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We reformulate the quality ladder model of Pakes and McGuire, Rand Journal of Economics, 25(4), 555-589 (1994) as a dynamic stochastic game with random moves in which each period one firm is picked at random to make an investment decision. Contrasting this model to the standard version with simultaneous moves illustrates the computational advantages of random moves. In particular, the quality ladder model with random moves avoids the curse of dimensionality in computing firms' expectations over all possible future states and is therefore orders of magnitude faster to solve than its counterpart with simultaneous moves when there are more than just a few firms. Perhaps unexpectedly, the equilibria of the quality ladder model with random moves are practically indistinguishable from those of the model with simultaneous moves. [ABSTRACT FROM AUTHOR]

The paper examines the issue of international pollution control under a dynamic framework involving heterogeneous countries and a critical threshold. We propose an appealing specification for this type of problem, and its novelty is illustrated by the fact that countries use linear strategies in equilibrium, although their utility and damage functions are highly convex. The stock of pollution under cooperation is always lower. Surprisingly, emissions are always higher in distant periods under the cooperative scenario; and we show through examples that this is a significant finding rather than some marginal effect. It is also shown that the efficient allocation of pollution abatement is driven only by the respective technologies of the countries. Finally, a dynamic transfer scheme allowing to implement the cooperative solution is proposed. [ABSTRACT FROM AUTHOR]

This note examines the structure of stationary bargaining equilibria in the finite framework of Anesi (2010) . The main result establishes a tight connection between the set of equilibrium absorbing points and the von Neumann–Morgenstern solutions: assuming that players are patient, that the voting rule is oligarchical, and that there is at least one veto player with positive recognition probability, a set of alternatives corresponds to the absorbing points of an equilibrium if and only if it is a von Neumann–Morgenstern solution. We also apply our analysis of ergodic properties of equilibria to the persistent agenda setter environment of Diermeier and Fong (2012) . We show that all equilibria are essentially pure, and we extend their characterization of absorbing sets to allow an arbitrary voting rule and by removing the restriction to pure strategy equilibria. [ABSTRACT FROM AUTHOR]

We define a class of dynamic Markovian games, directional dynamic games (DDG), where directionality is represented by a strategy-independent partial order on the state space. We show that many games are DDGs, yet none of the existing algorithms are guaranteed to find any Markov perfect equilibrium (MPE) of these games, much less all of them.We propose a fast and robust generalization of backward induction we call state recursion that operates on a decomposition of the overall DDG into a finite number of more tractable stage games, which can be solved recursively.We provide conditions under which state recursion finds at least one MPE of the overall DDG and introduce a recursive lexicographic search (RLS) algorithm that systematically and efficiently uses state recursion to find all MPE of the overall game in a finite number of steps. We apply RLS to find all MPE of a dynamic model of Bertrand price competition with cost-reducing investments which we show is a DDG. We provide an exact noniterative algorithm that finds all MPE of every stage game, and prove there can be only 1, 3, or 5 of them. Using the stage games as building blocks, RLS rapidly finds and enumerates all MPE of the overall game. RLS finds a unique MPE for an alternating move version of the leapfrogging game when technology improves with probability 1, but in other cases, and in any simultaneous move version of the game, it finds a huge multiplicity of MPE that explode exponentially as the number of possible cost states increases. [ABSTRACT FROM AUTHOR]

We examine project selection decisions of firms constrained in the number of projects they can handle at once. A new project opportunity arises every period. Taking on a project requires a commitment of uncertain duration, preventing the firm from selecting another project in subsequent periods until the commitment ends. In our dynamic game, when two firms are free of commitment, they move sequentially in random order. Symmetric pure strategy Markov perfect equilibria always exist. In equilibrium, the first mover strategically rejects some projects that are then selected by the second mover, even when the value of the project is the same for both firms. A monopolist rejects more projects, and adopts ones of higher average quality compared to the duopolist. Duopolists select too few projects compared to their jointly optimal behavior. We extend the model to allow for externalities, asymmetry, and n > 2 firms. [ABSTRACT FROM AUTHOR]

I develop a dynamic political economy model with an informal sector and two political parties alternating in office. In equilibrium, if the incumbent political party faces a higher probability of staying in office, it sets a higher tax rate on the formal economy to invest more in productive public capital, while spending less for current office rent. Moreover, I argue that public capital is mainly utilized by the formal sector, and this implies that countries in which incumbent parties are more likely to stay in power have a higher tax burden but a smaller informal sector. I also present some empirical evidence that supports the main results of the model. [ABSTRACT FROM PUBLISHER]

