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This dissertation studies decision theories for both individual and interactive choice problems. This thesis proposes three non-standard models that modify assumptions and settings of standard models. Chapter 1 provides an overview of this dissertation. In the second chapter I present a model of decision-making under uncertainty in which an agent is constrained in her cognitive ability to consider complex acts. The complexity of an act is identified by the corresponding partition of state space. The agent ranks acts according to the expected utility net of complexity cost. I introduce a new axiom called Aversion to Complexity, that depicts an agent's aversion to complex acts. This axiom, together with other modified classical expected utility axioms characterizes a Complexity Aversion Representation. In addition, I present applications to competitive markets with uncertainty and optimal contract design. The third Chapter discusses how a complexity averse agent measures the complexity cost of an act after she receives new information. I propose an updating rule for the complexity cost function called Minimal Complexity Updating. The idea is that if the agent is told that the true state must belong to a particular event, she needs not consider the complexity of an act outside of this event. The main result characterizes axiomatically the Minimal Complexity Aversion Representation. Lastly, I apply the idea of Minimal Complexity Updating to the theory of rational inattention. The last chapter deals with a variant model of fictitious play, in which each player has a perturbation term that measures to what extent his rival will stick to the rules of traditional fictitious play. I find that the empirical distribution can converge to a pure Nash equilibrium if the perturbation term is bounded. Furthermore, I introduce an updating rule for the perturbation term. I prove that if the perturbation term is updated in accordance with this rule, then play can converge to a pure Nash equilibrium. Doctor of Philosophy This dissertation studies decision theories for both individual and interactive choice problems. This thesis proposes three non-standard models that modify assumptions and settings of standard models. Chapter 1 provides an overview of this dissertation. In the second chapter I present a model of decision-making under uncertainty in which an agent is constrained in her cognitive ability to consider complex acts. The complexity of an act is identified by the corresponding partition of state space. The agent ranks acts according to the expected utility net of complexity cost. I introduce a new axiom called Aversion to Complexity, that depicts an agent's aversion to complex acts. This axiom, together with other modified classical expected utility axioms characterizes a Complexity Aversion Representation. In addition, I present applications to competitive markets with uncertainty and optimal contract design. The third Chapter discusses how a complexity averse agent measures the complexity cost of an act after she receives new information. I propose an updating rule for the complexity cost function called Minimal Complexity Updating. The idea is that if the agent is told that the true state must belong to a particular event, she needs not consider the complexity of an act outside of this event. The main result characterizes axiomatically the Minimal Complexity Aversion Representation. Lastly, I apply the idea of Minimal Complexity Updating to the theory of rational inattention. The last chapter deals with a variant model of fictitious play, in which each player has a perturbation term that measures to what extent his rival will stick to the rules of traditional fictitious play. I find that the empirical distribution can converge to a pure Nash equilibrium if the perturbation term is bounded. Furthermore, I introduce an updating rule for the perturbation term. I prove that if the perturbation term is updated in accordance with this rule, then play can converge to a pure Nash equilibrium.

This dissertation comprises of three problems in the area of Political Economy and Industrial Organization. The first chapter concerns how ideologically-opposite media firms report a particular event to maximize their payoffs from advocating their ideology and strengthen reader trust which increases if the report is proximate to their beliefs. I use these facts to develop a Hotelling's linear city model of competition where the two media firms choose their respective locations which signify the impression they want to impart to its readers. I find partisan media provides accurate information while covering topics favorable to its ideology. However, for unfavourable topics, the media never provides an indifferent report, but either defends its own ideology or delivers a partially accurate report. For unfavourable issues, imparting an indifferent impression rewards a media with lowest equilibrium payoffs. I identify sufficiency conditions where readers give better assessment to news of a media located farther away from their ideology than one which is nearer. Increasing competition by the entry of a third firm does not necessarily alleviate the level of bias in the news economy. The second paper studies the pricing schedule of a monopolist while it sells a non-durable product over two time periods. The consumer's experience with the product is correlated with two possible states — good (bad) experience is more probable under a high (low) state. Given this, I study the monopolist's pricing scheme in the two periods when consumers are wishful — overly optimistic about the high state even after a bad experience. I provide a comparative study of prices in each periods when the monopolist announces prices with and without commitment when consumers are either naive or sophisticated. The final chapter provides an understanding of the efficacy of two types of trade sanctions (import and export) using a directed network model. Sanctions are common punitive measures taken by a sender player to discipline a target player. Empirical evidences in the realm of international trade show differences in the effectiveness between import and export sanctions. This paper shows that such differences can be explained by one specific centrality feature of the underlying trading network — betweenness-centrality. This measure lends insights to the trade spill-overs following sanctions underscoring why sanctions are ineffective. I highlight when a higher value of this centrality acts as a sufficient condition towards effective sanction. Based on this analysis, one can conclude whether import or export sanction will be more effective for a given trade network. Doctor of Philosophy Three essays spanning across topics of political economy and Industrial Organization has been studied. The first essay `Media bias in the best and worst of times' studies how ideology-motivated (partisan) media firms try to create impressions to its audience about a particular issue to increase its payoffs from either of the two sources — reader trust and advocating its ideology. This trade-off depends on the type of issue at hand which either aggravates or moderates a media's wish to generate bias in its news. I investigate not only the degree of bias for any given event, but also study how profits of media are impacted from doing so. The second chapter `Monopoly pricing under wishful thinking' investigates the pricing strategies of a seller when he sells a non-durable product to a wishful buyer twice, over two time periods. Under two possible states of the world — textit{high} and textit{low} — the buyer can derives either a good or bad experience. It is assumed that a good experience is more likely than a bad one under textit{high} state. Would the buyer re-purchase the product after having a bad experience in the first period? A wishful buyer is overly optimistic about a good experience in the future even after a bad experience in the current period. Such optimism paves the way for pricing strategies in favor of the seller under certain conditions. My aim has been to highlight these conditions and draw comparison with a pricing model with non-wishful buyers. The third chapter investigates the effectiveness of trade sanctions. Such sanctions are imposed by a sender country against a target country when the latter has taken an action which the sender disapproves — initiating domestic war, building nuclear arsenals, etc. The sanctions are enforced until the target. However, only 30% sanctions are effective in disciplining the target. This paper studies if any feature of the trade network can explain why sanctions fail and what type of trade sanction — import or export — will be optimal in any given trade network.

