We present a theory and experimental evidence on pricing and portfolio choices under asymmetric reasoning. We show that under asymmetric reasoning, prices do not reflect all (types of) reasoning. Some agents who observe prices that cannot be reconciled with their reasoning switch from perceiving the environment as risky to perceiving it as ambiguous. If ambiguity averse, these agents become priceinsensitive and no longer influence prices directly. We present the results of an experiment and report that consistent with the theory i) mispricing decreases as the fraction of price-sensitive agents increases, and ii) price-insensitive agents trade to more balanced portfolios.

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We provide an instrumental theory of extreme campaign platforms. By adopting an extreme platform, a previously mainstream party with a relatively small probability of winning further reduces its chances. On the other hand, the party builds credibility as the one most capable of delivering an alternative to mainstream policies. The party gambles that if down the road voters become dissatisfied with the status quo and seek something different, the party will be there ready with a credible alternative. In essence, the party sacrifices the most immediate election to invest in greater future success. We call this phenomenontactical extremism.We show under which conditions we expect tactical extremism to arise and we discuss its welfare implications.

We study repeated legislative bargaining in an assembly that chooses its bargaining rules endogenously, and whose members face an election after each legislative term. An agenda protocol or bargaining rule assigns to each legislator a probability of being recognized to make a policy proposal in the assembly. We predict that the agenda protocol chosen in equilibrium disproportionately favors more senior legislators, granting them greater opportunities to make policy proposals, and it generates an incumbency advantage to all legislators. 1 Keywords: Legislative bargaining, bargaining rules, seniority, incumbency advantage, endogenous institutions, dynamic bargaining. 2Legislative rules a¤ect legislative outcomes. But where do these rules come from?Legislators bargain over them. Once procedural protocols are in place, legislators bargain over policy. The chosen procedural rules thus have important consequences for bargained policy outcomes. We wish to understand how rules are chosen and their e¤ect on policy.The literature on legislative bargaining (Binmore 1986; Baron and Ferejohn 1989; Merlo and Wilson 1995; Baron 1996; Morelli 1999; Banks and Duggan 2000, among many others) typically assumes that bargaining occurs under …xed rules. But this isn't always so -rules are often chosen by the agents themselves before their actual policy bargaining begins. Each chamber of the U.S. Congress, for example, is a "self-governing"group and, as implored by Article I, Section 5 of the U.S. Constitution ("each House may determine the Rules of its Proceedings"), establishes its own rules rather than accepting exogenous ones.We build from two key premises: the set of bargaining legislators is determined by elections in each period, and legislators choose the institutional rules that govern their bargaining game. We thus present an electoral dynamic theory of endogenous institutions.Our main result is to characterize the stationary equilibrium that maximizes incumbents' utility.The shadow of a future election looms large in the incumbents' choice of contemporaneous legislative rules. Incumbent legislators seek to be reelected, so they choose rules that help them secure this goal (Mayhew 1974). We identify the bargaining rule that helps them the most. This rule grants disproportionate proposal power to senior legislators, who use it to obtain more favorable policies and a greater share of resources for their constituencies. We demonstrate that this induces voters in every district to prefer reelecting their incumbent to electing a newly minted legislator. In addition to its relevance to the internal politics of the legislature and to electoral outcomes, seniority practices dramatically a¤ect policy-payo¤ inequality across districts as a consequence of 3 distributive advantages enjoyed by those privileged in agenda rules. 2 McKelvey and Riezman (1992) -hereafter MR92 -were the …rst to prove that the institution of a seniority rule can bene…t each incumbent legislator in his or her pursuit of reelection. MR92 compare two...

In this article, I show how members of an assembly form voting blocs strategically to coordinate their votes and affect the policy outcome chosen by the assembly. In a repeated voting game, permanent voting blocs form in equilibrium. These permanent voting blocs act as endogenous political parties that exercise party discipline. In a stylized assembly I prove that the equilibrium parties must be two small polarized voting blocs, one at each side of the ideological divide.