nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒08‒09
seven papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Can Market Failure Cause Political Failure? By Madhav S, Aney; Maitreesh Ghatak; Massimo Morelli
  2. The marginal utility of money: A modern Marshallian approach to consumer choice By József Sákovics and Daniel Friedman (University of California at Santa Cruz)
  3. Reciprocal Relationships and Mechanism Design By Celik, Gorkem; Peters, Michael
  4. Optimal Tax Rules for Addictive Consumption By Bossi, Luca; Calcott, Paul; Petkov, Vladimir
  5. The probability of nontrivial common knowledge By Andrea Collevecchio; Marco LiCalzi
  6. On the equivalence of Bayesian and dominant strategy implementation in a general class of social choice problems By Jacob K. Goeree; Alexey Kushnir
  7. The Strategic Use of Ambiguity By Frank Riedel; Linda Sass

  1. By: Madhav S, Aney; Maitreesh Ghatak; Massimo Morelli
    Abstract: We study how inefficiencies of market failure may be further amplified by political choices made by interest groups created in the inefficient market. We take an occupational choice framework, where agents are endowed heterogeneously with wealth and talent. In our model, market failure due to unobservability of talent endogenously creates a class structure that affects voting on institutional reform. In contrast to the world without market failure where the electorate unanimously vote in favour of surplus maximising institutional reform, we find that the preferences of these classes are often aligned in ways that creates a tension between surplus maximising and politically feasible institutional reforms.
    Keywords: occupational choice, adverse selection, property rights, assetliquidation, political failure, market failure.
    JEL: O12 O16 O17 I
    Date: 2011–07
  2. By: József Sákovics and Daniel Friedman (University of California at Santa Cruz)
    Abstract: We reformulate neoclassical consumer choice by focusing on lamda, the marginal utility of money. As the opportunity cost of current expenditure, lamda is approximated by the slope of the indirect utility function of the continuation. We argue that lamda can largely supplant the role of an arbitrary budget constraint in partial equilibrium analysis. The result is a better grounded, more flexible and more intuitive approach to consumer choice.
    Keywords: budget constraint, separability, value for money
    JEL: D01 D11
    Date: 2011–08–02
  3. By: Celik, Gorkem; Peters, Michael
    Abstract: We study an incomplete information game in which players are involved in a reciprocal relationship that allows them to coordinate their actions by contracting among themselves. We model this as a competing mechanism game in which players have the ability to write contracts. We characterize the set of outcome functions that can be supported as equilibrium in this enhanced game. We use our characterization to show that the set of supportable outcomes is bigger than the set of outcomes supported by a centralized mechanism designer who can offer mechanisms in which all players participate. The difference is that the contracting game makes it possible for players to convey partial information about their type at the time they offer contracts.
    Date: 2011–08–01
  4. By: Bossi, Luca; Calcott, Paul; Petkov, Vladimir
    Abstract: This paper studies implementation of the social optimum in a model of habit formation. We consider taxes that address inefficiencies due to negative consumption externalities, imperfect competition, and self-control problems. Our contributions are to: i) account for producers’ market power; and ii) require implementation to be robust and time consistent. Together, these features can imply significantly lower taxes. We provide a general characterization of the optimal tax rule and illustrate it with two examples.
    Keywords: dynamic externalities, internalities, addiction, optimal taxation, time consistent implementation,
    Date: 2011–06–23
  5. By: Andrea Collevecchio (Department of Management, Università Ca' Foscari Venezia); Marco LiCalzi (Department of Management, Università Ca' Foscari Venezia)
    Abstract: We study the probability that two or more agents can attain common knowledge of nontrivial events when the size of the state space grows large. We adopt the standard epistemic model where the knowledge of an agent is represented by a partition of the state space. Each agent is endowed with a partition generated by a random scheme. Assuming that agents' partitions are independently and identically distributed, we prove that the asymptotic probability of nontrivial common knowledge undergoes a phase transition. Regardless of the number of agents, when their cognitive capacity is suciently large, the probability goes to one; and when it is small, it goes to zero.
    Keywords: Common knowledge; Epistemic game theory; Random partitions
    JEL: C72 D83
    Date: 2011–07
  6. By: Jacob K. Goeree; Alexey Kushnir
    Abstract: We consider a standard social choice environment with linear utilities and independent, one-dimensional, private values. We provide a short and constructive proof that for any Bayesian incentive compatible mechanism there exists an equivalent dominant strategy incentive compatible mechanism that delivers the same interim expected utilities for all agents. We demonstrate the usefulness and applicability of our approach with several examples. Finally, we show that the equivalence between Bayesian and dominant strategy implementation breaks down when utilities are non-linear or when values are interdependent, multi-dimensional, or correlated.
    Date: 2011–07
  7. By: Frank Riedel (Institute of Mathematical Economics, Bielefeld University); Linda Sass (Institute of Mathematical Economics, Bielefeld University)
    Abstract: Ambiguity can be used as a strategic device in some situations. To demonstrate this, we propose and study a framework for normal form games where players can use Knightian uncertainty strategically. In such Ellsberg games, players may use Ellsberg urns in addition to the standard objective mixed strategies. We assume that players are ambiguity-averse in the sense of Gilboa and Schmeidler. While classical Nash equilibria remain equilibria in the new game, there arise new Ellsberg equilibria that can be quite different from Nash equilibria. A negotiation game with three players illustrates this finding. Another class of examples shows the use of ambiguity in mediation. We also highlight some conceptually interesting properties of Ellsberg equilibria in two person games with conflicting interests.
    Date: 2011–08

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