nep-gth New Economics Papers
on Game Theory
Issue of 2021‒12‒06
twelve papers chosen by
Sylvain Béal
Université de Franche-Comté

  1. Do Not Compromise By Liqun Liu
  2. Tax us, if you can: a game theoretic approach to profit shifting within the European Union By Joana Andrade Vicente
  3. Buyer’s Optimism, Information Design, and Price Discrimination By Pham, Hien
  4. A McKean-Vlasov game of commodity production, consumption and trading By Ren\'e A\"id; Ofelia Bonesini; Giorgia Callegaro; Luciano Campi
  5. Incentives and Strategic Behavior of Professional Boxers By AKIN, ZAFER; ISSABAYEV, MURAT; RIZVANOGHLU, ISLAM
  6. Experimental Analysis of Endogenous Institutional Choice: Constantly Revealing versus Ad-hoc Contracting By Daniela Di Cagno; Lorenzo Ferrari; Werner Güth; Vittorio Larocca
  7. Equilibrium Existence and Expected Payoffs in All-Pay Auctions with Constraints By Tuvana Pastine; Ivan Pastine
  8. Experts vs. policymakers in the COVID-19 policy response By Angelo Antoci; Valentina Rotondi; Fabio Sabatini; Pier Luigi Sacco; Mauro Sodini
  9. Auction Design with Approximate Common Prior By Pham, Hien; Yamashita, Takuro
  10. Misspecified Bayesian Learning by Strategic Players: First-Order Misspecification and Higher-Order Misspecification By Takeshi Murooka; Yuichi Yamamoto
  11. R&D innovation with socially responsible firms By Domenico Buccella; Luciano Fanti; Luca Gori
  12. The Right Person for the Right Job: Workers' Prosociality as a Screening Device By Bigoni, Maria; Ploner, Matteo; Vu, Thi-Thanh-Tam

  1. By: Liqun Liu
    Abstract: Complex reform decisions hinge crucially on precise policy-relevant information. Yet, when decision makers care about their reputation, they may be reluctant to collect information for fear of implementing good policies that are bad for future careers. I model the endogenous information acquisition in the delegated reform decision-making, allowing the public to constrain the decision maker's policy discretion. I show that the public almost ubiquitously benefits from eliminating or penalizing policies that are ex ante plausible. The public finds it optimal to ban the extreme but ex ante noncongruent policy to motivate information acquisition when 1) the decision maker is less likely to be congruent; 2) the appropriate policies are less likely to be extreme; 3) the scale of reform becomes more radical.
    Date: 2021–10
  2. By: Joana Andrade Vicente
    Abstract: In this paper we theoretically analyse the European Union’s ongoing political impasse regarding the choice of a single method to allocate multinational enterprises’ profits across countries and we find that this strategic situation resembles a coordination game with distributional consequences. The two Nash equilibria involve no efficiency trade-off (only a movement along the Pareto frontier), but the conflictual distribution of welfare gains and the presence of heterogeneous preferences have been preventing the implementation of a new long-term comprehensive tax policy reform. A unitary taxation approach with formulary apportionment in the European Union is better suited to tackle artificial profit shifting via transfer pricing and would mean an evolutionary change without disrupting the current international tax policy environment. It would restore faith in fairness in the European tax system and allow for further coordination of the transfer pricing policies of the two main international political forces – the United States and the European Union.
    Keywords: base erosion and profit shifting; Common Consolidated Corporate Tax Base; coordination games; European Union; transfer pricing.
    JEL: C7 F23 H25 H26
    Date: 2021–11
  3. By: Pham, Hien
    Abstract: A seller (she) faces a single buyer (he) who holds a biased and private prior belief regarding whether the product fits his need (which brings him a higher payoff than otherwise). The seller can provide additional information about the product that helps the buyer privately refine his belief. We fully characterize the revenue-maximizing menu of prices and disclosure policies that follows a simple cutoff structure. While the diversity in the priors alone is not sufficient to trigger price discrimi-nation, the presence of information design induces the optimal mech-anism featuring both information and price discrimination. Further-more, the seller does not strictly benefit from charging upfront pay-ments for information.
