
on Microeconomics 
Issue of 2011‒07‒27
thirteen papers chosen by JingYuan Chiou IMT Lucca Institute for Advanced Studies 
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 exante 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 exante 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 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs00608008&r=mic 
By:  Falk, Armin (University of Bonn); Zimmermann, Florian (University of Bonn) 
Abstract:  This paper studies how a preference for consistency can affect economic decisionmaking. We propose a twoperiod 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 principalagent 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 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp5840&r=mic 
By:  JeanFrançois Laslier (Department of Economics, Ecole Polytechnique  CNRS : UMR7176  Polytechnique  X); Bernard Walliser (EEPPSE  Ecole d'Économie de Paris  Paris School of Economics  Ecole d'Économie de Paris) 
Abstract:  The paper studies a specific reinforcement learning rule in twoplayer 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, zerosum, and twin games. 
Date:  2011–07–19 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal00609501&r=mic 
By:  Ron Peretz 
Abstract:  Two agents independently choose mixed mrecall 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 Mrecall 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 
URL:  http://d.repec.org/n?u=RePEc:huj:dispap:dp579&r=mic 
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 multivalued. We introduce a procedure to exclude some options recommended by the Nash solution. The procedure is based on the idea of the KalaiSmorodinsky 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 
URL:  http://d.repec.org/n?u=RePEc:hit:ccesdp:42&r=mic 
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 secondbest 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 presentbiased preferences can mitigate procrastination. 
Keywords:  Moral Hazard, team production, partnerships, procrastination, contract design, discrimination 
JEL:  D82 M52 L22 J71 
Date:  2011–07 
URL:  http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_13&r=mic 
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 moneyfree 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 Paretooptimal 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 Paretooptimal allocation and any hierarchical exchange mechanism one can nd an initial allocation of ownership rights, such that the given Paretooptimal allocation arises as a result of trade. 
Date:  2011–06 
URL:  http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_11&r=mic 
By:  Galichon, Alfred; Dana, RoseAnne; Carlier, Guillaume 
Abstract:  This paper studies eﬃcient risksharing 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 risksharing; concave order; stochastic dominance; 
JEL:  G12 D81 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/4056&r=mic 
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 Sshaped 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 
URL:  http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/2319&r=mic 
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 
URL:  http://d.repec.org/n?u=RePEc:igi:igierp:405&r=mic 
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 selfenforcing relational contract entails an handicap which is closer to the difference between the firms' specificcost, 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 
URL:  http://d.repec.org/n?u=RePEc:rtv:ceisrp:209&r=mic 
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 semicontinuous, (3) always includes a best reply to any mixed strategy profile, and is (4) convex and closedvalued. 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 pointwise setinclusion and, under a mild condition on the normal form of the game at hand, forms a complete lattice with meets based on pointwise 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 
URL:  http://d.repec.org/n?u=RePEc:bie:wpaper:451&r=mic 
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 SuppesSen 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 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:32252&r=mic 