nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒07‒27
thirteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Core stable bidding rings in independent private value auctions with externalities By Omer Biran
  2. Preferences for Consistency By Falk, Armin; Zimmermann, Florian
  3. Stubborn Learning By Jean-François Laslier; Bernard Walliser
  4. Correlation through Bounded Recall Strategies By Ron Peretz
  5. Proportional Nash solutions - A new and procedural analysis of nonconvex bargaining problems By Xu, Yongsheng; Yoshihara, Naoki
  6. Procrastination in Teams, Contract Design and Discrimination By Philipp Weinschenk
  7. Pareto-Optimal Assignments by Hierarchical Exchange By Sophie Bade
  8. Pareto efficiency for the concave order and multivariate comonotonicity. By Galichon, Alfred; Dana, Rose-Anne; Carlier, Guillaume
  9. Behavioral Properties of the Representative Agent. By Jouini, Elyès; Napp, Clotilde
  10. Asking Questions By Nenad Kos
  11. "Relational" Procurement Contracts: A Simple Model of Reputation Mechanism By Gian Luigi Albano; Berardino Cesi; Alberto Iozzi
  12. Refined best reply correspondence and dynamics By Dieter Balkenborg; Josef Hofbauer; Christoph Kuzmics
  13. Social choice with approximate interpersonal comparison of welfare gains By Pivato, Marcus

  1. By: Omer Biran (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)
    Abstract: We consider a second price auction between bidders with independently and identically distributed valuations, where a losing bidder suffers a negative direct externality. Considering ex-ante commitments to form bidding rings we study the question of core stability of the grand coalition, namely: is there a subset of bidders that prefers forming a small bidding ring rather than participating in the grand cartel? We show that in the presence of direct externalities between bidders the grand coalition is not necessarily core stable, as opposed to the zero externality case, where the stability of the grand coalition is a known result. Finally, we study collusion in auctions as a mechanism design problem, insisting on the difficulty to compare ex-ante and interim commitments. In particular, we show that there are situations in which bidders prefer colluding before privately learning their types.
    Keywords: Auctions;collusion;externalities;Bayesian games;core; partition function game;mechanism design
    Date: 2011–07–11
  2. By: Falk, Armin (University of Bonn); Zimmermann, Florian (University of Bonn)
    Abstract: This paper studies how a preference for consistency can affect economic decision-making. We propose a two-period model where people have a preference for consistency because consistent behavior allows them to signal personal and intellectual strength. We then present three experiments that study main predictions and implications of the model. The first is a simple principal-agent experiment that shows that consistency is valued by others and that this value is anticipated. The second experiment underlines the crucial role of early commitment for consistency preferences. Finally we show how preferences for consistency can be used to manipulate choices.
    Keywords: consistency preferences, experiments, early commitment, charitable giving, social influence
    JEL: C91 D64
    Date: 2011–07
  3. By: Jean-François Laslier (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Bernard Walliser (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: The paper studies a specific reinforcement learning rule in two-player games when each player faces a unidimensional strategy set. The essential feature of the rule is that a player keeps on incrementing her strategy in the same direction if and only if her utility increases. The paper concentrates on games on the square [0; 1] x [0; 1] with bilinear payoff functions such as the mixed extensions of 2 x 2 games. It studies the behavior of the system in the interior as well as on the borders of the strategy space. It precisely exhibits the trajectories of the system and the asymptotic states for symmetric, zero-sum, and twin games.
    Date: 2011–07–19
  4. By: Ron Peretz
    Abstract: Two agents independently choose mixed m-recall strategies that take actions in finite action spaces A1 and A2. The strategies induce a random play, a1,a2,..., where at assumes values in A1 X A2. An M-recall observer observes the play. The goal of the agents is to make the observer believe that the play is similar to a sequence of i.i.d. random actions whose distribution is Q \in \Delta(A1 X A2). For nearly every t, the following event should occur with probability close to one: "the distribution of a_{t+M} given at a_t,..,a_{t+M} is close to Q." We provide a sufficient and necessary condition on m, M, and Q under which this goal can be achieved (for large m). This work is a step in the direction of establishing a folk theorem for repeated games with bounded recall. It tries to tackle the difficulty in computing the individually rational levels (IRL) in the bounded recall setting. Our result implies, for example, that in some games the IRL in the bounded recall game is bounded away below the IRL in the stage game, even when all the players have the same recall capacity.
