Paper # Author Title
We examine contemporaneous perfect epsilon-equilibria, in which a player's actions after every history, evaluated at the point of deviation from the equilibrium, must be within epsilon of a best response. This concept implies, but is stronger than, Radner's ex ante perfect epsilon-equilibrium. A strategy profile is a contemporaneous perfect epsilon-equilibrium of a game if it is a subgame perfect equilibrium in a perturbed game with nearly the same payoffs, with the converse holding for pure equilibria. Download Paper
We posit that the value of a manager's human capital depends on the firm's business strategy. The resulting interaction between business strategy and managerial incentives affects the organization of business activities, both the internal organization of the firm and the determination of firm boundaries. We illustrate the impact of this interaction on firm boundaries in a dynamic agency model. There may be disadvantages in merging two firms even when such a merger allows the internalization of externalities between the two firms. Merging, by making unprofitable certain decisions, ncreases the cost of inducing managerial effort. This incentive cost is a natural consequence of the manager's business-strategy-specific human capital. Download Paper
We study the long-run sustainability of reputations in games with imperfect public monitoring. It is impossible tomaintain a permanent reputation for playing a strategy that does not play an equilibrium of the game without uncertainty about types. Thus, a player cannot indefinitely sustain a reputation for non-credible behavior in the presence of imperfect monitoring. Download Paper
We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade,leading to inefficient levels of investment and trade. Download Paper
The social context can have a large impact on economic decisions. The theoretical challenge is to formulate a model that encompasses both social and economic decisions in a meaningful manner. We discuss the incorporation of social context into neoclassical economic models using social institutions. We also discuss the relationship between social institutions, social capital, and the social value of assets (introduced by Mailath and Postlewaite (2002)). Download Paper
We study the long-run sustainability of reputations in games with imperfect public monitoring. It is impossible to maintain a permanent reputation for playing a strategy that does not eventually play an equilibrium of the game without uncertainty about types. Thus, a player cannot indefinitely sustain a reputation for non-credible behavior in the presence of imperfect monitoring. Download Paper
We present a dynamic agency model in which changes in the structure of a firm affect its value due to altered incentives. There may be disadvantages in merging two firms even when such a merger allows the internalization of externalities between the two firms. Merging, by making unprofitable certain decisions, increases the cost of inducing managers to exert effort. This incentive cost arises as a natural consequence of the manager's firm-specific human capital. Download Paper
We present a dynamic agency model in which changes in the structure of a firm affect its value due to altered incentives. There may be disadvantages in merging two firms even when such a merger allows the internalization of externalities between the two firms. Merging, by making unprofitable certain decisions, increases the cost of inducing managers to exert effort. Download Paper
We examine contemporaneous perfect epsilon-equilibria, in which a player's actions after every history, evaluated at the point of deviation from the equilibrium, must be within epsilon of a best response. This concept implies, but is not implied by Radner's ex ante perfect epsilon-equilibrium. A strategy profile is a contemporaneous perfect epsilon-equilibrium of a game if it is a subgame perfect equilibrium in a game achieved by perturbing payoffs by at most epsilon/2, with the converse holding for pure equilibria. Download Paper
We present a model incorporating both social and economic components, and analyze their interaction. We argue that such analysis is necessary for an understanding of the social arrangements that are consistent with underlying economic fundamentals. We introduce the notion of a social asset, an attribute that has value only because of the social arrangements governing society. We consider a generational matching model in which an attribute has value in some equilibrium social arrangements (matching patterns), but not in others. We then show that productive attributes (such as education) can have their value increased above their inherent productive value by some social arrangements, leading to the notion of the social value of an asset. Download Paper
We describe the maximum efficient subgame perfect equilibrium payoff for a player in the repeated Prisoners' Dilemma, as a function of the discount factor. For discount factors above a critical level, every efficient, feasible, individually rational payoff profile can be sustained. For an open and dense subset of discount factors below the critical value, the maximum efficient payoff is not an equilibrium payoff. When a player cannot achieve this payoff, the unique equilibrium outcome achieving the best efficient equilibrium payoff for a player is eventually cyclic. There is an uncountable number of discount factors below the critical level such that the maximum efficient payoff is an equilibrium payoff. Download Paper
We present three examples of finitely repeated games with public monitoring that have sequential equilibria in private strategies, i.e., strategies that depend on own past actions as well as public signals. Such private sequential equilibria can have features quite unlike those of the more familiar perfect public equilibria: (i) making a public signal less informative can create Pareto superior equilibrium outcomes; (ii) the equilibrium final-period action profile need not be a stage game equilibrium; and (iii) even if the stage game has a unique correlated (and hence Nash) equilibrium, the first-period action profile need not be a stage game equilibrium. Download Paper
