Michael Chwe's papers and book

Here are abstracts of my book manuscript, working papers, and published papers, ordered roughly from newest to oldest. The papers are available as pdf (Acrobat) files (a pdf reader is available for almost all computer platforms).  If the download doesn't work, please let me know.  Of course, any comments or suggestions are much appreciated!

Michael Chwe
michael@chwe.net
www.chwe.net
 
 

Incentive Compatibility Implies Signed Covariance

When a person's payoff depends on both her action and probabilistic events, the action she chooses and her payoff can be understood as random variables.  This paper shows that incentive compatibility implies that when a person chooses among two actions, conditional on these two actions, her action is nonnegatively correlated with the payoff difference between the two actions.  This simple and robust result has implications in a wide variety of contexts, including individual choice under uncertainty, strategic form games, and incomplete information games.  Incentive compatibility constraints have an immediate ``statistical'' interpretation.

A Robust and Optimal Anonymous Procedure for Condorcet's Model

In Condorcet’s model of information aggregation, a group of people decides among two alternatives, with each person getting an independent bit of evidence about which alternative is objectively superior. I define the “supermajority penalty” (SP) procedure and show that it is incentive compatible for all possible preferences and prior beliefs and is in this sense completely robust. I also show that for an unbiased person, the SP procedure is the optimal anonymous incentive compatible procedure when there are significant biases in both directions (when at least one person is biased toward one alternative and at least one person is biased toward the other). The SP procedure is not monotonic, but this is not unusual: I show that when there are significant biases in both directions, all nontrivial anonymous incentive compatible procedures are non-monotonic.

Rational Choice and the Humanities: Excerpts and Folktales

I compare Beatrice and Benedick in William Shakespeare’s Much Ado About Nothing with Richard and Harrison in Richard Wright’s Black Boy.  I use this comparison to introduce the reader to game theory and to address some common criticisms, for example that rational choice theory assumes selfish and market-oriented individuals.  I then look at some trickster folktales from the African-American tradition, such as the well-known Brer Rabbit and the Tar Baby tale, and argue that these folktales can be understood as early primers in game-theoretic reasoning, long before game theory took mathematical shape in the 1950s.  I discuss some common misperceptions which come up in controversies over rational choice theory and how game theory and the humanities might interestingly interact.  This paper was written for the Rational Choice Theory and the Humanities conference at Stanford in April 2005, organized by David Palumbo-Liu.

Rationally Constructing the Dimensions of the Political Sphere

Social construction poses a challenge to rational choice theory.  Rational choice models posit individuals whose identities and interests are already defined, while the point of social construction is that identities and interests are themselves the result of social processes.  This paper uses a game-theoretic model to show that the issue of social construction can in some form arise even in the stark conceptual world of completely rational and asocialized actors.  The paper suggests that it is possible that there are "hidden'' issues, dimensions of political activity which can be politicized but are not because no individual wants to politicize them.  People have diverse preferences on these issues, but they play no role in political expression or decision making, and in fact are not visible to the outside observer.  Individuals here do not "keep quiet'' out of social conditioning, conformity, or an inability to conceive of a different political reality, but because they are well aware that politicizing new issues has potentially risky real effects.  People who do try to expand the domain of political activity are people whom the currently understood dimensions of political activity place in a minority.  To create a new majority on a new dimension, it is not a matter of changing people's preferences but of creating "class consciousness,'' so that people know that others feel the same way they do.  The preferences which people use when voting, and their identity as majority or minority, are determined by constraints in people's knowledge of each other.  These constraints are not exogenous but actively and rationally constructed by people through communication.

Rational Ritual: Culture, Coordination, and Common Knowledge

How do political ceremonies help establish authority?  How can a public declaration have political consequences even when it says something that everyone already knows? Why do ritual songs and speech typically involve lots of repetition?   Why were circular forms considered ideal for public festivals during the French revolution?  Why was the advertising during the Barbara Walters television interview of Monica Lewinsky dominated by Internet companies?  Why are advertisers willing to pay more per viewer to buy commercial time on the most popular television programs?  Why are close friendships important for collective action even though people typically "reach'' many more people through casual acquaintances?  How is the "panopticon'' prison design also a ritual structure?  In what sense is everyone separately reading their own copy of the morning newspaper a ritual?  How is historical experience a resource for collective action?  How do rituals and media events help create social identity?  This book (essentially a more in-depth version of the "Culture, Circles, and Commercials" paper below) tries to answer these and other questions with a single argument, trying to find a common thread among a variety of cultural and social practices usually thought disparate.

