Institute for Mathematical Behavioral Sciences

In our economy the most important prices--longterm interest rates, for example--are the aggregate result of many self-interested individuals strategically making trades based on their privately perceived costs, values, and expectations. If these prices are to guide individuals into making efficient decisions, then each must be the competitive price that successfully clears its market and correctly impounds traders' private information. Economists have long believed that markets do this well, but have been unclear as to how a market in fact extracts sufficient information from its participants in order to arrive at a close approximation to the competitive price. Insight into this question may be obtained through understanding the incentives that the double auction gives participants to reveal their information. A double auction is a stylized market institution that explicitly recognizes that buyers and sellers' possess essential private information. In equilibrium the double auction demonstrates a remarkable ability to extract information from traders, arrive at the competitive price, and make an optimal allocation

We study when cooperation and conflict emerge in a class of “folk theorem” games such as the Prisoner’s Dilemma. We make use of two simple ideas: existing strategies are more likely to be imitated than new strategies are to be introduced, and it is possible to identify how an opponent will behave prior to the interaction. Both global interactions and the local interaction model of Ellison [1993] are examined. We use methods introduced by Kandori, Mailath and Rob [1993] and Young [1993] to examine the long-run evolutionary limit of this system. This limit contains only pure strategies. A sufficient condition for a unique limit is that a strategy beat all others in pairwise contests. When players can perfectly determine the strategy used by their opponent, full cooperation is achieved. When identification is imperfect, the long-run limit can be interpreted as a model of endogenous preferences where players who appear similar are treated altruistically, and players who appear to be different are treated spitefully.