Repeated Game Setting Research Articles

Endogenous leadership and sustainability of enhanced cooperation in a repeated interactions model of tax competition: Endogenous leadership in tax competition

AbstractIn this study, the endogenous timing of moves is analyzed in an infinitely repeated game setting of capital tax competition between a subgroup (a tax union) of countries agreeing on partial tax harmonization and outside countries. It is shown that in a subgame perfect equilibrium of the infinitely repeated tax competition game, they simultaneously set capital taxes in every stage game when a tax union comprises similar countries with respect to productivity, whereas they may set capital taxes sequentially in every stage game when a tax union comprises dissimilar countries. This finding is significantly different from Ogawa (2013), although we also assume that capital is owned by the country's residents, as in Ogawa's model. This is because a disadvantaged member country of the tax union would suffer from larger losses when a tax union comprising dissimilar countries, and thus the tax union will choose the strategy of moving Late for the sake of sustaining tax harmonization to avoid such losses.

Impact of Income Inequality on Urban Air Quality: A Game Theoretical and Empirical Study in China.

Income inequality and environmental pollution are of great concern in China. It is important to better understand whether the narrowing of income inequality and environmental improvement contradict each other. The study aims to investigate the linkage between income inequality and environmental pollution. To illustrate the interplay between different income groups on environmental issues, we apply a mixed-strategy game. Based on the game-theoretic analytical result, the probability of residents supporting clean energy and environmental protection decreases as income inequality widens and increases as inequality narrows. This empirical study is based on the proportion of coal consumption and urban air pollution data from 113 key environmental protection cities and regions in China. The air quality data are from the National Environmental Air Quality Monitoring Network published in the China Statistical Yearbook from 2014–2018. Convincing results show that regions with higher income inequality suffer severe smog and related pollution and that economies with narrow income disparity experience significant improvements in smog and pollution control, with the expansion of the proportion of clean energy use. The results also provide no evidence of the impact of per capita income on pollution. We studied the relationship between individuals of different wealth levels within an economy, within a repeated-game setting. The finding suggests that the distribution of growth impacts pollution. Imposing higher taxes on air polluters while transferring the revenue to the lower-income group is suggested.

Limited-Tenure Concessions for Collective Goods

This paper proposes and analyzes the consequences of a widely-used, but little-studied institution, limited-tenure concessions, for governing club goods and common-pool resources. We first show in a simple repeated game setting that such a system can incentivize socially-efficient provision of club goods. We then extend the model to account for spatially-connected resources, an arbitrary number of heterogeneous agents, and natural resource dynamics, and show that the basic ability of limited-tenure concessions to incentivize the first best private provision is preserved in this rich setting that is more representative of natural resources such as fish, water, and game. The duration of tenure and the dispersal of the resource then play pivotal roles in whether this limited-duration concession achieves the socially optimal outcome. Finally, in a setting with costly monitoring, we discuss the features of a concession contract that ensure first-best behavior, but at least cost to the implementing agency.

Cooperation, contributor types, and control questions

A large number of experimental studies use the strategy method procedure introduced by Fischbacher, Gächter, and Fehr (Econ. Lett. 71:397-404, 2001) to measure individuals’ attitudes towards cooperation. The procedure elicits subjects’ strategic-form decisions in a one-shot game and classifies each subject as one of several different contributor types. In this paper, we examine the robustness of the procedure and its capacity to help explain the pattern of contributions observed in a separate, repeated game setting. Overall, we show that the elicited contributor types can explain behavior fairly well in the repeated game. Free-rider types contribute less than conditional cooperators, although we observe evidence consistent with strategic cooperation in the early periods of the repeated game. Nevertheless, by the last period, classified free-rider types converge to pure free-riding behavior. In addition, we highlight a potential methodological concern related to the use of control questions. We find that the inclusion of control questions increases (decreases) the proportion of free rider (conditional cooperator) types, but also leads to substantial wait times for many subjects. This raises concerns about the psychological impact of long wait times, through boredom, frustration, or spite, on the cooperative behavior of subjects in the laboratory setting.

