Game theory formulates the situation in which multiple agents (called players) interact in a strategic manner, investigates what rational players would do, and explains the phenomena in question with its theoretical predictions.

In this paper, I investigate the optimal taxation of labor and capital as well as the political equilibrium when people are homogeneous and have a preference for fairness. Not surprisingly, the optimal taxation takes a variant Ramsey–Mirrlees formula. I then fully characterize the equilibrium fiscal policy and find conditions under which the maximum capital levy holds. In particular, I show that an additional concern for fairness may enforce or weaken the maximum capital levy result in an intuitive manner. For example, if the degree to which labor income is determined by stochastic shocks with respect to talent and effort is relatively larger than that of capital income, the maximum capital levy and hence no tax on labor is less plausible to obtain on equilibrium.

The purpose of this paper is to shed light on the role of taxpayers’ misperceptions in determining compliance behavior. This paper also analyzes the effect of increased randomness on evasion, revenue, and welfare. Whether or not individuals choose to evade taxes depends on the perceived audit probability and on the fraction of honest taxpayers in the population. When individuals know the precise probability of audit, the model becomes in effect a game of coordination, a situation that gives rise to multiple equilibria. This paper incorporates audit misperception by introducing a small amount of uncertainty about the true audit probability. With the introduction of this uncertainty, we verify that there is a unique equilibrium cutoff point, such that each taxpayer evades if and only if his perceived signal falls below this cutoff. It is argued that this unique equilibrium outcome fares better than others in explaining empirical and experimental observations. We also find that, when reducing uncertainty has no cost, the optimal uncertainty is generally indeterminate, even when including zero uncertainty. Finally, we show that, when reducing uncertainty is costly, eliminating all uncertainty can never be optimal. In the limit as this cost vanishes, the optimal uncertainty is unique, meaning that introducing a small amount of enforcement cost resolves the indeterminacy problem.

We re-examine the subjects’ behavior in the ultimatum bargaining experiments studied by Roth et al. (1991, American Economic Review). In our model, un-modeled factors including rationality determine players’ initial aspirations, and a modified version of the case-based learning process governs subsequent adaptations. The calibration results of this paper show that ‘satisficing’ can explain the actual subjects’ behavior surprisingly well. More precisely, it is shown that 77.7% to 96.7% of the observed behavior is consistent with our model prediction. We also argue that the closer the initial aspiration levels are to the perfect equilibrium payoff, the lower the mean or modal offer tends to be in the actual experiments.

The purpose of this paper is to investigate possibilities in promoting the movement of the Asian economies towards becoming information societies. We focus on promoting intra‐industry trade and investment in the information and telecommunications sector. We take into account the impacts and implications of the economic crisis and its aftermath on ongoing implementation of liberalization policies in the telecommunications industry in various Asian countries. Concrete action plans are proposed to exploit synergistic cooperation within the region as follows: (i) industrial relocation and utilization of actual and potential industrial complementarities; (ii) vertical integration, horizontal mergers, acquisitions, and consolidations of telecommunication companies to remedy over‐investment; (iii) prompt establishment of common technical standards of telecommunications through international organizations and multilateral negotiations; (iv) suitable international division of sub‐industries based on national capacity; (v) establishment of information centers as matchmakers between small‐and‐medium‐sized enterprises with diverse IT needs; (vi) expansion of trade and investment by quid pro quo multilateral trade negotiations.