nep-gth New Economics Papers
on Game Theory
Issue of 2012‒09‒22
24 papers chosen by
Laszlo A. Koczy
Hungarian Academy of Sciences and Obuda University

  1. In and out of Equilibrium II: Evolution in Repeated Games with Discounting and Complexity Costs By Matthijs van Veelen; Julian Garcia
  2. Games on Networks By Jackson, Matthew O.; Zenou, Yves
  3. Building and Rebuilding Trust with Promises and Apologies. By Eric Schniter; Roman M. Sheremeta; Daniel Sznycer
  4. Optimal Transport and Cournot-Nash Equilibria By Blanchet, Adrien; Carlier, Guillaume
  5. Partnerships, Imperfect Monitoring and Outside Options: Theory and Experimental Evidence By Paolo Crosetto; Alexia Gaudeul; Gerhard Riener
  6. Guilt causes equal or unequal division in alternating-offer bargaining By Kohler, Stefan
  7. What is a Solution to a Matrix Game By Martin Shubik
  8. Availability of Information and Representation Effects in the Centipede Game By Paolo Crosetto; Marco Mantovani
  9. Dynkin Games and Israeli Options By Yuri Kifer
  10. Multi-Dimensional Iterative Reasoning in Action: The Case of the Colonel Blotto Game By Ayala Arad; Ariel Rubinstein
  11. Envy can promote more equal division in alternating-offer bargaining By Kohler, Stefan
  12. Explicit vs. tacit collusion: The impact of communication in oligopoly experiments By Fonseca, Miguel A.; Normann, Hans-Theo
  13. Bargaining in River Basin Committees: Rules Versus Discretion By Le Breton, Michel; Thomas, Alban; Zaporozhets, Vera
  14. Matching with Incomplete Information By Qingmin Liu; George J. Mailath; Andrew Postlewaite; Larry Samuelson
  15. On the axiomatics of resource allocation: Interpreting the consistency principle By William Thomson
  16. A Characterization of the Top Trading Cycles Mechanism for the School Choice Problem By Dur, Umut
  17. The Strategic Impact of Higher-Order Beliefs By Yi-Chun Chen; Alfredo Di Tillio; Eduardo Faingold; Siyang Xiong
  18. Enforceable vs. non-enforceable contracts: a theoretical appraisal with fair players. By D'Agostino , Elena; Lisciandra, Maurizio
  19. Potentially Harmful International Cooperation on Global Public Good Provision By Wolfgang Buchholz; Richard Cornes; Dirk Rübbelke
  20. Competing for Customers in a Social Network (R) By Pradeep K. Dubey; Rahul Garg; Bernard De Meyer
  21. Sequential decision making without independence: a new conceptual approach By Antoine Nebout
  22. Stable climate coalitions (Nash) and international trade By Thomas Eichner; Rüdiger Pethig
  23. The Effects of the Length of the Period of Commitment on the Size of Stable International Environmental Agreements By Nkuiya, Bruno
  24. Self-enforcing environmental agreements and international trade By Thomas Eichner; Rüdiger Pethig

  1. By: Matthijs van Veelen (University of Amsterdam); Julian Garcia (Max-Planck-Institute for Evolutionary Biology)
    Abstract: We explore evolutionary dynamics for repeated games with small, but positive complexity costs. To understand the dynamics, we extend a folk theorem result by Cooper (1996) to continuation probabilities, or discount rates, smaller than 1. While this result delineates which payoffs can be supported by neutrally stable strategies, the only strategy that is evolutionarily stable, and has a uniform invasion barrier, is All D. However, with sufficiently small complexity costs, indirect invasions - but now through 'almost neutral' mutants - become an important ingredient of the dynamics. These indirect invasions include stepping stone paths out of full defection.
    Keywords: repeated games; evolutionary game theory; complexity costs; indirect invasions; robustness against indirect invasions; neutrally stable strategy; evolutionarily stable strategy; iterated prisoners dilemma
    JEL: C73
    Date: 2012–09–06
  2. By: Jackson, Matthew O.; Zenou, Yves
    Abstract: We provide an overview and synthesis of the literatures analyzing games where players are connected via a network structure. We study, in particular, the impact of the structure of the network on individuals’ behaviors. We focus on the game theoretic modeling, but also include some discussion of analyses of peer effects, as well as applications to diffusion, employment, crime, industrial organization, and education.
