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on Game Theory |
| By: | Ivan Guo; Shijia Jin |
| Abstract: | We propose a stochastic game modelling the strategic interaction between market makers and traders of optimal execution type. For traders, the permanent price impact commonly attributed to them is replaced by quoting strategies implemented by market makers. For market makers, order flows become endogenous, driven by tactical traders rather than assumed exogenously. Using the forward-backward stochastic differential equation (FBSDE) characterization of Nash equilibria, we establish a local well-posedness result for the general game. In the specific Almgren-Chriss-Avellaneda-Stoikov model, a decoupling approach guarantees the global well-posedness of the FBSDE system via the well-posedness of an associated backward stochastic Riccati equation. Finally, by introducing small diffusion terms into the inventory processes, global well-posedness is achieved for the approximation game. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.06717 |
| By: | Kunimoto, Takashi (Singapore Management University); Saran, Rene (University of Cincinnati, Cincinnati,); Serrano, Roberto (Brown University) |
| Abstract: | When the normative goals for a set of agents can be summarized in a set-valued rule and agents take actions that are rationalizable, a new theory of incentives emerges in which standard Bayesian incentive compatibility (BIC) is relaxed significantly. The paper studies the interim rationalizable implementation of social choice sets with a Cartesian product structure, a leading example thereof being ex-post efficiency. Setwise incentive compatibility (setwise IC), much weaker than BIC, is shown to be necessary for implementation. Setwise IC enforces incentives flexibly within the entire correspondence, instead of the pointwise enforcement entailed by BIC. Sufficient conditions, while based on the existence of SCFs in the correspondence that make truthful revelation a dominant strategy, are shown to be permissive to allow the implementation of ex-post efficiency in many settings where equilibrium implementation fails (e.g., bilateral trading, multidimensional signals). Furthermore, this success comes at little cost: all our mechanisms are well behaved, in the sense that best responses always exist. |
| Keywords: | rationalizability; implementation; correspondences; setwise incentive compatibility; setwise dominance; ex-post efficiency |
| JEL: | C72 D78 D82 |
| Date: | 2025–05–02 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:2025_002 |
| By: | Kunimoto, Takashi (Singapore Management University); Zhang, Cuiling (Singapore Management University) |
| Abstract: | Efficient, voluntary bilateral trades are generally not implementable in an interdependent values environment where agents’ information is ex ante symmetric (i.e., both parties have private information and each party’s valuation depends on the other’s information in the same way). Thus, we seek more positive results by employing two-stage mechanisms in which (i) the outcome (e.g., allocation of the goods) is determined first; (ii) the agents partially learn the state via their own outcome-decision payoffs; and (iii) transfers are finally made. We propose the approximate shoot-the-liar (AS) mechanism and generalized shoot-the-liar (GS) mechanism and identify mild conditions for each mechanism to have the desired properties. The AS mechanism ensures “approximately” efficient, voluntary trades. We also establish that if we ensure (exactly) efficient, voluntary trades, there is no loss of generality in focusing on the GS mechanism. We then identify a necessary and sufficient condition for the GS mechanism to implement efficient, voluntary trades. |
| Keywords: | bilateral trade; interdependent values; two-stage mechanisms |
| JEL: | C72 D78 D82 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:2025_001 |
| By: | Benoît Chevalier-Roignant (EM - EMLyon Business School); Stéphane Villeneuve (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Fabien Delpech (INSA Toulouse - Institut National des Sciences Appliquées - Toulouse - INSA - Institut National des Sciences Appliquées - UT - Université de Toulouse); May-Line Grapotte (INSA Toulouse - Institut National des Sciences Appliquées - Toulouse - INSA - Institut National des Sciences Appliquées - UT - Université de Toulouse) |
