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Dimitri Migrow, Hyungmin Park & Francesco Squintani

We study a leader’s choice of advisors, balancing political alignment, informational competence, and diversity of views. The leader can consult one or two advisors : one is politically aligned but less informed or shares potentially redundant information; the other is better informed but more biased. The leader’s optimal strategy can exhibit reversals. If both advisors are initially consulted, increasing the bias of the more biased advisor may cause the leader to exclude the aligned advisor to preserve truthfulness from the informed one. As bias rises further, the leader ultimately replaces the informed advisor if his bias becomes too large. When the leader is uncertain about the bias of the more informed advisor, increasing the chance of alignment can justify consulting both advisors.

Peter J Hammond

In normative models a decision-maker is usually assumed to be Bayesian rational, and so to maximize subjective expected utility, within a complete and correctly specified decision model. Following the discussion in Hammond (2007) of Schumpeter's (1911, 1934) concept of entrepreneurship, as well as Shackle's (1953) concept of potential surprise, we consider enlivened decision trees whose growth over time cannot be accurately modelled in full detail. An enlivened decision tree involves more severe limitations than a mis-specified model, unforeseen contingencies, or unawareness, all of which are typically modelled with reference to a universal state space large enough to encompass any decision model that an agent may consider. We consider three motivating examples based on: (i) Homer's classic tale of Odysseus and the Sirens; (ii) a two-period linear-quadratic model of portfolio choice; (iii) the game of Chess. Though our novel framework transcends standard notions of risk or uncertainty, for finite decision trees that may be truncated because of bounded rationality, an extended form of Bayesian rationality is still possible, with real-valued subjective evaluations instead of consequences attached to some terminal nodes. Moreover, these subjective evaluations underlie, for example, the kind of Monte Carlo tree search algorithm used by recent chess-playing software packages.

Peter J Hammond

Given a quantum state in the finite-dimensional Hilbert space Cn, the range of possible values of a quantum observable is usually identified with the discrete spectrum of eigenvalues of a corresponding Hermitian matrix. Here any such observable is identified with : (i) an ortho-measurable function de ned on the Boolean ortho-algebra generated by the eigenspaces that form an orthogonal decomposition of Cn ; (ii) a numerically identified orthogonal decomposition of Cn. The latter means that each subspace of the orthogonal decomposition can be uniquely identified by its own attached real number, just as each eigenspace of a Hermitian matrix can be uniquely identified by the corresponding eigenvalue. Furthermore, any density matrix on Cn is identified with a Bayesian prior ortho-probability measure defined on the linear subspaces that make up the Boolean ortho-algebra induced by its eigenspaces. Then any pure quantum state is identified with a degenerate density matrix, and any mixed state with a probability measure on a set of orthogonal pure states. Finally, given any quantum observable, the relevant Bayesian posterior probabilities of measured outcomes can be found by the usual trace formula that extends Born's rule

Giorgos Galanis, Giorgio Ricchiuti & Ben Tippet

Countries respond differently to climate change, and while this resulting behavioral heterogeneity is empirically observed, its impact on the evolution of global climate action has not been analyzed. This leads to two related questions that we address: (i) what is the role of the variation of preferences in the global political economy of climate action; and (ii) what are the necessary conditions for sustained high levels of global action? We develop an evolutionary political economy integrated assessment model where heterogeneous countries, in each period, choose whether to take action to reduce emissions or not. Countries’ choices are influenced by their current level of emissions, total participation in climate action, and other idiosyncratic factors capturing their heterogeneity, which depends on income inequality across countries, vulnerability to climate damages, and other political economy factors. Our model shows the possibility of various outcomes, where high levels of sustained global action is only one possibility. The key result is that sustained high levels of global action are achieved only if there is a low degree of heterogeneity in countries’ preferences for action and a strong peer pressure effect.

Peter J Hammond

Quantum randomness evidently transcends the classical framework of random variables defined on a single comprehensive Kolmogorov probability space. One prominent example is the quantum double-slit experiment due to Feynman (1951, 1966). A related non-quantum example, inspired by Boole (1862) and Vorobev (1962), has three two-valued random variables X, Y and Z, where the pairs X; Y and X ; Z are perfectly correlated, yet Y ; Z are perfectly anti-correlated. Such examples can be accommodated using a "multi-measurable" space with several different algebras of measurable events. This concept due to Vorobev (1962) allows construction of : 1) a measurable metaspace whose elements combine a point in the original sample space with a variable "contextual" Boolean algebra ; 2) a parametric family of probability metaspaces, each of which is a Kolmogorov probability space that represents a two-stage stochastic process where a random choice from the original sample space is preceded by the random choice of a contextual Boolean algebra in the multi-measurable space. Subsequent work will explore how quantum experimental results can be described using a quantum measurement tree with one or more preparation nodes where an experimental configuration is determined that governs the probability distribution of relevant quantum observables.

Peter J Hammond

This paper has been significantly revised & replaced with Discussion paper 93

Francesco Squintani

I study strategic transmission of verifiable information through intermediaries, and find that equilibrium full disclosure requires that all players are biased in the same direction relative to the decision maker. By embedding this strategic disclosure game into networks, I explore the intersection of information transmission in networks and strategic communication—two major economic theory research strands. When each networked player may hold information useful for any other’s decision, I find that the unique ex-ante optimal network is a line where players are ordered by their bliss points. This is also the unique network immune to coalitional deviations.

Waseem A. Toraubally

We augment the Shapley–Shubik (1977) market game to include a spatial dimension à la Hotelling (1929). Taking firms’ locations as given, we study and characterise, through several propositions, lemmata, and a theorem, the main equilibrium predictions of this new model. When both firms locate in the centre and there is no product differentiation at all, we derive a counterexample in which both firms charge a price that is greater than marginal cost. Intriguingly, we show that even when both firms are in the same location, it is possible for the Law of One Price (LOOP) to fail, i.e., the exact same good sells at different prices across two platforms that are a priori identical. We derive similar (equal- and unequal-price) counterexamples in the context where the firms locate at the extreme ends of the city. Now, it is well known that in the traditional Hotelling model, a pure-strategy Nash equilibrium (PSNE) fails to exist when the two firms are closely spaced and near the centre of the city. In our main result, we allow the firms to be arbitrarily close to each other, and propose two counterexamples in which a PSNE exists. In one, the LOOP holds, while in the other, it fails.

Margot Belguise

Politicians often use “red herrings” to distract voters from scandals. When do such red herrings succeed? I develop a model in which an incumbent runs for re-election and potentially faces a scandal. Some incumbents enjoy telling “tales” (attention-grabbing stories) while others use tales to distract voters from the scandal. Multiple equilibria can arise: one with a norm of tale-telling in which red herrings succeed and another with a norm against tale-telling in which they fail. Increased media attention to tales has a nonmonotonic effect, facilitating red herrings at low attention levels, but serving a disciplinary function at high levels.

Sebastiaan Maes & Raghav Malhotra

We study a setting where an analyst has access to purely aggregate information about the consumption choices of a heterogenous population of individuals. We show that observing the statistical moments of market demand allows the analyst to test aggregate data for rationality. Interestingly, just the mean and variance of demand carry observable restrictions. This is in stark contrast to impossibility result of the Sonnenschein-Mantel-Debreu theorem, which shows that aggregate demand carries no observable restrictions at all. We leverage our approach to deliver a characterization of rationality in terms of moments for the common twogood case. We illustrate the usefulness of moment-based restrictions through two applications: (i) improving the precision of demand and welfare estimates; and (ii) testing for the existence of a welfare-relevant representative consumer.

