nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2017‒02‒05
seventeen papers chosen by
Erik Thomson
University of Manitoba

  1. Frank H. Knight on Market Thinking:Reflections on the Logic and Ethics of the Capitalist Economy By Yasuhiro Sakai
  2. The contributions of Hart and Holmström to Contract Theory By László Á. Kóczy; János Kiss Hubert
  3. Narrative Economics By Robert J. Shiller
  4. Behavioral Economics and the Atheoretical Style By Spiegler, Ran
  5. Stochastic nonzero-sum games: a new connection between singular control and optimal stopping By de Angelis, Tiziano; Ferrari, Giorgio
  6. Challenging Lucas: from overlapping generations to infinite-lived agent models By Michael Assous; Pedro Garcia Duarte
  7. On non-cooperative foundation and implementation of the Nash Solution in subgame perfect equilibrium via Rubinstein’s game By Duman, Papatya; Trockel, Walter
  8. Disambiguation of Ellsberg equilibria in 2x2 normal form games By Decerf, Benoit; Riedel, Frank
  9. The Myopic Stable Set for Social Environments By Thomas Demuynck; Jean-Jacques Herings; Riccardo Saulle; Christian Seel
  10. Hypothesis testing equilibrium in signaling games By Sun, Lan
  11. Games with a Permission Structure: a survey on generalizations and applications By René van den Brink
  12. Coarse correlation and coordination in a game By Konstantinos Georgalos; Sonali Sen Gupta; Indrajit Ray
  13. Uncertain Rationality, Depth of Reasoning and Robustness in Games with Incomplete Information By Fabrizio Germano; Jonathan Weinstein; Peio Zuazo-Garin
  14. Disputed (Disciplinary) Boundaries. Philosophy, Economics, Value Judgments. By Silvestri, Paolo
  15. Nash equilibria of threshold type for two-player nonzero-sum games of stopping By de Angelis, Tiziano; Ferrari, Giorgio; Moriarty, John
  16. On preemption in discrete and continuous time By Steg, Jan-Henrik
  17. Potterian Economics By Daniel Levy; Avichai Snir

  1. By: Yasuhiro Sakai (Faculty of Economics, Shiga University)
    Abstract: The purpose of this paper is to shed a new light on the working and performance of the market economy from a pluralistic viewpoint. To this end, we first pay attention to the general equilibrium theory a la L.W. McKenzie, K. J. Arrow and G. Debreu. Whereas this theory seems to be established on the foundation of solid logic and advanced mathematics, the existence of special ethics and ideology behind the scenes should not be forgotten. We next reexamine the thought of Frank H. Knight, who has raised an strong objection against glorification of the market economy. In the late 1960s, I was a graduate student at the University of Rochester. I still recall the touching moment when Professor McKenzie, finally succeeding after a long struggle to prove the existence of a competitive economy by help of a mathematical theorem of fixed point, posed a bit in a class and said quietly, "It' so beautiful! ". The world was then in the midst of Cold War and divided into the two powerful blocs, the socialist bloc dominated by the Soviet Union and the capitalist block led by the United States of America. McKenzie's complacent whispering sounded like the victory declaration of capitalism over socialism. Around 40 years have passed since then. It seems that the "academic Cold War" between Marxian economics and modern economics is now over. At the same time, the ethics and ideology of general equilibrium looks surely fading away although it is not completely vanished. It is our regret, however, the new, synthetic social science which can replace the existing dogmatic doctrines are not in sight yet. A completely new approach like a second Knight or a second Keynes would urgently be needed.