Idevelop a dynamic investment game with a "memoryless" research and development process in which an incumbent and an entrant can invest in a new technology, and the entrant can also invest in the old technology. I show that an increase in the probability of successfully implementing a technology can cause the incumbent to reduce its investment. Under certain conditions, if the success probability is high, the incumbent allows the entrant to win the new technology so that firms reach an equilibrium in which they use different technologies, and threats of retaliation prevent attacks; but if the success probability is low, such an equilibrium cannot be sustained, and both firms eventually implement both technologies. [ABSTRACT FROM AUTHOR]

Abstract: We analyze dynamic price competition in a homogeneous goods duopoly, where consumers exchange information via word-of-mouth communication. A fraction of consumers, who do not learn any new information, remain locked-in at their previous supplier in each period. We analyze Markov perfect equilibria in which firms use mixed pricing strategies. Market share dynamics are driven by the endogenous price dispersion. Depending on the parameters, we obtain different ‘classes’ of dynamics. When firms are impatient, there is a tendency towards equal market shares. When firms are patient, there are extended intervals of market dominance, interrupted by sudden changes in the leadership position. [Copyright &y& Elsevier]

Abstract: This paper analyzes a two-player game of strategic experimentation with three-armed exponential bandits in continuous time. Players play bandits of identical types, with one arm that is safe in that it generates a known payoff, whereas the likelihood of the risky armsʼ yielding a positive payoff is initially unknown. When the types of the two risky arms are perfectly negatively correlated, the efficient policy is an equilibrium if and only if the stakes are high enough. If the negative correlation is imperfect and stakes are high, there exists an equilibrium that leads to efficiency for optimistic enough prior beliefs. [Copyright &y& Elsevier]

The geographical distribution of FDI in China is highly uneven and mostly concentrated in eastern China, which shows a core-periphery pattern. This is actually a macro outcome of the micro location and subsequent investment decisions of multinational corporations. The decisions of multinational corporations are not only subject to their types and strategic objectives, but also depend on the location advantage in each region, especially depend on various incentives provided by local governments. The empirical studies on FDI in China mostly regard the spatial agglomeration of FDI as a result, based on which they have researched on the reasons behind the agglomeration, like market potential, tax incentives, infrastructure, labor costs, human capital, FDI stock etc. Owning to higher productivity and greater mobility of multinational enterprises compared with domestic counterparts, local governments under fiscal decentralization has launched a comprehensive fiscal competition to pursue FDI, which ranges from tax incentives competition to competition in fiscal spending for productivity-enhancement. From this perspective, FDI agglomeration can be seen as the outcome of a multi-game among multinational corporations and the local governments. However, the spatial agglomeration of FDI, is not only an outcome of this game, but also affects the intermediate process of this game. In short, FDI agglomeration itself can generate agglomeration economies and attract the follow-up FDI. Thus, regions with larger amount of FDI stock (or larger agglomeration economies) may take advantage of this to set higher tax rate or provide lower subsidies. So far there is little theoretical and empirical research on how agglomeration economies affect the competitive strategy of local government in chasing FDI. Local governments can neither control the types and purposes of foreign investors, nor can they change the location advantages which are generated spontaneously. However, they can manipulate taxes, subsidies, structure and quantities of fiscal expenditures. Considering the operability, taxes and subsidies become the most preferred policy tools for local governments competing for FDI. To some extent subsidies can be regarded as negative taxes, so taxes and subsidies, in theory, can both be treated as taxes. Relying on the Markov perfect equilibrium framework, we construct a model to analyze how the agglomeration economies and location advantages affect the tax competition equilibrium. Considering the strategic interaction among regions and other spatial linkages in FDI competition, we have adopted a spatial panel econometric model. Using the panel data of China's 29 provinces from 1993 to 2009, our empirical analysis indicates that: (1) Regional tax competition do exist, and taxation is still an important factor affecting spatial distribution of FDI but its role has been weakened along the time; (2) Western provinces rely on tax competition more heavily and attract more elementary FDI which are more sensitive to tax incentives; (3) Eastern provinces with advantages of location and agglomeration economies could levy higher taxes on FDI to claim the rent of agglomeration; (4) The existence of agglomeration weaken the tax competition among provinces, and the average tax rates for FDI in the eastern and western provinces are both increasing with time. [ABSTRACT FROM AUTHOR]

