nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒09‒22
twelve papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. A Mechanism Design Approach to Climate Agreements By Martimort, David; Sand-Zantman, Wilfried
  2. Delegation to Independent Regulators and the Ratchet Effect By Joanne Evans; Paul Levine; Neil Rickman; Francesc Trillas
  3. Intertemporal Utility and Correlation Aversion By Steffen Andersen; Glenn W. Harrison; Morten Lau; Elisabet E. Rutstroem
  4. Do Contracts Help? A Team Formation Perspective By Norovsambuu Tumennasan
  5. Competition in Persuasion By Matthew Gentzkow; Emir Kamenica
  6. A new approach to the envelope theorem By Francesco Ruscitti
  7. Solution Concepts for Cooperative Games with Circular Communication Structure By Suzuki, T.; Talman, A.J.J.
  8. The Myerson Value and Superfluous Supports in Union Stable Systems By Encarnacion Algaba; Jesus Mario Bilbao; Rene van den Brink; Jorge J. Lopez
  9. Laboratory Games and Quantum Behaviour: The Normal Form with a Separable State Space By Hammond, Peter J
  10. Efficiency, egalitarism, stability and social welfare in economics By Elvio Accinelli; Leobardo Plata-Pérez; Joss Sánchez-Pérez
  11. A Note on Contribution Games with Loss Functions By Russo, Giuseppe; Senatore, Luigi
  12. A Model of Partnership Formation with Friction and Multiple Criteria By Stephen Kinsella; David M. Ramsey

  1. By: Martimort, David; Sand-Zantman, Wilfried
    Abstract: We analyze environmental agreements in contexts with asymmetric information, voluntary participation by sovereign countries and possibly limited enforcement. Taking a mechanism design perspective, we study how countries can agree on effort levels and compensations to take into account multilateral externalities. We delineate conditions for efficient agreements and trace out possible inefficiencies to the conjectures that countries hold following disagreement. We show how optimal mechanisms admit simple approximations with attractive implementation properties. Finally, we also highlight how limits on commitment strongly hinder performances of optimal mechanisms.
    JEL: D82
    Date: 2011–08–31
  2. By: Joanne Evans (University of Surrey); Paul Levine (University of Surrey); Neil Rickman (University of Surrey and CEPR); Francesc Trillas (Universitat Autonoma de Barcelona)
    Abstract: Dynamic principal-agent settings with asymmetric information but no commitment are well known to create a ratchet effect. Here, the most efficient agents must be provided with extra 'information rent' as an incentive to relinquish their informational advantage over an uninformed principal; this causes welfare to fall. We study this problem in the case of regulatory procurement and show that delegation by the government to an independent regulator whose preferences differ from the government's can overcome this inefficiency, and we provide 'conservative' conditions under which this happens. Our solution reflects several aspects of many modern regulatory settings: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across available regulators. Our results also provide an analogy with the literatures on the benefits of delegation to independent principals in other settings, such as monetary policy, financial regulation and trade and hence contribute to this broader research agenda.
    Keywords: delegation; ratchet effect; procurement
    JEL: L51
    Date: 2011–09
  3. By: Steffen Andersen (Copenhagen Business School); Glenn W. Harrison (Robinson College of Business, Georgia State University); Morten Lau (Durham Business School); Elisabet E. Rutstroem (Robinson College of Business, Georgia State University)
    Abstract: Convenient assumptions about qualitative properties of the intertemporal utility function have generated counter-intuitive implications for the relationship between atemporal risk aversion and the intertemporal elasticity of substitution. If the intertemporal utility function is additively separable then the latter two concepts are the inverse of each other. We review a simple theoretical specification with a long lineage in the literature on multi-attribute utility, and demonstrate the critical role of a concept known as intertemporal risk aversion or intertemporal correlation aversion. This concept is the intertemporal analogue of a more general concept applied to two attributes of utility, but where the attributes just happen to be the time-dating of the good. In the context of intertemporal utility functions, the concept provides an intuitive explanation of possible differences between (the inverse of) atemporal risk aversion and the intertemporal elasticity of substitution. We use this theoretical structure to guide the design of a series of experiments that allow us to identify and estimate intertemporal correlation aversion. Our results show that subjects are correlation averse over lotteries with intertemporal income profiles, and that the convenient additive specification of the intertemporal utility function is not an appropriate representation of preferences over time.