    Keywords: games on networks; games with incomplete information; graphical games; network games; peer effects.; social networks
    JEL: A14 C72 D85
    Date: 2012–09
  3. By: Eric Schniter (Economic Science Institute, Chapman University); Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University); Daniel Sznycer (Center for Evolutionary Psychology, University of California, Santa Barbara)
    Abstract: Using trust games, we study how promises and messages are used to build new trust where it did not previously exist and to rebuild damaged trust. In these games, trustees made non-binding promises of investment-contingent returns, then investors decided whether to invest, and finally trustees decided how much to return. After an unexpected second game was announced, but before it commenced, trustees could send a one-way message. This design allowed us to observe the endogenous emergence and natural distribution of trust-relevant behaviors and focus on naturally occurring remedial strategies used by promise-breakers and distrusted trustees, their effects on investors, and subsequent outcomes. In the first game 16.6% of trustees were distrusted and 18.8% of trusted trustees broke promises. Trustees distrusted in the first game used long messages and promises closer to equal splits to encourage trust in the second game. To restore damaged trust, promise-breakers used apologies and upgraded promises. On average, investments in each game paid off for investors and trustees, suggesting that effective use of cheap signals fosters profitable trust-based exchange in these economies.
    Keywords: promise, atonement, apology, cheap talk, cheap signals, trust game, trust building, remedial strategies, reciprocity, experiments
    Date: 2012
  4. By: Blanchet, Adrien (GREMAQ, TSE); Carlier, Guillaume (CEREMAD, Dauphine)
    Abstract: We study a class of games with a continuum of players for which Cournot-Nash equilibria can be obtained by the minimisation of some cost, related to optimal transport. This cost is not convex in the usual sense in general but it turns out to have hidden strict convexity properties in many relevant cases. This enables us to obtain new uniqueness results and a characterisation of equilibria in terms of some partial differential equations, a simple numerical scheme in dimension one as well as an analysis of the inefficiency of equilibria.
    Keywords: Cournot-Nash equilibria, mean-field games, optimal transport, externalities, Monge-Amp`ere equations, convexity along generalised geodesics.
    Date: 2012
  5. By: Paolo Crosetto (Max Planck Institute of Economics, Jena); Alexia Gaudeul (Max Planck Institute of Economics, Jena); Gerhard Riener (Düsseldorf Institute for Competition Economics (DICE), Heinrich Heine University, Düsseldorf)
    Abstract: We study theoretically and experimentally a two-person partnership game whereby agents only see the uncertain outcome of their joint effort but not how much the other agent contributed to it. The model combines problems of free-riding present in public good production and in teams with imperfect monitoring. We analyse effort and exit behaviour conditional on subjects' beliefs over the action taken by their partners and consider the effect of the availability and profitability of outside options. Our subjects do not adapt effort as a response to changes in their beliefs about the effort of their partner. Subjects display aversion for team work by exiting the partnership even when they believe their partner exerts sufficient effort to sustain it. Higher outside options do not either motivate or discourage effort in joint work but rather result in not only inefficient but also irrational breakdown in partnerships. Overall, social welfare decreases as the incentive to exit increases.
    Keywords: Imperfect monitoring, outside options, partnerships, public good production, repeated games, teams
    JEL: D82 H41
    Date: 2012–09–11
  6. By: Kohler, Stefan
    Abstract: Parties in a bargaining situation may perceive guilt, a utility loss caused by receiving the larger share that is modeled in some social preferences. I extend Rubinstein (1982)'s solution of the open-ended alternating-offer bargaining problem for self-interested bargainers to a game with equally patient bargainers that exhibit a similar degree of guilt. The bargaining parties still reach agreement in the first period. If guilt is strong, they split the bargaining surplus equally. In contrast, if guilt is weak, the bargaining outcome is tilted away from the Rubinstein division towards a more unequal split. As both bargainers sensation of guilt diminishes, the bargaining outcome converges to the Rubinstein division.
