The Dynamics of Competition and Cooperation

Selected papers and abstracts

Huck, Steffen/Leutgeb, Johannes/Oprea, Ryan (2017): "Payoff Information Hampers the Evolution of Cooperation". In: Nature Communications, Vol. 8, Article Number 15147, S. 1-5.

Abstract: Human cooperation has been explained through rationality as well as heuristics-based models. Both model classes share the feature that knowledge of payoff functions is weakly beneficial for the emergence of cooperation. Here, we present experimental evidence to the contrary. We let human subjects interact in a competitive environment and find that, in the long run, access to information about own payoffs leads to less cooperative behaviour. In the short run subjects use naive learning heuristics that get replaced by better adapted heuristics in the long run. With more payoff information subjects are less likely to switch to pro-cooperative heuristics. The results call for the development of two-tier models for the evolution of cooperation.

Huck, Steffen/Lünser, Gabriele/Tyran, Jean-Robert (2016): Price competition and reputation in markets for experience goods: An experimental study, RAND Journal of Economics, 2016, Vol. 47, 99-117.

Abstract: We experimentally examine the effects of price competition in markets for experience goods where sellers can build up reputations for quality. We compare price competition to monopolistic markets and markets where prices are exogenously fixed. Although oligopolies benefit consumers regardless of whether prices are fixed or endogenously chosen, we find that price competition lowers efficiency as consumers pay too little attention to reputation for quality. This provides empirical support to recent models in behavioral industrial organization that assume that consumers may, with increasing complexity of the marketplace, focus on selected dimensions of products.

Simon, Jenny/Valasek, Justin Mattias (2016): The Political Economy of Multilateral Aid Funds. WZB Discussion Paper SP II 2016-303. Berlin: WZB.

Abstract: When allocating foreign aid, donor countries often face a problem of incentivizing recipient countries to invest in measures that increase the effectiveness of aid spending. In this paper, we address a “hold-up” problem that occurs when donor countries have biased preferences over which recipient countries receive aid, and hence cannot commit to reward recipient-country investment. Specifically, we show that donor countries can mitigate this hold-up problem by committing to a joint allocation process (multilateral aid): if aid allocation decisions are made ex post via bargaining between donor countries then the recipient countries are induced to compete over ex ante investments. This competition occurs since the donor countries’ ex post bargaining outcome rewards higher aid effectiveness with more funding. Overcoming the hold-up problem via a multilateral aid fund, however, requires that donor countries forgo the allocation that maximizes their individual ex post utility. Therefore, donor countries will only commit to multilateral aid when the biases in their preferences are not overly divergent. Lastly, we show that the decision rule used by the multilateral fund impacts recipient country investment: relative to unanimity, majority induces higher levels of competition between recipient countries. This higher investment, however, comes at the cost of limiting aid to a strict subset of recipient countries, which implies that majority rule is not always optimal.

Friedman, Daniel/Huck, Steffen/Oprea, Ryan/Weidenholzer, Simon (2015): "From Imitation to Collusion. Long-run Learning in a Low-information Environment". In: Journal of Economic Theory, Vol. 155, S. 185-205.

Abstract: We explore the stability of imitation in a 1200-period experimental Cournot game where subjects do not know the payoff function but see the output quantities and payoffs of each oligopolist after every period. In line with theoretical predictions and previous experimental findings, our oligopolies reach highly competitive levels within 50 periods. However, already after 100 periods, quantities start to drop and eventually fall deep into collusive territory without pausing at the Nash equilibrium. Our results demonstrate how groups of subjects can learn their way out of dysfunctional heuristics, and suggest elements for a new theory of how cooperation emerges.

Ensthaler, Ludwig/Giebe, Thomas (2014): "A Dynamic Auction for Multi-Object Procurement under a Hard Budget Constraint". In: Research Policy, Vol. 43, No. 1, S. 179-189.