    Date: 2011–07–21
  5. By: Xu, Yongsheng; Yoshihara, Naoki
    Abstract: This paper studies the Nash solution to nonconvex bargaining problems. The Nash solution in such a context is typically multi-valued. We introduce a procedure to exclude some options recommended by the Nash solution. The procedure is based on the idea of the Kalai-Smorodinsky solution which has the same informational requirement on individual utilities as the Nash solution does and has an equity consideration as well. We then use this procedure to introduce two new solutions to nonconvex bargaining problems and study them axiomatically.
    JEL: C71 C78 D6 D7
    Date: 2011–07
  6. By: Philipp Weinschenk (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We study a dynamic model of team production with moral hazard. We show that the players begin to invest effort only shortly before the time limit when the reward for solving the task is shared equally. We explore how the team can design contracts to mitigate this form of procrastination and show that the second-best optimal contract is discriminatory. We investigate how limited liability or the threat of sabotage influences the team’s problem. It is further shown that players who earn higher wages can be worse off than teammates with lower wages and that present-biased preferences can mitigate procrastination.
    Keywords: Moral Hazard, team production, partnerships, procrastination, contract design, discrimination
    JEL: D82 M52 L22 J71
    Date: 2011–07
  7. By: Sophie Bade (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: A version of the Second Fundamental Theorem of Welfare Economics that applies to a money-free environment, in which a set of indivisible goods needs to be matched to some set of agents, is established. In such environments, "trade" can be identied with the set of hierarchical exchange mechanisms dened by Papai (2000). Papai (2000)'s result – that any such mechanism yields Pareto-optimal allocations – can be interpreted as a version of the First Fundamental Theorem of Welfare Economics for the given environment. In this note, I show that for any Pareto-optimal allocation and any hierarchical exchange mechanism one can nd an initial allocation of ownership rights, such that the given Pareto-optimal allocation arises as a result of trade.
    Date: 2011–06
  8. By: Galichon, Alfred; Dana, Rose-Anne; Carlier, Guillaume
    Abstract: This paper studies efficient risk-sharing rules for the concave dominance order. For a univariate risk, it follows from a comonotone dominance principle, due to Landsberger and Meilijson [28], that efficiency is characterized by a comonotonicity condition. The goal of the paper is to generalize the comonotone dominance principle as well as the equivalence between efficiency and comonotonicity to the multidimensional case. The multivariate case is more involved (in particular because there is no immediate extension of the notion of comonotonicity) and it is addressed by using techniques from convex duality and optimal transportation.
    Keywords: comonotonicity; efficiency; multivariate risk-sharing; concave order; stochastic dominance;
    JEL: G12 D81
    Date: 2011
  9. By: Jouini, Elyès; Napp, Clotilde
    Abstract: In this paper, we show that behavioral features can be obtained at a group level when the individuals of the group are heterogeneous enough. More precisely, starting from a standard model of Pareto optimal allocations, with expected utility maximizers and exponential dis- counting, but allowing for heterogeneity among agentsíbeliefs and time preference rates, we show that the representative agent exhibits interesting behavioral properties. In particular, we obtain an inverse S-shaped probability distribution weighting function and hyperbolic discounting. We provide possible interpretation as well as applications for this result.
    Keywords: Hyperbolic Discounting; Behavioral Agent; Neurofinance; Representative Agent; Probability Weighting Function;
    JEL: D87 H43 D84 D81 G11
    Date: 2011
  10. By: Nenad Kos
    Abstract: We examine a model of limited communication in which the seller is selling a single good to two potential buyers. Limited communication is modeled as follows: in each of the finite number of periods the seller asks one of the two buyers a binary question. After the final answer, the allocation and the transfers are executed. The model sheds light on the communication protocols that arise in welfare maximizing mechanisms. Among other things, we show that when the total number of questions is bounded the welfare optimal mechanism requires the seller to start with questioning one of the buyers and conclude with a single last question to the other buyer.