    Date: 2021–11
  4. By: Ren\'e A\"id; Ofelia Bonesini; Giorgia Callegaro; Luciano Campi
    Abstract: We propose a model where a producer and a consumer can affect the price dynamics of some commodity controlling drift and volatility of, respectively, the production rate and the consumption rate. We assume that the producer has a short position in a forward contract on \lambda units of the underlying at a fixed price F, while the consumer has the corresponding long position. Moreover, both players are risk-averse with respect to their financial position and their risk aversions are modelled through an integrated-variance penalization. We study the impact of risk aversion on the interaction between the producer and the consumer as well as on the derivative price. In mathematical terms, we are dealing with a two-player linear-quadratic McKean-Vlasov stochastic differential game. Using methods based on the martingale optimality principle and BSDEs, we find a Nash equilibrium and characterize the corresponding strategies and payoffs in semi-explicit form. Furthermore, we compute the two indifference prices (one for the producer and one for the consumer) induced by that equilibrium and we determine the quantity \lambda such that the players agree on the price. Finally, we illustrate our results with some numerics. In particular, we focus on how the risk aversions and the volatility control costs of the players affect the derivative price.
    Date: 2021–11
    Abstract: This paper studies the strategic behaviour of professional boxers in choosing the opponent and sharing the revenues generated by the fight. In professional boxing, a higher-ranked boxer has an upper hand in choosing his opponent among many challengers varying in popularity and strength. We build a three-stage model of a professional boxing fight/bout between the chooser and the one of his challengers to examine the strategic incentives of a chooser in sharing the purse in Nash Bargaining framework and exerting proper level of effort within a contest theory model. More importantly, we endogenize the choice of the opponent and thus the purse to be generated by the bout. We characterize the factors affecting the choice of an “optimal” opponent and the effort level exerted by the chooser and the opponent. One interesting result of the paper is that an older chooser who is ready to cash in his reputation tends to choose a stronger opponent, but puts little effort into the fight. On the other hand, a young rising “star” in the boxing market prefers a match against weaker opponents in order to minimize his risk of losing and to maximize his record of the “winning” outcomes along with market values.
    Keywords: Boxing, incentives, contests, opponent choice, bargaining, game theory
    JEL: C7
    Date: 2021–11–16
  6. By: Daniela Di Cagno (LUISS University); Lorenzo Ferrari (LUISS University); Werner Güth (‡Max Planck Institute for Collective Goods and LUISS University); Vittorio Larocca (LUISS University)
    Abstract: Ad-hoc contracting allows to quickly react to changes which could be neglected or noticed too late in case of constant contracting. But always deciding anew, e.g., how much and what to order in commercial and what to buy in private life, is too cumbersome. To capture the cognitive burden of ad-hoc contracting and how it can be avoided by constant contracting, our setup confronts ad-hoc pricing, which is non-revealing, with constantly revealing pricing. The experiment modifies the Acquiring-a-Company game by reversing the responsibility for pricing to the seller who proposes a price together with a cheap-talk value message in case of ad-hoc pricing and, in case of constantly revealing contracting the seller demands a constant surplus share for all periodic interactions. The experiment lets sellers decide between constantly revealing prices and ad-hoc non-revealing prices. Buyers, either aware of the seller’s surplus share or only of the periodic value message and price, can accept or reject trade in each of several successive periods played by the same pair, a seller and a buyer participant. Will sellers opt for constant pricing already without experience or ad-hoc pricing? And will one, when more experienced, opt for what has been more profitable?
    Keywords: Bargaining, Experiment, Complete and Incomplete Information
    JEL: C73 C92 D82 D90
    Date: 2021–11–05
  7. By: Tuvana Pastine (Department of Economics, Maynooth University.); Ivan Pastine (University College Dublin)
    Abstract: This paper introduces constraints on player choices in a broad class of all-pay auctions by allowing for upper bounds on players’ strategy sets. It proves the existence of equilibrium and derives simple closed-form formulae for players’ expected payoffs in any equilibrium. These formulae are straightforward to calculate in applications and do not require the derivation of the equilibrium or equilibria. This may be useful because: (i) In some applications players’ expected payoffs are the main item of interest. For example, one may be concerned about the effect of a policy on the market participants. In these cases the results can be used directly, bypassing the need for the full derivation of the equilibrium. (ii) In all-pay auctions, equilibrium is typically in mixed strategies. So in applications where the full characterization of the equilibrium is of interest, finding the players’ expected payoffs is a crucial first step in the derivation of the equilibrium.
