levels are important for the regulator.
    Date: 2009–12
  6. By: Sabrina Teyssier
    Abstract: This paper analyzes which type of intrinsic preferences drive an agent’s behavior in a sequential public good game depending on whether the agent is first or second mover. Theoretical predictions are based on heterogeneity of individuals in terms of social and risk preferences. We modelize preferences according to the inequity aversion model of Fehr and Schmidt (1999) and to the assumption of constant relative risk aversion. Risk aversion is significantly and negatively correlated with the contribution decision of first movers. Second movers with sufficiently high advantageous inequity aversion free-ride less and reciprocate more than others. Both results are predicted by our model. Nevertheless, no effect of disadvantageous inequity aversion of first movers is found in the data while theory predicted it. Our results underline the importance of taking into account the order of agents’ play to correctly understand which type of preferences influences cooperation in voluntary contribution mechanisms. They suggest that individuals’ behavior can be consistent between different experimental games.
    Keywords: inequity aversion, risk aversion, public good game, conditional contribution
    Date: 2009
  7. By: Douadia Bougherara; Sandrine Costa; Gilles Grolleau; Lisette Ibanez
    Abstract: A usual explanation to low levels of contribution to public goods is the fear of getting the sucker’s payoff (cooperation by the participant and defection by the other players). In order to disentangle the effect of this fear from other motives, we design a public good game where people have an insurance against getting the sucker’s payoff. We show that contributions to the public good under this ‘protective’ design are significantly higher and interact with expectations on other individuals' contribution to the public good. Some policy implications and extensions are suggested.
    Date: 2009–12
  8. By: Ian McDonald; Nikos Nikiforakis; Nilss Olekalns; Hugh Sibly
    Abstract: We investigate reference group formation and the impact of social comparisons on ultimatum bargaining using a laboratory experiment. Three individuals compete in a real-e¤ort task for the role of the proposer in a three-player ultimatum game. The role of the responder is randomly allocated. The third individual receives a ?fixed payment - our treatment variable - and makes no decision. The existence of a non-responder has a dramatic e¤ect on bargaining outcomes. In the most extreme treatment, more than half of the o¤ers are rejected. Behavior shows individuals exhibit self-serving bias in the way they de?ne their reference groups.
    Keywords: social comparisons; ultimatum bargaining; laboratory experiments; self-serving bias; real-e¤ort
    JEL: C78 C91 D63
    Date: 2009
  9. By: Cochard François, Couprie Helene, Hopfensitz Astrid (CRESE, Université de Franche-Comté. THEMA, Université de Cergy Pontoise. GREMAQ, Toulouse School of Economics)
    Abstract: Models of household economics require an understanding of economic interactions in families. Social ties, repetition and reduced strategic uncertainty make social dilemmas in couples a very special case that needs to be empirically studied. In this paper we present results from a large economic experiment with 100 maritally living couples. Participants made decisions in a social dilemma with their partner and with a stranger. We predict behavior in this task with individual and couples' socio-demographic variables, efficiency preferences and couples' marital satisfaction. As opposed to models explaining behavior amongst strangers, the regressions on couples’ decisions highlight clear patterns concerning cooperation behavior which could inspire future household decision-making models.
    Keywords: Noncooperative Games; Laboratory, Individual Behavior; Household Production and Intra-household Allocation
    JEL: C72 C91 D13
    Date: 2009
  10. By: Nejat Anbarci; Ching-jen Sun
    Abstract: Suppes-Sen Dominance is a commonly accepted criterion of impartiality in distributive justice. Mariotti (1999) characterized the Nash bargaining solution using Nash (1950).s Scale Invariance (SI) axiom and an axiom named Suppes-Sen Proofness (SSP) that embodies the Suppes-Sen principle. By adding a relative equity component to SSP, we first consider a stronger version of it, the Strong Suppes-Sen Proofness (SSSP) property. It turns out that the Egalitarian solution is the unique solution satisfying SSSP. We then consider two weaker versions of SSP, namely WSSP and alpha~WSSP. Yet, it is still possible to characterize the Nash solution by using WSSP and SI only. alpha~WSSP is much weaker than Weak Pareto Optimality (WPO) when alpha= 1. It turns out that it is possible to characterize the Nash solution by using Individual Rationality (IR), SI and alpha~WSSP for any alpha between [01).
    Keywords: Distributive justice, the Suppes-Sen Proofness, the Nash solution, the Egalitarian solution.
    JEL: C78 D74
    Date: 2009–12–08
  11. By: Nikos Ebel; Benteng Zou (CREA, University of Luxembourg)
    Abstract: In this paper we determine and analyze open loop and Markovian perfect equilibrium of a standard capital accumulation differential games, which is extended by a state depended cost function. As an application of the model we do consider knowledge accumulation or lobbying of firms with connected objectives. By using Pontryagin maximum principle and Hamilton-Jacob-Bellman equation, we find that the feedback strategies could be worse than open loop strategy, which is neither only due to ‘linearity’ as inWirl (1996, European Journal of Political Economy) nor only due to ’feedback information’ as Fershtman and Nitzan (1991, European Economic Review). Rather it is a mixed effect of these two.
    JEL: C71 C72 H41
    Date: 2009
  12. By: Shchetinin, Oleg (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: I show that a simple formal model of reciprocal altruism is able to predict human behavior in contracting situations, puzzling when considered within selfishness assumption. For instance, motivation and performance crowding-out are explained by a signaling mechanism in which provision of an extrinsic incentive signals non-generosity of the Principal and decreases Agent’s intrinsic motivation. The model’s equilibrium predicts behavior in the Control Game of Falk and Kosfeld and in a variant of Trust Game by Fehr and Rockenbach. This suggests that reciprocal altruism modeling could be fruitful more generally in applications of contract theory.<p>
    Keywords: Reciprocal Altruism; Extrinsic and intrinsic motivation; Contract Theory; Behavioral Economics.
