nep-gth New Economics Papers
on Game Theory
Issue of 2014‒09‒05
thirteen papers chosen by
László Á. Kóczy
Magyar Tudományos Akadémia

  1. Differential Games with (A)symmetric Players and Heterogeneous Strategies (II) By Benteng Zou
  2. Games With Possibly Naive Hyperbolic Discounters By Haan, Marco; Hauck, Dominic
  3. Communication networks in markets By Edoardo Gallo
  4. Fragility of the Commons under Prospect-Theoretic Risk Attitudes By Ashish R. Hota; Siddharth Garg; Shreyas Sundaram
  5. Stochastic Perron for Stochastic Target Games By Erhan Bayraktar; Jiaqi Li
  6. How responsive are people to changes in their bargaining position? Earned bargaining power and the 50–50 norm By Nejat Anbarci; Nick Feltovich
  7. Bargaining Power, Energy Security and Networks: an Applied Game Theory Approach By Roberto Roson; Franz Hubert
  8. Game theory analysis for carbon auction market through electricity market coupling By Mireille Bossy; Nadia Maizi; Odile Pourtallier
  9. The focal point in the Traveller’s Dilemma: An Experimental Study By Morone, Andrea; Morone, Piergiuseppe
  10. Asymmetry of Information within Family Networks By Joachim De Weerdt; Garance Genicot; Alice Mesnard
  11. The Pennsylvania Adoption Exchange Improves Its Matching Process By Vincent W. Slaugh; Mustafa Akan; Onur Kesten; M. Utku Ünver
  12. A repeated principal-agent model with on-the-job search By Herbold, Daniel
  13. Evidence for Relational Contracts in Sovereign Bank Lending By Peter Benczur; Cosmin L. Ilut

  1. By: Benteng Zou (CREA, Université de Luxembourg)
    Abstract: One family of heterogeneous strategies in differential games with (a)symmetric players is developed in which one player adopts an anticipating open-loop strategy and the other adopts a standard Markovian strategy. Via conjecturing principle, the anticipating open-loop strategic player plans his strategy based on the possi- ble updating the rival player may take. These asymmetric strategies frame non- degenerate Markovian Nash Equilibrium, which can be subgame perfect. Except the stationary path, this kind of strategy makes the study of short-run trajectory possible, which usually are not subgame perfect. However, the short-run non- perfection provides very important policy suggestions.
    Keywords: Differential Games, subgame perfect Markovian Nash Equilibrium, Heterogeneous strategy, anticipating open-loop strategy
    JEL: C73 C72
    Date: 2014
  2. By: Haan, Marco; Hauck, Dominic
    Abstract: We propose a solution concept for games that are played among hyperbolic discounters that are possibly naive about their own, or about their opponent's future time inconsistency. Our perception-perfect equilibrium essentially requires each player to take an action consistent with the subgame perfect equilibrium, given her perceptions concerning future types, and under the assumption that other present and future players have the same perceptions. Applications include a common pool problem and Rubinstein bargaining. When players are naive about their own time consistency and sophisticated about their opponent's, the common pool problem is exacerbated, and Rubinstein bargaining breaks down completely.
    Keywords: Hyperbolic Discounting, naivety, bargaining
    JEL: C72 C78 D03 D91
    Date: 2014–08–15
  3. By: Edoardo Gallo
    Abstract: This paper proposes a dynamic model of bargaining to analyze decentralized markets where buyers and sellers obtain information about past deals through their social network. There is a unique equilibrium outcome which depends crucially on the peripheral (least connected) individuals in each group. The main testable predictions are that groups with high density and/or low variability in the number of connections across individuals allow their members to obtain a better deal. These predictions are tested in a lab experiment through 4 treatments that vary the network that groups of 6 subjects are assigned to. The results of the experiment lend support to the theoretical predictions: subjects converge to a high equilibrium demand if they are assigned to a network that is dense and/or has low variability in number of connections across members. An extension explores an alternative set-up in which buyers and sellers belong to the same social network: if the network is regular and the agents are homogeneous then the unique equilibrium division is 50-50
    Keywords: network, communication, experiment, noncooperative bargaining, 50-50 division
    JEL: C73 C78 C91 C92 D83
    Date: 2014–08–26
  4. By: Ashish R. Hota; Siddharth Garg; Shreyas Sundaram
    Abstract: We study a common-pool resource game where the resource experiences failure with a probability that grows with the aggregate investment in the resource. To capture decision making under such uncertainty, we model each player's risk preference according to the value function from prospect theory. We show the existence and uniqueness of a pure strategy Nash equilibrium when the players have arbitrary (potentially heterogeneous) risk preferences and under natural assumptions on the rate of return and failure probability of the resource. Greater competition, vis-a-vis the number of players, increases the failure probability at the Nash equilibrium, and we quantify this effect by obtaining (tight) upper bounds on the failure probability at the equilibrium for a large number of players with respect to the failure probability under investment by a single player. We further examine the effects of heterogeneity in risk preferences of the players with respect to two characteristics of the prospect-theoretic value function: loss aversion and diminishing sensitivity. Heterogeneity in attitudes towards loss aversion always leads to higher failure probability of the resource at the equilibrium when compared to the case where players have identical risk preferences, whereas there is no clear trend under heterogeneity in the diminishing sensitivity parameter.
