A central question in economics is how markets coordinate the behavior of anonymous decision makers in a many person decentralized economy. A successful answer to this question requires understanding how anonymous decision makers behave in environments that exhibit strategic independence. In most economic environments, it is not possible to prescribe, describe, or predict a decision maker's behavior or the market outcome without a theory of interdependent decisions. Unfortunately, existing theories of interdependent decisions predict multiple equilibria. The purpose of this project is to build a general theory of interdependent decisions based on carefully designed experiments. This theory is based on the concept of equilibrium refinements. Equilibrium refinements determine when an outcome that is already expected would be implemented by rational players. The project develops a theory of interdependent decisions that not only identifies the outcomes that are self- enforcing when expected but also identifies the expected outcomes. More specifically, the investigators define a class of repeated market games which generalizes the coordination games used in their previous research by formalizing the concept of an anonymous decision maker. These markets games capture the essential aspects of the equilibrium selection problem on a decentralized economy. A laboratory environment is used to study the market games and to test a theory of repeated market games. The project formalizes the intuition that asset markets coordinate behavior by defining a set of admissible equilibria based on pre-play behavior by the participants, develops a theory of game form auctions, and considers whether the Folk theorem generalizes to repeated market games. The theory of repeated games is tested in the laboratory. The experiments consider alternative indexes of market activity, first best disequilibrium outcomes, alternative market institutions, incomplete information, and aggregate demand management by a large decision maker. This project is important because it provides extends theory and provides new empirical evidence on the way decisions are coordinated in decentralized economies. The results of the research will permit economists to make more precise, testable predictions about actual economies with interdependent decision making.