This dissertation consists of three essays in theoretical and applied microeconomics: the first essay is in cooperative game theory, and the second and third essays relate to forest economics. The first chapter studies a class of cooperative games dubbed ``r-essential games''. Cooperative game theory has proposed different notions of powerful players. For example, big-boss games (Muto et al., 1988) and clan games (Potters et al., 1989) are particular cases of veto games (Bahel, 2016). The first chapter extends these veto games by assuming that there is a given subset of powerful (or essential) players, but only a few (as opposed to all) essential players are required for a coalition to have a positive value. The resulting games, which are called r-essential games, encompass convex games (Shapley, 1971) and veto games. We show that r-essential games have a nonempty core. We give a recursive description of the core. Moreover, it is shown that the core and the bargaining set are equivalent for every r-essential game. An application to networks is provided. The second chapter employs a two-principal, one-agent model to estimate the social cost of fiscal federalism in China's northeast native forests. China's key forested region is located in the northeast and consists of state forest enterprises which manage forest harvesting and reforestation. Deforestation is a major problem there and has resulted in several central government reforms. We develop a framework for assessing the social cost of state forest enterprise deforestation. We first develop a two-principal, one-agent model that fits the federalistic organization of state forests, in that state forest managers make (potentially hidden) decisions under influence of provincial and central government policies. This model is used to quantify the social cost of these hidden actions. We then use panel data from a survey conducted by Peking University to compute social welfare losses and to formally identify the main factors in these costs. A sensitivity analysis shows that, interestingly, command and control through lower harvesting limits and a more accurate monitoring system are more important to lowering social welfare losses than conventional incentives targeting the wages of forest managers. Through regression analysis we also find that the more remote areas with a higher percentage of mature natural forests are the ones that will always have the highest social welfare losses. The third chapter studies the problem of choosing a rotation under uncertain future ecosystem values and timber prices. This problem is nearly as old as the field of forest economics itself. A forest owner faces various uncertainties caused by climate change and market shocks, due to its long-term nature of production and the joint production of interrelated timber and amenity (non-harvesting) benefit streams. The vast literature in stochastic rotation problems simply assumes a known probability distribution for whatever parameter is uncertain, but this type of assumption may lead to misspecification of a rotation decision model if a forest owner has no such information. We study a more relevant question of how to choose rotation ages when there is pure (or Knightian) uncertainty, in that the forest owner does not know distributional features of parameters and further can be averse to this type of information deficit. This chapter is the first to investigate pure uncertainty in amenity benefit streams and is also the first to analytically solve a stochastic rotation problem under pure uncertainty in either amenity streams or market prices. We use robust methods developed in macroeconomics that are particularly suited to forest capital investment problem, but with important differences owing to the nature of forest goods production. The results show that newer models suggesting rotation ages could be longer under volatile parameter distributions do not hold generally when pure uncertainty and forest owner uncertainty aversion is considered. Rather, the earlier literature showing faster or greater harvesting with increases in risk under risk neutrality may actually be a more general result than current literature supposes. In particular, we find that a landowner tends to harvest more when his degree of uncertainty aversion is higher and the model is misspecified by assumption, or when the volatility of an uncertain process is higher. These situations tend to magnify model misspecification costs, especially because the forest manager always assumes the worst case will happen when there is uncertainty. This implies the decision maker is pessimistic in the sense that he or she is always trying to maximize the utility under the worst possible state of nature (the lowest amenity benefit or the lowest timber price). Whether landowners are in fact uncertainty averse and assume the worst case in their decisions remains to be empirically investigated, but our work suggests it is an important question that must be answered. Doctor of Philosophy This dissertation consists of three essays in theoretical and applied microeconomics: the first essay is in cooperative game theory, and the second and third essays relate to forest economics. The first chapter studies a class of cooperative games dubbed ``r-essential games''. Cooperative game theory has proposed different notions of powerful players. For example, veto games (Bahel, 2016) have powerful players that are named veto players. Any coalition needs to include all these powerful players to achieve a positive coalition value. The first chapter extends these veto games by assuming that there is a given subset of powerful (or essential) players, but only a few (as opposed to all) essential players are required for a coalition to have a positive value. The resulting games, which are called r-essential games, encompass two classic games, convex games (Shapley, 1971) and veto games. We show that each r-essential game has at least one solution that is an allocation guaranteeing that no coalition can do better on its own. We provide a process allowing to compute this allocation in each r-essential game. An application to networks is provided. The second chapter estimates the damage of deforestation in China's northeast forests. This region consists of state forest enterprises which manage harvesting and reforestation and have represented the most important source of wood supplies since the 1950s. Deforestation is a major problem there. We develop a framework for assessing the damage to the society because of deforestation. We develop a theoretical model to describe the forest management structure, in which state forest managers make (potentially hidden) decisions under influence of provincial and central government policies. This model is used to quantify the damage. We then use data from a survey conducted by Peking University to compute the damage and confirm the main factors in these damages in practice. We find that lower harvesting limits and a more accurate monitoring system are the keys to lowering the damage. These are more important than conventional instruments used by the governments such as the wages for managers that achieve certain targets. We also find that the remote areas with a higher percentage of mature natural forests are the ones that will always have the largest damage. These areas are the hardest to monitor, but our results show they must be a critical focus moving forward. The third chapter studies when should a forest owner harvest under uncertain future ecosystem values and timber prices. A forest owner faces various uncertainties caused by climate change and market shocks, due to its long-term nature of production and the joint production of interrelated timber and non-harvesting benefit streams (such as the recreation value, the biodiversity value and the clean air supported by forests). Previous studies assume a known probability distribution for whatever parameter is uncertain, but this type of assumption may lead to a wrong decision model if a forest owner has no such information. We study a more relevant question of how to choose when to harvest with pure uncertainty, in that the forest owner does not know distributional features of parameters and further can be averse to this type of information deficit. This chapter is the first to investigate pure uncertainty and is also the first to analytically solve a harvest decision making problem under pure uncertainty in either non-harvesting benefit streams or market prices. We use macroeconomics methods that are particularly suited to forest capital investment problem. We find that a landowner tends to harvest more when there is pure uncertainty. Because the forest manager is pessimistic and always thinks the worst case will happen when there is uncertainty.