    Keywords: Knight, market thinking, general equilibrium, ethics, ideology
    Date: 2016–12
  2. By: László Á. Kóczy (Centre for Economic and Regional Studies, Hungarian Academy of Sciences and and Keleti Faculty of Business and Management, Óbuda University); János Kiss Hubert (Centre for Economic and Regional Studies, Hungarian Academy of Sciences)
    Abstract: The 2016 Nobel Memorial Prize in Economic Sciences was awarded to Oliver Hart and Bengt Holmström for their work on contract theory. Contract theory is a subfield of game theory where the conflict between the owner - the principal - and the CEO - or agent is at the centre of interest. In the following we explain the principal-agent model of Holmström with some extensions and then look at the property right aspects of these models based on Hart's work. Although the two researchers are recognised for their theoretical work, in our simple introduction we avoid complex formulae and illustrate the models with examples.
    Keywords: contract theory, incentives, principal-agent problem, Nobel prize, risk, property rights JEL Codes: C72, D82, D86
    Date: 2017
  3. By: Robert J. Shiller
    Abstract: This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920-21 Depression, the Great Depression of the 1930s, the so-called “Great Recession” of 2007-9 and the contentious political-economic situation of today, are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future.
    JEL: E00 E03 E30 G02 N1
    Date: 2017–01
  4. By: Spiegler, Ran
    Abstract: Behavioral economics is perceived by many to be part of a general shift in the culture of economics toward a less theoretical style. I present a critical discussion of certain manifestations of this trend: a preference for an anecdotal style of exposition (illustrated by Akerlof and Shiller's Phishing for Phools), reduced-form modeling (illustrated by Campbell's Ely Lecture), and the method of capturing psychological forces using parametric modifications of conventional functional forms. I argue that the subject of "psychology and economics" is intrinsically foundational, and that a pure-theory component is essential for it to realize its transformative potential.
    JEL: D03
    Date: 2017–01
  5. By: de Angelis, Tiziano (Center for Mathematical Economics, Bielefeld University); Ferrari, Giorgio (Center for Mathematical Economics, Bielefeld University)
    Abstract: In this paper we establish a new connection between a class of 2-player nonzerosum games of optimal stopping and certain 2-player nonzero-sum games of singular control. We show that whenever a Nash equilibrium in the game of stopping is attained by hitting times at two separate boundaries, then such boundaries also trigger a Nash equilibrium in the game of singular control. Moreover a differential link between the players' value functions holds across the two games.
    Keywords: games of singular control, games of optimal stopping, Nash equilibrium, onedimensional diffusion, Hamilton-Jacobi-Bellman equation, verification theorem
    Date: 2016–07–21
  6. By: Michael Assous; Pedro Garcia Duarte
    Abstract: The canonical history of macroeconomics, one of the rival schools of thought and the great economists, gives Robert Lucas a prominent role in shaping the recent developments in the area. According to it, his followers were initially split into two camps, the “real business cycle” theorists with models of efficient fluctuations, and the “new-Keynesians” with models in which fluctuations are costly, and the government has a role to play, due to departures from the competitive equilibrium (such as nominal rigidities and imperfect competition). Later on, a consensus view emerged (the so-called new neoclassical synthesis), based on the dynamic stochastic general equilibrium (DSGE) model, which combines elements of the models developed by economists of those two groups. However, this account misses critical developments, as already pointed out by Cherrier and Saïdi (2015). As a reaction to Lucas’s 1972 policy ineffectiveness results, based on an overlapping generations (OLG) model, a group of macroeconomists realized that a competitive OLG model may have a continuum of equilibria and that this indeterminacy justified government intervention for competitive cycles that emerged even in deterministic models. We can identify here two distinct, but related, groups: one of the deterministic cycles of David Gale, David Cass, and Jean-Michel Grandmont, and another of the stochastic models and sunspots of Karl Shell, Roger Guesnerie, Roger Farmer and Costas Azariadis (Lucas’s PhD student). Here, the OLG was the workhorse model. Following from these works, a number of authors, including Michael Woodford, argued that similar results could occur in models with infinitely lived agents when there are various kinds of market imperfections. With such generalization, some of these macroeconomists saw that once these imperfections are introduced, nothing important for business cycle modeling was lost and they could therefore leave the OLG model aside as a model of business fluctuations, to the dismay of authors such as Grandmont, Robert Solow and Frank Hahn. In this paper, we scrutinize the differences between the deterministic cycles and sunspot groups and explore the many efforts of building a dynamic competitive business cycle model that implies a role for the government to play. We then assess the transformation process that took place in the late 1980s when several macroeconomists switched from OLG to infinite-lived agents models with imperfections that eventually became central to the DSGE literature. With this we hope to shed more light on the origins of new neoclassical synthesis.