The Nexus between Contract Duration and the Use of Formal and Informal Incentive Pay

AbstractWe investigate a firm's choice of formal and informal effort incentives in a repeated game setting with undistorted signaling and liquidity‐constrained agents. The model allows for a simple geometric representation of credibility and incentive‐feasibility effects on optimal contract design. If credibility constitutes a binding constraint, explicit, i.e. enforceable, performance pay and discretionary salary promises are unambiguous substitutes and higher employee performance is associated with lower‐powered bonus pay. Using personnel data from an insurance company, we show that the model's predictions regarding the mediating role of expected contract duration on these relationships are consistent with remuneration practices.

Consumer Nationalism and Multilateral Trade Cooperation

We investigate the implications of consumer nationalism for multilateral trade cooperation. We develop a two-country, two-firm model, in which the firms produce horizontally differentiated products and act as Bertrand competitors. Assuming that there is asymmetry in consumer nationalism between countries, we show that the country with the (relatively more) nationalist consumers can sustain more liberal trade policies than its trade partner in a repeated-game setting. Moreover, its most cooperative equilibrium tariff is actually decreasing in the level of its consumers' nationalism, provided that countries are not too patient. On the other hand, asymmetric consumer nationalism across countries produces an anti-cooperation effect on the incentives of the country with the non-nationalist consumers.

Competitive Analysis of Bidding Behavior on Sponsored Search Advertising Markets

Online advertisers bidding in sponsored search auctions through Web search engines are experiencing unprecedentedly fierce competition in recent years, resulting in an obvious upward trend in bids submitted by advertisers. This bid inflation phenomenon poses significant threat to the overall stability and the effectiveness of sponsored search markets. Existing research efforts, however, do not yet provide directly relevant theoretical or managerial insights to help understand this kind of real-world competitive bidding behavior in sponsored search. Our research is targeted at filling in this important research gap. Based on a model of advertisers' rational competitive preference, we propose a novel equilibrium solution concept called the upper bound Nash equilibrium (UBNE), which can be viewed as the upper bound of the output-truthful subset in the NE continuum of sponsored search auctions. We show that the UBNE can better characterize advertisers' competitive bidding behavior than other solution concepts, offering a viable theory driven behavioral explanation for bid inflation. We also show that the UBNE is a stable outcome of competitions among advertisers in repeated game settings and yields the optimal outcome for Web search engines.

Strategic Disclosures of Litigation Loss Contingencies When Customer-Supplier Relationships Are at Risk

ABSTRACT In the presence of litigation-facing suppliers, the supply chain relationship is at risk. Suppliers with principal customers (dependent suppliers) have a higher concentration of sales to customers, and they are more at risk relative to suppliers without principal customers (non-dependent suppliers). As a result, we predict and find that litigation disclosure patterns differ for the two supplier types: dependent suppliers are more likely to delay bad news and accelerate good news related to litigation outcomes, compared to non-dependent suppliers. Such strategic disclosure patterns in our end-game setting are opposite to those documented in the existing supply chain literature for the repeated-game setting (for example, Hui, Klasa, and Yeung 2012). JEL Classifications: M41; M48; K22.

Does equalization transfer enhance partial tax cooperation?

This paper analyzes the effect of equalization transfer scheme on partial tax cooperation condition in a repeated game setting. It is shown that in order to achieve partial tax cooperation between two capital-rich (exporting) countries, the full equalization transfer scheme is superior to the partial equalization transfer scheme, whereas in order to achieve partial tax cooperation between two capital-poor (importing) countries, the partial equalization transfer scheme is superior to the full equalization transfer scheme.

Sustainability of coalitional equilibria within repeated tax competition

This paper analyzes the sustainability of capital tax harmonization agreements in a stylized model where countries have formed coalitions to agree on a common tax rate in order to avoid the inefficient, fully non-cooperative Nash equilibrium. In particular, for a given coalition structure we study to what extent the sustainability of tax agreements is affected by the coalitions that have formed. In our setup, countries are symmetric, but coalitions can be of arbitrary size. We analyze sustainability by means of a repeated game setting employing simple trigger strategies and we allow a sub-coalition to deviate from the coalitional equilibrium. For a given form of punishment we rank the sustainability of different coalition structures. We show that sub-coalitions consisting of singleton regions have the largest incentives to deviate and that the sustainability of cooperation depends on the degree of cooperative behavior ex-ante. Bilateral agreements between pairs of regions turn out to be the form of cooperation that is the easiest to sustain.