    Date: 2011
  11. By: Gian Luigi Albano (yItalian Public Procurement Agency (Consip S.p.A); Berardino Cesi (Faculty of Economics, University of Rome "Tor Vergata" and University of Bristol); Alberto Iozzi (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: We show how repeatedly awarded procurement contracts where unverifiable quality dimensions are relevant can be reinterpreted as relational contracts between a buyer and a contractor that is threatened by a potentially less efficient competitor. We compare two scenarios: 1) Under freedom of choices the (public) buyer freely chooses the contractor, the price and the (unverifiable) quality it should stick to, 2) in a competitive discretionary tendering the buyer evaluates differently the bids of the suppliers by means of a handicap, based on the firm's past performance. We show that, if firms' costs are common knowledge, relational discriminatory tenderings replicates the results of long term contracting (freedom of choice). The handicap ensures the existence of a relational contract under which the buyer selects the more efficient firm and pays it a price higher than its cost, and the firm delivers the required quality. This outcome is an equilibrium when thecost of quality is not too high, and the players' discount factor and the valuation of quality are not small. A self-enforcing relational contract entails an handicap which is closer to the difference between the firms' specific-cost, the lower is the variable cost of quality and the higher is the players' discount factor.
    Keywords: public procurement, relational contracts, unverifiable quality, handicap.
    Date: 2011–07–21
  12. By: Dieter Balkenborg; Josef Hofbauer; Christoph Kuzmics (Institute of Mathematical Economics, Bielefeld University)
    Abstract: We call a correspondence, defined on the set of mixed strategy profiles, a generalized best reply correspondence if it has (1) a product structure, is (2) upper semi-continuous, (3) always includes a best reply to any mixed strategy profile, and is (4) convex- and closed-valued. For each generalized best reply correspondence we define a generalized best reply dynamics as a differential inclusion based on it. We call a face of the set of mixed strategy profiles a minimally asymptotically stable face (MASF) if it is asymptotically stable under some such dynamics and no subface of it is asymptotically stable under any such dynamics. The set of such correspondences (and dynamics) is endowed with the partial order of point-wise set-inclusion and, under a mild condition on the normal form of the game at hand, forms a complete lattice with meets based on point-wise intersections. The refined best reply correspondence is then defined as the smallest element of the set of all generalized best reply correspondences. We ultimately find that every Kalai and Samet's (1984) persistent retract, which coincide with Basu and Weibull's (1991) CURB sets based, however, on the refined best reply correspondence, contains a MASF. Conversely, every MASF must be a Voorneveld's (2004) prep set, again, however, based on the refined best reply correspondence..
    Keywords: Evolutionary game theory, best response dynamics, CURB sets, persistent retracts, asymptotic stability, Nash equilibrium refinements, learning
    JEL: C62 C72 C73
    Date: 2011–07
  13. By: Pivato, Marcus
    Abstract: Suppose it is possible to make approximate interpersonal comparisons of welfare gains and losses. Thus, if w, x, y, and z are personal psychophysical states (each encoding all ethically relevant information about the physical and mental state of a person), then it sometimes possible to say, ``The welfare gain of the state change w --> x is greater than the welfare gain of the state change y --> z.'' We can represent this by the formula ``(w --> x)> (y --> z)'', where `>' is a `difference preorder': an incomplete preorder on the space of all possible personal state changes. A `social state change' is a bundle of personal state changes. A `social difference preorder' (SDP) is an incomplete preorder on the space of social state changes, which satisfies Pareto and Anonymity axioms. The `minimal' SDP is the natural extension of the Suppes-Sen preorder to this setting; we show that it is a subrelation of every other SDP. The `approximate utilitarian' SDP ranks social state changes by comparing the sum total utility gain they induce, with respect to all `utility functions' compatible with `>'. The `net gain' preorder ranks social state changes by comparing the aggregate welfare gain they induce upon various subpopulations. We show that, under certain conditions, all three of these preorders coincide.
    Keywords: utilitarian; interpersonal comparisons; difference order; cardinal utility; linearly ordered abelian group
    JEL: D63 D70
    Date: 2011–07–14

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