Communication and Coordination in Social Networks

This paper appeared in the Review of Economic Studies (2000) 67: 1-16.
You can download this paper (the file is s.pdf).
Here people playing a general coordination game use a communication network to let each other know their willingness to participate.  We obtain an exact characterization of which networks make coordination possible: we define a "minimal dependence network'' of a coordination game, and show that coordination is possible if and only if the communication network contains a minimal dependence network.  Coordination games can be understood as placing people into a hierarchy of social roles or "stages'':  "initial adopters,'' then "followers,'' and so on down to "late adopters.''  We show that a communication network helps coordination in exactly two ways: by informing each stage about earlier stages, and by creating common knowledge within each stage.  We then consider two examples: first we show that  "low dimensional'' networks can be better for coordination even though they have far fewer links than "high dimensional'' networks; second we show that wide dispersion of "insurgents,'' people predisposed toward participation, can be good for coordination but too much dispersion can be bad.

Structure and Strategy in Collective Action

This paper considers both structural and strategic influences on collective action.  Each person in a group wants to participate only if the total number participating is at least her threshold; people use a social network to communicate their thresholds.  People are strategically rational in that they are completely rational and also take into account that others are completely rational.  In several examples, I show that strategic rationality itself has structural implications otherwise not discernible.  Results include: cliques form the common knowledge crucial for collective action; dispersion of "insurgents,'' people strongly predisposed toward collective action, can be good for collective action but too much dispersion can be bad; classic "bandwagon'' models overstate the fragility of collective action.  (This paper is a nontechnical "companion piece" to "Communication and Coordination in Social Networks" below.)

Believe the Hype: Solving Coordination Problems with Television Advertising

This paper looks at data on how advertisers choose network television commercial slots.  The main result is that advertisers of "coordination problem'' or "social'' goods, in our sample computers, beer, pizza, and wine, tend to advertise on more popular shows and are willing to spend significantly more per viewer than advertisers of other products such as batteries, deodorant, and breakfast cereal.  The explanation offered here is that for technological reasons in the case of computers and social reasons in the case of beer, pizza, and wine, a person's preference for these goods increases in the number of other people who buy that good.  When a consumer sees a brand advertised on a popular show, she not only learns about the brand, she learns that many other people know about it also.  Hence advertisers of social goods are willing to pay a premium for slots on popular shows.  This has at least two implications.  Coordination problems are crucial in a wide variety of social contexts, from social movements to technological change to macroeconomics.  The result here illustrates that people often solve coordination problems not by adaptation or evolution, but by direct communication.  Second, the finding suggests another mechanism by which advertising can affect people's decisions: here a commercial does not signal anything about the product itself; all that is necessary is for a person to know that other people are watching too.

Minority Voting Rights Can Maximize Majority Welfare

This paper appeared in the American Political Science Review (1999) 93: 85-97.
You can download this paper (the file is d.pdf).
Recently, Lani Guinier argues against majority rule on fairness grounds, both abstractly and in the specific context of the representation of people of color in the United States. Since a majority can always get its way, a minority has little power and might not even participate in elections. Guinier suggests instead procedures which might distribute power more evenly, including "taking turns,'' in which the majority gets to decide more often, but the minority gets to decide at least some of the time. Two centuries earlier, however, Condorcet argued for majority rule on the basis of efficient information aggregation: if each individual has an equal chance of having the correct opinion, then majority rule is most likely to select the better of two alternatives.  This paper takes Condorcet's information aggregation model and adds voter heterogeneity: each voter has an idiosyncratic prior belief or preference which is the objectively better alternative. The main result is that given some prior beliefs, the best possible decision procedure for the majority involves taking turns, in the sense that with some probability the minority gets to decide even when outvoted by the majority. In other words, even the welfare criterion most favorable for the majority sometimes requires "special'' minority voting power.

