nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒01‒02
28 papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Organizational Routines: A Sceptical Look By Teppo Felin; Nicolai J. Foss
  2. Knowledge Disclosure, Patents and Optimal Organization of Research and Development By Sudipto Bhattacharya; Sergei Guriev
  3. Public-Good Valuation and Intrafamily Allocation By Jon Strand
  4. Optimal Degree of Public Information Dissemination By Camille Cornand; Frank Heinemann
  5. On the Completeness of Complete Markets By Herings,P. Jean-Jacques; Rohde,Kirsten I.M.
  6. Portfolio decisions on life annuities and financial assets with longevity and income uncertainty By Susanne Pech
  7. Utilitarian Collective Choice and Voting By Hillinger, Claude
  8. Information Dynamics and Equilibrium Multiplicity in Global Games of Regime Change By George-Marios Angeletos; Christian Hellwig; Alessandro Pavan
  9. Nash Equilibria of Games with a Continuum of Players By Guilherme Carmona
  10. Congestion Games Revisited By Nikolai S. Kukushkin
  11. Growth Accounting for Some Selected Developing, Newly Industrialized and Developed Nations from 1966-2000: A Data Envelopment Analysis By Somesh Kumar Mathur
  12. Learning in Repeated Games without Repeating the Game By Patrick Leoni
  13. Market Power, Survival and Accuracy of Predictions in Financial Markets By Patrick Leoni
  14. Making International Organizations More Democratic By Bruno S. Frey; Alois Stutzer
  15. Economic Consequences of Mispredicting Utility By Bruno S. Frey; Alois Stutzer
  16. Illustrating Adverse Selection in Health Insurance Markets with a Classroom Game By Jennifer M. Mellor
  17. Purification in the Infinitely-Repeated Prisoners’ Dilemma By V. Bhaskar; George J. Mailath; Stephen Morris
  18. Sunk Investments Lead to Unpredictable Prices (Second Version) By George J.Mailath; Andrew Postlewaite; Larry Samuelson
  19. Rationality of Belief Or Why Bayesianism is neither necessary nor sufficient for rationality By Itzhak Gilboa; Andrew Postlewaite; David Schmeidler
  20. The Effect of Adolescent Experience on Labor Market Outcomes: The Case of Height, Third Version By Nicola Persico; Andrew Postlewaite; Dan Silverman
  21. A Dynamic Model of Voting By Arianna Degan
  22. Social Isolation and Inequality By Andrew Postlewaite; Dan Silverman
  23. Consumption Commitments and Preferences for Risk By Andrew Postlewaite; Larry Samuelson; Dan Silverman
  24. Confidence-Enhanced Performance By Olivier Compte; Andrew Postlewaite
  25. On Price-Taking Behavior in Asymmetric Information Economies By Richard McLean; James Peck; Andrew Postlewaite
  26. Increasing Outer Risk By X. Henry Wang; Carmen F. Menezes
  27. On the Licensing of Innovations under Strategic Delegation By X. Henry Wang; Judy Hsu
  28. Inequality, Group Cohesion, and Public Good Provision: An Experimental Analysis By Jeffrey Milyo; Jennifer M. Mellor; Lisa Anderson

  1. By: Teppo Felin; Nicolai J. Foss
    Abstract: Organizational routines and capabilities have become key constructs not only in evolutionary economics, but more recently also in business administration, specifically strategic management. In this chapter we explicate some of the underlying theoretical problems of these concepts, and discuss the need for micro-foundations. Specifically, we focus on some of the explanatory problems of collective-level theorizing, and what we think are tenuous assumptions about human beings. We argue that individual-level considerations deserve significantly more consideration, and that evolutionary economics and strategic management would be well served by building on methodological individualism.
