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on Game Theory |
| By: | Hanyu Li; Xiaotie Deng |
| Abstract: | Classic no-trade theorems attribute trade to heterogeneous beliefs. We re-examine this conclusion for AI agents, asking if trade can arise from computational limitations, under common beliefs. We model agents' bounded computational rationality within an unfolding game framework, where computational power determines the complexity of its strategy. Our central finding inverts the classic paradigm: a stable no-trade outcome (Nash equilibrium) is reached only when "almost rational" agents have slightly different computational power. Paradoxically, when agents possess identical power, they may fail to converge to equilibrium, resulting in persistent strategic adjustments that constitute a form of trade. This instability is exacerbated if agents can strategically under-utilize their computational resources, which eliminates any chance of equilibrium in Matching Pennies scenarios. Our results suggest that the inherent computational limitations of AI agents can lead to situations where equilibrium is not reached, creating a more lively and unpredictable trade environment than traditional models would predict. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.17952 |
| By: | Marcel Nutz; Alessandro Prosperi |
| Abstract: | We study the high-frequency limit of an $n$-trader optimal execution game in discrete time. Traders face transient price impact of Obizhaeva--Wang type in addition to quadratic instantaneous trading costs $\theta(\Delta X_t)^2$ on each transaction $\Delta X_t$. There is a unique Nash equilibrium in which traders choose liquidation strategies minimizing expected execution costs. In the high-frequency limit where the grid of trading dates converges to the continuous interval $[0, T]$, the discrete equilibrium inventories converge at rate $1/N$ to the continuous-time equilibrium of an Obizhaeva--Wang model with additional quadratic costs $\vartheta_0(\Delta X_0)^2$ and $\vartheta_T(\Delta X_T)^2$ on initial and terminal block trades, where $\vartheta_0=(n-1)/2$ and $\vartheta_T=1/2$. The latter model was introduced by Campbell and Nutz as the limit of continuous-time equilibria with vanishing instantaneous costs. Our results extend and refine previous results of Schied, Strehle, and Zhang for the particular case $n=2$ where $\vartheta_0=\vartheta_T=1/2$. In particular, we show how the coefficients $\vartheta_0=(n-1)/2$ and $\vartheta_T=1/2$ arise endogenously in the high-frequency limit: the initial and terminal block costs of the continuous-time model are identified as the limits of the cumulative discrete instantaneous costs incurred over small neighborhoods of $0$ and $T$, respectively, and these limits are independent of $\theta>0$. By contrast, when $\theta=0$ the discrete-time equilibrium strategies and costs exhibit persistent oscillations and admit no high-frequency limit, mirroring the non-existence of continuous-time equilibria without boundary block costs. Our results show that two different types of trading frictions -- a fine time discretization and small instantaneous costs in continuous time -- have similar regularizing effects and select a canonical model in the limit. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.11765 |
| By: | Dirk Bergemann (Yale University); Marek Bojko (Yale University); Paul DŸtting (Google Research); Renato Paes Leme (Google Research); Haifeng Xu (University of Chicago and Google Research); Song Zuo (Google Research) |
| Abstract: | We study mechanism design in environments where agents have private preferences and private information about a common payoff-relevant state. In such settings with multi-dimensional types, standard mechanisms fail to implement efficient allocations. We address this limitation by proposing data-driven mechanisms that condition transfers on additional post-allocation information, modeled as an estimator of the payoff-relevant state. Our mechanisms extend the classic Vickrey-Clarke-Groves framework. We show they achieve exact implementation in posterior equilibrium when the state is fully revealed or utilities are affine in an unbiased estimator. With a consistent estimator, they achieve approximate implementation that converges to exact implementation as the estimator converges, and we provide bounds on the convergence rate. We demonstrate applications to digital advertising auctions and AI shopping assistants, where user engagement naturally reveals relevant information, and to procurement auctions with consumer spot markets, where additional information arises from a pricing game played by the same agents. |
| Date: | 2025–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2418r2 |
| By: | Jeroen Hinloopen; Stephen Martin; Sander Onderstal; Leonard Treuren |
| Abstract: | Antitrust laws prohibit private firms to coordinate their market behavior, yet many types of interfirm cooperation are legal. Using laboratory experiments, we study spillovers from legal cooperation in one market to non-competitive prices in a different market. Our theoretical framework predicts that such cooperation spillovers are most likely to occur for intermediate levels of competition. Our experimental findings support this theoretical prediction. In addition, our experimental results show that repeated interaction and communication about prices in a market are not necessary to achieve non-competitive prices in that market, as long as subjects can form binding agreements in a different market. Results from additional treatments suggest that commitment and multimarket contact are necessary for cooperation spillovers to emerge. |
