Play Communication and the Consequences of Imitation

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The introduction of information acquisition and information processing into economic models of decision making was a major breakthrough in the realism and the relevance of economics. The paradigm of information economics provided new insights in almost every area of economic research. One currently popular model treats economic agents with private information as games of incomplete information. Such models have penetrated most fields of economics, falling under the rubrics of signalling, screening, sorting, adverse selection, and mechanism design. Very few of these applied models allow agents to talk to each other, despite the obvious prevalence of conversation and other types of communication in reality. The central premise of this project is that communication should be explicitly incorporated in a game-theoretic way into economic models. Some of this research is in the context of two applications. The first consists of voting-political situations in which speechmaking plays an important role; the goal is to rationalize the role of political rhetoric. The second application is to bilateral trading, studying the effect of communication between traders whose preferences are private information on resource allocation. The double auction is taken as the prototype trading institution. The project also develops a novel approach to bounded rationality. Introspection tells us that the knowledge, computational powers, and complexity of the strategies assumed of individuals in economic models is beyond realistic belief. But rational choice models have not been displaced by alternatives because rational choice models perform well and the alternative models are descriptive and invariably break down. The model developed in this project differs from past work in that bounds are imposed on the individual's ability to compute, rather than on the complexity of the strategies. The key assumption of this model is that a boundedly rational individual confronted by circumstances for which he cannot, at the present time, calculate an optimal action for himself, will imitate others. Both of these lines of research are very exciting. Preliminary work shows that existing bargaining models can make seriously wrong predictions by ignoring pre-play communications. This project would correct the biases in these widely used economic models. The development of a tractable formal theory of bounded rationality would be a major breakthrough in economics. This new theory could explain some of the empirical problems with models that assume completely rational behavior by economic agents.