Showing papers in "Economic Theory in 2007"
TL;DR: The authors conducted an experiment using a binary version of the dictator game and found that many subjects behave fairly in the baseline case mainly because they intrinsically dislike appearing unfair, either to themselves or others.
Abstract: This paper explores whether generosity in experiments is truly evidence of concern for desirable social outcomes. We conduct an experiment using a binary version of the dictator game. We introduce several treatments in which subjects are able to leave the relationship between their actions and resulting outcomes uncertain, either to themselves or to another subject influenced by those actions, thus giving subjects the moral “wiggle room” to behave self-interestedly. We find significantly less generous behavior in these manipulations, relative to a baseline in which the relationship between actions and outcomes is transparent. We conclude that many subjects behave fairly in the baseline case mainly because they intrinsically dislike appearing unfair, either to themselves or others.
1,158 citations
TL;DR: In this article, the authors provide a framework for analyzing two-sided markets that allows for different degrees of product differentiation on each side of the market and show that competitive bottlenecks arise endogenously.
Abstract: We provide a framework for analyzing two-sided markets that allows for different degrees of product differentiation on each side of the market. When platforms are viewed as homogenous by sellers but heterogeneous by buyers, we show that “competitive bottlenecks” arise endogenously. In equilibrium, platforms do not compete directly for sellers, instead choosing to compete indirectly by subsidizing buyers to join. Sellers are left with none of the gains from trade. Despite this, it is sellers who choose to purchase from multiple platforms (multihome). Finally, the role of exclusive contracts to prevent multihoming is explored.
420 citations
TL;DR: It is found that leading-by-example increases contributions and earnings in an environment where a leader has private information about the returns from contributing, and the success of leadership appears to be driven by signaling rather than by nonpecuniary factors such as reciprocity.
Abstract: We report experimental results on the effect of leadership in a voluntary contribution game. Consistent with recent theories we find that leading-by-example increases contributions and earnings in an environment where a leader has private information about the returns from contributing (Hermalin in Am Econ Rev 88:1188–1206, 1998; Vesterlund in J Public Econ 87:627–657, 2003). In contrast the ability to lead-by-example has no effect on total contributions and earnings when such returns are commonly known. In our environment the success of leadership therefore appears to be driven by signaling rather than by nonpecuniary factors such as reciprocity.
327 citations
TL;DR: In this article, the authors explore the sanctioning behavior of individuals who experience a social dilemma and find that individuals do avenge sanctions they have received, and this serves to decrease contribution levels.
Abstract: We present the results of an experiment that explores the sanctioning behavior of individuals who experience a social dilemma. In the game we study, players choose contribution levels to a public good and subsequently have multiple opportunities to reduce the earnings of the other members of the group. The treatments vary in terms of individuals’ opportunities to (a) avenge sanctions that have been directed toward themselves, and (b) punish others’ sanctioning behavior with respect to third parties. We find that individuals do avenge sanctions they have received, and this serves to decrease contribution levels. They also punish those who fail to sanction third parties, but the resulting increase in contributions is smaller than the decrease the avenging of sanctions induces. When there are five rounds of unrestricted sanctioning, contributions and welfare are significantly lower than when only one round of sanctioning opportunities exists, and welfare is lower than at a benchmark of zero cooperation.
270 citations
TL;DR: In this article, the authors show that stable matching with quasi-linear preferences is equivalent to stable pricing with transferable utilities and a participation constraint, and to an optimal transportation (Monge-Kantorovich) linear programming problem.
Abstract: Hedonic pricing with quasi-linear preferences is shown to be equivalent to stable matching with transferable utilities and a participation constraint, and to an optimal transportation (Monge-Kantorovich) linear programming problem. Optimal assignments in the latter correspond to stable matchings, and to hedonic equilibria. These assignments are shown to exist in great generality; their marginal indirect payoffs with respect to agent type are shown to be unique whenever direct payoffs vary smoothly with type. Under a generalized Spence-Mirrlees condition (also known as a twist condition) the assignments are shown to be unique and to be pure, meaning the matching is one-to-one outside a negligible set. For smooth problems set on compact, connected type spaces such as the circle, there is a topological obstruction to purity, but we give a weaker condition still guaranteeing uniqueness of the stable match.