Sebastiaan Maes & Raghav Malhotra

Welfare e ects of price changes are often estimated with cross-sections ; these do not identify demand with heterogeneous consumers. We develop a theoretical method addressing this, utilizing uncompensated demand moments to construct local approximations for compensated demand moments, robust to unobserved preference heterogeneity. Our methodological contribution offers robust approximations for average and distributional welfare estimates, extending to price indices, taxable income elasticities, and general equilibrium welfare. Our methods apply to any cross-section; we demonstrate them via UK household budget survey data. We uncover an insight: simple non-parametric representative agent models might be less biased than complex parametric models accounting for heterogeneity.

Manipushpak Mitra, Indrajit Ray and Souvik Roy

For a strategic market game (as introduced by Shapley and Shubik), following Dubey and Rogawski (1990), we provide a full explicit characterisation of the set of trading equilibria (in which all goods are traded at a positive price), for both the “buy and sell” and the “buy or sell” versions of this model under standard assumptions on the utility functions. We interpret and illustrate our equilibrium-characterising conditions; we also provide simple examples of trading equilibria, including those of non-interior strategy profiles (in which at least one trader is using the whole endowment in at least one good or money).

Ralph W. Bailey, Maria Kozlovskaya and Indrajit Ray

We analyse the conditions for a strategy pro le to be an equilibrium in a specific buy and sell strategic market game, with two goods, using best responses of a player against random bids from the opponents. The difficulty in characterising mixed Nash equilbria is that the expected utility is not quasiconcave in strategies. We still prove that any mixed strategy Nash equilibrium profile in which every player faces only two random bids is trivial, that is, is a convex combination of some pure strategy Nash equilibria; moreover, we show that the outcome (the price and the allocations) is deterministic in such an equilibrium.

Vincent Anesi & Peter Buisseret

We develop a dynamic model in which a group collectively bargains with an external party. At each date the group makes an offer to the external party (the ‘agent’) in exchange for a concession. Group members hold heterogeneous preferences over agreements and are uncertain about the agent’s resolve. We show that all group members favor more aggressive proposals than they would if they were negotiating alone. By eliciting more information about the agent’s resolve, these offers reduce the group members’ uncertainty about the agent’s preferences and therefore reduce the group’s internal conflicts over its negotiating strategy. To mitigate the consequent risk that negotiations fail, decisive group members successively give up their influence over proposals: starting from any initially democratic decision process, the group eventually consolidates its entire negotiation authority into the hands of a single member.

Peter J. Hammond

Consider a continuum of independent and identically distributed random variables corresponding to the points of the unit interval [0; 1]. Known technical difficulties are complemented by showing directly that the random sample path is almost surely not a Lebesgue measurable function. This refutes the common claim that, because of some version of the "law of large numbers", the integral of each sample path equals the common mean of each random variable. To obtain a valid and useful result, we apply to the continuum of random variables the Monte Carlo method of numerical integration based on limits as the sample size tends to infinity of empirical finite sample averages of the realized random values. The resulting "Monte Carlo integral" is almost surely a degenerate random variable concentrated on the mean. A suitably modified version works when the different indexed random variables are merely independent with cumulative distribution functions that are measurable w.r.t. the index. Further generalizations to Monte Carlo integrals of conditionally independent random variables result, under conditions discussed in Hammond and Sun (2008, 2021), in non-degenerate random integrals that are measurable w.r.t. the conditioning -algebra.

Trivikram Dokka & Sonali SenGupta

Robust pricing models often suffer from being overly conservative. This is due to lack of asymmetry information within the set of possible valuation distributions. However, even when information on asymmetry is available incorporating it within pricing models makes the characterization of pricing policies very difficult. Our main results address this challenge by providing an explicit characterization of the worst-case prior under the extended information setting that includes semivariance as a measure of asymmetry on top of mean and variance. We illustrate the gain from having the asymmetry information captured via semivariance.

John Geanakoplos & Herakles Polemarchakis

Any finite conversation no matter how crazy it sounds can be given context in which it is a rational dialogue

Chowdhury Mohammad Sakib Anwar, Jorge Bruno, Renaud Foucart & Sonali SenGupta

We model a public goods game with groups, position uncertainty, and observational learning. Contributions are simultaneous within groups, but groups play sequentially based on their observation of an incomplete sample of past contributions. We show that full cooperation between and within groups is possible with self-interested players on a fixed horizon. Position uncertainty implies the existence of an equilibrium where groups of players conditionally cooperate in the hope of influencing further groups. Conditional cooperation implies that each group member is pivotal, so that efficient simultaneous provision within groups is an equilibrium.

Aviad Heifetz, Enrico Minelli & Herakles Polemarchakis

Purely affective interaction allows the welfare of an individual to depend on her own actions and on the profile of welfare levels of others. Under an assumption on the structure of mutual affection that we interpret as non explosive mutual affection, we show that equilibria of simultaneous-move affective interaction are Pareto optimal independently of whether or not an induced standard game exists. Moreover, if purely affective interaction induces a standard game, then an equilibrium profile of actions is a Nash equilibrium of the game, and this Nash equilibrium and Pareto optimal profile of strategies is locally dominant

This paper has been completely re-written and been replaced by CRETA working paper #77

Costas Cavounidis, Kevin Lang & Russell Weinstein

African Americans face shorter employment durations than similar whites. We hypothesize that employers discriminate in acquiring or acting on ability-relevant information. In our model, monitoring black but not white workers is self-sustaining. New black hires were more likely red by previous employers after monitoring. This reduces firms' beliefs about ability, incentivizing discriminatory monitoring. We confirm our predictions that layoffs are initially higher for black than non-black workers but that they converge with seniority and decline more with AFQT for black workers. Two additional predictions, lower lifetime incomes and longer unemployment durations for black workers, have known empirical support.

Giorgos Galanis, Iraklis Kollias, Ioanis Leventidis & Joep Lustenhouwer

The growing literature in behavioral finance and macroeconomics that uses dynamic discrete choice models has overwhelmingly assumed that individual choices are made on the basis of a logit framework. While this assumption allows for analytical tractability, it comes with a number of restrictions with regards to the economic environments it can represent. These restrictions are lifted if a probit framework is used instead. In this paper we compare the two approaches and show that, due to its ability to allow for correlations between the random part of different choice alternatives as well as random taste variation, the probit-based model can better fit actual choice data from an existing laboratory experiment, especially if there are more choice alternatives. On the other hand, for the case of two choice alternatives without random taste variation, the probit-based and logit-based models result in very similar dynamics. But even in that case, we find that important qualitative differences arise – in terms of an additional region of chaos – in the cobweb model of the seminal work of Brock and Hommes (1997). Our work highlights the usefulness of using the probit framework for extensions of existing theoretical models and as a way to better fit dynamic experimental or real world choice data

Peter J. Hammond

Following previous work on consequentialist decision theory, we consider an unrestricted domain of finite decision trees, including continuation subtrees, with : (i) decision nodes where the decision maker must make a move ; (ii) chance nodes at which a “roulette lottery” with exogenously specified strictly positive probabilities is resolved ; (iii) event nodes at which a “horse lottery” is resolved. A complete family of binary conditional base preference relations over Anscombe–Aumann lottery consequences is defined to be “prerational” just in case there exists a behaviour rule that is defined throughout the tree domain which is explicable as avoiding, under all predictable circumstances, consequences that are regrettable given what is feasible. Prerationality is shown to hold if and only if all conditional base preference relations are complete and transitive, while also satisfying both the independence axiom of expected utility theory and a strict form of Anscombe and Aumann’s extension of Savage’s sure thing principle. Assuming that the base relations satisfy non-triviality and a generalized form of state independence that holds even when consequence domains are state dependent, prerationality combined with continuity on Marschak triangles is equivalent to representation by a refined subjective expected utility function that excludes zero probabilities.

