Miguel A. Costa-Gomes

COMPARING MODELS OF STRATEGIC THINKING IN VAN HUYCK, BATTALIO, AND BEIL'S COORDINATION GAMES

This paper compares the leading models of strategic thinking with subjects’ initial responses to Van Huyck, Battalio, and Beil (1990, 1991) coordination games. Among the refined “equilibrium plus noise” models we compare, payoff-dominant equilibrium performs better than risk-dominant or maximin equilibrium. Among the individualistic models we compare, level-k and cognitive hierarchy models usually fit better than logit quantal response equilibrium or noisy introspection models. In Van Huyck, Battalio, and Beil games, payoff-dominant equilibrium usually fits better than level-k or cognitive hierarchy. The data favor versions of the models in which people model others as if they were perfectly correlated over the standard, independent versions. (JEL: C51, C72, C92)

A Comment on “Can Relaxation of Beliefs Rationalize the Winner's Curse?: An Experimental Study”

Ivanov, Levin, and Niederle (2010) use a common‐value second‐price auction experiment to reject beliefs‐based explanations for the winners curse. ILNs conclusion, however, stems from the misuse of theoretical arguments. Beliefs‐based models are even compatible with some observations from ILNs experiment.

Democracy and business cycles: Evidence from Portuguese economic history

The Portuguese Republic of 1910–1926 was characterised by extreme instability in the political and economic spheres. The authoritarian regime that succeeded the Republic claimed legitimacy asserting that democracy naturally implied fiscal and monetary instability. In this article we study the Republican period and the Monarchy that immediately preceded it, in order to test three hypotheses as to the roots of instability during the Republic: exceptionally high public expenditure made necessary by participation in World War I, the Fiscal Hypothesis; expansion of the money supply and increase in its variability, the Monetary Hypothesis; social and political unrest, facilitated by greater freedom in expressing grievances, the Democracy Hypothesis. Using standard econometric techniques we find strong evidence in favour of the Monetary and the Democracy Hypotheses but not in favour of the Fiscal Hypothesis. Moreover, our results support the view that political and monetary instability were mutually reinforcing phenomena. The examination of the two periods, Monarchy and Republic, reveals a strong positive association between political and economic cycles in the later, more democratic period.