    JEL: D2 L2 M1
    Date: 2004
  2. By: Sudipto Bhattacharya; Sergei Guriev
    Abstract: We develop a model of two-stage cumulative research and development (R&D), in which one Research Unit (RU) with an innovative idea bargains to license her nonverifiable interim knowledge exclusively to one of two competing Development Units (DUs) via one of two alternative modes: an Open sale after patenting this interim knowledge, or a Closed sale in which precluding further disclosure to a competing DU requires the RU to hold a stake in the licensed DU's post-invention revenues. Both models lead to partial leakage of RU's knowledge from it's description, to the licensed DU alone in a closed sale, and to both DUs in an open sale. We find that higher levels of interim knowledge are more likely to be licensed via closed sales. If the extent of leakage is lower, more RUs choose open sales, generating a non-monotonic relationship between the strength of Intellectual Property Rights (IPR) and aggregate R&D expenditures. We also develop a rationale for the ex ante acquisition of control rights over the RU by a DU, rooted in the RU's incentives to create knowledge under alternative modes of sale thereof, and her wealth constraint in ex interim bargaining.
    Keywords: R&D organisation, patents, intellectual property rights
    JEL: D23 O32 O34
    Date: 2004–09
  3. By: Jon Strand
    Abstract: I derive values of marginal changes in a public good for two-person households, measured alternatively by household member i’s willingness to pay (WTP) for the good on behalf of the household, WTPi(H), or by the sum of individual WTP values across family members, WTP(C). Households are assumed to allocate their resources in efficient Nash bargains over private and common household goods. WTPi(H) is then found by trading off the public good against household goods, and WTP(C) by trading the public good off against private goods. I then find that WTPi(H) is higher (lower) when member i has a high (low) marginal valuation of the public good, but on average represents WTP(C) correctly. Individuals then tend to represent households correctly on average when questioned about the household’s WTP for a public good, even when they are purely selfish and answer truthfully. Counting all members’ WTP answers on behalf of the household then leads to double counting. Pure and paternalistic altruism (the latter attached to consumption of the public good) move each member’s WTP on behalf of the household closer to the true aggregate WTP, but only the latter raises aggregate WTP.
    Keywords: public goods, willingness to pay, contingent valuation, intrafamily allocation, Nash bargaining
    JEL: D13 D64 H41 Q26
    Date: 2004
  4. By: Camille Cornand; Frank Heinemann
    Abstract: In currency exchange markets, there is a conflict between individual decisions and the socially optimal solution. Whereas agents have a coordination motive to take the same position, at the social level effective market coordination per se is not socially valuable, and the central bank aims at driving agents’ actions as close as possible to the economic fundamental state. Some studies argue that it might be better to withhold public information because its potential to serve as a focal point induces agents to exaggerate the importance of public announcements. This paper shows that public information should always be provided with maximum precision, but under certain condition not to all agents. Restrictions on the degree of publicity are a better instrument with which to prevent the negative welfare effects of public announcements than restrictions on their precision are. The optimal degree of publicity is always positive.
    Keywords: transparency, public information, private information, common p-beliefs, coordination, strategic complementarity
    JEL: C73 D82 F31
    Date: 2004
  5. By: Herings,P. Jean-Jacques; Rohde,Kirsten I.M. (METEOR)
    Abstract: We reconsider the allocational invariance of equilibria to different formulations of market completeness. We identify the so-far neglected assumption of sophisticated behavior as crucial to this result. The paper studies three market structures. First, the Arrow-Debreu setting is considered. Second, sequentially complete markets are analyzed, where goods on the spot markets and all contingent one-period ahead commodities can be traded in every state. Finally, complete markets are analyzed, where all possible contingent commodities can be traded at every state. Preferences may be time-consistent or time-inconsistent. A distinction is made between naïve and sophisticated behavior. For economies with time-inconsistent preferences, Arrow-Debreu equilibria are not related to either sequentially complete equilibria or complete equilibria. It does hold that every equilibrium consumption that can be attained in sequentially complete markets, can also be attained in complete markets. An example shows that the converse is not true for naïve economies. Finally, when preferences are restricted to be time-consistent and households are sophisticated, the three market structures yield the same equilibrium consumption. Surprisingly, for naïve households, this result is not true, even when preferences are time-consistent.