| Abstract: | There are many business situations in which investments by a supplier and a producer ("coinvest-ments") are both necessary for either of them to grasp a business opportunity. For instance, better quality tanks are needed to manufacture reliable hydrogen-powered vehicles. One of these two firms, typically the one facing a lower cost, may be more willing to invest, but the cautionary attitude of the other delays the coinvestment. We model supply-chain interactions in a classical tractable way to derive the firms' net present values (NPVs) upon coinvestment and determine their Nash equilibrium investment (timing) strategies. Firms coinvest when the real options of the weaker firm is ‘deep in the money.' These business situations are likely to be affected by evolving market circumstances, in particular due to changes in the demand dynamics or endogenous decision (by, say, the supplier) to conduct research and development (R&D). We investigate related model extensions, which confirm the robustness of our key result. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05033712 |
| By: | Jorg Franke (University of Bath); Alexandros Papadopoulos |
| Abstract: | Using the unique properties of a German TV game show, we analyze the extent and implications of strategic reciprocity in sequential performance evaluations in a contest with large stakes. The sequential order of performances implies that the scope for strategic reciprocity differs systematically between participants: Contestants that perform later in the sequence evaluate their rivals before they are evaluated themselves, which creates incentives for strategic reciprocity. We find that earlier contestants benefit from this effect, resulting in a substantial negative sequence order bias. We provide estimates for the change in winning probabilities and for the financial implications of this bias. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:eid:wpaper:58185 |
| By: | Michela Chessa (Université Côte d'Azur, CNRS, GREDEG, France) |
| Abstract: | The contemporary political landscape presents a complex and highly dynamic system characterized by fragile equilibria. We argue that while traditional cooperative game theory tools remain valuable, complex political processes need a more comprehensive analysis. By exploiting the natural isomorphism between simple cooperative games and hypergraph structures, we propose novel analytical frameworks for modeling and interpreting complex political scenarios. We apply hypergraph proper coloring, chromatic number analysis and a new measure of fragmentation to examine voting patterns within a council. We apply our analytical framework to the case of the United Nations Security Council. We formalize a persistent ideological division between Western and Non-Western member states, but we also reveal a certain fragmentation across years, in particular between Western states. This methodological approach offers promising insights for anticipating and interpreting future developments in complex political systems. |
| Keywords: | Voting system, UNSC, Hypergraphs, Chromatic number, Fragmentation |
| JEL: | C71 D72 D85 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2025-16 |
| By: | Martin Dufwenberg; Katja Görlitz; Christina Gravert |
| Abstract: | Peer evaluation tournaments are common in academia, the arts, and corporate environments. They make use of the expert knowledge that academics or team members have in assessing their peers’ performance. However, rampant opportunities for cheating may throw a wrench in the process unless, somehow, players have a preference for honest reporting. Building on Dufwenberg and Dufwenberg’s (2018) theory of perceived cheating aversion, we develop a multi-player model in which players balance the utility of winning against the disutility of being identified as a cheater. We derive a set of predictions, and test these in a controlled laboratory experiment. |
| Keywords: | psychological game, cheating, tournaments, laboratory experiment |
| JEL: | C91 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11720 |
| By: | Thomas Eichner; Marco Runkel |
| Abstract: | Within a two-country model, this paper identifies a novel emission leakage channel that is caused by moral behavior of (atomistic) consumers. In a non-cooperative emission tax game between the countries, the leakage effect lowers the governments’ marginal benefit of emission taxation, so equilibrium emission tax rates are even lower and the emission levels even higher than in the business-as-usual without moral consumers. The detrimental effect of consumer morality may remain, if governments behave morally, too, and may even be exacerbated under country asymmetries. It disappears, if governments choose emission caps, since the caps fix national emissions and avoid morality-induced leakage. |
| Keywords: | moral behaviour, emissions, tax, cap, leakage |
| JEL: | H23 H71 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11698 |
| By: | Martin Meier (University of Bath); Andres Perea (EpiCenter and Department of Quantitative Economics, Maastricht University) |
