nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒11‒07
eighteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Reputation with Analogical Reasoning By Philippe Jehiel; Larry Samuelson
  2. Career Concerns with Coarse Information By Alessandro Bonatti; Johannes Horner
  3. How Do Informal Agreements and Renegotiation Shape Contractual Reference Points? By Ernst Fehr; Oliver D. Hart; Christian Zehnder
  4. Behavioral biases and representative agent By Elyès Jouini; Clotilde Napp
  5. Collective risk aversion By Elyès Jouini; Clotilde Napp; Diego Nocetti
  6. Coordination with Communication under Oath By Nicolas Jacquemet; Stephane Luchini; Jason Shogren; Adam Zylbersztejn
  7. Common assumption of rationality By Keisler, H. Jerome; Lee, Byung Soo
  8. The Benefits of Sequential Screening By Krähmer, Daniel; Strausz, Roland
  9. On the Dual Approach to Recursive Optimization By Matthias Messner; Nicola Pavoni; Christopher Sleet
  10. Deterministic monotone dynamics and dominated strategies By Yannick Viossat
  11. On Multivariate Prudence By Elyès Jouini; Clotilde Napp; Diego Nocetti
  12. Why are bids not more unbalanced? By Mandell, Svante; Nyström, Johan
  13. A note on greater downside risk aversion By Richard Watt
  14. Extremal Choice Equilibrium: Existence and Purification with Infinite-Dimensional Externalities By Paulo Barelli; John Duggan
  15. Meritocracy Voting: Measuring the Unmeasurable By Peter C.B. Phillips
  16. Financing of Public Goods through Taxation in a General Equilibrium Economy: Theory and Experimental Evidence By Juergen Huber; Martin Shubik; Shyam Sunder
  17. Unawareness, Beliefs, and Speculative Trade By Aviad Heifetz; Martin Meier; Burkhard Schipper
  18. Optimism and Pessimism with Expected Utility By David Dillenberger; Andrew Postlewaite; Kareen Rozen

  1. By: Philippe Jehiel; Larry Samuelson
    Date: 2011–10–25
  2. By: Alessandro Bonatti (MIT, Sloan School of Management); Johannes Horner (Cowles Foundation, Yale University)
    Abstract: This paper develops a model of career concerns. The worker's skill is revealed through output, and wage is based on expected output, and so on assessed ability. Specifically, work increases the probability that a skilled worker achieves a one-time breakthrough. Effort levels at different times are strategic substitutes. Effort (and, if marginal cost is convex, wage) is single-peaked with seniority. The agent works too little, too late. Both delay and underprovision of effort worsen if effort is observable. If the firm commits to wages but faces competition, the optimal contract features piecewise constant wages as well as severance pay.
    Keywords: Career concerns, Experimentation, Career paths, Up-or-out, Reputation
    JEL: D82 D83 M52
    Date: 2011–10
  3. By: Ernst Fehr; Oliver D. Hart; Christian Zehnder
    Abstract: Previous experimental work provides encouraging support for some of the central assumptions underlying Hart and Moore (2008)’s theory of contractual reference points. However, existing studies ignore realistic aspects of trading relationships such as informal agreements and ex post renegotiation. We investigate the relevance of these features experimentally. Our evidence indicates that the central behavioral mechanism underlying the concept of contractual reference points is robust to the presence of informal agreements and ex post renegotiation. However, our data also reveal new behavioral features that suggest refinements of the theory. In particular, we find that the availability of informal agreements and ex post renegotiation changes how trading parties evaluate ex post outcomes. Interestingly, the availability of these additional options affects ex post evaluations even in situations in which the parties do not use them.
    JEL: C91 D86 J41
    Date: 2011–10
  4. By: Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX); Clotilde Napp (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)
    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. Starting from a standard model of Pareto optimal allocations, with expected utility maximizers but allowing for heterogeneity among individual beliefs, we show that the representative agent has an inverse S-shaped probability distortion function. As an application of this result, we show that an agent with a probability weighting function as in Cumulative Prospect Theory may be represented as a collection of agents with noisy beliefs.
