nep-gth New Economics Papers
on Game Theory
Issue of 2023‒01‒16
eighteen papers chosen by
Sylvain Béal
Université de Franche-Comté

  1. ON THE STRONG HYBRID SOLUTION OF AN N-PERSON GAME Second Revised Version By Bertrand Crettez; Rabia Nessah; Tarik Tazdaït
  2. Bayesian Opponent Modeling in Multiplayer Imperfect-Information Games By Sam Ganzfried; Kevin A. Wang; Max Chiswick
  3. On Hurwicz Preferences in Psychological Games By Giuseppe De Marco; Maria Romaniello; Alba Roviello
  4. Sequential Cursed Equilibrium By Shani Cohen; Shengwu Li
  5. On the Role of Bargaining Power in Nash-in-Nash Bargaining: When More is Less By Marc Escrihuela-Villar; Walter Ferrarese; Alberto Iozzi
  6. Coordination and Sophistication By Alaoui, Larbi; Janezic, Katharina A.; Penta, Antonio
  7. On Blockchain We Cooperate: An Evolutionary Game Perspective By Luyao Zhang; Xinyu Tian
  8. On the Development of Cooperative and Antagonistic Relationships in Public Good Environments. A Model-Based Experimental Study By Loerakker, Ben; Bault, Nadège; Hoyer, Maximilian; van Winden, Frans
  9. Informational Intermediation, Market Feedback, and Welfare Losses By Wenji Xu; Kai Hao Yang
  10. Diffusion in large networks By Michel Grabisch; Agnieszka Rusinowska; Xavier Venel
  11. Do Strict Egalitarians Really Exist? By Hyoji Kwon; Yukihiko Funaki
  12. Market Mechanisms for Low-Carbon Electricity Investments: A Game-Theoretical Analysis By Dongwei Zhao; Sarah Coyle; Apurba Sakti; Audun Botterud
  13. The network structure of global tax evasion Evidence from the Panama Papers By Garcia Alvarado Fernando; Mandel Antoine
  14. To Insure or Not to Insure? Promoting Trust and Cooperation with Insurance Advice in Markets By Ben Grodeck; Franziska Tausch; Chengsi Wang; Erte Xiao
  15. Price & Choose By Federico Echenique; Mat\'ias N\'u\~nez
  16. Strategic Sophistication and Trading Profits: An Experiment with Professional Traders By Marco Angrisani; Marco Cipriani; Antonio Guarino
  17. Explainable Performance By Hu\'e Sullivan; Hurlin Christophe; P\'erignon Christophe; Saurin S\'ebastien
  18. Study-Work Trade-off in Contests With Capacity-Constrained Students By Altunina Anastasiia

  1. By: Bertrand Crettez (CRED - Centre de Recherche en Economie et Droit - Université Paris-Panthéon-Assas); Rabia Nessah (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique); Tarik Tazdaït (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We propose a new notion of coalitional equilibrium, the strong hybrid solution, which is a refinement of Zhao's hybrid solution. It is well suited to study situations where people cooperate within coalitions but where coalitions compete with one another. In the strong hybrid solution, as opposed to the hybrid solution, the strategy profile assigned to each coalition is strongly Pareto optimal. We show that there exists a strong hybrid solution whenever preferences are partially quasi-transferable.
    Keywords: N -Person Game coalition structure hybrid solution strong hybrid solution, N -Person Game, coalition structure, hybrid solution, strong hybrid solution
    Date: 2022–05
  2. By: Sam Ganzfried; Kevin A. Wang; Max Chiswick
    Abstract: In many real-world settings agents engage in strategic interactions with multiple opposing agents who can employ a wide variety of strategies. The standard approach for designing agents for such settings is to compute or approximate a relevant game-theoretic solution concept such as Nash equilibrium and then follow the prescribed strategy. However, such a strategy ignores any observations of opponents' play, which may indicate shortcomings that can be exploited. We present an approach for opponent modeling in multiplayer imperfect-information games where we collect observations of opponents' play through repeated interactions. We run experiments against a wide variety of real opponents and exact Nash equilibrium strategies in three-player Kuhn poker and show that our algorithm significantly outperforms all of the agents, including the exact Nash equilibrium strategies.
