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Pareto-Improving Cheating In An Economic Policy Game

Author

Listed:
  • Christophe Deissenberg and Francisco Alvarez Gonzalez
Abstract
This paper presents a simple repeated-game model of interaction between the government and the private sector where, at each repetition, the government first makes a non-binding announcement about its future actions. The private sector, unsure whether or not this announcement will be respected, either acts (with probability $\\pi $) as if it trusted the announcement, or disregards it in its decision-making. After observing the reaction of the private sector, the government implements the actual policy measures. Finally, the private sector updates $\\pi $ as a function of the payoff he received. We show that, although they are never respected, the government's announcements may allow reaching an outcome that improves the situation of both players\\ compared to the standard equilibrium solutions. This result is in stark contrast to the conclusions usually presented in the related economic literature.

Suggested Citation

  • Christophe Deissenberg and Francisco Alvarez Gonzalez, 2001. "Pareto-Improving Cheating In An Economic Policy Game," Computing in Economics and Finance 2001 88, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:88
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    Citations

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    Cited by:

    1. Dawid, Herbert & Deissenberg, Christophe, 2005. "On the efficiency-effects of private (dis-)trust in the government," Journal of Economic Behavior & Organization, Elsevier, vol. 57(4), pages 530-550, August.
    2. Herbert Dawid & Christophe Deissenberg & Pavel Ševčik, 2005. "Cheap Talk, Gullibility, and Welfare in an Environmental Taxation Game," Springer Books, in: Alain Haurie & Georges Zaccour (ed.), Dynamic Games: Theory and Applications, chapter 0, pages 175-192, Springer.

    More about this item

    Keywords

    Macroeconomic policy-making; Barro-Gordon model; time inconsistency; reinforcement learning; reversed Stackelberg games; optimal cheating strategies; reputation; credibility.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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