This dissertation consists of three essays studying the theory of dynamic contest. This analysis mainly focuses on how the outcome and the optimal design in a dynamic contest varies on contest technology, heterogeneous players, contest architecture, and bias instruments. The first chapter outlines the dissertation by briefly discussing the motivations, methods, and main findings in the following chapters. Chapter 2 considers a situation in which two groups compete in a series of battles with complete information. Each group has multiple heterogeneous players. The group who first wins a predetermined number of battles wins a prize which is a public good for the winning group. A discriminatory state-dependent contest success function will be employed in each battle. We found that in the subgame perfect Nash equilibrium (equilibria), the lower valuation players can only exert effort in earlier battles, while the higher valuation players may exert effort throughout the entire series of battles. The typical discouragement effect in a multi-battle contest is mitigated when players compete as a group. We also provide two types of optimal contest designs that can fully resolve the free-rider problem in group contests. Chapter 3 investigates optimal contest design with multiple heterogeneous players. We allow the contest designer to have one or multiple/mixed objectives, which includes the following parts: the total effort; the winner's effort; the maximal effort; and the winning probability of the strongest player. We provide a one-size-fits-all contest design that is optimal given any objective function. In the optimal contest, the designer will have one of the weaker players exhaust the strongest in the contest with infinite battles. We obtain the required conditions on different contest frameworks (e.g., all-pay auctions and lottery contests) and bias instruments (e.g., head starts and multiplicative bias). This means the contest designer has multiple alternatives to design the optimal contest. The last chapter investigates a situation where two players compete in a series of sequential battles to win a prize. A player can obtain certain points by winning a single battle, and the available points may vary across the battles. The player who first obtains predetermined points wins the prize. We fully characterize the subgame perfect Nash equilibrium by describing the indifference continuation value interval. We found that when two players are symmetric, they only compete in the separating battle. In the general case, we found that winning a battle may not create any momentum when the weight of the battle is small. A small enough adjustment of a battle's weight will not change both players' incentive to win the battle. Increasing (or decreasing) a battle's weight weakly increases (or weakly decreases) both players' incentive to win. Doctor of Philosophy A contest in economics is defined as a situation in which players exert positive effort to win a prize. The effort can be money, time, energy, or any resource that is used in a competition. The prize can be monetary or other perks from winning a competition. In this dissertation, we explore dynamic multi-battle contests where the winner is not decided by one single competition but by a series of sequential competitions. For example, the US presidential primary begins sometime in January or February and ends about mid-June and candidates will compete in different states during the time. In NBA finals, the winner is decided by a best-of-seven contest. The team that first wins four games becomes the champion. In the second chapter, we explore multi-battle group contest in which each group has multiple heterogeneous players. The group who first wins a certain number of battles wins a prize. The prize is a public good within the winning group so players in the winning group can enjoy the prize regardless their effort. We found that players with high prize valuation will be discouraged in earlier battles due to high expected effort in later battles. This may make high-value players only exert effort in later and more decisive battles. The low-value players will exert effort in earlier battles and will free rider on high-value players in later battles. We also provide the optimal contest design that can fully resolve the free-rider problem. In the optimal contest design, the designer should completely balance two groups in every battle. In the third chapter, we explore the optimal contest design in the multi-battle contests with multiple heterogeneous players. The contest designer can have one or multiple/mixed objectives. We found a "one size fits all" multi-battle contest design that is optimal for various objective functions. In the optimal contest design, the designer should give different advantages to the strongest player and one of the weaker players. More specifically, the weaker player is easier to win each battle, while the strongest player needs to win fewer battles. This overturns the conventional wisdom that the advantage should be only given to the weaker players. In the fourth quarter, we explore the multi-battle contest that in which each battle has a different weight, that is, some battles may more or less important than others. We found that when a battle's weight is small, players may feel indifference between winning or losing the battle. Therefore, winning such battles will not create any momentum, and players tend to give up those battles by exerting no effort. We also found that when we increase or decrease a battle's weight, if the adjustment is small, it will not change players' incentive to win a battle. However, if the adjustment is large enough, it will increase or decrease players' incentive to win in the same direction.

