By Gerelt Tserengjigmid
This paper studies history-dependent risk aversion and focuses on a behavioral phenomenon called the reinforcement effect (RE), which states that people become less risk-averse after a good history than after a bad history. The RE is well-documented in consumer choices, financial markets, and lab experiments. I show that this seemingly anomalous behavior occurs whenever risk preferences are history-dependent (in a nontrivial way) and satisfy monotonicity with respect to first-order stochastic dominance. To study history-dependent risk aversion and the RE formally, I develop a behaviorally founded model of dynamic choice under risk that generalizes standard discounted expected utility. To illustrate the usefulness of my model, I apply it to the Lucas tree model of asset pricing and draw implications of the RE on asset price dynamics. I find that, compared to history-independent models, assets are overpriced when the economy is in a good state and are underpriced in a bad state. Moreover, my model generates high, volatile, and predictable asset returns, and low and smooth bond returns, consistent with empirical evidence.
By David Ahn, Ryota Iijima, Yves Le Yaouanq, and Todd Sarver
We propose nonparametric definitions of absolute and comparative naivete for dynamically inconsistent preferences. These definitions leverage ex-ante choice of menu to identify predictions of future behavior and ex-post choice from menus to identify actual behavior. Naifs prefer the flexibility of a menu to committing to their eventual choices, mistakenly anticipating more virtuous behavior. More naive individuals are more optimistic about their future behavior and demand more flexibility, yet are less virtuous in their actual choices. For Strotzian preferences, our definitions impose linear restrictions relating anticipated and actual temptation utilities to the virtuous utility, and yield further intuitive parametric restrictions in particular specifications such as quasi-hyperbolic discounting. We provide suitable definitions for random choice. Finally, we apply our definitions to understand the welfare implications of commitment devices.
By Anne-Christine Barthel and Tarun Sabarwal
Many questions of interest in economics can be stated in terms of monotone comparative statics: If a parameter of a constrained optimization problem increases, when does its solution increaseas well. This paper characterizes monotone comparative statics in different directions in finite-dimensional Euclidean space. These new characterizations are ordinal and retain the same flavor as their counterparts in the standard theory, showing new connections to the standard theory. The results are highlighted by several applications in consumer theory, producer theory and game theory. These applications were previously outside the scope of the standard theory of monotone comparative statics.
By Natalia Lazzati, John K.-H. Quah, and Koji Shirai
We develop revealed preference characterizations of (1) monotone choice in the context of individual decision making and (2) strategic complementarity in the context of simultaneous games. We first consider the case where the observer has access to panel data and then extend the analysis to the case where data sets are cross sectional and preferences heterogeneous. Lastly, we apply our techniques to investigate the possibility of spousal influence in smoking decisions.
By Alessandro Citanna and Paolo Siconofli
We design a competitive market for exclusive contracts in large economies with moral hazard and hidden information. We do not impose quantity restrictions – incentive constraints – on the consumption or production sets. We establish existence and constrained optimality of equilibrium. Our design can accommodate costly state verification and costly state falsification. In the latter environments, we provide examples showing the loss of efficiency derived from restricting agents to trading incentive compatible contracts.
By Volodymyr Lugovskyy, Daniela Puzzello, Andrea Sorensen, James Walker, and Arlington Williams
A growing literature in experimental economics examines the conditions under which cooperation can be sustained in social-dilemma settings. In particular, several recent studies contrast cooperation levels in games in which the number of decision rounds is probabilistic to games in which the number of decision rounds is finite. We contribute to this literature by contrasting the evolution of cooperation in probabilistically and finitely repeated linear voluntary-contribution public-goods games (VCM). Consistent with past results, ceteris paribus, cooperation is found to increase in the marginal value of the public good. Additionally, as the number of decision sequences increases, there is a pronounced decrease in cooperation in the final round of finite sequences compared to those with a probabilistic end round. We do not, however, find strong evidence that overall cooperation rates are affected by whether the number of decision rounds is finite or determined probabilistically.
By Marcus Berliant
We examine the fine microstructure of commuting in a game-theoretic setting with a continuum of commuters. Commuters’ home and work locations can be heterogeneous. A commuter transport network is exogenous. Traffic speed is determined by link capacity and by local congestion at a time and place along a link, where local congestion at a time and place is endogenous. After formulating a static model, where consumers choose only routes to work, and a dynamic model, where they also choose departure times, we describe and examine existence of Nash equilibrium in both models and show that they differ, so the static model is not a steady state representation of the dynamic model.
By Tommaso Denti
In a game, when there is uncertainty about the state of fundamentals, the players' behavior depends not only on their information about the state, but also crucially on their information about each other's information. Before taking actions, what do the players choose to know about what the others know? In this paper, I propose a tractable model of information acquisition to address this question in a systematic way. To unmask the primitive incentives to acquire information, the model does not impose restrictions on the information choice technology: the players can acquire information not only about the state, but also about each other's information in a flexible way. In coordination games, I show that the players have a strong incentive to know what the others know, even if it is unrelated to the state. In investment games, this leads to risk-dominance as the unique solution. In linear-quadratic games, this generates nonfundamental volatility. I further show that this incentive weakens as the game gets large and players small. In large investment games, multiple equilibria arise where the players focus on information about the state. In linear-quadratic games, nonfundamental volatility vanishes if no player is central in the game.
By Eric Hoffmann
Global games methods are aimed at resolving issues of multiplicity of equilibria and coordination failure that arise in game theoretic models by relaxing common knowledge assumptions about an underlying parameter. These methods have recently received a lot of attention when the underlying complete information game is one of strategic complements (GSC). Little has been done in this direction concerning games of strategic substitutes (GSS), however. This paper complements the existing literature in both cases by extending the global games method developed by Carlsson and Van Damme (1993) to N-player, multiple-action GSS and GSC, using a p-dominance condition as the selection criterion. Moreover, this approach is much less restrictive on the conditions that payoffs and the underlying parameter space must satisfy, and therefore serves to circumvent recent criticisms to global games methods. The second part of this paper generalizes the model by allowing groups of players to receive homogeneous signals, which, under certain conditions, strengthens the model's power of predictability.