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Recent Publications


Open list in Research Information System

Coalition formation versus free riding in rent-seeking contests

L. Block, Quick And Easy Journal Title (2022)

We study lobby group formation in a two-stage model where the players rst form lobby groups that then engage in a rent-seeking contest to inuence the legislator. However, the outcome of the contest aects all players according to the ideological distance between the implemented policy and the players' preferences. The players can either lobby by themselves, form a coalition of lobbyists or free ride. We nd that free coalition formation is reasonable if either players with moderate preferences face lobby groups with extreme preferences, or if there are two opposing coalitions with an equal number of members. Otherwise, there are always free riders among the players.


Wage Bargaining and Employment Revisited: Separability and Efficiency in Collective Bargaining

C. Haake, T. Upmann, P. Duman, Scandinavian Journal of Economics (2022)

We analyse the two-dimensional Nash bargaining solution (NBS) by deploying the standard labour market negotiations model of McDonald and Solow (1981). We show that the two-dimensional bargaining problem can be decomposed into two one-dimensional problems, such that the two solutions together replicate the solution of the two-dimensional problem if the NBS is applied. The axiom of Independence of Irrelevant Alternatives is shown to be crucial for this type of decomposability. This result has significant implications for actual negotiations because it allows for the decomposition of a multi-dimensional bargaining problem into one-dimensional problems---and thus helps to facilitate real-world negotiations.


Socio-legal systems and implementation of the Nash solution in Debreu–Hurwicz equilibrium

C. Haake, W. Trockel, Review of Economic Design (2021)

<jats:title>Abstract</jats:title><jats:p>In this article we combine Debreu’s (Proc Natl Acad Sci 38(10):886–893, 1952) social system with Hurwicz’s (Econ Design 1(1):1–14, 1994; Am Econ Rev 98(3):577–585, 2008) ideas of embedding a “desired” game form into a “natural” game form that includes all feasible behavior, even if it is “illegal” according to the desired form. For the resulting socio-legal system we extend Debreu’s concepts of a social system and its social equilibria to a socio-legal system with its Debreu–Hurwicz equilibria. We build on a more general version of social equilibrium due to Shafer and Sonnenschein (J Math Econ 2(3):345–348, 1975) that also generalizes the dc-mechanism of Koray and Yildiz (J Econ Theory 176:479–502, 2018) which relates implementation via mechanisms with implementation via rights structures as introduced by Sertel (Designing rights: invisible hand theorems, covering and membership. Tech. rep. Mimeo, Bogazici University, 2001). In the second part we apply and illustrate these new concepts via an application in the narrow welfarist framework of two person cooperative bargaining. There we provide in a socio-legal system based on Nash’s demand game an implementation of the Nash bargaining solution in Debreu–Hurwicz equilibrium.</jats:p>


Matching Strategies of Heterogeneous Agents under Incomplete Information in a University Clearinghouse

B. Hoyer, N. Stroh-Maraun, Games and Economic Behavior (2020), 121, pp. 453 - 481

We analyze the actual behavior of agents in a matching mechanism, using data from a clearinghouse at the Faculty of Business Administration and Economics at a German university, where a variant of the Boston mechanism is used. We supplement this data with data generated in a survey among the students who participated in the clearinghouse. We find that under the current mechanism over 74% of students act strategically by misrepresenting at least one of their preferences. Nevertheless, not all students are able to improve their outcome by doing so. We show that this is mainly due to the incomplete information of students and naiveté. Sophisticated students actually reach significantly better outcomes than naive students. Thus, we find evidence that naive students are exploited by sophisticated students in an incomplete information setting.


Disaggregating User Evaluations Using the Shapley Value

M. Feldotto, C. Haake, A. Skopalik, N. Stroh-Maraun, in: Proceedings of the 13th Workshop on Economics of Networks, Systems and Computation (NetEcon 2018), 2018, pp. 5:1-5:6

We consider a market where final products or services are compositions of a number of basic services. Users are asked to evaluate the quality of the composed product after purchase. The quality of the basic service influences the performance of the composed services but cannot be observed directly. The question we pose is whether it is possible to use user evaluations on composed services to assess the quality of basic services. We discuss how to combine aggregation of evaluations across users and disaggregation of information on composed services to derive valuations for the single components. As a solution we propose to use the (weighted) average as aggregation device in connection with the Shapley value as disaggregation method, since this combination fulfills natural requirements in our context. In addition, we address some occurring computational issues: We give an approximate solution concept using only a limited number of evaluations which guarantees nearly optimal results with reduced running time. Lastly, we show that a slightly modified Shapley value and the weighted average are still applicable if the evaluation profiles are incomplete.


