Lower Payoffs Research Articles

Stochastic Control Approach to Reputation Games

Through a stochastic-control-theoretic approach, we analyze reputation games, where a strategic long-lived player acts in a sequential repeated game against a collection of short-lived players. The key assumption in our model is that the information of the short-lived players is nested in that of the long-lived player. This nested information structure is obtained through an appropriate monitoring structure. Under this monitoring structure, we show that, given mild assumptions, the set of perfect Bayesian equilibrium payoffs coincides with Markov perfect equilibrium payoffs, and hence, a dynamic programming formulation can be obtained for the computation of equilibrium strategies of the strategic long-lived player in the discounted setup. We also consider the undiscounted average-payoff setup, where we obtain an optimal equilibrium strategy of the strategic long-lived player under further technical conditions. We then use this optimal strategy in the undiscounted setup as a tool to obtain a tight upper payoff bound for the arbitrarily patient long-lived player in the discounted setup. Finally, by using measure concentration techniques, we obtain a refined lower payoff bound on the value of reputation in the discounted setup. We also study the continuity of equilibrium payoffs in the prior beliefs.

Coordination of Electricity and Natural Gas Systems: An Incentive-Compatible Mutual Trust Solution

The coordination of electricity and natural gas systems has attracted increasing attention in recent years. This paper studies the coordinated dispatch of the two systems from a multi-agent perspective. First, our study demonstrates that the coordinated dispatch may lead to a lower payoff obtained by the power system, while the total utility of the two systems increases. For this issue, a transfer payment strategy that redistributes the total payoff to realize incentive compatibility is proposed. To extend its calculation to an incomplete information scenario considering the multi-agent premise, a two-stage algorithm is developed to solve the coordinated dispatch problem and calculate the transfer payment in a decentralized manner. In this algorithm, an anti-cheating mechanism is integrated to ensure mutual trust of the two systems. The numerical test results of two cases confirm the issue of power systems that lack economic incentives in coordination without a transfer payment and further validate the proposed incentive-compatible mutual trust mechanism.

A Unified Model of Firm Dynamics with Limited Commitment and Assortative Matching

ABSTRACTWe develop a unified theory of dynamic contracting and assortative matching to explain firm dynamics. In our model, neither firms nor managers can commit to arrangements that yield lower payoffs than their outside options, which are microfounded by the equilibrium conditions in a matching market. The model endogenously generates power laws in firm size and CEO compensation, and explains differences in their right tails. We also show that our model quantitatively accounts for many salient features of the time‐series dynamics and the cross‐sectional distribution of firm investment, dividend payout, and CEO compensation.

Divergent response-time patterns in vigilance decrement tasks.

Performance on tasks tends to change with time-on-task, usually for the worse. Two seemingly contradictory patterns of behavior are reported for these "vigilance decrements." Over the past 70 years, the more common vigilance decrement involves a decrease in signal detection associated with an increase in response times. In contrast, search tasks such as industrial inspection or X-ray screening produce vigilance decrements that involve a decrease in signal detection associated with a decrease in response times. Subjects respond faster with increasing time-on-task. Three experiments reported here were designed to explain these contrasting performance patterns. The results rule out task-type (search vs. nonsearch detection) and whether trials were paced versus unpaced by the computer as causes of these divergent response-time patterns. Instead, response structure-how subjects respond to the presence and absence of the critical signal-is the primary cause of this phenomenon. These results do not support traditional resource-depletion or under-stimulation theories of the vigilance decrement. Instead, I propose a dynamic-allocation resource theory in which the attention system uses various tactics to strategically disengage from tasks that provide low payoff across time-on-task. (PsycInfo Database Record (c) 2020 APA, all rights reserved).

Successive negative contrast effects in a risk-sensitive foraging procedure.

Although a wealth of studies have evidenced successive negative contrast effects in instrumental or operant procedures, relatively few studies have determined if and how a sudden downshift in reward quality alters foraging behaviour. In light of research by ecologists and psychologists in the area of risk-sensitive foraging, this area would serve as an adequate framework to examine the effects of a sudden downshift in reward quality on foraging behaviour. Therefore, the purpose of the current experiment was to explore if and how a sudden downshift in reward quality altered risk-sensitive foraging in rats. Subjects chose between a variable and fixed option that returned the same mean amount of sugar pellets, but one group of subjects (i.e., contrast group) were downshifted from 100% to 20% sugar pellets, whereas an unshifted control group received 20% sugar pellets throughout the study. Consistent with past risk-sensitive foraging research where reward quality was manipulated, subjects in the contrast group displayed significantly more risk-prone choices when reward quality was decreased from 100% to 20% sugar. However, the change in choice was inconsistent with contrast effects observed in prior contrast experiments. In addition to choice behaviour, other behavioural measures (e.g., rejected food, latency to choice) were significantly different between the unshifted control and contrast group and across conditions in the contrast group (e.g., latency to choice and rejected food significantly increased when reward quality changed from 100% to 20% sugar). These findings revealed a contrast effect and were similar to past contrast studies where reward quality was downshifted. Thus, when foragers experience a sudden downshift in reward quality, they may display significant behavioural changes and, in turn, display a bias for patches that yield a greater reward quality despite potentially lower payoffs. (PsycInfo Database Record (c) 2020 APA, all rights reserved).

