Felix Várdy

The value of commitment in Stackelberg games with observation costs

We study Stackelberg games in which the follower faces a cost for observing the leaders action. We show that, irrespective of the size of the cost, the leaders value of commitment is lost completely in all pure-strategy equilibria. However, there also exists a mixed-strategy equilibrium that fully preserves the first-mover advantage. In this type of equilibrium, the probability that the follower looks at the leaders action is independent of the cost of looking.

An experimental study of commitment in Stackelberg games with observation costs

We report on experiments examining the value of commitment in Stackelberg games where the follower chooses whether to pay some cost to perfectly observe the leaders action. Vardy (2004) shows that in the unique pure strategy subgame perfect equilibrium of this game, the value of commitment is lost completely; however, there exists a mixed-strategy subgame perfect equilibrium where the value of commitment is fully reserved. In the data, the value of commitment is largely preserved when the cost of looking is small, while it is lost when the cost is large. Nevertheless, for small observation costs, equilibrium behavior is clearly rejected. Instead, subjects persistently play non-equilibrium strategies in which the probability of the follower choosing to observe the leaders action is a decreasing function of the observation cost.

Demand for Slant: How Abstention Shapes Voters' Choice of News Media

Political commentators warn that the fragmentation of the modern media landscape induces voters to withdraw into ?information cocoons? and segregate along ideological lines. We show that the option to abstain breaks ideological segregation and generates ?cross-over? in news consumption: voters with considerable leanings toward a candidate demand information that is less biased toward that candidate than voters who are more centrist. This non-monotonicity in the demand for slant makes voters? ideologies non-recoverable from their choice of news media and generates disproportionate demand for media outlets that are centrist or only moderately biased. It also implies that polarization of the electorate may lead to ideological moderation in news consumption. Thus, our results cast doubt on the oft-prophesied, imminent demise of mainstream media and may help to explain recent empirical findings showing less ideological segregation in news consumption than predicted by extant theories.

Cheap Money and Risk Taking: Opacity versus Fundamental Risk

We explore the effect of interest rates on risk taking and find that it depends on the type of risk involved. In a Bayesian setting, investments can be risky either because payoff-relevant signals are noisy or because the dispersion of the prior is high. While both types of risk contribute symmetrically to the overall riskiness of an investment project, we show that changes in interest rates affect risk taking in these two types of risk in opposite directions. This makes the net effect of interest rates on risk taking—as measured by the average riskiness of financed projects—necessarily ambiguous and dependent on the sources of risk.

Mixed Motives and the Optimal Size of Voting Bodies

We study a Condorcet jury model where voters are driven by instrumental and expressive motives. We show that arbitrarily small amounts of expressive motives significantly affect equilibrium behavior and the optimal size of voting bodies. Enlarging voting bodies always reduces accuracy over some region. Unless conflict between expressive and instrumental preferences is very low, information does not aggregate in the limit, and large voting bodies perform no better than a coin flip in selecting the correct outcome. Thus, even when adding informed voters is costless, smaller voting bodies often produce better decisions.

On the Buyability of Voting Bodies

We study vote buying by competing interest groups in a variety of electoral and contractual settings. While increasing the size of a voting body reduces its buyability in the absence of competition, we show that larger voting bodies may be more buyable than smaller voting bodies when interest groups compete. In contrast, imposing the secret ballot is an effective way to fight vote buying in the presence of competition, but much less so in its absence. Regardless of competition, the option to contract on both votes and outcomes is worthless, as it does not affect buyability compared to contracting only on votes. The option to contract on votes and vote shares, on the other hand, is extremely valuable: it allows the first mover to effectively nullify competition and obtain its preferred policy at almost the monopoly cost.

On the Merits of Meritocracy

We study career choice when competition for promotion is a contest. A more meritocratic profession always succeeds in attracting the highest ability types, whereas a profession with superior promotion benefits attracts high types only if the hazard rate of the noise in performance evaluation is strictly increasing. Raising promotion opportunities produces no systematic effect on the talent distribution, while a higher base wage attracts talent only if total promotion opportunities are sufficiently plentiful.

Passion Over Reason? Mixed Motives and the Optimal Size of Voting Bodies

We study a Condorcet jury model where voters are driven both by passion (expressive motives) and by reason (instrumental motives). We show that arbitrarily small amounts of passion significantly affect equilibrium behavior and the optimal size of voting bodies. Increasing the size of voting bodies always reduces accuracy over some region. Unless conflict between passion and reason is very low, information does not aggregate in the limit. In that case, large voting bodies are no better than a coin flip at selecting the correct outcome. Thus, even when adding informed voters is costless, smaller voting bodies often produce better outcomes.

The Internal Job Market of the IMF`s Economist Program

This paper shows how the internal job market for participants in the IMFs Economist Program (EPs) could be redesigned to eliminate most of the shortcomings of the current system. The new design is based on Gale and Shapleys (1962) deferred acceptance algorithm and generates an efficient and stable outcome. An Excel-based computer program, EP-Match, implements the algorithm and applies it to the internal job market for EPs. The program can be downloaded from http://www.people.hbs.edu/gbarron/EP-Match_ for_Excel.htm.

The Ponds Dilemma

Is it better to be a big fish in a small pond or a small fish in a big pond? To find out, we study self-selection into contests among a large population of heterogeneous agents. Our simple and highly tractable model generates many testable and sometimes surprising predictions. For example: 1) Entry into the big pond–in terms of show-up fees, number or value of prizes–is non-monotonic in ability; 2) Entry into the more meritocratic (i.e., discriminatory) pond is likewise non-monotonic, exhibiting two interior extrema and disproportionately attracting contestants of very low ability; 3) Changes in reward structures can produce unexpected selection effects. For instance, offering higher show-up fees may lower entry, while raising the value of prizes or making a contest more meritocratic may lower the average ability of entrants.