Microeconomics
http://lists.repec.org/mailman/listinfo/nep-mic
Microeconomics2015-02-28Jing-Yuan ChiouDynamic Moral Hazard without Commitment
http://d.repec.org/n?u=RePEc:cwl:cwldpp:1989&r=mic
We study a discrete-time model of repeated moral hazard without commitment. In every period, a principal finances a project, choosing the scale of the project and a contingent payment plan for an agent, who has the opportunity to appropriate the returns of a successful project unbeknownst the principal. The absence of commitment is reflected both in the solution concept (perfect Bayesian equilibrium) and in the ability of the principal to freely revise the project's scale from one period to the next. We show that removing commitment from the equilibrium concept is relatively innocuous -- if the players are sufficiently patient, there are equilibria with payoffs low enough to effectively endow the players with the requisite commitment, within the confines of perfect Bayesian equilibrium. In contrast, the frictionless choice of scale has a significant effect on the project's dynamics. Starting from the principal's favorite equilibrium, the optimal contract eventually converges to the repetition of the stage-game Nash equilibrium, operating the project at maximum scale and compensating the agent (only) via immediate payments.
Johannes Horner
, Larry Samuelson
2015-02
Moral hazard, Dynamic moral hazard, Commitment, Principal-agent, Cash flow diversion
Attention, Coordination, and Bounded Recall
http://d.repec.org/n?u=RePEc:nwu:cmsems:1576&r=mic
I consider a exible framework of strategic interactions under incomplete information in which, prior to committing their actions (consumption, production, or investment decisions), agents choose the attention to allocate to an arbitrarily large number of information sources about the primitive events that are responsible for the incompleteness of information (the exogenous fundamentals). The analysis sheds light on what type of payoff¤ interdependencies contribute to inefficiency in the allocation of attention. The results for the case of perfect recall (in which the agents remember the inuence of each source on their posterior beliefs) are compared to those for the case of bounded recall (in which posterior beliefs about the underlying fundamentals are consistent with Bayesian updating, but in which the agents are unable to keep track of the influence of individual sources on their posterior beliefs).
Alessandro Pavan
2014-01-14
attention, endogenous information, strategic complementarity/substitutability, externalities, efficiency, welfare, bounded recall JEL Classification: C72, D62, D83, E50
From Rationality to Irrationality : Dynamic Interacting Structures
http://d.repec.org/n?u=RePEc:pra:mprapa:62148&r=mic
This article develops a general method to solve dynamic models of interactions between multiple strategic agents that extends the static model studied previously by the authors. It describes a general model of several interacting agents, their domination relations as well as a graph encoding their information pattern. It provides a general resolution algorithm and discusses the dynamics around the equilibrium. Our model explains apparent irrational or biased individual behaviors as the result of the actions of several goal-specific rational agents. Our main example is a three-agent model describing "the conscious", "the unconscious", and "the body". We show that, when the unconscious strategically dominates, the equilibrium is unconscious-optimal, but body and conscious-suboptimal. In particular, the unconscious may drive the conscious towards its goals by blurring physical needs. Our results allow for a precise account of agents' time rate preference. Myopic behavior among agents leads to oscillatory dynamics : each agent, reacting sequentially, adjusts its action to undo other agents' previous actions. This describes cyclical and apparently inconsistent or irrational behaviors in the dual agent. This cyclicality is present when agents are forward-looking, but can be dampened depending on the conscious sensitivity to other agents' actions.
Gosselin, Pierre
, Lotz, Aïleen
, Wambst, Marc
2015-02-14
dual agent; conscious and unconscious, rationality; multi-rationality; emotions; choices and preferences; multi-agent model; consistency; game theory; strategical advantage.
Information, Risk Sharing and Incentives in Agency Problems
http://d.repec.org/n?u=RePEc:bca:bocawp:15-7&r=mic
This paper studies the use of information for incentives and risk sharing in agency problems. When the principal is risk neutral or the outcome is contractible, risk sharing is unnecessary or completely taken care of by a contract on the outcome. In this case, information systems are ranked according to their informativeness of the agent’s action. When the outcome is noncontractible, however, the principal has to rely on imperfect information for both incentives and risk sharing. Under the first-order approach, we characterize a problem-independent ranking of information systems, which is relaxed from Gjesdal’s (1982) criterion. We also find sufficient conditions justifying the firstorder approach.
