Efficient Nash Equilibrium under Adverse Selection

This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [28]. We propose a simple extension of the game-theoretic structure in Hellwig [14] under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson [22].

Testing the TASP: An Experimental Investigation of Learning in Games with Unstable Equilibria

We report experiments designed to test between Nash equilibria that are stable and unstable under learning. The “TASP” (Time Average of the Shapley Polygon) gives a precise prediction about what happens when there is divergence from equilibrium under fictitious play like learning processes. We use two 4 x 4 games each with a unique mixed Nash equilibrium; one is stable and one is unstable under learning. Both games are versions of Rock-Paper-Scissors with the addition of a fourth strategy, Dumb. Nash equilibrium places a weight of 1/2 on Dumb in both games, but the TASP places no weight on Dumb when the equilibrium is unstable. We also vary the level of monetary payoffs with higher payoffs predicted to increase instability. We find that the high payoff unstable treatment differs from the others. Frequency of Dumb is lower and play is further from Nash than in the other treatments. That is, we find support for the comparative statics prediction of learning theory, although the frequency of Dumb is substantially greater than zero in the unstable treatments.

Subsidies as Optimal Fiscal Stimuli

In the theoretical macroeconomics literature, fiscal policy is almost uniformly taken to mean taxing and spending by a ‘benevolent government’ that exploits the potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd-out private consumption and hence typically reduce welfare. In this paper we consider the use of ‘tax-and-subsidise’ instead of ‘taxand- spend’ policies on account of their widespread use by governments, even in the recent recession, to stimulate economic activity. Within a static general equilibrium macro-model with imperfectly competitive good markets we examine the effect of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximise welfare, rendering no intervention as a suboptimal state. We also show that, within a two-country setting, a Nash non-cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between trading partners in setting these rates is more expansionary and leads to an improvement upon the non-cooperative solution.

Correlated equilibria, good and bad: an experimental study

We report results from an experiment that explores the empirical validity of correlated equilibrium, an important generalization of the Nash equilibrium concept. Specifically, we seek to understand the conditions under which subjects playing the game of Chicken will condition their behavior on private, third–party recommendations drawn from known distributions. In a “good–recommendations” treatment, the distribution we use is a correlated equilibrium with payoffs better than any symmetric payoff in the convex hull of Nash equilibrium payoff vectors. In a “bad–recommendations” treatment, the distribution is a correlated equilibrium with payoffs worse than any Nash equilibrium payoff vector. In a “Nash–recommendations” treatment, the distribution is a convex combination of Nash equilibrium outcomes (which is also a correlated equilibrium), and in a fourth “very–good–recommendations” treatment, the distribution yields high payoffs, but is not a correlated equilibrium. We compare behavior in all of these treatments to the case where subjects do not receive recommendations. We find that when recommendations are not given to subjects, behavior is very close to mixed–strategy Nash equilibrium play. When recommendations are given, behavior does differ from mixed–strategy Nash equilibrium, with the nature of the differ- ences varying according to the treatment. Our main finding is that subjects will follow third–party recommendations only if those recommendations derive from a correlated equilibrium, and further, if that correlated equilibrium is payoff–enhancing relative to the available Nash equilibria.

Noncooperative Oligopoly in Markets with a Continuum of Traders: A Limit Theorem µa la Cournot

In this paper, we consider an exchange economy µa la Shitovitz (1973), with atoms and an atomless set. We associate with it a strategic market game of the kind first proposed by Lloyd S. Shapley and known as the Shapley window model. We analyze the relationship between the set of the Cournot-Nash equilibrium allocations of the strategic market game and the Walras equilibrium allocations of the exchange economy with which it is associated. We show, with an example, that even when atoms are countably in¯nite, any Cournot-Nash equilibrium allocation of the game is not a Walras equilibrium of the underlying exchange economy. Accordingly, in the original spirit of Cournot (1838), we par- tially replicate the mixed exchange economy by increasing the number of atoms, without a®ecting the atomless part, and ensuring that the measure space of agents remains finite. We show that any sequence of Cournot-Nash equilibrium allocations of the strategic market games associated with the partially replicated exchange economies approximates a Walras equilibrium allocation of the original exchange economy.

