Strategic Choice Model Research Articles

The collective wisdom of behavioral game theory

AbstractWe apply an algorithm from the wisdom-of-crowds literature to optimally combine behavioral game theory models to more accurately predict strategic choice in one-shot, simultaneous-move games. We find that the optimal weighted average of seven behavioral game theory models predicts out-of-sample choice behavior significantly better than any of the individual models. The crowd of behavioral game theory models is wiser than any single one of them. Different strategic choice models complement each other by capturing distinct patterns of behavior. The field of behavioral game theory is enriched by having this diversity of models.

ОСОБЛИВОСТІ ФУНКЦІОНАЛЬНО-ІНСТИТУЦІЙНОЇ АРХІТЕКТУРИ СТРАТЕГІЧНОГО ПЛАНУВАННЯ ПРОМИСЛОВОГО РОЗВИТКУ

The article examines the essence of the institutional and functional architecture of industrial development strategic planning, which is an ordered system of relations between various institutions in course of designing the industrial strategy. The goal of the article is to identify the features of the functional and institutional architecture of strategic planning and to determine their impact on strategic decision-making processes in the field of industrial development. The main modules of strategic planning architecture are singled out. In particular, they include responsibility centers (which can be the Ministry of Economy of Ukraine or the Ministry of Strategic Industries of Ukraine) and stakeholders, as well as their roles and functions, legislation, and flows of information and analytical data. It was revealed that there are six main functions organizations perform during the strategic planning: framework goals of higher level; strategic goal setting; analysis of environment; strategic alternatives assessment; distinction of steering and planning functions; relationship between planning and budgeting. While the government has its own vision of strategic goals which depends on the political and technical performance of the responsible institution, it is important to engage various government and non-government institutions and business in strategic planning industry development. This idea was also supported within the models of strategic decision making – the model of strategic choice oriented on internal institutional capabilities and external control model which argues the external determinants highly contribute to the variation of the strategic alternatives assessment should be combined. In Ukraine main stakeholders can be represented by business associations and trade unions, R&D institutions and universities, think tanks and civil society organizations. Organizations providing statistical and analytical information also play an important role. There were determined several ways of stakeholders’ involvement in strategic planning of industry development – through participation in working group, through public discussion and through public inquiries preparing experts assessments. Ensuring transparency and efficiency of inter-institutional interaction, trust and support from key stakeholders is also an important component for stimulating systemic change. As a result of these findings the model of functional and institutional architecture of strategic planning of industrial development was elaborated in the study.

Environmental Status Goods and Market-Based Conservation: An Arm of Ostrom’s Polycentric Approach?

Ostrom suggests that collective action problems may present an obstacle to the reduction in (external costs from) global greenhouse gas emissions and that a polycentric approach is necessary to find a solution. A market-based prong of such a polycentric solution—alongside, e.g., governance-based prongs such as transferable pollution permits—may lie in the nature of certain salient “environmentally friendly” goods (e.g., Toyota Prius, Tesla cars, home solar panels). The present study analyzes the social welfare consequences of positional conservation (i.e., consumption of salient environmentally friendly goods for the purpose of status signaling) within a choice theoretic model. For example, the Toyota Prius and Tesla have been shown to be such a type of good. In a two-good model of strategic consumer choice, in which consumers choose between a positional, “conservation good” and an externally costly, “non-conservation good”, we find that positional conservation improves social welfare if the unit external cost of the non-conservation good consumption is sufficiently large. In such a case, positionality serves to (partly or fully) correct an under-consumption of the positional good. Fershtman and Weiss find, within a one-good (action) model, that positionality can be corrective of distortions from positive externalities but not of distortions from negative externalities (e.g., pollution). Within a two-good model of consumer choice, we find that “social rewards” can help to correct distortions generated by negative externalities and improve social welfare. The results of the present study suggest that the Paretian objective may not be to curb positional spending but to shift positional spending toward conspicuous goods that are otherwise under-consumed (e.g., conservation goods or education).

Detecting and Correcting for Separation in Strategic Choice Models

AbstractSeparation or “perfect prediction” is a common problem in discrete choice models that, in practice, leads to inflated point estimates and standard errors. Standard statistical packages do not provide clear advice on how to correct these problems. Furthermore, separation can go completely undiagnosed in fitting advanced models that optimize a user-supplied log-likelihood rather than relying on pre-programmed estimation procedures. In this paper, we both describe the problems that separation can cause and address the issue of detecting it in empirical models of strategic interaction. We then consider several solutions based on penalized maximum likelihood estimation. Using Monte Carlo experiments and a replication study, we demonstrate that when separation is detected in the data, the penalized methods we consider are superior to ordinary maximum likelihood estimators.

