We introduce a parametric model of other-regarding preferences in which my emotional state determines the marginal rate of substitution between my own and others' payoffs, and thus my subsequent choices. In turn, my emotional state responds to relative status and to the kindness or unkindness of others' choices. Structural estimations of this model with six existing data sets demonstrate that other-regarding preferences depend on status, reciprocity, and perceived property rights.Before any thing, therefore, can be the complete and proper object, either of gratitude or resentment, it must possess three different qualifications. First it must be the cause of pleasure in the one case, and of pain in the other. Secondly, it must be capable of feeling these sensations. And, thirdly, it must not only have produced these sensations, but it must have produced them from design, and from a design that is approved of in the one case and disapproved of in the other.
Markets have the capacity to resolve complex coordination problems. Hayek [1945] asked how privately held market information is organized through the trading process to arrive at competitive equilibrium. We propose strategies for sellers and buyers in a double auction (DA) market that result in transaction prices at or near competitive equilibrium in a variety of market environments. A large experimental literature documents convergence in many market environments to competitive equilibrium, but the theoretical literature treating the bargaining behavior in this institution is relatively small, and the models presented to date do not account for the many regularities observed in the data from experiments. We provide a model that accounts for several important regularities of double auction data. We model an informationally decentralized decision making procedure for sellers and buyers. Sellers form beliefs that an ask will be taken by some buyer. Similarly, buyers form beliefs that a bid will be taken by a seller. These beliefs are formed on the basis of observed market data, including frequencies of asks, bids, accepted asks, and accepted bids. Then traders choose an action that maximizes their own expected surplus. While traders in this model form beliefs about the probability that a given action they choose will result in a transaction, they have no beliefs about the types (costs or valuations) or strategies of other traders. The trading activity resulting from these beliefs is sufficient to achieve transaction prices near competitive equilibrium and complete market efficiency after several periods of trading. We would like to thank Vernon Smith and Arlington Williams for providing data for comparison with the theory in this paper. We thank
We introduce a parametric model of other-regarding preferences in which my emotional state determines the marginal rate of substitution between my own and others' payoffs, and thus my subsequent choices. In turn, my emotional state responds to relative status and to the kindness or unkindness of others' choices. Structural estimations of this model with six existing data sets demonstrate that other-regarding preferences depend on status, reciprocity, and perceived property rights.
Markets have the capacity to resolve complex coordination problems. Hayek [1945] asked how privately held market information is organized through the trading process to arrive at competitive equilibrium. We propose strategies for sellers and buyers in a double auction (DA) market that result in transaction prices at or near competitive equilibrium in a variety of market environments.A large experimental literature documents convergence in many market environments to competitive equilibrium, but the theoretical literature treating the bargaining behavior in this institution is relatively small, and the models presented to date do not account for the many regularities observed in the data from experiments. We provide a model that accounts for several important regularities of double auction data.We model an informationally decentralized decision making procedure for sellers and buyers. Sellers form beliefs that an ask will be taken by some buyer. Similarly, buyers form beliefs that a bid will be taken by a seller. These beliefs are formed on the basis of observed market data, including frequencies of asks, bids, accepted asks, and accepted bids. Then traders choose an action that maximizes their own expected surplus. While traders in this model form beliefs about the probability that a given action they choose will result in a transaction, they have no beliefs about the types (costs or valuations) or strategies of other traders. The trading activity resulting from these beliefs is sufficient to achieve transaction prices near competitive equilibrium and complete market efficiency after several periods of trading.We would like to thank Vernon Smith and Arlington Williams for providing data for comparison with the theory in this paper. We thank for helpful discussions. We would like especially to thank Jim Jordan for his help with the formulation of this model.
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