Games

We investigate the effect of the environment dimensionality and different dispersal strategies on the evolution of cooperation in a finite structured population of mobile individuals. We consider a population consisting of cooperators and free-riders residing on a two-dimensional lattice with periodic boundaries. Individuals explore the environment according to one of the four dispersal strategies and interact with each other via a public goods game. The population evolves according to a birth–death–birth process with the fitness of the individuals deriving from the game-induced payouts. We found that the outcomes of the strategic dispersal strategies in the two-dimensional setting are identical to the outcomes in the one-dimensional setting. The random dispersal strategy, not surprisingly, resulted in the worst outcome for cooperators. Full article

Trust is central to a large variety of social interactions. Different research fields have empirically and theoretically investigated trust, observing trusting behaviors in different situations and pinpointing their different components and constituents. However, a unifying, computational formalization of those diverse components and constituents of trust is still lacking. Previous work has mainly used computational models borrowed from other fields and developed for other purposes to explain trusting behaviors in empirical paradigms. Here, I computationally formalize verbal models of trust in a simple model (i.e., vulnerability model) that combines current and prospective action values with beliefs and expectancies about a partner’s behavior. By using the classic investment game (IG)—an economic game thought to capture some important features of trusting behaviors in social interactions—I show how variations of a single parameter of the vulnerability model generates behaviors that can be interpreted as different “trust attitudes”. I then show how these behavioral patterns change as a function of an individual’s loss aversion and expectations of the partner’s behavior. I finally show how the vulnerability model can be easily extended in a novel IG paradigm to investigate inferences on different traits of a partner. In particular, I will focus on benevolence and competence—two character traits that have previously been described as determinants of trustworthiness impressions central to trust. The vulnerability model can be employed as is or as a utility function within more complex Bayesian frameworks to fit participants’ behavior in different social environments where actions are associated with subjective values and weighted by individual beliefs about others’ behaviors. Hence, the vulnerability model provides an important building block for future theoretical and empirical work across a variety of research fields. Full article

We construct a dynamic bilateral monopoly game to analyze the bargaining between a foreign manufacturer and a domestic retailer regarding the wholesale price and explain the foreign upstream firm’s corporate social responsibility (CSR) initiative and its economic impacts on the domestic market. Under free trade, the foreign upstream firm’s CSR initiative realizes improvements in consumer surplus and social welfare in the home country. A “win–win–win” strategy exists, as the foreign manufacturer has more of an incentive to implement CSR when the government implements a strategic trade policy. The consumer-friendly action implemented by the foreign upstream firm leads to adequate consumer welfare and social welfare, which mitigates the government’s political hostility. With the high bargaining power of the foreign upstream firm and the low weight of the consumer-friendly upstream firm, the government should set a higher tariff rate for the foreign upstream firm to extract rent and enhance social welfare. Full article

Horizontal differentiation is generally derived from the aggregate utility function and is assumed to be symmetric. However, empirical work suggests that asymmetric horizontal differentiation can exist in practice. This paper examines the topic of asymmetric horizontal differentiation by allowing a firm’s costly advertising to have a different impact on its own demand function than it does on that of its rival. This leads to the interesting analytical result that advertising that increases the cross-price effect of its rival can lead to an increase in firm profits. This introduces the possibility of a ‘couple’ effect where firm advertising can tilt its own and its rival’s demand functions in different directions. Several competitive advertising ‘couple’ scenarios are explored using numerical simulation. Full article

This paper aims to analyze the impacts of a backup agreement contract on the performance of a small agricultural producers’ citrus supply chain. A backup agreement contract, which ensures for each echelon that a quantity of products will be bought independently of real demand, is proposed to coordinate a three-echelon supply chain, aimed at improving income. After presenting an overview of the literature that shows various coordination mechanisms but no backup agreement proposals for supply chain coordination, this paper develops a decentralized three-echelon supply chain facing stochastic customer demand and includes the backup agreement as a coordination mechanism to guarantee a balanced relationship between the chain members. The model is tested in a real case study in Colombia, and a sensitivity analysis is provided. Results show that a backup agreement contract coordinates the small agricultural producers’ supply chain and improves income for each echelon, especially for the small producer. However, the economic mechanism complexity can limit coordination among echelons, mainly because of a lack of trust and consolidated supply capacity from small farmers. The foregoing requires the development of an associative structure by small producers, which is proposed as future research work. Full article