Is Non-Neutrality Profitable for the Stakeholders of the Internet Market?

We consider a system in which there exists two ISPs, one “big” Content Provider (CP), and a continuum of End-Users (EUs). One of the ISPs is neutral and the other is non-neutral. We consider that the CP can differentiate between ISPs by controlling the quality of the content she is offering on each one. We also consider that EUs have different levels of innate preferences for ISPs. We formulate a sequential game, and explicitly characterize all the possible Sub-game Perfect Nash Equilibria (SPNE) of the game. We prove that if an SPNE exists, it would be one of the five possible strategies each of which we explicitly characterize. We prove that when EUs have sufficiently low innate preferences for ISPs, a unique SPNE exists in which the neutral ISP would be driven out of the market. We also prove that when these preferences are sufficiently high, there exists a unique SPNE with a non-neutral outcome in which both ISPs are active. Numerical results reveal that the neutral ISP receives a lower payoff and the non-neutral ISP receives a higher payoff (most of the time) in a non-neutral scenario. However, we identify scenarios in which the non-neutral ISP loses payoff by adopting non-neutrality. We also show that a non-neutral regime yields a higher welfare for EUs in comparison to a neutral one if the market power of the non-neutral ISP is small, the sensitivity of EUs (respectively, the CP) to the quality is low (respectively, high), or a combinations of these factors.

RETRACTED ARTICLE: Dishonesty is more affected by BMI status than by short-term changes in glucose

There is evidence that human decision-making is affected by current body energy levels and physiological states. There is less clear evidence linking decision-making to long-term changes in energy, as those associated with obesity. We explore the link between energy, obesity and dishonesty by comparing the behaviour of obese and lean subjects when hungry or sated while playing an anonymous die-under-cup task. Participants performed the task either before or after breakfast. We find that short-term switches in energy have only a mild effect on dishonesty, as only lean females lie less when sated. By contrast, obese subjects lie more than lean subjects in both conditions, and they lie more to avoid the lowest payoff than to get the highest payoff. Our findings suggest that the observed patterns are more likely mediated by factors associated with obesity than by short term energy dynamics, and call for a better integration of the psychological, economic and biological drivers of moral behaviour.

Dynamic Privacy Choices

I study a dynamic model of consumer privacy and platform data collection. In each period, consumers choose their level of platform activity. Greater activity generates more information about the consumer, thereby increasing platform profits. Although consumers value their privacy, the platform can collect information by gradually lowering the level of privacy protection. In the long run, consumers become “addicted” to the platform: They lose privacy and receive low payoffs, but choose high activity levels. If the platform cannot commit to future privacy policies, there is also an equilibrium in which the platform offers the highest privacy protection and fails to collect any information.

“To co-operate or not?” Risky co-operative behavior in Schizophrenia and the effect of vasopressin

Risky co-operation is when an individual chooses to co-operate in a social situation despite the possibility of the partner refusing to co-operate. Although this is a deviation from rational behavior, it may have helped humans in societal adaptation. Risky co-operation holds significance in social functioning. However, the status of risky cooperative behavior in schizophrenia, a disorder with impaired social cognition, is yet to be investigated. Moreover, the underlying neurobiology is unexplored.27 individuals with schizophrenia and 30 healthy volunteers performed an iterative stag hunt game, an ecologically valid, neuroeconomics game to measure risky cooperative behavior. The patients and healthy volunteers were matched on age and sex. An independent group of patients (n = 30) later performed the stag hunt game with intranasal vasopressin or saline in a counterbalanced crossover study design. Patients with schizophrenia, compared to healthy controls, switched from high-risk situations to a low-risk situation at lower payoff, suggesting impaired co-operation in a risky situation. Group differences were significant even after controlling for general risk- taking tendency and subjective mood state. In part-II of the study, there was no statistically significant difference in risky co-operative behavior with vasopressin.The results suggest impaired risky co-operative behavior in schizophrenia, which could influence the functional outcome. The study also provides a testable, ecologically valid paradigm for risky co-operative behavior in schizophrenia. Though single dose vasopressin did not influence the risky co-operative behavior, long term study with repeated administration is needed for a definitive conclusion.