The Role of Framing, Inequity and History in a Corruption Game: Some Experimental Evidence

We investigate the role of framing, inequity in initial endowments and history in shaping behavior in a corrupt transaction by extending the one-shot bribery game introduced by Cameron et al. (2009) to a repeated game setting. We find that the use of loaded language significantly reduces the incidence of bribery and increases the level of punishment. Punishment of bribery leads to reduced bribery in future. The evidence suggests that this game captures essential features of a corrupt transaction, over and above any sentiments of inequity aversion or negative reciprocity However, showing subjects the history of past play has little effect on the level of corruption.

Compliance signaling games: toward modeling the deterrence of insider threats

In a typical workplace, organizational policies and their compliance requirements set the stage upon which the behavioral patterns of individual agents evolve. The agents' personal utilities, access to information, and strategic deceptions shape the signaling systems of an intricate information-asymmetric game, thus mystifying assessment and management of organizational risks, which are primarily due to unintentional insider threats. Compliance games, as discussed here, model a rudimentary version of this signaling game between a sender (employee) and a receiver (organization). The analysis of these games' equilibria as well as their dynamics in repeated game settings illuminate the effectiveness or risks of an organizational policy. These questions are explored via a repeated and agent-based simulation of compliance signaling games, leading to the following: (1) a simple but broadly applicable model for interactions between sender agents (employees) and receiver agents (principals in the organization), (2) an investigation of how the game theoretic approach yields the plausible dynamics of compliance, and (3) design of experiments to estimate parameters of the systems: evolutionary learning rates of agents, the efficacy of auditing using a trembling hand strategy, effects of non-stationary and multiple principal agents, and ultimately, the robustness of the system under perturbation of various related parameters (costs, penalties, benefits, etc.). The paper concludes with a number of empirical studies, illustrating a battery of compliance games under varying environments designed to investigate agent based learning, system control, and optimization. The studies indicate how agents through limited interactions described by behavior traces may learn and optimize responses to a stationary defense, expose sensitive parameters and emergent properties and indicate the possibility of controlling interventions which actuate game parameters. We believe that the work is of practical importance--for example, in constraining the vulnerability surfaces arising from compliance games.

Asymmetric tax competition and fiscal equalization in a repeated game setting

This paper examines the relationship between tax competition and fiscal equalization in a standard tax competition model with repeated actions, in which regions differ in per capita capital endowments and production technologies. In particular, it asks how a fiscal equalization scheme affects the tax cooperation condition. It shows that when the scale of fiscal equalization scheme increases, capital exporter is more (and capital importer is less) cooperative in implementing tax coordination. The paper also demonstrates that the best cooperative tax rate – the one that provides the strongest potential for voluntary cooperation – takes a positive value and increases with the scale of fiscal equalization.

Political Economy of Altering Trade Restrictions in Response to Commodity Price Spikes

AbstractA model is developed to explain trade policy interventions in response to commodity price spikes. The model predicts that government preferences for averting losses for domestic interest groups lead to changes in trade distortions. In particular, trade interventions in response to downward price spikes are predicted, which is consistent with the proposal for a Special Safeguard Mechanism (SSM) in the World Trade Organization (WTO). Higher tariffs are likely in a noncooperative setting, and higher export subsidies will emerge in response. An efficient cooperative trade policy can be achieved in a repeated game setting and with possible involvement of the WTO.

