Pareto-efficient Nash Equilibrium Research Articles

Green subsidies as strategic trade policy tools

In a third-country market model in which two export countries adopt environmental policies (taxes and subsidies), this article analyses how an abatement (“green”) subsidy can become a potential strategic trade policy tool. When governments set the optimal policy considering their local environmental damages, a rich set of equilibria arises. In contrast to the standard result, it is shown that subsidising pollution abatement can 1) emerge as the unique Pareto-efficient Nash equilibrium of the policy game, 2) be the only feasible environmental policy when environmental awareness is low, irrespective of the efficiency of the cleaning technology, and 3) emerge as the unique Pareto-inefficient Nash equilibrium of the policy game at the end of the ecological transition. The article also tackles some dynamic issues that the policy game implies.

The disclosure decision game: Subsidies and incentives for R&D activity

This article presents a three-stage non-cooperative disclosure decision game (DDG), in which R&D-investing firms choose whether to disclose R&D-related information to the rival in a Cournot-like environment. Though firms have no (private) incentive to disclose information unilaterally on their cost-reducing R&D activity to prevent a rival from engaging in free appropriation, this work reveals opportunity for the government to design an optimal policy aimed at incentivising R&D disclosure. Following this welfare-improving path, sharing R&D-related information becomes a Pareto-efficient Nash equilibrium strategy. These findings suggest that using public subsidies to R&D disclosure can lead to a win-win result, eliminating the unpleasant non-disclosing outcome from a societal perspective.

A preference-based, multi-unit auction for pricing and capacity allocation

We study a pricing and allocation problem of a seller of multiple units of a homogeneous item, and present a semi-market mechanism in the form of an iterative ascending-bid auction. The auction elicits buyers’ preferences over a set of options offered by the seller, and processes them with a random-priority assignment scheme to address buyers’ “fairness” expectations. The auction’s termination criterion is derived from a mixed-integer programming formulation of the preference-based capacity allocation problem. We show that the random priority- and preference-based assignment policy is a universally truthful mechanism which can also achieve a Pareto-efficient Nash equilibrium. Computational results demonstrate that the auction mechanism can extract a substantial portion of the centralized system’s profit, indicating its effectiveness for a seller who needs to operate under the “fairness” constraint.

COMO: A Game-Theoretic Approach for Joint Multirate Opportunistic Routing and Forwarding in Non-Cooperative Wireless Networks

Multirate opportunistic routing was proposed to achieve high throughput by exploiting multi-user diversity and transmission rate diversity in wireless networks. However, the performance of multirate opportunistic routing still cannot be guaranteed when participating nodes are contributed by different parties and thus have selfish behaviors. In this paper, we present the first Cooperation-Optimal protocol for Multirate Opportunistic routing and forwarding, namely COMO, which guarantee the faithfulness of each player, and thus achieve the social efficiency and strongly Pareto efficient Nash equilibrium with the faithfulness as a given property. Here, social efficiency means that the end-to-end throughput should be maximized, while in a strongly Pareto efficient Nash equilibrium, no one can improve her utility without decreasing the utility of at least one other player. We not only rigorously prove the game-theoretic properties of our incentive protocol, but also extensively evaluate its performance on the ORBIT wireless testbed. Experiment results show that our protocol can prevent participating nodes' selfish behaviors and guarantee high performance of the multirate opportunistic routing protocol with a low communication overhead.

N-player mosquito net game: Individual and social rationality in the misuse of insecticide-treated nets

Many governmental and non-governmental organizations have distributed insecticide-treated nets (ITNs) to malaria endemic areas, which contributed to the reduction of malaria deaths. However, some people in malaria endemic areas used ITNs for alternative purposes such as fishery and agriculture. It is unclear why people threatened by malaria misuse ITNs. Here we develop a N-player mosquito net game, and theoretically show that the misuse of ITNs might be underpinned by individual and social rationality. In the mosquito net game, each player uses ITNs for malaria prevention or alternative purposes. The proper ITN use decreases the probability of malaria infection, while the improper ITN use increases the player's labor productivity. Each player's expected payoff is influenced by other players’ strategies. We found that the misuse of ITNs can be a Pareto efficient Nash equilibrium. The maximum number of players using ITNs for malaria prevention is limited by insecticidal effectiveness of ITNs and extra income from ITN misuse. Furthermore, we found that players in a low-income community are attracted to the misuse of ITNs even if the probability of malaria infection is high. Introduction of a tax on ITN misuse was shown to be effective to motivate the players to use ITNs for malaria prevention. Our results demonstrate that understanding decision making of people in malaria endemic areas is essential to design more effective malaria control programs.

