# 2003 Abstracts

693

Learning and Location

Joanne Sault, Otto Toivanen and Michael Waterson

In this paper we study whether learning from rivals affects within-market location decisions between competing firms. We show it does, using detailed locational data from twoleading hamburger chains in the UK. Using four different tests, we demonstrate that alternative explanations - pre-emption and product differention- have less bite than between firm learning.

Laws of Scarcity for a Finite Game: Exact Bounds on Estimations"

Alexander Kovalenkov and Myrna Wooders

A "Law of Scarcity" is that scarceness is rewarded. We demonstrate laws of scarcity for cores and aproximate cores of games. Furthermore, we show that equal treatment core payoff vectors satisfy a condition of cyclic monotonicity. Our results are developed for parameterized collections of games and exact bounds on the maximum possible deviation of approximate core payoff vectors from satisfying a law of scarcity are stated in terms of the parameters describing the games. We note that the parameters can, in principle, be estimated.

The KPSS Test with Outliers

Jesus Otero and Jeremy Smith

We investigate the effects of outliers on the KPSS tests. We find that for nonstationary series outliers induce spurious stationarity by lowering the power of these tests. The empirical size of these tests is also found to be sensitive to the location of the outlier.

Networks and Farsighted Stability

Frank H. Page Jr and Myrna Wooders

We make two main contributions to the theory of economic and social network formation. First, we introduce the notion of a network formation network or a supernetwork. Supernetworks provide a framework in which we can formally define and analyze farsightedness in network formation. Second, we introduce a new notion of equilibrium corresponding to farsightedness. In particular, we introduce the notion of a farsightedly basic network as well as the notion of a farsighted basis, and we show that all supernetworks possess a farsighted basis. A farsightedly basic network contained in the farsighted basis of a given supernetwork represents a possible final resting point (or absorbing state) of a network formation process in which agents behave farsightedly, Given the supernetwork representation of the rules governing network formation and the preferences of the individuals, a farsighted basis contains networks which are likely to emerge and persist of individuals behave farsightedly.

Decentralized Job Matching

Guillaume Haeringer and Myrna Wooders

This paper studies a decentralized job market model where firms (academic departments) propose sequentially a (unique) position to some workers (Ph.D. candidates). Successful candidates then decide whether to accept the offers, and departments whose positions remain unfilled propose to other candidates. We distinguish between several cases, depending on whether agents’ actions are simultaneous and/or irreversible (if a worker accepts an offer he is immediately matched, and both the worker and the firm to which she is matched go out of the market). For all these cases, we provide a complete characterization of the Nash equilibrium outcomes and the Subgame Perfect equilibria. While the set of Nash equilibria outcomes contain all individually rational matchings, it turns out that in most cases considered all subgame perfect equilibria yield a unique outcome, the worker-optimal matching.

Conformity and bounded rationality in games with many players.

Edward Cartwright and Myrna Wooders

Intepret a set of players all playing the same pure strategy and all with similar attributes as a society. Is it consistent with self interested behaviour for a population to organise itself into a relatively small number of societies? In a companion paper we characterized how large* e *must be, in terms of parameters describing individual games, for an equilibrium to exhibit conformity in pure strategies. In this paper we provide a wide class of games where such conformity is boundedly rational, that is, where *e* can be chosen to be small.

On Equilibrium in Pure Strategies in Games with Many Players

Edward Cartwright and Myrna Wooders

We introduce a framework of noncooperative games, allowing both countable sets of pure strategies and player types, in which players are characterized by their attributes and demonstrate that for all games with sufficiently many players, every mixed strategy Nash equilibrium can be used to construct a Nash "-equilibrium in pure strategies that is ‘"-equivalent’. Our framework introduces and exploits a distinction between crowding attributes of players (their external effects on others) and their taste attributes (their payoff functions). The set of crowding attributes is assumed to be compact; this is not required, however, for taste attributes. For the special case of at most a finite number of crowding attributes, we obtain analogs, for finite games, of purification results due to Pascoa (1993a,b,1998) for games with a continuum of players. Our main theorems are based on a new mathematical result, in the spirit of the Shapley-Folkman Theorem but applicable to a countable (not necessarily finite dimensional) strategy space.

Unhappiness and Crime:Evidence from South Africa

Nattavudh Powdthavee

This paper is the first of its kind to study quality of life responses of crime victims. Using cross-sectional data from the OHS97 survey of South Africa, we show that victims report significantly lower well-being than the non-victims, ceteris paribus. The calculated ‘compensating variation’ suggests that it would take, on average, an extra $10,000 per month to offset the psychological costs of crime. Happiness is lower for nonvictimized respondents currently living in higher crime areas. However, we find a strong evidence for females that criminal victimization hurts, but hurts less if the crime rate on our reference group is high.

