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on Microeconomics |
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Issue of 2011‒08‒29
fifteen papers chosen by Jing-Yuan Chiou IMT Lucca Institute for Advanced Studies |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. Economics, Princeton University) |
| Abstract: | This essay is the introduction for a collection of papers by the two of us on "Robust Mechanism Design" to be published by World Scientific Publishing. The appendix of this essay lists the chapters of the book. The objective of this introductory essay is to provide the reader with an overview of the research agenda pursued in the collected papers. The introduction selectively presents the main results of the papers, and attempts to illustrate many of them in terms of a common and canonical example, the single unit auction with interdependent values. In addition, we include an extended discussion about the role of alternative assumptions about type spaces in our work and the literature, in order to explain the common logic of the informational robustness approach that unifies the work in this volume. |
| Keywords: | Mechanism design, Robust mechanism design, Common knowledge, Universal type space, Interim equilibrium, Ex post equilibrium, Dominant strategies, Rationalizability, Partial implementation, Full implementation, Robust implementation |
| JEL: | C79 D82 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1818&r=mic |
| By: | Martimort, David; Stole, Lars |
| Abstract: | An aggregate game is a normal-form game with the property that each player’s payoff is a function only of his own strategy and an aggregate function of the strategy profile of all players. Aggregate games possess a set of purely algebraic properties that can often provide simple characterizations of equilibrium aggregates without first requiring that one solves for the equilibrium strategy profile. The defining nature of payoffs in an aggregate game allows one to project the n-player strategic analysis of a normal form game onto a lower-dimension aggregate-strategy space, thereby converting an n-player game to a simpler object – a self-generating single-person maximization program. We apply these techniques to a number of economic settings including competition in supply functions and multi-principal common agency games with nonlinear transfer functions. |
| Keywords: | Aggregate games; common agency; asymmetric informa- tion; menu auctions |
| JEL: | D8 C72 |
| Date: | 2011–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32871&r=mic |
| By: | Martimort, David; Stole, Lars |
| Abstract: | We study games of public delegated common agency under asymmetric information. Us- ing tools from non-smooth analysis and optimal control, we derive best responses and characterize equilibria (both continuous and discontinuous) using self-generating opti- mization programs of which any equilibrium allocation must be a solution. Special atten- tion is given to common agency games in which each principal’s payoff is a linear function of the agent’s action. In such games the self-generating optimization program reduces to the maximization of the principals’ “aggregate” virtual surplus in which the agent’s marginal valuation is replaced by a confluence of “virtual” valuations that reflect com- mon agency problems. One noteworthy subset of equilibrium allocations are “virtually truthful” which are the incomplete-information generalization of Bernheim and Whin- ston’s (1986) “truthful” equilibria. Virtually-truthful equilibria are simple to calculate and illustrate two distinct sources of equilibrium distortion: inefficient contracting by a given coalition of active principals and inefficient participation (insufficient activity) by principals. Our results are illustrated by means of two games: a public goods game in which each player simultaneously offers a menu contract to a common provider of the public good in order to induce greater supply, and a lobbying game between conflicting interest groups in which each group offers a menu of contributions to a common political decision-maker in an attempt to influence policymaking. |
| Keywords: | Common agency; asymmetric information; menu auctions; delegated contracting games; public goods; lobbying; non-smooth analysis; non-smooth control |
| JEL: | D73 D8 C61 C72 |
| Date: | 2011–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32874&r=mic |
| By: | Martimort, David; Stole, Lars |
| Abstract: | This note uses techniques developed for aggregate games to characterize the set of equilib- ria for a beauty contest or prediction game in which the experts’ preferences are quadratic, but with an otherwise unrestricted information structure for private signals and the state variable. We show that, on aggregate, the experts’ collective estimate of the unknown parameter to be estimated is unbiased for every equilibrium. |
| Keywords: | Aggregate games; beauty contests; prediction games |
| JEL: | C8 C72 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32872&r=mic |
| By: | Jonathan E. Alevy (Department of Economics, University of Alaska Anchorage) |