259 citations
TL;DR: In this article, the authors argue that different forms of government spending imply different elasticities of hours of work with regard to tax rates, and illustrate the empirical importance of this point by addressing the issue of hours worked and tax rates in three sets of economies: the US, Continental Europe and Scandinavia.
Abstract: This paper argues that it is essential to explicitly consider how the government spends tax revenues when assessing the effects of tax rates on aggregate hours of market work. Different forms of government spending imply different elasticities of hours of work with regard to tax rates. I illustrate the empirical importance of this point by addressing the issue of hours worked and tax rates in three sets of economies: the US, Continental Europe and Scandinavia. While tax rates are highest in Scandinavia, hours worked in Scandinavia are significantly higher than they are in Continental Europe. I argue that differences in the form of government spending can potentially account for this pattern.
203 citations
TL;DR: In this paper, the authors developed a method of growth accounting based on an integrated use of transitional growth models and micro data and found that 73% of TFP growth is explained by occupational shifts and financial deepening, without presuming exogenous technical progress.
Abstract: This paper explains and measures the sources of total factor productivity (TFP) by developing a method of growth accounting based on an integrated use of transitional growth models and micro data. We decompose TFP growth into the occupational-shift effect, financial-deepening effect, capital-heterogeneity effect, and sectoral-Solow-residuals. Applying this method to Thailand, which experienced rapid growth with enormous structural changes between 1976 and 1996, we find that 73% of TFP growth is explained by occupational shifts and financial deepening, without presuming exogenous technical progress. Expansion of credit is a major part. We also show the role of endogenous interaction between factor price dynamics and the wealth distribution for TFP.
151 citations
TL;DR: In this paper, a general methodology for characterizing the dynamic evolution of preferences in a wide class of strategic interactions is developed. But this methodology can be adapted to cases where preferences are only imperfectly observed.
Abstract: This paper develops a general methodology for characterizing the dynamic evolution of preferences in a wide class of strategic interactions. We give simple conditions characterizing the limiting distribution of preferences in general games, and apply our results to study the evolutionary emergence of overconfidence and interdependent preferences. We also show that this methodology can be adapted to cases where preferences are only imperfectly observed.
144 citations
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TL;DR: In this paper, the authors examine the impact of leniency law, and other rules, experimentally, and conclude that whistle-blow- ing may enforce trust and collusion by providing a tool for cartelists to punish each other.
Abstract: Leniency clauses, offering cartelists legal immunity if they blow the whistle on each other, is a recent anti-trust innovation. The authorities wish to thwart cartels and promote competition. This effect is not evident, however; whistle-blow- ing may enforce trust and collusion by providing a tool for cartelists to punish each other. We examine the impact of leniency law, and other rules, experimentally.
143 citations
TL;DR: In this article, regret is used to explain over-bidding in sealed-bid first-price auctions, and also behavior in several other settings that is inconsistent with risk aversion.
Abstract: The sealed-bid first-price auction of a single object in the case of independent privately-known values is the simplest auction setting and understanding it is important for understanding more complex mechanisms. But bidders bid above the risk-neutral Nash equilibrium theory prediction. The reasons for this “over bidding” remain an unsolved puzzle. Several explanations have been offered, including risk aversion, social comparisons, and learning. We present a new explanation based on regret and a model that explains not only the observed over bidding in sealed-bid first-price auctions, but also behavior in several other settings that is inconsistent with risk aversion.
135 citations
TL;DR: In this article, the authors used an overlapping generations model to study the factors generating the saving rate in Japan between 1960-2000 and found that observed aging of the population, total factor productivity (TFP), and fiscal policy to affect the national saving rate.
Abstract: In this paper, we use an overlapping generations model to study the factors generating the saving rate in Japan between 1960–2000. The model economy allows for observed aging of the population, total factor productivity (TFP), and fiscal policy to affect the national saving rate. Our calibrated general equilibrium setup generates saving rates that are reasonably similar to the data during this period. Our counterfactual experiments indicate that observed TFP growth rates are the main reason for both the secular decline and the two humps in the saving rate during 1960–2000.
TL;DR: In this article, the authors build a model of R&D-based growth in which the discovery of higher-quality products is governed by sequential stochastic innovation contests and identify a new structural barrier to innovation and growth.
