Resource Allocation Relationships

Yale University, New Haven CT

Investigators

Abstract

The research funded by this award seeks an understanding of the role and importance of relationships in allocating resources. Economists have a good understanding of competitive markets. The anonymous, frictionless nature of these markets makes them relatively easy to analyze and makes them an obvious point of departure for studying resource allocations. Economists have moved beyond this point of departure to study the effects of various frictions, such as market power, externalities, and asymmetric information, giving rise to well-established results in a variety of areas of microeconomics. This project takes the study of resource allocation in a complementary direction by relaxing the anonymity assumption and studying the role of relationships in resource allocation. Relationships arise out of repeated, personalized interactions, allowing incentives to be created by intertemporal links in behavior. In contrast to the standard finding that market frictions lead to inefficient outcomes, relationships may often have salutary efficiency implications. The project begins with basic work on repeated games. This work focuses on characterizing equilibrium behavior rather than payoffs and is especially concerned with cases in which agents are either constrained to use or simply choose to use so-called 'simple' strategies. In particular, the theory of repeated games has given rise to an intuition that some strategies are more reasonable than others, for a variety of reasons that often touch on concerns for simplicity. The project develops a formal and precise model of this idea and studies its implications. The second part of the project turns from the study of repeated games to examine relationships in more applied market context. The PI examines several different specific settings, each including a continuing relationship between two decision makers. These continuing relationships bring both benefits and costs; the goal is to determine when these relationships enhance market efficiency. The third part of the project examines the evolutionary game theory foundations of information processing and belief formation. The overall goal is a better understanding of how relationships help allocate resources. The research investigates when relationships complement or even replace prices and markets in allocating resources, when the result is an improvement in the allocation of resources, and how we can design markets and economic institutions to make good use of the power of relationships. Broader impacts include stronger ties between evolutionary game theory work in three different fields -- economics, biology, and psychology. The project also provides a framework for graduate student research.