Coordination on networks with farsighted and myopic agents

We study a coordination game on a fixed connected network where players have to choose between two projects. Some players are moderate (i.e. they are ex-ante indifferent between both projects) while others are stubborn (i.e. they always choose the same project). Benefits for moderate players are increasing in the number of neighbors who choose the same project. In addition, players are either farsighted or myopic. Farsighted players anticipate the reactions of others while myopic players do not. We show that, when all players are farsighted, full coordination among the moderate players is reached except if there are stubborn players for both projects. When the population is mixed, the set of stable strategy profiles is a refinement of the set of Nash equilibrium strategy profiles. In fact, turning myopic players into farsighted ones eliminates gradually the inefficient Nash equilibria. Finally, we consider a social planner who can improve coordination by means of two policy instruments: adding links to the network (socialization) and/or turning myopic players into farsighted ones (education).

Bayesian Exploration: Incentivizing Exploration in Bayesian Games

In a wide range of recommendation systems, self-interested individuals (“agents”) make decisions over time, using information revealed by other agents in the past, and producing information that may help agents in the future. Each agent would like to exploit the best action given the current information but would prefer the previous agents to explore various alternatives to collect information. A social planner, by means of a well-designed recommendation policy, can incentivize the agents to balance exploration and exploitation in order to maximize social welfare or some other objective. The recommendation policy can be modeled as a multiarmed bandit algorithm under Bayesian incentivecompatibility (BIC) constraints. This line of work has received considerable attention in the “economics and computation” community. Although in prior work, the planner interacts with a single agent at a time, the present paper allows the agents to affect one another directly in a shared environment. The agents now face two sources of uncertainty: what is the environment, and what would the other agents do? We focus on “explorable” actions: those that can be recommended by some BIC policy. We show how the principal can identify and explore all such actions.

Strategic Interactions and Uncertainty in Decisions to Curb Greenhouse Gas Emissions

This paper examines the strategic interactions of two large regions making choices about greenhouse gas emissions in the face of rising global temperatures. Three central features are highlighted: uncertainty, the incentive for free riding, and asymmetric characteristics of decision makers. Optimal decisions are modelled in a fully dynamic, feedback Stackelberg pollution game. Global average temperature is modelled as a mean reverting stochastic process. A numerical solution of a coupled system of Hamilton-Jacobi-Bellman equations is implemented and the probability distribution of outcomes is illustrated with Monte Carlo simulation. When players are identical, the outcome of the game is much worse than the social planner’s outcome. An increase in temperature volatility reduces player utility, making cooperative action through a social planner more urgent. Asymmetric damages or asymmetric preferences for emissions reductions are shown to have important effffects on the strategic interactions of players.

Prosecutor Quality, Witness Participation, Crime, and Reform

We develop a model wherein concerns about prosecutor quality reduce the willingness of witnesses to cooperate with prosecutors. This causes an increase in the crime rate and in wrongly convicted innocent defendants. Because citizens are taxpayers and may be victims, perpetrators, witnesses, or falsely accused defendants, they care about the prosecutor’s quality. They update beliefs about this quality based on the disposition of cases. If the prosecutor’s believed quality falls below a threshold, then a majority of voters chooses to replace the prosecutor with a challenger, in expectation of reform. We compare the majority’s choice with that of a social planner. (JEL D83, K41, K42)

Education, taxation and the perceived effects of sin good consumption

In a setting in which an agent has a behavioral bias that causes an underestimation or an overestimation of the health consequences of sin goods consumption, the paper studies how a social planner can affect the demand of such goods through education and taxation. When only optimistic consumers are present, depending on the elasticity of demand of the sin good with respect to taxation, the two instruments can be substitutes or complements. When consumers are heterogeneous, the correcting effect that taxation has on optimistic consumers has unintended distorting effects on both pessimistic and rational ones. In this framework, educational measures, by aligning biased consumers’ perceptions closer to the true probability of health damages, are more effective than taxation.

The Effect of Green Technology Adoption Strategy on Duopoly Competition

Given consumers’ trade-offs between conventional economic and environmental attributes of products, we provide a game-theoretic model to explore the role of GTA strategy in duopoly competition by incorporating two salient features: Two product types — The green product produced by a firm with GTA strategy and the ordinary product produced by a firm without GTA strategy, and two consumer segments, i.e., the green consumers who are willing to pay for green products and the ordinary consumers who are willing to pay for ordinary products. Our analysis shows that GTA strategy may either increase or decrease the green firm’s quality provision. The subtle relationship between the green firm’s quality strategy and GTA strategy not only affects its own equilibrium performances but its rival’s. We also find that two consumer segments may be better off in the presence of a lower GTA intensity. Additionally, although the GTA strategy benefits the environment, the GTA investment is not the more the better. Finally, we find that GTA strategy would lead to higher social welfare only when the GTA efficiency is high enough. Our work not only provides an alternative economic explanation why some firms choose to implement GTA strategy and some do not in reality, but gives managerial insights for firms with different GTA strategies as well as policy insights for the social planner.

How do Fines and Their Enforcement on Counterfeit Products Affect Social Welfare?

We consider a differential game which models the competition between a genuine and a counterfeit producer. The genuine manufacturer acts as a leader, first announcing the price of the product and the investments in advertising. After observing the leader’s decisions, the counterfeiter sets the selling price of the fakes. We assume that the demand of the good is driven by the brand-name goodwill. We calculate the Stackelberg feedback equilibria and the social welfare, defined by the unweighted sum of the genuine and fakes consumers, the profit of the genuine firm, minus the enforcement costs borne by the social planner. The purpose of this paper is twofold. Firstly we study the dependence of social welfare on the amount of the fines established in the IPR law and monitoring efforts. Then, we compare prices, profits and social welfare under Nash and Stackelberg framework.

Why Perfect Tests May Not Be Worth Waiting For: Information as a Commodity

Information products provide agents with additional information that can be used to update actions. In many situations, access to such products can be quite limited. For instance, in epidemics, there tends to be a limited supply of medical testing kits, or tests. These tests are information products because their output of a positive or a negative answer informs individuals and authorities on the underlying state and the appropriate course of action. In this paper, using an analytical model, we show how the accuracy of a test in detecting the underlying state affects the demand for the information product differentially across heterogeneous agents. Correspondingly, the test accuracy can serve as a rationing device to ensure that the limited supply of information products is appropriately allocated to the heterogeneous agents. When test availability is low and the social planner is unable to allocate tests in a targeted manner to the agents, we find that moderately good tests can outperform perfect tests in terms of social outcome. This paper was accepted by Charles Corbett, operations management.

A Macroeconomic SIR Model for COVID-19

The COVID-19 pandemic and subsequent lockdowns highlight the close and delicate relationship between a country’s public health and economic health. Models that combine macroeconomic factors with traditional epidemic dynamics to calculate the impacts of a disease outbreak are therefore extremely useful for policymakers seeking to evaluate the best course of action in such a crisis. We developed a macroeconomic SIR model that considers herd immunity, behavior-dependent transmission rates, remote workers, and the indirect externalities of lockdowns. It is formulated as an exit time control problem where a social planner is able to prescribe separate levels of the lockdown low-risk and high-risk portions of the adult population. The model predicts that by considering the possibility of reaching herd immunity, high-risk individuals are able to leave lockdown sooner than in models where herd immunity is not considered. Additionally, a behavior-dependent transmission rate (which represents increased personal caution in response to increased infection levels) can lower both output loss and total mortality. Overall, the model-determined optimal lockdown strategy, combined with individual actions to slow virus transmission, is able to reduce total mortality to one-third of the model-predicted no-lockdown level of mortality.