    Date: 2022–12
  3. By: Giuseppe De Marco (University of Naples Parthenope and CSEF); Maria Romaniello (University Campania Vanvitelli); Alba Roviello (University Campania Vanvitelli)
    Abstract: The literature on strategic ambiguity in classical games provides generalized notions of equilibrium in which each player best responds to ambiguous or imprecise beliefs about hisopponents’ strategy choices. In a recent paper, strategic ambiguity has been extended topsychological games, by taking into account ambiguous hierarchies of beliefs and maxmin preferences. Given that this kind of preference seems too restrictive as a general method to evaluate decisions, in this paper we extend the analysis by taking into account a-maxmin preferences in which decisions are evaluated by a convex combination of the worst-case (with weight a) and the best-case (with weight 1-a) scenarios. We give the definition of a-maxmin Psychological Nash Equilibrium; an illustrative example shows that the set of equilibria is affected by the parameter a and the larger is ambiguity the greater is the effect. We also provide a result of stability of the equilibria with respect to perturbations that involve the attitudes toward ambiguity, the structure of ambiguity and the payoff functions: converging sequences of equilibria of perturbed games converge to equilibria of the unperturbed game as the perturbation vanishes. Surprisingly, a final example shows that existence of equilibria is not guaranteed for every value of a.
    Keywords: Psychological games, ambiguous beliefs, a-MEU, equilibrium existence.
  4. By: Shani Cohen; Shengwu Li
    Abstract: Cursed equilibrium posits that players in a Bayesian game neglect the relationship between their opponent's actions and their opponent's type (Eyster and Rabin, 2005). Sequential cursed equilibrium generalizes this idea to extensive games, including those with endogenous private information. It predicts that players neglect the information content of hypothetical events, but make correct inferences from observed events -- as is consistent with data from experiments on hypothetical thinking.
    Date: 2022–12
  5. By: Marc Escrihuela-Villar (Universitat de les Illes Balears); Walter Ferrarese (Universitat de Les Illes Balears); Alberto Iozzi (Università di Roma ‘Tor Vergata’ & SOAS University of London)
    Abstract: In bargainings, the parties’ bargaining powers (BPs) may determine not only how the surplus is shared (share effect), but also the size of the aggregate surplus (size effect). Since the size effect may be positive or negative, the sign of the effect on a party’s payoff of a change in her BP is in principle undetermined. We first look at a general model with a party (the principal) negotiating with two counterparts. At the Nash-in-Nash solution, we show that the equilibrium payoff of the principal may be decreasing in her BP. Necessary conditions for this to occur are an asymmetric bargaining model and a sufficiently large difference in the way the bargained upon variables affect the principal’s payoff. We then revisit a standard linear vertical industry with one upstream firm, downstream Cournot competition, and public contracts. A negative effect on the upstream firm’s profits deriving from an increase in her BP is always found when the firm has different BPs across the negotiations and final goods are complements. We map these conditions to those characterised in the general model.
    Keywords: bargaining power, Nash-in-Nash, vertical relations
    JEL: D21 D43 D86
    Date: 2022–12–22
  6. By: Alaoui, Larbi; Janezic, Katharina A.; Penta, Antonio
    Abstract: How coordination can be achieved in isolated, one-shot interactions without com- munication and in the absence of focal points is a long-standing question in game theory. We show that a cost-benefit approach to reasoning in strategic settings deliv- ers sharp theoretical predictions that address this central question. In particular, our model predicts that, for a large class of individual reasoning processes, coordination in some canonical games is more likely to arise when players perceive heterogeneity in their cognitive abilities, rather than homogeneity. In addition, and perhaps contrary to common perception, it is not necessarily the case that being of higher cognitive sophistication is beneficial to the agent: in some coordination games, the opposite is true. We show that subjects’ behavior in a laboratory experiment is consistent with the predictions of this model, and reject alternative coordination mechanisms. Overall, the empirical results strongly support our model.