The Reeded Edge and the Phillips Curve: Money Neutrality, Common Knowledge, and Subjective Beliefs

This paper appeared in the Journal of Economic Theory 87 (1999): 49-71.
You can download this paper (the file is mm.pdf).
This paper presents a simple two person auction model in which a seller and buyer make bids in units of money; however, the value of a unit of money, the rate at which money is redeemed into utility, is uncertain. The model is flexible enough so that beliefs and the kind of incomplete information can be specified freely, as if they were policy variables rather than structural features of the economy.

Money is defined to be neutral if it affects equilibrium strategies only nominally. I show that money is neutral if and only if its value is common knowledge in the game theoretic sense: everyone knows what the value of a unit of money is, everyone knows that everyone knows, and so on. In other words, the informational requirements for neutrality are very strong: a monetary revaluation can have real effects even if everyone knows about it, for example. This suggests that monetary policy should include institutions, such as communications media, which affect people's knowledge about the knowledge of others. It also might help understand how monetary policy can have persistent effects and the meaning and efficacy of changing policy regimes.

The first example is an explanation of the marking of the edges of coins in response to the problem of incremental shaving, or "clipping.'' I argue that edge marking, which culminated in the "reeded edge,'' made a coin's value not just certain but also common knowledge, which maximizes total gains when the coin is used in trade.

The second example is an interpretation of Friedman's (1968) explanation of the Phillips curve in terms of subjective beliefs. I show that if the seller and buyer have different prior beliefs, then monetary policy can improve total gains from trade, measured objectively. A possible justification for monetary policy then is that it can help "solve'' trading inefficiencies due to incomplete information. I also find an "optimal'' level of inflation which captures the intuition that low levels of inflation encourage trade but high levels render money useless in trade.

Culture, Circles, and Commercials: Publicity, Common Knowledge, and Social Coordination

This paper appeared in Rationality and Society (1998) 10: 47-75.
You can download this paper (the file is c.pdf).
This paper applies a game theoretic argument, that common knowledge is necessary for "solving'' coordination problems, to a variety of cultural practices.  This argument helps in understanding how cultural practices such as mass ceremonies constitute power, how talking in inward-facing circles helps coordination, and why "social'' goods tend to be advertised on popular and expensive television shows.  The main conclusion is that cultural practices, usually understood in terms of "meaning'' or "content,'' must also be understood in terms of "publicity,'' or more precisely common knowledge generation.

Strategic Reliability of Communication Networks

You can download this paper in manuscript form (the file is p.pdf).
All methods of communication are to some degree unreliable, and one way organizations deal with this unreliability is to form communication networks. This paper offers a game theoretic analysis of how an organization's choice of network depends both on the available communications technology and the underlying strategic situation the organization faces. For example, if the available communication technology is very unreliable, the communication protocol might involve lots of redundancy or reconfirmation. Organizations for which miscoordination is disastrous, such as military units or emergency rescue teams, would probably have different communication protocols than organizations for which miscoordination is just inconvenient.

Previous studies of network reliability do not model the strategic situation and focus on "technical'' criteria such as the probability that a message is successfully delivered. This paper's "strategic reliability'' approach shows that when the underlying strategic situation is considered, technical criteria are not always appropriate. The paper develops a notation for modelling communication devices and looks at the choice of optimal network in three "coordinated attack" examples.
 

Farsighted Coalitional Stability

I define the largest consistent set, a solution concept which applies to situations in which coalitions freely form but cannot make binding contracts, act publicly, and are fully "farsighted" in that a coalition considers the possibility that, once it acts, another coalition might react, a third coalition might in turn react, and so on, without limit.  I establish weak nonemptiness conditions and apply it to strategic and coalitional form games and majority rule voting.  I argue that it improves on the von Neumann-Morgenstern stable set as it is usually defined but is consistent with a generalization of the stable set as in the theory of social situations.
 

Why Were Workers Whipped?  Pain in a Principal-Agent Model

Violence, which seems inherently irrational, and economics, which calls itself the study of rational behavior, seem altogether unrelated.  But violence is often used in incentives---one reason a person threatens to hurt another is to get that person to do something.  This paper uses a model to show that threatening pain can be rational and that pain is inflicted on people who are poor in the sense of having bad alternatives.  The model corrects a confusion in previous models of slavery and helps explain why child and not adult labourers were beaten during the British industrial revolution.

The Discrete Bid First Price Auction

In a first price auction in which buyers can bid only multiples of an increment and have uniformly distributed values, the expected price is less than the continuous bid price.