| Abstract: | After Ellsberg’s thought experiments brought focus to the relevance of missing information for choice, extensive efforts have been made to understand ambiguity theoretically and empirically (Ellsberg 1961). Fox and Tversky (1995) make an important contribution to understanding behavioral responses to ambiguity. In an individual choice setting they demonstrate that an aversion to ambiguous lotteries arises only when a comparison to unambiguous lotteries is available. The current study advances this literature by exploring the importance of Fox and Tversky’s finding for market outcomes and finds support for their Comparative Ignorance Hypothesis in the market setting. |
| Keywords: | ambiguity, asset market experiment, comparitive ignorance |
| JEL: | C91 C92 D81 G12 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ala:wpaper:2011-04&r=mic |
| By: | James Andreoni; Charles Sprenger |
| Abstract: | There is convincing experimental evidence that Expected Utility fails, but when does it fail, how severely, and for what fraction of subjects? We explore these questions using a novel measure we call the uncertainty equivalent. We find Expected Utility performs well away from certainty, but fails near certainty for about 40% of subjects. Comparing non-Expected Utility theories, we strongly reject Prospect Theory probability weighting, we support disappointment aversion if amended to allow violations of stochastic dominance, but find the u-v model of a direct preference for certainty the most parsimonious approach. |
| JEL: | D81 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17342&r=mic |
| By: | Gerhard Riener (GSBC-EIC - The Economics of Innovative Change, University of Jena); Simon Wiederhold (GSBC-EIC - The Economics of Innovative Change, University of Jena) |
| Abstract: | Controlling employees can have severe consequences in situations that are not fully contractible. However, the perception of control may be contingent on the nature of the relationship between principal and agent. We, therefore, propose a principal-agent model of control that takes into account social identity (in the sense of Akerlof and Kranton, 2000, 2005). From the model and previous literature, we conclude that a shared social identity between the principal and agent has both a cognitive, that is, belief-related, and a behavioral, that is, performance-related, dimension. We test these theoretical conjectures in a labor market experiment with perfect monitoring. Our ndings confirm that social identity has important implications for the agent's decision-making. First, agents who are socially close to the principal (in-group) perform, on average, more on behalf of the principal than socially distant (no-group) agents. Second, social identity shapes the agent's subjective expectations of the acceptable level of control. In-group agents expect to experience less control than no-group agents. Third, an agent's reaction to the monitoring level she eventually faces also depends on social identity. If the experienced level of control is lower than the expected control level, that is, the agent faces a positive sensation, the increase in performance is less pronounced for in-group agents than for no-group agents. In the case of a negative sensation, however, in-group agents react stronger than no-group agents. Put differently, being socially distant from the principal amplies the performance-enhancing effect of a positive control surprise and mitigates the detrimental performance effect of a negative surprise. |
| Keywords: | Control, Identity, Employee motivation, Principal-agent theory, Lab experiment |
| JEL: | C92 M54 |
| Date: | 2011–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-035&r=mic |
| By: | Gilles, R.P.; Lazarova, E.A.; Ruys, P.H.M. (Tilburg University, Center for Economic Research) |
| Abstract: | We consider a network economy in which economic agents are connected within a structure of value-generating relationships. Agents are assumed to be able to participate in three types of economic activities: autarkic self-provision; binary matching interactions; and multi-person cooperative collaborations. We introduce two concepts of stability and provide sufficient and necessary conditions on the prevailing network structure for the existence of stable assignments, both in the absence of externalities from cooperation as well as in the presence of size-based externalities. We show that institutional elements such as the emergence of socioeconomic roles and organizations based on hierarchical leadership structures are necessary for establishing stability and as such support and promote stable economic development. |
| Keywords: | Cooperatives;Networks;Clubs;Network economies;Stable matchings. |
| JEL: | C72 D71 D85 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011084&r=mic |
| By: | Theodoros M. Diasakos; Kostas Koufopoulos |
| Abstract: | This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz (1976). We propose a simple extension of the game-theoretic structure in Hellwig (1987) under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson (1983). |
| Keywords: | Insurance Market; Adverse Selection; Incentive Efficiency |
| JEL: | D86 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:215&r=mic |
| By: | Jaume García Segarra (Fundamentos del Análisis Económico (Economics Department), Universitat Jaume I); Miguel Ginés Vilar (Fundamentos del Análisis Económico (Economics Department), Universitat Jaume I) |