Common belief in rationality in psychological games: Belief-dependent utility and the limits of strategic reasoning

Psychological games enable us to study diverse motivations like anger, guilt, and intention-based reciprocity using models of rational strategic choice based on common belief in rationality (aka correlated rationalizability). This is achieved by letting utility depend not only on outcomes and beliefs about others’ behavior but also on higher-order beliefs. It is an open question whether such belief-dependent utilities can be made consistent with common belief in rationality in all empirically relevant cases. In this paper, we use a novel existence condition to show that common belief in rationality is possible for any empirically relevant case of belief-dependent utility. In addition, we present a recursive elimination procedure that characterizes common belief in rationality under minimal assumptions on belief-dependent utility functions.

A Strategic Choice Model of Dynamic Capabilities Development

The positive link between dynamic capabilities and firm performance is well understood. Given this link, recent research has highlighted the practical and theoretical importance of understanding how dynamic capabilities are developed. However, the evolutionary learning assumptions that underlie much dynamic capabilities research leave little room to explore the antecedents of dynamic capabilities development in terms of the reasoned and intentional actions of managers, i.e., their strategic choices. Consequently, it is unclear how a strategic choice view should approach the development of routines that constitute dynamic capabilities given a prior focus on selection pressure over behavioral variation. To address these concerns, I propose a strategic choice model to explain how managers can contribute to the development of dynamic capabilities. By drawing on the resource-based view, the knowledge-based view, and institutional theory, I surface the creation of “learning spaces” as a key moderator that explains how managers may take steps to develop dynamic capabilities for a firm facing conditions of increasing environmental dynamism. This article contributes to the dynamic capabilities literature by answering recent calls to explain how dynamic capabilities are developed, to further elaborate assumptions about managerial agency, and to integrate new and relevant insights from institutional theory.

The Simple Economics of Vaccine Quality in Competitive Markets

The world’s leading pharmaceutical laboratories are racing to complete trials and begin marketing an effective SARS-CoV-2 vaccine. International Health Organizations and National Public Health Agencies are charged with setting standards for successful completion of Phase 3 trials. Brand licensing is contingent on meeting these standards. Vaccine uptake, however, depends upon people’s perceptions of the quality of the licensed vaccine. We ask four questions: What are key dimensions of vaccine brand quality relevant to their marketing? Why should we distinguish between pre-licensing and post-licensing quality? What impact does the structure of the competitive market for vaccine brands have on post-licensing brand quality standards? What incentives or disincentives exist in post-licensing markets for quality improvement? We address these questions by revisiting a strategic quality choice model from decision economics. It is the nature of vaccines that they are subject to problems of market failure. This paper’s main contribution is to highlight two problems that result in lowered brand quality: the free rider problem and the commons problem. New vaccines in competitive markets suffer both problems unless there are specific interventions by public agencies to mitigate their impacts. These interventions are urgently needed to raise quality and ensure maximum uptake of vaccination.

Research on the Development Status, Strategic Choice and Business Model of China’s Charging Pile Industry

The interaction between electric vehicles and power grids can achieve the functions of cutting peaks and valleys of load, participate in frequency modulation, and provide reserve service. It is of great significance for the safe and economic operation of power grids and the ability to improve the capacity of new energy power generation. However, due to the lag of the development of China’s charging pile industry, which constrained the development of electric vehicles. This paper analyzes the key issues of market mechanism and infrastructure of charging piles. First, this paper summarizes the development status of China’s charging pile and proposes the research route for the development of charging pile bottlenecks; secondly we analyze China’s policies on different stages and construct implementation path of charging pile. By comparing the basic indicators, related policies and related innovation activities of the charging pile for China, we conclude that the development of the national electric vehicle industry needs to be increased in terms of government policies, business model innovation and public awareness.

