Pareto Efficient Outcome Research Articles

Gunning for efficiency with third party enforcement in threshold public goods

When public goods can only be provided when donations cross a minimum threshold, this creates an advantage in that Pareto Efficient outcomes can be Nash Equilibria. Despite this, experiments have shown that groups struggle to coordinate on one of the many efficient equilibria. We apply a mechanism used successfully in continuous public goods games, the Hired Gun Mechanism (Andreoni and Gee in J. Public Econ. 96(11–12):1036–1046, 2012), to see if it can successfully get subjects across the threshold. When we use the mechanism to eliminate only inefficient equilibria, without addressing coordination, there is a modest but statistically insignificant improvement with the mechanism. However, when we hone the mechanism to eliminate all but one of the provision-point equilibria, thereby addressing the coordination issue, the mechanism moves all subjects to the desired efficient outcome almost immediately. In fact, after only one round using the hired gun mechanism, all subject are coordinating on the chosen equilibrium. The mechanism can be applied in settings where a group (1) has a plan for public good provision, (2) can measure contributions, (3) can fine members and (4) has an agreed upon standard for expected contributions. In these settings simple punishments, when focused on solving coordination as well as free riding, can greatly improve efficiency.

Coordination under global random interaction and local imitation

Individuals are randomly matched to play a \(2\times 2\) coordination game where the Pareto efficient and risk dominant equilibria differ. Players choose strategies by imitating the strategy of the most successful individual they observe. So, while individuals interact globally, their observation and hence imitation, as determined by their social network, may be local. When all individuals observe each other, the most successful individual in the entire population is imitated; here, in the stochastically stable state, the population coordinates on the Pareto-efficient outcome. While this outcome is always stochastically stable, even when observability is incomplete, the state where everyone plays the action of the risk-dominant equilibrium may be stochastically stable as well. Reasonably tight sufficient conditions for unique stochastic stability of the state where all coordinate on the Pareto-efficient equilibrium strategy include each individual observing at least four other individuals or when each individual observes the same number of other individuals. These properties are readily generalisable to larger \(m\times m\) coordination games where the coordination outcomes can be Pareto-ranked.

Pareto-improving toll adjustment for a buildoperate-transfer toll road project with unknown demand

The social welfare gain and investment return are two main concerns of a road investment project, and they are usually key components of a Build-operate-transfer (BOT) contract. Therefore, the Pareto efficient outcomes of the two objectives are attractive for both government and private investor. This paper proposes a ex-post toll adjustment procedure called Paretoimproving trial-and-error procedure (PI-TEP), in order to achieve the Pareto efficient outcomes for a BOT toll road project with pre-determined road capacity and unknown demand function. The PI-TEP is novel and Pareto-improving, since the procedure does not require an analytical demand function and can improve social welfare and revenue simultaneously. Furthermore, the PI-TEP is theoretically proved to be efficient in obtaining the Pareto efficient outcomes. And thus, the procedure is practically useful and valuable for both government and private investor in a BOT toll road project.

A Network Approach to Public Goods

Suppose each of several agents can exert costly effort that creates nonrival, heterogeneous benefits for some others. For any possible outcome, we define a weighted, directed network describing marginal externalities, and argue that its structure sheds new light on negotiated outcomes. The Pareto efficient outcomes are those which make the largest eigenvalue of the network equal to 1. We use this to identify the essential agents for achieving Pareto improvements, and when a negotiation can be divided into smaller ones without much loss. How central agents are in this network, according to a standard measure, also relates to negotiated outcomes: in any Lindahl equilibrium, contributions are proportional to centralities.