    Keywords: overlapping generations model; Robert Lucas; Michael Woodford; DSGE model; new neoclassical synthesis
    JEL: B22 B23 E32
    Date: 2017–01–26
  7. By: Duman, Papatya (Center for Mathematical Economics, Bielefeld University); Trockel, Walter (Center for Mathematical Economics, Bielefeld University)
    Abstract: The alternating offers game due to Rubinstein (1982) had been used by Binmore (1980) and by Binmore (1986) to provide via its unique subgame perfect equilibrium an approximate non-cooperative support for the Nash bargaining solution of associated cooperative two-person bargaining games. These results had strengthened the prominent role of the Nash bargaining solution in cooperative axiomatic bargaining theory and its application, for instance in labor markets, and have often even be interpreted as a mechanism theoretical implementation of the Nash solution. Our results in the present paper provide exact non-cooperative foundations first, in our Proposition, via weakly subgame perfect equilibria of a game that is a modification of Rubinstein´s game, then in our Theorem, via sub-game perfect equilibria of a game that is a further modification of our first game. Moreover, they provide a general rule how to transform approximate support results into exact ones. Finally, we discuss the relation of the above mentioned support results, including our present ones, with mechanism theoretic implementation in (weakly) subgame perfect equilibrium of the Nash solution. There we come to the conclusion that a sound interpretation as an implementation can hardly be found except in very rare cases of extremely restricted domains of players´ preferences.
    Keywords: Nash program, Non-cooperative foundation, Implementation, Nash solution, Rubinstein game, Subgame perfect equilibrium
    Date: 2016–01–15
  8. By: Decerf, Benoit (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University)
    Abstract: Riedel and Sass (2013) study complete information normal form games in which ambiguity averse players use ambiguous randomization strategies, in addition to pure and mixed strategies. The solution concept they propose, the Ellsberg equilibrium, is a coarsening of the classical Nash equilibrium. We provide a foundation of the new equilibrium concept in the spirit of Harsanyi. We prove an extension of the Purification Theorem for 2x2 normal form games. Our result implies that any Ellsberg equilibrium of such game is the limit case of a mixed strategy equilibrium in a disturbed version of the game for which payoffs are ambiguously disturbed.
    Keywords: Knightian uncertainty, Ellsberg games, Ambiguity aversion, Purification, Disambiguation
    Date: 2016–03–03
  9. By: Thomas Demuynck; Jean-Jacques Herings; Riccardo Saulle; Christian Seel
    Abstract: We introduce a new solution concept for models of coalition formation, called the myopic stable set. The myopic stable set is defined for a very general class of social environments and allows for an infinite state space. We show that the myopic stable set exists and is non-empty. Under minor continuity conditions, we also demonstrate uniqueness. Furthermore, the myopic stable set is a superset of the core and of the set of pure strategy Nash equilibria in noncooperative games. Additionally, the myopic stable set generalizes and unifies various results from more specific environments. In particular, the myopic stable set coincides with the coalition structure core in coalition function form games if the coalition structure core is non-empty; with the set of stable matchings in the standard one-to-one matching model; with the set of pairwise stable networks and closed cycles in models of network formation; and with the set of pure strategy Nash equilibria infinite supermodular games, finite potential games, and aggregative games. We illustrate the versatility of our concept by characterizing the myopic stable set in a model of Bertrand competition with asymmetric costs, for which the literature so far has not been able to fully characterize the set of all (mixed) Nash equilibria.
