Volume 18, Issue 2 -

When people make decisions in a social context, they often make use of theory of mind , by reasoning about unobservable mental content of others. For example, the behavior of a pedestrian who wants to cross the street depends on whether or not he believes that the driver of an oncoming car has seen him or not. People can also reason about the theory of mind abilities of others, leading to recursive thinking of the sort ‘I think that you think that I think…’. Previous research suggests that this ability may be especially effective in simple competitive settings. In this paper, we use a combination of computational agents and Bayesian model selection to determine to what extent people make use of higher-order theory of mind reasoning in a particular competitive game known as matching pennies. We find that while many children and adults appear to make use of theory of mind, participants are also often classified as using a simpler reactive strategy based only on the actions of the directly preceding round. This may indicate that human reasoners do not primarily use their theory of mind abilities to compete with others.

We provide insights into (Bach, Christian W., and Andrés Perea’s. 2014. “Utility Proportional Beliefs.” International Journal of Game Theory : 1–22) concept of utility proportional beliefs and characterize its underlying reasoning process in normal-form games. Our analysis suggests that assumptions on the sensitivity to utilities influence players’ reasoning process and therefore the computations necessary to obtain a belief about the opponent. Under the assumption that more complex computations take longer to complete, we develop additional hypotheses about the players’ reaction times. These additional hypotheses allow for more rigorous testing of the concept than pure accordance with predictions. Using (Nauerz, Christian T., Marion Collewet, and Frauke Meyer. 2015. “Explaining Beliefs in Strictly Competitive One-shot Games.” Working Paper ) data set we confirm our hypotheses about players’ reaction times, strengthening our trust in the concept.

We relax the standard assumptions in collective decision-making models that voters can not only derive a perfect view about the accuracy of the information at their disposal before casting their votes, but can, in addition, also correctly assess other voters’ views about it. We assume that decision-makers hold potentially differing views, while remaining ignorant about such differences, if any. In this setting, we find that information aggregation works well with voting rules other than simple majority: as voters vote less often against their information than in conventional models, they can deliver higher-quality decisions, including in the canonical 12 jurors case. We obtain voting equilibria with many instances, in which other voting rules, including unanimity, clearly outperform simple majority.

Inspired by the study of control scenarios in elections and complementing manipulation and bribery settings in cooperative games with transferable utility, we introduce the notion of structural control in weighted voting games. We model two types of influence, adding players to and deleting players from a game, with goals such as increasing a given player’s Shapley–Shubik or probabilistic Penrose–Banzhaf index in relation to the original game. We study the computational complexity of the problems of whether such structural changes can achieve the desired effect.

In this note, we extend Aumann’s agreement theorem to a framework where beliefs are modelled by conditional probability systems à la Battigalli, P., and M. Siniscalchi. 1999. “Hierarchies of Conditional Beliefs and Interactive Epistemology in Dynamic Games.” Journal of Economic Theory 88: 188–230. We prove two independent generalizations of the agreement theorem, one where the agents share some common conditioning event, and one where they may not.

Many theories of development traps rely on coordination failures. In this paper we develop a theory of incentive traps in organizations, which demonstrates how the provision of incentives may itself become reinforcing for the emergence of traps. Our theory marks the dynamic interplay between incentives and performance in teams where peer-effects are present, the returns to which accrue far beyond the career horizon of current cohort of agents, while taking into account both intergenerational learning dynamics and the existence of markets for talent. The theory may help explain why high-quality research is rewarded less in those institutions where it is mostly scarce, why relative wages of professors in some developing countries are significantly lower than in developed economies, or why governments expenditure on education as percent of GDP is substantially lower in LDCs as compared to developed economies.

This paper models a market where short sales are prohibited and investors have heterogeneous beliefs on asset values. We show that short sale constraints may cause overpricing, the magnitude of which depends on not only investors’ opinion dispersion on the value of the particular asset, but also on its correlation to other assets, as well as, the investors’ opinion dispersion for the values of those other assets.

This paper investigates the theory of endogenous timing by taking into account a vertically-related market where an integrated firm competes with a downstream firm. Contrary to the standard results in the literature, we find that both firms play a sequential game in quantity competition and play a simultaneous game in price competition. Under mixed quantity-price competition, the firm choosing a price strategy moves first and the other firm choosing a quantity strategy moves later in equilibrium. Given that the timing of choosing actions is determined endogenously, aggregate profit (consumer surplus) is higher (lower) under price competition than under quantity competition. Lastly, social welfare is higher under quantity competition than under price competition when the degree of product substitutability is relatively low.

This paper studies how hiding sunk cost of investment would affect investment strategies in a duopoly. The investment would improve profit. If this improvement is larger for the first mover than the second mover, this study finds a unique symmetric equilibrium for a subset of such cases. On the other hand, a larger improvement for the second mover results in a class of symmetric equilibria. For the first case, the surplus to sharing information increases with higher volatility of profit flow and lower uncertainty about the investment cost. For the second case, this surplus grows with both mentioned types of uncertainty.