    Keywords: coordination; cognitive cost; sophistication; strategic reasoning; value of reasoning
    JEL: C72 C91 C92 D80
    Date: 2022–12–13
  7. By: Luyao Zhang; Xinyu Tian
    Abstract: Cooperation is fundamental for human prosperity. Blockchain, as a trust machine, is a cooperative institution in cyberspace that supports cooperation through distributed trust with consensus protocols. While studies in computer science focus on fault tolerance problems with consensus algorithms, economic research utilizes incentive designs to analyze agent behaviors. To achieve cooperation on blockchains, emerging interdisciplinary research introduces rationality and game-theoretical solution concepts to study the equilibrium outcomes of various consensus protocols. However, existing studies do not consider the possibility for agents to learn from historical observations. Therefore, we abstract a general consensus protocol as a dynamic game environment, apply a solution concept of bounded rationality to model agent behavior, and resolve the initial conditions for three different stable equilibria. In our game, agents imitatively learn the global history in an evolutionary process toward equilibria, for which we evaluate the outcomes from both computing and economic perspectives in terms of safety, liveness, validity, and social welfare. Our research contributes to the literature across disciplines, including distributed consensus in computer science, game theory in economics on blockchain consensus, evolutionary game theory at the intersection of biology and economics, bounded rationality at the interplay between psychology and economics, and cooperative AI with joint insights into computing and social science. Finally, we discuss that future protocol design can better achieve the most desired outcomes of our honest stable equilibria by increasing the reward-punishment ratio and lowering both the cost-punishment ratio and the pivotality rate.
    Date: 2022–12
  8. By: Loerakker, Ben; Bault, Nadège (University of Plymouth); Hoyer, Maximilian; van Winden, Frans
    Abstract: The importance of prosocial behavior is currently widely acknowledged. This not only holds for the social sciences, including economics, but also the life sciences where this kind of behavior is observed across the evolutionary ladder. Evolutionary continuity consequently suggests that caring for others may be due to both strategic motivations, based on deliberation and reasoning, and more impulsive (affective) non-strategic motivations, in line with the two major mental systems distinguished by Kahneman (2011). This study estimates and applies a dynamic affective-ties model, allowing for strategic behavior, on a novel experimental data set to investigate four underexplored issues regarding public good environments. First, do negative (antagonistic) relationships as well as positive (cooperative) relationships develop in a public good game environment once equal space is given for their development? Second, do people react differently to the positive versus negative behavior of others in such an environment? Third, does the affective-ties model outperform other relevant models in a proper out-of-sample prediction horse race regarding the same game? Fourth, is this model helpful in explaining behavior across different contexts? Our results provide a clear yes to each of these four questions. Negative relationships do develop, but seem less stable than positive relationships in the long run; people appear to react more strongly to the positive compared to the negative behavior of others; our estimated (two parameter) model outperforms other models; and our model helps explain why and how people switch behavioral rules (like tit-for-tat) as the parameters of a repeated prisoner’s dilemma game change.
    Date: 2022–12–05
  9. By: Wenji Xu (College of Business, City University of Hong Kong); Kai Hao Yang (Cowles Foundation and School of Management, Yale University)
    Abstract: This paper examines the welfare implications of third-party informational intermediation. A seller sets the price of a product that is sold through an informational intermediary. The intermediary can disclose information about the product to consumers and earns a fixed percentage of sales revenue in each period. The intermediary's market base grows at a rate that increases with past consumer surplus. We characterize the stationary equilibria and the set of subgame perfect equilibrium payoffs. When market feedback (i.e., the extent to which past consumer surplus affects future market bases) increases, welfare may decrease in the Pareto sense.
    Keywords: Informational intermediary, market size, market feedback, consumer surplus, Pareto-inferior outcomes, Markov perfect equilibrium, subgame perfect equilibrium.
    JEL: C73 D61 D82 D83 L15 M37
    Date: 2022–10
  10. By: Michel Grabisch (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Agnieszka Rusinowska; Xavier Venel
    Abstract: We investigate the phenomenon of diffusion in a countably infinite society of individuals interacting with their neighbors in a network. At a given time, each individual is either active or inactive. The diffusion is driven by two characteristics: the network structure and the diffusion mechanism represented by an aggregation function. We distinguish between two diffusion mechanisms (probabilistic, deterministic) and focus on two types of aggregation functions (strict, Boolean). Under strict aggregation functions, polarization of the society cannot happen, and its state evolves towards a mixture of infinitely many active and infinitely many inactive agents, or towards a homogeneous society. Under Boolean aggregation functions, the diffusion process becomes deterministic and the contagion model of Morris (2000) becomes a particular case of our framework. Polarization can then happen. Our dynamics also allows for cycles in both cases. The network structure is not relevant for these questions, but is important for establishing irreducibility, at the price of a richness assumption: the network should contain at least one complex star and have enough space for storing local configurations. Our model can be given a game-theoretic interpretation via a local coordination game, where each player would apply a best-response strategy in a random neighborhood.