G. Charles-Cadogan

In a natural experiment with index option prices, we study how probability judgment error, and probabilistic risk attitudes, characterize investors’ sentiment about the ranking of index option attractiveness, the weight they place on each rank, and their ability to discriminate between prices. We introduce a novel behavioral process that (1) characterizes investor sentiment about tail events in index option prices over time and probability ranks, (2) provides early warning signals of market instability, and (3) crash probability estimates from a closed form expression for the time varying transition probability that a seemingly stable market state will become unstable and crash.

G. Charles-Cadogan

We extend Machina’s (1982) preference functional to abstract Wiener space. This has the advantage of extending utility functions to: infinite dimensional spaces; providing estimates for Machina’s (1982) nonlinear utility functional; and establishing a nexus between microfoundations of local utility, subjective probability, prospect theory, and elements of quantum decision theory without complex valued Hilbert spaces. For example, the class of Markowitz nonconvex utility functions (for which prospect theory’s value function is a special case) are vector valued functions in abstract Wiener space. Instead of preferences over probability distributions, the problem is transformed into one of preferences over states. Under Arzela-Ascoli Theorem, Wiener measure is the limit and unique conjugate prior in Wiener space. By a change of measure local subjective (posterior) probability is a Wiener integral. So, binary choice is stochastic. This poses a challenge for the transitivity axiom because intransitive preferences will occur in that space almost surely. Savage’s (1972) SEU fails in the space because probability is state dependent.

G. Charles-Cadogan

Under Bruno De Finetti’s coherence theory of additive probability, the expected value of a sequence of mutually exclusive bets should not expose the bettor to certain loss for any of the bets in the sequence (i.e. no formation of Dutch books). However, decision makers (DMs) are known to have non-additive probability preferences represented in the frequency domain. This conundrum of choice implies that DMs are incoherent. If so, then preference reversal (PR) is more likely to occur. That is, DMs response to choice and valuation procedures (with similar expected value) are more likely to be dissimilar or their preferences may appear to be intransitive. We prove that even when the true states of choice experiments are procedure invariance and transitive preferences, PR will still be observed because of : (1) phase incoherence between paired gambles with the same expected value–when probability cycles are incomplete, and (2) experimenter interference in probability measurement. We introduce a utility coherence ratio for paired gambles, and estimates from simulated phase transition from incoherent states to coherent states in binary choice to illustrate the theory. We find that coherence measures are very sensitive to measurement error, coherent states have higher frequency phase transition, and incoherent states represent momentary lapse in judgment that eventually disappear. So, Dutch books and PR are prevented.

Francis Bloch, Kalyan Chatterjee and Bhaskar Dutta

This paper studies a game of attack and interception in a network, where a single attacker chooses a target and a path, and each node chooses a level of protection. We show that the Nash equilibrium of the game exists and is unique. It involves a mixed strategy of the attacker except when one target has a very high value relative to others. We characterize equilibrium attack paths and attack distributions as a function of the underlying network and target values. We also show that adding a link or increasing the value of a target may harm the attacker - a comparative statics effect which is reminiscent of Braess's paradox in transportation economics. Finally, we contrast the Nash equilibrium with the equilibria of two variations of the model : one where nodes make sequential protection decisions upon observing the arrival of a suspicious object, and one where all nodes cooperate in defense.

Giorgos Galanis and Roberto Veneziani

What are the distributive implications of utilitarianism? Is it compatible with a concern for equality, as many utilitarians have argued? We analyse these questions in the context of a pure allocation problem. We consider an infinitely-lived economy and, drawing on the behavioural literature, assume that individuals have reference-dependent preferences: agents' utility is a function of current consumption and a reference point which captures consumption habits, or the agents' upbringing. Assuming a history of inequalities in consumption and welfare, we show that the utilitarian allocation is equalising: starting from an unequal distribution, consumption and welfare inequalities decrease over time at the utilitarian optimum. However, even though agents are in a relevant sense identical, equality does not obtain at any finite time.

Peter J. Hammond

Roberts' "weak neutrality" or "weak welfarism" theorem concerns Sen social welfare functionals which are de ned on an unrestricted domain of utility function pro les and satisfy independence of irrelevant alternatives, the Pareto condition, and a form of weak continuity. Roberts (1980) claimed that the induced welfare ordering on social states has a one-way representation by a continuous, monotonic real-valued welfare function defined on the Euclidean space of interpersonal utility vectors that is, an increase in this welfare function is sufficient, but may not be necessary, for social strict preference. A counter-example shows that weak continuity is insufficient; a minor strengthening to pairwise continuity is proposed instead and its sufficiency demonstrated.

Andrew Harkins

This paper develops a framework for analyzing the effect of arbitrary changes to network structure in linear-quadratic games on networks. Changes to network structure which increase total activity and total utility are studied for the case of strategic complements and strategic substitutes. Changes which are welfare increasing are found to depend on a new measure of centrality which counts the total length of walks from a node. Two optimal network design problems are then considered. Total activity is found to be a convex function of the edge weights of the network, which allows for convex optimization techniques to be applied to minimize total activity as in the traditional ‘key player’ problem. Welfare maximizing network structures are also studied and previous results which associate optimal networks with nested split graphs are generalized.

Abhinay Muthoo

We lay down a simple (game-theoretic) model of a state-of-anarchy involving three players. We focus attention on the following question: Which subset of players (if any) will agree to cooperate amongst each other? Will all three players agree to do so, or only two of the three players (and if so, which two players)? Or will no player agree to cooperate with any other player? We show that the socially optimal outcome is for all three players to agree to cooperate with each other. We also show that due to the presence of positive externalities, in equilibrium, cooperation may only be established between two of the three players (which is sub-optimal).

Daniele Condorelli and Balazs Szentes

We characterize equilibria of oligopolistic markets where identical firms with constant marginal cost compete a’ la Cournot. For given maximal willingness to pay and maximal total demand, we first identify all combinations of equilibrium consumer and producer surplus that can arise from arbitrary demand functions. Then, as a further restriction, we fix the average willingness to pay above marginal cost (i.e., first best surplus) and identify all possible triples of consumer surplus, producer surplus and deadweight loss.

Corrado Di Guilmi and Giorgos Galanis

The original formulation of the median voter theorem predicts parties’ political convergence in a static setup, under two key assumptions : voters preferences being fixed and parties being opportunistic (purely office-motivated). Drawing on recent empirical findings about the evolution of voters’ political preferences, this paper verifies whether the median voter theorem’s results hold when (i) the control variables that influence voters’ preferences endogenously evolve over time, and (ii) parties are not opportunistic. We present a dynamic two-party voting model in which voters’ preferences evolve over time

F. Kubler R. Malhotra & H. Polemarchakis

We give conditions under which an individual's preferences can be identified with finite data. First, we derive conditions that guarantee that a finite number of observations of an individual's binary choices identify preferences over an arbitrarily large subset of the choice space and allow one to predict how the individual shall decide when faced with choices not previously encountered. Second, we extend the argument to observations of individual demand. Finally, we show that finitely many observations of Walrasian equilibrium prices and profiles of individual endowments suffice to identify individual preferences and, as a consequence, equilibrium comparative statics.

