nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒01‒23
twelve papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market By Martin Barner, Francesco Feri, Charles Plott
  2. The Dreze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability By CRES, Hervé; TVEDE, Mich
  3. Economic and Hypothetical Dictator Game Experiments: Incentive Effects at the Individual Level By Avner Ben-Ner; Ori Levy
  4. Dynamic Inefficiencies in Insurance Markets: Evidence from long-term care insurance By Amy Finkelstein; Kathleen McGarry; Amir Sufi
  5. Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions By Steven D. Levitt; Chad Syverson
  6. Incentive to encourage cownstream competition under bilateral oligopoly By Caprice, S.
  7. Voting for the Electoral System: an Experiment. By Ortona, Guido
  8. Social Interactions and Economic Behavior By Giulio Zanella
  9. The Effects of Market Structure on Industry Growth: Rivalrous Non-excludable Capital By Christos Koulovatianos; Leonard J. Mirman
  10. Specialization and Nonrenewable Resources: Ricardo Meets Ricardo By Ujjayant Chakravorty; Darrell Krulce; James Roumasset
  11. Vulnerable Trade: The Dark Side of an Edgeworth Box By Charles Anderton; John Carter
  12. Applying Intermediate Microeconomics to Terrorism By Charles Anderton; John Carter

  1. By: Martin Barner, Francesco Feri, Charles Plott
    Abstract: Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option would be known with certainty. The results are the following: (1) Information becomes aggregated in the prices as if fully informative rational expectations operated; and (2) The mechanism through which information gets into the market is captured by a path dependent process that we term "The Fundamental Coordination Principle of Information Transfer in Competitive Markets". The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the "Fundamental Principle."
    Keywords: Microstructure, Information, Rational Expectations experiments, Information Aggregation, Belief Formation, Bubbles, Cascades, Mirages
    Date: 2004–08
  2. By: CRES, Hervé; TVEDE, Mich (Institute of Economics, University of Copenhagen)
    Abstract: This paper studies corporate control in a general equilibrium model with incomplete markets. At the market equilibrium, shareholders typically disagree on the way to evaluate production plans outside the market span. Hence a collective decision mechanism is needed to resolve this conflict. A mechanism proposed by Drèze (1974), resp. Grossman & Hart (1979), consists in allowing (Lindahl-like) sidepayments between final, resp. initial, shareholders. Although it is likely to exhibit desirable efficiency properties, this mechanism is difficult to implement. Another mechanism (e.g., Drèze (1985) and De-Marzo (1993)) relies on majority voting by shareholders. Since voting occurs in a multidimensional setup, super majority rules are needed to ensure existence of equilibria. We give conditions under which sidepayment equilibria are voting equilibria for the smallest rate of super majority ensuring existence. Thereby we are able to compare the relative performances of the Drèze and Grossman-Hart criteria with respect to stability in the voting mechanism. We show that the endogenization of portfolio holding in the Drèze criterion can either help or completely jeopardize the aggregation process, depending on the shareholders' expectations. This ambivalence is absent in the Grossman-Hart criteria.
    Keywords: incomplete markets; super majority voting; sidepayments; corporate charter; self-fulfilling prophcies
    JEL: D21 D52 D71 G39
    Date: 2004–03–01
  3. By: Avner Ben-Ner; Ori Levy
    Abstract: The paper compares behavior in economic dictator game experiments played with actual money (amounts given by "dictator" subjects) with behavior in hypothetical dictator game experiments where subjects indicate what they would give, although no money is actually exchanged. The average amounts transferred in the two experiments are remarkably similar. Moreover, we uncover meaningful individual differences in real and hypothetical allocations and demonstrate the importance of two personality traits - agreeableness and extraversion - in reconciling them. We conclude that extraverts are "all talk;" agreeable subjects are "for real."
    Keywords: Dictator Game, Incentives, Individual Differences, Personality
    JEL: C91 D81
  4. By: Amy Finkelstein; Kathleen McGarry; Amir Sufi
    Abstract: We examine whether unregulated, private insurance markets efficiently provide insurance against reclassification risk (the risk of becoming a bad risk and facing higher premiums). To do so, we examine the ex-post risk type of individuals who drop their long-term care insurance contracts relative to those who are continually insured. Consistent with dynamic inefficiencies, we find that individuals who drop coverage are of lower risk ex-post than individuals who were otherwise-equivalent at the time of purchase but who do not drop out of their contracts. These findings suggest that dynamic market failures in private insurance markets can preclude the efficient provision of insurance against reclassification risk.
    JEL: D4 D8 I11 G22 J14
    Date: 2005–01
  5. By: Steven D. Levitt; Chad Syverson
    Abstract: Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homeowner, are one example. Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly. We test these predictions by comparing home sales in which real estate agents are hired by others to sell a home to instances in which a real estate agent sells his or her own home. In the former case, the agent has distorted incentives; in the latter case, the agent wants to pursue the first-best. Consistent with the theory, we find homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer, even after controlling for a wide range of housing characteristics. Situations in which the agent's informational advantage is larger lead to even greater distortions.