Imitation and the Emergence of Nash Equilibrium Play in Games with Many PlayersEdward Cartwright

We model a learning dynamic in which players imitate and innovate. Of interest is to question whether Nash equilibrium play emerges, and if so, the role that imitation plays in this emergence. Our main result provides a general class of coordination games for which approximate Nash equilibrium play does emerge. Important conditions include that players imitate "similar" individuals. The role of imitation in learning is discussed in the context of two examples where it is shown that imitation can lead to pareto superio outcomes.

Viable Tax Constitutions

Carlo Perroni and Kimberley A. Scharf

Taxation is only sustainable if the general public complies with it. This observation is uncontroversial with tax practitioners but has been ignored by the public finance tradition, which has interpreted tax constitutions as binding contracts by which the power to tax is irretrievably conferred by individuals to government, which can then levy any tax it chooses. However, in the absence of an outside party enforcing contracts between members of a group, no arrangement within groups can be considered to be a binding contract, and therefore the power of tax must be sanctioned by individuals on an ongoing basis. In this paper we offer, for the first time, a theoretical analysis of this fundamental compliance problem associated with taxation, obtaining predictions that in some cases point to a re-interptretation of the theoretical constructions of the public finance tradition while in others call them into question.

682 Social Conformity in Games with Many Players

Myrna Wooders, Edward Cartwright and Reinhard Selton

681

Dynamic Price Competition with Price Adjustment Costs and Product Differentiation

Gianluigi Vernasca

We study a discrete time dynamic game of price competition with spatially differentiated products and price adjustment costs. We characterise the Markov perfect and the open-loop equilibrium of our game. We find that in the steady state Markov perfect equilibrium, given the presence of adjustment costs, equilibrium prices are always higher than prices at the repeated static Nash solution, even though, adjustment costs are not paid in steady state.This is due to intertemporal strategic complementarity in the strategies of the firms and from the fact that the cost of adjusting prices adds credibility to high price equilibrium strategies. On the other hand, the stationary open-loop equilibrium coincides always with the static solution. Furthermore, in contrast to continuous time games, we show that the stationary Markov perfect equilibrium converges to the static Nash equilibrium when adjustment costs tend to zero. Moreover, we obtain the same convergence result when adjustment costs tend to infinity.

680

Fiscal Interactions among European Countries

Michaela Redoano

In this paper we investigate whether there is empical evidence that EU Countries set their public expenditure and their taxes interdependently. We use a panel of data across european countries, years and fiscal variables to estimated countries’ reactions functions. We find evidence of intedependences consistent with the literature on tax and yardistick competition

679

Consumers and Competition

Michael Waterson

This paper shows that even if all consumers face search costs, if these are below a certain level dependent upon the firm numbers and demand elasticity, the Diamond-type equilibrium with all prices at the monopoly level fails to exist.

678

The Utility of the Voting Power Approach

Dennis Leech

This paper argues that the voting power approach is much more general than is portrayed by Albert (“The Voting Power Approach: Measurement without Theory”, European Union Politics, 4:3, 2003) and is therefore capable of generating important insights about voting systems, such as qualified majority voting in the EU Council. The voting power approach focuses on understanding the properties of voting systems by analysing outcomes and thereby is able to generate empirical facts that are not otherwise obvious. That the approach is so general has not previously been pointed out in the relevant literature; it has usually been taken as coinciding with power indices. Albert’s criticism is directed at one aspect of the theory of voting power indices: the assumption of probabilistic voting that underlies conventional power indices. It is argued that he fails to take account of the different uses of power indices and that the probabilistic voting assumptions he derides may or may not be useful depending on this. It is necessary to emphasise the key distinction between a priori power indices and measure of empirical voting power. Albert misrepresents the voting power approach and is not willing to allow that it encompasses a diversity of methods as well as a research agenda.

677

Chain Store Pricing for Stragegic Accommodation

Paul W. Dobson and Michael Waterson

Chain-stores now dominate most areas of retailing. While retailers may operate nationally or even internationally, the markets they compete in are largely local. How should they best operate pricing policy in respect of the different markets served - price uniformly across the local markets or on a local basis according to market conditions? We model this by allowing local market differences, with entry being inevitable in certain markets while being naturally or institutionally blockaded in others. We show that practising price discrimination is not always best for the chain-store. Competitive conditions exist under which uniform pricing can raise profits.

676

The Impacts of Liberalisation on a Brazilian Air Shuttle Market

Alessandro V.M. Oliveira

This paper aims at assessing the impacts of recent economic liberalisation on an important subset of the Brazilian airline industry: the air shuttle market on the route Rio de Janeiro – São Paulo, a pioneer service created in 1959. In order to estimate structural relationships of the competition model, a product differentiated setting with conduct parameter was designed. Results permitted inferring about a rupture in the degree of firms' heterogeneity and in the extent of the deviation from Nash behaviour due to regulatory reform, as well as estimation of pertinent route-level cost information.