Addressing endogeneity in strategic urban mode choice models

Endogeneity is a potential anomaly in econometric models, which may cause inconsistent parameter estimates. Transport models are prone to this problem and applications that properly correct for it are scarce. This paper focuses on how to address this issue in the case of strategic urban mode choice models (i.e., the third stage of classic strategic transport models), possibly the main tool for the assessment of costly transport projects. To address this problem, we propose and validate, for the first time, adequate instruments that may be obtained from data that is already available in this context. The proposed method is implemented using the Control Function approach, which we use to detect and correct for endogeneity in a case study in Valparaiso, Chile. The effects arising from the neglected endogeneity in this case study reflect on an overestimation between 26–49% of the subjective value of time and an underestimation of 33–75% of modal elasticities.

Endogenous Quality Investments in the U.S. Hospital Market

High and increasing hospital prices have led to calls for price regulation. If prices are high because of consolidation, regulating prices could enhance welfare. However, high prices could also reflect increased willingness to pay by privately insured consumers for clinical and non-clinical quality. If so, regulating prices could reduce quality. We present a model of strategic quality choice where hospitals make quality investments to increase private revenue. We confirm the model's predictions across numerous quality measures including patient satisfaction, hospital processes, risk adjusted mortality, the revealed preferences of current Medicare patients, technology adoption, physician quality, and ED wait times.

How Do Social Norms and Expectations About Others Influence Individual Behavior?

Social norms can be understood as the grammar of social interaction. Like grammar in speech, they specify what is acceptable in a given context (Bicchieri in The grammar of society: the nature and dynamics of social norms, Cambridge University Press, New York, 2006). But what are the specific rules that direct human compliance with the norm? This paper presents a quantitative model of self- and the other-perspective interaction based on a ‘quantum model of decision-making’, which can explain some of the ‘fallacies’ of the classical model of strategic choice. By (re)connecting two fields of social science research—norms compliance, and strategic decision-making—we aim to show how the novel quantum approach to the later can advance our understanding of the former. From the cacophony of different quantum models, we distill the minimal structure necessary to account for the known dynamics between the expectations and decisions of an actor. This model was designed for the strategic interaction of two players and successfully tested in the case of the one-shot Prisoners’ Dilemma game. Quantum models offer a new conceptual framework for examining the interaction between self- and other-perspective in the process of social interaction which enables us to specify how social norms influence individual behavior.

Duality in human capital accumulation and inequality in income distribution

In view of the dualities in human capital and the inequality of income and wealth distribution that exist in general and, more conspicuously, in the third world, this paper puts forth a strategic choice model to analyze how such dualities and inequality are strengthened and sustained over time. Ignoring inertia, we argue that this is the outcome of strategic choices made by individual agents on how much human capital to accumulate as an endogenous response to technological innovations. Our analysis takes account of the fact that the various qualities of human capital are complementary to the productivity of each other, hence turning human capital accumulation by the rich and the poor into choices that exhibit strategic complementarities. Such complementarities could potentially increase the productivity of labor at its micro and macro levels, promote growth, and contribute to reducing inequality in income distribution. The model explains why the dualities in human capital arise through such choices and why such dualities get worse with economic growth if it is accompanied by inflation unless the cost of education facing the poor is reined in. The analysis is extended to explain how the dualities in health capital mirror those in human capital. We also argue in favor of the plausible multiplier effects that the human capital accumulation and ensuing innovations may trigger further endogenous growth. Finally, the analysis invites a debate in regard to the type and level of education and policy objectives that will meet the need of the technology of the time.

Blockchain Upgrade as a Coordination Game

The choice by a blockchain community of whether to implement a proposed policy upgrade constitutes a coordination game, for which governance rules can help community members to select an equilibrium. Unlike typical scenarios in which governance is studied, in which the entire population is subject to the outcome of the governance process, hard forks are possible and may be desirable for a subset of the blockchain community. We first develop a simple model of strategic chain choice. Coordinating on a single chain is always a Nash equilibrium for the community, whereas a hard fork can be a Nash equilibrium depending on the composition of the community and the upgrade being proposed. Hard forks maximize the social welfare of the blockchain community under select circumstances. We then investigate the performance of two common voting schemes -- majority rule and quadratic voting -- in assisting equilibrium selection and maximizing the social welfare of the community. Neither voting scheme eliminates the occurrence of suboptimal hard forks. We show that, given the constant threat of a hard fork, both the governance rules adopted and restrictions on the policy proposal space are important for maximizing community value.

