Collaborative Research: Studies of Contracting and Strategic Behavior

Northwestern University, Evanston IL

Investigators

Abstract

This proposal describes two projects. The first, "Non-cooperative Foundations for Competition with Externalities," is collaborative work between llya Segal and Michael Whinston. The second, "Strategic Precommitment in House Location Choices" is work that will be done solely by Michael Whinston. The first project studies bilateral contracting between one principal and N agents in the presence of externalities among different agents' contracts with the principal. Two approaches to analyzing these settings exist in the literature. One studies specific non-cooperative bilateral bargaining games. The other supposes that N is large and analyzes a type of competitive equilibrium. Neither is currently fully satisfactory. The first approach has the problem that different non-cooperative contracting games lead to difficult, and often multiple, outcomes. The second has the problem that the notions of competitive equilibrium studied have not been justified as a limit of situations in which N gets large, as has the traditional concept of competitive equilibrium. This project has two goals. First, to identify predictions for these contracting settings that are robust to the specific bargaining processes assumed. Second, to develop a non-cooperative foundation for competitive equilibrium in these settings. Preliminary research suggests that one can identify robust equilibrium predictions for two commonly studied non-cooperative games, and that when a competitive equilibrium exists, it is indeed the only limit of equilibrium outcomes of these games. The second project is an empirical investigation of strategic precommitment. Among the most significant aspects of the influx of game theory into economics has been its use to develop models of strategic precommitment. In such models, one agent's choice of a long-lived decision variable is determined in part by the agent's expectation that this choice will affect the decisions made by later-moving agents. Such models have been used in recent years in numerous areas of economics. However, despite their widespread theoretical use, much less attention has focused on examining the empirical applicability of the theory of strategic precommitment. This project attempts to do so in the context of location decisions made by builders of single family houses. There are several reasons why this is an attractive area to look for such effects. First, the location decision that accompanies building a single-family house is extremely permanent. Second, among the various factors that contribute to the utility of the homeowner, the distance from neighboring houses is almost certainly a significant one. Third, house building decisions are typically staggered and so permit a comparison of the behavior of the location decisions made when a parcel is already fully surrounded by already built-upon parcels to the location choices made when one adjacent parcel is still not built-upon. Fourth, there are a number of observable factors that affect the desirability of various locations on a parcel of land that can aid in the identification of strategic effects. Finally, the type of models built here may have further application to issues in urban economics such as the study of the impact of zoning regulation.