    Keywords: Behavioral agent; probability weighting function; representative agent
    Date: 2012
  5. By: Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX); Clotilde Napp (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX); Diego Nocetti (CIMS - Courant Institute of Mathematical Science - New York University)
    Abstract: In this paper we analyse the risk attitude of a group of heterogenous agents and we develop a theory of comparative collective risk tolerance. In particular, we characterize how shifts in the distribution of individual levels of risk tolerance affect the representative agent's degree of risk tolerance. In the model with efficient risk – sharing and two agents (e.g. a household) with isoelastic preferences we show that an increase of the level of risk tolerance of one of the agents might have an ambiguous impact on the aggregate level of risk tolerance; the latter increases for some levels of aggregate wealth while it decreases for other levels of aggregate wealth. Specifically, there are two possible shapes for aggregate risk tolerance as a function of the risk tolerance level of one of the agents: increasing curve or increasing then decreasing curve. For more general populations we characterize the effect of first order like shifts (individual levels of risk tolerance more concentrated on high values) and second order like shifts (more dispersion on individual levels of risk tolerance) on the collective level of risk tolerance. We also evaluate how shifts in the distribution of individual levels of risk tolerance impact the collective level of risk tolerance in a framework with exogenous egalitarian sharing rules. Our results permit to better characterize differences in risk taking behavior between groups and individuals and among groups with different distribution of risk preferences.
    Keywords: heterogenous agents, collective risk, risk tolerance, isoelastic preferences, aggregate wealth, risk preferences
    Date: 2012
  6. By: Nicolas Jacquemet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Stephane Luchini (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Jason Shogren (Departement of Economics and Finance, University of Wyoming - University of Wyoming); Adam Zylbersztejn (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: We study the simultaneous move version of a coordination game in which failures arise due to the use (and fear) of weakly dominated strategies. Existing evidence shows neither cheap talk communication between players nor historical information on past decisions nor even repetition-based learning are able to implement the efficient outcome. We study the effect of one addition to the design: subjects sign a truth-telling oath before participating to the game with cheap-talk communication. We find oath significantly improves the truthfulness of messages sent, as well as helps eliminating weakly dominated actions. This change however has very few consequences on coordination, because receivers do not adjust their own strategies for this change.
    Keywords: Coordination game; Cheap talk communication; Oath
    Date: 2011–10–26
  7. By: Keisler, H. Jerome; Lee, Byung Soo
    Abstract: In this paper, we provide an epistemic characterization of iterated admissibility (IA), i.e., iterated elimination of weakly dominated strategies. We show that rationality and common assumption of rationality (RCAR) in complete lexicographic type structures implies IA, and that there exist such structures in which RCAR can be satisfied. Our result is unexpected in light of a negative result in Brandenburger, Friedenberg, and Keisler (2008) (BFK) that shows the impossibility of RCAR in complete continuous structures. We also show that every complete structure with RCAR has the same types and beliefs as some complete continuous structure. This enables us to reconcile and interpret the difference between our results and BFK’s. Finally, we extend BFK’s framework to obtain a single structure that contains a complete structure with an RCAR state for every game. This gives a game-independent epistemic condition for IA.
    Keywords: Epistemic game theory; rationality; admissibility; iterated weak dominance; assumption; completeness; Borel Isomorphism Theorem; o-minimality
    JEL: D80 C72
    Date: 2011–09–08
  8. By: Krähmer, Daniel; Strausz, Roland
    Abstract: This paper considers the canonical sequential screening model and shows that when the agent has an ex post outside option, the principal does not benefit from eliciting the agent's information sequentially. Unlike in the standard model without ex post outside options, the optimal contract is static and conditions only on the agent's aggregate final information. The benefits of sequential screening in the standard model are therefore due to relaxed participation rather than relaxed incentive compatibility constraints. We argue that in the presence of ex post participation constraints, the classical, local approach fails to identify binding incentive constraints and develop a novel, inductive procedure to do so instead. The result extends to the multi-agent version of the problem.
