Bad politicians

We present a simple theory of the quality of elected officials. Quality has (at least) two dimensions: competence and honesty. Voters prefer competent and honest policymakers, so high-quality citizens have a greater chance of being elected to office. But low-quality citizens have a “comparative advantage” in pursuing elective office, because their market wages are lower than the market wages of high-quality citizens (competence), and/or because they reap higher returns from holding office (honesty). In the political equilibrium, the average quality of the elected body depends on the structure of rewards from holding public office. Under the assumption that the rewards from office are increasing in the average quality of office holders there can be multiple equilibria in quality. Under the assumption that incumbent policymakers set the rewards for future policymakers there can be path dependence in quality.Corruption

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

Bad luck or bad policy?

Monetary policy

On the informational content of wage offers

This article investigates signaling and screening roles of wage offers in a single-play matching model with two-sided unobservable characteristics. It generates the following predictions as matching equilibrium outcomes: (i) “good” jobs offer premia if “high-quality” worker population is large; (ii) “bad” jobs pay compensating differentials if the proportion of “good” jobs to “low-quality” workers is large; (iii) all firms may offer a pooling wage in markets dominated by “high-quality” workers and firms; or (iv) Gresham’s Law prevails: “good” types withdraw if “bad” types dominate the population. The screening/signaling motive thus has the potential of explaining a variety of wage patterns

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 will condition their behavior on private, third-party recommendations drawn from known distributions in playing the game of Chicken. In a `good-recommendations` treatment, the distribution is such that following recommendations comprises 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 such that following recommendations comprises 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 following recommendations does not comprise 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 differences 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.

Against Game Theory

People make choices. Often, the outcome depends on choices other people make. What mental steps do people go through when making such choices? Game theory, the most influential model of choice in economics and the social sciences, offers an answer, one based on games of strategy such as chess and checkers: the chooser considers the choices that others will make and makes a choice that will lead to a better outcome for the chooser, given all those choices by other people. It is universally established in the social sciences that classical game theory (even when heavily modified) is bad at predicting behavior. But instead of abandoning classical game theory, those in the social sciences have mounted a rescue operation under the name of “behavioral game theory.” Its main tool is to propose systematic deviations from the predictions of game theory, deviations that arise from character type, for example. Other deviations purportedly come from cognitive overload or limitations. The fundamental idea of behavioral game theory is that, if we know the deviations, then we can correct our predictions accordingly, and so get it right. There are two problems with this rescue operation, each of them is fatal. (1) For a chooser, contemplating the range of possible deviations, as there are many dozens, actually makes it exponentially harder to figure out a path to an outcome. This makes the theoretical models useless for modeling human thought or human behavior in general. (2) Modeling deviations are helpful only if the deviations are consistent, so that scientists (and indeed decision makers) can make predictions about future choices on the basis of past choices. But the deviations are not consistent. In general, deviations from classical models are not consistent for any individual from one task to the next or between individuals for the same task. In addition, people’s beliefs are in general not consistent with their choices. Accordingly, all hope is hollow that we can construct a general behavioral game theory. What can replace it? We survey some of the emerging candidates

Robustness

The standard theory of decision making under uncertainty advises the decision maker to form a statistical model linking outcomes to decisions and then to choose the optimal distribution of outcomes. This assumes that the decision maker trusts the model completely. But what should a decision maker do if the model cannot be trusted? Lars Hansen and Thomas Sargent, two leading macroeconomists, push the field forward as they set about answering this question. They adapt robust control techniques and apply them to economics. By using this theory to let decision makers acknowledge misspecification in economic modeling, the authors develop applications to a variety of problems in dynamic macroeconomics. Technical, rigorous, and self-contained, this book will be useful for macroeconomists who seek to improve the robustness of decision-making processes.decision-making, uncertainty, statistical models, control techniques, economic modeling, dynamic microeconomics, misspecification

Breakdowns

We study a continuous-time game of strategic experimentation in which the players try to assess the failure rate of some new equipment or technology. Breakdowns occur at the jump times of a Poisson process whose unknown intensity is either high or low. In marked contrast to existing models, we find that the cooperative value function does not exhibit smooth pasting at the efficient cut-off belief. This finding extends to the boundaries between continuation and stopping regions in Markov perfect equilibria. We characterize the unique symmetric equilibrium, construct a class of asymmetric equilibria, and elucidate the impact of bad versus good Poisson news on equilibrium outcomes

MIGRATORY POLICY IN DEVELOPING COUNTRIES: HOW TO BRING BEST PEOPLE BACK?

This paper analyzes the decision of a migrant to return or stay within the framework of a signaling model withexogenous migratory costs. If employers have only imperfect information about the type of a worker and goodworkers migrate, bad workers might copy their strategy in order to get the same high wage as the good workers.Employers will therefore reduce the wage they pay to migrants and good workers incur a loss compared to theperfect information setup. In one hybrid equilibrium of the game, the more bad workers migrate, the higher theincentive for good workers to come back. Policy implications follow.Temporary migration, Return migrants, Hybrid Bayesian Equilibrium, Signaling model.