A. Heifetz, E. Minelli & H. Polemarchakis

What normative constraints should bind parents (or policy makers) if they intervene in the choices of children (or constituencies) whose preferences evolve over time? For a sophisticated child who anticipates correctly his preference change, we prove that generically there exist parental interventions that are Pareto improving over the backward induction path that the child will follow on his own. If, in contrast, the child misperceives his future preferences, Pareto improving interventions might not exist, and even nudges might be painfully sobering. The parent may then choose to minimize the maximal disappointment along time that her benevolent intervention would cause.

Corrado Di Guilmi , Giorgos Galanis , Giorgos Baskozos

The paper proposes a behavioural-compartmental-epidemiological model with heterogenous agents who choose whether to enact physical distancing practices. Motivated by the evidence on individual physical distancing behaviour during the COVID-19 outbreak, our model extends the standard compartmental-epidemiological models by including endogenous physical distancing behaviour, drawing on discrete choice theory. This approach can account for two important factors : (i) the limited information about the contagion dynamics available for individuals and (ii) the heterogeneity in the individual ability and preferences concerning physical distancing. Despite its simplicity, the model provides policy indications about the timing and size of mitigating policies and the level and quality of information available for the public.

Giorgos Baskozos, Giorgos Galanis & Corrado Di Guilmi

We present an epidemic model in which heterogenous agents choose whether to enact social distancing practices. The policy maker decides on the timing and the extent of policies that incentivise social distancing. We evaluate the consequences of interventions and find that: (i) the timing of intervention is paramount in slowing the contagion, and (ii) a delay cannot be compensated by stronger measures.

Robert Akerlof, Hongyi Li, and Jonathan Yeo

This paper uses a laboratory experiment to study competitions for power — and the role of patronage in such competitions. We construct and analyze a new game — the “chicken-and-egg game” — in which chickens correspond to positions of power and eggs are the game’s currency. We find that power tends to accumulate, through a “power begets power” dynamic, in the hands of “lords.” Other subjects behave like their vassals in the sense that they take lords’ handouts rather than compete against them. We observe substantial wealth inequality as well as power inequality. There are also striking gender differences in outcomes — particularly in rates of lordship. In a second treatment, where we eliminate patronage by knocking out the ability to transfer eggs, inequality is vastly reduced and the “power begets power” dynamic disappears

Graciela Chichilnisky, Peter J. Hammond & Nicholas Stern

Ramsey famously condemned discounting “future enjoyments” as “ethically indefensible”. Suppes enunciated an equity criterion which, when social choice is utilitarian, implies giving equal weight to all individuals’ utilities. By contrast, Arrow (1999a, b) accepted, perhaps reluctantly, what he called Koopmans’ (1960) “strong argument” implying that no equitable preference ordering exists for a sufficiently unrestricted domain of infinite utility streams. Here we derive an equitable utilitarian objective for a finite population based on a version of the Vickrey–Harsanyi original position, where there is an equal probability of becoming each person. For a potentially infinite population facing an exogenous stochastic process of extinction, an equitable extinction biased original position requires equal conditional probabilities, given that the individual’s generation survives the extinction process. Such a position is well-defined if and only if survival probabilities decline fast enough for the expected total number of individuals who can ever live to be finite. Then, provided that each individual’s utility is bounded both above and below, maximizing expected “extinction discounted” total utility — as advocated, inter alia, by the Stern Review on climate change — provides a coherent and dynamically consistent equitable objective, even when the population size of each generation can be chosen.

Peter J. Hammond, Lei Qiao & Yeneng Sun

Monte Carlo simulation is used in [13] to characterize a standard stochastic framework involving a continuum of random variables that are conditionally independent given macro shocks. This paper presents some general properties of such Monte Carlo sampling processes, including their one-way Fubini extension and regular conditional independence. In addition to the almost sure convergence of Monte Carlo simulation considered in [13], here we also consider norm convergence when the random variables are square integrable. This leads to a necessary and sufficient condition for the classical law of large numbers to hold in a general Hilbert space. Applying this analysis to large economies with asymmetric information shows that the conflict between incentive compatibility and Pareto efficiency is resolved asymptotically for almost all sampling economies, corresponding to some results in [21] and [24].

Francis Bloch, Bhaskar Dutta and Marcin Dziubinski

We propose and study a strategic model of hiding in a network, where the network designer chooses the links and his position in the network facing the seeker who inspects and disrupts the network. We characterize optimal networks for the hider, as well as equilibrium hiding and seeking strategies on these networks. We show that optimal networks are either equivalent to cycles or variants of a core-periphery networks where every node in the periphery is connected to a single node in the core.

Anastasios Dosis & Abhinay Muthoo

We study a two-stage, winner-takes-all, R&D race, in which, at the outset, firms are uncertain regarding the viability of the project. Learning through experimentation introduces a bilateral (dynamic) feedback mechanism. For relatively low-value products, the equilibrium stopping time coincides with the socially efficient stopping time although firms might experiment excessively inequilibrium; for relatively high-value products, firms might reduce experimentation and stop rather prematurely due to the fundamental free-riding effect. Perhaps surprisingly, a decrease in the value of the product can spur experimentation.

Marcus Miller and Lei Zhang

After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to ‘fire-sales’ of securitised assets. We show how adding a systemic ‘bank run’ to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.

Philippe Mongin, GREGHEC, Paris

Following an initiative of Social Choice and Welfare, this is the result of an interview conducted by email exchange during the period from July 2017 to February 2018, with minor adjustments later in 2018. Apart from some personal history, topics discussed include: (i) social choice, especially with interpersonal comparisons of utility; (ii) utilitarianism, including Harsanyi’s contributions; (iii) consequentialism in decision theory and in ethics; (iv) the independence axiom for decisions under risk; (v) welfare economics under uncertainty; (vi) incentive compatibility and strategy-proof mechanisms, especially in large economies; (vii) Pareto gains from trade, and from migration; (viii) cost–benefit analysis and welfare measurement; (ix) the possible future of normative economics.

Giorgos Galanis, Roberto Veneziani & Naoki Yoshihara

Introducing a concept of fairness of economic allocations, namely exploitation as the unequal exchange of labor (henceforth, UE exploitation) by generalizing Roemer’s [51, 52] seminal model, this paper aims to answer the following two questions in the context of an intertemporal economy with linear technology: How is income and wealth inequality related (or unrelated) to the existence and persistence of UE exploitation? What are the mechanisms driving the persistent existence of UE exploitation in growing economies? Agents are UE exploited (resp. exploiters) if the amount of labor that they contribute to the economy is smaller (resp. bigger) than the amount of labor ‘received’ by them via their income. It is proved, first, that UE exploitation is monotonically correlated to functional income inequality. Second, it is shown that, unless agents discount the future, asset inequalities are necessary, but not sufficient for the persistence of UE exploitation, and the capital accumulation leading to the disappearance of UE exploitation cannot be ruled out in equilibrium. Third, it is shown that, regardless of whether agents discount the future, labor-saving technical progress may yield sustained growth with persistent UE exploitation by keeping labor abundant relative to capital, which restrains wages from rising. Unlike in models with differentiable production functions, this mechanism does not rely on changes in the marginal productivity of inputs and it is entirely driven by the interaction between innovation and labor markets.