| Keywords: | STG/23/026#57790427 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:ete:msiper:779662 |
| By: | Lang, Xu (Tilburg University, Center For Economic Research); Talman, A.J.J. (Tilburg University, Center For Economic Research) |
| Keywords: | TU games; Restricted coalition; the core; bihierarchy |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiucen:ba028add-c3b1-4de4-bfc6-0cb6a1e05c0c |
| By: | Muhammed Ceesay; Nicola Doni; Domenico Menicucci |
| Abstract: | This paper is about a procurement auction setting with two sellers in which before the auction seller i can make an investment which improves the ex ante probability distribution of his cost; seller j observes seller i's investment decision before bidding occurs. Under somewhat restrictive assumptions on the pre- and the post-investment cost distributions, Arozamena and Cantillon (2004) prove that in the first price auction seller i's investment induces seller j to bid more aggressively. This negative strategic effect contributes to AC's result that the investment incentive for seller i is stronger in the second price auction than in the first price auction. We prove that under weaker but economically significant assumptions, and discretely distributed costs, an investment by seller i may actually induce seller j to bid less aggressively in the first price auction (i.e., the strategic effect may be positive), and the investment incentive may be stronger in the latter auction. Moreover, in some cases the buyer prefers the first price auction precisely because it provides a stronger investment incentive, even though the second price auction is preferable when no investment is possible. We prove that the two auctions are not equivalent in a setting in which each seller has the option to invest and the sellers are ex ante symmetric, and that the second price auction gives a stronger investment incentive to the initially stronger seller than to the other seller (this increases asymmetries), but such result does not necessarily hold in the first price auction. |
| Keywords: | Procurement Auctions, First-Price Auction, Second-Price Auction, Pre-Auction Investment, Strategic Effect, Auction Ranking. |
| JEL: | D44 D82 L15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2026_01.rdf |
| By: | Jawwad Noor; Fernando Payró Chew |
| Abstract: | We study a dynamic predator–prey game in which a predator can conceal its movement under naturally occurring environmental noise. In the safe state, forest noise is i.i.d., whereas in the dangerous state the predator contributes additional noise as it approaches the prey. The prey updates her beliefs about danger from the realized noise sequence and chooses whether to remain vigilant. We characterize equilibrium patterns of noise generated in the forest and show that a marker for deception is a hot-hand effect, whereby streaks persist with increasing probability. |
| Keywords: | belief biases, deception, endogenous information, optimal stopping |
| JEL: | D01 D9 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1544 |
| By: | Masaaki Fujii (Graduate School of Economics, The University of Tokyo) |
| Abstract: | Financial firms and institutional investors are routinely evaluated based on their performance relative to their peers. These relative performance concerns significantly influence risk-taking behavior and market dynamics. While the literature studying Nash equilibrium under such relative performance competitions is extensive, its effect on asset price formation remains largely unexplored. This paper investigates mean-field equilibrium price formation of a single risky stock in a discrete-time market where agents exhibit exponential utility and relative performance concerns. Unlike existing literature that typically treats asset prices as exogenous, we impose a market-clearing condition to determine the price dynamics endogenously within a relative performance equilibrium. Using a binomial tree framework, we establish the existence and uniqueness of the market-clearing mean-field equilibrium in both single- and multi-population settings. Finally, we provide illustrative numerical examples demonstrating the equilibrium price distributions and agents' optimal position sizes. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf615 |
| By: | Fryderyk Falniowski; El\.zbieta Pli\'s |
| Abstract: | We examine the impact of a change in diversity introduced by a new product on the evolution of an economic system. Modeling Schumpeterian competition as a population game with a unique, attracting, evolutionarily stable state (the Schumpeterian state), in which both innovators and imitators coexist, we examine how the Schumpeterian state evolves depending on the properties of the new product developed by innovators. This way, we demonstrate that the change in diversity is one of the spiritus movens of innovation, influencing the process of creative destruction. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.17365 |
| By: | Sindri Engilbertsson; Sander Onderstal; Leonard Treuren |
