Promises and Endogenous Reneging Costs Yuval Heller (Bar Ilan University) David Sturrock (Institute for Fiscal Studies & UCL) Zurich, March 2018 Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 1 / 41
Outline Introduction 1 The Partnership Game 2 Evolutionary Analysis 3 Variants and Extensions (Work in Progress) 4 Conclusion 5 Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 2 / 41
Introduction Outline Introduction 1 Background Motivating Example Brief Overview of Results Related Literature and Contribution The Partnership Game 2 Evolutionary Analysis 3 Variants and Extensions (Work in Progress) 4 Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 3 / 41
Introduction Background Background Experimental evidence suggests that people suffer from intrinsic (psychological) costs of lying or of reneging on a promise. Trust (Ellingsen & Johannesson, 03; Charness & Dufwenberg, 06; Vanberg, 08) Sender-receivers (Gneezy, 05; Hurkens & Kartik, 09; Lundquist et al., 09 ) Reporting dice’s outcome (Fischbacher & Föllmi-Heusi, 13; Shalvi et al., 11; Gneezy, Kajackaite & Sobel, 18; Abeler, Nosenzo & Raymond, 18). Details The intrinsic costs are increasing in the size of the lie: Distance between the reported and the true outcome. The damage induced to the partner. How others perceive the agent’s behavior. In some setups, small lies are normative. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 4 / 41
Introduction Background Background Experimental evidence suggests that people suffer from intrinsic (psychological) costs of lying or of reneging on a promise. Trust (Ellingsen & Johannesson, 03; Charness & Dufwenberg, 06; Vanberg, 08) Sender-receivers (Gneezy, 05; Hurkens & Kartik, 09; Lundquist et al., 09 ) Reporting dice’s outcome (Fischbacher & Föllmi-Heusi, 13; Shalvi et al., 11; Gneezy, Kajackaite & Sobel, 18; Abeler, Nosenzo & Raymond, 18). Details The intrinsic costs are increasing in the size of the lie: Distance between the reported and the true outcome. The damage induced to the partner. How others perceive the agent’s behavior. In some setups, small lies are normative. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 4 / 41
Introduction Motivating Example Motivating Example Two busy researchers consider working together on a paper. Stage 1: Each makes a non-enforceable promise regarding future effort. 1 Stage 2: Each chooses his effort level in the joint project. 2 Effort choices are strategic complements. Best-reply of each is to exert a bit less effort than their partner. With ‘cheap talk’ no effort will be exerted (bad outcome). Research Questions: How does communication (with reneging costs) enable coordination and commitment to high effort? What reneging cost would emerge from an evolutionary process induced by social learning? Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 5 / 41
Introduction Motivating Example Motivating Example Two busy researchers consider working together on a paper. Stage 1: Each makes a non-enforceable promise regarding future effort. 1 Stage 2: Each chooses his effort level in the joint project. 2 Effort choices are strategic complements. Best-reply of each is to exert a bit less effort than their partner. With ‘cheap talk’ no effort will be exerted (bad outcome). Research Questions: How does communication (with reneging costs) enable coordination and commitment to high effort? What reneging cost would emerge from an evolutionary process induced by social learning? Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 5 / 41
Introduction Motivating Example Motivating Example Two busy researchers consider working together on a paper. Stage 1: Each makes a non-enforceable promise regarding future effort. 1 Stage 2: Each chooses his effort level in the joint project. 2 Effort choices are strategic complements. Best-reply of each is to exert a bit less effort than their partner. With ‘cheap talk’ no effort will be exerted (bad outcome). Research Questions: How does communication (with reneging costs) enable coordination and commitment to high effort? What reneging cost would emerge from an evolutionary process induced by social learning? Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 5 / 41