Abstract: We build a model of R&D-based growth in which the discovery of higher-quality products is governed by sequential stochastic innovation contests. We term the costly attempts of incumbent firms to safeguard the monopoly rents from their past innovations rent-protecting activities. Our analysis (1) offers a novel explanation of the observation that the difficulty of conducting R&D has been increasing over time, (2) establishes the emergence of endogenous scale-invariant long-run innovation and growth, and (3) identifies a new structural barrier to innovation and growth. We also show that long-run growth depends positively on proportional R&D subsidies, the population growth rate, and the size of innovations, but negatively on the market interest rate and the effectiveness of rent-protecting activities.
TL;DR: In this article, the authors investigate a class of cooperative games that generalizes some economic applications with a similar structure, and define four properties with respect to deleting edges that each selects a unique component efficient solution on the class of line-graph games.
Abstract: Recently, applications of cooperative game theory to economic allocation problems have gained popularity. We investigate a class of cooperative games that generalizes some economic applications with a similar structure. These are the so-called line-graph games being cooperative TU-games in which the players are linearly ordered. Examples of situations that can be modeled like this are sequencing situations and water distribution problems. We define four properties with respect to deleting edges that each selects a unique component efficient solution on the class of line-graph games. We interpret these solutions and properties in terms of dividend distributions, and apply them to economic situations.
TL;DR: This paper investigated whether differences between Catholics and Protestants most closely identified with the Protestant Work Ethic can account for long delays in the start of Industrialization observed between various countries and regions. But they found that these differences may possibly explain why Northern Europe developed before Southern Europe, but they cannot explain why America developed before Latin America.
Abstract: Max Weber in 1905 claimed that Protestantism, and more specifically Calvinism, facilitated the rise of capitalism. This paper assesses the quantitative plausibility of his hypothesis by introducing religious beliefs into a dynamic general equilibrium model of development and growth. Through counterfactual exercises, the paper investigates whether differences between Catholics and Protestants most closely identified with the Protestant Work Ethic can account for long delays in the start of Industrialization observed between various countries and regions. The main finding is that these differences may possibly explain why Northern Europe developed before Southern Europe, but they cannot explain why Europe developed before Latin America.
Many of the tenets of Calvinism have had profound social implications–in particular, that thrift, industry, and hard work are forms of moral virtue and that business success is an evidence of God’s grace. Because these views helped to create a climate favorable to commerce, Calvinism played a role in the overthrow of feudalism and the establishment of capitalism.
Microsoft Encarta
TL;DR: In this article, the effects of public release of information (polls) on participation levels were studied and the adverse effects of providing information about the electorate's preferences and may explain why some countries bar opinion polls close to an election date.
Abstract: We study costly majority voting when voters rationally anticipate others have similar preferences. The correlation in preferences lowers expected turnout because votes have a positive externality on those who abstain. We study the effects of the public release of information (polls) on participation levels. Polls raise expected turnout but reduce expected welfare because they stimulate the “wrong” group to participate resulting in a “toss-up” election. Our novel results highlight the adverse effects of providing information about the electorate’s preferences and may explain why some countries bar opinion polls close to an election date.
TL;DR: In this paper, necessary and sufficient conditions for rationalizing individual and aggregate consumer demand data with individual quasilinear and homothetic utility functions were proposed, where consumer surplus is a valid measure of consumer welfare.
Abstract: Changes in total surplus are traditional measures of economic welfare. We propose necessary and sufficient conditions for rationalizing individual and aggregate consumer demand data with individual quasilinear and homothetic utility functions. Under these conditions, consumer surplus is a valid measure of consumer welfare. For nonmarketed goods, we propose necessary and sufficient conditions on input market data for efficient production, i.e. production at minimum cost. Under these conditions we derive a cost function for the nonmarketed good, where producer surplus is the area above the marginal cost curve.
TL;DR: In this article, a standard Real Business Cycle model driven by productivity shocks can successfully account for the 50% decline in cyclical volatility of output, its components, and labor input that has occurred since 1983.
