Game theory has been applied to a growing list of practical problems, from antitrust analysis to monetary policy; from the design of auction institutions to the structuring of incentives within firms

The signatories to this document are economists who have studied telecommunications, auctions, and competition policy. While we may disagree about the stimulus package, we believe that it is important to implement mechanisms that make stimulus spending as efficient as possible. To that end, we have come together to encourage the National Telecommunications Information Agency (NTIA) and Rural Utilities Service (RUS) to adopt auction mechanisms to allocate broadband stimulus grants.

Auctions and competitive bidding institutions are important both for empirical and theoretical reasons. Auctions are among the oldest forms of economic exchange. Today, auctions are used in an increasing range of transactions – from online sales via the internet to the sale of the radio spectrum. In the familiar English auction, bid prices rise until the last and highest bid wins the item. The English auction enjoys a secure place in a wide variety of settings: the sale of art and antiques, rare gems, tobacco and fish, real estate and automobiles, and liquidation sales of all kinds. An alternative institution is the sealed-bid auction where the highest bidder wins the item at the named sealed bid. The sales of public and private companies has been accomplished by sealed bids as have the sales of real estate, best-seller paperback rights, theater bookings of films, U.S. Treasury securities, and offshore oil leases. A third method is the “Dutch” auction, used in the sale of a variety of goods but especially in the sale of flowers in Holland. The auctioneer’s initial price is set sufficiently high, and then the price is lowered at intervals. The first buyer who signals a bid obtains the item at the current price. Competitive bidding is also a common means for conducting multiple-source procurements. Here, a single buyer solicits bids from a number of competing suppliers with the objective of obtaining the most attractive terms measured not only in terms of price, but also by product quality, management capability, service performance, and the like. The most common institution for complex procurements is the submission of multiple rounds of sealed bids before the buyer makes a final selection.

This paper considers a model of out-of-court settlement negotiations in which rational individuals hold potentially differing beliefs about the merits of the case. The following results pertain in equilibrium. First, under incomplete information, self-interested disputants will fail to attain negotiated settlements (at least some of the time). Second, there is a fundamental tradeoff between settlement efficiency and equity. Increasing the frequency of out-of-court settlements inevitably means adopting settlements that are less responsive to the true merits of the case. Third, the frequency of litigation increases as court costs decline. Moreover, this response can be so great that average court expenditures rise with the decline in legal costs. Fourth, a shift from the American system to the British system of allocating court costs results in a fall in the frequency of litigation.

The seller posted-price procedure is probably the most common method for making transactions in modern economies. We analyze the performance of posted pricing for transactions having significant common-value elements. In a model of two-sided private information, we characterize the fully revealing, perfect equilibrium offer strategy of the seller. We also characterize equilibrium behavior under two other pricing procedures-a sealed-bid procedure and a direct revelation mechanism. Finally, we examine the efficiency of these procedures and show that as the degree of common values increases, fewer mutually beneficial agreements are attained.

Negotiation JournalVolume 11, Issue 2 p. 135-144 Computer-Aided Negotiation and Economic Analysis William F. Samuelson, William F. Samuelson William F. Samuelson is professor of economics and finance at the Boston University School of Management, 704 Commonwealth Ave., Boston, Mass. 02215.Search for more papers by this author William F. Samuelson, William F. Samuelson William F. Samuelson is professor of economics and finance at the Boston University School of Management, 704 Commonwealth Ave., Boston, Mass. 02215.Search for more papers by this author First published: April 1995 https://doi.org/10.1111/j.1571-9979.1995.tb00054.xCitations: 1AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume11, Issue2April 1995Pages 135-144 RelatedInformation

This paper examines the effect of the labor-leisure choice on portfolio and consumption decisions over an individual's life cycle. The model incorporates the fact that individuals may have considerable flexibility in varying their work effort (including their choice of when to retire). Given this flexibility, the individual simultaneously determines optimal levels of current consumption, labor effort, and an optimal financial investment strategy at each point in his life cycle. We show that labor and investment choices are intimately related. The ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante.

In recent years, final-offer arbitration (FOA) has become an increasingly frequent means of resolving labor disputes in the private and public sectors. The present paper models FOA when each disputant has private information bearing on the true value of the case. The model characterizes the disputants' equilibrium offer behavior and examines arbitration performance. The main conclusion is that FOA outcomes are crudely responsive to the underlying merits of the case. In its favor, FOA can be expected to be less costly to administer than arbitration procedures that attempt to extract perfect information.