| Abstract: | Antitrust authorities impose substantial penalties on firms engaging in illegal price-fixing. We examine how basing cartel fines on revenue, profit, or price overcharge influences prices, cartel incidence, and cartel stability. In an infinitely repeated Bertrand oligopoly game, we show that fines based on revenues/profits/overcharge incentivize firms to charge prices above/equal to/below the monopoly price. Cartels are stable for a smaller range of discount factors when fines are based on overcharges rather than other bases. We test these predictions in a laboratory experiment where subjects can form cartels, which allows them to discuss pricing at the risk of being detected and fined. By equalizing expected fines across treatments, we isolate the effect of the fine's base. We find that market prices are lowest under overcharge-based fines and highest under revenue-based fines. While these results align with the theoretical predictions, cartel incidence and cartel stability do not differ significantly across fining regimes. Our results suggest that antitrust authorities could improve enforcement by shifting from revenue-based fines to profit- or overcharge-based fines. |
| Keywords: | STG/23/026#57790427 |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:ete:msiper:779661 |
| By: | Meinhardt, Holger Ingmar |
| Abstract: | Recently, Maggiorano et al. (2025) claimed that they have developed a strongly polynomial-time combinatorial algorithm for the nucleolus in convex games that is based on the reduced game approach and submodular function minimization method. Thereby, avoiding the ellipsoid method with its negative side effects in numerical computation completely. However, we shall argue that this is a fallacy based on an incorrect application of the Davis/Maschler reduced game property (RGP). Ignoring the fact that despite the pre-nucleolus, other solutions like the core, pre-kernel, and semi-reactive pre-bargaining set possess this property as well. This causes a severe selection issue, leading to the failure to compute the nucleolus of convex games using the reduced games approach. In order to assess this finding in its context, the ellipsoid method of Faigle et al. (2001) and the Fenchel-Moreau conjugation-based approach from convex analysis of Meinhardt (2013) to compute a pre-kernel element were resumed. In the latter case, it was exploited that for TU games with a single-valued pre-kernel, both solution concepts coincide. Implying that one has computed the pre-nucleolus if one has found the sole pre-kernel element of the game. Though it is a specialized and highly optimized algorithm for the pre-kernel, it assures runtime complexity of O(n^3) for computing the pre-nucleolus whenever the pre-kernel is a single point, which indicates a polynomial-time algorithm for this class of games. |
| Keywords: | Transferable Utility Game, Pre-Kernel, Pre-Nucleolus, Single-Valuedness of the Pre-Kernel, Fenchel-Moreau Conjugation, Indirect Function, Runtime Complexity, Polynomial-Time Algorithm, Stability Analysis |
| JEL: | C71 |
| Date: | 2025–11–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126932 |
| By: | Laura Doval; Alex Smolin |
| Abstract: | We study mechanism design when a designer repeatedly uses a fixed mechanism to interact with strategic agents who learn from observing their allocations. We introduce a static framework, calibrated mechanism design, requiring mechanisms to remain incentive compatible given the information they reveal about an underlying state through repeated use. In single-agent settings, we prove implementable outcomes correspond to two-stage mechanisms: the designer discloses information about the state, then commits to a state-independent allocation rule. This yields a tractable procedure to characterize calibrated mechanisms, combining information design and mechanism design. In private values environments, full transparency is optimal and correlation-based surplus extraction fails. We provide a microfoundation by showing calibrated mechanisms characterize exactly what is implementable when an infinitely patient agent repeatedly interacts with the same mechanism. Dynamic mechanisms that condition on histories expand implementable outcomes only by weakening incentive compatibility and individual rationality--a distinction that vanishes in transferable utility settings. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.17858 |
| By: | Cho, Chanheung; Schunk, Nathan; Brown, Zachary S.; Sohngen, Brent; Baker, Justin S. |
| Abstract: | Phosphorus (P) runoff from agriculture is a major driver of eutrophication in trans-boundary water systems like Lake Erie. This paper develops a dynamic game model to examine how strategic interactions between the U.S. and Canada shape long-term crop production and environmental outcomes under stochastic soil P dynamics. The results show that while unilateral decisions often lead to higher crop production, they also result in greater environmental damage due to excessive P runoff. In contrast, incorporating transboundary nutrient spillovers naturally reduces P application and mitigates environmental harm, though at the cost of lower production. These findings suggest the importance of integrating biophysical feedback and economic incentives in nutrient management, emphasizing that long-term sustainability requires balancing productivity with environmental constraints. |
| Keywords: | Environmental Economics and Policy |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea25:360742 |
| By: | Keisuke HATTORI; Takeshi YOSHIKAWA |