Outcome Equivalence in School Choice with Reciprocal Preferences

C. Haake, N. Stroh-Maraun, Economics Letters (2018), 170, pp. 39 - 41

We show that the Boston school choice mechanism (BM), the student proposing deferred acceptance algorithm (DA) and the top trading cycles algorithm (TTC) generate the same outcome when the colleges’ priorities are modified according to students’ preferences in a “first preferences first” manner. This outcome coincides with the BM outcome under original priorities. As a result, the DA and TTC mechanism that are non-manipulable under original priorities become vulnerable to strategic behavior.


Dynamic Voluntary Provision of Public Goods: The Recursive Nash Bargaining Solution

S. Hoof, in: Static & Dynamic Game Theory: Foundations & Applications, Springer International Publishing, 2018, pp. 13-23

DOI


Thoughts on Social Design

W. Trockel, C. Haake, in: Studies in Economic Design, Springer, 2018

One of the fundamental problems in applications of methods and results from mechanism design and implementation theory is the effective enforcement of theoretically established equilibria by which social choice rules are implemented. Hurwicz (2008) and Myerson (2009) introduce different concepts of formalizing enforcement of institutional rules via the introduction of legal and illegal games. In this note the relation of their concepts with that of a social system defined inDebreu (1952) is analyzed and its potential of being instrumental for modelling institution design is discussed. The existence proof for such a system, also known as generalized game or abstract economy had been the basis for the existence proof of a competitive equilibrium of an economy.


The Generalized Nash Bargaining Solution for Transfer Price Negotiations under Incomplete Information

C. Haake, S. Recker, Group Decision and Negotiation (2018), 27(6), pp. 905-932

In our model two divisions negotiate over type-dependent contracts to determine an intrafirm transfer price for an intermediate product. Since the upstream division's (seller's) costs and downstream division's (buyer's) revenues are supposed to be private information, we formally consider cooperative bargaining problems under incomplete information. This means that the two divisions consider allocations of expected utility generated by mechanisms that satisfy (interim) individual rationality, incentive compatibility and/or ex post efficiency. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether or not incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine fair transfer payments and transfer quantities. In particular, the generalized Nash bargaining solution tries to balance divisional profits, while incentive constraints are still in place. In that sense a fair profit division is generated. Furthermore, by means of illustrative examples we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the models existing in the literature. We demonstrate that there is a tradeoff between ex post efficiency and fairness.


Maintaining vs. Milking Good Reputation when Customer Feedback is Inaccurate

B. Mir Djawadi, R. Fahr, C. Haake, S. Recker, PLoS ONE (2018), 13(11), e0207172

In Internet transactions, customers and service providers often interact once and anonymously. To prevent deceptive behavior a reputation system is particularly important to reduce information asymmetries about the quality of the offered product or service. In this study we examine the effectiveness of a reputation system to reduce information asymmetries when customers may make mistakes in judging the provided service quality. In our model, a service provider makes strategic quality choices and short-lived customers are asked to evaluate the observed quality by providing ratings to a reputation system. The customer is not able to always evaluate the service quality correctly and possibly submits an erroneous rating according to a predefined probability. Considering reputation profiles of the last three sales, within the theoretical model we derive that the service provider’s dichotomous quality decisions are independent of the reputation profile and depend only on the probabilities of receiving positive and negative ratings when providing low or high quality. Thus, a service provider optimally either maintains a good reputation or completely refrains from any reputation building process. However, when mapping our theoretical model to an experimental design we find that a significant share of subjects in the role of the service provider deviates from optimal behavior and chooses actions which are conditional on the current reputation profile. With respect to these individual quality choices we see that subjects use milking strategies which means that they exploit a good reputation. In particular, if the sales price is high, low quality is delivered until the price drops below a certain threshold, and then high quality is chosen until the price increases again.


