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Abstract:
We examine experimentally the impact of communication on trust and cooperation. Our design admits observation of promises, lies, and beliefs. The evidence is consistent with people striving to live up to others' expectations in order to avoid guilt, as can be modeled using psychological game theory. When players exhibit such guilt aversion, communication may influence motivation and behavior by influencing beliefs about beliefs. Promises may enhance trustworthy behavior, which is what we observe. We argue that guilt aversion may be relevant for understanding strategic interaction in variety of settings, and that it may shed light on the role of language, discussions, agreements, and social norms in these contexts.

Promises, partnership, contract theory, behavioral economics, hidden action, moral hazard, lies, social preferences, psychological game theory, guilt aversion, reciprocity, fairness

Abstract:
Leniency clauses, offering cartelists legal immunity if they blow the whistle on each other, is a recent anti-trust innovation. The authorities wish to thwart cartels and promote competition. This effect is not evident, however; whistle-blowing may enforce trust and collusion by providing a tool for cartelists to punish each other. We examine the impact of leniency law, and other rules, theoretically and experimentally.

Anti-trust, leniency, immunity, amnesty, blow the whistle, cartels, price competition, Bertrand model, experiment, communication

Abstract:
We test whether promises per se are effective in enhancing cooperative behavior in a form of a trust game. In Charness & Dufwenberg (2006) we found considerable effectiveness for free-form personalized pre-play statements-of-intent ("promises"), in support of a theory of belief-dependent guilt aversion. However, we were not able to reject an alternative explanation based on a belief-independent cost-of-lying. We now adapt our old design and replace the free-form messages with an opportunity for a bare promise-only message. If both forms of promises are equally effective, this would be consistent with a cost-of-lying explanation. However, in sharp contrast to previous results, we find that these bare promise-only messages lead to behavior that is much the same as when no messages are feasible. Further, beliefs are unaffected, in contrast with the change in beliefs we found with personalized promises. This provides evidence for belief-dependent guilt aversion over cost-of-lying.

Behavioral economics, cheap talk, communication, cost-of-lying, credibility, guilt aversion, psychological game theory, promises

Abstract:
Building on recent work on dynamic interactive epistemology, we extend the analysis of extensive-form psychological games (Geneakoplos, Pearce & Stacchetti, Games and Economic Behavior, 1989) to include conditional higher-order beliefs and enlarged domains of payoff functions. The approach allows modeling dynamic psychological effects (such as sequential reciprocity, psychological forward induction, and regret) that are ruled out when epistemic types are identified with hierarchies of initial beliefs. We define a notion of psychological sequential equilibrium, which generalizes the sequential equilibrium notion for traditional games, for which we prove existence under mild assumptions. Our framework also allows us to directly formulate assumptions about 'dynamic' rationality and interactive beliefs in order to explore strategic interaction without assuming that players beliefs are coordinated on an equilibrium. In particular, we provide an exploration of (extensive-form) rationalizability in psychological games.

Psychological games, belief-dependent motivation, extensive-form solution concepts, dynamic interactive epistemology

Abstract:
There is widespread conjecture that distributional concerns like fairness and altruism, found to shape people's behavior in small group situations, have no impact on trading in markets with many participants. We explore the issue analytically by considering a general equilibrium framework where agents exhibit such preferences. For each economy with 'social' agents we define a comparable economy with selfish agents. We derive a sufficient condition such that any outcome which is an equilibrium with distributional concerns constitutes an equilibrium also in the counterpart selfish economy, and vice versa. We show that this condition is fulfilled for most of the standard distributional concern models whenever the economy is large enough. We also show that the same condition is sufficient for the equlibrium outcomes to be efficient even in the presence of distributional concerns.

Social Preferences, Competitive Markets, General Equilibrium

Abstract:
We study competitive market outcomes in economies where agents have other-regarding preferences. We identify a separability condition on monotone preferences that is necessary and sufficient for one's own demand to be independent of the allocations and characteristics of other agents in the economy. Given separability, it is impossible to identify other-regarding preferences from market behaviour: agents behave as if they had classical preferences that depend only on own consumption in competitive equilibrium. If preferences, in addition, depend only on the final allocation of consumption in society, the Second Welfare Theorem holds as long as an increase in resources can be distributed such that all agents are better off. Nevertheless, the First Welfare Theorem generally does not hold. Allowing agents to care about their own consumption and the distribution of consumption possibilities in the economy, we provide a condition under which agents have no incentive to make direct transfers, and show that this condition implies that competitive equilibria are efficient given prices.

markets, other-regarding preferences, self-interest, welfare

Abstract:
Many experimental studies indicate that people are motivated by reciprocity. Rabin (1993) develops techniques for incorporating such concerns into game theory and economics. His model, however, does not fare well when applied to situations with an interesting dynamic structure (like many experimental games), because it is developed for normal form games in which information about the sequential structure of a strategic situation is suppressed.In this paper we develop a theory of reciprocity for extensive games in which the sequential structure of a strategic situation is made explicit. We propose a new solution concept-sequential reciprocity equilibrium-which is applicable to extensive games, and we prove a general equilibrium existence result. The model is applied in several examples, including some well known experimental games like the Ultimatum game and the Sequential Prisoners' Dilemma.