Improving technologies create a “buy or wait?” dilemma. In this paper, we consider repeat purchases when the consumer faces an infinite stream of new technologies. We develop a probabilistic model and focus on the role of “more variability” on the process of technological innovation. Similar to real options models, we find that variability in the technological process increases value for the co...

We analyze a simple strategic model of interaction between central bank and labor union. We assume that the intransparency of the central bank (labor union) induces Knightian uncertainty faced by the labor union (central bank). Knightian uncertainty means that decision makers are unable to make exact probability judgements. It is modelled by Choquet Expected Utility Theory and its recent applic...

Performance Pay and Risk Aversion A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the sec...

Standard economic models assume that the weight given to information from different sources depends exclusively on its diagnosticity. In this paper we study whether the same piece of information is weighted more heavily simply because it arose from direct experience rather than from observation. We investigate this possibility by conducting repeated game experiments in which groups of players a...

Starting from an example of the Allies’ decision to feint at Calais and attack Normandy on D-Day, this paper models misrepresentation of intentions to competitors or enemies. Allowing for the possibility of bounded strategic rationality and rational players’ responses to it yields a sensible account of lying via costless, noiseless messages. In some leading cases, the model has generically uniq...

We present a formal treatment of contracting in the face of ambiguity. The central idea is that boundedly rational individuals will not always interpret the same situation in the same way. More speci cally, even with well de ned contracts, the precise actions to be taken by each party to the contract might be disputable. Taking this potential for dispute into account, we analyze the e ects of a...

Recently, several game theorists have questioned whether information partitions are appropriate. Bacharach (2005) has considered in particular more general information patterns which may not even correspond to a knowledge operator. Such patterns arise when agents lack perfect discrimination, as in Luce’s (1956) example of intransitive indifference. Yet after extending the state space to include...

A partly heuristic attempt at exploring long-run policies aimed at a second-best compromise between ex ante risk-sharing efficiency and ex post productive efficiency. Wage subsidies for low-skilled workers financed by taxes on high wages are advocated, together with improved risk sharing between capital and labour, between generations and between the countries belonging to EMU. The scope of the...

Many labor markets share three stylized facts: employers cannot give full attention to all candidates, candidates are ready to provide information about their preferences for particular employers, and employers value and are prepared to act on this information. In this paper we study how a signaling mechanism, where each worker can send a signal of interest to one employer, facilitates matches ...

This paper offers a model of optimism, pessimism, and cognitive dissonance. Beliefs—and consequently choices—depend not only on relevant information, but also on what makes the decision maker better-off. In an associated experiment, subjects who stood to gain from an increase in the price of a financial asset predicted higher prices than subjects who stood to gain from a decrease in price. Cons...