Net Payoffs Research Articles

Evolutionary Game Analysis on Group Cooperation of Heterogeneous Chaoshan Firms

In developing global trade and commerce, firms founded by Chaoshan merchants have gradually formed informal institutions of group cooperation. This study constructs an asymmetric evolutionary game model for Chaoshan firms from the HCIA (historical and comparative institutional analysis) perspective of group cooperation institutions. Furthermore, it analyses the evolutionary path and the constraint mechanism of group cooperation institutions of heterogeneous Chaoshan firms. The results suggest that if the net payoffs to one party from cooperation are less than those from a breach, it is detrimental for both parties to continue group cooperation. When the net payoffs from cooperation are more than those from a breach, both parties choose group cooperation if reputational compensation covers the losses. Otherwise, the ultimate cooperation between both parties depends on the distribution of benefits, the profitability of cooperation, the penalty cost of a breach, the cost of cooperation and the loss from a breach suffered by adhering to cooperation.

A model of inter-organizational network formation

How do inter-organizational networks emerge? We address this question using an equilibrium framework where firms' decisions to form links with other firms are modeled as a strategic game. In this game, firms weigh the costs and benefits of establishing a relationship with other firms and form ties if their net payoffs are positive. We characterize the equilibrium networks as exponential random graphs (ERGM), and we estimate the firms' payoffs using a Bayesian approach. We apply the framework to a co-investment network of venture capital firms in the medical device industry, providing economic interpretations ERGM parameter estimates. We learn that firms rely on their joint partners (transitivity) and prefer to form ties with firms similar to themselves (homophily). These results hold after controlling for the interdependence among ties. Our structural approach allows us to simulate the effects of economic shocks or policy counterfactuals. We test two such policy shocks, namely, firm entry and regulatory change. We show that while entry of few firms does not have meaningful effects on the shape of the network, a regulatory shock of minimum capital requirements increases the co-investment network's density and clustering.

Lockdown Without Loss? A Natural Experiment of Net Payoffs from COVID-19 Lockdowns.

Lacking a federal policy to control the spread of COVID-19, state governors ordered lockdowns and mask mandates, at different times, generating a massive natural experiment. The authors exploit this natural experiment to address four issues: (1) Were lockdowns effective in reducing infections? (2) What were the costs to consumers? (3) Did lockdowns increase (signaling effect) or reduce (substitution effect) consumers' mask adoption? (4) Did governors' decisions depend on medical science or nonmedical drivers? Analyses via difference-in-differences and generalized synthetic control methods indicate that lockdowns causally reduced infections. Although lockdowns reduced infections by 480 per million consumers per day (equivalent to a reduction of 56%), they reduced customer satisfaction by 2.2%, consumer spending by 7.5%, and gross domestic product by 5.4% and significantly increased unemployment by 2% per average state by the end of the observation period. A counterfactual analysis shows that a nationwide lockdown on March 15, 2020, would have reduced total cases by 60%, whereas the absence of any state lockdowns would have resulted in five times more cases by April 30. The average cost of reducing the number of cases by one new infection was about $28,000 in lower gross domestic product.

THE IMPACT OF TAXES ON INDIVIDUAL LONG-TERM SAVINGS DECISION

This paper uses experimental methods to analyze how different forms of taxation influence the decision between immediate consumption and saving. The parameters are chosen in such a way that the treatments No Tax, Immediate Taxation and Deferred Taxation have identical net payoffs, which should induce the same decisionmaking patterns. However, we find that these expectations only apply to the treatments No Tax and Immediate Taxation. The participants in the Deferred Taxation treatment show a significantly weaker preference for saving which hints at a misperception of this form of taxation. This result also has political implications as many OECD countries try to incentivize voluntary saving for retirement through deferred taxation. In the experiment, however, this type of taxation leads to less saving than an economically equivalent immediate taxation of savings. Furthermore, the paper shows that individuals only partially recognize the advantages of immediate or deferred taxation compared to a classic income tax. While the periodic yield is tax exempt in systems of immediate or deferred taxation, it is taxable under a classical income tax. The latter should have a negative effect on saving decisions. However, these theoretical predictions do not hold in our experiment.