    Date: 2021
  8. By: Angelo Antoci; Valentina Rotondi; Fabio Sabatini; Pier Luigi Sacco; Mauro Sodini
    Abstract: We build an evolutionary game-theoretic model of the interaction between policymakers and experts in shaping the policy response to the COVID-19 pandemic. Players' decisions concern two alternative strategies of pandemic management: a "hard" approach, enforcing potentially unpopular measures such as strict confinement orders, and a "soft" approach, based upon voluntary and short-lasting social distancing. Policymakers' decisions may also rely upon expert advice. Unlike experts, policymakers are sensitive to a public consensus incentive that makes lifting restrictions as soon as possible especially desirable. This incentive may conflict with the overall goal of mitigating the effects of the pandemic, leading to a typical policy dilemma. We show that the selection of strategies may be path-dependent, as their initial distribution is a crucial driver of players’ choices. Contingent on cultural factors and the epidemiological conditions, steady states in which both types of players unanimously endorse the strict strategy can coexist with others where experts and policymakers agree on the soft strategy, depending on the initial conditions. The model can also lead to attractive asymmetric equilibria where experts and policymakers endorse different strategies resulting in cyclical dynamics. This multiplicity of equilibria can explain the coexistence of contrasting pandemic countermeasures observed across countries in the first wave of the outbreak. Our results suggest that cross-country differences in the COVID-19 policy response need not be the effect of poor decision making. Instead, they can endogenously result from the interplay between policymakers and experts incentives under the local social, cultural and epidemiological conditions.
    Keywords: COVID-19; Coronavirus; Lockdown; Culture; Evolutionary game theory
    JEL: C73 H12 I18 Z10
    Date: 2021–11
  9. By: Pham, Hien; Yamashita, Takuro
    Abstract: We consider an auction design problem with private values which are dis-tributed in a possibly correlated way. Both the seller and bidders do not know the true distribution, but (perhaps based on the data about past auctions), each of them has some “benchmark” distribution in mind. They face “local” uncertainty in the sense that their benchmark distributions are “ε-close” to each other and to the true distribution, and this itself is common knowledge. We show that, no matter how small (but positive) is ε (i.e., except for an ex-act common prior case), the worst-case-minded seller finds it optimal to offer a dominant-strategy mechanism. With an appropriate transfer reduction, we show that, as ε vanishes, the seller’s expected revenue converges to the ex-pected revenue in the optimal dominant-strategy mechanism with ε = 0 (i.e., with an exact common prior), but not to the expected revenue in the optimal Bayesian mechanism with ε = 0.
    Date: 2021–11
  10. By: Takeshi Murooka (Osaka School of International Public Policy, Osaka University); Yuichi Yamamoto (Institute of Economic Research, Hitotsubashi University)
    Abstract: We consider strategic players who may have a misspecified view about the world, and investigate their long-run behavior when they learn an unknown state from public signals over time. Our framework is flexible and allows for higher-order misspecification, in that a player may have a bias about the physical environment, a bias about the opponent's bias about the physical environment, and so on. We provide a condition under which players' beliefs and actions converge to a steady state, and then characterize how one's misspecification influences the long-run (steady-state) outcome. We apply these results to various economic examples such as Cournot competition, team production, and discrimination. We find that higher-order misspecification can have a significant impact on the equilibrium outcome: One's overconfidence can have opposite effects on the equilibrium outcome, depending on whether the opponent is aware of this bias or not.
    Keywords: model misspecification, learning, convergence, overconfidence, bias transmission
    JEL: C73 D83 D90 D91
    Date: 2021–12
  11. By: Domenico Buccella; Luciano Fanti; Luca Gori
    Abstract: This work revisits the R&D model à la D’Aspremont –Jacquemin (1988) (AJ) in a context with socially responsible firms. In the traditional model firms invest but, in equilibrium, they are cast into a prisoner’s dilemma. Socially responsible firms also invest in equilibrium. However, provided that firms consider sufficiently high consumer welfare, to invest is firms’ utility-enhancing: the prisoner’s dilemma vanishes, and the R&D investment is the firms’ Pareto-efficient choice. That is, while in the traditional AJ context to invest in R&D is Pareto-inferior for the whole society, when firms are of CSR type their R&D innovation becomes a Pareto-superior choice.
    Keywords: Process innovation; Corporate social reponsibility; Nash equilibrium; Social welfare
    JEL: D43 L13 O31
    Date: 2021–11–01
  12. By: Bigoni, Maria (University of Bologna); Ploner, Matteo (University of Trento); Vu, Thi-Thanh-Tam (University of Trento)
    Abstract: The impact of workers' non-pecuniary motivation on their productivity is a fundamental issue in labor economics. Previous studies indicate that prosocially motivated workers may perform better when assigned to jobs having socially desirable implications – even if effort is non contractible and they are offered a low-powered fixed-compensation scheme – as compared to a standard job with an effort-contingent payment. This suggests that profit maximizing employers should assign workers to different jobs, based on workers' prosociality. We run an experiment to explore the link between workers' prosociality and their level of effort under a prosocial and a standard job, and show that employers actually exploit the information on workers' prosociality to assign them the type of job that would be most profitable from the firm's perspective.
    Keywords: dictator game, incentives, laboratory experiment, principal-agent game, real-effort task
    JEL: C91 D63 D64
    Date: 2021–10

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