nep-gth New Economics Papers
on Game Theory
Issue of 2013‒02‒16
fourteen papers chosen by
Laszlo A. Koczy
Hungarian Academy of Sciences and Obuda University

  1. Existence of Nash Equilibrium in games with a measure space of players and discontinuous payoff functions By Carmona, Guilherme; Podczeck, Konrad
  2. Approximate Nash equilibrium under the single crossing conditions By Kukushkin, Nikolai S.
  3. Coordination in 2 x 2 Games by Following Recommendations from Correlated Equilibria By Johne Bone; Michalis Drouvelis; Indrajit Ray
  4. An eye-tracking study of feature-based choice in one-shot games By Giovanna Devetag; Sibilla Di Guida; Luca Polonio
  5. Cognitive ability and learning to play equilibrium: A level-k analysis By David Gill; Victoria Prowse
  6. Reputation in the Presence of Noisy Exogenous Learning By Ju Hu
  7. Identification of Games of Incomplete Information with Multiple Equilibria and Common Unobserved Heterogeneity By Victor Aguirregabiria; Pedro Mira
  8. Bilateralism and Multilateralism: a Network Approach By PAPACCIO, Anna
  9. Silence is golden: communication, silence, and cartel stability By Basuchoudhary, Atin; Conlon, John R.
  10. Multilateral Stability and Efficiency of Trade Agreements: A Network Formation Approach By Jorzik, Nathalie; Mueller-Langer, Frank
  11. "Interlinkage and Generous Tit-for-Tat Strategy" By Hitoshi Matsushima
  12. Overbidding and Heterogeneous Behavior in Contest Experiments By Roman M. Sheremeta
  13. Social Distance and Trust: Experimental Evidence from a Slum in Cairo By Binzel, Christine; Fehr, Dietmar
  14. Dynamic endogenous formation of trade agreements: flexibility versus coordination By James Lake

  1. By: Carmona, Guilherme; Podczeck, Konrad
    Abstract: Balder's (2002) model of games with a measure space of players is integrated with the line of research on finite-player games with discontinuous payoff functions which follows Reny (1999). Specifically, we extend the notion of continuous security, introduced by McLennan, Monteiro and Tourky (2011) and Barelli and Meneghel (2012) for finite-players games, to games with a measure space of players and establish the existence of pure strategy Nash equilibrium for such games. A specification of our main existence result is provided which is ready to fit the needs of applications. As an illustration, we consider several optimal income tax problems in the spirit of Mirrlees (1971) and use our game-theoretic result to show the existence of an optimal income tax in each of these problems.
    Keywords: Existence of equilibrium; measure space of players; discontinuities
    JEL: C72
    Date: 2013–01–24
  2. By: Kukushkin, Nikolai S.
    Abstract: We consider strategic games where strategy sets are linearly ordered while the preferences of the players are described by binary relations. All restrictions imposed on the preferences are satisfied in the case of epsilon-optimization of a bounded-above utility function. A Nash equilibrium exists and can be reached from any strategy profile after a finite number of best response improvements if the single crossing conditions hold w.r.t.\ pairs [one player's strategy, a profile of other players' strategies], and the preference relations are transitive. If, additionally, there are just two players, every best response improvement path reaches a Nash equilibrium after a finite number of steps. If each player is only affected by a linear combination of the strategies of others, the single crossing conditions hold w.r.t.\ pairs [one player's strategy, an aggregate of the strategies of others], and the preference relations are interval orders, then a Nash equilibrium exists and can be reached from any strategy profile with a finite best response path.
    Keywords: strong acyclicity; single crossing; Cournot tatonnement; Nash equilibrium; aggregative game
    JEL: C72
    Date: 2013–02–10
  3. By: Johne Bone; Michalis Drouvelis; Indrajit Ray
    Abstract: We consider three games, Symmetric Battle of the Sexes, Modified Battle of the Sexes and Chicken and two different correlation devices, public and private, with the same expected payoffs in equilibrium, which is also the best correlated equilibrium payoff for these games. Despite our choices of the payoffs in these games based on some theoretical criteria, we find that coordination and following recommendations vary significantly among our treatments. We explain these differences by analysing players' choices in cases when they do and do not follow recommendations in different games.
    Keywords: Coordination, Public message, Recommendation, Correlated equilibrium
    JEL: C72 C92 D83
    Date: 2013–02
  4. By: Giovanna Devetag; Sibilla Di Guida; Luca Polonio
    Abstract: We analyze subjects’ eye movements while they make decisions in a series of one-shot games. The majority of them perform a partial and selective analysis of the payoff matrix, often ignoring the payoffs of the opponent and/or paying attention only to specific cells. Our results suggest that subjects apply boundedly rational decision heuristics that involve best responding to a simplification of the decision problem, obtained either by ignoring the other players’ motivations or by considering them only for a subset of outcomes. Finally, we find a correlation between types of eye movements observed and choices in the games.