    Keywords: alternating offers; bargaining; bargaining power; behavioral economics; equity; fairness; guilt; inequality aversion; negotiation; social preferences
    JEL: D03 C78 D63
    Date: 2012–09–10
  7. By: Martin Shubik
    Date: 2012
  8. By: Paolo Crosetto (Max Planck Institute of Economics, Strategic Interaction Group, Jena); Marco Mantovani (Université Libre de Bruxelles, and DEMM, Università degli studi di Milano, and CEREC, Facultés Universitaires Saint-Louis)
    Abstract: The paper presents the results of a novel experiment testing the effects of environment complexity on strategic behavior, using a centipede game. Behavior in the centipede game has been explained either by appealing to failures of backward induction or by calling for preferences that induce equilibria consistent with observed behavior. By manipulating the way in which information is provided to subjects we show that reduced availability of information is sufficient to shift the distribution of take-nodes further from the equilibrium prediction. On the other hand, similar results are obtained in a treatment where reduced availability of information is combined with an attempt to elicit preferences for reciprocity, through the presentation of the centipede as a repeated trust game. Our results could be interpreted as cognitive limitations being more effective than preferences in determining (shifts in) behavior in our experimental centipede. Furthermore our results are at odds with the recent ones in Cox and James (2012), suggesting caution in generalizing their results. Reducing the availability of information may hamper backward induction or induce myopic behavior, depending on the strategic environment.
    Keywords: Centipede, Backward Induction, Representation effects
    JEL: C72 C73 C91
    Date: 2012–09–11
  9. By: Yuri Kifer
    Abstract: We start briefly surveying research on optimal stopping games since their introduction by E.B.Dynkin more than 40 years ago. Recent renewed interest to dynkin's games is due, in particular, to the study of Israeli (game) options introduced in 2000. We discuss the work on these options and related derivative securities for the last decade. Among various results on game options we consider error estimates for their discrete approximations, swing game options, game options in markets with transaction costs and other questions.
    Date: 2012–09
  10. By: Ayala Arad; Ariel Rubinstein
    Date: 2012
  11. By: Kohler, Stefan
    Abstract: Bargainers in an open-ended alternating-offer bargaining situation may perceive envy, a utility loss caused by receiving the smaller share that is modeled in some social preferences in addition to self-interest. I extend Rubinstein (1982)'s original solution of the bargaining problem for two self-interested bargainers to this strategic situation. Bargainers still reach agreement in the first period and their bargaining shares increase in the strength of their own envy. As both bargainers' envy diminishes, the agreed partition converges to the Rubinstein division. If equally patient bargaining parties exhibit similar envy, then the agreed partition is tilted away from the Rubinstein division towards the equal division. Notably, the potential sensation of envy also boosts the share of the eventually envy-free party who leaves the bargaining with the larger share under the agreed partition. This gain in bargaining strength through envy can result in a bargaining outcome that is more unequal than predicted by the Rubinstein division.
    Keywords: alternating offers; bargaining; bargaining power; behavioral economics; envy; equity; fairness; inequality aversion; negotiation; social preferences
    JEL: D03 C78 D63
    Date: 2012–09–10
  12. By: Fonseca, Miguel A.; Normann, Hans-Theo
    Abstract: We explore the difference between explicit and tacit collusion by investigating the impact communication has in experimental markets. For Bertrand oligopolies with various numbers of firms, we compare pricing behavior with and without the possibility to communicate among firms. We find strong evidence that talking helps to obtain higher profits for any number of firms, however, the gain from communicating is nonmonotonic in the number of firms, with medium-sized industries having the largest additional profit from talking. We also find that industries continue to collude successfully after communication is disabled. Communication supports fims in coordinating on collusive pricing schemes, and it is also used for conflict mediation. --
    Keywords: cartels,collusion,communication,experiments,repeated games
    JEL: C7 C9 L4 L41
    Date: 2012
  13. By: Le Breton, Michel; Thomas, Alban; Zaporozhets, Vera
    Abstract: In this paper, we introduce a game-theoretical non-cooperative model of bargaining to analyse project funding in the French river basin com- mittees. After sorting out some of the main theoretical predictions, we proceed with an empirical application to the subsidy policy of French Wa- ter Agencies. The theoretical model of bargaining is simulated for various risk preferences, and a reduced-form estimation of the distribution of sub- sidies is performed. We find some evidence in support of the predictions regarding the role of bargaining in decision-making for water management.