    JEL: D8 L1 L8 R2
    Date: 2005–01
  6. By: Caprice, S.
    Abstract: We show that, contrary to the key result of the previous literature, input supplier's profit can increase with the number of downstream firms if the upstream firm is not a monopolist but competes with an alternative inferior supplier. ...French Abstract : Cet article montre, contrairement au résultat classique de la littérature sur les relations verticales (avec problème d'engagement sur les contrats, en amont) que le profit d'un fournisseur peut augmenter avec le nombre de distributeurs s'il n'est pas un monopole, mais est concurrencé par un autre fournisseur.
    JEL: C72 D43 L4
    Date: 2004
  7. By: Ortona, Guido
    Abstract: he choice of the electoral system should be delegated to the citizens. However, citizens are not sufficiently informed to choose the system directly. It is argued that they may instead state their preferences for two basic characteristics of a Parliament, i.e. Governability and Representativeness. It is then possible to choose the system through a purely technical procedure. An experiment illustrates the method.
    JEL: D72
    Date: 2004–12
  8. By: Giulio Zanella
    Abstract: This paper is a critical introduction to the new wave of economic literature on the effect of social interactions on individual behavior and aggregate economic outcomes. I refer to this research program, also known as new social economics, as the socioeconomic analysis of behavior, to distinguish it from the more popular economic analysis of social behavior. I discuss the main features of so-called interactions-based models, and I show how they help us to understand substantive economic phenomena. In order to restrict the focus, I choose five possible applications: matching in the labor market, welfare participation, poverty traps and inequality, investor behavior, and consumer behavior. Then I dwell upon two key undecided questions: (i) why economic behavior is affected by social interactions, and (ii) how the social context is shaped by rational individuals. Finally, I briefly discuss the main empirical routes so far used.
    Keywords: new social economics, social interactions, neighborhood effects, social networks, social norms, social multiplier
    JEL: D10 D85 Z13
    Date: 2004–11
  9. By: Christos Koulovatianos; Leonard J. Mirman
    Abstract: We analyze imperfect competition in dynamic environments where firms use rivalrous but nonexcludable industry-specific capital that is provided exogenously. Capital depreciation depends on utilization, so firms influence the evolution of the capital equipment through more or less intensive supply in the final-goods market. Strategic incentives stem from, (i) a dynamic externality, arising due to the non-excludability of the capital stock, leading firms to compete for its use (rivalry), and, (ii) a market externality, leading to the classic Cournot-type supply competition. Comparing alternative market structures, we isolate the effect of these externalities on strategies and industry growth.
    JEL: D43 D92 L13 O12 Q20
    Date: 2005–01
  10. By: Ujjayant Chakravorty (Department of Economics, Emory University); Darrell Krulce (QUALLCOM, Inc., San Diego); James Roumasset (Department of Economics, University of Hawaii at Manoa)
    Abstract: The one-demand Hotelling model fails to explain the observed specialization of nonrenewable resources. We develop a model with multiple demands and resources to show that specialization of resources according to demand is driven by Ricardian comparative advantage while the order of resource use over time is determined by Ricardian absolute advantage. An abundant resource with absolute advantage in all demands must be initially employed in all demands. When each resource has an absolute advantage in some demand, no resource may be used exclusively. The two-by-two model is characterized. Resource and demand-specific taxes are shown to have significant substitution effects.
    Keywords: Dynamic comparative advantage, energy, non-renewable resources, multiple demands, Hotelling
    JEL: D9 Q3 Q4
    Date: 2004
  11. By: Charles Anderton (Department of Economics, College of the Holy Cross); John Carter (Department of Economics, College of the Holy Cross)
    Abstract: We examine incentives to seize and defend goods offered for trade in an Edgeworth box economy. Appropriation possibilities generate an equilibrium of coerced redistribution and voluntary trade in a reduced box. Potential mutual gains remain untaken because the prospect of piracy creates a price wedge, wherein the effective relative price is lowered for the exporter and raised for the importer. As the vulnerability of one or both goods increases, the price wedge widens, causing trade to diminish. If vulnerability becomes sufficiently high, then trade and appropriation are driven to zero, or one or both players are rendered indifferent to trade.
    Keywords: appropriation, property rights, piracy, trade, edgeworth box
    JEL: C72 D51 D74 F10
    Date: 2004–12
  12. By: Charles Anderton (Department of Economics, College of the Holy Cross); John Carter (Department of Economics, College of the Holy Cross)
    Abstract: The authors show how microeconomic concepts and principles are applicable to the study of terrorism. The utility maximization model provides insights into both terrorist resource allocation choices and government counterterrorism efforts, while basic game theory helps characterize the strategic interdependencies among terrorists and governments.
    Keywords: terrorism; rational choice model; income and substitution effects; Slutsky equation; game theory; prisoners’ dilemma; chicken; public goods
    JEL: A12 A22 C70 D11 D74 H41 H56
    Date: 2004–12

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