Jia xie
2015
Economic models
Disputes, Debt and Equity
http://d.repec.org/n?u=RePEc:gla:glaewp:2014_21&r=mic
We show how the prospect of disputes over firms’ revenue reports promotes debt financing over equity. These findings are presented within a costly state verification model with a risk averse entrepreneur. The prospect of disputes encourages incentive regimes which limit penalties and avoid stochastic monitoring, even when the lender can commit to stochastic enforcement strategies. Consequently, optimal contracts shift away from equity and toward standard debt. For a useful special case of the model, closed form solutions are presented for leverage and consumption allocations under efficient debt contracts.
Alfred Duncan
, Charles Nolan
2014-12
Microeconomics, costly state verification; external finance
The Dynamics of Social Influence
http://d.repec.org/n?u=RePEc:oxf:wpaper:742&r=mic
Individual behaviors such as smoking, fashion, and the adoption of new products is influenced by taking account of others' actions in one's decisions. We study social influence in a heterogeneous population and analyze the long-run behavior of the dynamics. We distinguish between cases in which social influence arises from responding to the number of current adopters, and cases in which social influence arises from responding to the cumulative usage. We identify the equilibria of the dynamics and show which equilibrium is observed in the long-run. We find that the models exhibit different behaviour and hence this differentiation is of importance. We also provide an intuition for the different outcomes.
Bary S.R. Pradelski
2015-02-24
social influence, imitation, equilibrium selection
Poverty and Self Control
http://d.repec.org/n?u=RePEc:red:sed014:1156&r=mic
The absence of self-control is often viewed as an important correlate of persistent poverty. Using a standard intertemporal allocation problem with credit constraints faced by an individual with quasi-hyperbolic preferences, we argue that poverty damages the ability to exercise self-control. Our theory invokes George Ainslieâ€™s notion of â€œpersonal rules,â€ interpreted as subgame-perfect equilibria of an intrapersonal game played by a time-inconsistent decision maker. Our main result pertains to situations in which the individual is neither so patient that accumulation is possible from every asset level, nor so impatient that decumulation is unavoidable from every asset level. Such cases always possess a threshold level of assets above which personal rules support unbounded accumulation, and a second threshold level of assets below which there is a â€œpoverty trapâ€: no personal rule permits the individual to avoid depleting all liquid wealth. In short, poverty perpetuates itself by undermining the ability to exercise self-control. Thus policies designed to help the poor accumulate assets may be highly effective, even if they are temporary. We also explore the implications for saving with easier access to credit, the demand for commitment devices, the design of accounts to promote saving, and the variation of the marginal propensity to consume across classes of resource claims.
Sevin Yeltekin
, Debraj Ray
, B. Douglas Bernheim
2014
Dynamic Managerial Compensation: On the Optimality of Seniority-based Schemes
http://d.repec.org/n?u=RePEc:nwu:cmsems:1579&r=mic
We study the optimal dynamics of incentives for a manager whose ability to generate cash ows changes stochastically with time and is his private information. We show that, in general, the power of incentives (or "pay for performance") may either increase or decrease with tenure. However, risk aversion and high persistence of ability call for a reduction in the power of incentives later in the relationship. Our results follow from a new variational approach that permits us to tackle directly the "full program," thus bypassing some of the di¢ culties of working with the "relaxed program" encountered in the dynamic mechanism design literature.
Daniel Garrett
, Alessandro Pavan
2014-11-01
managerial compensation, power of incentives, pay for performance, dynamic mechanism design, adverse selection, moral hazard, persistent productivity shocks, risk aversion. JEL Classification: D82
Frustration and Anger in Games
http://d.repec.org/n?u=RePEc:igi:igierp:539&r=mic
Frustration, anger, and aggression have important consequences for economic and social behavior, concerning for example monopoly pricing, contracting, bargaining, tra¢ c safety, violence, and politics. Drawing on insights from psychology, we develop a formal approach to exploring how frustration and anger, via blame and aggression, shape interaction and outcomes in economic settings. KEYWORDS: frustration, anger, blame, belief-dependent preferences, psychological games JEL codes: C72, D03
Pierpaolo Battigalli
, Martin Dufwenberg
, Alec Smith
2015
Anxiety, overconfidence, and excessive risk taking
http://d.repec.org/n?u=RePEc:fip:fednsr:711&r=mic
We provide a preference-based rationale for endogenous overconfidence. Horizon-dependent risk aversion, combined with a possibility to forget, can generate overconfidence and excessive risk taking in equilibrium. An “anxiety prone” agent, who is more risk-averse to imminent than to distant risks, has an incentive to distort her future self’s beliefs toward underestimating risk. Such self-deception can be achieved even if the future self is aware of the attempted distortion. We relate our results to the literature on empirically observed overconfidence and excessive risk taking in several domains of financial and other types of decision making.”