    JEL: D10 D64 D91 E21
    Date: 2012–07–18
  14. By: Qingmin Liu; George J. Mailath; Andrew Postlewaite; Larry Samuelson
    Date: 2012
  15. By: William Thomson (University of Rochester)
    Abstract: An allocation rule is consistent if the recommendation it makes for each problem “agrees” with the recommendation it makes for each associated reduced problem, obtained by imagining some agents leaving with their assignments. Some authors have described the consistency principle as a “fairness principle”. Others have written that it is not about fairness, that it should be seen as an “operational principle”. We dispute the particular fairness interpretations that have been offered for consistency, but develop a different and important fairness foundation for the principle, arguing that it can be seen as the result of adding “some” efficiency to a “post-application” and efficiency-free expression of solidarity in response to population changes. We also challenge the interpretations of consistency as an operational principle that have been given, but identify a sense in which such an interpretation can be supported. We review and assess the other interpretations of the principle, as “robustness”, “coherence”, and “reinforcement”.
    Keywords: consistency principle; fairness principle; solidarity; punctual axiom, relational axiom, consistent extensions, converse consistency
    JEL: C79 D63 D74
    Date: 2012–09
  16. By: Dur, Umut
    Abstract: Abstract This paper characterizes the top trading cycles mechanism for the school choice problem. Schools may have multiple available seats to be assigned to students. For each school a strict priority ordering of students is determined by the school district. Each student has strict preference over the schools. We first define weaker forms of fairness, consistency and resource monotonicity. We show that the top trading cycles mechanism is the unique Pareto efficient and strategy-proof mechanism that satisfies the weaker forms of fairness, consistency and resource monotonicity. To our knowledge this is the first axiomatic approach to the top trading cycles mechanism in the school choice problem where schools have a capacity greater than one.
    Keywords: Top Trading Cycles Mechanism; School Choice Problem
    JEL: C78 I20 D78 D61
    Date: 2012–09–15
  17. By: Yi-Chun Chen; Alfredo Di Tillio; Eduardo Faingold; Siyang Xiong
    Date: 2012
  18. By: D'Agostino , Elena; Lisciandra, Maurizio
    Abstract: In this paper we provide a simple model examining the choice between enforceable and non-enforceable contracts when, on the one hand, drafting an enforceable contract is costly and, on the other hand, fulfilling a non-enforceable contract is left to parties’ fairness. According to the previous literature we find that (1) the choice between the two contract settings in equilibrium depends on fairness and enforcement costs, and (2) whenever a non-enforceable contract is chosen in equilibrium it turns out welfare-improving. However, we are able to measure efficiency and make punctual predictions of how distant the decentralized solution is from first-best. Precisely, we find that efficiency is strongly conditioned by the stake of the transaction, so that both contracts allow for very high levels of efficiency in the presence of low-stake transactions, whereas efficiency always collapses to very low levels for high-stake transactions. It implies that a social planner should intervene only in the last case, even in the presence of high levels of fairness. Our results are robust and hold in a repeated game, proving that reputation is not welfare improving unless the number of interactions exceeds a given threshold.
    Keywords: fairness; enforceability; contract choice; welfare analysis
    JEL: D03 D86
    Date: 2012–08–21
  19. By: Wolfgang Buchholz; Richard Cornes; Dirk Rübbelke
    Abstract: Recent international climate negotiations suggest that complete agreements are unlikely to materialize. Instead, partial cooperation between like-minded countries appears a more likely outcome. In this paper we analyze the effects of such partial cooperation between like-minded countries. In doing so, we link the literature on partial cooperation with so-called matching approaches. Matching schemes are regarded as providing a promising approach to overcome undersupply of public goods like climate protection. The functioning of matching mechanisms in a setting with an incomplete agreement, i.e. a contract where only a subset of the players participates, has however not been investigated yet. This paper fills this research gap by analyzing incomplete matching agreements in the context of international climate protection. We analyse their effect on both welfare and the global climate protection level. We show that matching coalitions may bring about a decline in global public good provision and a reduction in the welfare of outsiders.