    JEL: D82 M54
    Date: 2009–12–09
  13. By: Blanco, Mariana (Universidad del Rosario); Engelmann, Dirk (Royal Holloway, University of London); Koch, Alexander K. (University of Aarhus); Normann, Hans-Theo (Goethe University Frankfurt)
    Abstract: Within-subject data from sequential social dilemma experiments reveal a correlation of first-and second-mover decisions for which two channels may be responsible, that our experiment allows to separate: i) a direct, preference-based channel that influences both first- and second-mover decisions; ii) an indirect channel, where second-mover decisions influence beliefs via a consensus effect, and the first-mover decision is a best response to these beliefs. We find strong evidence for the indirect channel: beliefs about second-mover cooperation are biased toward own second-mover behavior, and most subjects best respond to stated beliefs. But when first movers know the true probability of second-mover cooperation, subjects' own second moves still have predictive power regarding their first moves, suggesting that the direct channel also plays a role.
    Keywords: experimental economics, consensus effect, social dilemmas
    JEL: C72 C90
    Date: 2009–12
  14. By: Amedeo Piolatto (Universidad de Alicante)
    Abstract: This study compares the representativeness of voters in the proportional electoral system with the situation under plurality rule. Representativeness is commonly measured by comparing parties’ received votes with their shares of seats in the Parliament; this implies that proportional rule should always better represent voters. A coalition within the Parliament, however, rules the country without interference and supports the government; when a coalition is formed, the pivotal role of small parties and the proposal right of the formateur can significantly impact the distribution of power. Focusing on the coalition formation stage, I demonstrate that the proportional rule is more representative only under very specific conditions. If these conditions are not met, introducing some distortions in the distribution of seats among parties can actually improve representativeness.
    Keywords: Electoral systems, proportional rule, plurality rule, voters’ representation
    JEL: C72 D72 H1 P16
    Date: 2009
  15. By: Rudolf Kerschbamer; Matthias Sutter; Uwe Dulleck
    Abstract: Credence goods markets suffer from inefficiencies arising from informational asymmetries between expert sellers and customers. While standard theory predicts that inefficiencies disappear if customers can verify the quality received, verifiability fails to yield efficiency in experiments with endogenous prices. We identify heterogeneous distributional preferences as the main cause and design a parsimonious experiment with exogenous prices that allows classifying experts as either selfish, efficiency loving, inequality averse, inequality loving or competitive. Results show that most subjects exhibit non-standard distributional preferences, among which efficiency-loving and inequality aversion are most frequent. We discuss implications for institutional design and agent selection in credence goods markets.
    Keywords: Distributional Preferences, Credence Goods, Verifiability, Experiment
    JEL: C72 C91 D82
    Date: 2009–12
  16. By: Richard Dutu; Benoit Julien; Ian King
    Abstract: When goods are sold through competing auctions, what e¤ect does monetary policy have on the equilibrium allocation? To answer, we extend the competing auctions framework in several ways: buyers choose how much money they bring to an auction, the quantities traded at the auctions are endogenous, and sellers can charge a fee (either positive or negative) to buyers participating in their auction. We present two di¤erent speci?cations of the model. In the ?rst model, sellers post a quantity they wish to sell and a fee, and allow the price to be determined by an auction. In the second model, sellers post a price and a fee and allow the quantity sold to be determined by an auction. When sellers post a quantity and buyers bid prices, the Friedman rule implements the ?rst best and, in this case, no fee is charged by sellers. Sellers charge buyers a participation fee as soon as the nominal interest rate is positive, and marginal increments in money growth decrease both the posted quantity and buyers?entry. The use of auction fees reduces welfare in this environment. When sellers post a price and buyers bid quantities, the Friedman rule is optimal but does not yield the ?rst best as agents trade an ine¢ ciently low quantity in multilateral matches and an ine¢ ciently high quantity in pairwise matches. Marginal increments in money growth decrease the posted real price and the quantities traded. When the interest rate is low, sellers pay buyers who participate in their auction, which increases welfare. When the interest rate is high, sellers charge buyers who participate in their auction, which reduces welfare.
    Keywords: Competing auctions; money; search; in?ation; auction fees
    JEL: C78 D44 E40
    Date: 2009
  17. By: Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University)
    Abstract: This paper examines the two externalities that a country?s environmental regulation imposes on other country's welfare: an environmental externality, due to transboundary pollution, and a competitive advantage externality, as regulations a¤ect domestic ?rms?abatement costs, which impact the pro?ts of their foreign competitors. We ?rst analyze the emission standards that countries independently set under di¤erent market structures and then compare them with the standards set under international environmental agreements that internalize one or both types of externalities. The paper hence disentangles the e¤ect of each externality. We show that ?rms?pro?ts increase when countries participate in international treaties if the environmental damage from pollution is relatively low and such pollution is not signi?cantly transboundary. We hence demonstrate that international environmental agreements can serve as cooperative devices ?rms use to ameliorate overproduction and increase pro?ts, without the need to form collusive agreements.
    Keywords: Transboundary pollution, strategic environmental policy, international envi- ronmental agreement, market structure
    JEL: C72 F12 H23 Q28
    Date: 2009–12

This nep-gth issue is ©2010 by Laszlo A. Koczy. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.