Strategic Interaction Effects Research Articles

Strategic interaction in environmental regulation and sulfur dioxide emissions: Evidence from China

Environmental regulation is the central government's main instrument for pollution control, but its actual implementation effect directly depends on the level of enforcement by local governments. Using panel data of 30 regions in Mainland China from 2004 to 2020 and a spatial Durbin model, we investigated the effects of strategic interaction among local governments in environmental regulation on sulfur dioxide (SO2) emissions. We found a “race to the top” behavior in the enforcement of environmental regulation among China's local governments. The enhancement of environmental regulation in a region or in its adjacent regions can significantly reduce SO2 emissions in that region, indicating that joint environmental governance can achieve considerable pollution control effects. Furthermore, influence mechanism analysis shows that the emission reduction effect of environmental regulation is primarily achieved through green innovation and finance. In addition, we found that environmental regulation has a significant negative impact on SO2 emissions in low-energy-consuming regions, but not in high-energy-consuming regions. Our findings indicate that China should continue to implement and deepen the green performance appraisal system for local governments and improve the efficiency of environmental regulations in high-energy-consuming regions.

Inference in an incomplete information entry game with an incumbent and with beliefs conditioned on unobservable market characteristics

We consider a static entry game played between an incumbent and a collection of potential entrants. Entry decisions are made with incomplete information and beliefs are conditioned, at least partially, on a market characteristic that is unobserved by the econometrician. We describe conditions under which, even though the unobserved market characteristic cannot be identified, a subset of parameters of the model can still be identified, including all the strategic-interaction effects. We also characterize testable implications for strategic behavior by the incumbent when this player is able to shift the unobserved market characteristic to deter entry. We present results under Bayesian Nash equilibrium (BNE) and under the weaker behavioral model of iterated elimination of nonrationalizable strategies. Our empirical example analyzes geographic entry decisions in the Mexican internet service provider (ISP) industry. This industry has an incumbent, América Móvil (AMX), which established a widespread geographic presence as a monopolist following the privatization of Telmex in 1990. Our results show significant strategic interaction effects between AMX and its competitors, as well as evidence of strategic behavior by AMX to deter entry and maximize its market share.

The role of strategic interactions in risk-taking behavior: A study from asset growth perspective

This study uses panel data on Vietnamese commercial banks from 2008 to 2018 in order to investigate the role of strategic interactions in determining bank risk-taking behavior by considering bank asset growth. The results suggest that aggressive competition is less favorable for banks striving for stability and that a high value of competitive strategy measure (as a proxy for strategic interactions) encourages risk-taking incentives. We also find that the distributional effects of strategic interaction on bank risk-taking because of asset growth reveal that the uncertainty in strategic-interaction-driven profits diminishes in banks with higher growth. This finding is consistent with the idea that when competition becomes more aggressive, bank restructuring should focus on increasing total assets by merging and acquiring small- and medium-sized banks to stabilize the banking sector. Furthermore, the results demonstrate that banks with low leverage or under regulatory pressure engage in more risk-taking. Therefore, policymakers may not implement a tighter capital requirement that contributes to a heightened level of risk. The results are robust to alternative measures of risk-taking and monetary policy stance as well as different econometric specifications.

Nonparametric tests for strategic interaction effects with rationalizability

We introduce the first nonparametric tests for the presence and the sign of strategic interaction effects in discrete 2 × 2 games of complete information under the assumption of rationalizable behavior, which includes Nash Equilibrium as a special case but allows for incorrect beliefs. Our tests assume the existence of an observable covariate with a positive stochastic relationship with the payoffs of a particular player.

The politics of environmental enforcement: the case of the Resource and Conservation Recovery Act

Does environmental enforcement actions, including states’ strategic responses to neighbors’ policy choices, depend on governor party affiliation? Do governors of different parties use environmental policy instruments differently? Our paper addresses these questions. Accounting for endogeneity and omitted variable biases, we find that Democratic governors on average depress overall inspection rates versus their Republican counterparts, but not the frequency of punitive actions (except in the South). Strategic responses to neighbors do not depend on party affiliation. Finally, treating party affiliation as endogenous and allowing for strategic interaction effects both appear important for our estimations.

Interdependent Durations with Incomplete Information

In this paper, we propose an interdependent durations model with incomplete information structure for multiple players. Our model generates a system of simultaneous equations of the conditional marginal distributions for duration outcomes, and implies that the corresponding copula function is the copula of the unobserved heterogeneity terms. We establish the uniqueness of the Bayesian Nash Equilibrium for the model resorting to a moderate social influence condition. We obtain identification of the finite dimensional parameters capturing the interaction effects and all nonparametric model primitives from the simultaneous equations of conditional marginal distributions and the dependence among unobserved heterogeneity through the conditional joint distribution of duration outcomes. Thus, the direct strategic interaction effects and the selection effects due to unobserved heterogeneity are separately identified.

