Common Agency and Computational Complexity: Theory and Experimental Evidence

In a common agency game, several principals try to influence the behavior of an agent. Common agency games typically have multiple equilibria. One class of equilibria, called truthful, has been identified by Bernheim and Whinston and has found widespread use in the political economy literature. In this paper we identify another class of equilibria, which we call natural. In a natural equilibrium, each principal offers a strictly positive contribution on at most one alternative. We show that a natural equilibrium always exists and that its computational complexity is much smaller than that of a truthful equilibrium. To compare the predictive power of the two concepts, we run an experiment on a common agency game for which the two equilibria predict a different equilibrium alternative. The results strongly reject the truthful equilibrium. The alternative predicted by the natural equilibrium is chosen in 65% of the matches, while the one predicted by the truthful equilibrium is chosen in less than 5% of the matches.lobbying;experimental economics;common agency;truthful equilibrium;natural equilibrium;computational complexity

A Theory of Sequential Reciprocity

Many experimental studies indicate that people are motivated by reciprocity. Rabin (1993) develops techniques for incorporating such concerns into game theory and economics. His model, however, does not fare well when applied to situations with an interesting dynamic structure (like many experimental games), because it is developed for normal form games in which information about the sequential structure of a strategic situation is suppressed. In this paper we develop a theory of reciprocity for extensive games in which the sequential structure of a strategic situation is made explicit. We propose a new solution concept— sequential reciprocity equilibrium—which is applicable to extensive games, and we prove a general equilibrium existence result. The model is applied in several examples, including some well known experimental games like the Ultimatum game and the Sequential Prisoners’ Dilemma.Reciprocity;extensive games

The Endogenous Evolution of Market Institutions: An Experimental Investigation

We study an experimental market in which the structure of the information flows is endogenized. When making an offer, traders choose not only the price at which they are prepared to trade, but also the subset of traders they want to inform about the offer. This design allows for two extreme institutions as special cases. If traders always inform every other trader about each offer, the resulting institution is equivalent to a double auction. If, on the other hand, traders always inform only one other trader about each offer, the resulting institution is equivalent to a decentralized bargaining market. The institution that actually evolved in the experiments, however, was in between the two extreme cases. Subjects typically informed all traders of the other market side, but none of their own side. This endogenously evolving institution, however, turned out to have the same properties as the double auction.market institution;information structure;efficiency

Your Morals are Your Moods

We test the effect of players' moods on their behavior in a gift-exchange game.In the first stage of the game, player 1 chooses a transfer to player 2.In the second stage, player 2 chooses an effort level.Higher effort is more costly for player 2, but it increases player 1's payoff.We say that player 2 reciprocates if effort is increasing in the transfer received.Player 2 is generous if an effort is incurred even when no transfer is received.Subjects play this game in two different moods.To induce a `bad mood', subjects in the role of player 2 watched a sad movie before playing the game; to induce a `good mood', they watched a funny movie.Mood induction was effective: subjects who saw the funny movie reported a significantly better mood than those who saw the sad movie.These two moods lead to significant differences in player 2's behavior.We find that a bad mood implies more reciprocity while a good mood implies more generosity.Since high transfers are relatively more common, player 1 make more money when second movers are in a bad mood.rationality;motivation;game theory;emotions;reciprocity;gift giving

Employment Duration and Resistance to Wage Reductions: Experimental Evidence

One of the long-standing puzzles in economics is why wages do not fall sufficiently in recessions so as to avoid increases in unemployment. Put differently, if the competitive market wage declines, why don't employers simply force their employees to accept lower wages as well? As an alternative to reviewing statistical data we have performed an experiment with a lower competitive wage in the second phase of an employment relationship that is known to both parties. Our hypothesis is that employers will not lower wages correspondingly and that employees will resist such wage cuts. Our experiment casts two subjects in the highly stylized roles of employer and employee. We find at most mild evidence for resistance to wage declines. Instead, the experimental results can be more fruitfully interpreted in terms of an "ultimatum game", in which some surplus between employers and employees is split. In this view, wages and their lack of decline are simply the mechanical tool for accomplishing this split.wage flexibility;ratchet effect (of wages);(wage) bargaining;labour market;ultimatum game;fair wages

Public Versus Private Exchanges

We study the structure of markets when traders are given the opportunity to create their own market, as on the internet.On the internet, public exchanges have in many cases been replaced by private exchanges.We use experiments to investigate possible reasons for the failure of public exchanges.In our experimental markets, when traders make an offer, they decide whom to inform about the offer.Participants typically inform all traders on the other side of the market, but not on their own side, resulting in a private, not a public exchange.This private exchange leads to the same outcomes in terms of prices and efficiency as a double auction.When we impose transaction costs on the buyers, only the sellers make private offers, which results in an inefficient market. When we provide incentives for sellers to inform each other, most of the sellers reveal a strict preference to hide offers from rivals.However, when sellers do share price information, they attain a higher price and benefit collectively