A formal game-theoretic model of an intertwined supply network, in full and simplified versions, is proposed. Conditions for the sustainable development of an active system are presented in general form and then specified to the class of intertwined supply networks. As an illustration, a concise example of the dynamic Cournot duopoly and a detailed example of the model of Social and Private Interests Coordination Engines (SPICE-model) for a marketing network are considered and analytically investigated and sustainability conditions are established. An important conclusion is that the sustainable development of the active system is possible only under the viability conditions satisfied simultaneously with coordinating the interests of all active agents of the system. Full article

Experimental studies show that the Nash equilibrium and its refinements are poor predictors of behavior in non-cooperative strategic games. Cooperation models, such as ERC and inequality aversion, yield superior predictions compared to the standard game theory predictions. However, those models are short of providing a general theory of behavior in economic interactions. In two previous articles, we proposed a rational theory of behavior in non-cooperative games, termed Economic Harmony theory (EH). In EH, we retained the rationality principle but modified the players’ utilities by defining them as functions of the ratios between their actual and aspired payoffs. We also abandoned the equilibrium concept in favor of the concept of “harmony,” defined as the intersection of strategies at which all players are equally satisfied. We derived and tested the theory predictions of behavior in the ultimatum game, the bargaining game with alternating offers, and the sequential common-pool resource dilemma game. In this article, we summarize the main tenets of EH and its previous predictions and test its predictions for behaviors in the public goods game and the trust game. We demonstrate that the harmony solutions account well for the observed fairness and cooperation in all the tested games. The impressive predictions of the theory, without violating the rationality principle nor adding free parameters, indicate that the role of benevolent sentiments in promoting fairness and cooperation in the discussed games is only marginal. Strikingly, the Golden Ratio, known for its aesthetically pleasing properties, emerged as the point of fair demands in the ultimatum game, the sequential bargaining game with alternating offers, and the sequential CPR dilemma game. The emergence of the golden ratio as the fairness solution in these games suggests that our perception of fairness and beauty are correlated. Because the harmony predictions underwent post-tests, future experiments are needed for conducting ex ante tests of the theory in the discussed games and in other non-cooperative games. Given the good performance of economic harmony where game theory fails, we hope that experimental economists and other behavioral scientists undertake such a task. Full article

The Kolkata Paise Restaurant Problem is a challenging game in which n agents decide where to have lunch during their break. The game is not trivial because there are exactly n restaurants, and each restaurant can accommodate only one agent. We study this problem from a new angle and propose a novel strategy that results in greater utilization. Adopting a spatially distributed approach where the restaurants are uniformly distributed in the entire city area makes it possible for every agent to visit multiple restaurants. For each agent, the situation resembles that of the iconic traveling salesman, who must compute an optimal route through n cities. We rigorously prove probabilistic formulas that confirm the advantages of this policy and the increase in utilization. The derived equations generalize formulas that were previously known in the literature, which can be seen as special cases of our results. Full article

In a domestic market, a duopoly produces a homogeneous final good, pollution, pollution abatement, and R&D, which reduces abatement cost. One of the firms (foreign) has superior technology. The government regulates the duopoly by levying a pollution tax to maximize domestic welfare. We consider the potential implementation of three innovation agreements: cooperative research joint venture (RJV), non-cooperative RJV, and licensing. In the cooperative (non-cooperative) RJV, the firms (do not) internalize R&D spillovers. We show that, for the domestic firm, the cooperative RJV dominates, and licensing is the least desirable alternative. Although licensing is dominant for the foreign firm, it is not implementable. Both RJVs are implementable. Implementation of both types of RJVs improves the competitiveness of the domestic firm and welfare. This study yields an important policy prescription: a subsidy policy that induces the foreign firm to accept a feasible cooperative RJV when it strictly prefers a feasible non-cooperative RJV is always welfare improving. Full article

This paper presents an incentivized experiment analyzing the role of demographic characteristics in individual decision-making under uncertainty. Reactions to a natural source of uncertainty, payoffs in a TV game show, were measured using Fuzzy-set Qualitative Comparative Analysis (fsQCA), allowing us to identify multiple configurations of causal conditions that are sufficient for individuals to prefer an uncertain payoff to a sure gain, and, thus, lower risk aversion. This paper found evidence of preference for uncertainty, measured as willingness to play for an uncertain payoff, in individuals with characteristics most commonly present in the literature: being male; young; childless; with studies in finance or similar areas. This paper also shows that conditions that would not justify the preference for uncertainty according to the literature (an older individual or having children), when combined with other conditions, change contestants’ behavior regarding preference for uncertainty. Individuals that are both older and single, and individuals that have children combined with education in finance, show an inverse effect on preference for uncertainty. Full article

