Analogy-based Expectations and the Partially Cursed Equilibrium

Recent literature has questioned the existence of a learning foundation for the partially cursed equilibrium. This paper closes the gap by showing that a partially cursed equilibrium corresponds to a particular analogy-based expectation equilibrium.Analogy Expectations; Bounded Rationality; Curse; Learning

Contracts and Promises - An Approach to Pre-play Agreements

In line with the widely applied principle of just deserts, we assume that the severity of the penalty on a contract offender increases in the harm on the other. When this principle holds, the influence of the efficiency of the agreement on the incentives to abide by it crucially depends on whether actions are strategic complements or substitutes. With strategic substitutes, there is a conflict between Pareto-efficiency and the incentives to abide. The opposite tends to be true when actions are strategic complements. The results are interpreted in the context of legal contracts and in that of informal mutual promises.partnerships; contracts; pre-play communication; legal enforcement; social norms; guilt

Moral Hazard and Clear Conscience

The paper studies theoretically how the optimal contract in the hidden-action moral hazard model is affected when an agent feels bad when not reaching a target effort set in the contract. While the presence of guilt brings the outcome closer to first-best, an effort target is not costless for the principal. In equilibrium, the agent’s effort falls short of the target, inducing guilt which must be compensated by a higher financial reward. Thus, although the principal’s payoff is higher, the agent receives a part of the monetary rents accruing to intrinsic motivation. This result differs markedly from previous contributions on contracting under social preference or pro-social motivation.Moral Hazard; Norms; Agency; Social Preferences; Guilt; Work Ethic

Political Parties and Network Formation

We argue that anticorruption laws may provide an efficiency rationale for why political parties should meddle in the distribution of political nominations and government contracts. Anticorruption laws forbid trade in spoils that politicians distribute. However, citizens may pay for gaining access to politicians and, thereby, to become potential candidates for nominations. Such rent-seeking results in excessive network formation. Political parties may reduce wasteful network formation, thanks to their ability to enter into exclusive membership contracts. This holds even though anticorruption laws also bind political parties.political parties, two-sided platforms, rent-seeking, network formation

Commitment in Alternating Offers Bargaining

We extend the Ståhl-Rubinstein alternating-offer bargaining procedure to allow players, prior to each bargaining round, to simultaneously and visibly commit to some share of the pie. If commitment costs are small but increasing in the committed share, then the unique outcome consistent with common belief in future rationality (Perea, 2009), or more restrictively subgame perfect Nash equilibrium, exhibits a second mover advantage. In particular, as the smallest share of the pie approaches zero, the horizon approaches in…nity, and commitment costs approach zero, the unique bargaining outcome corresponds to the reversed Rubinstein outcome (d/(1 + d); 1/(1 + d)).alternating offer bargaining; bargaining power; commitment; epistemic game theory; patience

Beyond Procedural Fairness and Reciprocity

Most research in economics models agents somehow motivated by outcomes. Here, we model agents motivated by procedures instead, where procedures are defined independently of an outcome. To that end, we design procedures which yield the same expected outcomes or carry the same information on other's intentions while they have different outcome-invariant properties. Agents are experimentally confirmed to exhibit preferences over these which link to psychological attributes of their moral judgment.procedural preferences; experiment; procedural fairness

Gambling for the Upper Hand - Settlement Negotiations in the Lab

Gambling for the Upper Hand - Settlement Negotiations in the LabWe exploit a controlled non-framed laboratory experiment to study settlement negoti- ations and the plaintiff's decision to raise a lawsuit in case of an impasse. We find that greater variance in court outcomes increases the litigation rate. Further analysis suggests that this is due to the reflection effect in plaintiffs' loss aversion who treat disadvantageous inequality as a loss and who are thus willing to take negative expected value bets for more equality. When studying the settlement negotiations, the best-fitting logit-quantal-response- equilibrium predicts observed comparative statics patterns not predicted by the subgame perfect equilibrium.bargaining, litigation, loss aversion, quantal-response equilibrium, settlement

Commitment and Conflict in Multilateral Bargaining

We extend the Baron and Ferejohn (1989) model of multilateral bargaining by allowing the players to attempt commiting to a bargaining position prior to negotiating. If successful,commitment binds a player to reject any proposal which allocates to her a share below a self-imposed threshold. Any such attempted commitment fails and decays with an exogenously given probability. We characterize and compare symmetric stationary subgame perfect equilibria under unanimity rule and majority rules. Under unanimity rule, there are potentially many equilibria which can be ordered from the least to most inefficient, according to how how many commitment attempts must fail in order for an agreement to arise. The most inefficient equilibrium exists independently of the number of players, and the delay in this equilibrium is increasing in the number of players. In addition, more efficient commitment profiles cannot be sustained in equilibrium if the number of players is sufficiently large. The expected inefficiency due to delay at the least and at the most efficient equilibrium increases as the number of players increases. Under any (super)majority rule, however, there is no equilibrium with delay or inefficiency. The reason is that competition to be included in the winning coalition discourages attempts to commit to an aggressive bargaining position. We also show that inefficiencies related to unanimity decision making may be aggravated by longer lags between consecutive bargaining rounds. The predicted patterns are by and large consistent with observed inefficiencies in many international arenas including the European Union, WTO, and UNFCCC. The results suggest that the unanimity rule is particularly damaging if the number of legislators is large and the time lags between consecutive sessions are long