| Abstract: | We propose a new rationalizability concept for dynamic games with imperfect information, forward and backward rationalizability , that combines elements from forward and backward induction reasoning. It proceeds by applying the forward induction concept of strong rationalizability (also known as extensive-form rationalizability ) in a backward inductive fashion: It first applies strong rationalizability from the last period onwards, subsequently from the penultimate period onwards, keeping the restrictions from the last period, and so on, until we reach the beginning of the game. We argue that, compared to strong rationalizability, the new concept provides a more compelling theory for how players react to surprises. We show that the new concept always exists, and is characterized epistemically by (a) first imposing common strong belief in rationality from the last period onwards, then (b) imposing common strong belief in rationality from the penultimate period onwards, keeping the restrictions imposed by (a), and so on. It turns out that in terms of outcomes, the concept is equivalent to the pure forward induction concept of strong rationalizability, but both concepts may differ in terms of strategies. In terms of strategies, the new concept provides a refinement of the pure backward induction reasoning as embodied by backward dominance and backwards rationalizability . In fact, the new concept can be viewed as a backward looking strengthening of the forward looking concept of backwards rationalizability. Combining our results yields that every strongly rationalizable outcome is also backwards rationalizable. Finally, it is shown that the concept of forward and backward rationalizability satisfies the principle of supergame monotonicity : If a player learns that the game was actually preceded by some moves he was initially unaware of, then this new information will only refine, but never completely overthrow, his reasoning. Strong rationalizability violates this principle. |
| Date: | 2024–01–19 |
| URL: | https://d.repec.org/n?u=RePEc:eid:wpaper:58183 |
| By: | Zahra Ebrahimi; Maxi Guennewig; Bryan Routledge; Ariel Zetlin-Jones |
| Abstract: | Blockchain is a database technology that enables a group of self-interested users to maintain a distributed ledger without relying on a trusted third party, such as a bank. In this paper, we develop a new game-theoretic framework for analyzing blockchain systems, wherein each user determines how to update the distributed ledger. The usefulness of blockchains depends on whether users’ updating strategies achieve consensus—meaning that they agree on the correct version of the ledger and have no incentive to omit or alter past data. We show that the currently implemented strategy—the longest chain rule—fails to achieve consensus when users are sufficiently heterogeneous. We then establish the existence of new equilibrium strategies, which are slight modifications of the longest chain rule and ensure consensus regardless of the degree of heterogeneity. In practice, these equilibrium strategies enhance the resilience of blockchain systems against threats such as double-spending and 51% attacks. Our findings underscore the critical role economic incentives play in determining the security and stability of blockchain ledgers. |
| Keywords: | Blockchain, consensus, double-spending |
| JEL: | D80 D83 E42 G2 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_685 |
| By: | Alastair Langtry |
| Abstract: | This paper presents a model of network formation and public goods provision in local communities. Here, networks can sustain public good provision by spreading information about people's behaviour. I find a critical threshold in network connectedness at which public good provision drops sharply, even though agents are highly heterogeneous. Technology change can tear a community's social fabric by pushing high-skilled workers to withdraw from their local community. This can help explain rising resentment toward perceived ``elites'' -- their withdrawal actively harms those left behind. Moreover, well-meaning policies that upskill workers can make them worse off by reducing network connectedness. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.06872 |
| By: | Grenadier, Brian M. (Stanford U); Grenadier, Steven R. (Stanford U) |
| Abstract: | Deferred prosecution agreements (DPAs) are now a standard tool used by prosecutors to punish corporate crime. Under a DPA, the defendant escapes prosecution by living up to the terms of the contract. However, if the prosecutor declares a breach, the defendant may face immediate prosecution. We present an equilibrium theoretical model of the terms of a DPA, highlighting a little-recognized, yet potentially valuable benefit accorded the defendant: the option to breach. While at the initiation of the agreement, a breach might likely be seen as a much more painful outcome than adhering to the DPA, over time this situation could change. Using the tools of real option analysis, we demonstrate that DPAs may embed valuable optionality, particularly for longer-term agreements with significant uncertainty over future prosecution outcomes. Since DPA penalties must price in such optionality, naïve comparisons to agreements without optionality, such as plea bargains, will mistakenly conclude that DPA terms are overly onerous and oppressive. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4231 |