Why Class Formation Occurs in Humans but Not among Other Primates : A Primate Coalitions Model.

Most human societies exhibit a distinct class structure, with an elite, middle classes, and a bottom class, whereas animals form simple dominance hierarchies in which individuals with higher fighting ability do not appear to form coalitions to "oppress" weaker individuals. Here, we extend our model of primate coalitions and find that a division into a bottom class and an upper class is inevitable whenever fitness-enhancing resources, such as food or real estate, are exploitable or tradable and the members of the bottom class cannot easily leave the group. The model predicts that the bottom class has a near flat, low payoff and always comprises at least half the society. The upper class may subdivide into one or more middle class(es), resulting in improved payoff for the topmost members (elite). The model predicts that the bottom class on its own is incapable of mounting effective counter-coalitions against the upper class, except when receiving support from dissatisfied members of the middle class(es). Such counter-coalitions can be prevented by keeping the payoff to the lowest-ranked members of the middle classes (through concessions) well above that of the bottom class. This simple model explains why classes are also absent in nomadic hunter-gatherers and predominate in (though are not limited to) societies that produce and store food. Its results also agree well with various other known features of societies with classes.

Pay One or Pay All: Random Selection of One Choice for Payment

It has become increasingly common in economics experiments to elicit a series of choices from participants, and then pay for only one, selected at random, after all have been made. This allows the researcher to observe a large number of individual decisions, and to increase payoffs for each decision since only one of them will be used for payment. It has not been demonstrated, however, whether subjects behave as if each of these choices involves the stated payoffs, or if subjects scale-down payoffs to account for the random selection that is made. This paper reports an experiment that tests this directly. In an environment where payoff scale effects have been demonstrated to matter, three treatments are conducted: pay for one of 10 choices under low payoffs, pay for all 10 choices under low payoffs, and pay for 1 of 10 choices under 10x the low payoff level. Increasing payoff scale has a significant effect on choices compared with the low payoff treatments where all 10 decisions are paid, or where one decision is paid. However, there is no significant difference in choices between paying for one or all 10 decisions at the low payoff level. This supports the validity of using the random-choice payment method.

Social goods dilemmas in heterogeneous societies.

Prosocial behaviours are encountered in the donation game, the prisoner's dilemma, relaxed social dilemmas and public goods games. Many studies assume that the population structure is homogeneous, meaning that all individuals have the same number of interaction partners or that the social good is of one particular type. Here, we explore general evolutionary dynamics for arbitrary spatial structures and social goods. We find that heterogeneous networks, in which some individuals have many more interaction partners than others, can enhance the evolution of prosocial behaviours. However, they often accumulate most of the benefits in the hands of a few highly connected individuals, while many others receive low or negative payoff. Surprisingly, selection can favour producers of social goods even if the total costs exceed the total benefits. In summary, heterogeneous structures have the ability to strongly promote the emergence of prosocial behaviours, but they also create the possibility of generating large inequality.

Contract Compliance Under Biased Expectations

Contract compliance is key for economic growth. However, determinants affecting contract breach are not yet well understood. In this paper, we focus on contract situations with a potential hold-up problem, such as contract farming agreements which are prevalent in many developing countries. We examine if agents' payoff expectations serve as a reference point affecting (non-)compliant behavior by inducing a subjective loss when the agent compares the realized payoff and the expected payoff from the contract. Results from our lab experiment in Ghana indicate that overconfident agents, i.e., agents with relatively high payoff expectations, breach more often than underconfident agents, i.e., agents with relatively low payoff expectations. Moreover, more pronounced individual loss aversion amplifies the effect of subjective losses on contract breach. In a treatment, we manipulate agents' overestimation exogenously and use it as an instrument to demonstrate that the reported effects are causal.

Preferences for power

Power—the ability to determine the outcomes of others—usually comes with various benefits: higher compensation, public recognition, etc. We develop a new game, the Power Game, to demonstrate that a substantial fraction of individuals enjoy the intrinsic value of power: they accept lower payoffs in exchange for power over others, without any benefits to themselves. These preferences exist independently of other components of decision rights, cannot be explained by social preferences and are not driven by mistakes, confusion or signaling intentions. We further show that valuation of power (i) is higher when individuals directly determine outcomes of others; (ii) depends on how much discretion one has over those outcomes; and (iii) is tied to relationships between individuals. We establish that ignoring preferences for power may have large welfare implications and, consequently, should be included in the study of political systems and labor contracts.

When Are Financial Covenants Relevant?

