Minimizing Regret: The General Case

In repeated games with differential information on one side, the labelling "general case" refers to games in which the action of the informed player is not known to the uninformed, who can only observe a signal which is the random outcome of his and his opponent's action. Here we consider the problem of minimizing regret (in the sense first formulated by Hannan [8]) when the information available is of this type. We give a simple condition describing the approachable set.Minimize regret;differential information;approachability

Sophisticated Players and Sophisticated Agents

A sophisticated player is an individual who takes the action of the opponents, in a strategic situation, as determined by decision of rational opponents, and acts accordingly. A sophisticated agent is rational in the choice of his action, but ignores the fact that he is part of a strategic situation. We discuss a notion of equilibrium with sophisticated agents, we provide conditions for its existence, and argue that it differs systematically from the Nash equilibrium.Procedural rationality;sophisticated agents

Sequential Common Agency

In a common agency game a set of principals promises monetary transfers to an agent which depend on the action he will take. The agent then chooses the action, and is paid the corresponding transfers. Principals announce their transfers simultaneously. This game has many equilibria; Bernheim and Whinston ([1]) prove that the action chosen in the coalition-proof equilibrium is e±cient. The coalition-proof equilibria have an alternative characterization as truthful equilibria. The other equilibria may be inefficient. Here we study the sequential formulation of the common agency game: principals announce their transfers sequentially. We prove that the set of equilibria is different in many important ways. The outcome is efficient in all the equilibria. The truthful equilibria still exist, but are no longer coalition-proof. Focal equilibria are now a different type of equilibria, that we call thrifty. In thrifty equilibria of the sequential games, principals are better off (and the agent worse off) than in the truthful equilibria of the simultaneous common agency. These results suggest that the sequential game is more desirable institution, because it does not have ine±cient equilibrium outcomes; but it is less likely to emerge when agents have the power to design the institution.Common agency;sequential games;principal agent games;political influence

Optimal Taxes Without Commitment.

In the problem of optimal taxation in an economy with two productive factors, labor and capital, the optimal solution when the government can commit to a sequence of tax rates, has the tax on capital tending to zero in the limit, with all the tax burden on labour. It is well known, however, that this solution is time inconsistent; so if the commitment power is not perfect, this second best tax plan will not be suitable. We model explicitly the tradeoff between the cost of revising the tax plan, and the benefit of the revision.FISCAL POLICY;CAPITAL;TAXES;TAXATION

Pay Enough - Or Don't Pay at All

Abstract: Economics seems largely based on the assumption that monetary incentives improve performance. By contrast, a large literature in psychology, including a rich tradition of experimental work, claims just the opposite. In this paper we present and discuss a set of experiments designed to test the effect of different monetary compensations on performance. In our experiments we find that whenever money is offered, a larger amount yields a higher performance. It is not true, however, that offering money always induces a higher performance: participants who were offered a small payoff gave a worse performance than those who were offered no compensation at all. These results suggest that the behavior of participants is influenced by their perception of the contract that is offered to them. When the contract offers money the environment is perceived as monetary, and participants respond in a qualitatively different way in monetary and non-monetary environments. In a different set of experiments we test subjects who, acting as principals, have to provide the appropriate incentive to agents. We show that principals do not anticipate the drastic difference in behavior. The vast majority of principals seem to think incorrectly that a larger compensation is unambiguously a better incentive.Monetary incentives;performance;motivation;principal-agent

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

Skill, Strategy and Passion: An Empirical Analysis of Soccer

zero sum games;motivation;rationality;natural experiments;sports;soccer

Organizing effects of testosterone and economic behavior: not just risk taking

Recent literature emphasizes the role that testosterone, as well as markers indicating early exposure to T and its organizing effect on the brain (such as the ratio of second to fourth finger,D2:D4), have on performance in financial markets. These results may suggest that the main effect of T, either circulating or in fetal exposure, on economic behavior occurs through the increased willingness to take risks. However, these findings indicate that traders with a low digit ratio are not only more profitable, but more able to survive in the long run, thus the effect might consist of more than just lower risk aversion. In addition, recent literature suggests a positive correlation between abstract reasoning ability and higher willingness to take risks. To test the two hypotheses of testosterone on performance in financial activities (effect on risk attitude versus a complex effect involving risk attitude and reasoning ability), we gather data on the three variables in a sample of 188 ethnically homogeneous college students (Caucasians). We measure a D2:D4 digit ratio, abstract reasoning ability with the Raven Progressive Matrices task, and risk attitude with choice among lotteries. Low digit ratio in men is associated with higher risk taking and higher scores in abstract reasoning ability when a combined measure of risk aversion over different tasks is used. This explains both the higher performance and higher survival rate observed in traders, as well as the observed correlation between abstract reasoning ability and risk taking. We also analyze how much of the total effect of digit ratio on risk attitude is direct, and how much is mediated. Mediation analysis shows that a substantial part of the effect of T on attitude to risk is mediated by abstract reasoning ability

Sophisticated Players and Sophisticated Agents

A sophisticated player is an individual who takes the action of the opponents, in a strategic situation, as determined by decision of rational opponents, and acts accordingly. A sophisticated agent is rational in the choice of his action, but ignores the fact that he is part of a strategic situation. We discuss a notion of equilibrium with sophisticated agents, we provide conditions for its existence, and argue that it differs systematically from the Nash equilibrium