Introduction Brief Overview of Results Brief Overview of Results Both low and high reneging costs induce zero efforts. With quadratic payoffs, intermediate level of reneging costs induce: Maximal promises. Substantial (non-maximal) efforts. Second-best outcome (& better than Stackelberg equilibrium). Observable costs: The second-best cost is evolutionary stable. Demonstrating robustness to: Sequential communication. One-sided reneging costs. Discontinuity in the reneging cost around zero. Imperfect observability. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 6 / 41
Introduction Brief Overview of Results Brief Overview of Results Both low and high reneging costs induce zero efforts. With quadratic payoffs, intermediate level of reneging costs induce: Maximal promises. Substantial (non-maximal) efforts. Second-best outcome (& better than Stackelberg equilibrium). Observable costs: The second-best cost is evolutionary stable. Demonstrating robustness to: Sequential communication. One-sided reneging costs. Discontinuity in the reneging cost around zero. Imperfect observability. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 6 / 41
Introduction Brief Overview of Results Brief Overview of Results Both low and high reneging costs induce zero efforts. With quadratic payoffs, intermediate level of reneging costs induce: Maximal promises. Substantial (non-maximal) efforts. Second-best outcome (& better than Stackelberg equilibrium). Observable costs: The second-best cost is evolutionary stable. Demonstrating robustness to: Sequential communication. One-sided reneging costs. Discontinuity in the reneging cost around zero. Imperfect observability. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 6 / 41
Introduction Brief Overview of Results Brief Overview of Results Both low and high reneging costs induce zero efforts. With quadratic payoffs, intermediate level of reneging costs induce: Maximal promises. Substantial (non-maximal) efforts. Second-best outcome (& better than Stackelberg equilibrium). Observable costs: The second-best cost is evolutionary stable. Demonstrating robustness to: Sequential communication. One-sided reneging costs. Discontinuity in the reneging cost around zero. Imperfect observability. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 6 / 41
Introduction Related Literature and Contribution Related Literature and Contributions Communication with lying costs (e.g., Kartik, Ottaviani & Squintani, 2007; Kartik, 2009) . Our contributions: (i) bilateral communication, (ii) communication about future action, (III) endogenising intrinsic costs. Partnership Games (e.g., Holmstrom, 82; Radner, Myerson & Maskin, 86) We demonstrate a novel mechanism to sustain efficient outcomes. Commitment in strategic encounters (e.g., S chelling, 1960; Caruana & Einav, 2008; Ellingsen & Miettinen, 2008). In most existing models more commitment is advantageous. In our model, the optimal level of commitment is intermediate. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 7 / 41
Introduction Related Literature and Contribution Related Literature and Contributions Communication with lying costs (e.g., Kartik, Ottaviani & Squintani, 2007; Kartik, 2009) . Our contributions: (i) bilateral communication, (ii) communication about future action, (III) endogenising intrinsic costs. Partnership Games (e.g., Holmstrom, 82; Radner, Myerson & Maskin, 86) We demonstrate a novel mechanism to sustain efficient outcomes. Commitment in strategic encounters (e.g., S chelling, 1960; Caruana & Einav, 2008; Ellingsen & Miettinen, 2008). In most existing models more commitment is advantageous. In our model, the optimal level of commitment is intermediate. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 7 / 41
Introduction Related Literature and Contribution Related Literature and Contributions Communication with lying costs (e.g., Kartik, Ottaviani & Squintani, 2007; Kartik, 2009) . Our contributions: (i) bilateral communication, (ii) communication about future action, (III) endogenising intrinsic costs. Partnership Games (e.g., Holmstrom, 82; Radner, Myerson & Maskin, 86) We demonstrate a novel mechanism to sustain efficient outcomes. Commitment in strategic encounters (e.g., S chelling, 1960; Caruana & Einav, 2008; Ellingsen & Miettinen, 2008). In most existing models more commitment is advantageous. In our model, the optimal level of commitment is intermediate. Heller and Sturrock Promises & Endogenous Reneging Costs Zurich, March 2018 7 / 41
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