    Keywords: diffusion, countable network, aggregation function, polarization, convergence, bestresponse
    Date: 2022
  11. By: Hyoji Kwon (Graduate School of Ecoomics, Waseda University); Yukihiko Funaki (School of Political Science and Economics, Waseda University)
    Abstract: The purpose of our study is to verify the argument of Cappelen et al. (2007) that insists on the pluralism of fairness ideals. Their experiments are based on the dictator game with production, and they suggest that three fairness ideals exist: strict egalitarianism, libertarianism, and liberal egalitarianism. However, because of the characteristics of the dictator game, the egoistic behavior of taking all of the endowments is a reasonable decision and cannot be ignored. In this paper, we show by estimation of modified models that strict egalitarians do not exist but that egoists do. We assume that people who follow different fairness ideals also place different weights on fairness, and we separate the weight parameter by the three fairness ideals. Especially in the case of strict egalitarianism, the estimated value of the weight parameter indicates that strict egalitarians behave like egoists who take all of the total product. This result implies that people rarely follow the strict egalitarian ideal under this kind of dictator game with a production phase and, instead, a high proportion of egoists take the total product without considering any fairness ideals.
    Keywords: Fairness; Distributional Preferences; Dictator game
    JEL: C91 D63 D91
    Date: 2022–11
  12. By: Dongwei Zhao; Sarah Coyle; Apurba Sakti; Audun Botterud
    Abstract: Electricity markets are transforming from the dominance of conventional energy resources (CERs), e.g., fossil fuels, to low-carbon energy resources (LERs), e.g., renewables and energy storage. This work examines market mechanisms to incentivize LER investments, while ensuring adequate market revenues for investors, guiding investors' strategic investments towards social optimum, and protecting consumers from scarcity prices. To reduce the impact of excessive scarcity prices, we present a new market mechanism, which consists of a Penalty payment for lost load, a supply Incentive, and an energy price Uplift (PIU). We establish a game-theoretical framework to analyze market equilibrium. We prove that one Nash equilibrium under the penalty payment and supply incentive can reach the social optimum given quadratic supply costs of CERs. Although the price uplift can ensure adequate revenues, the resulting system cost deviates from the social optimum while the gap decreases as more CERs retire. Furthermore, under the traditional marginal-cost pricing (MCP) mechanism, investors may withhold investments to cause scarcity prices, but such behavior is absent under the PIU mechanism. Simulation results show that the PIU mechanism can reduce consumers' costs by over 30% compared with the MCP mechanism by reducing excessive revenues of low-cost CERs from scarcity prices.
    Date: 2022–12
  13. By: Garcia Alvarado Fernando; Mandel Antoine (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper builds on recent insights from network theory and on the rich dataset made available by the Panama Papers in order to investigate the micro-economic dynamics of tax-evasion. We model offshore financial entities documented in the Panama Papers as links between jurisdictions in the global network of tax evasion. A quantitative analysis shows that the resulting network, far from being a random collection of bilateral links, has key features of complex networks such as a core-periphery structure and a fat-tail degree distribution. We argue that these structural features imply that policy must adopt a systemic perspective to mitigate tax evasion. We offer three sets of insights from this perspective. First, we identify through centrality measures tax havens that ought to be priority policy targets. Second, we show that efficient tax treaties must contain exchange information clauses and link tax-havens to non-haven jurisdictions. Third, we show that the optimal deterrence strategies for a social-planner facing a strategic tax-evader in a Stackelberg competition can be characterized using the notion of Bonacich centrality.