Strategy-proof contract auctions and the role of ties

A contract auction establishes a contract between a center and one of the bidders. As contracts may describe many terms, preferences over contracts typically display indifferences. The Qualitative Vickrey Auction (QVA) selects the best contract for the winner that is at least as good for the center as any of the contracts offered by the non-winning players. When each bidder can always offer a contract with higher utility for the center at an arbitrarily small loss of her own utility, the QVA is the only mechanism that is individually rational, strategy-proof, selects stable outcomes, and is Pareto efficient. For general continuous utility functions, a variant of the QVA involving fixed tie-breaking is strategy-proof and also selects stable outcomes. However, there is no mechanism in this setting that in addition also selects Pareto efficient outcomes.

Distributional Preferences, Reciprocity-Like Behavior, and Efficiency in Bilateral Exchange.

Under what conditions do distributional preferences, such as altruism or a concern for fair outcomes, generate efficient trade? I analyze theoretically a simple bilateral exchange game: each player sequentially takes an action that reduces his own material payoff but increases the other player's. Each player's preferences may depend on both his/her own material payoff and the other player's. I identify two key properties of the second-mover's preferences: indifference curves kinked around "fair" material-payoff distributions, and materials payoffs entering preferences as "normal goods." Either property can drive reciprocity-like behavior and generate a Pareto efficient outcome.

Stability and efficiency in perfect foresight situation

We study the stable standard of behavior in a perfect foresight situation that was introduced by Xue (Econ Theory 11:603–627, 1998). We assume that the inducement relations are invertible and coalition free. We show that the conditions are sufficient for the existence of the nonempty-valued optimistic/conservative stable standard of behavior for perfect foresight situation (OSSB-PF/CSSB-PF). Moreover, we find that an OSSB-PF supports a Pareto-efficient outcome as a stable outcome; if the preference relations are strict, only the Pareto-efficient outcomes are supported by the OSSB-PF.

Mechanism Design With Renegotiation and Costly Messages

IN ONE INTERPRETATION of the mechanism design problem, the agents in volved are designing a mechanism for themselves, rather than having it im posed on them by an outside planner; the mechanism may, for example, be a contract or a constitution. In that case, they will presumably choose a mecha nism that will deliver a Pareto-efficient outcome in equilibrium. Suppose, how ever, that play of the mechanism results in an out-of-equilibrium outcome and that this outcome is Pareto-inefficient. Then, unless they have been able some how to commit to this mechanism, the agents can be expected to tear up the contract and negotiate a new, Pareto-efficient, outcome. In the two-agent case, this possibility of renegotiation limits the set of social choice rules that can

Bargaining with Linked Disagreement Points

In the context of bilateral bargaining,we deal with issue linkage by developing a two-issue-two-players cooperative bargaining model. The axioms we propose focus on the role of the disagreement points. A family of bargaining rule stands out: the monotonic equal net ratio solutions. These solutions point to Pareto efficient outcomes such that the relative gains for players are equal across issues and reward the players for improving their bargaining power over each issue. We discuss our results in light of international trade and environmental negotiations, which are often put on the bargaining table in a linked fashion.

Is Agglomeration Desirable?

By introducing heterogeneity between high-skilled mobile and low-skill immobile workers in a model with land rent and commuting costs we develop a new model in the field of the new model in the field of the new economic geography. This model, which can reveal a dispersion-agglomeration-dispersion configuration when trade gets freer, is used to compare via the Pareto criterion the two possible market outcomes, i.e. agglomeration and dispersion. When these equilibria can be ranked it is shown that dispersion can be a Pareto-efficient outcome.

Subject-Specific Performance Information can Worsen the Tragedy of the Commons: Experimental Evidence