Matthew J Robertson

When can a prosecutor persuade a loss-averse judge to increase her rate of conviction? Motivated by empirical evidence, I study a model of persuasion in which the loss a judge incurs from wrongful conviction looms larger than the gain from a just verdict. I show that, surprisingly, the prosecutor benefits from persuasion even when the judge is extremely loss-averse. However, a necessary condition is that the prosecutor does not underestimate the judge’s loss aversion. I draw on experimental findings to quantify the effectiveness of persuasion under loss aversion.

Matthew J. Robertson

I study contests in which each player is ranked by a scoring rule based on both her performance and how close this performance is to a private target, set before the contest. Each player’s decision problem is to choose her target when performance is subject to a random component. I analyse the incentive properties of target setting, derive conditions on the primitives such that equilibria exist and characterise the players’ behaviour. I show that target setting generates outcome uncertainty under a large class of conditions. In particular, neither private abilities nor perfectly correlated states are necessary. Target setting, therefore, has important implications in contest design as outcome uncertainty is a salient determinant of consumers’ demand for contests.

Dan Bernhardt, Peter Buisseret & Sinem Hidir

We study multi-district legislative elections between two office-seeking parties when the election pits a relatively strong party against a weaker party ; when each party faces uncertainty about how voter preferences will evolve during the campaign; and, when each party cares not only about winning a majority, but also about its share of seats in the event that it holds majority or minority status. When the initial imbalance favoring one party is small, each party targets the median voter in the median district, in pursuit of a majority. When the imbalance is moderate, the advantaged party continues to hold the centre-ground, but the disadvantaged party retreats to target its core supporters; it does so to fortify its minority share of seats in the likely event that it fails to secure a majority. Finally, when the imbalance is large, the advantaged party advances toward its opponent, raiding its moderate supporters in pursuit of an outsized majority.

Gaetano Bloise, Herakles Polemarchakis & Yiannis Vailakis

Debt is sustainable at a competitive equilibrium due solely to the reputation of debtors for repayment; that is, even absent collateral or legal sanctions available to creditors. Under incomplete markets, when the rate of interest (net of growth) is recurrently negative, self-insurance is more costly than borrowing, and repayments on loans are enforced by he implicit threat of loss of risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money and, in general, is not valued as a speculative bubble; it is distinct from outside money. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.

Dimitri Migrow

A manager aims to elicit employees’ information by designing a hierarchical communication network. She decides who communicates with whom, and in which order, where communication takes the form of “cheap talk” (Crawford and Sobel, 1982) and the information structure is beta-binomial. The optimal network is shaped by two competing forces: an intermediation force that calls for grouping employees together and an uncertainty force that favours separating them. The manager optimally divides employees into groups of similar bias. Under simple conditions on biases and a uniform prior, the optimal network features a single intermediary who communicates directly to the manager

Graciela Chichilnisky, Peter J. Hammond & Nicholas Stern

Ramsey famously pronounced that discounting “future enjoyments” would be ethically indefensible. Suppes enunciated an equity criterion implying that all individuals’ welfare should be treated equally. By contrast, Arrow (1999a, b) accepted, perhaps rather reluctantly, the logical force of Koopmans’ argument that no satisfactory preference ordering on a sufficiently unrestricted domain of infinite utility streams satisfies equal treatment. In this paper, we first derive an equitable utilitarian objective based on a version of the Vickrey–Harsanyi original position, extended to allow a variable and uncertain population with no finite bound. Following the work of Chichilnisky and others on sustainability, slightly weakening the conditions of Koopmans and co-authors allows intergenerational equity to be satisfied. In fact, assuming that the expected total number of individuals who ever live is finite, and that each individual’s utility is bounded both above and below, there is a coherent equitable objective based on expected total utility. Moreover, it implies the “extinction discounting rule” advocated by, inter alia, the Stern Review on climate change.

Peter J Hammond

Whether an economic agent's decision creates an externality often depends on the institutional context in which the decision was made. Indeed, in orthodox economics, a technological or exogenous externality occurs just in case one agent's economic welfare or production possibilities are directly affected by the market decisions of other agents. A pecuniary externality occurs just in case one consumer's economic welfare or producer's profit is affected indirectly by price changes caused by changes in other agents' decisions. Similarly, an institutional or endogenous externality may arise whenever allocations are determined by a mechanism that is not strategyproof for some agent. Then even a resource balance constraint creates an institutional externality except in special cases such as when no individual agent's action can affect market clearing prices - i.e., there are no pecuniary externalities.

Francis Bloch, Bhaskar Dutta & Mihai Manea

We analyze the formation of partnerships in social networks. Players need favors at random times and ask their neighbors in the network to form exclusive long-term partnerships that guarantee reciprocal favor exchange. Refusing to provide a favor results in the automatic removal of the underlying link. When favors are costly, players agree to provide the first favor in a partnership only if they otherwise face the risk of eventual solitude. In equilibrium, the players essential for realizing every maximum matching can avoid this risk and enjoy higher payoffs than inessential players. Although the search for partners is decentralized and reflects local incentives, the strength of essential players drives efficient partnership formation in every network. When favors are costless, players enter partnerships at any opportunity and every maximal matching can emerge in equilibrium. In this case, efficiency is limited to special linking patterns: complete and complete bipartite networks, locally balanced bipartite networks with positive surplus, and factor-critical networks.

Pablo F. Beker & Conrado Cuevas

We study the value of public information in a stochastic exchange economy where agents trade assets to reallocate risk and mandatory (retirement) savings imposes a lower bound on the market value of some agents' holdings of a nancial asset. Since equilibrium prices depend on the agents' beliefs about the states of nature, the arrival of information shifts the agents' mandatory savings constraints. We show that the arrival of public information can generate an ex-ante Pareto improvement relative to an uninformative equilibrium even when ex-post improvements are not possible.

Walter Bossert & Bhasker Dutta

We propose and characterize a class of measures of welfare change that are based on the generalized Gini social welfare functions. In addition, we analyze these measures in the context of a second-order dominance property that is akin to generalized Lorenz dominance as introduced by Shorrocks (1983) and Kakwani (1984). Because we consider welfare differences rather than welfare levels, the requisite equivalence result involves linear welfare functions (that is, those associated with the generalized Ginis) only, as opposed to the entire class of strictly increasing and S-concave welfare indicators. Journal of Economic

David Ronayne and Daniel Sgroi

We present results from an experiment involving 1,500 participants on whether, when and why good advice is ignored, focusing on envy and stubbornness. Participants performance in skill-based and luck-based tasks generated a probability of winning a bonus. About a quarter ignored advice that would have increased their chance of winning. Good advice was followed less often when the adviser was relatively highly remunerated or the task was skill-based. More envious advisees took good advice more often in the skill-based task, but higher adviser remuneration significantly reduced this effect. Susceptibility to the sunk cost fallacy reduced the uptake of good advice. (Revised March 2018)

Matteo Foschi

When consumers register with loyalty schemes, or open a 'customer account', offered by large retailers, they allow retailers to study their purchasing behaviour over time. Via personalised offers and discounts, retailers can then use this information to price discriminate. I study the effect on consumer welfare of this discrimination, assuming several different levels of informativeness within the schemes. When schemes are uninformative about consumer preferences they are certain to hurt consumer surplus. When they are fully or partially informative, an increase in aggregate consumer surplus can take place under some conditions. Pareto improvements are never possible. The model studies groceries and online industries where temptation and self-control are an issue.

