Research Seminar Microeconomics“The Economic Foundations of Psychological Commitment”Tigran Melkonyan (U Warwick)
25 October 2018
The Microeconomics Research Seminar welcomes Tigran Melkonyan (University of Warwick), who will present his work on
"The Economic Foundations of Psychological Commitment".
Place: Room 250, Allende-Platz 1
Hour: 17:15 - 18:45
We are looking forward to seeing you there!
Abstract
People often psychologically commit to a course of action in strategic interactions, even where it might seem irrational to do so. For example, such psychological commitments may lead people to punish counterparts who violate an unenforceable agreement (at a cost to themselves), or to cooperate in the Centipede game and the finitely repeated Prisoner’s Dilemma game. What are the economic foundations of such psychological commitments? This paper provides a formal, reasoning-based account of psychological commitments based on “virtual bargaining”—a mode of reasoning that joins elements of individualistic and collaborative reasoning. We introduce two equilibrium concepts in extensive-form games that represent this type of reasoning: (i) virtual bargaining equilibrium and (ii) subgame virtual bargaining equilibrium. We formally analyze these solution concepts in four games representing broad classes of interactions and compare them with the subgame perfect equilibria. We find that, under certain conditions, virtual bargaining enables even self-interested individuals to psychologically commit, and stick, to a course of action that deviates from, and may lead to better outcomes than, standard predictions.