Abstract: This paper shows that a standard Real Business Cycle model driven by productivity shocks can successfully account for the 50% decline in cyclical volatility of output, its components, and labor input that has occurred since 1983. The model is successful because the volatility of productivity shocks has also declined significantly over the same time period. We then investigate whether the decline in the volatility of the Solow Residual is due to changes in the volatility of some other shock operating through a channel that is absent in the standard model. We therefore develop a model with variable capacity and labor utilization. We investigate whether government spending shocks, shocks that affect the household’s first order condition for labor, and shocks that affect the household’s first order condition for saving can plausibly account for the change in TFP volatility and in the volatility of output, its components, and labor. We find that none of these shocks are able to do this. This suggests that successfully accounting for the post-1983 decline in business cycle volatility requires a change in the volatility of a productivity-like shock operating within a standard growth model.
TL;DR: In this paper, the authors show that a high price floor allows competitors to obtain higher profits than a low price floor, and that the effect of a high floor on the overall procompetitive effect for duopolies is larger than that of a low floor.
Abstract: A potential source of instability of many economic models is that agents have little incentive to stick with the equilibrium. We show experimentally that this can matter with price competition. The control variable is a price floor, which increases the cost of deviating from equilibrium. According to traditional theory, a higher floor allows competitors to obtain higher profits. Behaviorally, the opposite result obtains with two (but not with four) competitors. An error model, which builds on Luce (Individual Choice Behavior, 1959), can adequately describe supra-Nash pricing with a low-floor, but then fails to capture the overall pro-competitive effect of a high-floor seen for duopolies.
TL;DR: In this article, it was shown that some other properties of the utility function have also to be considered depending on the serial correlation existing between the background risk and the future income risk.
Abstract: Does the sign of the third derivative of the utility function with respect to wealth still govern precautionary saving motives in the presence of a background risk? This article shows that some other properties of the utility function have also to be considered depending on the serial correlation existing between the background risk and the future income risk.
TL;DR: In this article, the authors tried to implement a correlated equilibrium with payoffs outside the convex hull of Nash equilibrium payoffs by privately recommending play and found that subjects are reluctant to follow certain recommendations.
Abstract: This study reports a laboratory experiment wherein subjects play a hawk–dove game. We try to implement a correlated equilibrium with payoffs outside the convex hull of Nash equilibrium payoffs by privately recommending play. We find that subjects are reluctant to follow certain recommendations. We are able to implement this correlated equilibrium, however, when subjects play against robots that always follow recommendations, including in a control treatment in which human subjects receive the robot “earnings.” This indicates that the lack of mutual knowledge of conjectures, rather than social preferences, explains subjects’ failure to play the suggested correlated equilibrium when facing other human players.
TL;DR: In this article, the authors model the trade-off between production and appropriation in the presence of simultaneous inter- and intra-group conflicts and derive exact conditions for when dividing individuals into more groups leads to more productive and less appropriative activities.
Abstract: This paper models the trade-off between production and appropriation in the presence of simultaneous inter- and intra-group conflicts. The model exhibits a ‘group cohesion effect’: if the contest between the groups becomes more decisive, the players devote fewer resources to the intra-group conflict. Moreover, there is also a ‘reversed group cohesion effect’: if the intra-group contests become less decisive, the players devote more resources to the inter-group contest. The model also sheds new light on normative questions. I derive exact conditions for when dividing individuals into more groups leads to more productive and less appropriative activities. Moreover, I show that there is an optimal size of the organization which is determined by a trade-off between increasing returns to scale in production and increasing costs of appropriative activities.
TL;DR: A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified as mentioned in this paper.
Abstract: A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally.
TL;DR: In this article, the authors focus on a class of randomly selected games, and estimate how many pairs of experimental subjects would have to be observed playing a previously unexamined game before the mean of the experimental observations would provide a better prediction than the theory about the behavior of a new pair of subjects playing this game.
Abstract: There is a good deal of miscommunication among experimenters and theorists about how to evaluate a theory that can be rejected by sufficient data, but may nevertheless be a useful approximation. A standard experimental design reports whether a general theory can be rejected on an informative test case. This paper, in contrast, reports an experiment designed to meaningfully pose the ques- tion: "how good an approximation does a theory provide on average." It focuses on a class of randomly selected games, and estimates how many pairs of experimental subjects would have to be observed playing a previously unexamined game before the mean of the experimental observations would provide a better prediction than the theory about the behavior of a new pair of subjects playing this game. We call this quantity the model's equivalent number of observations, and explore its properties.