More than skills: A novel matching proposal for multiplayer video games

N. Stroh-Maraun, D. Kaimann, J. Cox, Entertainment Computing (2018), 25, pp. 26-36

DOI


A Duration Model Analysis of Consumer Preferences and Determinants of Video Game Consumption

D. Kaimann, N. Stroh-Maraun, J. Cox, Journal of Consumer Behaviour (2018), 17(3), pp. 290 - 301

DOI


Variety in the video game industry: An empirical study of the Wundt curve

D. Kaimann, N. Stroh-Maraun, J. Cox, Managerial and Decision Economics (2018), 39(3), pp. 354 - 362

DOI


Constitutions and groups

A. Mauleon, N. Roehl, V. Vannetelbosch, Games and Economic Behavior (2017), 107, pp. 135-152

DOI


Towards an Economic Theory of Destabilization War

T. Gries, C. Haake, Peace Economics, Peace Science and Public Policy (2016), 22(4), pp. 377 - 384

DOI


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Capacity investments in a competitive energy market

L. Block, B. Westbrock, 2022

We study the abilities of competitive markets to produce sufficient energy capacities to meet a fixed energy demand. Renewable energy producers with stochastic outputs and no variable costs compete against conventional energy producers with deterministic, pollutant outputs and increasing marginal costs. We find that either market forces are strong enough to serve the entire demand, or they are too weak such that the market fails and nothing is produced. This crucially depends on the relative cost of renewable energy investments, such that relatively cheap renewable energy causes the market to fail. Welfare analyses show that with increasing levels of conventional energy pollution the ability of the market to produce an ecient outcome further declines. As a policy implication, our findings refute the use of a strategic reserve as a blackout backstop solution. Instead, a capacity mechanism consisting of a tax-and-subsidy scheme can align the market outcome with the eficient solution for all pollution levels and relative costs of renewable energy capacities.


Distortion through modeling asymmetric bargaining power

C. Haake, T. Streck, 2022, pp. 17

We study the consequences of modeling asymmetric bargaining power in two-person bargaining problems. Comparing application of an asymmetric version of a bargaining solution to an upfront modification of the disagreement point, the resulting distortion crucially depends on the bargaining solution concept. While for the Kalai-Smorodinsky solution weaker players benefit from modifying the disagreement point, the situation is reversed for the Nash bargaining solution. There, weaker players are better off in the asymmetric bargaining solution. When comparing application of the asymmetric versions of the Nash and the Kalai-Smorodinsky solutions, we demonstrate that there is an upper bound for the weight of a player, so that she is better off with the Nash bargaining solution. This threshold is ultimately determined by the relative utilitarian bargaining solution. From a mechanism design perspective, our results provide valuable information for a social planner, when implementing a bargaining solution for unequally powerful players.


Network formation with NIMBY constraints

L. Block, 2020

We study the structure of power networks in consideration of local protests against certain power lines (’not-in-my-backyard’). An application of a network formation game is used to determine whether or not such protests arise. We examine the existence of stable networks and their characteristics, when no player wants to make an alteration. Stability within this game is only reached if each player is sufficiently connected to a power source but is not linked to more players than necessary. In addition we introduce an algorithm that creates a stable network.


The Decomposability of the Nash Bargaining Solution in Labor Markets

C. Haake, T. Upmann, P. Duman, CIE Working Paper Series, Paderborn University, 2019

In this paper, we analyze the two-dimensional Nash bargaining solution (NBS) deploying a standard labor market negotiations model (see McDonald and Solow, 1981; Creedy and McDonald, 1991). We show that the two-dimensional bargaining problem can be decomposed into two one-dimensional problems such that the (Cartesian) product of the solutions of these problems replicates the solution of the two-dimensional problem, if the NBS is applied. However, this decomposition fails for any solution concept that does not satisfy the axiom of Independence of Irrelevant Alternatives (IIA axiom). Our decomposition result has significant implications for actual negotiations, as it allows for the decomposition of a multi-issue bargaining problem into a set of simpler problems, in particular a set of single-issue bargaining problems. In this way, the decomposition may help facilitate negotiations in labor markets and also in other environments.


Feedback Pareto weights in cooperative NTU differential games

S. Hoof, CIE Working Paper Series, Paderborn University, 2018

This note deals with agreeability in nontransferable utility (NTU) differential games. We introduce state feedback Pareto weights to enrich the set of efficient cooperative solutions. The framework is particularly useful if constant weights fail to support agreeability, but cooperation is desired nonetheless. The concept is applied to an adverting differential game.