The main aim of this article is to investigate the behavioral consequences of the provision of subject-specific information in the group effort levels chosen by players in an experimental CPR game. We examine two basic treatments, one with incomplete information and the other with complete information. In the former, subjects are informed only about their own individual payoffs and the aggregate extraction effort level of the group, and in the latter they are also informed about the individual effort levels and payoffs of each subject. Given this setting, the basic question we attempt to answer is: Will the provision of subject-specific performance information (i.e. individual’s effort levels and payoffs) improve or worsen the tragedy of the commons (i.e. an exploitation effort level greater than the socially optimum level)? In order to motivate our hypotheses and explain our experimental results at the individual level, we make use of the theory of learning in games, which goes beyond standard non-cooperative game theory, allowing us to explore the three basic benchmarks in the commons context: Nash equilibrium, Pareto efficient, and open access outcomes. We use several learning and imitation theoretical models that are based on contrasting assumptions about the level of rationality and the information available to subjects, namely: best response, imitate the average, mix of best response and imitate the average, imitate the best and follow the exemplary learning rules. Finally, in order to econometrically test the hypotheses formulated from the theoretical predictions we use a random-effects model to assess the explanatory power of the different selected behavioral learning and imitation rules.

Subject-specific performance information can worsen the tragedy of the commons: Experimental evidence

The main aim of this article is to investigate the behavioral consequences of the provision of subject-specific information in the group effort levels chosen by players in an experimental CPR game. We examine two basic treatments, one with incomplete information and the other with complete information. In the former, subjects are informed only about their own individual payoffs and the aggregate extraction effort level of the group, and in the latter they are also informed about the individual effort levels and payoffs of each subject. Given this setting, the basic question we attempt to answer is: Will the provision of subject-specific performance information (i.e. individual’s effort levels and payoffs) improve or worsen the tragedy of the commons (i.e. an exploitation effort level greater than the socially optimum level)? In order to motivate our hypotheses and explain our experimental results at the individual level, we make use of the theory of learning in games, which goes beyond standard non-cooperative game theory, allowing us to explore the three basic benchmarks in the commons context: Nash equilibrium, Pareto efficient, and open access outcomes. We use several learning and imitation theoretical models that are based on contrasting assumptions about the level of rationality and the information available to subjects, namely: best response, imitate the average, mix of best response and imitate the average, imitate the best and follow the exemplary learning rules. Finally, in order to econometrically test the hypotheses formulated from the theoretical predictions we use a random-effects model to assess the explanatory power of the different selected behavioral learning and imitation rules.

Optimal bilateral trade of multiple objects

We study a private-values buyer–seller problem with multiple objects. Valuations are binary and i.i.d. We construct mechanisms that span the set of all Pareto-efficient outcomes. The induced trading rules for objects are linked in a simple way.

Qualitative One-to-Many Multi-Issue Negotiation: Approximating the QVA

When there is one buyer interested in obtaining a service from one of a set of sellers, multi-attribute or multi-issue auctions can ensure an allocation that is efficient. Even when there is no transferable utility (e.g., money), a recent qualitative version of the Vickrey auction may be used, the QVA, to obtain a Pareto-efficient outcome where the best seller wins. However, auctions generally require that the preferences of at least one party participating in the auction are publicly known, while often making this information public is costly, undesirable, or even impossible. It would therefore be useful to have a method that does not impose such a requirement, but is still able to approximate the outcome of such an auction. The main question addressed here is whether the Pareto-efficient best-seller outcome in multi-issue settings without transferable utility (such as determined by the QVA) can be reasonably approximated by multi-bilateral closed negotiation between a buyer and multiple sellers. In these closed negotiations parties do not reveal their preferences explicitly, but make alternating offers. The main idea is to have multiple rounds of such negotiations. We study three different variants of such a protocol: one that restricts the set of allowed offers for both the buyer and the seller, one where the winning offer is announced after every round, and one where the sellers are only told whether they have won or not after every round. It is shown experimentally that this protocol enables agents that can learn preferences to obtain agreements that approximate the Pareto-efficient best-seller outcome as defined by the auction mechanism. We also show that the strategy that exploits such a learning capability in negotiation is robust against and dominates a Zero Intelligence strategy. It thus follows that the requirement to publicly announce preferences can be removed when negotiating parties are equipped with the proper learning capabilities and negotiate using the proposed multi-round multi-bilateral negotiation protocol.

