[We propose a new criterion for equilibria of extensive games, in the spirit of Selten's perfectness criteria. This criterion requires that players' strategies be sequentially rational: Every decision must be part of an optimal strategy for the remainder of the game. This entails specification of players' beliefs concerning how the game has evolved for each information set, including informaiton sets off the equilibrium path. The properties of sequential equilibria are developed; in particular, we study the topological structure of the set of sequential equilibria. The connections with Selten's trembling-hand perfect equilibria are given.]
A fundamental assumption in much of game theory and economics is that all the relevant information for determining the rational play of a game is contained in its structural description. Recent experimental studies of bargaining have demonstrated effects due to information not included in the classical models of games of complete information. The goal of the experiment reported here is to separate these effects into components that can be attributed to the possession of specific information by specific bargainers, and to assess the extent to which the observed behavior can be characterized as equilibrium behavior. The results of the experiment permit us to identify such component effects, in equilibrium, including effects that depend on whether certain information is common knowledge or not. The paper closes with some speculation on the causes of these effects.
The equilibrium growth model is modified and used to explain the cyclical variances of a set of economic time series, the covariances between real output and the other series, and the autocovariance of output. The model is fitted to quarterly data for the post-war U.S. economy. Crucial features of the model are the assumption that more than one time period is required for the construction of new productive capital, and the non-time-separable utility function that admits greater intertemporal substitution of leisure. The fit is surprisingly good in light of the model's simplicity and the small number of free parameters. THAT WINE IS NOT MADE in a day has long been recognized by economists (e.g., Bdhm-Bawerk [6]). But, neither are ships nor factories built in a day. A thesis of this essay is that the assumption of multiple-period construction is crucial for explaining aggregate fluctuations. A general equilibrium model is developed and fitted to U.S. quarterly data for the post-war period. The co-movements of the fluctuations for the fitted model are quantitatively consistent with the corresponding co-movements for U.S. data. In addition, the serial correlations of cyclical output for the model match well with those observed. Our approach integrates growth and business cycle theory. Like standard growth theory, a representative infinitely-lived household is assumed. As fluctuations in employment are central to the business cycle, the stand-in consumer values not only consumption but also leisure. One very important modification to the standard growth model is that multiple periods are required to build new capital goods and only finished capital goods are part of the productive capital stock. Each stage of production requires a period and utilizes resources. Halffinished ships and factories are not part of the productive capital stock. Section 2 contains a short critique of the commonly used investment technologies, and presents evidence that single-period production, even with adjustment costs, is inadequate. The preference-technology-information structure of the model is presented in Section 3. A crucial feature of preferences is the non-time-separable utility function that admits greater intertemporal substitution of leisure. The exogenous stochastic components in the model are shocks to technology and imperfect indicators of productivity. The two technology shocks differ in their persistence.
[A new class of tests for heteroscedasticity in linear models based on the regression quantile statistics of Koenker and Bassett [17] is introduced. In contrast to classical methods based on least-squares residuals, the new tests are robust to departures from Gaussian hypotheses on the underlying error process of the model.]
This paper establishes a natural and satisfying characterization of the class of collective choice rules which are acyclic and satisfy the Arrow axioms (unrestricted domain, independence of irrelevant alternatives, and the weak Pareto principle). We show that, when the number of alternatives is larger than the number of individuals, there must exist an individual who can at least some critical number of pairwise decisions. This critical number of veto pairs depends on the number of alternatives and individuals, and, as the number of alternatives increases without limit, the fraction of all pairs which some individual can veto approaches unity. We also present a global veto theorem and an axiomatic characterization of the Pareto extension rule which utilizes acyclicity rather than quasi-transitivity. ARROW [1] SHOWED that the only collective choice rules that yield weak order social preference relations and satisfy unrestricted domain, independence of irrelevant alternatives, and the weak Pareto principle are dictatorial. Gibbard [9] demonstrated that by relaxing the rationality requirement from transitivity to quasi-transitivity (i.e., transitivity of the strict preference relation) we can evade the letter though not the spirit of the Arrow dictatorship result: oligarchy, a weaker form of dictatorship, still obtains when the other three axioms are imposed. In this paper we prove a theorem parallel to those of Arrow and Gibbard for the weaker rationality requirement of acyclicity (i.e., the absence of cycles of strict preference). Since acyclicity is a necessary and sufficient condition for the existence of a nonempty set of maximal elements in every finite feasible set, there are powerful reasons for imposing it. Moreover, as we argue in Blair and Pollak [2], it is difficult to justify any stronger rationality property such as quasi-transitivity without at the same time justifying some even stronger rationality condition which implies dictatorship. Our principal result shows that, when the number of alternatives is larger than the number of individuals, there must exist an individual who can at least some critical number of pairwise decisions. (We say that individual i has a veto over the ordered pair (y, x) if he is weakly decisive for x against y-that is, if his strict preference for x over y implies weak social preference for x over y, regardless of the preferences of other individuals.) This critical number of veto pairs depends on the number of alternatives and the number of individuals. As the number of alternatives increases without limit, the fraction of all pairs that some individual can veto approaches unity. There may be more than one individual who can veto at least the critical number of pairs; indeed, it is possible for every individual to have a veto over every ordered pair of alternatives.
We devise and apply a new method for estimating demand for local public goods from survey data. Individuals' responses to questions about whether they wanted more, less, or the same amount of various local public goods are combined with observations of their incomes, tax rates, and the amounts of actual spending in their home communities. Parameter estimates turn out to be quite similar to those found with studies like Bergstrom and Goodman's study based on total expenditures across communities.
[This paper proposes a simple theory to explain bargaining impasses, which is based on Schelling's view of the bargaining process as a struggle between bargainers to commit themselves to favorable bargaining positions. Because bargaining impasses are generally Pareto-inefficient, anything involving a positive probability of impasse is Pareto-inefficient as well. It is demonstrated that in spite of this avoidable inefficiency, when successful commitment is uncertain and irreversible it can still be rational for individuals to attempt commitment and thereby risk an impasse; in a leading special case, the model reduces to a Prisoner's Dilemma game, in which only strategic-dominance arguments are needed to establish this conclusion. Further, making commitment more difficult, or changing the costs of disagreement in a way that makes available a wider range of settlements that are better for both bargainers than disagreement, need not always lower the probability of impasse, in spite of the conventional wisdom to the contrary.]
THE MAIN PURPOSE of this paper is to provide an axiomatic approach to marginal cost (MC) pricing and to point out its similarity with Aumann-Shapley (A-S) pricing. The latter is a cost-sharing price mechanism discussed in [3 and 6] that is derived from a set of five natural axioms. In this paper we consider models in which there is one producer with a given technology who faces fixed input prices and produces a finite number of consumption goods. Thus, we can uniquely derive the cost function that describes the minimal cost of producing a given vector of consumption goods. By a price mechanism P(., ) we mean a rule or a function that associates with each cost function F and vector a of quantities, a vector of prices: