This paper examines the nature of rational choice in strategic games.Although there are many reasons why an agent might select a Nash equilibrium strategy in a particular game, rationality alone does not require him to do so.A natural extension of widely accepted axioms for rational choice under uncertainty to strategic environments generates an alternative class of strategies, labelled "rationalizable."It is argued that no rationalizable strategy can be discarded on the basis of rationality alone, and that all rationally justifiable strategies are members of the rationalizable set.The properties of rationalizable strategies are studied, and refinements are considered.PROOF OF PROPOSITION 5.5: Since under the specified conditionsf(-) is a contraction mapping, Nash equilibrium is unique.We need only show P(G) = N*(G).Since P(G) is the intersection of an infinite sequence of compact, nested sets, it is compact.Consequently, we can define di = max d(s,, s,).s,,s, E-P,(G) Assume without loss of generality that d, > di Vi > 1.If point rationalizable strategies are not unique, then di > 0. Let s' and sj' be the strategies for which d(s'1, sj') = dl.There must exist t', t' e P(G)such that fl(t') = sj, and fl(t") = sj', with g,(t') = v1(t") (the first component doesn't effect fl( )).Now d(t', t") < ( d2 ) < d1(I-1)1/2. (i=2 J Further, d(f(t'), f(t")) > d(s', sj') = dl.So d(f(t), ft"))> d(t, t"I(I 1 ,/2

Why are observed contracts so often incomplete in the sense that they leave contracting parties' obligations vague or unspecified? Traditional answers to this question invoke transaction costs or bounded rationality. In contrast, we argue that such incompleteness is often an essential feature of a well-designed contract. Specifically, once some aspects of performance are unverifiable, it is often optimal to leave other verifiable aspects of performance unspecified. We explore the conditions under which this occurs, and investigate the structure of optimal contracts when these conditions are satisfied.

We examine conditions under which "Veblen effects" arise from the desire to achieve social status by signaling wealth through conspicuous consumption. While Veblen effects cannot ordinarily arise when preferences satisfy a "single-crossing property," they may emerge when this property fails. In that case, "budget" brands are priced at marginal cost, while "luxury" brands, though not intrinsically superior, are sold at higher prices to consumers seeking to advertise wealth. Luxury brands earn strictly positive profits under conditions that would, with standard formulations of preferences, yield marginal-cost pricing. We explore factors that induce Veblen effects, and we investigate policy implications.

We consider the properties of equilibrium behaviour in an aggregative growth model with intergenerational altruism. Various positive properties such as the cyclicity of equilibrium programs, and the convergence of equilibrium stocks to a steady state, are analyzed. Among other normative properties, it is established that under certain natural conditions, Nash equilibrium programs are efficient and “modified Pareto optimal” in a sense made clear in the paper, but never Pareto optimal in the traditional sense.

Strotz (1956) and Pollak (1968) were among the first to study the behaviour of an economic agent whose preferences change over time. They suggested that such an agent would choose a “consistent plan” which they described as “the best plan that he would actually follow”. A Markov-consistent plan has a particularly simple structure: current decisions are independent of past decisions, except insofar as past decisions affect the current values of state variables. Unfortunately, Markov-consistent plans do not generally exist. In this paper, we demonstrate that the existence problem dissappears for finite horizon problems when one introduces even a small amount of smooth uncertainty into production.

Although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation, our understanding of bequest motives remains incomplete. We develop a simple model of strategic bequests in which a testator influences the decisions of his beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries' actions. The model generates falsifiable empirical predictions that are inconsistent with other theories of intergenerational transfers. We present econometric and other evidence that strongly suggests that bequests are often used as compensation for services rendered by beneficiaries.

This paper extends pre-existing results concerning voluntary private funding of public goods. The assumption that individuals care about themagnitude of their own contributions only insofar as these contributions affect the aggregate level of expenditures is shown to have untenable implications. The analysis suggests that a reexaminationof the factors that motivate individuals to make contributions is in order. Copyright 1986 by American Economic Association.

This paper analyzes a model in which individuals care about both consumption (intrinsic utility) and social status. Status depends on public perceptions about an individual's predispositions rather than on the individual's actions. However, since predispositions are unobservable, actions signal predispositions and therefore affect status. When status is sufficiently important relative to intrinsic utility, many individuals conform to a rigid standard of behavior, despite heterogeneous intrinsic preferences. When status is relatively unimportant, no conformity emerges. The model produces both customs and fads, and it suggests an explanation for the development of multiple subcultures with distinct norms. Copyright 1994 by University of Chicago Press.

This paper presents new empirical evidence in support of the view that a significant fraction of total saving is motivated by the desire to leave bequests. Specifically, the author finds that social security annuity benefits significantly raise life insurance holdings and depress private annuity holdings among elderly individuals. These patterns indicate that the typical household would choose to maintain a positive fraction of its resources in bequeathable forms, even if insurance markets were perfect. Evidence on the relationship between insurance purchases and total resources reinforces this conclusion. Copyright 1991 by University of Chicago Press.

Weekly returns of stock portfolios exhibit substantial autocorrelation. Analytical studies suggest that nonsynchronous trading is capable of explaining from 5% to 65% of the autocorrelation. The varying importance of nonsynchronous trading in these studies arises primarily from differing assumptions regarding nontrading periods of stocks. We simulate the effects of nonsynchronous trading by sampling stock returns from a return generating process using transactions data to obtain the precise time of each stock's last trade. We find that simulated weekly portfolio returns exhibit autocorrelations that are roughly 25% that of their observed (CRSP) weekly returns.