Eisenbach, Thomas M.
, Schmalz, Martin C.
2015-02-01
overconfidence; dynamic consistency; biases; deception; risk taking
A Framework for Modeling Bounded Rationality: Mis-specified Bayesian-Markov Decision Processes
http://d.repec.org/n?u=RePEc:arx:papers:1502.06901&r=mic
We provide a framework to study dynamic optimization problems where the agent is uncertain about her environment but has (possibly) an incorrectly specified model, in the sense that the support of her prior does not include the true model. The agent's actions affect both her payoff and also what she observes about the environment; she then uses these observations to update her prior according to Bayes' rule. We show that if optimal behavior stabilizes in this environment, then it is characterized by what we call an equilibrium. An equilibrium strategy $\sigma$ is a mapping from payoff relevant states to actions such that: (i) given the strategy $\sigma$, the agent's model that is closest (according to the Kullback-Leibler divergence) to the true model is $\theta(\sigma)$, and (ii) $\sigma$ is a solution to the dynamic optimization problem where the agent is certain that the correct model is $\theta(\sigma)$. The framework is applicable to several aspects of bounded rationality, where the reason why a decision maker has incorrect beliefs can be traced to her use of an incorrectly-specified model.
Ignacio Esponda
, Demian Pouzo
2015-02
Optimism and Pessimism with Expected Utility, Fifth Version
http://d.repec.org/n?u=RePEc:pen:papers:15-009&r=mic
Maximizing subjective expected utility is the classic model of decision making under uncertainty. Savage (1954) provides axioms on preference over acts that are equivalent to the existence of a subjective expected utility representation, and further establishes that such a representation is essentially unique. We show that there is a continuum of other \expected utility" representations in which the probability distributions over states used to evaluate acts depend on the set of possible outcomes of the act and suggest that these alternate representations can capture pessimism or optimism. We then extend the DM's preferences to be defined over both subjective acts and objective lotteries, allowing for source-dependent preferences. Our result permits modeling ambiguity aversion in Ellsberg's two-urn experiment using a single utility function and pessimistic probability assessments over prizes for lotteries and acts, while maintaining the axioms of Savage and von Neumann-Morganstern on the appropriate domains.
David Dillenberger
, Andrew Postlewaite
, Kareen Rozen
2013-11-01
Subjective expected utility, optimism, pessimism, stake-dependent probability
A note on the welfare of a sophisticated time-inconsistent decision-maker
http://d.repec.org/n?u=RePEc:zbw:wzbmbh:spii2015201&r=mic
I examine the circumstances under which a sophisticated time-inconsistent decisionmaker (i) will not or (ii) need not severely miscoordinate her behavior across time, in the sense of following a course of action which fails to be Pareto-optimal for the sequence of temporal selves of the individual (Laibson [1994] and O'Donoghue and Rabin [1999] provide prominent instances of such miscoordination). Studying the standard solution concept for this case - Strotz-Pollak equilibrium - in general decision problems with perfect information, I establish two results: first, for finite-horizon problems without indifference, essential consistency (Hammond [1976]) is sufficient for choice to be Pareto-optimal. Second, if the decision problem satisfies a certain history-independence property, whenever an equilibrium outcome fails to be Pareto-optimal, it is Pareto-dominated by another equilibrium outcome, leading to an existence result for a Pareto-optimal solution.
Kodritsch, Sebastian
2015
time-inconsistency,multi-selves approach,Strotz-Pollak equilibrium,welfare,Pareto-optimality
Information Aversion
http://d.repec.org/n?u=RePEc:red:sed014:1091&r=mic
We propose a theory of inattention solely based on preferences, absent any cognitive limitations, or external costs of acquiring information. Under disappointment aversion, information decisions and risk attitude are intertwined, and agents are intrinsically information averse. We illustrate this link between attitude towards risk and information in a standard portfolio problem. We show agents never choose to receive information continuously in a diffusive environment: they optimally acquire information at infrequent intervals only. In contrast to existing theories, we show the optimal frequency of information acquisition can decrease when risk increases, consistent with empirical evidence. We show information aversion tends to lower significantly the benefits of diversification, leads to a joint evaluation of project gains and their information process, as well as creates scope for the creation of information providers. These results suggest our approach can explain many observed features of decision under uncertainty.
