Abstract. Experimentalists frequently claim that human subjects in the laboratory violate game-theoretic predictions. It is here argued that this claim is usually premature. The paper elaborates on this theme by way of raising some conceptual and methodological issues in connection with the very definition of a game and of players ’ preferences, in particular with respect to potential context dependence, interpersonal preference dependence, backward induction and incomplete information.

Abstract: Many experimental studies indicate that people are motivated by reciprocity. Rabin (1993) develops techniques for incorporating such concerns into game theory and economics. His model, however, does not fare well when applied to situations with an interesting dynamic structure (like many experimental games), because it is developed for normal form games in which information about the sequential structure of a strategic situation is suppressed. In this paper we develop a theory of reciprocity for extensive games in which the sequential structure of a strategic situation is made explicit. We propose a new solution concept— sequential reciprocity equilibrium—which is applicable to extensive games, and we prove a general equilibrium existence result. The model is applied in several examples, including some well known experimental games like the Ultimatum game and the Sequential Prisoners’ Dilemma.

We provide a user’s guide to “exotic ” preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risksensitive and robust control, “hyperbolic ” discounting, and preferences over sets (“temptations”). We apply each to a number of classic problems in macroeconomics and finance, including consumption and saving, portfolio choice, asset pricing, and Pareto optimal allocations.

The poor often behave as if they are very myopic. For example, consider the stylized fact that they borrow repeatedly (often continuously) at very high interest rates. Under standard consumption theory, borrowing at high rates

This paper considers an intertemporal decision problem in which the agent has limited foresight. It offers an interpretation of why people may smoke when they are young- and arguably have a short horizon of foresight- and In this paper we shall consider why some people decide to take up smoking when young, despite knowing the dangers, then, when older, give up- often at considerable effort and after several attempts. In our model the central issue will relate to a change in horizon of foresight. We shall imagine that

Abstract not found

This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We estimate an infinite-horizon consumptionsavings model that allows, but does not require, temptation and self-control in preferences. To help identify the presence of temptation, we exploit an implication of the theory that a tempted individual has a preference for commitment. In the presence of temptation, the cross-sectional distribution of the wealth-consumption ratio, in addition to that of consumption growth, becomes a determinant of the asset-pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. The estimates that we obtain provide statistical evidence supporting the presence of temptation. Based on our estimates, we explore some quantitative implications of this class of preferences on equity premium and on the welfare cost of business cycles. We are grateful to Narayana Kocherlakota and Luigi Pistaferri for helpful suggestions, and to seminar participants at the Federal Reserve Bank, the University of Minnesota, the SED 2005 Annual Meeting, and the Midwest Macro 2005 Annual Meeting for comments. Liu thanks the

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When discount factors within the household differ, implementing the ex-ante Pareto efficient consumption allocation requires the ability to adhere to binding intertemporal contracts. In the absence of commitment, the availability of a “private ” savings technology (a device that is only accessible by a single owner) may incite individuals to take costly strategic savings action in order to manipulate the time path of consumption. This paper presents a model that formalizes this idea and derives several testable theoretical implications. In particular, households where husbands and wives are well matched in terms of time preference should make greater use of joint (public) accounts, less use of individual (private) accounts, and make more efficient investment choices as compared to their poorly matched peers. The model informed the design of a field experiment where married couples in rural Kenya were given the opportunity to open joint and individual bank accounts at randomly assigned interest rates. The behavior of individuals in the experiment is inconsistent with ex-ante Pareto efficiency and a variety of alternative models of intrahousehold resource allocation, but consistent with the proposed model of strategic savings. Savings misallocation due to strategic behavior may be substantial: in the experiment poorly matched couples forgo at least 64 percent more interest than well matched couples. I thank my advisors, Abhijit Banerjee, Esther Duflo, and Tavneet Suri for invaluable advice and feedback at all stages of this project. I am also grateful to Dan Keniston, Cynthia Kinnan, Ben Olken, Rob Townsend, the participants of the MIT Development and Applied Micro Lunches, and the faculty and participants of the Russell

This paper proposes a new, more robust, experiment to test for the presence of hyperbolic discounting. Recently, a growing literature has studied intertemporal choice when individuals discount the future hyperbolically. These preferences generate dynamically inconsistent choices, in contrast with the usual assumption of exponential discounting, where this issue cannot arise. Hyperbolic discounting is justified based on experimental evidence of individual self-control problems. We argue that this interpretation depends crucially on the absence of uncertainty. We show that, once uncertainty is included, the observed behavior is compatible with exponential discounting. We then test for the presence of hyperbolic discounting in a new experiment that controls for uncertainty. The experiment offers two choice sets, the second being a strict subset of the first. Exponential discounters will (possibly weakly) prefer the largest one. Hyperbolic discounters, in contrast, will (strictly) prefer the second set because its design makes it equivalent to a commitment technology. The experiment is conducted...