TL;DR: In this paper, the authors use the Theorem of the alternative to prove new results on the implementability of general, asymmetric auctions, and to provide simpler proofs of known results for symmetric auctions.
Abstract: This note uses the Theorem of the Alternative to prove new results on the implementability of general, asymmetric auctions, and to provide simpler proofs of known results for symmetric auctions. The tradeoff is that type spaces are taken to be finite.
TL;DR: For the connections model of strategic network formation, with two-way flow of information and without information decay, specific parameter configura- tions are given for which Nash networks do not exist as discussed by the authors.
Abstract: For the connections model of strategic network formation, with two-way flow of information and without information decay, specific parameter configura- tions are given for which Nash networks do not exist. Moreover, existence and the scope of Nash network architectures are briefly discussed.
TL;DR: In this article, the authors consider asymmetric Bertrand games with arbitrary payoffs at ties or sharing rules, and identify sufficient conditions for the zero-profit outcome and the existence of Nash equilibria.
Abstract: We consider asymmetric Bertrand games with arbitrary payoffs at ties or sharing rules, and identify sufficient conditions for the zero-profit outcome and the existence of Nash equilibria. Subject to some technical conditions on non-tied payoffs the following hold. If the sharing rule is strictly tie-decreasing all players but one receive zero equilibrium payoffs, while everybody does so if non-tied payoffs are symmetric. Mixed (pure) strategy Nash equilibria exist if the sharing rule is (norm) tie-decreasing and coalition-monotone.
TL;DR: In this article, the authors construct social orderings which depend only on ordinal non-comparable information about individual preferences, and combine these properties to characterize two families of fair social orders.
Abstract: In a model of private good allocation, we construct social orderings which depend only on ordinal non-comparable information about individual preferences. In order to avoid Arrovian-type impossibilities, we let those social preferences take account of the shape of individual indifference curves. This allows us to introduce equity and cross-economy robustness properties, inspired by the theory of fair allocation. Combining such properties, we characterize two families of fair social orderings.
TL;DR: In this paper, the authors theoretically and experimentally investigate second chance offers in online marketplaces and compare it to two sequential auctions, and they show that the equilibrium bidding strategy in the second chance offer mechanism only exists in mixed strategies.
Abstract: Second chance offers in online marketplaces involve a seller conducting an auction for a single object and then using information from the auction to offer a losing bidder a take-it-or-leave-it price for another unit. We theoretically and experimentally investigate this practice and compare it to two sequential auctions. We show that the equilibrium bidding strategy in the second chance offer mechanism only exists in mixed strategies, and we observe that this mechanism generates more profit for the auctioneer than two sequential auctions. We also observe virtually no rejections of profitable offers in the ultimatum bargaining stage.
TL;DR: In this paper, the authors apply a regularization procedure called increasing rearrangement to monotonize Edgeworth and Cornish-Fisher expansions and any other related approximations of distribution and quantile functions of sample statistics.
Abstract: This paper applies a regularization procedure called increasing rearrangement to monotonize Edgeworth and Cornish–Fisher expansions and any other related approximations of distribution and quantile functions of sample statistics. In addition to satisfying monotonicity, required of distribution and quantile functions, the procedure often delivers strikingly better approximations to the distribution and quantile functions of the sample mean than the original Edgeworth–Cornish–Fisher expansions.
TL;DR: In a two-stage revelation mechanism as mentioned in this paper, agents report two stages: the first stage is before the allocation is made, and the second stage is after the allocation has been made, but before final transfers are decided.
Abstract: If valuations are interdependent and agents observe their own allocation payoffs, then two-stage revelation mechanisms expand the set of implementable decision functions. In a two-stage revelation mechanism agents report twice. In the first stage - before the allocation is decided - they report their private signals. In the second stage - after the allocation has been made, but before final transfers are decided - they report their payoffs from the allocation. Conditions are provided under which an uninformed seller can extract (or virtually extract) the full surplus from a sale to privately informed buyers, in spite of the buyers’ signals being independent random variables.