    Keywords: social environments; group formation; stability; Nash equilibrium
    JEL: C70 C71
    Date: 2017–01
  10. By: Sun, Lan (Center for Mathematical Economics, Bielefeld University)
    Abstract: In this paper, we propose a definition of Hypothesis Testing Equilibrium (HTE) for general signaling games with non-Bayesian players nested by an updating rule according to Hypothesis Testing model characterized by Ortoleva (2012). An HTE may be different from a sequential Nash equilibrium because of the dynamic inconsistency. However, when player 2 only takes zero-probability message as an unexpected news, an HTE is a refinement of sequential Nash equilibrium and it survives Intuitive Criterion, but not vice versa. We provide existence theorem covering a broad class of signaling games often studied in economics, and the constrained HTE is unique in such signaling games.
    Keywords: Signaling Games, Hypothesis Testing Equilibrium, Equilibrium Refinement
    Date: 2016–05–30
  11. By: René van den Brink (Department of Econometrics and OR, VU University and Tinbergen Institute Amsterdam, The Netherlands)
    Abstract: In the field of cooperative games with restricted cooperation, various restrictions on coalition formation are studied. The most studied restrictions are those that arise from restricted communication and hierarchies. This survey discusses several models of hierarchy restrictions and their relation with communication restrictions. In the literature, there are results on game properties, Harsanyi dividends, core stability, and various solutions that generalize exisiting solutions for TU-games. In this survey we mainly focus on axiomatizations of the Shapley value in different models of games with a hierarchically structured player set, and their applications. Not only do these axiomatizations provide insight in the Shapley value for these models, but also by considering the types of axioms that characterize the Shapley value, we learn more about different network structures. A central model of games with hierarchies are the games with a permission structure where players in a cooperative transferable utility game are part of a permission structure in the sense that there are players that need permission from other players before they are allowed to cooperate. This permission structure is represented by a directed graph. Generalizations of this model are, for example, games on antimatroids, and games with a local permission structure. Besides discussing these generalizations, we briefly discuss some applications, in particular auction games and hierarchically structured firms.
    Keywords: Cooperative TU-game; hierarchy; permission structure; antimatroid; local permission structure; applications.
    JEL: C71
    Date: 2017–01–30
  12. By: Konstantinos Georgalos; Sonali Sen Gupta; Indrajit Ray
    Abstract: In a coarse correlated equilibrium (Moulin and Vial 1978), each player finds it optimal to commit ex ante to the future outcome from a probabilistic correlation device instead of playing any strategy of their own. In this paper, we consider a specific two-person game with unique pure Nash and correlated equilibrium and test the concept of coarse correlated equilibrium with a device which is an equally weighted lottery over three symmetric outcomes in the game including the Nash equilibrium, with higher expected payoff than the Nash payoff (as in Moulin and Vial 1978). We also test an individual choice between a lottery over the same payoffs with equal probabilities and the sure payoff as in the Nash equilibrium of the game. Subjects choose the individual lottery, however, they do not commit to the device in the game and instead coordinate to play the Nash equilibrium. We explain this behaviour as an equilibrium in the game.
    Keywords: Correlation, Coordination, Lottery
    JEL: C72 C91 C92 D63 D83
    Date: 2017
  13. By: Fabrizio Germano; Jonathan Weinstein; Peio Zuazo-Garin
    Abstract: Predictions under common knowledge of payoffs may differ from those under arbitrarily, but finitely, many orders of mutual knowledge; Rubinstein's (1989) Email game is a seminal example. Weinstein and Yildiz (2007) showed that the discontinuity in the example generalizes: for all types with multiple rationalizable (ICR) actions, there exist similar types with unique rationalizable action. This paper studies how a wide class of departures from common belief in rationality impact Weinstein and Yildiz's discontinuity. We weaken ICR to ICR-x, where x is a sequence whose n-th term is the probability players attach to (n - 1)th-order belief in rationality. We find that Weinstein and Yildiz's discontinuity holds when higher-order belief in rationality remains above some threshold (constant x), but fails when higher-order belief in rationality eventually becomes low enough (x converging to 0).