    Date: 2014–08
  5. By: Erhan Bayraktar; Jiaqi Li
    Abstract: We develop the stochastic Perron's method in the framework of stochastic target games, in which one player tries to find a strategy such that the state process almost-surely reaches a given target no matter which action is chosen by the other player. Within this framework, the stochastic Perron's method produces a viscosity sub-solution (super-solution) of a Hamilton-Jacobi-Bellman (HJB) equation. Using a comparison result, we characterize the value as a viscosity solution to the HJB equation.
    Date: 2014–08
  6. By: Nejat Anbarci; Nick Feltovich
    Abstract: A recurring puzzle in bargaining experiments is that individuals under–respond to changes in their bargaining position, compared to the predictions of standard bargaining theories. Nearly all of these results have come from settings with bargaining power allocated exogenously, so that individuals may perceive it as having been “unearned” and thus be reluctant to exploit it. Also, equal splits have typically been equilibrium outcomes, leading to a powerful tendency toward 50–50 splits. We conduct a bargaining experiment in which subjects earn their bargaining power through a real–effort task. Treatments are based on the Nash demand game (NDG) and a related unstructured bargaining game (UBG). Subjects bargain over a fixed “cake” (amount of money), with disagreement payoffs determined entirely by the number of units of the real–effort task successfully completed. About one–fourth of the time, one player earns a disagreement payoff above half the cake size; in these cases, 50–50 splits are not individually rational, and thus not equilibriumoutcomes. We find that subjects are least responsive to changes in own and opponent disagreement payoffs in the NDG with both disagreement payments below half the cake size. Responsiveness is higher in the UBG, and in the NDG when one disagreement payment is more than half the cake, but in both cases it is still less than predicted. It is only in the UBG when a disagreement payment is more than half the cake that responsiveness to disagreement payoffs reaches the predicted level. Our results imply that even when real–life bargaining position is determined by past behaviour rather than luck, the extent to which actual bargaining corresponds to theoretical predictions will depend on (1) the institutions within which bargaining takes place, and (2) the distribution of bargaining power; in particular, whether the 50–50 norm yields a viable outcome. See above See above
    Keywords: NA, Game theoretical models, Game theoretical models
    Date: 2013–06–21
  7. By: Roberto Roson; Franz Hubert
    Abstract: The realization of international energy distribution networks requires cooperation and the sharing of costs and benefits. Economic incentives, at a country level, to join an international network depend on how net surplus would be distributed, which in turn depends on a variety of factors: position of each country on a specific network, geo-political stability, existence of market distortions and avaiability of alternative energy sources (including renewables). This study is aimed at presenting a game theory methodology that can be applied to real world cases, thereby shedding light on several political economy issues.A methodology will be presented and illustrated with application to a fictious network structure. The method is based on a two-stage process: first, a network optimization model is used to generate payoff values under different coalitions and network structures; a second model is subsequently employed to identify cooperative game solutions, like the Shapley value or the nucleolus. Country level surplus and infrastructure costs can therefore be compared, to assess the economic viability of each project.A numerical model will be realized and discussed. The model output will be sensitive to assumptions on link capacity, supply and demand curves, possible existence of market distortions, alternative energy sources, geo-political stability.
    Keywords: None specifically, although a similar approach has been tested for Eastern Europe., Energy, Infrastructure
    Date: 2013–09–05
  8. By: Mireille Bossy; Nadia Maizi; Odile Pourtallier
    Abstract: In this paper, we analyze Nash equilibria between electricity producers selling their production on an electricity market and buying CO2 emission allowances on an auction carbon market. The producers' strategies integrate the coupling of the two markets via the cost functions of the electricity production. We set out a clear Nash equilibrium on the power market that can be used to compute equilibrium prices on both markets as well as the related electricity produced and CO2 emissions released.