Abstract: This contribution revisits the problem of allocating R&D subsidies by government agencies. Typically, the applicants’ financial constraints are private information. The literature has recommended the use of auctions in order to reduce information rents and thus improve the efficiency of how scarce public funds are allocated. We propose a new open clock auction for this procurement problem. This auction is strategically simple, as it exhibits truthtelling in dominant strategies and satisfies ex-post rationality, while observing the budget constraint. We test the auction in Monte-Carlo simulation and discuss its applicability and limitations. Moreover, we highlight connections to recent advances in computer science.

Ensthaler, Ludwig/Giebe, Thomas/Li, Jianpei (2014): "Speculative Partnership Dissolution with Auctions". In: Review of Economic Design, Vol. 18, No. 2, S. 127-150.

Abstract: The literature on partnership dissolution generally takes the dissolution decision as given and examines whether the outcome is efficient. A well-known result is that \(k+1\)-price auctions dissolve a partnership efficiently when the share structure is sufficiently close to equal. We extend the setup in two directions. First, we introduce complementarities by assuming a nontrivial continuation value of the partnership that is lost in case of dissolution. This makes inefficient breakups as well as continuation possible outcomes. Second, we assume that dissolution is not given, but must be triggered by a deliberate decision of at least one partner. This implies a signaling game, where calling for dissolution signals private information. We show that, in our extended setting, standard \(k+1\)-price auctions cannot dissolve a two-player equal-share partnership ex post efficiently. While allowing for veto or requiring consent does not help, adding a proper reserve to the winner’s bid auction restores efficiency.

Baake, Pio/Huck, Steffen (2013): Crop Failures and Export Tariffs. WZB Discussion Paper SP II 2013-315. Berlin: WZB.

Abstract: We analyse a stylized model of the world grain market characterized by a small oligopoly of traders with market power on both the supply and demand side. Crops are stochastic and exporting countries can impose export tariffs to protect domestic food prices. Our first result is that export tariffs are strategic complements and that for poor harvests equilibrium tariffs can explode (shedding some light on recent volatility in world food prices). We also show that the strategic interplay between governments of export countries and traders can give rise to a number of peculiar comparative statics. For example, it can be in the interest of traders to have poor harvests in one of the countries. Finally, we demonstrate that traders as well as consumers in import countries can benefit from cooperation between grain exporting countries.

Dal Bó, Perdro/Fréchette, Guillaume R. (2013): Strategy Choice In The Infinitely Repeated Prisoners' Dilemma. WZB Discussion Paper SP II 2013–311. Berlin: WZB.

Abstract: We use a novel experimental design to identify the subjects’ strategies in an infinitely repeated prisoners’ dilemma experiment. We ask subjects to design strategies that will play in their place. We find that eliciting strategies has negligible effects on their behavior, supporting the validity of this method. We find the chosen strategies include some common ones such as Tit-For-Tat and Grim trigger. However, other strategies that are considered to have desirable properties, such as Win-Stay-Lose-Shift, are not prevalent. We also find that the strategies used to support cooperation change with the parameters of the game. Finally, our results confirm that long-run miscoordination can arise.

Herbst, Luisa/Konrad, Kai A./Morath, Florian (2013): Endogenous Group Formation in Experimental Contests. WZB Discussion Paper SP II 2013-301. Berlin: WZB.

Abstract: We study endogenous group formation in tournaments employing experimental threeplayer contests. We find that players in endogenously formed alliances cope better with the moral hazard problem in groups than players who are forced into an alliance. Also, players who are committed to expending effort above average choose to stand alone. If these players are forced to play in an alliance, they invest even more, whereas their co-players choose lower effort. Anticipation of this exploitation may explain their preference to stand alone.

Huck, Steffen/Lünser, Gabriele K./Tyran, Jean-Robert (2012): "Competition Fosters Trust". In: Games and Economic Behavior, Vol. 76, No. 1, S. 195-209.

Abstract: We study the effects of reputation and competition in a trust game. If trustees are anonymous, outcomes are poor: trustees are not trustworthy, and trustors do not trust. If trustees are identifiable and can, hence, build a reputation, efficiency quadruples but is still at only a third of the first best. Adding more information by granting trustors access to all trusteesʼ complete history has, somewhat surprisingly, no effect. On the other hand, we find that competition, coupled with some minimal information, eliminates the trust problem almost completely.