The Impact of Information Provision on Agglomeration Bonus Performance: An Experimental Study on Local Networks

The Agglomeration Bonus (AB) is a mechanism to induce adjacent landowners to spatially coordinate their land use for the delivery of ecosystem services from farmland. This paper uses laboratory experiments to explore the performance of the AB in achieving the socially optimal land management configuration in a local network environment where the information available to subjects varies. The AB poses a coordination problem between two Nash equilibria: a Pareto dominant and a risk dominant equilibrium. The experiments indicate that if subjects are informed about both their direct and indirect neighbors’ actions, they are more likely to coordinate on the Pareto dominant equilibrium relative to the case where subjects have information about their direct neighbors’ action only. However, the extra information can only delay – and not prevent – the transition to the socially inferior risk dominant Nash equilibrium. In the long run, the AB mechanism may only be partially effective in enhancing delivery of ecosystem services on farming landscapes featuring local networks.

Keeping Up with the Joneses: Who Loses Out?

This paper investigates how well-being varies with individual wage rates when individuals care about relative consumption and so there are Veblen effects – Keeping up with the Joneses – leading individuals to over-work. In the case where individuals compare themselves with their peers – those with the same wage-rate - it is shown that Keeping up with the Joneses leads some individuals to work who otherwise would have chosen not to. Moreover for these individuals well-being is a decreasing function of the wage rate - contrary to standard theory. So those who are worst-off in society are no longer those on the lowest wage.

Consumption Decisions When People Value Conformity

In this paper we assume that for some commodities individuals may wish to adjust their levels of consumption from their normal Marshallian levels so as to match the consumption levels of a group of other individuals, in order to signal that they conform to the consumption norms of that group. Unlike Veblen’s concept of conspicuous consumption this can mean that some individuals may reduce their consumption of the relevant commodities. We model this as a three-stage game in which individuals first decide whether or not they wish to adhere to a norm, then decide which norm they wish to adhere to, and finally decide their actual consumption. We present a number of examples of the resulting equilibria, and then discuss the potential policy implications of this model.

Non-Cooperative Asymptotic Oligopoly in Economies with Infinitely Many Commodities

In this paper, we extend the non-cooperative analysis of oligopoly to exchange economics with infinitely many commodities by using strategic market games. This setting can be interpreted as a model of oligopoly with differentiated commodities by using the Hotelling line. We prove the existence of an "active" Cournot-Nash equilibrium and show that, when traders are replicated, the price vector and the allocation converge to the Walras equilibrium. We examine how the notion of oligopoly extends to our setting with a countable infinity of commodities by distinguishing between asymptotic oligopolists and asymptotic price-takes. We illustrate these notions via a number of examples.

Information Design

There are two ways of creating incentives for interacting agents to behave in a desired way. One is by providing appropriate payoff incentives, which is the subject of mechanism design. The other is by choosing the information that agents observe, which we refer to as information design. We consider a model of symmetric information where a designer chooses and announces the information structure about a payoff relevant state. The interacting agents observe the signal realizations and take actions which affect the welfare of both the designer and the agents. We characterize the general finite approach to deriving the optimal information structure for the designer - the one that maximizes the designer's ex ante expected utility subject to agents playing a Bayes Nash equilibrium. We then apply the general approach to a symmetric two state, two agent, and two actions environment in a parameterized underlying game and fully characterize the optimal information structure: it is never strictly optimal for the designer to use conditionally independent private signals; the optimal information structure may be a public signal or may consist of correlated private signals. Finally, we examine how changes in the underlying game affect the designer's maximum payoff. This exercise provides a joint mechanism/information design perspective.

Can Migrants save Greece from Ageing? A Computable General Equilibrium Approach using G-AMOS.

The population of Greece is projected to age in the course of the next three decades. This paper combines demographic projections with a multi-period economic Computable General Equilibrium (CGE) modelling framework to assess the macroeconomic impact of these future demographic trends. The simulation strategy adopted in Lisenkova et. al. (2008) is also employed here. The size and age composition of the population in the future depends on current and future values of demographic parameters such as the fertility, mortality rates and the level of annual net migration. We use FIV-FIV software in order to project population changes for 30 years. Total population and working age population changes are introduced to the GAMOS modelling framework calibrated for the Greek economy for the year 2004. Positive net migration is able to cancel the negative impacts of an ageing population that would otherwise occur as a result of the shrinking of the labour force. The policy implication is that a viable, long-lasting migration policy should be implemented, while the importance of policies that could increase fertility should also be considered.

