Theories of coalitional rationality

This paper generalizes the concept of best response to coalitions of players and offers epistemic definitions of coalitional rationalizability in normal form games. The best response of a coalition is defined to be a correspondence from sets of conjectures to sets of strategies. From every best response correspondence it is possible to obtain a definition of the event that a coalition is rational. It requires that if it is common certainty among players in the coalition that play is in some subset of the strategy space then they confine their play to the best response set to those conjectures. A strategy is epistemic coalitionally rationalizable if it is consistent with rationality and common certainty that every coalition is rational. A characterization of this set of strategies is provided for best response correspondences that satisfy four properties: monotonicity, a weak form of Pareto-optimality and two consistency requirements with individual best responses. Special attention is devoted to a correspondence that leads to a solution concept that is generically equivalent to the iteratively defined concept of coalitional rationalizability (Ambrus [04]).noncooperative games, coalition agreements, rationalizability, epistemic solution concept

Theories of Coalitional Rationality

This paper generalizes the concept of best response to coalitions of players and offers epistemic definitions of coalitional rationalizability in normal form games. The (best) response of a coalition is defined to be an operator from sets of conjectures to sets of strategies. A strategy is epistemic coalitionally rationalizable if it is consistent with rationality and common certainty that every coalition is rational. A characterization of this solution set is provided for operators satisfying four basic properties. Special attention is devoted to an operator that leads to a solution concept that is generically equivalent to the iteratively defined concept of coalitional rationalizability.Economic

Two-player preplay negotiation games with conditional offers

We consider an extension of strategic normal form games with a phase before the actual play of the game, where players can make binding offers for transfer of utilities to other players after the play of the game, contingent on the recipient playing the strategy indicated in the offer. Such offers transform the payoff matrix of the original game but preserve its non-cooperative nature. The type of offers we focus on here are conditional on a suggested 'matching offer' of the same kind made in return by the receiver. Players can exchange a series of such offers, thus engaging in a bargaining process before a strategic normal form game is played. In this paper we study and analyze solution concepts for two-player normal form games with such preplay negotiation phase, under several assumptions for the bargaining power of the players, such as the possibility of withdrawing previously made offers and opting out from the negotiation process, as well as the value of time for the players in such negotiations. We obtain results describing the possible solutions of such bargaining games and analyze the degrees of efficiency and fairness that can be achieved in such negotiation process

Underreported Earnings and Old-Age Pension: An Elementary Model

This paper analyzes the interconnections of underreported earnings, savings and oldage pension with the help of a most simple, elementary model. The workers can be divided into three groups: 1) well-paid who report their full earnings, 2) well-paid who report only the minimum earnings (evaders) and 3) the poorly paid. We assume that the evaders save a significant part of their hidden earnings for their old age. We compare three pension systems of equal size: (i) the proportional, (ii) the proportional plus basic pension and (iii) the proportional with means testing. Our major result is as follows: if the evaders can be recognized and excluded, then the means-tested system is superior to the basic system.reporting earnings, proportional pensions, basic pensions, meansassisted pensions

Stable Allocations of Risk

Measuring risk can be axiomatized by the concept of coherent measures of risk. A risk environment specifies some individual portfolios' realization vectors and a coherent measure of risk. We consider sharing the risk of the aggregate portfolio by studying transferable utility cooperative games: risk allocation games. We show that the class of risk allocation games coincides with the class of totally balanced games. As a limit case the aggregate portfolio can have the same payoff in all states of nature. We prove that the class of risk allocation games with no aggregate uncertainty coincides with the class of exact games.Coherent Measures of Risk, Risk Allocation Games, Totally Balanced Games, Exact Games

Strongly Rational Sets for Normal-Form Games

Curb sets [Basu and Weibull, Econ. Letters 36 (1991), 141-146] are product sets of pure strategies containing all individual best-responses against beliefs restricted to the recommendations to the remaining players. The concept of minimal curb sets is a set-theoretic coarsening of the notion of strict Nash equilibrium. We introduce the concept of minimal strong curb sets which is a set-theoretic coarsening of the notion of strong Nash equilibrium. Strong curb sets are product sets of pure strategies such that each player.s set of recommended strategies must contain all coalitional best-responses of each coalition to whatever belief each coalition member may have that is consistent with the recommendations to the other players. Minimal strong curb sets are shown to exist and are compared with other well known solution concepts. We also provide a dynamic learning process leading the players to playing strategies from a minimal strong curb set.mathematical economics;

Social Security Reform in the US: Lessons from Hungary

The partial privatization of the US Social Security system was clearly the top economic policy priority for the new Bush administration. While many famous economists, publicists and politicians support, others reject the partial privatization of the Social Security system. The international comparisons have been quite infrequent, concentrated on few countries (Chile, Great Britain and Sweden) and left out similar reforms introduced in similar situations, like in Hungary, Poland and other ex-communist countries. In this article I try to make up for this omission and outline the lessons from the Hungarian reform, started in 1998. The conclusion is simple: such a reform is possible but does not solve the problems of social security.Social Security, Pensions, Prefunding of pensions, United States, Hungary

Coherent Measures of Risk from a General Equilibrium Perspective

Coherent measures of risk defined by the axioms of monotonicity, subadditivity, positive homogeneity, and translation invariance are recent tools in risk management to assess the amount of risk agents are exposed to. If they also satisfy law invariance and comonotonic additivity, then we get a subclass of them: spectral measures of risk. Expected shortfall is a well-known spectral measure of risk is. We investigate the above mentioned six axioms using tools from general equi- librium (GE) theory. Coherent and spectral measures of risk are compared to the natural measure of risk derived from an exchange economy model, that we call GE measure of risk. We prove that GE measures of risk are coherent measures of risk. We also show that spectral measures of risk can be represented by GE measures of risk only under stringent conditions, since spectral measures of risk do not take the regulated entity's relation to the market portfolio into account. To give more insights, we characterize the set of GE measures of risk.Coherent Measures of Risk, General Equilibrium Theory, Exchange Economies, Asset Pricing

Outside offers and bidding costs

This paper provides a search theoretic model with endogenous job creation, and homogenous workers and firms. The model introduces bidding costs and allows the current employer to make a counteroffer with probability q when the worker receives an outside offer. In equilibrium, a higher level of ex-post competition (q) reduces the probability that an employed worker receives an outside offer. Therefore, a higher level of ex-post competition may decrease the expected income of the workers. In the extreme case when the competition is cutthroat (q = 1), no employed worker receives outside offers and each employed worker earns only the minimum wage. In contrast to existing models, our model allows for wage dispersion even if all frictions (including bidding and search costs) converge to zero simultaneously. When bidding costs are small and ex-post competition is strong, a small change in parameter values may influence the equilibrium bidding, wage distribution and job creation substantially. Consequently, it is not only the overall level of market frictions that matters, but also their structure.counteroffers, wage dispersion, job creation