Experiments on revealed preference often use budget sets that are randomly and independently drawn according to some criteria for each participant. However, this means that the budget sets faced by different individuals are not the same. This paper proposes a method to control for these differences. In particular, we control for the “power” of different budget sets by examining the consistency of an individual’s choices relative to some simulated baseline behavior conditional on budgets faced by the individual. We apply this methodology to two existing experimental datasets. Our results show that failure to account for this variation results in a bias when looking directly at measures of choice consistency and the sign of this bias depends on the measure being used. However, controlling for this variation does not change the correlation between measures of choice consistency and observable demographic characteristics like income and education. Full article

We investigate why a firm might purposefully hire a chief executive officer (CEO) who under- or over-estimates the degree of substitutability between competing products. This counterintuitive result arises in imperfect competition because CEO bias can affect rival behavior and the intensity of competition. We lay out the conditions under which it is profitable for owners to hire biased managers. Our work shows that a universal policy that effectively eliminates such biases need not improve social welfare. Full article

In the Inverse Set, relative to the Shapley Value of a non-convex cooperative game, we derive a procedure to find out a convex game in which the Egalitarian Allocation is a coalitional rational value. The procedure depends on the relationship between two parameters called the Convexity Threshold and the Coalitional Rationality Threshold. Some examples follow and illustrate the procedure. We discussed a similar problem for other efficient values, the Shapley Value and the Egalitarian Nonseparable Contribution, in earlier work. Full article

In a model of simultaneous voting, Feddersen and Pesendorfer (1998) consider the possibility that jurors vote strategically, rather than sincerely reflecting their individual information. This results in the counterintuitive result that a jury is more likely to convict the innocent under a unanimity rule than under majority rule. Dekel and Piccione (2000) show that those unintuitive predictions also hold with sequential voting. In this paper, we report paired experiments with sequential and simultaneous voting under unanimity and majority rule. Observed behavior varies significantly depending on whether juries vote simultaneously or in sequence. We also find evidence that subjects use information inferred from prior votes in making their sequential voting decisions, but that information implied by being pivotal in simultaneous votes does not seem to be reliably processed. Full article

When a firm finances a new project by issuing debt, it has an incentive to invest in excessively high-risk projects because shareholders enjoy all the benefits in case the project is successful but have limited liability when it fails. Anticipating such behavior, creditors may require a higher interest rate or may even refuse to provide capital. This debt–equity conflict is alleviated by the fact that most investment decisions are made by risk-averse managers who are not as well diversified as shareholders. This paper investigates the debt–equity conflict in firms in which the managers have an unobservable degree of risk averseness. Since managerial risk averseness is a desirable quality, such asymmetric information makes managers undertake actions that increase the market’s perception of them as being highly risk-averse. Consequently, such reputation building leads to a lower number of excessively high-risk projects being undertaken. This paper compares the entrepreneurial economy, in which managers are the sole owners of the firms, with the corporate economy, in which managers are hired by shareholders. Using the overlapping generations model, this paper shows that managerial reputation building can partially resolve the debt–equity conflict and improve efficiency in both economies; however, such improvement is larger in the entrepreneurial economy. Full article

I characterize the optimal accuracy level r of an unbiased Tullock contest between two players with heterogeneous prize valuations. The designer maximizes the winning probability of the strong player or the winner’s expected valuation by choosing a contest with an all-pay auction equilibrium ($r\ge 2$). By contrast, if she aims at maximizing the expected aggregate effort or the winner’s expected effort, she will choose a contest with a pure-strategy equilibrium, and the optimal accuracy level $r<2$ decreases in the players’ heterogeneity. Finally, a contest designer who faces a tradeoff between selection quality and minimum (maximum) effort will never choose a contest with a semi-mixed equilibrium. Full article

I investigate the paradoxes associated with the Fédération Internationale de Football Association (FIFA) point-based ranking of national soccer teams. The ranking has been plagued with paradoxes that incentivize teams to avoid playing friendly matches, i.e., matches that are not part of any official FIFA tournament or preliminaries, and applying other counterintuitive strategies. The most spectacular paradox was the dramatic underrating of the hosts of major tournaments. For a long time, host teams, which were absent from preliminary matches, would play only friendly matches that awarded few points. Here, I present three models that estimate the magnitude of the resulting “host effect” at 14.2–16 positions. Such an estimate counteracts the intuition that a large investment in hosting a tournament should result in an improvement in the host team’s standing. However, as discussed here, a given host’s low ranking could decrease interest in the tournament, and likely result in a major loss of advertisement revenue. Full article