On the Strategic Complementarity of Skilled Workers and Technological Innovation: Which Determines Which?

In this document, we analyse the strategic complementarity between technological investment and investment in training by workers. We show that, beyond the importance of the answer to the question about which factor determines which, initial minimal conditions in both factors are required to start a long-run social development process. If these minimums are not met, the economy can become a self-satisfied economy, with a social mediocre performance but, at least in the short run, successful from the individual point of view. We consider that either manager of firms as workers are rational agents who make decisions about their future behaviour, considering the current state of the economy, understanding for such, the percentage of innovative and non-innovative firms in the market and the percentage of skilled and unskilled workers in the labour market. While managers decide the best way to invest, workers decide whether to invest or not in the upgrade or in the development of their skills to face the new challenges posed by technological change. The evolution of the economy is summarized in a complex dynamical system represented by a coupled dynamical system very close to the replicator dynamics considered in evolutionary game theory. In this way, we show that the initial conditions play a crucial role to understand the possibilities of future performance of the economy in each country, and, on the other hand, we analyse the conditions that make possible or necessary the intervention of the government in the economy. JEL Codes: C72, C73, O11, O55, K42

Information Use and the Condorcet Jury Theorem

Using a simple model of a coordination game, this paper explores how the information use of individuals affects an optimal committee size. Although enlarging the committee promotes information aggregation, it also stimulates the members’ coordination motive and distorts their voting behavior through higher-order beliefs. On the determination of a finite optimal committee size, the direction and degree of strategic interactions matter. When the strategic complementarity among members is strong, a finite optimal committee size exists. In contrast, it does not exist under strategic substitution. This mechanism is applied to the design of monetary policy committees in a New Keynesian model in which a committee conducts monetary policy under imperfect information.

Costly Interpretation of Asset Prices

We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, investors are boundedly rational, and their interpretation of prices injects noise into the price, generating a source of endogenous noise trading. Our setup predicts price momentum and yields excessive return volatility and excessive trading volume. In an overall equilibrium, investors optimally choose sophistication levels by balancing the benefit of beating the market against the cost of acquiring sophistication. There can exist strategic complementarity in sophistication acquisition, leading to multiple equilibria. This paper was accepted by Gustavo Manso, finance.

Market power and welfare in asymmetric divisible good auctions

We analyze a divisible good uniform‐price auction that features two groups, each with a finite number of identical bidders, who compete in demand schedules. In the linear‐quadratic‐normal framework, this paper presents conditions under which the unique equilibrium in linear demands exists and derives novel comparative statics results that highlight the interaction between payoff and information parameters with asymmetric groups. We find that the strategic complementarity in the slopes of traders' demands is reinforced by inference effects from prices, and we display the role of payoff and information asymmetries in explaining deadweight losses. Furthermore, price impact and the deadweight loss need not move together, and market integration may reduce welfare. The results are consistent with the available empirical evidence.

Deterrence with Imperfect Attribution

Motivated by recent developments in cyberwarfare, we study deterrence in a world where attacks cannot be perfectly attributed to attackers. In the model, each of $$ n $$ attackers may attack the defender. The defender observes a noisy signal that probabilistically attributes the attack. The defender may retaliate against one or more attackers and wants to retaliate against the guilty attacker only. We note an endogenous strategic complementarity among the attackers: if one attacker becomes more aggressive, that attacker becomes more “suspect” and the other attackers become less suspect, which leads the other attackers to become more aggressive as well. Despite this complementarity, there is a unique equilibrium. We identify types of improvements in attribution that strengthen deterrence—namely, improving attack detection independently of any effect on the identifiability of the attacker, reducing false alarms, or replacing misidentification with non-detection. However, we show that other improvements in attribution can backfire, weakening deterrence—these include detecting more attacks where the attacker is difficult to identify or pursuing too much certainty in attribution. Deterrence is improved if the defender can commit to a retaliatory strategy in advance, but the defender should not always commit to retaliate more after every signal.

The differential impact of friendship on cooperative and competitive coordination

Friendship is commonly assumed to reduce strategic uncertainty and enhance tacit coordination. However, this assumption has never been tested across two opposite poles of coordination involving either strategic complementarity or substitutability. We had participants interact with friends or strangers in two classic coordination games: the stag-hunt game, which exhibits strategic complementarity and may foster “cooperation”, and the entry game, which exhibits strategic substitutability and may foster “competition”. Both games capture a frequent trade-off between a potentially high paying but uncertain option and a low paying but safe alternative. We find that, relative to strangers, friends are more likely to choose options involving uncertainty in stag-hunt games, but the opposite is true in entry games. Furthermore, in stag-hunt games, friends “tremble” less between options, coordinate better and earn more, but these advantages are largely decreased or lost in entry games. We further investigate how these effects are modulated by risk attitudes, friendship qualities, and interpersonal similarities.