| By: | Rosa Van Den Ende (Centre d'Economie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne, Universität Bielefeld); Dylan Laplace Mermoud (ENSTA, Institut Polytechnique de Paris, Conservatoire National des Arts et Métiers) |
| Abstract: | Responsibility in complex networks extends beyond direct actions: players should also bear responsibility for the indirect effects within their supply chains or network. We introduce a novel framework to allocate responsibility for indirect environmental, social, and economic impacts across a dynamic network. Unlike static approaches, our framework accounts for the evolving structure of supply chains, financial systems, and other interconnected systems, where relationships change over time. We use the time-dependent Laplacian matrix to capture how responsibility propagates through the network, revealing a diffusion process that aligns with key axioms of fairness: linearity, efficiency, symmetry, and the independent player property. We show that approximating the responsibility measure preserves these properties, supporting the use of our framework as a rigorous and practical method to allocate responsibility in real-world networks |
| Keywords: | Dynamic networks; Laplacian matrix; allocation of responsibility; diffusion; climate policy |
| JEL: | D85 Q5 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:mse:cesdoc:25008 |
| By: | Jun Nakabayashi; Juan M. Ortner; Sylvain Chassang; Kei Kawai |
| Abstract: | Auctioneers suspecting bidder collusion often lack the formal evidence needed for legal recourse. A practical alternative is to design auctions that hinder collusion. Since Abreu et al. (1986), economic theory has emphasized imperfect monitoring as a constraint on collusion, but evidence remains scarce on whether: (i) information frictions meaningfully limit real-world collusion; and (ii) auctioneers can effectively exploit these frictions. Indeed, transparency concerns often prevent the introduction of explicit randomness in auction design. We make progress on this issue by studying the impact of subjective scoring in auctions run by Japan’s Ministry of Land, Infrastructure, and Transportation. The adoption of scoring auctions significantly reduced winning bids in ways inconsistent with competition. Model-based inference suggests that the cartel’s dynamic obedience constraints were binding and were tightened by imperfect monitoring. Subjective scoring can successfully leverage imperfect monitoring frictions to reduce the scope of collusion. |
| JEL: | C57 C72 D44 L41 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33668 |
| By: | Eric Darmon; Thomas LE TEXIER; Zhiwen LI; Thierry Pénard |
| Abstract: | Antitrust authorities are concerned with the dominant market position of Tech Giants such as Google, Meta, or Amazon. These digital conglomerates are characterized by platform-based business models and multimarket contact (MMC). In traditional one-sided markets, theory and empirical evidence show that MMC tends to relax competition. In this paper, we revisit this result in the context of platform competition with competitive bottleneck and cross-market externalities, and provide new insights into the impact of MMC on platform competition. In this context, when platforms charge the two groups of users (bilateral pricing), we find that MMC always decreases the profitability of platforms regardless of the nature and magnitude of cross-market externalities. Then we consider the case in which platforms can only charge one group of users (unilateral pricing). When platforms charge the side on which they are not directly competing for users (i.e. the side that is not the competitive bottleneck), MMC may relax competition only if cross-group externalities and cross-market externalities are both sufficiently small. From a competition policy perspective, our paper provides insights into how antitrust authorities should review conglomerate mergers in digital markets and assesses the effects of the diversification strategies of digital platforms in the context of cross-market externalities and competitive bottleneck. |
| Keywords: | two-sided markets, platform competition, digital markets, multimarket contact, cross-market externalities, competitive bottleneck, competition policy |
| JEL: | D43 L13 L41 L86 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-22 |