This dissertation brings new causal evidence on three topics in education and health. In the first chapter, I study how in-utero exposure to floods affects the education and health outcomes of individuals. I focus on the 1982-1983 El Niño event in Peru to exploit a natural experiment. I assess the impacts of plausible and exogenous in-utero exposure to excess rainfall on education achievement at adulthood. I find that individuals exposed in-utero to the 1982-1983 El Niño floods, have less chances to have completed primary education at adulthood with different effects by place of residence and gender. In the second chapter, I study how a low-cost face-to-face intervention, that exposed senior-year high school students to female role models affects career preferences and reduces the gender preference gap for STEM programs in Peru in a randomized controlled trial. I find that exposure to role models increased preference for engineering majors only for those girls in the top math ability quartile; and that the effect was stronger for those who reside geographically close to the role models' university. Finally, in the third chapter, I investigate how to optimally allocate students to academic programs. I evaluate external signals of ability transmitted to students by academic probation rules in Peru using a regression discontinuity design. The analysis suggests that academic probation is associated with higher drop-out rates from programs and a deterioration in subsequent academic performance. I conclude that in a society with predominant gender norms, signals of ability could aid to the retention of only qualified students in selected programs with further implications on aggregate productivity and the allocation of talent. Doctor of Philosophy This study sought to understand how exposure to different adverse events in life affects individuals' decision choices. I focus on a developing country, Peru, where returns to education are high and investment in human capital can improve individuals' lives. In the first chapter, I study how prenatal exposure to extreme weather conditions (i.e. the 1982-1983 El Niño floods in Peru) affected the education achievement of those individuals when they were older. This adverse and unpredictable event, affecting the evolution of babies while in-utero, during the nine months of gestation, reduced the probability that the exposed individual had completed primary education. In the second chapter, I implement an experiment in the field to understand the effect of the exposure to role models on the reduction of the gender gap in careers that are male dominated such as Science, Technology, Engineering, and Mathematics (STEM). The gender gap in STEM fields is a major cause of concern for policymakers around the world since it not only contributes to talent misallocation but also critically deepens gender-based socioeconomic inequalities. I find that a brief exposure to role models of about 20 minutes increases preferences for engineering majors of high talented female high school students, and I attribute this to inspiration rather than information mechanisms. The evidence suggests that, inspired by role models, high math ability girls had increased self-confidence for succeeding in engineering majors. Finally, in the third chapter I investigate the misallocation of students to academic programs and more specifically the effect of one university policy related to academic probation on attrition rates and subsequent academic performance. Academic probation is a warning received by students failing to make substantial academic progress required for graduation. By receiving academic probation, students get additional information of their capabilities to successfully complete a degree. The analysis suggests that academic probation is associated with higher drop-out rates from programs and a deterioration in subsequent academic performance aiding to the retention of only qualified students in selected fields of study.

In this study, I introduce the alternative-dependent focal Luce model (ADFLM), a random choice model generalizing the well-known Luce model (1959). In the ADFLM, focal alternatives are chosen more frequently relative to their utilities. I identify utilities, focal sets, and the magnitude of focal biases from choice data. Additionally, I axiomatically characterize the ADFLM by weakening the independence of irrelevant alternatives (IIA) axiom. This model can explain the well-known behavioral phenomena, the attraction and compromise effects. Furthermore, I also study the seller's profit maximization problem in the ADFLM. I also study an asymmetric dynamic patent race with a deadline under complete information. In my model, two firms decide whether to invest in RandD. The patent arrives randomly according to a Poisson process, and the large firm has a higher hazard rate than the small firm. I find the unique sub-game perfect Nash equilibrium strategy for this game. At the equilibrium, the large firm will stay longer in the race, while the small firm will quit earlier. The large firm's optimal stopping time is not affected by the competition, while the small firm's stopping time is reduced. Additionally, I find that companies will remain longer in the race if the investigation cost is lower, the winning premium is higher, the deadline is extended further, and the hazard rate is more prominent. Moreover, the market becomes more efficient with the competition since the patent is easier to realize. Doctor of Philosophy In this research, I study the consumer's behavior when individuals have limited cannot or do not give the same attention to each alternative available to them. In my study, I characterize the alternative-dependent focal Luce model (ADFLM), a consumer behavior model. Moreover, I solve the seller's profit maximization problem when the consumer's behavior follows the ADFLM. Meanwhile, I also study a dynamic patent race problem that occurs when firms compete for a patent with a deadline. If no firms achieve the patent, the stopping time (when the firm quits the patent race) of the large firm's (with a higher success rate every period) is not affected by the introduction of the small firm. However, the small firm quits earlier when the large firm is introduced. The competition between the two companies increases the overall probability of receiving a patent.

The boon of public goods to a society is its inclusive nature where no individual can be restricted from enjoying its fruits. However, this very feature generates proclivity among individuals in the society to escape paying their share towards creation of the public good, which is known as free-riding. Interestingly, contribution levels in reality surpass predictions suggested by theoretical findings. To understand and assuage the free-riding problem, we study a public good game where individuals in a society form small groups or coalitions to carry out collective decisions about contribution levels. Such cooperative action is further augmented when we account for social and other-regarding preferences in individuals, which make them care about well-being of others. While social preferences are well documented in other economic environments, their effect on the formation, likelihood and size of coalitions to provide public goods is not well understood. This dissertation uses both theoretical and experimental methods to incorporate social preferences into the study of coalition formation and how such coalitions affect the provision of the public good. In any public good provision problem, marginal per capita return (MPCR) is an important determinant. For every dollar a person spends on privately providing the public good, the MPCR measures how much the individual gets back. Conventional theory suggests an inverse relationship between coalition size and MPCR, which stands contrary to recent experimental evidences. My dissertation uses heterogenous social preferences to arrive at sufficient conditions which establishes a positive relationship between coalition size and MPCR. Chapter 2 theoretically investigates the conditions required to achieve a positive relationship between coalition size and MPCR when an individual's social preference is private information. The model is a two-stage public good game, where in the first stage individuals decide whether or not to join the coalition and then in the next stage, the coalition votes to contribute to public good. The results suggest that individuals with pro social preferences are more likely to join the coalition and upon joining always contribute to the public good. Higher MPCR further increase an individual's likelihood to join coalition and contribute to public good. The results hold true under different model specifications as well. Chapter 3 test the theoretical predictions of Chapter 2 by using an experiment. In the experiment, subject's payoff is determined by exogenously inducing social preferences into an individual's payoff function. The experiment validates the predictions of theoretical model and we find that individuals who have lower weight on their own payoff are likely to join the coalition and also vote to contribute to public good. Higher return from public good also results in larger coalition size and increases the likelihood to contribute to public good. Chapter 4 also tests the theoretical prediction, however, here the preferences are estimated by using an incentivized task based on how much money they are willing to give to someone else. The outcomes from the incentivized task suggest that individuals who give more money to others are more likely to join the coalition and also contribute to public good. High MPCR ensures larger coalition size and more individuals contributing to public good. We also find that coalition size have a positive impact on individual's decision to join the coalition and contribute. Doctor of Philosophy Public goods like healthcare services, free-vaccinations, cleaner environment is an important parameter to the development of a society. The primary features of these goods are non-excludability – no one can be excluded from enjoying the benefit of the good and non-rivalry such that multiple individuals can enjoy its benefits. These features allow many to free-ride and escape contribution towards the provision of the public good. In this dissertation, we study how coalitions amongst people in a society can potentially assuage the free-riding problem. International Environment Agreements (IEA) such as Kyoto Protocol, Paris agreement are some of the examples of existing coalitions. While in practice coalitions, i.e., subgroups of individuals who agree to act collectively to produce a public good exist, the conditions under which these coalitions are most likely to form are not well understood. In this dissertation we incorporate facets of Behavioral Economics to understand functioning of coalitions which will allow to incorporate various behavioral and other-regarding preferences to study economic outcomes. Other-regarding preferences assume that individuals also care about the well-being of others. The dissertation uses both theory and experiments to understand and test the conditions required for successful coalition formation through behavioral economics-based explanations. A society is comprised of heterogeneous individuals who value public good differently and so have different willingness to pay. For example, not everyone is equally willing to pay for the construction of a public park. We exploit such heterogeneity to understand how efficient coalitions can be formed such that it increases chances of public good provision. We construct a two-stage game where individuals choose whether or not to join the coalition in the first stage. Once individuals learn the size of the coalition they can determine whether it is desirable for them to contribute to the public good in the second stage. As a result, despite individual social preferences being private information, our mechanism increases the size of the public good and thus outcome efficiency. The design of our model also helps to test these predictions by using human subjects' experiments. We find that individuals who care more the well-being of others join the coalition and also contribute to the public good. An increase in benefit from public good also increases the likelihood of higher coalition size and higher contribution levels. In its scientific mission, the study aims to understand importance of heterogenous society in successful provisioning of public goods.

