Timing Is Everything: A New Way to Estimate Strategic Behavior
Cycles of violence are driven by actions and reactions, whether between or among governments, insurgents, or terrorists. In this working paper, authors Danny Klinenberg, Eli Berman, and Esteban Klor describe an approach for estimating strategic behavior rooted in game theory that can accommodate the messy reality of conflict.
DownloadMany applied economic studies aim to estimate strategic behavior through reaction curves. Examples include two-sided conflicts, or economic trade wars, and algorithmic pricing between firms. Analysis is usually performed at a prespecified time interval, such as days, weeks, months, or years, using a vector autoregression (VAR). Yet sides may respond within a day to one action, but wait a month after another. If data is recorded in arbitrary time intervals, then the researcher may mistake waiting to act for inaction. In this working paper, authors Danny Klinenberg (IGCC), Eli Berman (UC San Diego), and Esteban Klor (Hebrew University of Jerusalem) analytically show that VAR analyses do not recover true reaction curves if the timing of reaction is not accurately recorded. This misspecification can cause the sign of the VAR coefficient to reverse and misspecified standard errors leading to erroneous inference. Further, they discuss an alternative structural approach rooted in game theory to estimate reaction curves and investigate its usefulness in a Monte Carlo simulation.
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