Markets for Contracts: Experiments Exploring the Compatibility of Games and Markets for Games

Creators: Plott, Charles R.; Williamson, Dean V.

Abstract

The research presented here explores the relationship between games and the economic environment in which the game might be embedded. In particular, the focus is on a market institution in which agents buy and sell rights to participate in a follow-on stage of strategic interaction. Many instruments found in markets, such as insurance contracts and warranties, have that property and motivate the study. The central question posed is how the game and the market, two different types of processes, interact. Traditionally two sets of theory are applied to each of the separate processes: one relates to price formation in the market and the other involves modeling the follow-on stage of interaction as a game. However the application becomes ambiguous when the game has multiple solutions. Consequently, it is not clear from theory how or if joint convergence of the two processes might evolve. The study focuses on that issue and the results demonstrate that outcomes in the game are systematically linked to outcomes in the market. The game outcomes can be characterized by traditional game-theoretic solution concepts. Moreover, the market converges to a competitive equilibrium consistent with the Nash equilibrium that obtains in the game.

Additional Information

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