    Keywords: microeconomics ;
    Date: 2004
  6. By: Susanne Pech (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: There are two stylised facts, namely weak demand for life-annuities and flat age-wealth profile that contradict the life-cycle hypothesis. In this paper we design a theoretical framework, which combines plausible arguments, which have been put forward in the literature to reconcile theory with empirical evidence. Besides the existence of an annuity market and of a public pension system we assume risk-averse individuals who are uncertain about lifetime and disposable income and who have preferences for leaving bequests. It is shown that this framework can contribute to explain the observed portfolio decision in favour of financial assets relatively to annuities.
    Keywords: savings; life annuities; bequests; uncertain lifetime; uncertain income; social security
    JEL: D81 D91 G22 H55
    Date: 2004–12
  7. By: Hillinger, Claude
    Abstract: In his seminal Social Choice and Individual Values, Kenneth Arrow stated that his theory applies to voting. Many voting theorists have been convinced that, on account of Arrow?s theorem, all voting methods must be seriously flawed. Arrow?s theory is strictly ordinal, the cardinal aggregation of preferences being explicitly rejected. In this paper I point out that all voting methods are cardinal and therefore outside the reach of Arrow?s result. Parallel to Arrow?s ordinal approach, there evolved a consistent cardinal theory of collective choice. This theory, most prominently associated with the work of Harsanyi, continued the older utilitarian tradition in a more formal style. The purpose of this paper is to show that various derivations of utilitarian SWFs can also be used to derive utilitarian voting (UV). By this I mean a voting rule that allows the voter to score each alternative in accordance with a given scale. UV-k indicates a scale with k distinct values. The general theory leaves k to be determined on pragmatic grounds. A (1,0) scale gives approval voting. I prefer the scale (1,0,-1) and refer to the resulting voting rule as evaluative voting. A conclusion of the paper is that the defects of conventional voting methods result not from Arrow?s theorem, but rather from restrictions imposed on voters? expression of their preferences. The analysis is extended to strategic voting, utilizing a novel set of assumptions regarding voter behavior.
    JEL: D72 D71
    Date: 2004–12
  8. By: George-Marios Angeletos; Christian Hellwig; Alessandro Pavan
    Abstract: Global games of regime change %u2013 that is, coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attacks it %u2013 have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to accumulate information over time and take actions in many periods. It is shown that dynamics may lead to multiple equilibria under the same information assumptions that guarantee uniqueness in the static benchmark. Multiplicity originates in the interaction between the arrival of information over time and the endogenous change in beliefs induced by the knowledge that the regime survived past attacks. This interaction also generates interesting equilibrium properties, such as the possibility that fundamentals predict the eventual regime outcome but not the timing or the number of attacks, or that dynamics alternate between crises and phases of tranquility without changes in fundamentals.
    JEL: C7 D7 D8 F3
    Date: 2004–12
  9. By: Guilherme Carmona (Universidade Nova de Lisboa)
    Abstract: We characterize Nash equilibria of games with a continuum of players (Mas-Colell (1984)) in terms of approximate equilibria of large finite games. For the concept of $(\epsilon,\epsilon)$ - equilibrium --- in which the fraction of players not $\epsilon$ - optimizing is less than $\epsilon$ --- we show that a strategy is a Nash equilibrium in a game with a continuum of players if and only if there exists a sequence of finite games such that its restriction is an $(\epsilon_n,\epsilon_n)$ - equilibria, with $\epsilon_n$ converging to zero. The same holds for $\epsilon$ - equilibrium --- in which almost all players are $\epsilon$ - optimizing --- provided that either players' payoff functions are equicontinuous or players' action space is finite. Furthermore, we give conditions under which the above results hold for all approximating sequences of games. In our characterizations, a sequence of finite games approaches the continuum game in the sense that the number of players converges to infinity and the distribution of characteristics and actions in the finite games converges to that of the continuum game. These results render approximate equilibria of large finite economies as an alternative way of obtaining strategic insignificance.