    Keywords: Robustness, rationalizability, bounded rationality, incomplete information, belief hierarchies.
    JEL: C72 D82 D83
    Date: 2016–12
  14. By: Silvestri, Paolo (University of Turin)
    Abstract: This paper aims to address the following two questions: a) what is the logic of the kind of discourse that seeks to found, demarcate or defend the autonomy or the boundaries of a discipline; b) why does this discourse, whether methodological, ontological or epistemological, sometimes turn into normative, dogmatic-excommunicating wrangles among disciplines, schools or scholars? I will argue that an adequate answer may be found if we understand: 1) disciplines as institutions and, therefore, as dogmatic systems, where scholars’ discourse often takes the form of a legitimizing discourse regarding the founding Reference of their own discipline; 2) that scholars speak in the name of that very foundation, with which they closely identify; 3) that the issue of the legitimacy of a discipline cannot easily be separated from the issue of identity and, therefore, of a scholar’s legitimacy; 4) that the excommunication may arise not only when the founding Reference is absolutized, but also as a form of self-defense of a scholar’s identity-legitimacy. To understand these claims I will re-examine three paradigmatic positions: the methodological, ontological and epistemological considerations put forward by (and the debates between) Pareto, Croce and Einaudi – with specific reference to the demarcation between philosophy, economics and value-judgments.
    Date: 2017–01
  15. By: de Angelis, Tiziano (Center for Mathematical Economics, Bielefeld University); Ferrari, Giorgio (Center for Mathematical Economics, Bielefeld University); Moriarty, John (Center for Mathematical Economics, Bielefeld University)
    Abstract: This paper analyses two-player nonzero-sum games of optimal stopping on a class of regular diffusions with singular boundary behaviour (in the sense of Itô and McKean (1974) [19], p. 108). We prove that Nash equilibria are realised by stopping the diffusion at the first exit time from suitable intervals whose boundaries solve a system of algebraic equations. Under mild additional assumptions we also prove uniqueness of the equilibrium.
    Keywords: nonzero-sum Dynkin games, Nash equilibrium, smooth-fit principle, regular diffusions, free boundary problems
    Date: 2016–07–21
  16. By: Steg, Jan-Henrik (Center for Mathematical Economics, Bielefeld University)
    Abstract: The seminal work of Fudenberg and Tirole (1985) on how preemption erodes the value of an option to wait raises general questions about the relation between models in discrete and continuous time and thus about the interpretation of its central result, relying on an “infinitely fine grid†. Here it is shown that the preemption equilibrium is the limit of the unique symmetric equilibria of the game when reduced to any sequence of grids becoming infinitely fine. Furthermore, additional subgame perfect equilibria using conventional continuous-time mixed strategies are identified.
    Keywords: Preemption, discrete time, continuous time, subgame perfect equilibrium, convergence
    Date: 2016–04–11
  17. By: Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; The Rimini Centre for Economic Analysis, Italy); Avichai Snir (Department of Banking and Finance, Netanya Academic College, Israel)
    Abstract: Recent studies in psychology and neuroscience find that fictional works exert strong influence on readers and shape their opinions and worldviews. We study the Potterian economy, which we compare to economic models, to assess how Harry Potter books affect economic literacy. We find that some principles of Potterian economics are consistent with economists' models. Many others, however, are distorted and contain numerous inaccuracies, which contradict professional economists' views and insights, and contribute to the general public's biases, ignorance, and lack of understanding of economics.
    Keywords: Economic and Financial Literacy, Political Economy, Public Choice, Rent Seeking, Folk Economics, Harry Potter, Social Organization of Economic Activity, Literature, Fiction, Potterian Economy, Potterian Economics, Popular Opinion
    JEL: A13 A14 D72 D73 H00 H11 I20 P16 P48 P51 Z11 Z13
    Date: 2017–01

This nep-hpe issue is ©2017 by Erik Thomson. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.