    JEL: C78 H41 Q54
    Date: 2012–09
  20. By: Pradeep K. Dubey; Rahul Garg; Bernard De Meyer
    Date: 2012
  21. By: Antoine Nebout
    Abstract: This paper is a critical reflection on the notion of dynamic consistency that is commonly used in the literature in Economics and Decision Theory and on the difficulty to test it in an experimental set up. Building on the possible characteristics of individual dynamic preferences, we propose a conceptual categorisation of possible sequential decision making behaviors. In particular, we show that not conforming to Expected Utility Theory does not necessarily implies a violation of dynamic consistency and propose a simple set of decision tasks that allows to reveal different strategic types of resolution of a sequential decision problem by a non-expected utility maximizers.
    Date: 2012–09
  22. By: Thomas Eichner; Rüdiger Pethig
    Abstract: The basic model of the literature on self-enforcing international environmental agreements is a model of autarkic countries. We extend that model by international trade and investigate its impact on the performance of ’Nash’ coalitions and on their stability, in particular, in a general equilibrium framework. First we characterize the performance of coalitions and non-coalition countries with regard to emissions and welfare and compare business as usual with the coalition-fringe scenario. In qualitative terms, the results in our free-trade model turn out to be the same as in the basic model for quadratic functional forms. In our model with international trade countries influence the terms of trade with their choice of policy and they make strategic use of that terms-of-trade effect. We find, however, that in the quadratic version of our model - as in the basic model - stable coalitions consist of no more than two countries. Finally, we explore the outcome of trade liberalization by moving from autarky to free trade. Although the coalition steps up its mitigation effort, world emissions rise which may be referred to as a ’green paradox of trade liberalization’. Trade liberalization turns out to be bad for the environment as well as for the coalition countries’ welfare and the aggregate welfare of all countries; it reduces the range of profitable coalitions, and it even tends to hamper the formation of stable coalitions.
    Keywords: sub-global climate coalition, international trade,trade liberalization, self-enforcing IEA
    JEL: C72 F50 Q50 Q58
    Date: 2012
  23. By: Nkuiya, Bruno
    Abstract: This paper extends the standard model of self-enforcing dynamc international environmental agreements by allowing the length of the period of commitment of such agreements to vary as a parameter. It analyzes the pattern of behavior of the size of stable coalitions, the stock of pollution, and the emission rate as a function of the length of the period of commitment. It is shown that the length of the period of commitment can have very significant effects on the equilibrium. We show numerically that at the initial date, as the length of commitment is increased, the potential gain from cooperation tends to diminish, increasing the disincentive to ratify the agreements. This suggests that considerable attention should be given to the determination of the length of such international agreements.
    Keywords: International environmental agreements, global pollution, stock pollution, dynamc games, Environmental Economics and Policy, Q5, C73, F53,
    Date: 2012–08
  24. By: Thomas Eichner; Rüdiger Pethig
    Abstract: In the basic model of the literature on international environmental agreements (IEAs) (Barrett 1994; Rubio and Ulph 2006) the number of signatories of selfenforcing IEAs does not exceed three, if non-positive emissions are ruled out. We extend that model by introducing a composite consumer good and fossil fuel that are produced and consumed in each country and traded on world markets. When signatory countries act as Stackelberg leader and emissions are positive, the size of stable IEAs may be significantly larger in our model with international trade. This would be good news if larger self-enforcing IEAs would lead to stronger reductions of total emissions. Unfortunately, the allocation of total emissions in self-enforcing IEAs turns out to be approximately the same as in the business as usual scenario independent of the number of its signatories. We also investigate the role of international trade by comparing our free-trade results with the outcome in the regime of autarky. Our autarky model turns out to coincide with the basic model of the literature alluded to above. We contribute to that literature by showing that in autarky regime the outcome of self-enforcing IEAs is also approximately the same as in business as usual.
    Keywords: international trade, self-enforcing environmental agreements, Stackelberg equilibrium
    JEL: C72 F02 Q50 Q58
    Date: 2012

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