    Keywords: Nash equilibrium, Games with a continuum of players, Games with finitely many players, approximate equilibria.
    JEL: C72
    Date: 2004–12–21
  10. By: Nikolai S. Kukushkin (Russian Academy of Sciences, Dorodnicyn Computing Center)
    Abstract: Strategic games are considered where the players derive their utilities from participation in certain 'processes.' Two subclasses consisting exclusively of potential games are singled out. In the first, players choose where to participate, but there is a unique way of participation, the same for all players. In the second, the participation structure is fixed, but each player may have an arbitrary set of strategies. In both cases, the players sum up the intermediate utilities; thus the first class essentially coincides with that of congestion games. The necessity of additivity in either case is proven.
    Keywords: Nash equilibrium; Potential games; Congestion games; Additive aggregation
    JEL: C72
    Date: 2004–12–22
  11. By: Somesh Kumar Mathur (Department of Economics,Jamia Millia Islamia)
    Abstract: We work out technical efficiency levels of 29 countries consisting of some selected South Asian, East Asian and EU countries using data envelopment analysis. Luxembourg has an efficiency score of one(most efficient) in all the years .Netherlands also has an efficiency score of one in 1966,1971,1976 and 1981.Japan,UK,Belgium,Ireland,Indonesia,Spain and Germany has an efficiency score of one in at least one of the years from 1966 to 2000.In the year 2000 though mean efficiency levels(without including life expectancy as input) of South Asian countries is higher than the European Union Countries and East Asian countries. Japan has the highest average efficiency followed by Hong Kong in the East Asian region in the period 1966-2000. We also decompose labor productivity growth into components attributable to technological changes (shifts in the overall production frontier), technological catch up or efficiency changes(movement towards or away from the frontier),capital accumulation(movement along the frontier) and human capital accumulation( proxied by life expectancy).The overall production frontier is constructed using deterministic methods requiring no specification of functional form for the technology nor any assumption about market structure or the absence of market imperfections. Growth accounting results tend to convey that for the East Asian and the South Asian countries efficiency changes(technological catch up) have contributed the most, while for the European countries it is the technical changes which has contributed to labour productivity changes between 1966-2000. We also analyze the evolution of cross country distribution for the 29 countries included in our sample using Kernel densities. It seems that there are other factors like trade openness,quality of governments,population rate of growth, savings rate, corruption perception indices, rule of law index, social capital and trust variables, formal and informal rules governing the society, among others, rather than the ones that are included below for the growth accounting exercise, which are primarily responsible for the existence of bimodal labour productivity distribution for countries included in our sample. However, from this growth accounting exercise, we do find that there is convergence in statistical terms of efficiency changes and human capital accumulation across countries of the EU, South Asian and East Asian regions.
    Keywords: data envelopment analysis, growth accounting, technical efficiency, efficiency change, technological change, capital accumulation, human capital accumulation, kernel smoothing, cross country labor productivity distribution and counterfactual distributions
    JEL: C6 D5 D9
    Date: 2004–12–22
  12. By: Patrick Leoni
    Abstract: This paper extends the convergence result on Bayesian learning in Kalai and Lehrer (1993a, 1993b) to a class of games where players have a payoff function continuous for the product topology. Provided that 1) every player maximizes her expected payoff against her own beliefs, 2) every player updates her beliefs in a Bayesian manner, and 3) prior beliefs other players’ strategies have a grain of truth, we show that after some finite time the equilibrium outcome of the above game is arbitrarily close to a Nash equilibrium. Those assumptions are shown to be tight.
    Keywords: learning, product topology
    JEL: C73 D83
  13. By: Patrick Leoni
    Abstract: This paper aims to show that the market selection hypothesis in finance is not solely driven by the competitiveness of such markets, as was originally claimed by Alchian [1] and Friedman [4]. Within a standard intertemporal General Equilibrium framework, we allow for an agent to have enough influence on financial markets to strategically affect prices of assets traded. We then show that, as in Sandroni [15], the agent’ long-run consumption will vanish if she makes less accurate predictions than the market, and maintain her market power otherwise. We conclude that the Darwinian justification to this market selection is not the only explanation for the eventual domination of agents making the most accurate predictions. Rather, we claim that the origin of market selection, and in turn of the common prior assumption in asset pricing, is associated with the ability to foresee accurately market uncertainty.
