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Dual-process theories distinguish between intuition (fast and emotional) and reasoning (slow and controlled) as a basis for human decision-making. We contrast dominance-solvable games, which can be solved by step-by-step deliberative reasoning, with pure coordination games, which must be solved intuitively. Using functional magnetic resonance imaging, we found that the middle frontal gyrus, the inferior parietal lobule, and the precuneus were more active in dominance-solvable games than in coordination games. The insula and anterior cingulate cortex showed the opposite pattern. Moreover, precuneus activity correlates positively with how 'effortful' a dominance-solvable game is, whereas insula activity correlates positively with how 'effortless' a coordination game is.

A big power is facing a small power that may have developed weapons of mass destruction, The small power can create strategic ambiguity by refusing arms inspections. We study the impact of strategic ambiguity on arms proliferation and welfare. Strategic ambiguity is a substitute for actually acquiring weapons: ambiguity reduces the incentive for the small power to invest in weapons, which reduces the threat of arms proliferation. But strategic ambiguity hides information, and this can lead to costly mistakes. Cheap-talk messages can be used to trigger inspections when such mistakes are particularly costly. Tough messages that trigger inspections always imply a greater risk of arms proliferation.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jet.2006.02.007 Byline: Maitreesh Ghatak (a), Massimo Morelli (b), Tomas Sjostrom (c) Abstract: We study market inefficiencies and policy remedies when agents choose their occupations, and entrepreneurial talent is subject to private information. Untalented entrepreneurs depress the returns to entrepreneurship because of adverse selection. The severity of this problem depends on the outside option of entrepreneurs, which is working for wages. This links credit, product and labor markets. A rise in wages reduces the adverse selection problem. These multimarket interactions amplify productivity shocks and may generate multiple equilibria. If it is impossible to screen entrepreneurs then all agents unanimously support a tax on entrepreneurs that drives out the less talented ones. However, if screening is possible, e.g., if wealthy entrepreneurs can provide collateral for their loans, then wealthy entrepreneurs do not support surplus enhancing taxes. Author Affiliation: (a) London School of Economics, London, UK (b) Ohio State University, Ohio, USA (c) Rutgers University, NJ, USA Article History: Received 1 August 2001; Revised 23 February 2006

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmateco.2005.08.009 Byline: Chen-Ying Huang (a), Tomas Sjostrom (b) Keywords: Cooperative game theory; Partition function form games; Consistency; Non-cooperative implementation; Recursive core Abstract: In partition function form games, the recursive core (r-core) is implemented by a modified version of Perry and Reny's [Perry, M., Reny, P., 1994. A non-cooperative view of coalition formation and the core. Econometrica 62, 795-817] non-cooperative game. Specifically, every stationary subgame perfect Nash equilibrium (SSPNE) outcome is an r-core outcome. With the additional assumption of total r-balancedness, every r-core outcome is an SSPNE outcome. Author Affiliation: (a) Department of Economics, National Taiwan University, Taipei, Taiwan (b) Department of Economics, Rutgers University, New Brunswick, NJ 08901, USA Article History: Received 6 January 2004; Revised 7 April 2005; Accepted 30 August 2005

Two players simultaneously decide whether or not to acquire new weapons in an arms race game. Each player's type determines his propensity to arm. Types are private information, and are independently drawn from a continuous distribution. With probability close to one, the best outcome for each player is for neither to acquire new weapons (although each prefers to acquire new weapons if he thinks the opponent will). There is a small probability that a player is a dominant strategy type who always prefers to acquire new weapons. We find conditions under which the unique Bayesian-Nash equilibrium involves an arms race with probability one. However, if the probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the game where the probability of an arms race is close to zero.

Many believe that a key innovation by the Grameen Bank is to encourage borrowers to help each other in hard times. To analyse this, we study a mechanism design problem where borrowers share information about each other, but their limited side contracting ability prevents them from writing complete insurance contracts. We derive a lending mechanism which efficiently induces mutual insurance. It is necessary for borrowers to submit reports about each other to achieve efficiency. Such cross-reporting increases the bargaining power of unsuccessful borrowers, and is robust to collusion against the bank.

We study an overlapping generations version of the principal-agent problem, where incentive contracts are determined in general equilibrium. All individuals are workers when young, but have a choice between becoming entrepreneurs or remaining workers when old. Imperfections in the credit market give rise to rents in entrepreneurial activities involving capital. These rents motivate poor young agents to work hard and save to overcome the borrowing constraints. With a labour market that is subject to moral hazard, the increased effort raises social welfare. Policies that reduce credit market imperfections, or redistribute income, may reduce welfare by dampening this effect.

Continuous fictitious play learning process does not converge cyclically to a mixed strategy equilibrium in two-person zero-sum game. This is the result of a study of the Robinson's fictitious play learning process. In the CFP study, non-zero games mixed equilibria are found to be highly unstable. Likewise, in zero-sum games, convergence is found to be consistent in all of the starting positions compared to non-zero games.

A study of the economic model where the implementation problem becomes a signaling game, with the planner becoming a player by assuming the disposition of the agents, was enabled in an equilibrium condition by placing restrictions on the outcomes predicated by the planner. This is based on the assumption that the planner is cognizant of the information flow and content between agents, as well as imbued with the ability to set choice rules and interaction parameters.

Competition is a positive influence on efficiency. Firms in an industry where competition does not exist generally tend to lack any push towards excellence. This situation eventually leads to their dissolution and their replacement or takeover by more efficient enterprises. Competitive pressures eventually create a stochastic equilibrium, particularly in a situation where there are a large number of firms.

This paper analyses how international side-payments can be used to facilitate international trade negotiations. We present a model where many countries trade many goods, and we calculate, by use of the Shapley value, international income transfers which will induce nations to eliminate their distortionary trade policies.

The extent of optimality of decentralization is investigated using a mathematical model in which agents work in sequence on a project, share information without the principal's knowledge and therefore has the opportunity to collude with one another. The model imposes the limited liability constraint implying non-transferable utility between two agents, that is, an agent with no money cannot transfer money to the other agent. Results indicate that decentralization always leads to the optimal distribution of surplus.

A principal must decide whether or not to implement a project that originated with one of her employees. Several employees have information about the quality of the project. A successfully [...]