Sinem Hidir

This paper explores the interaction between uncertain bias and endogeneous information acquisition in strategic communication. I consider an expert who is privately informed about his bias as well as about whether he is informed, in addition can also engage in costly information acquisition. In this setup, information acquisition simultaneously serves the purposes of getting informed and increasing credibility before communicating through cheap talk to a decision maker. I define the signaling and the intrinsic value of information and find the conditions under which a separating equilibrium can arise, which is the most informative as well as the welfare maximizing equilibrium. I solve for equilibria as a function of cost of information acquisition and show that communication is most precise with an initially uninformed expert at an intermediary cost value. The overall welfare is non-monotone in cost, and it increases when cost increases to enable separation. When covert information acquisition is considered, there is a tradeoff between less wasteful investment versus less communication precision compared to the overt case.

Chirantan Ganguly & Indrajit Ray

We consider a Bayesian game, namely the Battle of the Sexes with private information, in which each player has two types, High and Low. We allow cheap talk regarding players’ types before the game. We prove that the unique fully revealing symmetric cheap talk equilibrium exists (for a low range of prior probability of the High-type) and has a desirable type-coordination property: it fully coordinates on the ex-post efficcient pure Nash equilibrium when the players’ types are different. Type-coordination is also obtained in a partially revealing equilibrium in which only the High-type is not truthful, for a medium range of prior probability of the High-type. We also prove that there is no (non-babbling) truthful cheap talk equilibrium if only one player talks.

Ricardo Gonçalves & Indrajit Ray

We consider the set-up of a Japanese-English auction with exogenously fixed discrete bid levels for the wallet game with two bidders, following Gonçalves and Ray (2017). We show that in this auction, partition equilibria exist that may be separating or pooling. We illustrate some separating and pooling equilibria with two and three discrete bid levels. We also compare the revenues of the seller from these equilibria and thereby find the optimal choices of bid levels for these cases.

Bhaskar Dutta & Hannu Vartiainen

Farsighted formulations of coalitional formation, for instance by Harsanyi (1974) and Ray and Vohra(2015), have typically been based on the von Neumann-Morgenstern (1944) stable set. These farsighted stable sets use a notion of indirect dominance in which an outcome can be dominated by a chain of coalitional ‘moves’ in which each coalition that is involved in the sequence eventually stands to gain. Dutta and Vohra(2016) point out that these solution concepts do not require coalitions to make optimal moves. Hence, these solution concepts can yield unreasonable predictions. Dutta and Vohra (2016) restricted coalitions to hold common, history independent expectations that incorporate optimality regarding the continuation path. This paper extends the Dutta-Vohra analysis by allowing for history dependent expectations. The paper provides characterization results for two solution concepts corresponding to two versions of optimality. It demonstrates the power of history dependence by establishing nonemptyness results for all finite games as well as transferable utility partition function games. The paper also provides partial comparisons of the solution concepts to other solutions.

David P. Myatt & Chris Wallace

In an asymmetric coordination (or anti-coordination) game, players acquire and use signals about a payoff-relevant fundamental from multiple costly information sources. Some sources have greater clarity than others, and generate signals that are more correlated and so more public. Players wish to take actions close to the fundamental but also close to (or far away from) others’ actions. This paper studies how asymmetries in the game, represented as the weights that link players to neighbours on a network, affect how they use and acquire information. Relatively centrally located players (in the sense of Bonacich, when applied to the dependence of players’ payoffs upon the actions of others) acquire fewer signals from relatively clear information sources; they acquire less information in total; and they place more emphasis on relatively public signals.

Raghul S Venkatesh

In the classic Crawford-Sobel (CS) model of strategic communication between an informed Sender and uninformed Receiver, perfect information transmission is never achieved as an equilibrium outcome. I present a modified version of the CS cheap talk game with the following two innovations : (i) both players take actions, and (ii) actions are strategic substitutes. In contrast to the CS setup, the modified game can facilitate perfect information revelation. I characterize the conditions under which a full information revelation equilibrium exists. When these conditions are violated, only partial revelation equilibria exist. Under partial revelation, the Sender reveals information up to a threshold state and pools beyond this threshold, resulting in some loss of information. Welfare analysis suggests that partial revelation equilibria with a higher threshold pareto dominate those with lower thresholds. Crucially, a higher threshold equilibrium is also interim efficient – every Sender type at least weakly prefers this over a lower threshold equilibrium.

Raghul S Venkatesh

I develop a model of activism and polarization in the context of electoral competition. Two candidates imultaneously announce policy platforms and seek the support of ideologically inclined activists. Activists compete to influence electoral outcomes by expending costly support for their respective candidates. The presence of activists always moderates the platform choice of candidates, compared to the case of no activism. The main finding is to provide conditions under which as activists’ ideological partisanship increases (decreases), polarization of candidate platforms reduces (widens) - meaning candidates may compromise even though their supporters become more extreme. I precisely characterize the conditions under which the presence of activism and increasing partisanship among activists are both welfare-improving for voters. Finally, I identify a novel crowding out effect of big money on the demand for activism. My analysis suggests public funding of elections as an important institutional reform that could mitigate the pernicious effects of high polarization.

Kirill Pogorelskiy & Stefan Traub

We introduce a skewness-based approach to measure tax progression and demand for redistribution. Adapting a novel, quantile-based statistical measure of skewness to right-skewed income distributions, we uncover its political economy foundation, by simultaneously relating the same measure to the classical model of income redistribution due to Meltzer and Richard (1981), to the Prospect Of Upward Mobility (POUM) mechanism due to Benabou and Ok (2001), and to the progressivity of a tax schedule. In an empirical analysis of UK income distributions in 1979 - 2013, we find that skewness has increased over time, with the rich moving further away from the median. While the magnitude of the increase has remained small enough so that observed redistribution (or lack thereof ) could be consistent with POUM hypothesis, more recent periods show an increase in tax progression.

Herakles Polemarchakis, Larry Selden & Xinxi Song

Individuals behave differently when they know the objective probability of events and when they do not. The smooth ambiguity model accommodates both ambiguity (uncertainty) and risk. For an incomplete, competitive asset market, we develop a revealed preference test for asset demand to be consistent with the maximization of smooth ambiguity preferences ; and we show that ambiguity preferences constructed from finite observations converge to underlying ambiguity preferences as observations become dense. Subsequently, we give sufficient conditions for the asset demand generated by smooth ambiguity preferences to identify the ambiguity and risk indices as well as the ambiguity probability measure. We do not require ambiguity beliefs to be observable : in a generalized specification, they may not even be defined. An ambiguity free asset plays an important role for identification.

Francis Bloch, Bhaskar Dutta, Stéphane Robin & Min Zhu

This paper analyzes the formation of partnerships in social networks. Agents randomly request favors and turn to their neighbors to form a partnership. If favors are costly, agents have an incentive to delay the formation of the partnership. In that case, for any initial social network, the unique Markov Perfect equilibrium results in the formation of the maximum number of partnerships when players become infinitely patient. If favors provide benefits, agents rush to form partnerships at the cost of disconnecting other agents and the only perfect initial networks for which the maximum number of partnerships are formed are the complete and complete bipartite networks. The theoretical model is tested in the lab. Subjects generally play according to their equilibrium strategy and the efficient outcome is obtained over 78% of the times. Decisions are affected by the complexity of the network. Two behavioral rules are observed during the experiment: subjects accept the formation of the partnership too often and reject partnership offers when one of their neighbors is only connected to them.