The Efficiency of Direct Public Involvement in Environmental Policymaking: An Experimental Test

In collaborative negotiation, stakeholder representatives are charged with the development of a mutually acceptable set of public policies. Although this approach has become popular in environmental negotiations, little is known about the characteristics of the outcomes that are reached. In this paper, we employ an Edgeworth box framework to investigate the nature of bargaining over public goods (environmental policies) that have multiple attributes. We then design and conduct laboratory experiments within this framework to test whether negotiated outcomes satisfy standard axiomatic bargaining predictions under a variety of conditions. Specifically, we test whether two parties with Pareto inefficient endowments of two goods will trade to Pareto improving and Pareto efficient outcomes, and to the Nash bargain in particular. We vary whether the Nash bargain coincides with or diverges from the outcome that maximizes the joint payoff, or the outcome that equalizes payoffs, and whether subjects are provided full or partial information. We find that bargainers reach Pareto improving and efficient outcomes across treatments, but withdraw support for the Nash bargain when it generates unequal payments or when payoff information is private. We conclude that this experimental framework offers a promising method for studying multi-attribute negotiations.

The Efficiency of Observability and Mutual Linkage

This paper studies the aspiration-based learning dynamics in symmetric normal-form games played at multiple locations. In particular, the aspiration level in one location is linked to the average performances of players in observable locations. With a decentralized information structure, the learning dynamics converge to limit states. For a large class of information structures and games, when there exists trembles in the updating of aspiration levels, the unique stochastically stable equilibrium is characterized by the Pareto efficient symmetric outcome. In the prisoners' dilemma, if the probability of trembles is sufficiently small, both players in every location will ultimately cooperate most of the time.

Information-driven coordination: experimental results with heterogeneous individuals

We study experimentally a coordination game with N heterogeneous individuals under different information treatments. We explore the effects of information on the emergence of Pareto-efficient outcomes, by means of a gradual decrease of the information content provided to the players in successive experiments. We observe that successful coordination is possible with private information alone, although not on a Pareto-optimal equilibrium. Reinforcement-based learning models reproduce the qualitative trends of the experimental results.

A Comprehensive Experiment for an Introductory Course in Microeconomics

I present a classroom experiment designed to help students learn (1) decision-making using marginal analysis; (2) the prediction of the price; (3) the decentralized determination of a price by the market; (4) specialization; (5) the gains from trade; and (6) the ability of a competitive market to create a Pareto-efficient outcome. The innovation of the experiment lies in its comprehensiveness and in the identical opportunities faced by all students. The experiment has two parts. There is a warm-up which is assigned as homework and the experiment proper which takes two 50-minute class sessions. I have run it in classes at the undergraduate introductory level, at the undergraduate intermediate level and at the MA introductory level; these classes have varied in size from 20 to 200 students.

Relational Contracts, Taxation and the Household

This paper applies the theory of relational contracts to make precise the idea that because households are engaged in a repeated non-cooperative game, Pareto efficient outcomes can be supported by self interest, given the specific pattern of specialisation and exchange which exists in the household. The household's choice of a particular solution from the resulting feasible set is found by the maximisation of a household welfare function, a generalisation of a suggestion originally made by Samuelson. This nests as special cases the objective functions used in currently popular models of households engaged in one-shot cooperative games. We take a specific example of such a household welfare function, characterise the determinants of the household utility distribution, and then apply the model to examine the effects of a move from joint to individual taxation. We show that on standard stylised facts, secondary earners are always better off absolutely, and define the conditions under which they will also be so relatively. This confirms the conclusions from models which concern themselves only with the across-household welfare distribution.

Is Agglomeration Desirable?

By introducing heterogeneity between high-skilled mobile and low-skill immobile workers in a model with land rent and commuting costs we develop a new model in the field of the new economic geography. This model, which can reveal a dispersion-agglomeration-dispersion configuration when trade gets freer, is used to compare via the Pareto criterion the two possible market outcomes, i.e. agglomeration and dispersion. When these equilibria can be ranked it is shown that dispersion can be a Pareto-efficient outcome.