Price-taking behavior seems to contradict rationality if a price effect is to be expected. This paper identifies a strategic effect between price-takers and non-price-takers on financial markets. It results from the liquidity reduction non-price-taking induces. Thus, a trade-off between the benefits of calculating price impacts correctly and market liquidity exists. It is shown that price-takers may benefit more from trading than their fully rational counterparts do. Moreover, it is demonstrated that when the choice of behavior is unobservable and decision costs exist an investor would profit more as a non-price-taker when his trading potential is large, and more as a price-taker when it is small. However, when the choice of behavior is observable it is the other way around. If various rounds of trading take place, an investor’s terminal endowment converges to his risk tolerance share. Thus, an efficient allocation is obtained. Furthermore, a paradox concerning the endogenous choice of manners of calculation is identified.

For many products, consumers need to sign a pricing contract with the seller under uncertainty about their future consumption needs. Recent empirical literature has consistently pointed out that consumers may not be good forecasters of their future consumption needs, and may suffer from overestimation or underestimation biases. This paper considers consumers who are heterogeneous in their expected demands arising from heterogeneity in their biases about their forecasted consumption needs. We show that the optimal menu of two-part pricing in this case leads to the lower-expected demand segment getting exactly the same surplus on the average as the higher-expected demand segment, or the higher-expected demand segment getting even lower surplus on the average than the lower-expected demand segment. We show directions of externalities these unbiased, positively-biased, and negatively-biased segments impose on one another, and how they can be different under no price discrimination, and second- and third-degree price discrimination.

Real life disputes, negotiations and competitive situations involve multi-issue considerations in which the final outcome depends on the aggregated effort over several dimensions. We consider two allocation systems, the I-system, in which each issue is disputed and award independently, and the A-system, in which all issues are aggregate in a single prize award. In the A-system, we propose a contest success function that aggregates the individuals’ multi-issue efforts in a single outcome. Among other results, we found that the A-system tends to induce higher total effort than the I-system. The model is also able to reproduce a large set of strategic behaviors. For instance, under decreasing returns to effort, individuals maximize their payoffs by distributing effort over all issues, while under increasing returns to effort, individuals focus on a single issue. Hybrid equilibria, in which one individual focus in a single issue while the other individual diversifies effort over all issues, may also emerge when individuals hold different returns to effort. Strategic behavior is simultaneously influenced by the weight of each issue on the final outcome and by comparative advantages. Throughout the manuscript, we link our results with strategic behavior observed in electoral competition, i.e., “issue ownership”,“issue divergence/convergence”and“common value issues”. We expect that our findings will help researchers and practitioners to better understand the process of endogenous selection of issues in competitive contexts and to provide guidance in the implementation of the optimal allocation mechanism.

In this paper, we investigate how limited liability affects firms’ bidding behavior in license auctions. We focus on a model where firms first seek financing from banks, then bid for the licenses, and the winning firms set prices in a product market with uncertain demand. In a model of one license, the winning firm becomes a monopoly. A higher bid induces a higher product price. In a model of two licenses, a higher bid provides a positive externality to all other firms. In both models, bids are extremely high in the English auction, and the English auction always generates more revenue than the first-price/discriminatory auction.

This paper establishes a duopoly model with product differentiation and outsourcing in order to analyze the equilibrium competition strategies (choice of prices versus quantities) when the outsourcer outsources its intermediate good to a final product competitor. We show that: (1) both firms choose the quantity strategy when the cost efficiency of the subcontractor is low; (2) the choice of competition strategy is the price strategy for the subcontractor and the quantity strategy for the outsourcer when the cost efficiency of the subcontractor is moderate; (3) both firms choose the price strategy when the cost efficiency of the subcontractor is sufficiently high.

This paper models a war of attrition where participants first choose contest investment levels that act as a constraint for how long they can compete. To include a measure of the resource’s transferability to other uses (e.g. other contests), expenditures are a convex combination of investment decisions and their ‘bid’ in the contest. It is shown in the symmetric equilibrium that participants use a mixed strategy for their resource investments and plan to exhaust those resources in the contest. Implications of an investment constraint on equilibrium strategies in a structured, tournament-style sequence of contests are also explored, where it is shown that increasing the number of contests in the tournament does not necessarily increase participants’ investments in expectation. These modifications to the standard model allow for important insights into a variety of pre-calculated and budgeted all-pay contests.

Why do some couples marry, while others prefer cohabitation? The proposed model does not assume utility differences between these two states but assumes separation frictions in marriage and not in cohabitation. We show that high expectations from the relationship lead to marriage even though the utility is drawn from the same distribution as in cohabitation. Moreover, mutual agreement on marriage may take place when the expected utility in partnership is both a private and a common knowledge, although for different sets of expected utility values. Surprisingly, when the expected utility is relatively low, marriage may take place only in the common knowledge environment.