    Keywords: market imperfection, asset pricing, learning
    JEL: G11 G12 D43
  14. By: Bruno S. Frey; Alois Stutzer
    Abstract: World governance today is characterized by international organizations lacking democratic legitimacy and control by the citizens they claim to represent. They are also criticized for being inefficient. This leads to violent protests and to NGOs having great influence. To address these problems, we propose international governance based on the democratic idea of citizen participation: All citizens of the member countries of international organizations have the potential right to participate in the decision-making of international organizations via initiatives, referendums and recalls. In order to reduce transaction costs, a representative group of citizens is randomly selected who can actually exercise their participation rights.
    Keywords: international organizations, initiative, random selection, recall, referendum
    JEL: D72 O19
  15. By: Bruno S. Frey; Alois Stutzer
    Abstract: Individuals make systematic mistakes in their decisions, because they mispredict utility from choice options. When deciding, extrinsic attributes of choice options are more salient than intrinsic attributes. Adaptation is neglected, recollection of feelings is distorted, decisions are rationalized and wrong intuitive theories of happiness are applied. People overestimate extrinsic attributes and therefore put too much emphasis on acquiring income and gaining status. In contrast, they underestimate intrinsic attributes and devote too little time to their family, friends or hobbies, which lowers their utility level. The theoretical analysis is consistent with an econometric study on commuting decisions using reported subjective well-being data.
    Keywords: adaptation, extrinsic/intrinsic attributes, individual decision-making, misprediction, subjective well-being, time allocation
    JEL: A12 D11 D12 D84 I31 J22
  16. By: Jennifer M. Mellor (Department of Economics, College of William and Mary)
    Abstract: This paper describes a classroom game that illustrates the effects of asymmetric information and adverse selection in health insurance markets. The first phase of this game simulates a market in which buyers can purchase insurance from sellers who sometimes lack information about buyer type. The results demonstrate the classic prediction that asymmetric information will result in adverse selection. Here, low risk buyers will forego the purchase of insurance at a measurable loss of potential earnings. In the second phase of the game, sellers and buyers can trade two different types of health insurance policies, one moderate and another generous. The results from this simulation demonstrate how adverse selection can lead to an inefficient sorting of buyers across plans, an outcome that is discussed in Cutler and Zeckhauser (1997). In this case, too few buyers elect to purchase the generous insurance plan. The paper provides a series of questions to stimulate class discussion on the causes and consequences of adverse selection for consumers and insurers, and solutions that can be implemented in employer and government-sponsored programs.
    Keywords: Classroom, Experiment, Adverse selection
    JEL: A2 C9 D4 I1
    Date: 2004–12–10
  17. By: V. Bhaskar (University of Essex); George J. Mailath (Department of Economics, University of Pennsylvania); Stephen Morris (Yale University)
    Abstract: This paper investigates the Harsanyi (1973)-purifiability of mixed strategies in the repeated prisoners’ dilemma with perfect monitoring. We perturb the game so that in each period, a player receives a private payoff shock which is independently and identically distributed across players and periods. We focus on the purifiability of a class of one-period memory mixed strategy equilibria used by Ely and Välimäki (2002) in their study of the repeated prisoners’ dilemma with private Monitoring. We find that the strategy profile is purifiable by perturbed-game finite-memory strategies if and only if it is strongly symmetric, in the sense that after every history, both players play the same mixed action. Thus “most” strategy profiles are not purifiable by finite memory strategies. However, if we allow infinite memory strategies in the perturbed game, then any completely-mixed equilibrium is purifiable.
    Keywords: Purification, repeated games, belief-free equilibria, imperfect monitoring.