Valentin Haddad
, Marianne Andries
2014
Citizen-Editors' Endogenous Information Acquisition and News Accuracy
http://d.repec.org/n?u=RePEc:ctc:serie1:def005&r=mic
This paper provides a model of the market for news where profit-maximizing media outlets choose their editors from a population of rational citizens. The analysis identifies a novel mechanism of media bias: the bias in a media outlet's news reports is the result of the slanted endogenous information acquisition strategy of its editor. In particular, the results show that the expected accuracy of news reports is lower the more ideological an editor is. Nevertheless, citizens find it optimal to acquire information from a media outlet whose editor has similar ideological preferences. Depending on the distribution of citizens' ideological preferences, a media outlet may choose an ideological editor even in a monopolistic market. Moreover, ideological editors are more likely to be present in the market for news: i) the higher the number of media outlets competing in the market for news; ii) the lower the opportunity cost that citizens have to incur to acquire information
Francesco Sobbrio
2013-11
Media Bias, Slant, Information Acquisition, Valence, Competition
Noisy Learning in a Competitive Market with Risk Aversion
http://d.repec.org/n?u=RePEc:lvl:lacicr:1502&r=mic
We address the issue of risk aversion in a competitive equilibrium when some buyers engage in learning and information is conveyed through the price system. Specifically, since the learning process yields uncertainty, we study the effect of risk aversion on the equilibrium outcomes of the model, including the amount of information released by the market. We show that risk aversion has an effect on the market outcomes but not on the flow of information. In particular, an increase in risk aversion lowers the competitive price and quantity. However, an increase in risk aversion does not change the amount of information embedded in the equilibrium price.
Leonard J. Mirman
, Egas M. Salgueiro
, Marc Santugini
2015
Learning, Risk aversion, Uncertainty
Price Discrimination in Asymmetric Industries: Implications for Competition and Welfare
http://d.repec.org/n?u=RePEc:ctc:serie1:def019&r=mic
Price discrimination by consumer's purchase history is widely used in regulated industries, such as communication or utilities, both by incumbents and entrants. I show that such discrimination can have surprisingly negative welfare eects { even though prices and industry prots fall, so does consumer surplus. Earlier studies that did not allow entrants to discriminate or assumed symmetric rms yielded sharply dierent results, the pro{competitive eect of price discrimination are stronger in these settings. Imposing a pricing constraint on incumbent's discrimination leads the entrant to discriminate more heavily, but still improves both consumer and producer welfare.
Hinnerk Gnutzmann
2014-11
History{based price discrimination, asymmetric price discrimination, switching cost
Information and Trading Targets in a Dynamic Market Equilibrium
http://d.repec.org/n?u=RePEc:arx:papers:1502.02083&r=mic
This paper investigates the equilibrium interactions between trading targets and private information in a multi-period Kyle (1985) market. There are two investors who each follow dynamic trading strategies: A strategic portfolio rebalancer who engages in order splitting to reach a cumulative trading target and an unconstrained strategic insider who trades on long-lived information. We consider cases in which the constrained rebalancer is partially informed as well as the special case in which the rebalancer is ex ante uninformed. We derive a linear Bayesian Nash equilibrium, describe an algorithm for computing such equilibria, and present numerical results on properties of these equilibria.
Jin Hyuk Choi
, Kasper Larsen
, Duane J. Seppi
2015-02
Stability in price competition revisited
http://d.repec.org/n?u=RePEc:pra:mprapa:62302&r=mic
We consider consumers with the same reservation price, who desire to buy at most one unit of a good. Firms compete only in prices but there are other features firms cannot control that would eventually lead an agent to buy in one firm or another. We introduce such uncertainty in a model of a price competition game with incomplete information. This competition takes place under stability and we provide equilibrium existence results. We analyze different specifications of residual demands which yield further interpretations that deepen the phenomenon of price dispersion, Bertrand’s paradox and market power.
Faias, Marta
, Hervés-Estévez, Javier
, Moreno-García, Emma
2014-08-31
Price competition, incomplete information, Nash equilibrium, ap- proximate equilibrium, price dispersion.