This dissertation focuses on studying various network formation games in Economics. We explore a different model in each chapter to capture various aspects of networks. Chapter 1provides an overview of this dissertation. Chapter 2 studies the possible Nash equilibrium configurations in a model of signed network formation as proposed by Hiller (2017). We specify the Nash equilibria in the case of heterogeneous agents. We find 3 possible Nash equilibrium configurations: Utopia network, positive assortative matching, and disassortative matching. We derive the specific conditions under which they arise in a Nash equilibrium. In Chapter 3, we study a generalized model of signed network formation game where the players can choose not only positive and negative links but also neutral links. We check whether the results of the signed network formation model in the literature still hold in our generalized framework using the notion of pairwise Nash equilibrium. Chapter 4 studies inequality in a weighted network formation model using the notion of Nash equilibrium. As a factor of inequality, there are two types of players: Rich players and poor players. We show that both rich and poor players designate other rich players as their best friends. As a result, We present that nested split graphs are drawn from survey data because researchers tend to ask respondents to list only a few friends. Doctor of Philosophy This dissertation focuses on studying various network formation games in Economics. We explore a different model in each chapter to capture various aspects of networks. Chapter 1 provides an overview of this dissertation. Chapter 2 studies the possible singed network configurations in equilibrium. In the signed network, players can choose a positive (+) relationship or a negative (-) relationship toward each other player. We study the case that the players are heterogeneous. We find 3 possible categories of networks in equilibrium: Utopia network, positive assortative matching, and disassortative matching. We derive the specific conditions under which they arise in equilibrium. In Chapter 3, we study a generalized model of signed network formation game where the players can choose not only positive and negative links but also neutral links. We check whether the results of the signed network formation model in the literature still hold in our generalized framework. Chapter 4 studies inequality in a weighted network formation model using the notion of Nash equilibrium. In this weighted network model, each player can choose the level of relationship. As a factor of inequality, there are two types of players: rich players and poor players. We show that both rich and poor players choose other rich players as their best friends. As a result, we present that nested split graphs are drawn from survey data because these social network data are censored due to the limit of the number of responses.

This dissertation consists of three papers. In the first paper, I study firms' capital raising decisions in a two-stage signaling game. In the model, firms can issue debt or equity to finance sequentially arriving investment projects. Management is assumed to have an initial information advantage over investors. However, when a firm's decision in the first stage can change investors' beliefs and, consequently, impact the security issuance in the second stage, its optimal choice differs significantly from the strict debt-equity preference in a comparable one-stage model. In equilibrium, a dynamic pecking order arises, suggesting that the information friction can solely explain various aspects of observed corporate financing behavior. The second paper is coauthored with Hans Haller. In this paper, we model how different wealth constraints among investors affect an entrepreneur's way of raising capital, his share of project NPV, and his ownership of the new firm. Combining cooperative and noncooperative approaches, we develop and analyze a bargaining framework and demonstrate cases in which a fair division cannot be achieved when sharing of cost and sharing of return are jointly considered. Our results cover conditions on how the entrepreneur can strategically achieve larger net wealth accumulation, and when he can obtain control of the firm. We further discuss the entrepreneur's preferences on the firm's ownership dispersion level under public financing. The third paper argues that although innovation is costlier than imitation, the incumbent firm is endowed with an advantage of enhancing its product ahead of potential competitors. In a model that connects consumers' utility with firms' production, I show that the incumbent's product enhancement decision can foster the creation of a better product, improve consumers' utility, and deter entrance from competitors. The pace of creative activities is determined by the incumbent's potential of improving its product quality and the nature of product differentiation in the industry. Thus, creative destruction may not manifest itself as new firms replacing the incumbent, but as the incumbent constantly renovating its product. Doctor of Philosophy This dissertation consists of three papers. In the first paper I study the adverse selection problem faced by firms in a dynamic information environment, the difference between incentives provided by debt and equity securities, and how different contracts and model settings affect the equilibrium outcome, investment efficiency, and social welfare. The premise of the first paper is that dynamic elements of information asymmetry are key to better understanding how firms raise capital. This study aims to provide a more complete description and improve our understanding of the role of information in capital markets and how asymmetric information might interact with other market frictions. In the second paper I study the origin of the firm and the bargaining problem between entrepreneurs and investors. This second paper intends to provide one possible answer for the question why firms do exist. The main point in the paper is that even when we abstract away from standard frictions like adverse selection or moral hazard, an entrepreneur still has to bargain with investors to raise the required amount of capital. The firm has to be established to enforce the bargaining outcome, which takes the form of an ownership contract, because there is a time gap between conducting the investment and when the proceed can be realized. Another purpose of this second study is to investigate fairness instead of efficiency. Finally, in the third paper, I address the question how and when an incumbent monopolist can deter entry by means of investment in product quality enhancement. In some industries, creative destruction can be frequently observed: Incumbent firms are replaced by new firms that offer slightly different but better products. On the other hand, in a number of industries incumbent firms are at the forefront of innovation and stay ahead of potential entrants. I consider a model that allows for the latter fact combined with another frequent fact: that potential entrants more or less copy the incumbent's prior product, regardless of existence and enforcement of intellectual property rights. This third paper offers predictions on product innovation and market failure across firms and industries.

