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Aggregate Efficiency in Games

Florian Mudekereza

Abstract

We show that, in large population games, decentralized information aggregation generically corrects for individual-level biases. This establishes a new testable aggregate efficiency benchmark where the behavior of boundedly rational agents mimics that of fully rational agents. However, we find that structural economic forces such as strategic network formation and profit-maximizing platforms can systematically select pathological environments to exploit individuals' biases, thereby causing aggregate inefficiencies. We characterize these inefficiencies in monopoly and labor markets. Our findings therefore suggest that policy should shift focus from correcting individuals' behavior to monitoring and regulating information structures.

Aggregate Efficiency in Games

Abstract

We show that, in large population games, decentralized information aggregation generically corrects for individual-level biases. This establishes a new testable aggregate efficiency benchmark where the behavior of boundedly rational agents mimics that of fully rational agents. However, we find that structural economic forces such as strategic network formation and profit-maximizing platforms can systematically select pathological environments to exploit individuals' biases, thereby causing aggregate inefficiencies. We characterize these inefficiencies in monopoly and labor markets. Our findings therefore suggest that policy should shift focus from correcting individuals' behavior to monitoring and regulating information structures.
Paper Structure (55 sections, 38 theorems, 218 equations, 1 figure, 2 tables)

This paper contains 55 sections, 38 theorems, 218 equations, 1 figure, 2 tables.

Table of Contents

  1. Introduction
  2. Framework
  3. Setup and Preliminaries
  4. Sampling Process
  5. Statistical Inference
  6. Inference Procedures
  7. Discussion: Inference Procedures
  8. Examples of Inference Procedures
  9. Bayesian Inference
  10. Maximum Likelihood Estimation
  11. Decision-Making Process
  12. Equilibrium Concept
  13. Characterization of CoSESI
  14. Examples
  15. Informativeness
  16. ...and 40 more sections

Key Result

Proposition 1

A CoSESI, $\theta_{n,F^q}(p)\in[0,1]$, exists in every subjective game $\langle u_{\gamma},\upsilon,p,F^{q}\rangle_n$, where the mapping from the success probability to the joint distribution $p$ is continuous.

Figures (1)

  • Figure 1: Equilibrium Outcomes and Ranking of simple CoSESIs

Theorems & Definitions (108)

  • Definition 1: Inference Procedure
  • Definition 2: Monotone Inference Procedure
  • Definition 3: Correlation Neglect
  • Definition 4
  • Definition 5: CoSESI
  • Proposition 1
  • Corollary 1: SESI
  • Definition 6: Informativeness
  • Proposition 2: Characterization of SESI
  • Definition 7
  • ...and 98 more