Lockdown Without Loss? A Natural Experiment of Net Payoffs to COVID Lockdowns

Lockdown Without Loss? A Natural Experiment of Net Payoffs to COVID Lockdowns

Neural regions associated with gain-loss frequency and average reward in older and younger adults

Research on the biological basis of reinforcement-learning has focused on how brain regions track expected value based on average reward. However, recent work suggests that humans are more attuned to reward frequency. Furthermore, older adults are less likely to use expected values to guide choice than younger adults. This raises the question of whether brain regions assumed to be sensitive to average reward, like the medial and lateral PFC, also track reward frequency, and whether there are age-based differences. Older (60-81 years) and younger (18-30 years) adults performed the Soochow Gambling task, which separates reward frequency from average reward, while undergoing fMRI. Overall, participants preferred options that provided negative net payoffs, but frequent gains. Older adults improved less over time, were more reactive to recent negative outcomes, and showed greater frequency-related activation in several regions, including DLPFC. We also found broader recruitment of prefrontal and parietal regions associated with frequency value and reward prediction errors in older adults, which may indicate compensation. The results suggest greater reliance on average reward for younger adults than older adults.

Behavioral decision-making in power demand-side response management: A multi-population evolutionary game dynamics perspective

Traditional single-agent decision-based optimization theory system is gradually hard to address long-term dynamic interaction problems in power demand-side response management (DRM). To this end, this paper thoroughly investigates the behavioral decision-making issues in power DRM from a perspective of multi-population evolutionary game dynamics. First, the evolutionary dynamics of general two-strategy three-population evolutionary games (2s3pEGs) is discussed, and relative net payoffs (RNPs) are defined for them in engineering. Discussion reveals that long-term evolutionary stable equilibrium (ESE) achieved in 2s3pEGs is only determined by RNPs. Further, the modeling idea of general two-strategy n-population (n ≥ 2) evolutionary games (npEGs) is elaborated. Second, a two-strategy npEG-based power DRM model is developed, as well as an npEG algorithm. Based on these, this paper investigates the long-term ESE of user engagement in power DRM using six subcases, which verifies the practicality and effectiveness of the obtained findings. Moreover, the case study reveals that incentive pricing from utility companies plays a major role in increasing user engagement in power DRM, thereby promoting different user populations to participate in smart power consumption, dispatching and distribution. Finally, the future work is prospected. This paper attempts to apply npEG dynamics to power DRM. The findings could provide guidelines for the investigations on bounded rationality and limited information-based behavioral decision-making issues, especially in the power DRM field.

A model of inter-organizational network formation

How do inter-organizational networks emerge? Accounting for interdependence among ties while studying tie formation is one of the key challenges in this area of research. We address this challenge using an equilibrium framework where firms' decisions to form links with other firms are modeled as a strategic game. In this game, firms weigh the costs and benefits of establishing a relationship with other firms and form ties if their net payoffs are positive. We characterize the equilibrium networks as exponential random graphs (ERGM), and we estimate the firms' payoffs using a Bayesian approach. To demonstrate the usefulness of our approach, we apply the framework to a co-investment network of venture capital firms in the medical device industry. The equilibrium framework allows researchers to draw economic interpretation from parameter estimates of the ERGM Model. We learn that firms rely on their joint partners (transitivity) and prefer to form ties with firms similar to themselves (homophily). These results hold after controlling for the interdependence among ties. Another, critical advantage of a structural approach is that it allows us to simulate the effects of economic shocks or policy counterfactuals. We test two such policy shocks, namely, firm entry and regulatory change. We show how new firms' entry or a regulatory shock of minimum capital requirements increase the co-investment network's density and clustering.

The distance to death perceptions of older adults explain why they age in place: A theoretical examination

Older persons prefer to age in place or stay put in their current dwellings and move less frequently than any other age group. However, current residential mobility theories do not fully account for these preferences and behaviors because they focus on why older people move rather than on why they remain in their dwellings and do not consider the temporal or human developmental context of these residential decisions. It is essential to understand why older persons are reluctant to move because their ability to age successfully—have healthy, independent, active, and enjoyable lives—depends on where they live. When they stay put, they also rely more on family caregivers and paid home care providers to maintain their independence, rather than on the supportive services offered by senior group facilities, such as assisted living. They demand more home modification and financial service products, and their residential decisions influence the supply of housing that younger populations can potentially buy or rent. This paper's theoretical analysis proposes that Carstensen's socioemotional selectivity theory (SST), a lifespan theory of motivation, improves our understanding of why older persons age in place—either in their dwellings or more broadly in their communities. It offers an alternative interpretation of how life-changing events, such as retirement, lower incomes, spousal death, physical limitations, and health declines, influence their residential decisions. Whereas residential mobility theories view these transitions as disruptions that change the appropriateness or congruence of where older people live, SST proposes that older persons perceive these events as signs or cues that they are closer to death and must differently prioritize their goals and emotional experiences. Feeling their time is “running out,” older persons are motivated to stay put because moving requires preparations that are physically and emotionally trying and they are able to adapt to their current housing shortcomings. Their residential environments are now also a source of difficult-to-replace positive emotions and provide them with a supportive network of intimate and reliable interpersonal relationships. It is challenging for them to learn how to safely and efficiently conduct their usual activities and routines in another location and to establish new residential attachments and social connections. They would benefit from any net positive emotional payoffs only in a distant future, an unattractive prospect when they perceive a limited time left to live. Empirical studies must test the theoretical propositions presented in this paper. However, the disproportionally large projected future growth of the age 75 and older population with a heightened awareness of their limited time left to live should be a strong rationale for such investigations.