This dissertation consists of three essays in Health Economics relating to the recent challenges in the U.S. The first essay studies the impact of retirement on subsequent health and investigates the mediation effect of social network in the relationship between retirement and health. Findings reveal that retirement adversely impacts physical and mental health outcomes and a considerable portion of these effects are explained by social network changes post-retirement. In particular, shrinkage in the size of social network post-retirement deteriorates physical health and increases depression in retirees. In the second essay, we assess the differential effect of social distancing on the daily growth rate of COVID-19 infections in the US counties by considering the spatial pattern of COVID-19 spread. We also conduct a comparative analysis of the effect on urban versus rural counties, as well as low versus high socially vulnerable counties. Our analysis illustrates that a high level of social distancing compliance is needed in urban counties and in socially vulnerable areas to achieve the largest impact at curve flattening, whereas moderate-compliance is enough in reaching the peak marginal impact in rural regions and counties with low social vulnerability. In the third essay, by combining multiple data sources, we investigate how racial disparities in access to healthcare contribute to the disparity in COVID-19 infections and mortality in black versus white sub-groups. The multilevel analysis demonstrates that a higher probability of having health insurance significantly reduces disparity in COVID-19 mortality in black sub-group while it has no impact on the disparity in whites. Doctor of Philosophy This dissertation uses various quantitative methods to investigate policy-relevant questions regarding the recent challenges in the U.S. economy. In the first chapter, we explore how the physical and mental health of individuals changes by retirement. The results show that retirement decreases physical health while increases depression and anxiety. We also analyze how social network changes after retirement might cause changes in the health of retirees. We find that retirees may experience worse physical and mental health than non-retirees due to losing some of their relationships after retirement. In particular, the loss of contacts increases depression and deteriorates general health. In the second chapter, we investigate how compliance with social distancing within a typical county and its neighbor counties can reduce the spread of COVID-19. We examine this question for urban versus rural counties in the US and socially vulnerable versus socially not vulnerable counties. We find a high compliance level of social distancing is needed in urban counties and in socially vulnerable areas to reach the highest impact at slowing down the COVID-19 virus spread. In the third chapter, we examine whether healthcare access inequalities (e.g., having health insurance) increase the risk of COVID-19 infections and mortality for black communities. Our results show that having health insurance decreases COVID-19 mortality in communities of color but not whites.

Learning plays an important role in adopting new technology. While the role of learning in the decision to adopt is widely investigated in the literature, its role in knowing how to best use technology and the speed of learning is not. For instance, when farmers adopt groundwater extraction technology, they need to learn their private marginal cost and marginal benefit of extracting water. Comparing the extraction behavior of the owners of new wells with old wells, we explore the role of experience in shaping farmers' decisions. We use three identification strategies to test the hypothesis that owners of new wells extract more water than owners of old wells. Employing panel data at the district level in a fixed-effects model, we find that groundwater extraction rises as the growth rate in new wells increases. Our second strategy uses the exogenous variation in precipitation shocks in a double-difference approach. Employing census data at the well level, we show that more water is extracted from new wells than older wells and that the difference in extraction increases in areas that experience negative precipitation shocks. The third strategy is the nearest-neighbor matching method which confirms the above findings and indicates that old wells are more efficient in maintaining their inter-temporal extraction. We also provide evidence regarding the speed of learning about using technology. Our findings have important implications for discussions of common pool regulation. Firms are often considered entities with complete private information about their true abatement costs. Our findings imply that quantity instruments for regulating groundwater extraction fail to guarantee productive efficiency when farmers face uncertainty about their marginal abatement cost. This paper also provides new insights for optimizing climate change scenarios, in light of the importance of the learning lag in using new technologies. In chapter two, we discuss the effects of precipitation shocks on the rural labor market and migration. The welfare of both agrarian and non-agrarian workers in rural areas is highly affected by agricultural output volatility, caused in part by weather shocks. This paper examines the impact of precipitation shocks on labor supply and out-migration in rural Iran. We use individual-level panel data combined with station-based precipitation data at the rural-agglomeration level to study the intensive and extensive margins of employment. Our results indicate different types of responses to positive and negative shocks. Using a fixed-effects panel data model, we find that workers in agriculture and industry sectors increase their hours of work in response to positive shocks. At the extensive margin, we find that negative shocks reduce the labor market participation of women. We observed heterogeneity in responses based on the sector of employment, gender, and the roles of individuals in the household. We also show that positive shocks affect the division of labor at the household level. Our estimates for the probability of migration indicate that negative shocks raise the probability of migration for young men. We show that the labor-migration of the same group is also affected by negative shocks, but the impact could be explained by the local unemployment rate, implying the labor market is a channel through which precipitation shocks affect migratory decisions. In the final chapter, we investigate parents' investment in the quality of their children. While school enrollment at the primary level has been rising in developing countries to almost complete national coverage, international measures of education quality, especially in basic knowledge of reading and math, do not exhibit a