Abstract: We generalize the dynamic bargaining game of to arbitrary quota rules to provide a non-cooperative characterization of the von Neumann–Morgenstern stable set. Assuming that players are sufficiently patient and have strict preferences, a pure-strategy stationary equilibrium exists and in any such equilibrium, a policy is a steady state if and only if it is in the stable set. The result provides a non-cooperative foundation of stable sets in settings with dynamic policy-making and a persistent agenda setter. [Copyright &y& Elsevier]

Standard economic models of groundwater management impose restrictive assumptions regarding perfect transmissivity (i.e., the aquifer behaves as a bathtub), no external effects of groundwater stocks, observability of individual extraction rates, and/or homogeneous agents. In this article, we derive regulatory mechanisms for inducing the socially optimal extraction path in Markov perfect equilibrium for aquifers in which these assumptions do not hold. In spite of the complexity of the underlying system, we identify an interesting case in which a simple linear mechanism achieves the social optimum. To illustrate potential problems that can arise by erroneously imposing simplifying assumptions, we conduct a simulation based on data from the Indian state of Andhra Pradesh. [ABSTRACT FROM AUTHOR]

Abstract: We study the Markov perfect equilibria (MPEs) of an infinite horizon game in which pairs of players connected in a network are randomly matched to bargain. Players who reach agreement are removed from the network without replacement. We establish the existence of MPEs and show that MPE payoffs are not necessarily unique. A method for constructing pure strategy MPEs for high discount factors is developed. For some networks, we find that all MPEs are asymptotically inefficient as players become patient. [Copyright &y& Elsevier]

Abstract: This paper presents an extension of a static model of economic conflict analyzed by and to an infinite horizon differential game. Our aim is to highlight the strategic role of appropriation among a smaller group of agents in an intertemporal context. The model yields the conclusion that there exists a unique linear/nonlinear Markov perfect equilibrium strategy, even when strategies are defined over the entire state space. We demonstrate that “partial cooperation” can be seen as a long-run response to conflict. Moreover, a decrease in the effectiveness of appropriation, the depreciation rate of a common-pool stock, the rate of time preferences or an increase in the “degree of noise” improves the degree of “partial cooperation” and thus welfare in an anarchic society. [Copyright &y& Elsevier]

We analyse a two-player game of strategic experimentation with two-armed bandits. Either player has to decide in continuous time whether to use a safe arm with a known pay-off or a risky arm whose expected pay-off per unit of time is initially unknown. This pay-off can be high or low and is negatively correlated across players. We characterize the set of all Markov perfect equilibria in the benchmark case where the risky arms are known to be of opposite type and construct equilibria in cut-off strategies for arbitrary negative correlation. All strategies and pay-offs are in closed form. In marked contrast to the case where both risky arms are of the same type, there always exists an equilibrium in cut-off strategies, and there always exists an equilibrium exhibiting efficient long-run patterns of learning. These results extend to a three-player game with common knowledge that exactly one risky arm is of the high pay-off type. [ABSTRACT FROM PUBLISHER]

We investigate the incentives for investments in capacity in a simple strategic dynamic model with random demand growth. We construct non-collusive Markovian equilibria where the firms' decisions depend on the current capacity stock only. The firms maintain small reserve margins and high market prices, and extract large rents. In some equilibria, rationing occurs with positive probability, so the market mechanism does not ensure 'security of supply'. Usually, the price cap reflects the value of lost energy or lost load (VOLL) that consumers place on severely reducing consumption on short notice. Our analysis identifies a minimum price cap, unrelated to the VOLL, that allows the firms to recoup their investment and production costs in equilibrium. However, raising the price cap above this minimum increases market prices and reduces consumer surplus, without affecting the level of investment. [ABSTRACT FROM AUTHOR]

Time consistent policies and reforms of intergenerational transfers are analyzed in an overlapping generation model. Governments have preferences, which give much weight to the living generations, and they cannot commit themselves to future taxes and transfers, which will be decided by future governments with different objectives. The economy follows one of two equilibrium paths with perfect foresight. On one path, governments finance the costs of their transfers to the living by increasing public debt recklessly. Consumers pay more and more taxes to finance the cost of this debt, and the successive generations will enter a process of impoverishment. On the other path, in spite of their preference bias, governments borrow less and put the economy on a path of egalitarian consumption flows for the successive generations, with a constant ratio of public debt to national income. The mechanisms, which put an economy on one or the other equilibrium paths, are unconnected to the fundamentals of the model. [ABSTRACT FROM AUTHOR]