Usvitskiy, A. (2023). A Dynamic Model of Endogenous Development: the Role of Pioneers
Social Choice and Welfare, 1-32. https://doi.org/10.1007/s00355-023-01489-9
We investigate a dynamic development process which involves heterogeneous agents making location choices. In our spatial model agents differ from each other by the impact they have on the development dynamics. In equilibrium, a high impact agent, the pioneer, sacrifices some short-run benefits and chooses an underdeveloped location. The pioneer improves that location and creates incentives for other agents to choose it later in the game. We design a laboratory experiment to test various comparative statics of the model and analyze the role of pioneers as well as the effect that early investments in public goods have on long-run outcomes. Our findings are consistent with theoretical predictions — high impact subjects tend to choose pioneering more frequently than other agents. As predicted, improvements in initial conditions through early investments in public goods significantly affect the dynamics of the system and can lead to substantial welfare improvements. Moreover, learning and experimentation play a significant role in our experiments and help subjects’ behavior to match point predictions of the model. We also observe behavioral deviations such as when some low impact subjects consistently act as lesser pioneers and also choose the underdeveloped location. Such behavior can be treated as growing cooperation and linked to Pareto improvement concerns over the outcomes of previous games.
Usvitskiy, A. (2022). Strategic Risk-taking in Dynamic Contests [Working paper version]
Journal of Economic Behavior & Organization, 198, 511-534. https://doi.org/10.1016/j.jebo.2022.03.011
We investigate a process of decision-making in a multi-period winner-take-all contest, in which competing players simultaneously choose among actions with different levels of risk every period. Strategic risk-taking is analyzed in isolation from effort choices, and, according to expected utility theory, risk preferences are irrelevant. We derive a closed-form solution of the dynamic game for any number of periods. In the equilibrium, a leading player chooses the lowest level of risk, a trailing player chooses the highest level of risk, and all elements of the action space with intermediate levels of risk are irrelevant. We design a laboratory experiment to test various comparative statics of the model and explore behavioral deviations. Our findings are consistent with theoretical predictions — subjects tend to choose riskier lotteries when they are behind and safer lotteries when they are ahead, while the magnitude of the advantage does not seem to affect the risk-taking levels. We also observe some behavioral deviations such as a decline in risk-taking in the absence of the safe option, which only occurs while being behind. We find the quantal response equilibrium of our dynamic game and explain some of behavioral deviations; incorporating learning, subject types, and the probability weighting function into the behavioral model allows us to explain the rest of behavioral findings obtained from the data and compare the relative importance of these components.