We examine a market in which firms confront a moral hazard problem in the provision of product quality, facing a short-term incentive to produce low quality but potentially earning higher profits from "committing" to high quality. There are two types of firms in the market, "inept" firms who can produce only low quality, and "competent" firms who have a choice between high and low quality. Firms occasionally leave the market, causing competent and inept potential entrants to compete for the right to inherit the departing firm's reputation. In a repeated interaction, with consumers receiving noisy signals of product quality, competent firms choose high quality in an attempt to distinguish themselves from inept firms. Competent firms find average reputations most valuable, in the sense that a competent firm is most likely to enter the market by purchasing an average reputation, in the hopes of building it into a good reputation, than either a very low reputation or a very high reputation. Inept firms, in contrast, find it profitable to either buy high reputations and deplete them or buy low reputations. Financial support from the National Science Foundation is gratefully acknowledged. Download Paper
This paper addresses the question of whether agents will invest efficiently in attributes that will increase their productivity in subsequent matches with other individuals. We present a two-sided matching model in which buyers and sellers make investment decisions prior to a matching stage. Once matched, the buyer and seller bargain over the transfer price. In contrast to most matching models, preferences over possible matches are affected by decisions taken before the matching process. We show that if bargaining respects the existence of outside options (in the sense that the resulting allocation is in the core of the assignment game), then efficient decisions can always be sustained in equilibrium. However, there may also be inefficient equilibria. Our analysis identifies a potential source of inefficiency not present in most matching models. Download Paper
We construct a model in which a firm's reputation must be built gradually, is managed, and dissipates gradually unless appropriately maintained. Consumers purchase an experience good from a firm whose unobserved effort affects the probability distribution of consumer utilities. Consumers observe private, noisy signals ( consumer utilities ) of the behavior of the firm, yielding a game of imperfect private monitoring. The standard approach to reputations introduces some "good" or "Stackelberg" firms into the model, with consumers ignorant of the type of the firm they face and with ordinary firms acquiring their reputations by masquerading as Stackelberg firms. In contrast, the key ingredient of our reputation model is the continual possibility that the ordinary or "competent" firm might be replaced by a "bad" or "inept" firm who never chooses the Stackelberg action. Competent firms then acquire their reputations by convincing consumers that they are not inept. Building a reputation is an exercise in separating one-self from inept firms who one is not, rather than pooling with Stackelberg firms who one would like to be. We investigate how a firm manages such a reputation, showing, among other features, that a competent firm may not always choose the most efficient effort level to distinguish itself from an inept one. Download Paper
In repeated games with imperfect public monitoring, players can use public signals to perfectly coordinate their behavior. Our study of repeated games with imperfect private monitoring focuses on the coordination problem that arises without public signals. We present three new observations. First, in a simple twice repeated game, we characterize the private signalling technologies that allow non-static Nash behavior in pure strategy equilibria. Our characterization uses the language of common p-belief due to Monderer and Samet (GEE, 1989). Second, we show that in the continuum action convention game of Shin and Williamson (GEE, 1996), for any full support private monitoring technology, equilibria of the finitely repeated convention game must involve only static Nash equilibria. Ey contrast, with sufficiently informative public monitoring, the multiplicity of Nash equilibria allows a finite folk theorem. Finally, for finite action games, we prove that there are full support private monitoring technologies for which a Nash reversion infinite horizon folk theorem holds. Download Paper
We consider a market in which there are two types of workers, "red" and "green," where these labels have no direct payoff implications. Workers can choose to acquire costly skills. Skilled workers must search for firms with a job vacancy, while firms with vacancies also search for unemployed workers. A unique symmetric equilibrium exists in which firms ignore workers' colors. There may also exist an asymmetric equilibrium in which firms only search for green workers, more green than red workers acquire skills, skilled green workers receive higher wage rates than skilled red workers, and the unemployment rate is higher among skilled red than green workers, though there are more unemployed skilled green than red workers. Discrimination between ex ante identical individuals thus arises as an equilibrium phenomenon. Our analysis differs from previous models of discrimination in assuming that firms have perfect information about workers with whom they are matched, and strictly prefer to hire minority workers (contingent on meeting a worker), and in generating predictions concerning unemployment as well as wage rates. Download Paper
Evolutionary game theory provides an answer to two of the central questions in economic modeling: When is it reasonable to assume that people are rational? And, when is it reasonable to assume that behavior is part of a Nash equilibrium (and if it is reasonable, which equilibrium)? The traditional answers are not compelling, and much of evolutionary modeling is motivated by the need for a better answer. Evolutionary game theory suggests that, in a range of settings, agents do (eventually) play a Nash equilibrium. Moreover, evolutionary modeling has shed light on the relative plausibility of different Nash equilibria. Download Paper
A strategy profile of a normal form game is proper if and only if it is quasi-perfect in every extensive form (with that normal form). Thus, properness requires optimality along a sequence of supporting trembles, while sequentiality only requires optimality in the limit. A decision-theoretic implementation of sequential rationality, strategic independence respecting equilibrium (SIRE), is defined and compared to proper equilibrium, using lexicographic probability systems. Finally, we give tremble-based characterizations, which do not involve structural features of the game, of the rankings of strategies that underlie proper equilibrium and SIRE. Download Paper
This paper shows that Nash equilibria of a local-interaction game are equivalent to correlated equilibria of the underlying game. Download Paper