Economics and Information Theory

Most economic models are based on the self-interest hypothesis that assumes that material self-interest exclusively motivates all people. Experimental economists have gathered overwhelming evidence in recent years, however, that systematically refutes the self-interest hypothesis, suggesting that concerns for altruism, fairness, and reciprocity strongly motivate many people. Moreover, several theoretical papers demonstrate that the observed phenomena can be explained in a rigorous and tractable manner. These theories then induced a first wave of experimental research which offered exciting insights into both the nature of preferences and the relative performance of competing fairness theories. The purpose of this chapter is to review these developments, to point out open questions, and to suggest avenues for future research. We also discuss recent neuroeconomic evidence that is consistent with the view that many people have a taste for mutual cooperation and the punishment of norm violators. We further illustrate the powerful impact of fairness concerns on cooperation, competition, incentives, and contract design.

https://www.et.econ.uni-muenchen.de/personen/professor/schmidt/publikationen/papers/reciprocalt.pdf

The Economics of Fairness, Reciprocity and Altruism--Experimental Evidence and New Theories.

We investigate the conventional wisdom that competition among interested parties attempting to influence a decision maker by providing verifiable information brings out all the relevant information. We find that, if the decision maker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties, competition may be unnecessary; while if the decision maker is unsophisticated or not well informed, competition is not generally sufficient. However, if the interested parties' interests are sufficiently opposed, or if the decision maker is seeking to advance the parties' decision maker's need for prior knowledge about the relevant variables and for strategic sophistication. In other settings, only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow defective decision making.

Relying on the Information of Interested Parties

The goal of this paper is to point out that analyses of parallelism m computational problems have practical implications even when mult~processor machines are not available. This is true because, in many cases, a good parallel algorithm for one problem may turn out to be useful for designing an efficsent serial algorithm for another problem A unified framework for cases like this is presented. Particular cases, which axe discussed in this paper, provide motivation for examining parallelism in sorting, selecuon, minimum-spanning-tree, shortest route, max-flow, and matrix multiplication problems, as well as in scheduling and locational problems.

/pdf/applying-parallel-computation-algorithms-in-the-design-of-5739xt6ko2.pdf

Applying Parallel Computation Algorithms in the Design of Serial Algorithms

Most economic models are based on the self-interest hypothesis that assumes that all people are exclusively motivated by their material self-interest. In recent years experimental economists have gathered overwhelming evidence that systematically refutes the self-interest hypothesis and suggests that many people are strongly motivated by concerns for fairness and reciprocity. Moreover, several theoretical papers have been written showing that the observed phenomena can be explained in a rigorous and tractable manner. These theories in turn induced a new wave of experimental research offering additional exciting insights into the nature of preferences and into the relative performance of competing theories of fairness. The purpose of this paper is to review these recent developments, to point out open questions, and to suggest avenues for future research.

http://web.mit.edu/14.193/www/WorldCongress-IEW-Version6Oct03.pdf

Theories of Fairness and Reciprocity - Evidence and Economic Applications

The authors develop a monopoly model of product design and safety signaling incorporating a parametric liability specification. The firm first engages in RD injuries lead to losses which are allocated by the liability system. The authors vary the liability system's allocation of losses and trace out the implications for R&D investment and the price-safety relationship. Copyright 1995 by American Economic Association.

Product Safety: Liability, R&D, and Signaling

Settlement negotiations with two-sided asymmetric information: Model duality, information distribution, and efficiency

Firms communicate product quality attributes to consumers through a variety of channels, such as pricing, advertising, releases of research reports and test results, or warranties and returns policies. The conceptualization of the economics of such communication is that it takes on one of two alternative forms when quality is exogenous: 1) disclosure of quality through a credible direct claim; 2) signaling of quality via producer actions that influence buyers' beliefs about quality. In general, these two literatures have ignored one-another. In this paper we argue that disclosure and signaling are two sides of a coin and that firms should be viewed as choosing which means of communication they will employ. Moreover, we show that integration of these two alternatives leads to a number of new implications about disclosure, signaling, firm preferences over type, and the social efficiency of the channel of communication employed.

/pdf/communicating-quality-a-unified-model-of-disclosure-and-3fe59cwaqn.pdf

Communicating Quality: A Unified Model of Disclosure and Signaling

We consider two problems of locating facilities on trees. In the first, we wish to determine the location of n points so as to maximize the minimum distance between any pair. In the second we wish to locate p centers of a single type of facility so as to minimize the maximum distance between any point and the center nearest to it. We provide polynomial algorithms for both problems, of O|N|2 log n · log |N| for the first problem and of O|N|2 log p for the second, where |N| is the number of nodes in the tree.

/pdf/location-on-tree-networks-p-centre-and-n-dispersion-problems-4i3n0mugmf.pdf

Location on Tree Networks: P-Centre and n-Dispersion Problems

The adversarial provision of evidence is modeled as a game in which two parties engage in strategic sequential search. An axiomatic approach is used to characterize a court's decision based on the evidence provided. Although this process treats the evidence submissions in an unbiased way, the equilibrium outcome may still exhibit bias. Bias arises from differences in the cost of sampling or asymmetry in the sampling distribution. In a multi-stage model, a pro-defendant bias arises in the first stage from a divergence between the parties' stakes. Finally, the adversarial process generates additional costs which screen out some otherwise meritorious cases.

Andrew F. Daughety

Papers

Product Safety: Liability, R&D, and Signaling

Settlement negotiations with two-sided asymmetric information: Model duality, information distribution, and efficiency

Communicating Quality: A Unified Model of Disclosure and Signaling

Location on Tree Networks: P-Centre and n-Dispersion Problems

On the Economics of Trials: Adversarial Process, Evidence and Equilibrium Bias