675

Happiness and the Standard of Living: the Case for South Africa

Nattavudh Powdthavee

Is happiness pattern structurally the same between the poor countries and the rich countries? Using a cross-sectional data from SALDRU93 survey, we show that relationships between subjective well-being and socioeconomic variables have a similar structure in South Africa as they are in the developed countries. Well-beingappears to rise with income. Unemployment, however, is detrimental to reported well-being, both at the individual- and household-level. Living standard indicators such as durable assets ownership seem to be as good determinants of happiness levels as income. Relative income also matters in the evaluation of subjective well-being, once relative consumption is controlled for.

674

Does Centralisation Affect the Number and Size of Lobbies?

Michaela Redoano

Previous research has shown that if countries "merge", (i.e. move to centralized policy choices) the effect is to reduce lobbying. However empirical evidence suggests that this is not the case. This paper explains the empirical evidence in a two-jurisdiction political economy model of public good provision under policy centralization and policy decentralization, where the policy choice can be affected by the pressure of endogenously formed lobbies. We measure lobbying in three ways:(i) the number of lobbies formed under the two settings, (ii) their impact on policy decisions and (iii) the amount of resources transferred to the policy makers. We show that preference heterogeneity and lobby formation are positively related and that moving from decentralization to centralization can a.ect both the number and the type of lobbies. We develop some examples; among them: under centralization, compared to decentralization, the size of lobbies can be higher but the impact on policy can be smaller. Moreover we show how the majority groups try to o.set lobbying by strategic voting for a candidate of a different group.

673

Analytical Results for Model of Periodic Consumption

Clare Kelly

This paper presents the partial analytical solution to a model of periodic consumption that incorporates imperfect capital markets and uncertainty. Our model assumes that consumption decisions occur more frequently than income receipt. We show that the week specific consumption functions can be ordered. At low levels of wealth these functions exhibit a “ushaped”pattern between income receipts. We show analytically that changes in the level of the borrowing constraint affect only the level of consumption function and not the MPC whilst mean preserving changes in uncertainty affect both.

672

Social Conformity and Bounded Rationality in Arbitrary Games with Incomplete Information: some first results

Edward Cartwright and Myrna Wooders

Intepret a set of players all playing the same pure strategy and all with similar attributes as a society. Is it consistent with self interested behaviour for a population to organise itself into a relatively small number of societies? By introducing the concept of approximate substitute players in non-cooperative games we are able to put a boundon the rationality of such social conformity for an arbitrary game and arbitrary number of societies.

671

Learning to Play Approximate Nash Equilibria in Games with Many Players

Edward Cartwright

We illustrate one way in which a population of boundedly rational individuals can learn to play an approximate Nash equilibrium. Players are assumed to make strategy choices using a combination of imitation and innovation. We begin by looking at an imitation dynamic and provide conditions under which play evolves to an imitation equilibrium; convergence is conditional on the network of social interaction. We then illustrate, through example, how imitation and innovation can complement each other; in particular, we demonstrate how imitation can ‚help a population to learn to play a Nash equilibrium where more rational methods do not. This leads to our main result in which we provide a general class of large game for which the imitation with innovation dynamic almost surely converges to an approximate Nash, imitation equilibrium.

670

Information Aggregation, Costly Voting and Common Values

Sayantan Ghosal and Ben Lockwood

In a model of majority voting with common values and costly but voluntary participation, we show that in the vicinity of equilibrium, it is always Pareto-improving for more agents, on the average, to vote. This demonstrates that the negative voting externality identified by Borgers(2001) in the context of private values is always dominated by a positive informational externality. In addition, we show that multiple Pareto-ranked voting equilibria may exist and moreover, majority voting with compulsory participation can Pareto dominate majority voting with voluntary par-ticipation. Finally, we show that the ine .ciency result is robust to limited preference heterogeneity.

669

Representing Games as Coalition Production Economies with Public Goods

Antoni Meseguer-Artola, Myrna Holtz Wooders and Juan-Enrique Martinez-Legaz

668

Hotelling Tax Competition

Myrna Wooders and Ben Zissimos

This paper shows how competition among governments for mobile firms can bring about excessive differentiation in levels of taxation and public good provision. Hotelling’s Principle of Minimum Differentiation is applied in the context of tax competition and shown to be invalid. Instead, when an equilibrium exists, differentiation of public good provision is maximized. Non-existence of equilibrium, which can occur, is a metaphor for intense tax competition. The paper also shows that, to some extent, perfect tax discrimination presents a solution to the existence problem created by Hotelling tax competition, but that the efficiency problem of Hotelling tax competition is exacerbated.