| Abstract: | We propose and characterize a new solution for problems with asymmetric bargaining power among the agents that we named weighted proportional losses solution. It is specially interesting when agents are bargaining under restricted probabilistic uncertainty. The weighted proportional losses assigns to each agent losses proportional to her ideal utility and also proportional to her bargaining power. This solution is always individually rational, even for 3 or more agents and it can be seen as the normalized weighted equal losses solution. When bargaining power among the agents is equal, the weighted proportional losses solution becomes the Kalai-Smorodinsky solution. We characterize our solution in the basis of restricted monotonicity and restricted concavity. A consequence of this result is an alternative characterization of Kalai-Smorodinsky solution which includes contexts with some kind of uncertainty. Finally we show that weighted proportional losses solution satisfyies desirable properties as are strong Pareto optimality for 2 agents and continuity also fulfilled by Kalai-Smorodinsky solution, that are not satisfied either by weighted or asymmetric Kalai-Smorodinsky solutions. |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:10/21&r=mic |
| By: | Silvana Krasteva; Huseyin Yildirim |
| Abstract: | This paper investigates the sequencing choice of a buyer who negotiates with the sellers of two complementary objects with uncertain payoffs. We show that the sequencing matters to the buyer only when equilibrium trade can be inefficient. In this case, the buyer begins with the less powerful seller if the sellers have sufficiently diverse bargaining powers. If, however, both sellers are strong bargainers, then the buyer begins with the stronger of the two. For either choice, the buyer’s sequencing (weakly) increases the social surplus. Our analysis further reveals that it is sometimes optimal for the buyer to raise her own cost of acquisition to better manage the supplier competition. As such, we find that the buyer may commit to paying the sellers a minimum price strictly above the marginal cost; and that the buyer may outsource an input even though it can be made in-house. Finally, we identify the first - and second - mover advantages in negotiations for the sellers. |
| Keywords: | negotiation, sequencing, bargaining power, coordination |
| JEL: | C70 L23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:11-17&r=mic |
| By: | Alejandro Saporiti |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1117&r=mic |
| By: | John Duggan (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158) |
| Abstract: | This paper takes up the foundational issue of existence of stationary subgame perfect equi- libria in a general class of coalitional bargaining games that includes many known bargaining models and models of coalition formation. General sufficient conditions for existence of equilib- ria are currently lacking in many interesting environments: bargaining models with non-concave stage utility functions, models with a Pareto optimal status quo alternative and heterogeneous discount factors, and models of coalition formation in public good economies with consumption lower bounds. This paper establishes existence of stationary equilibrium under compactness and continuity conditions, without the structure of convexity or comprehensiveness used in the extant literature. The proof requires a precise selection of voting equilibria following different proposals. The result is applied to obtain equilibria in models of bargaining over taxes, coalition formation in NTU environments, and collective dynamic programming problems. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:roc:wallis:wp62&r=mic |
| By: | Stefan T. Trautmann; Ulrich Schmidt |
| Abstract: | There is a large literature showing that willingness-to-accept (WTA) is usually much higher than willingness-to-pay (WTP) in empirical studies although they should be roughly equal according to traditional economic theory. A second stream of literature shows that people are typically ambiguity averse, i.e. they prefer lotteries with known probabilities over lotteries with unknown ones. Our study combines both streams of literature and analyzes whether there is an interaction between the WTP-WTA disparity and ambiguity aversion |
| Keywords: | WTP-WTA disparity, ambiguity aversion, comparative ignorance |
| JEL: | C91 D81 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1727&r=mic |
| By: | Segev, Ella; Sela, Aner |
| Abstract: | We study a sequential all-pay auction with two contestants who are privately informed about a parameter (ability) that affects their cost of effort. In the model, contestant 1 (the first mover) exerts an effort in the first period which translates into an observable output but with some noise, and contestant 2 (the second mover) observes this noisy output. Then, contestant 2 exerts an effort in the second period, and wins the contest if her output is larger than or equal to the observed noisy output of contestant 1; otherwise, contestant 1 wins. We study two variations of this model where contestant 1 either knows or does not know the realization of the noise before she chooses her effort. Contestant 2 does not know the realization of the noise in both variations. For both variations, we characterize the subgame perfect equilibrium and investigate the effect of a random noise on the expected highest effort in this contest. |
| Keywords: | Noisy outputs; Sequential contests |
| JEL: | D44 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8509&r=mic |