Ex-Post Max-Min Fairness of Generalized AGV Mechanisms

We generalize the standard Arrow-d'Aspremont-Gerard-Varet (AGV) mechanism to balance the net payoffs received by all agents, while maintaining Bayesian incentive compatibility, ex-post efficiency, and ex-post budget balance of the standard AGV mechanism. In a private-value setting with independent agents' types and the principal's cost, we formulate a convex optimization problem to find the mechanism (that achieves ex-post max-min fairness) over a set of parameterized generalized AGV mechanisms, through maximizing the expected value of the minimum ex-post net payoff. We reformulate the convex program as a linear program that can be effectively solved when the number of agents is small. When the number of agents is large, we propose to solve the formulated convex program through the incremental subgradient method. Numerical results on two action models show that the proposed mechanism significantly outperforms the standard AGV mechanism in terms of the expected minimum ex-post payoff.

Peer effects in endogenous networks

This paper presents a model of strategic network formation with local complementarities in effort levels and positive local externalities. Results are obtained for a general class of payoff functions, which subsumes the linear-quadratic specification frequently used in theoretical and applied work. We assume homogeneous agents and characterize equilibria for two-sided and one-sided link formation. (Pairwise) Nash equilibrium networks are nested split graphs, which are a strict subset of core-periphery networks. We highlight the relevance of the convexity of the value function for obtaining these structures. More central agents are shown to exert more effort and obtain higher gross payoffs in equilibrium. However, net of linking cost, central agents may obtain strictly lower net payoffs. The curvature of the value function is also important for efficiency considerations. These findings are relevant for many social and economic phenomena, such as educational attainment, criminal activity, labor market participation, and R&D expenditures of firms.

Collective action problem in heterogeneous groups.

I review the theoretical and experimental literature on the collective action problem in groups whose members differ in various characteristics affecting individual costs, benefits and preferences in collective actions. I focus on evolutionary models that predict how individual efforts and fitnesses, group efforts and the amount of produced collective goods depend on the group's size and heterogeneity, as well as on the benefit and cost functions and parameters. I consider collective actions that aim to overcome the challenges from nature or win competition with neighbouring groups of co-specifics. I show that the largest contributors towards production of collective goods will typically be group members with the highest stake in it or for whom the effort is least costly, or those who have the largest capability or initial endowment. Under some conditions, such group members end up with smaller net pay-offs than the rest of the group. That is, they effectively behave as altruists. With weak nonlinearity in benefit and cost functions, the group effort typically decreases with group size and increases with within-group heterogeneity. With strong nonlinearity in benefit and cost functions, these patterns are reversed. I discuss the implications of theoretical results for animal behaviour, human origins and psychology.

Causes of Individual Differences in Animal Exploration and Search.

Numerous studies have documented individual differences in exploratory tendencies and other phenomena related to search, and these differences have been linked to fitness. Here, I discuss the origins of these differences, focusing on how experience shapes animal search and exploration. The origin of individual differences will also depend upon the alternatives to exploration that are available. Given that search and exploration frequently carry significant costs, we might expect individuals to utilize cues indicating the potential net payoffs of exploration versus the exploitation of known acts. Informative cues could arise from both recent and early-life experiences, from both the social and physical environment. Open questions are the extent to which an individual's exploratory tendencies are fixed throughout life versus being flexibly adjusted according to prevailing conditions and the actions of other individuals, and the extent to which individual differences in exploration extend across domains and are independent of other processes.

A continuum of commitment

We examine a generic three-stage game for two players with alternating moves, where the first player can choose the level of adjustment cost to be paid in the last period to modify the action she announced in the first period. In the resulting continuum of commitment options, convexifying the choice between first-mover and second-mover advantage in pure strategies, we characterize when an intermediate adjustment-cost level is chosen in equilibrium. We show that the wastefulness of the adjustment cost may be in the players’ best interest, improving both of their individual net payoffs over making any fraction of the adjustment cost a side-payment from the first to the second player.