    Keywords: one-shot games, eye-tracking, similarity, categorization, focal points, individual behavior, experimental economics, behavioral economics
    JEL: C72 C91 D01 D83
    Date: 2013
  5. By: David Gill; Victoria Prowse
    Abstract: In this paper we investigate how cognitive ability influences behavior, success and theevolution of play towards Nash equilibrium in repeated strategic interactions. We study behaviorin a p-beauty contest experiment and find striking differences according to cognitiveability: more cognitively able subjects choose numbers closer to equilibrium, converge morefrequently to equilibrium play and earn more even as behavior approaches the equilibriumprediction. To understand better how subjects with different cognitive abilities learn differently,we estimate a structural model of learning based on level-k reasoning. We find asystematic positive relationship between cognitive ability and levels; furthermore, the averagelevel of more cognitively able subjects responds positively to the cognitive ability of theiropponents, while the average level of less cognitively able subjects does not respond at all.Our results suggest that, in strategic environments, higher cognitive ability translates intobetter analytic reasoning and a better ‘theory of mind’.
    Keywords: Cognitive ability, bounded rationality, level-k, convergence, learning non-equilibrium behavior, beauty contest, repeated games, structural modeling, theory of mind, intelligence, Raven test
    JEL: C92 C73 D83
    Date: 2013–01–25
  6. By: Ju Hu (Department of Economics, University of Pennsylvania)
    Abstract: This paper studies the reputation effect in which a long-lived player faces a sequence of uninformed short-lived players and the uninformed players receive informative but noisy exogenous signals about the type of the long-lived player. We provide an explicit lower bound on all Nash equilibrium payoffs of the long-lived player. The lower bound shows when the exogenous signals are sufficiently noisy and the long-lived player is patient, he can be assured of a payoff strictly higher than his minmax payoff.
    Keywords: Reputation, repeated games, learning, relative entropy
    JEL: C73 D82 D83
    Date: 2013–02–06
  7. By: Victor Aguirregabiria; Pedro Mira
    Abstract: This paper deals with the identification and estimation of discrete games of incomplete information with multiple equilibria when we allow for three types of unobservables for the researcher: (a) payoff-relevant variables that are players' private information; (b) payoff-relevant variables that are common knowledge to all the players; and (c) non-payoff-relevant or "sunspot" variables which are common knowledge to the players. The specification of the payoff function is nonparametric, and the probability distributions of the unobservables is also nonparametric but with finite support (i.e., finite mixture model). We show that if the number of players in the game is greater than two and the number of discrete choice alternatives is greater than the number of mixtures in the distribution of the unobservables, then the model is nonparametrically identified under the same type of exclusion restrictions that we need for identification without unobserved heterogeneity. In particular, it is possible to separately identify the relative contributions of payoff-relevant and "sunspot" type of unobserved heterogeneity to observed players' behavior. We also present results on the identification of counterfactual experiments using the estimated model.
    Keywords: Discrete games of incomplete information; Multiple equilibria in the data; Unobserved heterogeneity; Sunspots; Finite mixture models.
    JEL: C13 C35
    Date: 2013–02–02
  8. By: PAPACCIO, Anna (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy)
    Abstract: The deadlock in the Doha Round and the proliferation of regional and bilateral trade agreements has given rise to a new interest in the potential relationship between regionalism and multilateralism. This paper has two main aims. First, the formation of free trade agreements amongst symmetric and asymmetric countries has been studied by means of the network formation theory. Second, we have focused on the connection between bilateralism and multilateralism and we have evaluated the efficiency of the equilibrium configurations. In order to characterize and distinguish between bilateral and multilateral outcomes we have used two different network stability notions, that is, pairwise stability and strong stability. Moreover, from the analysis of pairwise and strong stability we have also obtained insights on the relationship between bilateralism and multilateralism.
    Keywords: Free Trade Agreements; Multilateralism; Network Formation Games
    JEL: D85 F10 F13
    Date: 2013–01–31
  9. By: Basuchoudhary, Atin; Conlon, John R.
    Abstract: This paper studies how cartel stability is influenced by asymmetric information and communication about demand. Firms in a cartel face fluctuating demand in a repeated game framework. In each period, one randomly chosen firm knows current demand. In this context we consider two different equilibria -- one where the informed firm communicates its information to its partners and another where it does not. We show that cartels are extremely unstable when the informed firm communicates with the uninformed firms. However, when the informed firm does not communicate with the uninformed firms cartels can be as stable as when there are no demand fluctuations at all.