Dynamic Mechanisms without Money
http://d.repec.org/n?u=RePEc:cwl:cwldpp:1985&r=mic
We analyze the optimal design of dynamic mechanisms in the absence of transfers. The designer uses future allocation decisions as a way of eliciting private information. Values evolve according to a two-state Markov chain. We solve for the optimal allocation rule, which admits a simple implementation. Unlike with transfers, efficiency decreases over time, and both immiseration and its polar opposite are possible long-run outcomes. Considering the limiting environment in which time is continuous, we show that persistence hurts.
Yingni Guo
, Johannes Horner
2015-02
Mechanism design, Principal-Agent, Token mechanisms
Assortative matching through signals
http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2013-044&r=mic
When agents do not know where to find a match, they search. However, agents could direct their search to agents who strategically choose a certain signal. Introducing cheap talk to a model of sequential search with bargaining, we find that signals will be truthful if there are mild complementarities in match production: supermodularity of the match production function is a necessary and sufficient condition. It simultaneously ensures perfect positive assortative matching, so that single-crossing property and sorting condition coincide. As the information from signals allows agents to avoid all unnecessary search, this search model exhibits nearly unconstrained efficiency.
Friedrich Poeschel
, , , 2013-08
Assortative matching, sorting, search, signals, information
Knowing me, imagining you: Projection and overbidding in auctions
http://d.repec.org/n?u=RePEc:pra:mprapa:62052&r=mic
People overestimate the probability that others share their values or preferences. I introduce type projection equilibrium (TPE) to capture such projection in Bayesian games. TPE allows each player to believe his opponents share his type with intermediate probability \rho. After establishing existence, I address my main question: How does projection affect behavior in games? I analyze auctions and distribution games. In auctions, projection implies an increased sense of competition, which induces overbidding in all (first-price) auctions. In addition, it biases the perceived value distribution, which induces cursed bidding in common value auctions. Thus, projection induces a hitherto neglected bias in bidding. It is novel in that it explains behavior across conditions and it is independently founded in psychology. I test projection equilibrium in multiple ways on existing data and find that it substantially improves on alternative concepts, both in isolation and in addition to them. The findings are cross-validated by testing projection of social preferences in distribution games.
Breitmoser, Yves
2015-02-10
auctions, overbidding, winner's curse, projection, risk aversion, cursed equilibrium, level-k, social preferences
Contracting on Networks
http://d.repec.org/n?u=RePEc:aim:wpaimx:1501&r=mic
A principal offers bilateral contracts to a set of agents organized in a network conveying synergies, in a context where agents' efforts are observable and where the principal's objective increases with the sum of efforts. We characterize optimal contracts as a function of agents' positions on the network. The analysis shows that contract enforceability is key to understand optimality. We also examine linear contracting and we analyze the situation where the principal is constrained to contract with a single agent on the network. Last, we extend this setting to network entry.
Mohamed Belhaj
, Frédéric Deroian
2015-01-12
optimal contracting, multi-agency, Network, Strategic Complementarity, enforceability
Transparency and Distressed Sales under Asymmetric Information
http://d.repec.org/n?u=RePEc:cwl:cwldpp:1986&r=mic
We analyze price transparency in a dynamic market with private information and correlated values. Uninformed buyers compete inter- and intra-temporarily for a good sold by an informed seller suffering a liquidity shock. We contrast public versus private price offers. In a two-period case all equilibria with private offers have more trade than any equilibrium with public offers; under some additional conditions we show Pareto-dominance of the private-offers equilibria. If a failure to trade by the deadline results in an efficiency loss, public offers can induce a market breakdown before the deadline, while trade never stops with private offers.
William Fuchs
, Aniko Ory
, Andrzej Skrzypacz
2015-02
Adverse selection, Transparency, Distress, Market design, Volume
Get Rid of Unanimity: The Superiority of Majority Rule with Veto Power
http://d.repec.org/n?u=RePEc:cpr:ceprdp:10408&r=mic
Consider a group of agents whose goal is to reform the status quo if and only if this is Pareto improving. Agents have private information and may have common or private objectives, which creates a tension between information aggregation and minority protection. We propose a simple voting system -majority rule with veto power- that essentially resolves this tension, for it combines the advantageous properties of both majority and unanimity rules. We argue that our results shed new light on the evolution of voting rules in EU institutions and could guide policy reforms in cases such as juries in the US.