    Date: 2014–08
  9. By: Morone, Andrea; Morone, Piergiuseppe
    Abstract: This paper provides an experimental test of the traveller’s dilemma. Our investigation aims to address the research hypothesis that introducing a reference point à la Schelling (set equal to the Pareto optimal solution) might drive people away from rationality even when the size of the penalty/reward is high. Experimental findings reported in this paper provide answers to this question showing that the reference point did not encourage coordination around the Pareto optimal choice.
    Keywords: traveller’s dilemma; focal point; individual decision
    JEL: C9 D7
    Date: 2014
  10. By: Joachim De Weerdt (EDI, Tanzania); Garance Genicot (Georgetown University); Alice Mesnard (City University, London and Institute for Fiscal Studies.)
    Abstract: This paper studies asymmetry of information and transfers within a unique data set of 712 extended family networks from Tanzania. Using cross-reports on asset holdings, we construct measures of misperception of income among all pairs of households belonging to the same network. We show that there is significant asymmetry of information and no evidence of major systematic over-evaluation or under-evaluation of income in our data, although there is a slight over-evaluation on the part of migrants regarding non-migrants. We develop a static model of asymmetric information that contrasts altruism, pressure and exchange as motives to transfer. The model makes predictions about the correlations between misperceptions and transfers under these competing explanations.Testing these predictions in the data gives support to the model of transfers under pressure or an exchange motive with the recipient holding all the bargaining power.
    Keywords: Asymmetric Information, Transfers, Pressure, Exchange, Altruism.
    Date: 2014–08
  11. By: Vincent W. Slaugh (Tepper School of Business, Carnegie Mellon University); Mustafa Akan (Tepper School of Business, Carnegie Mellon University); Onur Kesten (Tepper School of Business, Carnegie Mellon University); M. Utku Ünver (Boston College)
    Abstract: The Pennsylvania Adoption Exchange (PAE) helps case workers representing children in state custody by recommending prospective families for adoption. We describe PAE's operational challenges using case worker surveys and a regression analysis of data on child outcomes over multiple years. Using a discrete-event simulation of PAE, we justify the value of a statewide adoption network and demonstrate the importance of the family preference information quality on the percentage of children who successfully nd adoptive placements. Finally, we detail a series of simple improvements implemented by PAE to increase the adoptive placement rate through collecting more valuable information, improving the family ranking algorithm, and aligning incentives for families to provide useful preference information.
    Keywords: community OR; public service; decision support; market design
    JEL: C78
    Date: 2014–08–01
  12. By: Herbold, Daniel
    Abstract: This paper analyzes how on-the-job search (OJS) by an agent impacts the moral hazard problem in a repeated principal-agent relationship. OJS is found to constitute a source of agency costs because efficient search incentives require that the agent receives all gains from trade. Further, the optimal incentive contract with OJS matches the design of empirically observed compensation contracts more accurately than models that ignore OJS. In particular, the optimal contract entails excessive performance pay plus efficiency wages. Efficiency wages reduce the opportunity costs of work effort and hence serve as a complement to bonuses. Thus, the model offers a novel explanation for the use of efficiency wages. When allowing for renegotiation, the model generates wage and turnover dynamics that are consistent with empirical evidence. I argue that the model contributes to explaining the concomitant rise in the use of performance pay and in competition for high-skill workers during the last three decades. --
    Keywords: Repeated Principal-Agent Model,On-the-Job Search,Moral Hazard,Multitasking,Efficiency Wages
    JEL: C73 D82 D86 J33 L14
    Date: 2014
  13. By: Peter Benczur; Cosmin L. Ilut
    Abstract: This paper presents direct evidence for relational contracts in sovereign bank lending. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems on current spreads (a "punishment" effect in prices) from an indirect effect through higher expected future default probabilities ("loss of reputation"). Such a punishment provides positive surplus to lenders after a default and decreases the borrower's present discounted value of the net benefits of future borrowing, which create dynamic incentives. Using data on bank loans to developing countries between 1973-1981 and constructing continuous variables for credit history, we find evidence that most of the influence of past repayment problems is through the direct, punishment channel.
    JEL: C73 D86 F34 G12 G14 G15
    Date: 2014–08

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