    Date: 2011–03–01
  4. By: Norovsambuu Tumennasan (School of Economics and Management, Aarhus University, Denmark)
    Abstract: Economists perceive moral hazard as an undesirable problem because it undermines efficiency. Carefully designed contracts can mitigate the moral hazard problem, but this assumes that a team is already formed. This paper demonstrates that these contracts are sometimes the reason why teams do not form. Formally, we study the team formation problem in which the agents’ efforts are not verifiable and the size of teams does not exceed quota r. We show that if the team members can make only balanced transfers, then moral hazard affects stability adversely. However, if the team members cannot make transfers, then moral hazard affects stability positively in a large class of games. For example, a stable team structure exists if teams produce public goods or if the quota is two. However, these existence results no longer hold if efforts are verifiable.
    Keywords: team formation, hedonic game, moral hazard, assortative partition
    JEL: C71 C78
    Date: 2011–09–12
  5. By: Matthew Gentzkow; Emir Kamenica
    Abstract: Does competition among persuaders increase the extent of information revealed? We study ex ante symmetric information games where a number of senders choose what information to gather and communicate to a receiver, who takes a non-contractible action that affects the welfare of all players. We characterize the information revealed in pure-strategy equilibria. We consider three ways of increasing competition among senders: (i) moving from collusive to non-cooperative play, (ii) introducing additional senders, and (iii) decreasing the alignment of senders' preferences. For each of these notions, we establish that increasing competition cannot decrease the amount of information revealed, and will in a certain sense tend to increase it.
    JEL: D83 L15 M37
    Date: 2011–09
  6. By: Francesco Ruscitti
    Abstract: We study the di¤erentiability of the value function of a constrained optimization problem. We consider the envelope-theorem framework of Milgrom and Segal (2002), and we accomplish two goals. We show how one can relax Milgrom and Segal’s assumption that the choice set does not vary with parameters. More importantly, we develop a new approach to proving the di¤erentiability of the value function. The key idea and main mathematical tool we employ in our approach are a novel feature in the literature dealing with the di¤erentiability of the value function.
    Keywords: value function, uniform convergence, di¤erentiability, cor-
    JEL: C60 C61 C65
    Date: 2011–09
  7. By: Suzuki, T.; Talman, A.J.J. (Tilburg University, Center for Economic Research)
    Abstract: We study transferable utility games with limited cooperation between the agents. The focus is on communication structures where the set of agents forms a circle, so that the possibilities of cooperation are represented by the connected sets of nodes of an undirected circular graph. Agents are able to cooperate in a coalition only if they can form a network in the graph. A single-valued solution which averages marginal contributions of each player is considered. We restrict the set of permutations, which induce marginal contributions to be averaged, to the ones in which every agent is connected to the agent that precedes this agent in the permutation. Staring at a given agent, there are two permutations which satisfy this restriction, one going clockwise and one going anticlockwise along the circle. For each such permutation a marginal vector is determined that gives every player his marginal contribution when joining the preceding agents. It turns out that the average of these marginal vectors coincides with the average tree solution. We also show that the same solution is obtained if we allow an agent to join if this agent is connected to some of the agents who is preceding him in the permutation, not necessarily being the last one. In this case the number of permutations and marginal vectors is much larger, because after the initial agent each time two agents can join instead of one, but the average of the corresponding marginal vectors is the same. We further give weak forms of convexity that are necessary and sufficient conditions for the core stability of all those marginal vectors and the solution. An axiomatization of the solution on the class of circular graph games is also given.
    Keywords: Cooperative game;graph structure;average tree solution;Myerson value;core stability;convexity.