Ambiguous Information and Market Entry: An Experimental Study

We study experimentally how entry into a market with uncertain capacity is affected by the type of information potential entrants have available. Our focus is on behavior in a two-market entry game. In the risky information market there are two possible market capacities, both known to occur with probability 1/2. In the ambiguous information market the two possible market capacities effectively occur with probability 1/2 but participants are only told that there is uncertainty about capacities. We find that average entry is higher under ambiguous information than under risky information. To control for comparison effects and the effects of strategic interaction in the two-market environment we also study a two-lottery individual decision problem and one-market entry games with ambiguous and risky information. For these two cases the experimental results show no difference between information conditions. Our results are consistent with the notion that complex strategic interaction leads to higher market entry under ambiguous information.

Strategic Interaction between General Practitioners and Specialists: Implications for Gatekeeping

We propose to estimate strategic interaction effects between general practitioners (GPs) and different specialist types to evaluate the viability threat for specialists associated to the introduction of a mandatory referral scheme. That is, we show that the specialists' loss of patientele when patients can only contact them after a GP referral has important consequences for the viability of the specialist types whose entry decisions are strategic substitutes in GPs entry decisions. To estimate the strategic interaction effects, we model the entry decisions of different physician types as an equilibrium entry game of incomplete information and sequential decision making. This model permits identification of the nature of the strategic interaction effects as it does not rely on restrictive assumptions on the underlying payoff functions and allow for the strategic interaction effects to be asymmetric in sign. At the same time, the model remains computationally tractable and allows for sufficient firm heterogeneity. Our findings for the Belgian physician markets, in which there is no gatekeeping, indicate that entry decisions of dermatologists and pediatricians are strategic substitutes in the entry decisions of GP's, whereas the presence of gynecologists, ophthalmologists and throat, nose and ear-specialists has a positive impact on GP payoffs of entry. Our results thus indicate that transition costs are likely upon the implementation of gatekeeping and that these costs are mainly associated to the viability of dermatologists and pediatricians.

Who Decides?: A Critical Look at Procedural Discretion

Federal civil procedure today relies extensively on trial judge discretion to manage litigation, promote settlements, and otherwise tailor process to individual cases. Even those rules with decisional standards leave trial judges considerable interpretive freedom to make case-specific determinations. This Article criticizes these choices and recommends stricter rules. Many judges and procedure scholars applaud the discretionary approach, and the Advisory Committee seems content to draft vague rules that implement it. The assumption seems to be that trial judges have the expertise and experience to do a good job of tailoring procedures to the needs of particular cases. The assumption is wrong, and this Article explains why. After surveying how discretion operates in federal procedure and explaining how it has come to dominate, the Article turns to developing the argument against case-specific discretion. It begins by identifying the primary purpose of procedure and explains why achieving quality settlements is as important as achieving quality judgments. The settlement quality and judgment quality objectives conflict, however, and designing procedures to balance them optimally is a difficult matter. The Article then identifies three serious problems that frustrate any effort by trial judges to strike an optimal balance in individual cases: bounded rationality limits, information access obstacles, and strategic interaction effects. These problems are particularly acute in procedure because of the highly strategic nature of litigation and the tightly integrated structure of a procedural system. The Article explains why the three problems are not as serious for committee-based rulemakers as for trial judges and why the cost-benefit balance therefore supports adopting stricter rules. The Article concludes by discussing four ways to limit discretion and illustrating each with concrete reform proposals in the areas of discovery, settlement promotion, and class action law.

Institutions, Path Dependence, and Democratic Consolidation

Formal political institutions have been assigned two roles in democratization theorizing: as contingent effects of strategic interaction and as predictable bases for democratic consolidation. These roles might be reconciled if we assume that institutions become persistent once in place. But patterns of behavior surrounding these institutions do not appear to conform to the expectations of path dependency or comparable frameworks: while unchallenged in some cases, these institutions are repeatedly contested and often enough revised in others. This is true even of ‘low stakes’ institutional designs. Consequently, groups often perceive institutional designs not as ‘locked in’ and instead as malleable over even a few years. Codified political institutions therefore appear unable to generate the reduced risks - in effect, the credible commitments - which Adam Przeworski’s argument about democratic consolidation requires. This conclusion suggests that consolidation may result from reductions in political risks caused by non-institutional factors. It also has implications for diverse arguments which assume stability or predictability in formal institutions.

Welfare aspects of technological adoption with learning

This paper considers the welfare implications of adoption of a new technology when this technology is characterized by costs of adaptation and some ‘localized learning’ effects. A two-period model is developed to represent the ‘adoption game’ between firms in a duopolistic framework. Optimal social ‘patterns’ of adoption are compared with private patterns emerging as equilibria of the game. It is shown that differences between the two patterns are due first to the shape of the demand function of the product sold on the duopolistic market, and secondly to strategic interaction effects between the adopting firms.

Strategic product choice and equilibrium traps for less developed countries

Strategic trade considerations will influence product choice decisions of less developed countries (LDCs) when products with learning-augmented technologies are involved. With constant rates of time preference and learning economies in production, welfare-maximizing production strategies in the international trade product choice game depend on relative levels of ‘impatience’ across countries, demand and learning parameters, and the other LDC's production strategy. Further, a low level growth ‘trap’ equilibrium for one LDC arises naturally from the choice theoretic context of the model and international coordination may be needed to obtain Pareto-efficient outcomes in some cases. Multiple LDC production of the good with learning benefits in production is generally discouraged by price and strategic interaction effects.