    JEL: C72 C73
    Date: 2004–01–14
  18. By: George J.Mailath (Department of Economics, University of Pennsylvania); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, University of Wisconsin)
    Abstract: We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade.
    Keywords: Sunk investments, inefficient investments, sunspots, random prices.
    JEL: D40 D50
    Date: 2003–06–03
  19. By: Itzhak Gilboa (Eitan Berglas School of Economics, Tel Aviv University); Andrew Postlewaite (Department of Economics, University of Pennsylvania); David Schmeidler (Eitan Berglas School of Economics, Tel Aviv University)
    Abstract: Economic theory reduces the concept of rationality to internal consistency. The practice of economics, however, distinguishes between rational and irrational beliefs. There is therefore an interest in a theory of rational beliefs, and of the process by which beliefs are generated and justified. We argue that the Bayesian approach is unsatisfactory for this purpose, for several reasons. First, the Bayesian approach begins with a prior, and models only a very limited form of learning, namely, Bayesian updating. Thus, it is inherently incapable of describing the formation of prior beliefs. Second, there are many situations in which there is not sufficient information for an individual to generate a Bayesian prior. Third, this lack of information is even more acute when we address the beliefs that can be attributed to a society. We hold that one needs to explore other approaches to the representation of information and of beliefs, which may be helpful in describing the formation of Bayesian as well as non-Bayesian beliefs.
    Keywords: Decision making; Bayesian; Behavioral Economics
    JEL: D81
    Date: 2004–03–01
  20. By: Nicola Persico (Department of Economics, University of Pennsylvania); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Dan Silverman (Department of Economics, University of Michigan)
    Abstract: Taller workers receive a wage premium. Net of differences in family background, the disparity is similar in magnitude to the race and gender gaps. We exploit variation in an individual’s height over time to explore how height affects wages. Controlling for teen height essentially eliminates the effect of adult height on wages for white males. The teen height premium is not explained by differences in resources or endowments. The teen height premium is partly mediated through participation in high school sports and clubs. We estimate the monetary benefits of a medical treatment for children that increases height.
    Keywords: Confidence, Optimism, Behavioral Economics
    JEL: D81 D83
    Date: 2001–12–05
  21. By: Arianna Degan (Department of Economics, University of Quebec at Montreal)
    Abstract: We propose and estimate a dynamic model of voting with asymmetric information incorporating the three main factors affecting voting choices of individual citizens: party identification, policy preferences, and candidates’ valence. Using individual level data on voting decisions in two consecutive presidential elections, we identify and estimate (1) the distribution of voters’ policy positions and (2) candidates’ valence. In addition to providing an equilibrium interpretation of the observed voting profiles and electoral outcomes, we use the estimated model to conduct counterfactual experiments to assess the relative importance of candidates’ policy positions, valence, and voters’ information on the outcomes of elections and to evaluate the performance of the electoral process.
    Keywords: Party identification, policy preferences, consecutive elections, valence
    JEL: D72
    Date: 2003–11–23
  22. By: Andrew Postlewaite (Department of Economics, University of Pennsylvania); Dan Silverman (Department of Economics, University of Michigan)
    Abstract: There is an increasing interest in the concept of social exclusion and the related concept of social isolation and their potential role in understanding inequality. We examine the degree to which voluntary separation from social activities during adolescence affects adult wages. It is well-known that participation in high school athletic programs leads to higher adult wages. We present empirical evidence that this premium is not primarily due to selection on predetermined characteristics valued in the labor market.
    Keywords: Decision making; Bayesian; Behavioral Economics
    JEL: D81
    Date: 2004–04–27
  23. By: Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, University of Wisconsin); Dan Silverman (Department of Economics, University of Michigan)
    Abstract: We examine an economy in which the cost of consuming some goods can be reduced by making commitments to consumption levels independent of the state. For example, it is cheaper to produce housing services via owner-occupied than rented housing, but the transactions costs associated with the former prompt relatively inflexible housing consumption paths. We show that consumption commitments can cause risk-neutral consumers to care about risk, creating incentives to both insure risks and bunch uninsured risks together. For example, workers may prefer to avoid wage risk while bearing an unemployment risk that is concentrated in as few states as possible.
