The e-mail game revisited - Modeling rough inductive reasoning

I study the robustness of Rubinstein´s (1989) E-Mail Game results towards rough inductive reasoning. Rough induction is a form of boundedly rational reasoning where a player does not carry out every inductive step. The information structure in the E-Mail game is generalized and the conditions are characterized under which Rubinstein´s results hold. Rough induction generates a payoff dominant equilibrium where the expected payoffs change continously in the probability of "faulty" communication. The article follows one of Morris´(2001a) reactions to the E-Mail game "that one should try to come up with a model of boundedly rational behavior that delivers predictions that are insensitive to whether there is common knowledge or a large number of levels of knowledge".

WTO´s Anti-dumping Rule and the Protection of Incumbents

Article VI of the GATT allows counter measures of goods are sold on a foreign market at a price below average production plus transportation costs. The present article analyzes Article VI based on a simple game theoretic model with two countries and economies of scale in the production of one homogeneous good. It is shown that multiple equilibria exist under the WTO rule for some parameter values which do not exist without the rule. In some equilibria the incumbent serves the entire market even if the entrant can porduce at lower costs. The model supports the criticism of the anti-dumping rule as an instrument of protection by industrialized countries against competition from developing countries.

Where Are The Problems with Credence Goods?

With credence goods consumers cannot judge the quality they receive compared to the quality they need. The needed quality can only be observed by an expert seller who may exploit the information asymmetry by cheating. In recent years various contributions have analyzed the credence goods problem under a wide variety of assumptions yielding equilibria exhibiting various degrees of inefficiencies and fraud. The present paper presents conditions under which market institutions solve the fraudulent expert problem at no cost and characterizes the inefficiencies that arise if at least one of these conditions is violated. Our analysis not only permits a clearer discrimination between situations in which markets prevent fraud and those in which they do not; it also helps to identify the forces driving the different inefficiency results derived in the literature.

Imported Equipment, Human Capital and Economic Growth in Developing Countries

De Long and Summers (1991) began a literature examining the impact of equipment investment on growth. In this paper we examine such a relationship for developing countries by considering imports of equipment from advanced countries as our measure of equipment investment for a sample of 55 developing countries. We examine whether the level of human capital in a country affects its ability to benefit from such investment. We find a complex interrelationship between imported equipment and human capital. Generally, the relationship between imported equipment and growth is lowest, and often negative, for countries with low levels of human capital, highest for countries within an intermediate range and somewhat in between for countries with the highest level of human capital.Capital Goods Imports, Human Capital, Developing Countries, Technology Diffusion

Why the US and not Brazil? Old Elites and the Development of a Modern Economy

Old elites can block changes, but not all do. Why is it that stronger elites may allow more changes than weaker elites? Why do economies with larger stocks of natural resources not grow faster than economies poorer in natural resources? We argue that old elites hold some power to extract rents from the economy. Whereas old sectors (i.e. agriculture or extraction of natural resources) are not affected by rent extraction, modern sectors require investments that do react to rent extraction. At the same time, a modern sector relies on networks of firms. These structures form the basis of political power of a new elite, which reduces the ability of the old elite to extract rents. We show that countries rich in natural resources provide their old elite with incentives to extract rents so high that the private sector has no incentives to build up a modern economy. If the old elite is either politically very strong or the natural resource sector is small compared to the potential of the modern sector, the old elite will choose to extract smaller rents from a growing sector. Some empirical evidence completes the paper.

On Doctors, Mechanics and Computer Specialists Or Where are the Problems with Credence Goods?

With credence goods consumers cannot judge the quality they receive compared to the quality they need. The needed quality can only be observed by an expert seller who may exploit the information asymmetry by cheating. In recent years various contributions have analyzed the credence goods problem under a wide variety of assumptions yielding equilibria exhibiting various degrees of inefficiencies and fraud. The variety of results has fostered the impression that the equilibrium behavior of experts and consumers in the credence goods market sensitively depends on the details of the models. More disturbingly, apparently similar models often lead to contradicting results. The present paper shows that the results for the majority of the specific models can be reproduced in a very simple unifying framework. Our model is constructed so that an efficient solution is reached if a small number of critical assumptions is satisfied, and virtually all existing results on inefficiencies in the credence good market are obtained by relaxing one of these conditions. Thus, our simple unifying model not only permits a clearer discrimination between situations in which market institutions solve the fraudulent expert problem without any cost and those where they do not; it also helps to identify the forces driving the various inefficiency results in the literature. Existing results are generalized, some previous interpretations of the forces leading to the striking differences in outcomes are questioned, and a new source for inefficiencies is identified.

Price discrimination via the choice of distribution channels

This article studies the use of different distribution channels as an instrument of price discrimination in credence goods markets. In credence goods markets, where consumers do not know which quality of the good or service they need, price discrimination proceeds along the dimension of quality of advice offered. High quality advice and appropriate treatment is provided to the most profitable market segment only. Less profitable consumers are induced to demand a treatment without a serious diagnosis. If consumers differ in the probabilities of needing different treatments some consumers are potentially overtreated. By contrast, under heterogeneity in the valuations of a successful intervention some consumers are potentially undertreated. Our results help to explain the casual observation that in the early phase of the IT industry only low quality equipment was distributed via warehouse sellers while today it is quite common to see high quality equipment at discounters.Price Discrimination; Distribution Channels; Credence Goods; Experts; Discounters

Contracting for Infrastructure Projects as Credence Goods

Large infrastructure projects are a major responsibility of government, who usually lacks expertise to fully specify the demanded projects. Contractors, typically experts on such projects, advise of the needed design in their bids. Producing the right design is nevertheless costly. We model the contracting for such infrastructure projects taking into account this credence goods feature and examine the performance of commonly used contracting methods. We show that when building costs are public information, multistage competitive bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search and the traditional Design-and-Build approach. While the latter leads to minimum design effort, sequential search suffers from a commitment problem. If building costs are the private information of the contractors and are revealed to them after design cost is sunk, competitive bidding may involve sampling more than two contractors. The commitment problem under sequential search may be overcome by the procurer's incentive to search for low building cost if the design cost is sufficiently low. If this is the case, sequential search may outperform competitive bidding.Credence Goods, Design-Build, Competitive Bidding, Sequential Search, Infrastructure Projects

μ-σ Games

Risk aversion in game theory is usually modelled using expected utility, which has been critized early on leading to an extensive literature on generalized expected utility. In this paper we are first to apply μ-σ theory to the analysis of (static) games. μ-σ theory is widely accepted in the finance literature, using it allows us to study the effect on uncertainty endogenous to the game, i.e. mixed equilibria. In particular, we look at the case of linear μ-σ utility functions and determine the best response strategy. In the case of 2x2- and NxM-games we are able to characterize all mixed equilibria.

On the Effectiveness of Demand Side Management Information Programs on Household Electricity Demand

We empirically study the effectiveness of a Demand Side Management (DSM) program for households based on customer information.