Identity Management and Tradable Reputation

Online reputation trading is a new phenomenon facilitated by the prosperity of e-commerce and social networks. Whether reputations will be reliable when people can purchase rather than build them originally is a natural concern and also a challenge to online marketplaces. In the present study, we examine a reputation market in an infinitely repeated game setting, where agents sell products and trade their online reputations. Agents exert effort to provide products, and their reputations are updated based on consumer feedback. High-type agents have a lower cost of effort than low types. In addition to reputation system, we consider products that are randomly audited, and agents do not receive payment for products that fail the audit. Our analysis depicts a separating equilibrium: high-type agents can be sorted out from low-type agents by their reputations, which contrasts with the results in Tadelis (2002). In a separating equilibrium, reputations become a perfect indicator of agents’ types, effort levels, and product quality. We demonstrate the key role of auditing in separating different types of agents, and reveal the substitution effect between auditing frequency and harshness of reputation systems. We also study the design of the reputation system and the audit mechanism in order to achieve different equilibria in the reputation market. By proposing online reputations as an asset, our paper generates implications for establishing reliable online environments and promoting effective online interactions.

Systematic Bailout Guarantees and Tacit Coordination

Abstract Both the academic literature and the policy debate on systematic bailout guarantees and Government subsidies have ignored an important effect: in industries where firms may go out of business due to idiosyncratic shocks, Governments may increase the likelihood of (tacit) coordination if they set up schemes that rescue failing firms. In a repeated-game setting, we show that a systematic bailout regime increases the expected profits from coordination and simultaneously raises the probability that competitors will remain in business and will thus be able to “punish” firms that deviate from coordinated behaviour. These effects make tacit coordination easier to sustain and have a detrimental impact on welfare. While the key insight holds across any industry, we study this question with an application to the banking sector, in light of the recent financial crisis and the extensive use of bailout schemes.

Partial tax coordination in a repeated game setting

This paper addresses the sustainability and stability problems of partial tax coordination among regional or national sovereign governments that aim to maximize tax revenues in a repeated game setting. We show that partial tax coordination is more likely to prevail either if the number of countries in a coalition subgroup is smaller or if the number of existing countries in the entire economy is larger. The main driving force for these results is the response of the intensity of tax competition. The increased (decreased) intensity of tax competition makes partial tax coordination more (less) sustainable. We also examine the robustness of the above result using the basic model by extending it in three ways: to the case of linear utility, a stick-and-carrot punishment strategy, and asymmetric capital endowments across countries.

Equity–Efficiency Optimizing Resource Allocation: The Role of Time Preferences in a Repeated Irrigation Game

We study repeated water allocation decisions among small scale irrigation users in Tanzania. In a treatment replicating water scarcity conditions, convexities in production make that substantial efficiency gains can be obtained by deviating from equal sharing, leading to an equity–efficiency trade-off. In a repeated game setting, it becomes possible to reconcile efficiency with equity by rotating the person who receives the largest share, but such a strategy requires a longer run perspective. Correlating experimental data from an irrigation game with individual time preference data, we find that less patient irrigators are less likely to use a rotation strategy.

On incentivizing upload capacity in P2P-VoD systems: Design, analysis and evaluation

Free riding has long been a serious problem in peer-to-peer (P2P) systems due to the selfish behavior of individual users. To conquer this problem, a key design issue of the P2P systems is to appropriately incentivize users to contribute resources. In P2P Video-on-Demand (VoD) applications, content providers need to incentivize the peers to dedicate bandwidth and upload data to one other so as to alleviate the upload workload of their content servers. In this paper, we design a simple yet practical incentive mechanism that rewards each peer based on its dedicated upload bandwidth. We use a mean field interaction model to characterize the distribution of number of peers in different video segments, based on which we characterize the content providers’ uploading cost as a function of the peers’ contribution. By using a game theoretic framework, we analyze the interaction between a content provider’s rewarding strategy and the peers’ contributing behaviors and derive a unique Stackelberg equilibrium. We further analyze the system efficiency in terms of the price of anarchy and study the long term behavior of the system under a repeated game setting. Via extensive simulations, we validate the stability and efficiency of our incentive scheme.

A Theory of Economic Sanctions

This paper presents a work-horse model to analyze the mechanism of triadic sanctions, where the receiver of the sanction is not the actual target. With a motivating example of the US sanctions against Iran and a simple game theoretic framework, we show that the threat of such sanction is not credible in situations where the game ends after single stage, or when the entities are not concerned with future transactions amongst each other. In a repeated game setting, on the other hand, the threats become credible, but the level of enforcement would differ across firms/countries depending on the economic interdependency and how the parties perceive the probability that the games would continue to the next period.