No abstract

Many believe that a key innovation by the Grameen Bank is to encourage borrowers to help each other in hard times. To analyse this, we study a mechanism design problem where borrowers share information about each other, but their limited side contracting ability prevents them from writing complete insurance contracts. We derive a lending mechanism which efficiently induces mutual insurance. It is necessary for borrowers to submit reports about each other to achieve efficiency. Such cross-reporting increases the bargaining power of unsuccessful borrowers, and is robust to collusion against the bank.

Dual-process theories distinguish between intuition (fast and emotional) and reasoning (slow and controlled) as a basis for human decision-making. We contrast dominance-solvable games, which can be solved by step-by-step deliberative reasoning, with pure coordination games, which must be solved intuitively. Using functional magnetic resonance imaging, we found that the middle frontal gyrus, the inferior parietal lobule, and the precuneus were more active in dominance-solvable games than in coordination games. The insula and anterior cingulate cortex showed the opposite pattern. Moreover, precuneus activity correlates positively with how "effortful" a dominance-solvable game is, whereas insula activity correlates positively with how "effortless" a coordination game is.

No abstract

Two players simultaneously decide whether or not to acquire new weapons in an arms race game. Each player's type determines his propensity to arm. Types are private information, and are independently drawn from a continuous distribution. With probability close to one, the best outcome for each player is for neither to acquire new weapons (although each prefers to acquire new weapons if he thinks the opponent will). There is a small probability that a player is a dominant strategy type who always prefers to acquire new weapons. We find conditions under which the unique Bayesian-Nash equilibrium involves an arms race with probability one. However, if the probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the game where the probability of an arms race is close to zero.