    Keywords: Unemployment, risk sharing, income distribution
    JEL: D21 D31 D81
    Date: 2001–12–01
  24. By: Olivier Compte (Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS)); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: There is ample evidence that emotions affect performance. Positive emotions can improve performance, while negative ones may diminish it. For example, the fears induced by the possibility of failure or of negative evaluations have physiological consequences (shaking, loss of concentration) that may impair performance in sports, on stage or at school. There is also ample evidence that individuals have distorted recollection of past events, and distorted attributions of the causes of successes of failures. Recollection of good events or successes is typically easier than recollection of bad ones or failures. Successes tend to be attributed to intrinsic aptitudes or own effort, while failures are attributed to bad luck. In addition, these attributions are often reversed when judging the performance of others. The objective of this paper is to incorporate the first phenomenon above into an otherwise standard decision theoretic model, and show that in a world where performance depends on emotions, biases in information processing enhance welfare.
    Keywords: Confidence, Perception, Psychology
    JEL: D8
    Date: 2001–05–01
  25. By: Richard McLean (Department of Economics, Rutgers University); James Peck (Department of Economics, Ohio State University); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: It is understood that rational expectations equilibria may not be incentive compatible: agents with private information may be able to affect prices through the information conveyed by their market behavior. We present a simple general equilibrium model to illustrate the connection between the notion of informational size presented in McLean and Postlewaite (2002) and the incentive properties of market equilibria. Specifically, we show that fully revealing market equilibria are not incentive compatible for an economy with few privately informed producers because of the producers’ informational size, but that replicating the economy decreases agents’ informational size. For sufficiently large economies, there exists an incentive compatible fully revealing market equilibrium.
    Keywords: Rational Expectations Equilibria, Informational Smallness
    JEL: D52 D82
    Date: 2004–06–04
  26. By: X. Henry Wang; Carmen F. Menezes (Department of Economics, University of Missouri-Columbia)
    Abstract: Recent empirical research has established that the distributions of a wide range of economic variables are kurtotic in that they have higher peak(s) in the neighborhood of the mean and greater elongation in the tails than the normal distribution. This paper provides a formal characterization of the empirically significant notions of kurtotic distributions by formulating the concept of outer risk. An increase in outer risk corresponds to a dispersion transfer from the center of a distribution to its tails. In terms of the relocation of probability mass, such a dispersion transfer accentuates the peak(s) of the distribution and elongates its tails. It is shown that ordering distributions by outer risk is equivalent to the ordering of distributions resulting from unanimous choice by all individuals whose utility function has a negative fourth derivative.
    Keywords: Outer risk, outer risk aversion
    JEL: D81
    Date: 2004–12–23
  27. By: X. Henry Wang (Department of Economics, University of Missouri-Columbia); Judy Hsu
    Abstract: This paper uses a three-stage licensing-delegation-quantity game to study the licensing of a cost-reducing innovation by a patent-holding firm to its competitor. It is shown that licensing is less likely to occur under strategic delegation compared to no delegation.
    Keywords: licensing; strategic delegation
    JEL: D45 L10 L20
    Date: 2004–12–23
  28. By: Jeffrey Milyo (Department of Economics, University of Missouri-Columbia); Jennifer M. Mellor; Lisa Anderson
    Abstract: Recent studies argue that inequality reduces group cohesiveness and dampens support for expenditures on public goods and social programs. In light of competing theoretical explanations and mixed empirical evidence of the effect of inequality on public goods provision, we conduct a test using a public goods experiment. Our design introduces inequality by manipulating the levels and distributions of fixed payments given to subjects for participating in the experiment. When made salient through public information about each individual’s standing within the group, inequality in the distribution of fixed payments reduces contributions to the public good for all group members.
    JEL: D31 H41 Z13
    Date: 2004–12–27

This nep-mic issue is ©2005 by Joao Carlos Correia Leitao. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.