Prisoners' other dilemma

We find that contrary to common perception, cooperation as equilibrium of the infinitely repeated discounted prisoner's dilemma is in many relevant cases not very plausible, or at least questionable: for a significant subset of the payoff-discount factor parameter space cooperation equilibria are strictly risk dominated by non-cooperation (according to the Harsanyi-Selten 1988 criterion). Examples include collusion equilibria in the repeated Cournot duopoly

Prisoners' Other Dilemma

We find that contrary to common perception, cooperation as equilibrium of the infinitely repeated discounted prisoner's dilemma is in many relevant cases not very plausible, or at least questionable: for a significant subset of the payoff-discount factor parameter space cooperation equilibria are strictly risk dominated by non-cooperation (according to the Harsanyi-Selten 1988 criterion). Examples include collusion equilibria in the repeated Cournot duopoly.Prisoner's Dilemma; Risk dominance; Repeated games; Equilibrium selection; Cooperation; Collusion;

Excess returns and the distinguished player paradox

Suppose the value of a firm is endogenously determined by a manager's costly effort. We call this manager a distinguished player if he also can trade shares of the firm on a market. Arbitrage-free asset pricing theory suggests that the equilibrium market price reflects the value increasing contribution of a distinguished player. Trade at this price, however, cannot be an equilibrium of a market game since due to private effort costs, shares have a lower value to the distinguished player as compared to other investors. Why? The distinguished player himself can gain by selling at this price and in turn reduce effort. By merging asset pricing and corporate finance concepts we solve this distinguished player paradox and show how this asymmetry in valuations can systematically bring about a trade price strictly below the equilibrium value of the company. This implies that buyers enjoy excess returns on their investment and is thereby at odds with the efficient markets hypothesis. It further involves a substantial reinterpretation of traditional no-arbitrage towards a game-theoretic understanding. The empirical prediction that companies with a distinguished player yield excess-returns was confirmed for the sample of S&P500 firms and S&P1500 firms in a companion paper by von Lilienfeld-Toal and R¨unzi (2007). Our results are shown to be robust with respect to trading rules, discrete versus continuous effort, trading costs, noise traders, and price taking behavior

Civic Capital in Two Cultures: The Nature of Cooperation in Romania and USA

We experimentally investigate the nature of cooperation in various repeated games, with subjects from Romania and USA. We find stark cross-country differences in the propensity to sustain multilateral cooperation through bilateral rewards and punishments. U.S. groups perform well because sufficiently many cooperators are willing to discipline free riders. Romanian cooperators are less prone to jeopardize their productive bilateral relationships for the benefit of the group, collectively failing to provide adequate discipline. Our analysis indicates that the performance differences constitute a group-level phenomenon, being largely due differences in shared beliefs rather than differences in individuals' preferences