    Keywords: cartels; communication; stability;
    JEL: D82 C72 L00
    Date: 2013–01
  10. By: Jorzik, Nathalie; Mueller-Langer, Frank
    Abstract: We study the endogenous network formation of bilateral and multilateral trade agreements by means of hypergraphs and introduce the equilibrium concept of multilateral stability. We consider multi-country settings with a firm in each country that produces a homogeneous good and competes as a Cournot oligopolist in each market. Under endogenous tariffs, we find that the existence of a multilateral trade agreement is always necessary for the stability of the trading system and that the formation of preferential trade agreements is always necessary for achieving global free trade. We also find that global free trade is efficient but not necessarily the only multilaterally stable trade equilibrium when countries are symmetric (heterogeneous) in terms of market size. We derive conditions under which such a conflict between overall welfare efficiency and stability occurs.
    Keywords: Preferential trade; multilateral trade agreements; multilateral stability; GATT; network formation
    JEL: F13 F12 D85 C72
    Date: 2013–02
  11. By: Hitoshi Matsushima (Faculty of Economics, University of Tokyo)
    Abstract: We investigate an infinitely repeated prisoners' dilemma with imperfect monitoring and projects the possibility that the interlinkage of the players' distinct activities enhances implicit collusion. We show a necessary and sufficient condition for the existence of generous tit-for-tat Nash equilibrium. Such an equilibrium, if it exists, is unique. This equilibrium achieves approximate efficiency when monitoring is almost perfect, where the discount factors are fixed.
    Date: 2013–02
  12. By: Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University)
    Abstract: We provide an overview of experimental literature on contests and point out the two main phenomena observed in most contest experiments- (i) overbidding relative to the standard Nash equilibrium prediction and (ii) heterogeneous behavior of ex-ante symmetric contestants. Based on the sample of contest experiments that we review, the median overbidding rate is 72%. We provide different explanations for the overbidding phenomenon, including bounded rationality, utility of winning, other-regarding preferences, probability distortion, and the shape of the payoff function. We also provide explanations for heterogeneous behavior of contestants based on differences in preferences towards winning, inequality, risk and losses, and demographic differences. Furthermore, we suggest mechanisms that can reduce overbidding and induce more homogeneous behavior. Finally, we discuss directions for future research.
    Keywords: experiments, contests, overbidding, heterogeneous behavior
    JEL: C72 C91 C92 D72 D74
    Date: 2013
  13. By: Binzel, Christine (University of Heidelberg); Fehr, Dietmar (WZB - Social Science Research Center Berlin)
    Abstract: While strong social ties help individuals cope with missing institutions, trade is essentially limited to those who are part of the social network. We examine what makes the decision to trust a stranger different from the decision to trust a member of a given social network (a friend), by comparing the determinants of these two decisions for the same individual. We implement a binary trust game with hidden action in a lab-in-the-field experiment with residents of an informal housing area in Cairo. Our results show that trust is higher among friends than among strangers and that higher trust among friends is related to the principal's belief of trustworthiness. However, on average a principal underestimates her friend's trustworthiness leading to inefficient outcomes. Our findings suggest that even within a social network, trade may often be limited to exchanges with few information asymmetries.
    Keywords: trust, social distance, hidden action, solidarity, economic development
    JEL: C72 C93 D82 O12
    Date: 2013–01
  14. By: James Lake (Southern Methodist University)
    Abstract: Unlike the previous literature, this paper endogenizes the choice between any type of trade agreement -- Customs Union (CU), Free Trade Agreement (FTA) or Most Favored Nation (MFN) agreement-- and shows how the presence of Preferential Trade Agreements (i.e. CU or FTA) affects the possibility of free trade. The dynamic nature of the model captures an important tradeoff between the equilibrium type of Preferential Trade Agreement (PTA): while CU members coordinate tariffs imposed on nonmembers, individual FTA members have the flexibility of forming future PTAs with nonmembers. CUs can emerge in equilibrium because of this coordination benefit. However, in such cases, CUs may not lead to free trade implying that PTAs can prevent free trade in that free trade will only be attained if PTAs are banned. Nevertheless, a path of FTAs leading to free trade can emerge in equilibrium because of the FTA flexibility benefit. Thus, FTAs play an important role in limiting the destructive role of PTAs. Moreover, surprisingly, FTA free riding incentives strengthen the extent that FTAs limit the destructive role of PTAs.
    Keywords: Preferential Trade Agreement, Free Trade Agreement, Customs Union, coordination, flexibility, free riding, networks, farsighted.
    JEL: C71 F12 F13
    Date: 2013–02

This nep-gth issue is ©2013 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.