parallel improvement. Since parents' expenditure is an important determinant of children's school performance, we investigate parents' investments in the quality of their children's education, measured by their spending on books and other school materials. We develop an overlapping generations model, in which we consider families' expenditure as an input to their children's human capital. Moreover, in our model, parents use the current status of their children's human capital as a screening measure for adjusting their investment, instead of the standard tradition of simply balancing the trade-off between future income and the current stream of direct and indirect school costs. From our theoretical analysis, our main hypothesis is that families consider better school performance to be a reliable predictor of future return, and this incentivizes them to invest more in children who are academically promising, considering other determinants of children's schooling output, such as school quality. Empirically, we use an instrumental variables approach to test our main hypothesis, and it is accepted using data for Ghanaian primary school students in rural areas. Doctor of Philosophy Adopting new technology need learning, either in the form of knowledge or by working with the adopted technology. While the role of learning in the decision to adopt is widely investigated in the literature, its role in knowing how to best use technology and the speed of learning is not. In the first chapter, we investigate the adoption of the use of groundwater technology. When farmers adopt groundwater extraction technology, they need to learn about how to best use the technology to maximize their profit in the short and long run. We use five sets of data from Iran to show the existence of learning in the use of groundwater technology. Our findings improve the discussion on the regulation of firms in using common resources. This paper also provides new insights for optimizing climate change scenarios, in light of the importance of the learning lag in using new technologies. In chapter two, we discuss the effects of precipitation shocks on the rural labor market and migration. Weather shocks affect the welfare of workers in rural areas. This paper examines the impact of precipitation shocks on labor supply and out-migration in rural Iran. We use individual-level and station-based precipitation data at the rural-agglomeration level to study the effects of precipitation shocks on employment. Our results indicate different types of responses to positive and negative shocks. We find that workers in agriculture and industry sectors increase their hours of work in response to positive shocks and negative shocks reduce the labor market participation of women. We also show that the labor market is a channel through which precipitation shocks affect migratory decisions. In the final chapter, we investigate parents' investment in the quality of their children. While school enrollment at the primary level has been rising in developing countries, international measures of education quality, especially in basic knowledge of reading and math, do not exhibit a parallel improvement. Since parents' expenditure is an important determinant of children's school performance, we investigate parents' investments in the quality of their children's education, measured by their spending on books and other school materials. We develop a model, in which we consider families' expenditure as an input to their children's human capital. We hypothesize that families consider better school performance to be a reliable predictor of future return. Empirically, we test our hypothesis, and it is accepted using data for Ghanaian primary school students in rural areas.

This dissertation focuses on exploring individual and strategic decision problems in Economics. I take a different approach in each chapter to capture various aspects of decision problems. An overview of this dissertation is provided in Chapter 1. Chapter 2 studies an individual's decision making in extensive-form games under ambiguity when the individual is ambiguous about an opponent's moves. In this chapter, a player follows Choquet Expected Utility preferences, since the standard Expected Utility cannot explain the situations of ambiguity. I raise the issue that dynamically inconsistent decision making can be derived in extensive-form games with ambiguity. To cope with this issue, this chapter provides sufficient conditions to recover dynamic consistency. Chapter 3 analyzes the strategic decision making in signaling games when a player makes an inference about hidden information from the behavioral hypothesis. The Hypothesis Testing Equilibrium (HTE) is proposed to provide an explanation for posterior beliefs from the player. The notion of HTE admits belief updates for all events including zero-probability events. In addition, this chapter introduces well-motivated modifications of HTE. Finally, Chapter 4 examines a boundedly rational individual who considers selective attributes when making a decision. It is assumed that the individual focuses on a subset of attributes that stand out from a choice set. The selective attributes model can accommodate violations of choice axioms of Independence from Irrelevant Alternative (IIA) and Regularity. Doctor of Philosophy This dissertation focuses on exploring individual and strategic decision problems in Economics. I take a different approach in each chapter to capture various aspects of decision problem. An overview of this dissertation is provided in Chapter 1. Chapter 2 studies an individual’s decision making in extensive-form games under ambiguity. Ambiguity describes the situation in which the information available to a decision maker is too imprecise to be summarized by a probability measure (Epstein, 1999). It is known that ambiguity causes dynamic inconsistency between ex-ante and interim decision making. This chapter provides sufficient conditions under which dynamic consistency is maintained. Chapter 3 analyzes the strategic decision making in signaling games in which there are two players: informed sender and uninformed receiver. The sender has a private information about his type and the receiver makes an inference about hidden information. This chapter suggests a notion of the Hypothesis Testing Equilibrium (HTE), which provides an alternative explanation for the receiver’s beliefs. The idea of the HTE can be used as a refinement of Perfect Bayesian Equilibrium (PBE) in signaling games to cope with the known limitations of PBE. Finally, Chapter 4 examines a boundedly rational individual who considers only salient attributes when making a decision. The individual considers an attribute only when it stands out enough in a choice set. The selective attribute model can accommodate violations of choice axioms of Independence from Irrelevant Alternative (IIA) and Regularity.