On the Role of Emotions in Games

Numerous experiments have shown that players cooperate in a prisoner's dilemma (PD) game. I contribute to this literature by showing that emotions might be the key to overcoming the coordination failure. I model emotions by generally distinguishing between two types of emotions: First, expected emotions play a central role. These are experienced not during the decision-making, but are rather ex post, i. e. after the outcomes are realized. In this regard, standard theory accounts for expected emotions by allowing for phenomenons such as fairness considerations, inequality aversion and temptation in iterated PD games. I describe how expected emotions - in particular satisfaction, anger, remorse and disappointment - may have an impact on the perceived payoff in a PD game. Second, immediate emotions seem to be equally important in my model. Immediate emotions, just as expected emotions, arise from considering the consequences of one's decision. The crucial difference, however, is that they are experienced during the decision-making.In introducing immediate emotions I apply the projection bias model developed by Loewenstein et al. (2003) and embed the perceived payoff into the projection bias model. I find that expected emotions might lead to the emergence of a new Pareto-efficient Nash equilibrium in which all players cooperate. However, immediate emotions might destroy this equilibrium instantaneously.

Multi-Level Coordination and Decision-Making in Service Operations

Decisions in service operations are complex since they involve various interdependent decision-makers (agents) at different hierarchical levels, ranging from customer representatives over account managers to top executives. We formulate a three-level maintenance service problem as a stochastic decision-making model, with an account manager, supervisor, and worker at each of the three levels. The proposed incentive mechanism aligns the interests of lower level agents with the goals of the top agent. The agents' strategic interactions are analyzed game-theoretically and results show that a Pareto-efficient Nash equilibrium can be attained given certain organizational properties. Furthermore, we show that local information can be sufficient for organization-wide optimal decisions. In a final step, the three-level model is generalized for multi-level, i.e., multi-organizational-scale, systems. [Service Science, ISSN 2164-3962 (print), ISSN 2164-3970 (online), was published by Services Science Global (SSG) from 2009 to 2011 as issues under ISBN 978-1-4276-2090-3.]

Pareto-Efficient and Goal-Driven Power Control in Wireless Networks: A Game-Theoretic Approach With a Novel Pricing Scheme

A Pareto-efficient, goal-driven, and distributed power control scheme for wireless networks is presented. We use a non-cooperative game-theoretic approach to propose a novel pricing scheme that is linearly proportional to the signal-to-interference ratio (SIR) and analytically show that with a proper choice of prices (proportionality constants), the outcome of the noncooperative power control game is a unique and Pareto-efficient Nash equilibrium (NE). This can be utilized for constrained-power control to satisfy specific goals (such as fairness, aggregate throughput optimization, or trading off between these two goals). For each one of the above goals, the dynamic price for each user is also analytically obtained. In a centralized (base station) price setting, users should inform the base station of their path gains and their maximum transmit-powers. In a distributed price setting, for each goal, an algorithm for users to update their transmit-powers is also presented that converges to a unique fixed-point in which the corresponding goal is satisfied. Simulation results confirm our analytical developments.

Neutrally Stable Outcomes in Cheap-Talk Coordination Games

This paper examines equilibrium and stability in symmetric two-player cheap-talk games and specifically characterizes the set of neutrally stable outcomes in cheap-talk 2 × 2 coordination games. With a finite message set, this set is finite. As the number of messages goes to infinity, the set expands toward a countable limit. The Pareto efficient Nash equilibrium payoff is its unique cluster point. By contrast, the corresponding limit set of strategically stable outcomes is dense in the interval spanned by the Nash equilibrium payoffs of the underlying game. Journal of Economic Literature Classification Number: C70.

A Model of Pre-game Communication

A model is presented where players communicate prior to the play of a two-player, complete-information game. Each of two common hypotheses is examined: That communication yields Nash-equilibrium outcomes, and that, within the equilibrium framework, communication yields Pareto-efficient equilibria. The strong version of each of these hypotheses is rejected but weaker results are established. The main result is that, if we assume equilibrium and that players communicate for a long time, then in every equilibrium of every game, each player will get a payoff at least as great as that of his worst Pareto-efficient Nash equilibrium. Journal of Economic Literature Classification Numbers: C72, C78, C92.