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PARETO-IMPROVING CHEATING IN AN ECONOMIC POLICY GAME

Christophe Deissenberg and Francisco Alvarez Gonzalez
Authors registered in the RePEc Author Service: Christophe Deissenberg and Francisco Alvarez Gonzalez ()

No 88, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: This paper presents a simple repeated-game model of interaction between the government and the private sector where, at each repetition, the government first makes a non-binding announcement about its future actions. The private sector, unsure whether or not this announcement will be respected, either acts (with probability $\\pi $) as if it trusted the announcement, or disregards it in its decision-making. After observing the reaction of the private sector, the government implements the actual policy measures. Finally, the private sector updates $\\pi $ as a function of the payoff he received. We show that, although they are never respected, the government's announcements may allow reaching an outcome that improves the situation of both players\\ compared to the standard equilibrium solutions. This result is in stark contrast to the conclusions usually presented in the related economic literature.

Keywords: Macroeconomic policy-making; Barro-Gordon model; time inconsistency; reinforcement learning; reversed Stackelberg games; optimal cheating strategies; reputation; credibility. (search for similar items in EconPapers)
JEL-codes: C72 C79 E61 (search for similar items in EconPapers)
Date: 2001-04-01
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