Social economic decision-making considers the well-being and emotions of others. Unlike traditional economics which routinely assumes that individuals care only about their own outcomes, behavioral economics and neuroeconomics offer research strategies which help us explore our social motivations. This dissertation consists of three essays studying the underlying behavioral and neural mechanisms of individuals' social economic decision-making. The analyses focus on investigating experimentally how humans make decisions in three distinct social economic environments. Chapter 2 examines how individuals react to hold-up when explicit promises are available. Hold-up happens when two parties can form an incomplete contract to cooperate, but the agreement may fall apart due to concerns about the other party gaining bargaining power. We propose that a belief-dependent frustration anger model can explain behavior about investment, cooperation, and costly punishment in a hold-up environment. We show experimentally that communication improves cooperation and increases efficiency. Promises lead to cooperation, and broken promises lead to costly punishment. Chapter 3 explores threats' deterrence effect and credibility in an ultimatum bargaining environment where two parties can both benefit over trade but have a conflict of interests. We show that a belief-dependent frustration anger model captures the relationship among messages, beliefs, and behavior. Our design permits the observation of communicated threats, credibility, and deterrence. As we hypothesize, messages convey intention to punish the opponents (threats) changes players' expectations, that first movers are largely deterred by the threats and second movers' threats are credible. Threats lead to deterrence and greater propensity for costly punishment. Chapter 4 investigates the neural basis of individuals' charity donation behavior in a modified dictator game. The right temporoparietal junction (rTPJ) has been associated with social decision-making, but the exact neural mechanism of charitable giving remains unknown. In our experiment, participants allocate money between themselves and a charity in a graphical revealed preference task, that measures both parameterized other-regarding preferences and economic rationality (Monotonicity, WARP, and GARP). We find evidence for a causal role of the rTPJ in determining fairness preferences and economic rationality. Doctor of Philosophy Social economic decision-making considers the well-being and emotions of others. Individuals engage in social economic decision-making on a daily basis, for example, negotiating over an offer, investing or cooperating on a project, bargaining over a purchase, or interacting with friends or strangers. Each of these decisions involves a variety of motivations including money for oneself, the well-being of others, each participants’ emotions and future relationships. Because of the complex nature of social economic decisions we need to employ an interdisciplinary research strategy. Behavioral economics applies psychological insights to economic problems and allows us to model the behavior of people who care about more than just money. Neuroeconomics integrates neuroscientific techniques and information about how the brain works to further expand our set of research tools. In this dissertation, we use all of these methods to explore how people make economic decisions in three distinct social scenarios. All three scenarios are especially intriguing since they represent different ways in which individuals integrate “others” into their own decision-making process. First, hold-up happens when two parties can form an incomplete agreement to cooperate and achieve higher efficiency together, however, the agreement may fall apart due to concerns about the other party gaining more bargaining power. In a historic example, Fisher Body had an exclusive supply agreement with General Motors. When the demand for cars increased sharply, Fisher Body held up General Motors by increasing prices. Second, negotiation is a situation where two parties can both benefit from trade, but they have conflicting interests. Third, individuals who engage in charity donations often sacrifice themselves monetarily to improve well-being of others. The scientific mission of this dissertation is to advance understanding of how individuals engage in social decision-making. In particular, we examine how communication (promises and threats) influences decision-making involving hold-up and negotiation respectively, and explore the neural mechanism governing altruism and charitable giving. We find evidence that communication enhances cooperation and efficiency in social economic decision-making through by changing expectations about monetary payoffs. In addition, we find evidence that the neural circuits responsible for fair-minded behavior also play a role in regulating economic rationality. This dissertation improves our understanding about how humans engage in social exchanges on both behavioral and neural levels.

System dynamics can be a very useful tool to expand the boundaries of one's mental models to better understand the underlying behavior of systems. But despite its utility, there remains challenges associated with system dynamics modeling that the current research addresses by expanding the system dynamics modeling toolbox. The first challenge relates to imprecision or vagueness, for example, with respect to human perception and linguistic variables. The most common approach is to use table or graph functions to capture the inherent vagueness in these linguistic (qualitative) variables. Yet, combining two or more table functions may lead to further complexity and, moreover, increased difficulty when analyzing the resulting behavior. As part of this research, we extend the system dynamics toolbox by applying fuzzy logic. Then, we select a problem of congestion pricing in mitigating traffic congestion to verify the effectiveness of our integration of fuzzy logic into system dynamics modeling. Another challenge, in system dynamics modeling, is defining proper equations to predict variables based on numerous studies. In particular, we focus on published equations in models for energy balance and weight change of individuals. For these models there is a need to define a single robust prediction equation for Basal Metabolic Rate (BMR), which is an element of the energy expenditure of the body. In our approach, we perform an extensive literature review to explore the relationship between BMR and different factors including age, body composition, gender, and ethnicity. We find that there are many equations used to estimate BMR, especially for different demographic groups. Further, we find that these equations use different independent variables and, in a few cases, generate inconsistent conclusions. It follows then that selecting a single equation for BMI can be quite difficult for purposes of modeling in a systems dynamics context. Our approach involves conducting a meta-regression to summarize the available prediction equations and identifying the most appropriate model for predicting BMR for different sub-populations. The results of this research potentially could lead to more precise predictions of body weight and enhanced policy interventions to help mitigate serious health issues such as obesity. Ph. D.

Networks, generically, refer to any application of graph theory in economics. Consider an undirected graph where nodes represent players and links represent relationships between them. Players can both form and delete links by which we mean that they can both form new relationships and terminate existing ones. A stable network is one in which no incentives exist to change the network structure. There can be various forms of stability depending on how many links players are allowed to form or delete at a time. Under strong pairwise stability, each player is allowed to delete any number of links at a time while any pair of players can form one link at a time. We introduce a network-value function, which assigns to each possible network a certain value. The value is allocated according to the component-wise egalitarian allocation rule, which divides the value generated by a component equally among members of the component (where a component refers to a maximally connected subgraph). An efficient network is one that maximizes the network value function. We show that there is an underlying conflict between strong pairwise stability and efficiency. Efficient networks are not necessarily strongly pairwise stable. This conflict can be resolved only if value functions satisfy a certain property called "middlemen-security". We further find that there is a broad class of networks called "middlemen-free networks" for which the above condition is automatically satisfied under all possible value functions. We also look at three network applications. A peering contract is an arrangement between Internet Service Providers under which they exchange traffic with one another free of cost. We analyze incentives for peering contracts among Internet service providers using the notion of pairwise stability. A hierarchy is a directed graph with an explicit top-down structure where each pair of linked agents have a superior-subordinate relationship with each other. We apply the notion of conjunctive permission value to demonstrate the formation of hierarchical firms in a competitive labor market. Comparative or targeted advertising is defined as any form of advertising where a firm directly or indirectly names a competitor. We also examine a model of targeted advertising between oligopolistic firms using non-cooperative game theoretic tools. Ph. D.