Strategic Binary Choice Models with Partial Observability

Strategic Binary Choice Models with Partial Observability

A negotiation decision model for public–private partnerships in brownfield redevelopment

Urban development cannot proceed without the commitment of multiple actors, because decision-making processes have become more and more interdependent. This article supports better decision-making in brownfield redevelopment projects in cases where the project realization depends on a public–private partnership between a municipality and a developer. In a broader sense, in this research, we investigate how the negotiation process in brownfield redevelopment projects can be improved by providing an understanding of the characteristics of a brownfield area and the interaction between the parties involved. In order to improve the process, a negotiation decision model is proposed. This is a hybrid model consisting of five phases. Its novelty lies in the combination of a latent class model and a strategic choice model that can be formulated as a prescriptive-interactive approach in decision theory. The hybrid negotiation model is applied to a reconstructed case study in order to present its possibilities. Accordingly, three applications of the model are introduced, and in each application the beneficiary is a municipality. Although using decision models for brownfield redevelopment projects has already been thoroughly studied, there is little evidence concerning the prescriptive-interactive component built into existing models.

How do business-level strategies affect multiple market servicing modes in the foreign country?

Purpose– There is considerable literature on the firm's market servicing mode (MSM) when it enters the foreign country. However, scant research has been conducted to examine how business-level strategies (BLSs) affect internationalised firms to choose a multiple rather than single post-entry MSM. The purpose of this paper is to test the effect of three BLSs on firms’ selection of multiple MSMs.Design/methodology/approach– Survey responses of 165 internationalised Greek small- and medium-sized enterprises (SMEs) were collected capturing the types of BLSs they used during 2008-2010 and their number of MSMs in a particular foreign country in 2011. The data were analysed using logistic regression.Findings– The findings suggest that firms that implement collaborative and differentiation strategies are more likely to use multiple rather than single MSMs. Firms that implement penetration pricing strategies are more likely to use single MSMs, although this effect is marginally significant. Overall, the validity of the strategic choice model regarding the choice of multiple MSMs is confirmed.Originality/value– Despite its importance, the effect of BLSs influencing MSMs has not seemingly been investigated, especially in the context of internationalised SMEs as opposed to large multinational enterprises; and, for post-entry as opposed to initial modes. The findings underline the BLS significance on internationalised SME adoption of multiple vs single MSMs in the host country.

Estimating Extensive Form Games inR

This article introduces new software, the games package, for estimating strategic statistical models in R. In these models, the probability distribution over outcomes corresponds to the equilibrium of an underlying game form. We review such models and provide derivations for one example, including discussion of alternative motivations for the stochastic component of the models. We introduce the basic functionality of the games package, such as how to estimate players’ utilities for outcomes as a function of covariates. The package implements maximum likelihood estimation for the most commonly used models of strategic choice, including three extensive form games and an ultimatum bargaining model. The software also includes functions for bootstrapping, plotting fitted values with their confidence intervals, performing non-nested model comparisons, and checking global convergence failures. We use the new software to replicate Leblang’s (2003) analysis of speculative currency attacks.

Corporate Strategic Choice Basing on Externality Internalization

Corporate strategy of architecture enterprises with multiregional projects is building coordination between the corporate inner resources and the externalities from social & natural environment. This paper attempts to establish a strategic choice model of internalization of the externalities, as an analytic tool integrating both dimensions of the inner-resources and environment.

OEM’s Electric Vehicle Strategies: Risk Assessment

In order to analyze the approach of the main automotive players regarding the electrification path each one is following, this report assesses those aspects required for a consistent corporate product strategy. As distinctive differences are found in terms of the scope of products, some boundaries are defined based on the mobility concept, establishing the differentiation of the current automotive business into two separated industries. After analyzing each of the industries, the report focuses on four automotive OEMs and the way they are coping with the competition for profit in each scenario. The paper also analyses and assesses both each OEM strategic choice and business model.

Underwriter Competition in Accelerated Seasoned Equity Offerings

We show competition between underwriters even when fees are clustered. We study accelerated seasoned equity offerings (SEOs), which are now the predominant form of public SEO in the U.S., Canada, and Europe. Underwriters compete by establishing capacity sufficient to allow them to maintain close relationships with issuers, in order to be able to identify when issuers will need funds and conduct issues quickly. Speed of issue is the key consideration for issuers using accelerated SEOs, and managing capacity is a key concern of underwriting firms. We test predictions from a model of strategic choice with field study data.