    Keywords: H26 H87 D85 C54 Tax Evasion Socio-economic Networks Game Theory,H26,H87,D85,C54 Tax Evasion,Socio-economic Networks,Game Theory
    Date: 2022–05
  14. By: Ben Grodeck (Department of Economics, Monash University); Franziska Tausch (Tausch: Stepstone); Chengsi Wang (Department of Economics, Monash University); Erte Xiao (Department of Economics, Monash University)
    Abstract: We design and test a novel insurance advice mechanism aimed at promoting trust and cooperation in markets with asymmetric information. In a buyer-seller game, sellers have the option to advise buyers on whether to purchase third-party insurance against the potential losses from the opportunistic behavior of strategic sellers. The theoretical model suggests that both cooperative and strategic sellers advise buyers not to purchase insurance. Once this advice has been given, strategic sellers are less likely to pursue self-interest due to associated psychological costs. We conduct a controlled laboratory experiment and show that the insurance advice mechanism significantly increases market efficiency, with sellers being more likely to cooperate with buyers and buyers being more likely to purchase from sellers. Furthermore, we find that the insurance advice mechanism is more effective when sellers observe buyers’ insurance purchase decisions.
    Keywords: asymmetric information, insurance, trust, cooperation, experimental economics
    JEL: C91 D9 D47 D82 L86
    Date: 2022–12
  15. By: Federico Echenique; Mat\'ias N\'u\~nez
    Abstract: We describe a two-stage mechanism that fully implements the set of efficient outcomes in two-agent environments with quasi-linear utilities. The mechanism asks one agent to set prices for each outcome, and the other agent to make a choice, paying the corresponding price: Price \& Choose. We extend our implementation result in three main directions: an arbitrary number of players, non-quasi linear utilities, and robustness to max-min behavior. Finally, we discuss how to reduce the payoff inequality between players while still achieving efficiency.
    Date: 2022–12
  16. By: Marco Angrisani; Marco Cipriani; Antonio Guarino
    Abstract: We run an experiment where professional traders, endowed with private information, trade an asset over multiple periods. After the trading game, we gather information about the professional traders’ characteristics by having them carry out a series of tasks. We study which of these characteristics predict profits in the trading game. We find that strategic sophistication, as measured in the Guessing Game (for example, through level-k theory), is the only significant determinant of professional traders’ profits. In contrast, profits are not driven by individual characteristics such as cognitive abilities or behavioral traits. Moreover, higher profits are due to the ability to trade at favorable prices rather than to the ability to earn higher dividends. Comparing these results to those of a sample of students, we show that whereas cognitive skills are important for students, they are not for traders, whereas the opposite is the case for strategic sophistication.
    Keywords: experiments; financial markets; professional traders; strategic sophistication
    JEL: C93 G11 G14
    Date: 2022–12–01
  17. By: Hu\'e Sullivan; Hurlin Christophe; P\'erignon Christophe; Saurin S\'ebastien
    Abstract: We introduce the XPER (eXplainable PERformance) methodology to measure the specific contribution of the input features to the predictive or economic performance of a model. Our methodology offers several advantages. First, it is both model-agnostic and performance metric-agnostic. Second, XPER is theoretically founded as it is based on Shapley values. Third, the interpretation of the benchmark, which is inherent in any Shapley value decomposition, is meaningful in our context. Fourth, XPER is not plagued by model specification error, as it does not require re-estimating the model. Fifth, it can be implemented either at the model level or at the individual level. In an application based on auto loans, we find that performance can be explained by a surprisingly small number of features. XPER decompositions are rather stable across metrics, yet some feature contributions switch sign across metrics. Our analysis also shows that explaining model forecasts and model performance are two distinct tasks.
    Date: 2022–12
  18. By: Altunina Anastasiia (National Research University Higher School of Economics)
    Abstract: The choice of education and career trajectory plays a crucial role in student behavior and labor market outcomes. This paper investigates how students allocate limited time across academic activities and gaining work experience. We show that in a setting in which student types (or abilities) constitute private information, there are pooling and separating equilibria, which are sustained under a certain state of the job market. Our theoretical model shows how each student’s choice between working and studying depends on the contract, and students’ abilities and expectations about the benefits of a master’s degree. To test the main predictions of the model, we conduct a survey of 122 HSE University economics students, who were completing their bachelor’s degree in 2022. Our empirical findings partially confirm what the theory predicts. We also provide possible explanations for the effects that are not in line with our model but observed among the students.
    Keywords: contest theory, signaling, contract theory, education trajectories
    JEL: D86 D82 I26
    Date: 2022

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