Ali al-Nowaihi

The stability of the cournot oligopoly model: A reassessment

Abstract The stability properties of the Cournot oligopoly model are examined for the continuous adjustment process. Sufficient conditions for instability are established which are shown to be of significance when the number of firms, n , is small. Local and global stability are shown under appropriate conditions which for global stability include the restriction n ⩽ 5. The proof of global stability corrects a well-known proof by F. Hahn ( Rev. Econ. Stud. 29 (1962), 329–331). Results for the discrete time adjustment process are reported and the restrictiveness of the models assumptions are discussed.

Can reputation resolve the monetary policy credibility problem

Abstract This paper addresses three problems with ‘reputational’ equilibria in the Barro-Gordon monetary policy game: the multiplicity of equilibria, the coordination problem and a ‘chisel-prone’ credibility problem. A ‘chisel-proof’ credibility condition ensures that in response to a small deviation from the low inflation rate by the central bank, it never pays for the private sector to acquiesce. If the private sector can coordinate, then a low but nonzero inflation outcome can be supported as a subgameperfect and ‘chisel-proof’ credible noncooperative equilibrium. For an atomistic private sector the result can still hold in a game between successive monetary administrations.

Optimal Income Taxation in the Presence of Tax Evasion: Expected Utility Versus Prospect Theory

The predictions of expected utility theory (EUT) applied to tax evasion are flawed on two counts: (i) They are quantitatively in error by huge orders of magnitude. (ii) Higher taxation is predicted to lower evasion, which is at variance with the evidence. An emerging literature in behavioral economics, most notably based on prospect theory (PT), has shown that behavioral economics is much better at explaining tax evasion. We extend this literature to incorporate issues of optimal taxation. As a benchmark for a successful theory, we require that it should explain, jointly, the facts on the tax rate, tax gap and the level of government expenditure. We find that when taxpayers use EUT (respectively, PT) and the optimal tax is derived from a social welfare function that also uses EUT (respectively, PT), then, the calibration results are completely at odds with the facts. However, when taxpayers use PT but the social welfare function uses standard EUT, there is a very close match between the predictions and the facts. This has important implications for context dependent preferences but also for the newly emerging literature on liberalism versus paternalism in behavioral economics.

A note on the Loewenstein–Prelec theory of intertemporal choice

In one of the major contributions to behavioral economics, Loewenstein and Prelec (1992) set the foundations for the behavioral approach to decision making over time. We correct a number of errors in Loewenstein and Prelec (1992). Furthermore, we provide a correct, more direct and simpler derivation of their generalized hyperbolic discounting formula that has formed the basis of much recent work on temporal choice.

Can political monetary cycles be avoided

Abstract This paper shows that political monetary cycles can be avoided in a monetary regime with Walsh-type contracts. Such contracts were originally proposed to eliminate the inflationary bias of discretionary monetary policy. This requires some commitment mechanism to enforce the contract and prevent its renegotiation, but here we rule this out. Instead, in the context of a monetary regime with an instrument-independent central bank and an inflation target (the goal) set by the government, Walsh contracts serve a different purpose: namely, they provide an efficient signalling device that eliminates the political monetary cycle, results in the election of competent governments and increases social welfare.

Existence of a Condorcet Winner When Voters Have Other-Regarding Preferences

In standard political economy models, voters are ‘self-interested’ i.e. care only about ‘own’ utility. However, the emerging evidence indicates that voters often have ‘other-regarding preferences’ (ORP), i.e., in deciding among alternative policies voters care about their payoffs relative to others. We extend a widely used general equilibrium framework in political economy to allow for voters with ORP, as in Fehr- Schmidt (1999). In line with the evidence, these preferences allow voters to exhibit ‘envy’ and ‘altruism’, in addition to the standard concern for ‘own utility’. We give sufficient conditions for the existence of a Condorcet winner when voters have ORP. This could open the way for an incorporation of ORP in a variety of political economy models. Furthermore, as a corollary, we give more general conditions for the existence of a Condorcet winner when voters have purely selfish preferences.

Evidential Equilibria: Heuristics and Biases in Static Games of Complete Information

Standard equilibrium concepts in game theory find it difficult to explain the empirical evidence from a large number of static games, including the prisoners’ dilemma game, the hawk-dove game, voting games, public goods games and oligopoly games. Under uncertainty about what others will do in one-shot games, evidence suggests that people often use evidential reasoning (ER), i.e., they assign diagnostic significance to their own actions in forming beliefs about the actions of other like-minded players. This is best viewed as a heuristic or bias relative to the standard approach. We provide a formal theoretical framework that incorporates ER into static games by proposing evidential games and the relevant solution concept: evidential equilibrium (EE). We derive the relation between a Nash equilibrium and an EE. We illustrate these concepts in the context of the prisoners’ dilemma game.

Learning to cooperate without awareness in multiplayer minimal social situations

Experimental and Monte Carlo methods were used to test theoretical predictions about adaptive learning of cooperative responses without awareness in minimal social situations-games in which the payoffs to players depend not on their own actions but exclusively on the actions of other group members. In Experiment 1, learning occurred slowly over 200 rounds in a dyadic minimal social situation but not in multiplayer groups. In Experiments 2-4, learning occurred rarely in multiplayer groups, even when players were informed that they were interacting strategically and were allowed to communicate with one another but were not aware of the games payoff structure. Monte Carlo simulation suggested that players approach minimal social situations using a noisy version of the win-stay, lose-shift decision rule, deviating from the deterministic rule less frequently after rewarding than unrewarding rounds.

An extension of the Becker proposition to non-expected utility theory

In a seminal paper, Becker (1968) showed that the most efficient way to deter crime is to impose the severest possible penalty (to maintain adequate deterrence) with the lowest possible probability (to economize on costs of enforcement). We shall call this the Becker proposition (BP). The BP is derived under the assumptions of expected utility theory (EU). However, EU is heavily rejected by the evidence. A range of non-expected utility theories have been proposed to explain the evidence. The two leading alternatives to EU are rank dependent utility (RDU) and cumulative prospect theory (CP). The main contributions of this paper are: (1) We formalize the BP in a more satisfactory manner. (2) We show that the BP holds under RDU and CP. (3) We give a formal behavioral approach to crime and punishment that could have applicability to a wide range of problems in the economics of crime.

The Hyperbolic Punishment Function

Abstract All models in Law and Economics use punishment functions (hereafter, PF) that incorporate a trade-off between probability of detection, p, and punishment, F. Suppose society wishes to minimize the total costs of enforcement and damages from crime, T( p,F). For a given p, an optimal punishment function (OPF) determines an F that minimizes T( p,F). A popular and tractable PF is the hyperbolic punishment function (HPF). We show that the HPF is an OPF for a large class of total cost functions. Furthermore, the HPF is an upper (lower ) bound for an even larger class of punishment functions. If the HPF cannot (can) deter crime, then none (all ) of the PF’s for which the HPF is an upper (lower ) bound can deter crime. Thus, if one can demonstrate that a particular policy is ineffective (effective) under the HPF, there is no need to even compute the OPF. Our results should underpin an even greater use of the HPF. We give illustrations from mainstream and behavioral economics.