Hervé Crès & Mich Tvede

Some trades based on differences in beliefs might cause more harm than good. Should they be restricted? If yes, how? We propose three limits on regulation aimed at protecting beneficial trades: Unanimity – the regulator should not object to trades with identical beliefs; Autarky – if the regulator does not object to two unrelated trades, both with identical beliefs, then it should not object to the mere juxtaposition of the trades; and, Independence of Irrelevant Agents – the regulator should consider solely the agents involved in the trade. We show that there is a unique policy within these three limits: Laissez-faire.

Athanasios Andrikopoulos & Xeni Dassiou

We examine the impact of exchange rates on profits and prices in differentiated consumable goods markets under imperfect competition. We model the exchange rate exposure of exporting firms operating within price and quantity settings where between and within competition co-exist. We show that these two forms of competition may act as opposing forces in terms of the impact of the exchange rate on the optimal prices (quantities) and profits in both Bertrand and Cournot models. Real and bilateral exchange rate exposure is empirically tested using stock price and profit data from twenty-two multinational firms from nine markets during 1984-2015.

Peter Eso & Chris Wallace

In a simple trading game the buyer and seller have repeated opportunities to acquire and disclose hard (verifiable) evidence about the value of the tradable good. The parties disclose individually favourable information but conceal signals which are beneficial to the other side. In a leading case of interest with a finite horizon and sufficiently patient players, the equilibrium is characterized by a period of skimming (in which the seller makes offers acceptable only to informed buyers) concluded by a single settling period in which agreement is reached for sure. The length of delay until agreement and the corresponding efficiency loss are decreasing in the time horizon and in the abilities of the trading parties to identify the good’s value, but increasing in impatience. An arbitrarily long time horizon can generate either immediate agreement or no trade between uninformed parties.

Facundo Albornoz, Antonio Cabrales & Esther Hauk

We study a model that integrates productive and socialization efforts with network choice and parental investments. We characterize the unique symmetric equilibrium of this game. Individuals underinvest in productive and social effort. However, solving only the investment problem can exacerbate the misallocations due to network choice, to the point that in the presence of congestion eects the intervention may generate an even lower social welfare than no intervention at all. We also study the interaction of parental investment with network choice. In many scenarios, intergenerational transmission of abilities leads to a tendency towards to conformism, which aggravates potential problems of network overpopulation. We relate our equilibrium results with the existing evidence on parental occupational transmission.

Peter J. Hammond & Yeneng Sun

A general parameter process defined by a continuum of random variables is not jointly measurable with respect to the usual product sigma-algebra. For the case of independent random variables, a one-way Fubini extension of the product space was constructed in our 2006 paper (“Joint measurability and the one-way Fubini property for a continuum of independent random variables”, Proceedings of the American Mathematical Society, 134: 737–747) to satisfy a limited form of joint measurability. For the general case we show that this extension exists if and only if there is a countably generated sigma-algebra given which the random variables are essentially pairwise conditionally independent, while their joint conditional distribution also satisfies a suitable joint measurability condition. Applications include new characterizations of essential pairwise independence and essential pairwise exchangeability through regular conditional distributions with respect to the usual product sigma-algebra in the framework of a one-way Fubini extension.

David Ronayne

In the classic Hotelling-Downs model of political competition there is (almost always) no pure strategy equilibrium with three or more potential strategic candidates where the distribution of voters’ preferred policies are single-peaked. I study the effect of introducing two idealist candidates who are non-strategic (i.e., fixed to their policy platform), to an unlimited number of potential strategic entrants. I present results that hold for a non-degenerate class of cases : (i) For any equilibrium, it must be that the left-most and right-most candidates (i.e., extremists) are idealists; (ii) Hotelling’s Law fails : in any equilibrium, candidates do not share their policy platforms, which instead are spread out across the policy space; (iii) Characterizations for symmetric and asymmetric single-peaked distributions of voters’ ideal policy preferences. Equilibria where many strategic candidates enter exist only if the distribution of voter preferences is asymmetric.

Sinong Ma & Zvi Safra

In this work we reconsider Harsanyi’s celebrated (1953, 1955, 1977) utilitarian impartial observer theorem. Departing from Harsanyi’s individual-centered approach, we argue that, when societal decisions are at stake, postulates must not be drawn from individualistic behavior. Rather, they should be based on societal norms. Hence, notions like societal fairness should explicitly be taken as the guiding principles. Continuing this line of thinking, we state and prove a utilitarian result that, rather than the independence assumption, is based on the notion of procedural fairness and on similar treatment of societal and individual lotteries.

Herakles Polemarchakis

Eventual consensus is the only property of a rational dialog.

Giulio Trigilia

Firms seeking external financing jointly choose what securities to issue, and the extent of their disclosure commitments. The literature shows that enhanced disclosure reduces the cost of financing. This paper analyses how disclosure affects the optimal composition of financing means. It considers a market where firms compete for external financing under costly-state-verification, but,in contrast to the standard model : (i) the degree of asymmetric information between firms and outside investors is variable, and (ii) firms can affect it through a disclosure policy, modeled as a verifiable signal with a cost decreasing in its noise component. Two central predictions emerge. On the positive side, optimal disclosure and leverage are negatively correlated. Efficient equity financing requires that firms are sufficiently transparent, whereas debt does not; it solely relies on the threat of bankruptcy and liquidation. Therefore, more transparent firms issue cheaper equity and face a higher opportunity cost of leveraged external financing. The prediction is shown to be consistent with the behavior of US corporations since the 1980s. On the normative side, disclosure externalities and time inconsistencies lead to under-disclosure and excessive leverage relative to the constrained best. If mandatory disclosures are feasible { that is, they cannot be easily dodged { they increase welfare. Otherwise, endogenously higher transparency can be triggered if regulators set capital requirements. Capital regulation proves especially useful when (i) firm performances are highly correlated, and (ii) disclosure requirements can be easily dodged { conditions that seem to apply to large financial firms. The view of capital standards as a means to improve the information environment is novel in the literature; its policy implications and challenges are discussed.

Andreas Park & Daniel Sgroi

We analyze and confirm the existence and extent of rational informational herding and rational informational contrarianism in a financial market experiment, and compare and contrast these with equivalent irrational phenomena. In our study, subjects generally behave according to benchmark rationality. Traders who should herd or be contrarian in theory are the signicant sources of both within the data. Correcting for subjects who can be identified as less rational increases our ability to predict herding or contrarian behavior considerably.

Peter J. Hammond

To prove their Walrasian equilibrium existence theorem, Arrow and Debreu (1954) devised an abstract economy that Shapley and Shubik (1977) cricitized as a market game because, especially with untrustworthy traders, it fails to determine a credible outcome away from equilibrium. All this earlier work also postulated a Walrasian auctioneer with complete information about traders' preferences and endowments. To ensure credible outcomes, even in disequilibrium, warehousing is introduced into a multi-stage market game. To achieve Walrasian outcomes in a large economy with incomplete information, even about traders' endowments, a strategy-proof demand revelation mechanism is considered, and then extended to include warehousing.

Gaetano Bloise, Herakles M. Polemarchakis and Yiannis Vailakis

Sovereign debt is not sustainable even in the presence of uninsurable risks; which extends the result of Bulow and Rogoff (1989). But the argument is not as general. Indeed, examples show that positive borrowing may be enforced even though the sovereign’s natural debt limits, corresponding to the most pessimistic evaluation of future endowment, are finite. Unsustainable sovereign debt in incomplete asset markets requires a strong version of high implied interest rates: the value of the most optimistic evaluation of future endowment is finite

Gaetano Bloise & Herakles Polemarchakis

In a dynamic economy, money provides liquidity as a medium of exchange. A central bank that sets the nominal rate of interest and distributes its profit to shareholders as dividends is traded in the asset market. A nominal rates of interest that tend to zero, but do not vanish, eliminate equilibrium allocations that do not converge to a Pareto optimal allocation.