A Continuum of Commitment

We examine a generic three-stage game for two players with alternating moves, where the first player can choose the level of adjustment cost to be paid in the last period for modifying the action she announced in the first period. In the resulting continuum of commitment options, convexifying the choice between first-mover and second-mover advantage in pure strategies, we characterize when an intermediate adjustment-cost level is chosen in equilibrium. We show that the wastefulness of the adjustment cost may be in the players' best interest, improving both of their individual net payoffs over making any fraction of the adjustment cost a side payment from the first to the second player.

Effects of time-inconsistent preferences on information technology infrastructure investments with growth options

Increasing information technology (IT) infrastructure spending and the capability of such projects to provide a platform for a firm to realize value from IT marks their importance. Effective management of IT infrastructure investments includes identification of embedded growth options in the infrastructure, and exercising them in a timely manner. Extant research has recognized that while managers could use real options thinking in IT investment management, managerial bias could affect the timing of option exercise and their realized value. We analyze the effect of time-inconsistent preferences of present-biased managers on the exercise time of real growth options and the realized value using a discrete time option valuation model. The results show that present-biased managers are more likely to exercise options early when the net payoffs are low, the option payoffs have high volatility, and the risk free discount rate is small. In addition, present biased managers are more likely to exercise a growth option early in its life when the project is performing well. We provide implications for practice and IT governance.

Peer Effects in Endogenous Networks

This paper presents a model of strategic network formation with local complementarities in effort levels and positive local externalities. Results are obtained for a general class of payoff functions, which subsumes the linear-quadratic specification frequently used in the literature. We assume homogeneous agents and characterize equilibria for two-sided and one-sided link formation. (Pairwise) Nash equilibrium networks are shown to be nested split graphs, which are a strict subset of core-periphery networks. The relevance of the convexity of the value function in obtaining these structures is highlighted. In equilibrium more central agents exert more effort and obtain higher gross payoffs. However, net of linking cost, central agents may obtain strictly lower net payoffs. Under additional assumptions on payoffs we show that the only efficient network structures are also nested split graphs. These findings are relevant for a wide range of social and economic phenomena, such as educational attainment, criminal activity, labor market participation, and R&D expenditures of firms.

Imperfect Public Monitoring with Costly Punishment: An Experimental Study

This paper experimentally investigates the effects of a costly punishment option on cooperation and social welfare in long, finitely repeated public good contribution games. In a perfect monitoring environment, increasing the severity of the potential punishment monotonically increases average net payoffs. In a more realistic imperfect monitoring environment, we find a U-shaped relationship. Access to a standard punishment technology in this setting significantly decreases net payoffs, even in the long run. Access to a severe punishment technology leads to roughly the same payoffs as with no punishment option, as the benefits of increased cooperation offset the social costs of punishing. (JEL C92, H41, K42)

Fortune Favours the Bold: An Agent-Based Model Reveals Adaptive Advantages of Overconfidence in War

Overconfidence has long been considered a cause of war. Like other decision-making biases, overconfidence seems detrimental because it increases the frequency and costs of fighting. However, evolutionary biologists have proposed that overconfidence may also confer adaptive advantages: increasing ambition, resolve, persistence, bluffing opponents, and winning net payoffs from risky opportunities despite occasional failures. We report the results of an agent-based model of inter-state conflict, which allows us to evaluate the performance of different strategies in competition with each other. Counter-intuitively, we find that overconfident states predominate in the population at the expense of unbiased or underconfident states. Overconfident states win because: (1) they are more likely to accumulate resources from frequent attempts at conquest; (2) they are more likely to gang up on weak states, forcing victims to split their defences; and (3) when the decision threshold for attacking requires an overwhelming asymmetry of power, unbiased and underconfident states shirk many conflicts they are actually likely to win. These “adaptive advantages” of overconfidence may, via selection effects, learning, or evolved psychology, have spread and become entrenched among modern states, organizations and decision-makers. This would help to explain the frequent association of overconfidence and war, even if it no longer brings benefits today.

Male‐induced costs of mating for females compensated by offspring viability benefits in an insect

Sexual conflict facilitates the evolution of traits that increase the reproductive success of males at the expense of components of female fitness. Theory suggests that indirect benefits are unlikely to offset the direct costs to females from antagonistic male adaptations, but empirical studies examining the net fitness pay-offs of the interaction between the sexes are scarce. Here, we investigate whether matings with males that invest intrinsically more into accessory gland tissue undermine female lifetime reproductive success (LRS) in the cricket Teleogryllus oceanicus. We found that females incur a longevity cost of mating that is proportional to the partner's absolute investment into the production of accessory gland products. However, male accessory gland weight positively influences embryo survival, and harmful ejaculate-induced effects are cancelled out when these are put in the context of female LRS. The direct costs of mating with males that sire offspring with higher viability are thus compensated by direct and possibly indirect genetic benefits in this species.