This paper shows that financial covenants have no value for creditors of highly levered firms, because an attempt to enforce their rights in technical default would result in a lower payoff than continued operations under shareholders' control. This explains the widespread use of cov-lite loans by junk firms. By contrast, for investment-grade firms tightly set covenants allow creditors to demand full repayment while the firm is still solvent. This ensures that creditors sustain no loss regardless of the underlying default probability, mitigating their concerns about the firm's financial health and alleviating adverse selection in lending. We show that the optimal strictness of financial covenants is hump-shaped in the firm's leverage.

Reporting under Ignorance – Is it a Lie if I Don't Know?

We study self-serving reporting behavior when people are ignorant on whether they are dishonest or telling the truth. We argue that the costs of making a (potentially) dishonest report under ignorance are smaller than the behavioral costs of a deliberate lie. In our laboratory reporting task, subjects are either eligible to a high payoff or a low payoff. One dimension varies the available information on the eligibility to payoffs, and the other dimension the ex-ante probability distribution of payoffs. Ignorance on the eligibility to payoffs leads to a pronounced increase in the fraction of unjustified claims of the high payoffs. While the probability dimension has only a small effect per se, the combination with ignorance is detrimental for truthful reporting. Potential explanations include the highly controversial social norm for reporting under ignorance. Further results indicate that most subjects are information seeking when having the opportunity to choose the preferred information regime.

Ideological Motives and Group Decision-Making

This paper studies experimentally when and how ideological motives shape group decision-making outcomes. Groups repeatedly decide between a monetarily preferred outcome that generates a high payoff but also an ideologically undesirable externality, or an ideologically preferred outcome that generates a low payoff and no externality. Groups that disagree forgo all payoffs. We find that groups which disagree initially are more likely to end up agreeing on the ideologically preferred outcome. We classify participants into ideologically motivated and payoff motivated types and show that this effect stems from the fact that ideologically motivated types are less likely to give in after disagreements. Heterogeneous groups disagree more often and, thus, foster agreements on the ideologically preferred outcome. Our treatments show that, due to this mechanism, large groups are more likely to implement the ideologically preferred outcome than small groups. Furthermore, an additional treatment provides a rationale for why and evidence that it matters for individual ideological commitment and its influence on group outcomes whether the externality is ideologically undesirable or desirable. Theoretically, we show that our results are best explained by the predictions of a model of fixed ideological preferences.

Revisiting the competency trap

Abstract We revisit the competency trap and reexamine when it occurs. We show that a bias against alternatives that improve with practice does not require that learning is myopic in the sense of lacking foresight or failing to explore. The same bias occurs even if learners engage in substantial exploration and have foresight. In fact, we demonstrate that even a rational and foresighted learner, who follow an optimal strategy for balancing exploration and exploitation, will learn to prefer alternatives with initially high payoffs that decrease with practice over alternatives, with identical expected values, that have initially low payoffs that increase with practice. Our results show that a bias against alternatives that improve with practice is due to an asymmetry in error correction rather than to myopic learning. The implication is that a wide range of selection systems, even optimally designed ones, will be biased against late-bloomers.

Policy effectiveness in spatial resource wars: A two-region model

We develop a spatial resource model in continuous time in which two agents strategically exploit a mobile resource in a two-region setup.To counteract the overexploitation of the resource (the tragedy of commons) that occurs when players are free to choose where to harvest, the regulator can establish a series of spatially structured policies. We compare the equilibria in the case of a common resource with those that emerge when the regulator either creates a natural reserve, or assigns Territorial User Rights to the players.We show that, when technological and preference parameters dictate a low harvesting effort, the policies are ineffective in promoting the conservation of the resource and, in addition, they lead to a lower payoff for at least one of the players. Conversely, in a context of higher harvesting effort, the intervention can help to safeguard the resource, preventing extinction while also improving the welfare of both players.

Investigating cooperation with robotic peers.

We explored how people establish cooperation with robotic peers, by giving participants the chance to choose whether to cooperate or not with a more/less selfish robot, as well as a more or less interactive, in a more or less critical environment. We measured the participants' tendency to cooperate with the robot as well as their perception of anthropomorphism, trust and credibility through questionnaires. We found that cooperation in Human-Robot Interaction (HRI) follows the same rule of Human-Human Interaction (HHI), participants rewarded cooperation with cooperation, and punished selfishness with selfishness. We also discovered two specific robotic profiles capable of increasing cooperation, related to the payoff. A mute and non-interactive robot is preferred with a high payoff, while participants preferred a more human-behaving robot in conditions of low payoff. Taken together, these results suggest that proper cooperation in HRI is possible but is related to the complexity of the task.