Nikos Kokonas & Herakles Polemarchakis

In a stochastic economy of overlapping generations subject to uninsurable risks, competitive allocations need not be constrained optimal. This is the case even in the presence of long-lived assets and no short sales.

Nikos Kokonas & Herakles Polemarchakis

A reduction in the output of productive assets (trees) in some states of the world can expand the span of payoffs of assets; and, improved risk sharing may compensate for the loss of output and support a Pareto superior allocation. Surprisingly, if short sales of assets are not allowed, improved risk sharing that results from the destruction of output does not suffice to induce a Pareto superior allocation.

Pablo Beker & Emilio ESPINO

We evaluate the ability of the Lucas [25] tree and the Alvarez-Jermann [3] models, both with homogeneous as well as heterogeneous beliefs, to generate a time series of excess returns that displays both short-term momentum and long-term reversal, i.e., positive autocorrelation in the short-run and negative autocorrelation in the long-run. Our analysis is based on a methodological contribution that consists in (i) a recursive characterisation of the set of constrained Pareto optimal allocations in economies with limited enforceability and belief heterogeneity and (ii) an alternative decentralisation of these allocations as competitive equilibria with endogenous borrowing constraints. We calibrate the model to U.S. data as in Alvarez and Jermann [4]. We find that only the Alvarez-Jermann model with heterogeneous beliefs delivers autocorrelations that not only have the correct sign but are also of magnitude similar to the US data.

Jacob Glazer, Ilan Kremer & Motty Perry

Crowdfunding, Internet websites, and health care are only a few examples of markets in which agents make decisions not only on the basis of their own investigations and knowledge, but also on the basis of information from a "central planner" about other agents’ actions. While such reciprocal learning can be welfare-improving, it may reduce agents’ incentives to conduct their own investigations, and may lead to harmful cascades. We study the planner’s optimal policy regarding when to provide information and how much information to provide. We show that the optimum policy involves a delicate balance of hiding and revealing information.

M.Udara Peiris & Herakles Polemarchakis

Explicit targets for the composition of assets traded by governments are necessary for fiscal-monetary policy to determine the stochastic paths of inflation or exchange rates; this is the case even if fiscal policy is non-Ricardian.Targets obtain with the traditional conduct of monetary policy and Credit Easing, but not with inconventional policy and Quantitative Easing. The composition of the portfolios traded by monetary-fiscal authorities determines premia in asset and currency markets

Motty Perry & Philip J. Reny

Citation indices are regularly used to inform critical decisions about promotion, tenure, and the allocation of billions of research dollars. Nevertheless, most indices (e.g., the h-index) are motivated by intuition and rules of thumb, resulting in undesirable conclusions. In contrast, five natural properties lead us to a unique new index, the Euclidean index, that avoids several shortcomings of the h-index and its successors. The Euclidean index is simply the Euclidean length of an individual’s citation list. Two empirical tests suggest that the Euclidean index outperforms the h-index in practice.

Motty Perry, Philip J. Reny & Arthur J. Robson

Understanding the purpose of sex remains one of the most important unresolved problems in evolutionary biology. The difficulty is not that there are too few theories of sex, the difficulty is that there are too many and none stand out. To distinguish between theories we suggest the following question: Why are there no triparental species in which an offspring is composed of the genetic material of three individuals? A successful theory should confer an advantage to biparental sex over asexual reproduction without conferring an even greater advantage to triparental sex. We pose our question in the context of two leading theories of sex, the (deterministic) mutational hypothesis that sex reduces the rate at which harmful mutations accumulate, and the red queen hypothesis that sex reduces the impact of parasitic attack by increasing genotypic variability. We show that the mutational hypothesis fails to provide an answer to the question because it implies that triparental sex dominates biparental sex, so the latter should never be observed. In contrast, we show that the red queen hypothesis is able to explain biparental sex without conferring an even greater advantage to triparental sex.

Sergiu Hart, Ilan Kremer & Motty Perry

An evidence game is a strategic disclosure game in which an informed agent who has some pieces of verifiable evidence decides which ones to disclose to an uninformed principal who chooses a reward. The agent, regardless of his information, prefers the reward to be as high as possible. We compare the setup where the principal chooses the reward after the evidence is disclosed to the mechanism-design setup where he can commit in advance to a reward policy. The main result is that under natural conditions on the truth structure of the evidence, the two setups yield the same equilibrium outcome.

Bhaskar Dutta & Rajiv Vohra

In the study of farsighted coalitional behavior, a central role is played by the von Neumann-Morgenstern (1944) stable set and its modification that incorporates farsightedness. Such a modification was first proposed by Harsanyi (1974) and has recently been re-formulated by Ray and Vohra (2015). The farsighted stable set is based on a notion of indirect dominance in which an outcome can be dominated by a chain of coalitional ‘moves’ in which each coalition that is involved in the sequence eventually stands to gain. However, it does not require that each coalition make a maximal move, i.e., one that is not Pareto dominated (for the members of the coalition in question) by another. Nor does it restrict coalitions to hold common expectations regarding the continuation path from every state. Consequently, when there are multiple continuation paths the farsighted stable set can yield unreasonable predictions. We resolve this difficulty by requiring all coalitions to have common rational expectations about the transition from one outcome to another. This leads to two related concepts: the rational expectations farsighted stable set (REFS) and the strong rational expectations farsighted stable set (SREFS). We apply these concepts to simple games and to pillage games to illustrate the consequences of imposing rational expectations for farsighted stability

Michael McMahon, Udara Peiris & Herakles Polemarchakis

Quantitative easing compromises the control of the central bank over the stochastic path of inflation.

Niall Hughes

Models of single district plurality elections show that with three parties anything can happen - extreme policies can win regardless of voter preferences. I show that when single district elections are used to fill a legislature we get back to a world where the median voter matters. An extreme policy will generally only come about if it is preferred to a more moderate policy by the median voter in a majority of districts. The mere existence of a centrist party can lead to moderate outcomes even if the party itself wins few seats. Furthermore, I show that while standard single district elections always have misaligned voting i.e. some voters do not vote for their preferred choice, equilibria of the legislative election exist with no misaligned voting in any district. Finally, I show that when parties are impatient, a fixed rule on how legislative bargaining occurs will lead to more coalition governments, while uncertainty will favour single party governments.

Sebastian Fehrler & Niall Hughes

We investigate the potential of transparency to influence committee decision making. We present a model in which career concerned committee members receive private information of different type-dependent accuracy, deliberate and vote. We study three levels of transparency under which career concerns are predicted to affect behavior differently, and test the model’s key predictions in a laboratory experiment. The model’s predictions are largely borne out - transparency negatively affects information aggregation at the deliberation and voting stages, leading to sharply different committee error rates than under secrecy. This occurs despite subjects revealing more information under transparency than theory predicts.

Felix Kubler & Herakles Polemarchakis

The demand for assets as prices and initial wealth vary identifies beliefs and attitudes towards risk. We derive conditions that guarantee identification with no knowledge either of the cardinal utility index or of the distribution of future endowments or payoffs of assets; the argument applies even if the asset market is incomplete and demand is observed only locally.