This paper develops a model showing that people who have flexibility in choosing how much to work will prefer to invest substantially more of their money in risky assets than if they had no such flexibility. Viewed in this way, labor supply flexibility offers insurance against adverse investment outcomes. The model provides support for the conventional wisdom that the young can tolerate more risk in their investment portfolios than the old. The model has other implications for the study of household financial behavior over the life cycle. It implies that households will take account of the value of labor supply flexibility in deciding how much to invest in their own human capital and when to retire. At the macro level it implies that people will have a labor supply response to shocks in the financial markets.

This paper examines the conditions under which evolutionary processes ‘select’ equilibrium strategies of agents or firms. Under plausible dynamics, optimal selection takes place provided that economic agents are small relative to the environment — that is, each such agent has a negligible effect on others' payoffs. However, when this assumption is not met, survival need not imply optimality. Examples in the contexts of bargaining, bidding, and market competition are presented.

Most real decisions, unlike those of economics texts, have a status quo alternative—that is, doing nothing or maintaining one's current or previous decision. A series of decision-making experiments shows that individuals disproportionately stick with the status quo. Data on the selections of health plans and retirement programs by faculty members reveal that the status quo bias is substantial in important real decisions. Economics, psychology, and decision theory provide possible explanations for this bias. Applications are discussed ranging from marketing techniques, to industrial organization, to the advance of science.

An understanding of the correct model of intertemporal consumption choice is crucial to evaluating the effects of fiscal policies. The debates over whether deficit policy matters (Martin Feldstein, 1974; Robert Barro, 1974) and, if so, how to measure such policy (Robert Eisner and Paul Pieper, 1985; Kotlikoff, 1986) are fundamentally debates about the correct model of consumption. Unfortunately, distinguishing empirically between different consumption theories is a subtle business that has produced no strong conclusions. One problem confronting many tests of alternative consumption theories is that they require joint and quite specific assumptions about preferences, economic resources, and the consumer's information set that may not be justified. In such cases, what is described as a rejection of a particular model may simply be a rejection of restrictive assumptions placed on the model. A second problem that is also routinely swept under the rug involves the implicit assumption that consumers optimize perfectly given their preferences and resources, and that they correctly value their resources. In order to explore these more fundamental questions we, have conducted an experiment to determine whether individuals, when placed in a controlled life cycle setting, make consistent and coherent consumption choices, and whether they correctly value their future resources. The experiment provides negative answers to both of these questions; in the experiment subjects made significant and systematic errors in their consumption choice, reflecting, in part, an overdiscounting of future income. This paper reviews several of the findings from our 1987 working paper, and then discusses their implications for fiscal policy. We give a brief description in Section I of the experiment. Section II describes inconsistencies and errors in consumption choice and traces them to the overdiscounting of future labor income. Section III presents some regression results also pointing to an undervaluation of future resources. Section IV discusses the implications of these results for viewing fiscal policy and suggests the need for additional experiments as well as consumption models that acknowledge, rather than avoid computation problems.

This paper presents the results of an experimental study of the life cycle model in which subjects were asked to make preferred consumption choices under hypothetical life cycle economic conditions. The questions in the experiment are designed to test the model's assumption of rational choice and to elicit information about preferences. The subjects' responses suggest a widespread inability to make coherent and consistent consumption decisions. Errors in consumption decision-making appear to be very substantial and, in many cases, systematic. In addition, the experiment's data strongly reject the standard homothetic, time-separable life cycle model. The principal specific findings of the laboratory experiment are: (1) Subjects displayed significant inconsistencies in their consumption decisions; each of the subjects, in at least two pairs of economically identical situations, chose consumption values that differed by 20 percent or more. From the perspective of the standard life cycle model, error in decision-making accounts, on average, for roughly half of the variation in consumption. (2) A sizeable fraction of subjects undervalued future earnings relative to present assets; i.e., they systematically overdiscounted future earnings. (3) Almost all subjects exhibited oversaving behavior, apparently because they underestimated the power of compound interest. (4) The hypothesis that intertemporal consumption preferences are uniform across individuals is strongly rejected. Indeed, the demographic characteristics of subjects are significant determinants of consumption choice in the experiment.

In a competitive procurement, a buyer seeks to institute a bidding and contracting procedure which selects the most efficient firm to undertake the contract while offering terms that promote risk sharing between buyer and contractor. This paper develops a model to analyze formally the trade-off between the objectives of risk sharing and efficient contractor selection.

This paper presents a simple model of competitive procurement, in which potential bidders incur non-recoverable resource costs in preparing bids. The main findings are that equilibrium entry achieves a welfare optimum but that expected procurement cost need not decline with increases in the number of potential bidders.