    JEL: C71
    Date: 2011
  8. By: Encarnacion Algaba (University of Sevilla); Jesus Mario Bilbao (University of Sevilla); Rene van den Brink (VU University Amsterdam); Jorge J. Lopez (University of Sevilla)
    Abstract: Cooperative games with partial cooperation cover a wider rank of real world situations than the classic model of cooperative games where every subset of a set of agents can form a coalition to execute the game. In this paper, the set of feasible coalitions which models the partial cooperation will be given by a union stable system. These systems contain, as particular cases, the communication situations and the permission structures, which are well-known both from a theoretical and applied point of view. Moreover, union stable systems are a natural framework for many other economic situations that arise in practice and which can not be modelled by these subsystems. In this paper, the goal is to make clear that there exists a close relationship between the Myerson value and the so-called conference game which player set consists of the supports of the union stable system. For that, we first analyze the relation between the restricted game and the conference game to establish later which effects a union stable system has on certain desirable properties of these games. Using the superfluous support property, defined through the conference game, new characterizations for the Myerson value are given in this context.
    Keywords: Conference game; restricted game; union stable system; Myerson value; superfluous support property
    JEL: C71
    Date: 2011–09–08
  9. By: Hammond, Peter J (Department of Economics, University of Warwick)
    Abstract: The subjective expected utility (SEU) criterion is formulated for a particular four-person “laboratory game” that a Bayesian rational decision maker plays with Nature, Chance, and an Experimenter who influences what quantum behaviour is observable by choosing an orthonormal basis in a separable complex Hilbert space of latent variables. Nature chooses a state in this basis, along with an observed data series governing Chance's random choice of consequence. When Gleason's theorem holds, imposing quantum equivalence implies that the expected likelihood of any data series w.r.t. prior beliefs equals the trace of the product of appropriate subjective density and likelihood operators.
    Date: 2011
  10. By: Elvio Accinelli (Facultad de Economía, Universidad Autónoma de san Luis Potosí. Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Leobardo Plata-Pérez (Facultad de Economía, Universidad Autónoma de san Luis Potosí.); Joss Sánchez-Pérez (Facultad de Economía, Universidad Autónoma de san Luis Potosí.)
    Abstract: The Pareto optimal concept does not concern with fairness or equality, it is a concept related to efficiency. In this paper, using techniques from the general equilibrium theory, we relate efficiency, fairness and stability of an economy.
    Keywords: Fairness, efficiency, economics welfare
    JEL: D4 D6
    Date: 2011–07
  11. By: Russo, Giuseppe; Senatore, Luigi
    Abstract: Decisions on joint funding of continuous public goods between two agents often involve heterogeneous targets. We introduce loss functions in a contribution game in order to study the effect of this conflict. Unlike Varian (1994), joint contribution occurs only if the players’ targets are sufficiently close and the sequential game reduces free riding problems, while total contribution is higher in the simultaneous game.
    Keywords: Public Goods; Intergovernmental Relations
    JEL: H77 H41 C72
    Date: 2011–08
  12. By: Stephen Kinsella (Department of Economics, Kemmy School of Business, University of Limerick); David M. Ramsey (Department of Mathematics and Statistics, University of Limerick)
    Abstract: We present a model of partnership formation based on two discrete character traits. There are two classes of individual. Each individual observes a sequence of potential partners from the other class. The traits are referred to as attractiveness and character, respectively. All individuals prefer partners of high attractiveness and similar character. Attractiveness can be measured instantly. However, in order to observe the character of an individual, a costly interview (or date) is required. On observing the attractiveness of a prospective partner, an individual must decide whether he/she wishes to proceed to the interview stage. During the interview phase, the prospective pair observe each other's character and then decide whether they wish to form a pair. Mutual acceptance is required for both an interview to occur and a pair to form. An individual stops searching on nding a partner. A set of criteria based on the concept of a subgame perfect Nash equilibrium is used to define an equilibrium of this game. It is argued that under such a general formulation there may be multiple equilibria. For this reason, we define a specific formulation of the game, the so called symmetric version, which has a unique symmetric equilibrium. The form of this equilibrium has some similarities to the block separating equilibrium derived for classical models of two-sided mate choice and job search problems, but is essentially different.
    Keywords: mutual mate choice, game theory, common preferences, homotypic preferences, subgame perfect equilibrium
    Date: 2011–09–13

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