| Abstract: | We analyze a two-stage duopoly where rivals first make non-cooperative demand-expanding investments yielding non-excludable benefits and then compete in product markets. Two efficiency paradoxes emerge endogenously. First, when production technologies are identical, firms with less efficient investment technology earn higher profits. Second, firms disadvantaged in both production and investment can outperform superior rivals. The mechanism is that market-expanding investments benefit all firms while costs fall disproportionately on efficient investors, enabling inefficient firms to free-ride. These paradoxes persist across product differentiation, simultaneous timing, and alternative aggregation technologies. Subsidies intended to remedy market failures paradoxically exacerbate efficiency reversals. While efficiency heterogeneity enhances short-run welfare through complementary effects, it may undermine long-run market selection, potentially causing inefficient monopolization. Our framework applies to brand advertising, platform development, standard-setting, and industry reputation, revealing fundamental tensions between static welfare gains and dynamic efficiency, with implications for competition policy and strategic management in coopetitive markets. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25126 |
| By: | Shota Fujishima |
| Abstract: | This study investigates an adaptive pricing scheme aimed at achieving an efficient state in a traffic congestion game characterized by a diverse population of road users. While the planner possesses knowledge of players' preferences, their ability to observe only aggregate states limits the implementation of differentiated taxes. We propose a pricing approach that aligns taxes with the true values of externalities over time, ensuring global stability of the social optimum through replicator dynamics. Our findings suggest that the planner, despite being unable to accurately assess externalities at each moment, can still navigate the economy toward a long-term social optimum by adjusting the disaggregated state based on aggregate observations, while acknowledging the challenges posed by heterogeneous value of time (VOT) among drivers. We also find that a pricing mechanism that incorporates the current externalities for each period, which could be executed by a planner with full access to the disaggregated state, might fail to achieve the global stability of the social optimum under the same dynamics. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.17157 |
| By: | Madjid Eshaghi Gordji; Mohamadali Berahman |
| Abstract: | Trust serves as a fundamental pillar of human interactions, playing a crucial role in economic, social, and political relationships. While traditional models of trust primarily focus on the decision making of the first player, this paper introduces an innovative approach that shifts the emphasis to the decision making processes of the second player. The proposed model employs a repetitive structure through which the first player effectively cultivates the second player's trust through consistent and strategic actions. This framework is applicable across various fields, including public policy, marketing, and international relations. It significantly deepens our understanding of the trust-building process and aids in fostering sustainable cooperation in real world scenarios. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.17061 |
| By: | Liang, Qiao; Hendrikse, George W.J.; Huang, Zuhui |
| Abstract: | This paper examines how farmers producing differentiated quality products choose different governance structures in a non-cooperative game between farmers, enterprises, and consumers. A cooperative and an IOF (investor owned firm) coexist in equilibrium and low quality is delivered by the cooperative. The trade-off between pooling and the elimination of the double markup determines the attractiveness of cooperatives compared to IOFs. |
| Keywords: | Agricultural and Food Policy, Institutional and Behavioral Economics, Political Economy |
| URL: | https://d.repec.org/n?u=RePEc:ags:iamo10:90805 |
| By: | Ge, Houtian; Gomez, Miguel I.; Jablonski, Rebecca B.R. |
| Abstract: | Cities across the world are integrating values attributes (e.g., requirements or preferences for locally grown or raised items) into their public food procurement bid requests. Yet little is known about how vendors respond to these changes. Their response is important as a) cities first and foremost have an obligation to procure food (regardless of value attributes), and b) even without the integration of values attributes, few vendors respond to most bids. This study develops a novel Nash equilibrium framework to examine how food vendors adjust their bidding strategies in response to changes in bidding environments. Using an agent-based simulation method, we analyze competitive bidding dynamics, incorporating values including the providing of locally grown items and those produced by Minority and Women-Owned Businesses (MWBE), as well as vendor risk preferences, and farm price volatility. Our results reveal policy actions that can induce higher or lower bid prices. This game-theoretical framework for evaluating public food procurement policies provides actionable guidance for policymakers seeking to balance equity, sustainability, and cost-effectiveness in food procurement, therein enabling government food procurement programs to meet targeted goals while operating effectively. |
| Keywords: | Labor and Human Capital |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea25:361192 |