On unification of solutions to the bargaining problem

C. Haake, C. Qin, CIE Working Paper Series, Paderborn University, 2018

We establish axioms under which a bargaining solution can be found by the maximization of the CES function and is unique up to specification of the distribution and elasticity parameters. This solution is referred to as the CES solution which includes the NASH and egalitarian solutions as special cases. Next, we consider a normalization of the CES function and establish axioms, under which a bargaining solution can be found by the maximization of the normalized CES and is unique up to the specifications of the distribution and its substitution parameters. We refer to this solution as the normalized CES solution, which includes the Nash and Kalai-Smorodinsky solutions as special cases. Our paper contributes to bargaining theory by establishing unified characterizations of existing as well as a great variety of new bargaining solutions.


Matching Strategies of Heterogeneous Agents under Incomplete Information in a University Clearinghouse

B. Hoyer, N. Stroh-Maraun, CIE Working Paper Series, Paderborn University, 2017

In actual school choice applications the theoretical underpinnings of the Boston School Choice Mechanism (BM) (complete information and rationality of the agents) are often not given. We analyze the actual behavior of agents in such a matching mechanism, using data from the matching mechanism currently used in a clearinghouse at a faculty of Business Administration and Economics at a German university, where a variant of the BM is used, and supplement this data with data generated in a survey among students who participated in the clearinghouse. We find that under the current mechanism over 70% of students act strategically. Controlling for students' limited information, we find that they do act rationally in their decision to act strategically. While students thus seem to react to the incentives to act strategically under the BM, they do not seem to be able to use this to their own advantage. However, those students acting in line with their beliefs manage a significantly better personal outcome than those who do not. We also run simulations by using a variant of the deferred acceptance algorithm, adapted to our situation, to show that the use of a different algorithm may be to the students' advantage.


An Economic Theory of 'Destabilization War'

T. Gries, C. Haake, 2016

While Islamic State is the most present example, it is a fact that in many places around the globe, throughout history initially small groups have tried to challenge and destabilize or even overthrow governments by means of terrorist and guerrilla strategies. Therefore, we answer two questions. Why does a small group of insurgents believe it can overthrow the government by turning violent, even if the government is clearly superior? And how does a conflict develop into terrorism, a guerilla war, or a major conventional civil war, or is resolved peacefully? We develop a formal model for rebels and government and derive optimal choices. Further, we focus on three elements as important ingredients of a "destabilization war". All three of these - large random events, time preference (which we relate to ideology), and choice of duration of fight - are rarely considered in formal conflict theory. We can answer the above two questions using game theory analysis. First, insurgents rise up because they hope to destabilize through permanent challenging attacks. In this context, large randomness is an important ally of rebels. While each individual attack may have a low impact, at some point a large random event could lead to success. Hence, the duration of activities is a constitutive element of this kind of armed conflict. Patience (low time preference), which may reflect rebels' degree of ideological motivation, is crucial. Second, the mode of warfare or the conflict resolutions that develop are generally path-dependent and conditioned on the full set of options (including compromise). Various conditions (level of funding, ease of recruitment, access to weapons) influence different modes of warfare or a peaceful compromise in a complex way.


Strategic Formation of Customer Relationship Networks

S. Brangewitz, C. Haake, P. Möhlmeier, Universität Paderborn, 2015

We analyze the stability of networks when two intermediaries strategically form costly links to customers. We interpret these links as customer relationships that enable trade to sell a product. Equilibrium prices and equilibrium quantities on the output as well as on the input market are determined endogenously for a given network of customer relationships. We investigate in how far the substitutability of the intermediaries' products and the costs of link formation influence the intermediaries' equilibrium profits and thus have an impact on the incentives to strategically form relationships to customers. For networks with three customers we characterize locally stable networks, in particular existence is guaranteed for any degree of substitutability. Moreover for the special cases of perfect complements, independent products and perfect substitutes, local stability coincides with the stronger concept of Nash stability. Additionally, for networks with n customers we analyze stability regions for selected networks and determine their limits when n goes to infinity. It turns out that the shape of the stability regions for those networks does not significantly change compared to a setting with a small number of customers.


Cooperative Transfer Price Negotiations under Incomplete Information

S. Brangewitz, C. Haake, CIE Working Paper Series, Paderborn University, 2013

In this paper, we analyze a model in which two divisions negotiate over an intrafirm transfer price for an intermediate product. Formally, we consider bargaining problems under incomplete information, since the upstream division’s (seller's) costs and downstream division's (buyer's) revenues are supposed to be private information. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine transfer payments and transfer probabilities. Furthermore, we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the existing literature for negotiated transfer pricing under incomplete information. In particular, we focus on the models presented in Wagenhofer (1994).


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