Showing papers by "Pradeep Dubey published in 2000"
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TL;DR: In this article, the authors extend the standard model of general equilibrium with incomplete markets (GEI) to allow for default, and show that default is reasonably modeled as an equilibrium phenomenon.
Abstract: We extend the standard model of general equilibrium with incomplete markets (GEI) to allow for default. The equilibrating variables include aggregate default levels, as well as prices of assets and commodities. Default can be either strategic, or due to ill-fortune. It can be caused by events directly affecting the borrower, or indirectly as part of a chain reaction in which a borrower cannot repay because he himself has not been repaid. Each asset is defined by its promises A, the penalties lambda for default, and the limitations Q on its sale. The model is thus named GE(A,lambda,Q). Each asset is regarded as a pool of promises. Different sellers will often exercise their default options differently, while each buyer of an asset receives the same pro rata share of all deliveries. This model of assets represents for example the securitized mortgage market and the securitized credit card market. Given any collection of assets, we prove that equilibrium exists under conditions similar to those necessary to guarantee the existence of GEI equilibrium. We argue that default is thus reasonably modeled as an equilibrium phenomenon. Moreover, we show that more lenient lambda which encourage default may be Pareto improving because they allow for better risk spreading. Our definition of equilibrium includes a condition on expected deliveries for untraded assets that is similar to the trembling hand refinements used in game theory. Using this condition, we argue that the possibility of default is an important factor in explaining which assets are traded in equilibrium. Asset promises, default penalties, and quantity constraints can all be thought of as determined endogenously by the forces of supply and demand. Our model encompasses a broad range of moral hazard, adverse selection, and signalling phenomena (including the Akerlof lemons model and Rothschild-Stiglitz insurance model) in a general equilibrium framework. Many authors (including Akerlof , Rothschild and Stiglitz) have suggested that equilibrium may not exist in the presence of adverse selection. But our existence theorem shows that it must. The problem is the inefficiency of the resulting equilibrium, not its nonexistence. The power of perfect competition simplifies many of the complications attending the finite player, game theoretic analyses of the same topics. The Modigliani-Miller theorem typically fails to hold when there is the possibility that the firm or one of its investors might default.
63 citations
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TL;DR: In this article, the authors consider a principal who is eager to induce his agents to work at their maximal effort levels, and he samples n days at random out of the T days on which they work, and awards a prize of B dollars to the most productive agent.
Abstract: We consider a principal who is keen to induce his agents to work at their maximal effort levels. To this end, he samples n days at random out of the T days on which they work, and awards a prize of B dollars to the most productive agent. The principal's policy (B,n) induces a strategic game Gamma(B,n) between the agents. We show that to implement maximal effort levels weakly (or, strongly) as a strategic equilibrium (or, as dominant strategies) in Gamma(B,n), at the least cost B to himself, the principal must choose a small sample size n. Thus less scrutiny by the principal induces more effort from the agents. The need for reduced scrutiny becomes more pronounced when agents have information of the history of past plays in the game. There is an inverse relation between information and optimal sample size. As agents acquire more information (about each other), the principal -- so to speak -- must "undo" this by reducing his information (about them) and choosing the sample size n even smaller.
1 citations
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TL;DR: In this paper, the authors consider a learning process in which each player unilaterally deviates to a best response to his current conjectures of others' strategies; and then updates his conjectures in accordance with the induced play of the game.
Abstract: For extensive form games with perfect information, consider a learning process in which, at any iteration, each player unilaterally deviates to a best response to his current conjectures of others' strategies; and then updates his conjectures in accordance with the induced play of the game. We show that, for generic payoffs, the outcome of the game becomes stationary in finite time, and is consistent with Nash equilibrium. In general, if payoffs have ties or if players observe more of each others' strategies than is revealed by plays of the game, the same result holds provided a rationality constraint is imposed on unilateral deviations: no player changes his moves in subgames that he deems unreachable, unless he stands to improve his payoff there. Moreover, with this constraint, the sequence of strategies and conjectures also becomes stationary, and yields a self- confirming equilibrium.