667

Candidate Stability and Probabilistic Voting Procedures

Carmelo Rodriguez-Alvarez

We extend the analysis of Dutta, Jackson and Le Breton (Econometrica 2001) on strategic candidacy to probabilistic environments. For each configuration of the agenda and each profile of voters' preferences over running candidates a *probabilistic voting procudure selects* a lottery on the set of candidates at stake. Assuming that candidates cannot vote, we show that *random dictatorships* are the only unanimous probabilistic voting procedures that never provide unilateral incentives for the candidates to leave the ballot independently of the composition of the agenda. However, more flexible rules can be divised if we focus on the stability of specific agendas.

666

Candidate Stability and Voting Correspondences

Carmelo Rodriguez-Alvarez

For each set of candidates at state and each profile of voters' preferences over running candidates a voting corresponsence selects a set of candidates. following Dutta, Jackson and Le Breton (Econometrica 2001) a voting correspondence is candidate stable if a candidate never benefits from withdrawing unilateraly her candidacy. If candidates cannot vote and compare sets of candidates according to their expected utility conditional on some prior probability assessment only dictatorial voting correspondences are candidate stable and unanimous. If the assessments are restricted to be uniform, rules that select the set of best candidates of tww fixed voters are also allowed. We also analyze other domains of preferences fitting extreme attitudes towards risk in which positive results are obtained.

665

Optimum Currency Area Theory: A Framework for Discussion about Monetary Integration

Roman Horváth and Luboš Komárek*

In this paper the authors calculate OCA-indexes for industrial countries in an effort to estimate the benefit-cost ratio of adopting a common currency. The results correspond to the estimation of Bayoumi and Eichengreen (1997b) and show that the ranking of the economies suitable to form a monetary union stays the same in the 1980s as well as in the 1990s. In other words, the economies, which were structurally close to each other in the 1980s, remain close in the 1990s and the opposite is valid for the structurally different economies. This empirical estimation also does not provide evidence for views, which emphasise the seemingly striking difference between the core and the periphery of the European Union. The authors perform also an estimation of the same index by including the Czech Republic and find no support for the view that the economy of the Czech Republic could possibly structurally differ more than the EMU member countries between each other. Then they conclude that if the EMU is sustainable, the accession of the Czech economy should not change it.

664

Dynamics of Banking Technology Adoption: An Application to Internet Banking

Yoonhee Tina Chang

This paper is concerned with examining behaviour of firms (banks) and consumers (banks’customers) in the event of a new technology (internet banking) introduction. The determinants of consumer adoption of internet banking are characterised using survey data from Korea in both static and dynamic framework. I find evidence that adoption of internet banking is influenced by sex, age, marital status, degree of exposure to internet banking, and the characteristics of the banks. A duration analysis shows no evidence of first mover advantage (order effects) in internet banking whilst the largest bank (rank effects) in commercial banking remains dominant in internet banking. The results imply that the internet bankin g adoption is dominated by social norm effects.

663

The Performance of SETAR Models: A Regime Conditional Evaluaton of Point, Interval and Density Forecasts

Gianna Boero and Emanuela Marrocu

The aim of this paper is to analyse the out-of-sample performance of SETAR models relative to a linear AR and a GARCH model using daily data for the Euro effective exchange rate. The evaluation is conducted on point, interval and density forecasts, unconditionally, over the whole forecast period, and conditional on specific regimes. The results show that overall the GARCH model is better able to capture the distributional features of the series and to predict higher-order moments than the SETAR models. However, from the results there is also a clear indication that the performance of the SETAR models improves significantly conditional on being on specific regimes.

662

How Much did the Soviets Really Spend on Defence? New Evidence from the Close of the Brezhnev Era

Mark Harrison

The paper considers the influence of the budget for military spending in the Soviet command economy. A specific problem is that the Soviet strategy of concealment left us without good measures of the military burden on Societ resources. The paper surveys previous western attempts to fill this gap alongside post-Brezhnev revelations. A new documentary source from 1982 that appears authoritative suggests much highter figures than anything proposed or revealed so far, and supports tthese higher figures in detail. However, the figures contain many puzzles and the authenticity of the document itself cannot be fully assured.

661

Market Structure and Entry in Fast Food

Joanne Sault, Otto Toivanen and Michael Waterson

One of the phenomena of the twentieth century, chainstores, are remarkably little studied by economists. Amongst open questions are the following: What factors influence the pattern of their openings? Does the spread of one constrain others having broadly the same retail offer? Do they locate close to competitors? To answer such questions, one must examine a time path of development- put simply one must observe actual entry. This is precisely what is done in a series of papers (Toivanen and Waterson, 2000; 2001; Sault, Toivanen and Waterson -hereafter STW, 2002; forthcoming) we are working on concerning the spread of restaurant outlets in the UK. This paper sketches the main elements of our program, then examines a particular issue, the micro-geography of location, in detail.