Bouton, Laurent
, Llorente-Saguer, Aniol
, Malherbe, Frédéric
2015-02
constructive abstention; information aggregation; Pareto criterion; unanimity rule; veto power
One-Shot Bargaining Mechanisms
http://d.repec.org/n?u=RePEc:arx:papers:1502.05238&r=mic
We consider the situation that two players have cardinal preferences over a finite set of alternatives. These preferences are common knowledge to the players, and they engage in bargaining to choose an alternative. In this they are assisted by an arbitrator (a mechanism) who does not know the preferences. Our main positive result suggests a satisfactory-alternatives mechanism wherein each player reports a set of alternatives. If the sets intersect, then the mechanism chooses an alternative from the intersection uniformly at random. If the sets are disjoint, then the mechanism chooses an alternative from the union uniformly at random. We show that a close variant of this mechanism succeeds in selecting Pareto efficient alternatives only, as pure Nash equilibria outcomes. Then we characterize the possible and the impossible with respect to the classical bargaining axioms. Namely, we characterize the subsets of axioms can be satisfied simultaneously by the set of pure Nash equilibria outcomes of a mechanism. We provide a complete answer to this question for all subsets of axioms. In all cases that the answer is positive, we present a simple and intuitive mechanism which achieves this goal. The satisfactory-alternatives mechanism constitutes a positive answer to one of these possibility cases (arguably the most interesting case). Our negative results exclude the possibility of an efficient mechanism with unique equilibrium outcome, and exclude the possibility of an efficient symmetric mechanism which is invariant with respect to repetition of alternatives.
Yakov Babichenko
, Leonard J. Schulman
2015-02
On bargaining sets for finite economies
http://d.repec.org/n?u=RePEc:pra:mprapa:62303&r=mic
We define a bargaining set for finite economies using Aubin’s veto mechanism and show its coincidence with the set of Walrasian allocations. Then, we rewrite our notion in terms of replicated economies showing that, in contrast with Anderson, Trockel and Zhou’s (1997) non-convergence result, this Edgeworth bargaining set shrinks to the set of Walrasian allocations.
Hervés-Estévez, Javier
, Moreno-García, Emma
2014-07-18
Bargaining sets, coalitions, core, veto mechanism.
Strategic Location Choice under Dynamic Oligopolistic Competition and Spillovers
http://d.repec.org/n?u=RePEc:ctc:serie1:def001&r=mic
This paper investigates firms' optimal location choices explicitly accounting for the role of inwards and outwards knowledge spillovers in a dynamic Cournot oligopoly with firms that are heterogeneous in their ability to carry out cost-reducing R\&D. Firms can either locate in an industrial cluster or in isolation. Technological spillovers are exchanged between the firms in the cluster. It is shown that a technological leader has an incentive to locate in isolation only if her advantage exceeds a certain threshold, which is increasing in firms' discount rate, in industry dispersion, and in the intensity of knowledge spillovers. Scenarios are identified where although it is optimal for the technological leader to locate in isolation, from a welfare perspective it would be desirable that she locates in the cluster.
Luca Colombo
, Herbert Dawid
2013-11
Location Choice, Knowledge Spillovers, Technological Leadership, Markov-perfect Equilibrium
English Auctions with Ensuing Risks and Heterogeneous Bidders
http://d.repec.org/n?u=RePEc:pen:papers:15-010&r=mic
We establish conditions under which an English auction for an indivisible risky asset has an efficient ex post equilibrium when the bidders are heterogeneous in both their exposures to, and their attitudes toward, the ensuing risk the asset will generate for the winning bidder. Each bidder's privately known type is unidimensional, but may affect both his risk attitude and the expected value of the asset's return to the winner. An ex post equilibrium in which the winning bidder has the largest willingness to pay for the asset exists if two conditions hold: each bidder's marginal utility of income is log-supermodular, and the vector-valued function mapping the type vector into the bidders' expected values for the asset satisfies a weighted average crossing condition. However, this equilibrium need not be efficient. We show that it is efficient if each bidder's expected value for the asset is nonincreasing in the types of the other bidders, or if the bidders exhibit nonincreasing absolute risk aversion or if the asset is riskless.
Audrey Hu
, Steven A. Matthews
, Liang Zou
2015-02-25
English auction, ensuing risk, heterogeneous risk preferences, interdependent values, ex post equilibrium, ex post efficiency
Equilibrium Bank Runs Revisied
http://d.repec.org/n?u=RePEc:red:sed014:1142&r=mic
Peck and Shell (2003) show that equilibrium bank runs are possible in the Diamond and Dybvig (1983)environment. We show that their result is an artifact of their restriction to direct mechanisms. That is, their bank contract is not an optimal one. We show that an indirect mechanism eliminates the possibility of bank-run equilibria and implements the socially efficient outcome. The optimal mechanism can be interpreted as a form of deposit insurance.