| By: | Lata Gangadharan (Department of Economics, Monash University, Clayton, VIC 3800 Australia); Jona Krutaj (Centre for Decision Research and Experimental Economics, University of Nottingham, UK); Marie Claire Villeval (CNRS, Université Lumière Lyon 2, Université Jean-Monnet Saint-Etienne, emlyon business school, GATE, 69007 Lyon, France; IZA, Bonn, Germany) |
| Abstract: | Heterogeneous returns from contributions to a public good create a normative conflict between equality and efficiency. In a laboratory experiment, we proposed an indicative menu of contribution principles including one featuring a decentralized redistribution mechanism ensuring earnings equality in exchange for fully efficient contributions. Although a majority of individuals, when in the position of an impartial observer, considered this principle to be the most appropriate and expected others to agree, they failed to act on it. Designating a leader who endorsed this principle and made non-binding recommendations enabled a majority of groups to adopt it successfully. This resulted in full contributions and earnings equalization through redistribution from advantaged to disadvantaged members, effectively resolving the conflict. |
| Keywords: | Normative conflict, Redistribution, Efficiency, Leadership, Reciprocity, Experiment |
| JEL: | C92 D03 D64 D74 H41 D83 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:gat:wpaper:2528 |
| By: | Munt Juan Leandro; Parodi Salvador; Carrión Gonzalo; Bosch Miguel |
| Abstract: | This paper proposes a methodological reconstruction of contemporary economic mainstream, privileging structural continuity over rupture theses. From a Lakatosian approach, the transformations undergone by game theory, experimental economics, and behavioral economics are examined, interpreting them as coherent extensions of the neoclassical program. Within this framework, Ariel Rubinstein’s internal critique of the naturalistic view of economic theory is revisited, arguing that his perceptual stance—focused on the plausibility and representational value of models—offers more consistent grounds for sustaining the continuity of economic analysis. This methodological notion is articulated with Don Ross’s ontological defense of qualitative prediction, put forward in response to Alexander Rosenberg’s objections concerning the empirical entity of the discipline. The paper concludes with a reflection on the metaxioms that organize economic judgment, highlighting the internal coherence of the mainstream and its adaptive capacity. |
| JEL: | B21 B41 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4822 |
| By: | Herings, P.J.J. (Tilburg University, Center For Economic Research); Savaş, Deniz (Tilburg University, Center For Economic Research) |
| Keywords: | Social learning environment; opinion dynamics; potentials; equilibrium |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiucen:5d6e68d2-9b82-421f-a06d-a02378fa1057 |
| By: | Maxime Perodaud (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur); Michela Chessa (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur) |
| Abstract: | This study investigates how consumer confirmation bias affects expert decision-making in credence goods markets by combining theoretical modeling with experimental analysis. Using psychological game theory, we develop a dynamic two-player model in which an expert's utility is shaped by both financial incentives and the psychological disutility associated with not meeting consumer expectations. The model predicts that experts with higher psychological sensitivity are more likely to deviate from profit-maximizing strategies to align with consumer beliefs, potentially increasing market inefficiencies. Experimental results show that the extent to which confirmation bias influences expert behavior depends on both the expert's sensitivity and state of the world. Under conditions of high sensitivity and consumer bias, experts adjusted their recommendations to match consumer expectations, even when doing so led to suboptimal outcomes. These findings have policy implications and contribute to the literature on credence goods by highlighting the tension between expert judgment and consumer-driven expectations. |
| Keywords: | Psychological game theory, Experiments, Credence goods, Confirmation bias, Belief-dependent preferences |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05441370 |
| By: | Feldman, Paul; Lee, Siun |
| Abstract: | Myopic loss aversion (MLA)—the tendency to "chase losses"—is a well-documented behavioral bias influencing investment decisions. However, whether groups amplify or mitigate this bias remains unclear. To investigate, we conducted an investment game where participants made decisions both individually and in groups under two conditions: "paper losses" (losses recorded prior to cash-out) and "realized losses" (Imas, 2016). Consistent with prior literature, we replicated the finding that individuals exhibit MLA. More importantly, our experimental evidence shows that group decision-making can intensify MLA rather than alleviate it. By analyzing group conversations with an LLMassisted approach, we identified key social mechanisms—rapid consensus formation, emotional contagion, and a shift toward risk-seeking behavior—that amplify these biases. These findings are significant because they reveal how group dynamics can undermine sound financial decision-making, emphasizing the need for financial literacy programs that address groupthink, shared biases, and emotional contagion and promote structured decision-making frameworks. |
| Keywords: | Labor and Human Capital |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea25:361193 |