A computable general equilibrium analysis of the relative price sensitivity required to induce rebound effects in response to an improvement in energy efficiency in the UK economy

In recent years there has been extensive debate in the energy economics and policy literature on the likely impacts of improvements in energy efficiency. This debate has focussed on the notion of rebound effects. Rebound effects occur when improvements in energy efficiency actually stimulate the direct and indirect demand for energy in production and/or consumption. This phenomenon occurs through the impact of the increased efficiency on the effective, or implicit, price of energy. If demand is stimulated in this way, the anticipated reduction in energy use, and the consequent environmental benefits, will be partially or possibly even more than wholly (in the case of ‘backfire’ effects) offset. A recent report published by the UK House of Lords identifies rebound effects as a plausible explanation as to why recent improvements in energy efficiency in the UK have not translated to reductions in energy demand at the macroeconomic level, but calls for empirical investigation of the factors that govern the extent of such effects. Undoubtedly the single most important conclusion of recent analysis in the UK, led by the UK Energy Research Centre (UKERC) is that the extent of rebound and backfire effects is always and everywhere an empirical issue. It is simply not possible to determine the degree of rebound and backfire from theoretical considerations alone, notwithstanding the claims of some contributors to the debate. In particular, theoretical analysis cannot rule out backfire. Nor, strictly, can theoretical considerations alone rule out the other limiting case, of zero rebound, that a narrow engineering approach would imply. In this paper we use a computable general equilibrium (CGE) framework to investigate the conditions under which rebound effects may occur in the Scottish regional and UK national economies. Previous work has suggested that rebound effects will occur even where key elasticities of substitution in production are set close to zero. Here, we carry out a systematic sensitivity analysis, where we gradually introduce relative price sensitivity into the system, focusing in particular on elasticities of substitution in production and trade parameters, in order to determine conditions under which rebound effects become a likely outcome. We find that, while there is positive pressure for rebound effects even where (direct and indirect) demand for energy is very price inelastic, this may be partially or wholly offset by negative income and disinvestment effects, which also occur in response to falling energy prices.

A comparison of results from MRIO and interregional computable general equilibrium (CGE) analyses of the impacts of a positive demand shock on the ‘CO2 trade balance’ between Scotland and the rest of the UK

In previous work we have applied the environmental multi-region input-output (MRIO) method proposed by Turner et al (2007) to examine the ‘CO2 trade balance’ between Scotland and the Rest of the UK. In McGregor et al (2008) we construct an interregional economy-environment input-output (IO) and social accounting matrix (SAM) framework that allows us to investigate methods of attributing responsibility for pollution generation in the UK at the regional level. This facilitates analysis of the nature and significance of environmental spillovers and the existence of an environmental ‘trade balance’ between regions. While the existence of significant data problems mean that the quantitative results of this study should be regarded as provisional, we argue that the use of such a framework allows us to begin to consider questions such as the extent to which a devolved authority like the Scottish Parliament can and should be responsible for contributing to national targets for reductions in emissions levels (e.g. the UK commitment to the Kyoto Protocol) when it is limited in the way it can control emissions, particularly with respect to changes in demand elsewhere in the UK. However, while such analysis is useful in terms of accounting for pollution flows in the single time period that the accounts relate to, it is limited when the focus is on modelling the impacts of any marginal change in activity. This is because a conventional demand-driven IO model assumes an entirely passive supply-side in the economy (i.e. all supply is infinitely elastic) and is further restricted by the assumption of universal Leontief (fixed proportions) technology implied by the use of the A and multiplier matrices. In this paper we argue that where analysis of marginal changes in activity is required, a more flexible interregional computable general equilibrium approach that models behavioural relationships in a more realistic and theory-consistent manner, is more appropriate and informative. To illustrate our analysis, we compare the results of introducing a positive demand stimulus in the UK economy using both IO and CGE interregional models of Scotland and the rest of the UK. In the case of the latter, we demonstrate how more theory consistent modelling of both demand and supply side behaviour at the regional and national levels affect model results, including the impact on the interregional CO2 ‘trade balance’.

Outsourcing versus FDI in oligopoly equilibrium

We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship specific investment. Firms’ internationalisation mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalisation, even when they are ex-ante identical. With ex-ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource.

The Rebound Effect with Energy Production: A Partial Equilibrium Analysis

Rebound is the extent to which improvements in energy efficiency fail to translate fully into reductions in energy use because of the implicit fall in the price of energy, when measured in efficiency units. This paper discusses aspects of the rebound effect that are introduced once energy is considered as a domestically produced commodity. A partial equilibrium approach is adopted in order to incorporate both energy use and production in a conceptually tractable way. The paper explores analytically two interesting results revealed in previous numerical simulations. The first is the possibility that energy use could fall by more than the implied improvement in efficiency. This corresponds to negative rebound. The second is the finding that the short-run rebound value can be greater than the corresponding long-run value.