Are wars rational?

There are few circumstances where wars are globally welfare enhancing. One can imagine that wars can be individually optimizing, for example when we consider the old land-taking or enslaving war. But casual empiricism indicates that quite often fools engage in wars, like minnows tickling obviously overpowering giants (Irak, North Korea) or others who have little objective chance of winning (South Ossetia, Caprivi, Falklands). Is it because some belligerent are poorly informed or even irrational?

Clara Ponsati and Santiago Sanchez-Pages use Markov games with fully rational players to characterize wars, and even chronic wars. A country can lay a claim on another country, leading to bargaining or war, and it can only end if one surrenders. The problem is that parties do not know their relative strengths and can only learn about them by engaging in war. Add a dose of optimism, and you have a recipe for war. Were one to add some political economy (or populism) to this model, outcomes would be really depressing and worrisome. But I still have some faith in humanity.

Is there really no selection bias in laboratory experiments?

Whenever you read about a survey or an experiment, the first worry one should have is whether there is some selection bias in the studied example. As I have argued before, experimental economics is almost exclusively on a sample from a minority of the world population. But assuming that we are only interested in this minority (and unfortunately we are), is there still some selection bias.

Blair Cleave, Nikos Nikiforakis and Robert Slonim did some experiments in the classroom with over 1000 students, and then invited them for more experiments in a laboratory setting. Those that followed the experiment did not have different characteristics, which is reassuring. However, this only partially alleviates my worries. Indeed, students are only a small minority of the current population, one that is more educated, coming from a richer background, younger, etc. I am looking forward to a broader study...

An analysis of the oldest auction in history

Homo economicus is not a recent phenomenon. Not only that, he design market mechanisms early in history that appear to be very subtle. The oldest known auction was designed by Illyria in Babylonic times. This is a marriage markets in its true sense, as it is about auctioning off potential brides. All eligible girls are assembled, and an auctioneer offers them to the highest bidders, starting with the one expected to fetch the highest price. Proceeds are used to sell the least attractive brides to the poorest men assembled.

Michael Baye, Dan Kovenock and Casper de Vries analysis this auction in a two-player environment and claim that there is something paradoxical. Assume complete information, which means the auctioneer will always earn zero profit. Then is appears players can earn a much larger surplus by playing a mixed strategy than with a pure strategy. And there a continuum of these mixed strategies, and the expected payoff for both players is arbitrarily high, but finite. The problem is the solution procedure used to solve for symmetric mixed strategies breaks down here, because it selects strategies that are not part of Nash equilibria. We should learn from that to be very careful when applying standard theorems. A similar reasoning applies to incomplete information where the bidders do not know how much the other player values the potential brides.

There is no recent literature on this auction. However, it was mentioned on the back cover of the August 2006 issue of the Journal of Political Economy. I suspect this is what inspired the authors to work on this. They could have mentioned this and acknowledged the submitter, Costas Meghir.