Ed Nosal
, Bruno Sultanum
, David Andolfatto
2014
When and How the Punishment Must Fit the Crime
http://d.repec.org/n?u=RePEc:mnh:wpaper:37483&r=mic
In repeated normal-form (simultaneous-move) games, simple penal codes (Abreu,1986, 1988) permit an elegant characterization of the set of subgame-perfect outcomes. We show that the logic of simple penal codes fails in repeated extensive-form games. By means of examples, we identify two types of settings in which a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator, but also to the nature of the deviation.
Mailath, George J.
, Nocke, Volker
, White, Lucy
2015
Simple Penal Code , Subgame Perfect Equilibrium , Repeated Extensive Game , Optimal Punishment
A Mechanism for Optimal Enforcement of Coordination: Sidestepping Theory of Mind
http://d.repec.org/n?u=RePEc:ppc:wpaper:0003&r=mic
Mechanisms employing fines and rewards may be introduced in multi-equilibrium situations to enforce a certain equilibrium. The mechanism does two things. First, it produces a signal disrupting the normal dynamics of repeated play; potentially encouraging agents to reconsider their expectations. Secondly, it changes the payoffs. In deciding what behavior to engage in after introduction of a new mechanism a rational agent needs to consider to what degree the signal has been received and convinced others, which in turn depends on what those others believe about the reception of the signal, and so on. The epistemic mess is a challenge for both the agents and for a policy maker interested in facilitating a re-coordination. The latter begs the question: How large must fines and rewards be to ensure re-coordination? We show that the result we get from classic game theory is more "heavy handed" than necessary; far less intervention is actually required. Specifically we will outline a mechanism that ensures re-coordination, regardless of the idiosyncratic belief formation processes of the population, while at the same time making minimal interventions.
Alexander Funcke
, Daniel Cownden
2015-02
coordination, fines and rewards, mechanism design
Costless delay in negotiations
http://d.repec.org/n?u=RePEc:unm:umagsb:2015002&r=mic
We study strategic negotiation models featuring costless delay, general recognition procedures, endogenous voting orders, and finite sets of alternatives. Two examples show 1. non-existence of stationary subgame-perfect equilibrium SSPE. 2. the recursive equations and optimality conditions are necessary for SSPE but insufficient because these equations can be singular. Strategy profiles excluding perpetual disagreement guarantee non-singularity. The necessary and sufficient conditions for existence of stationary best responses additionally require either an equalizing condition or a minimality condition. Quasi SSPE only satisfy the recursive equations and optimality conditions. These always exist and are SSPE if either all equalizing conditions or all minimality conditions hold.
Herings P.J.J.
, Houba H
2015
Noncooperative Games; Stochastic and Dynamic Games; Evolutionary Games; Repeated Games; Bargaining Theory; Matching Theory;
Rent-seeking contests with private valuations
http://d.repec.org/n?u=RePEc:cca:wpaper:390&r=mic
We study a rent-seeking contest in which players have heterogeneous and private valuations. In addition to their own type, agents only know that all valuations are drawn from an unspeciÂ…ed distribution, of which they only know the mean. We obtain a closed-form solution for agentsÂ’ optimal level of investment and subject it to comparative statics analy- sis. We also investigate the issue of entry in the game and the amount of rent dissipation that results in equilibrium. Finally, we compare our results with those that would emerge in a context of perfect information.
Andrea Gallice
2014
rent-seeking; contests; private information; imperfect information.
Stochastic Games with Hidden States
http://d.repec.org/n?u=RePEc:pen:papers:15-007&r=mic
This paper studies infinite-horizon stochastic games in which players observe noisy public information about a hidden state each period. We find that if the game is connected, the limit feasible payoff set exists and is invariant to the initial prior about the state. Building on this invariance result, we provide a recursive characterization of the equilibrium payoff set and establish the folk theorem. We also show that connectedness can be replaced with an even weaker condition, called asymptotic connectedness. Asymptotic connectedness is satisfied for generic signal distributions, if the state evolution is irreducible.
Yuichi Yamamoto
2015-01-14
stochastic game, hidden state, connectedness, stochastic selfgeneration, folk theorem