Learning to be unpredictable : an experimental study.

This study tests experimentally whether the ability of subjects to play a noncooperative game's mixed-strategy equilibrium (to make their play unpredictable) is affected by how much information subjects have about the structure of the game. Subjects played the mixed-strategy equilibrium when they had all the information about other players' payoffs and actions, but not otherwise. Previous research has shown that players of a game can play a mixed-strategy equilibrium if they observe the actions of all players and use sophisticated Bayesian learning to infer the likely payoffs to other players. The result of this study suggests that the subjects in our experiments did not use sophisticated Bayesian learning. The result also suggests that economists should be careful about assuming in their models that people can easily infer everyone else's payoffs.Game theory

Self-Fulfilling Currency Crises: The Role of Interest Rates

We develop a stylized currency crises model with heterogeneous information among investors and endogenous determination of interest rates in a noisy rational expectations equilibrium. Our model captures three key features of interest rates: the opportunity cost of attacking the currency responds to the investors' behavior; the domestic interest rate may influence the central bank's preferences for a fixed exchange rate; and the domestic interest rate serves as a public signal which aggregates private information about fundamentals. We explore the payoff and informational channels through which interest rates determine devaluation outcomes, and examine the implications for equilibrium selection by global games methods. Our main conclusion is that multiplicity is not an artifact of common knowledge. In particular, we show that multiplicity emerges robustly, either when a devaluation is triggered by the cost of high domestic interest rates as in Obstfeld (1996), or when a devaluation is triggered by the central bank's loss of foreign reserves as in Obstfeld (1986), provided that the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domestic bond supply are sufficiently small.

Delayed financial disclosure: Mexico's recent experience

This article documents a delay in the public release of Mexican international reserve data in the months before Mexico's debt crisis at the end of 1994. The article establishes that in that year investors did not know the level of Mexican reserves before October; yet this lack of information did not seem to reduce investor confidence in the Mexican economy. The article does not establish whether the delay in releasing reserve data was due to logistical problems or to a government strategy. The possibility that the delay was strategic is evaluated by developing an economic model that captures some of the principal constraints facing the Mexican government in 1994 and that makes explicit the conflicting objectives of the government and investors. The model shows that in such an environment with private information, strategic delay can occur in equilibrium if investors are uncertain about the cause of the delay.Mexico ; Devaluation of currency ; Peso, Mexican

Strategic information transmission: a mathematica tool for analysis

Economists and other applied researchers use game theory to study industrial organization, financial markets, and the theory of the firm. In an earlier article in the Mathematica Journal, [Dickhaut and Kaplan 1991] present a procedure for solving two-person games of complete information. In many applications, however, "asymmetric information" is a central issue. By asymmetric information, we mean that one party has access to information that the other party lacks. The branch of game theory that deals with this problem is known as "games of incomplete information"; the formal model is discussed in [Harsanyi 1967]. [Myerson 1991, Tirole 1989] et al, discuss the applications but do not focus on computational procedures. We provide, in this article, an application of Mathematica to games of incomplete information that should be of interest for two reasons: (i) as a basis for thinking about solutions to games of incomplete information, and (ii) as an approach to understanding the particular application presented here, namely, the effect of strategic information transmission in firms and markets

An experimental study of learning and limited information in games

We report on experiments that tested the predictions of competing theories of learning in games. Experimental subjects played a version of the three-person matching-pennies game. The unique mixed-strategy Nash equilibrium of this game is locally unstable under naive Bayesian learning. Sophisticated Bayesian learning predicts that expectations will converge to Nash equilibrium if players observe the entire history of play. Neither theory requires payoffs to be common knowledge. We develop maximum-likelihood tests for the independence conditions implied by the mixed-strategy Nash equilibrium. We find that perfect monitoring was sufficient and complete payoff information was unnecessary for average play to be consistent with the equilibrium (as is predicted by sophisticated Bayesian learning). When subjects had imperfect monitoring and incomplete payoff information, average play was inconsistent with the equilibrium.Game theory

Spin-Offs, Fiduciary Duty, and the Law

In recent years, merger and acquisition activity has captured the corporate headlines, reaffirming the popular view that bigger is better. Yet the benefits of such empire building are belied by evidence that corporate spin-offs generally add more value to a business or group of businesses. Indeed, the advantages of spin-offs have not been lost on some of the more astute corporate executives, and although mergers and acquisitions may make better copy, spin-offs have been quietly on the rise. Companies such as AT&T, General Motors, ITT, Sprint, Dun and Bradstreet, and Sears have successfully reaped the benefits of performing tax-free spin-offs pursuant to Internal Revenue Code (I.R.C. or Code) § 355, the principle means of effecting them. The largest benefit of a spin-off is that I.R.C. §355 creates a tax-free shelter under which no gain or loss is recognized by either the distributing corporation or the shareholders receiving the distribution, thus eliminating the double taxation which otherwise would be incurred. Section 355 and the applicable Treasury Regulations (Regulations), however, establish several requirements that must be met before a spin-off will qualify as tax-free. These requirements demonstrate that the IRS disfavors spin-offs.The main thrust of the requirements is to prevent spin-offs from being used as devices for extracting earnings and profits tax-free or at capital gain rates. For example, a primary hurdle to a tax-free spin-off is the business purpose test, a subjective test requiring that the spin-off be motivated by a real and substantial non-federal tax purpose germane to the business of the parent corporation, subsidiary, or affiliated group to which the corporation belongs. The IRS uses the subjectivity of the business purpose test as a filtering mechanism to disqualify many corporations that would otherwise fulfill the requirements for a valid spin-off.There are numerous reasons why a corporation might want to pursue a spin-off, all of them real and substantial and having nothing to do with federal taxation. For example, many corporations have found that spin-offs unlock value in their businesses, thereby rewarding shareholders. Other legitimate reasons for spin-offs include facilitating acquisitions, enhancing earnings from stock offerings, increasing management accountability, sharpening corporate fitness and focus, and increasing efficiency. In some circumstances, avoiding liability and providing takeover defenses may be appropriate justifications for spin-offs. In circumstances where these are not appropriate justifications, safeguards against entrenchment and state fraudulent conveyance laws have proven to be adequate deterrents to abuse.All of the above legitimate, non-tax rationales ultimately serve to enhance shareholder value and are therefore consistent with directors\u27 and officers\u27 fiduciary duty to their shareholders-namely, to maximize value. The current tax law, however, ignores this duty and often frustrates it. This Article proposes that I.R.C. § 355 and the accompanying regulations should be revised to facilitate rather than hinder corporate spin-offs. Part I reviews the history of the tax treatment of spin-offs and outlines the section 355 provisions, treasury regulations, and revenue rulings that currently govern spin-offs. Part II considers some improper motives for spin-offs, but argues that legal safeguards against entrenchment and state fraudulent conveyance laws adequately address abusive spin-offs. Part II examines the legitimate, non-tax rationales behind spin-offs within the context of management\u27s fiduciary duty to maximize shareholder value. Finally, Part IV analyzes the reasons why the tax law should encourage spin-offs and suggests revisions to section 355 to facilitate them. Spin-offs, Business Purpose Test, Tax Law, Merger and Acquisitio