    Keywords: dynamic mechanism design; Mirrlees approach; participation constraints; Sequential screening
    JEL: D82 H57
    Date: 2011–11
  9. By: Matthias Messner; Nicola Pavoni; Christopher Sleet
    Abstract: We bring together the theories of duality and dynamic programming. We show that the dual of an additively separable dynamic optimization problem can be recursively decomposed using summaries of past Lagrange multipliers as state variables. Analogous to the Bellman decomposition of the primal problem, we prove equality of values and solution sets for recursive and sequential dual problems. In nonadditively separable settings, the equivalence of the recursive and sequential dual is not guaranteed. We relate recursive dual and recursive primal problems. If the Lagrangian associated with a constrained optimization problem admits a saddle then, even in nonadditively separable settings, the values of the recursive dual and recursive primal problems are equal. Additionally, the recursive dual method delivers necessary conditions for a primal optimum. If the problem is strictly concave, the recursive dual method delivers necessary and sufficient conditions for a primal optimum. When a saddle exists, states on the optimal dual path are subdifferentials of the primal value function evaluated at states on the optimal primal path and vice versa.
    Date: 2011
  10. By: Yannick Viossat (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)
    Abstract: We survey and unify results on elimination of dominated strategies by monotonic dynamics and prove some new results that may be seen as dual to those of Hofbauer and Weibull (J. Econ. Theory, 1996, 558-573) on convex monotonic dynamics.
    Keywords: evolutionary game theory; evolutionary dynamics ; dominated strategies; monotonic dynamics
    Date: 2011–10–26
  11. By: Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX); Clotilde Napp (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX); Diego Nocetti (CIMS - Courant Institute of Mathematical Science - New York University)
    Abstract: In this paper we extend the theory of precautionary saving to the case in which uncertainty is multidimensional and we develop a matrix-measure of multivariate prudence. Furthermore, we characterize comparative prudence, decreasing and increasing prudence, the effect of uncertainty on the marginal propensity to consume out of wealth, and the Drèze-Modigliani substitution effect in this multivariate setting. We also characterize the concept of multivariate downside risk aversion as a multivariate preference for harm disaggregation. We show that our definition is equivalent to a positive precautionary saving motive. We propose an alternative measure of the intensity of downside risk aversion and show that this measure is useful in understanding several economic problems that involve multivariate preferences.
    Keywords: matrix-measure, multivariate prudence, comparative prudence, multivariate downside risk aversion, downside risk aversion, multivariate preferences
    Date: 2011–07–19
  12. By: Mandell, Svante (VTI); Nyström, Johan (VTI)
    Abstract: Earlier theoretical models of unbalanced bidding in unit price contracts (UPC) ofter predict corner solutions, i.e. zero bids for unit prices of expected overextimated quantities. However, anecdotal evidence indicates a lack of zero bids in the actual contracts. We pursue a possible explanation for this anomaly in risk-aversion of the contractor. Using a simple model we show that a contractor with superior information may exploit this in the bidding process to increase her expectd revenue. However, in so doing she increases her risk exposure. If the contractor is risk-averse, she typically will avoid a corner solution to this risk vs. expected return trade-off.
    Keywords: Unbalanced bidding; risk; modelling; unit price contraction; public procurement
    JEL: D82 D86 H51 L51
    Date: 2011–11–02
  13. By: Richard Watt
    Abstract: This paper characterizes downside risk aversion in a simple and intuitive manner. It is shown that using this characterization one can simplify considerably a theorem by Jindapon (2010) relating to greater downside risk aversion as measured by the prudence probability premium. The comparative statics of downside risk aversion in risk-free wealth are also considered.
    Keywords: downside risk aversion, prudence
    JEL: D8
    Date: 2011–11
  14. By: Paulo Barelli (University of Rochester); John Duggan (University of Rochester)
    Abstract: We prove existence and purification results for equilibria in which players choose extreme points of their feasible actions in a class of strategic environments exhibiting a product structure. We assume finite-dimensional action sets and allow for infinite-dimensional externalities. Applied to large games, we obtain existence of Nash equilibrium in pure strategies while allowing a continuum of groups and general dependence of payoffs on average actions across groups, without resorting to saturated measure spaces. Applied to games of incomplete information, we obtain a new purification result for Bayes-Nash equilibria that permits substantial correlation across types, without assuming conditional independence given the realization of a finite environmental state. We highlight our results in examples of industrial organization, auctions, and voting.
    Date: 2011–10
  15. By: Peter C.B. Phillips (Cowles Foundation, Yale University)
    Abstract: Learned societies commonly carry out selection processes to add new fellows to an existing fellowship. Criteria vary across societies but are typically based on subjective judgments concerning the merit of individuals who are nominated for fellowships. These subjective assessments may be made by existing fellows as they vote in elections to determine the new fellows or they may be decided by a selection committee of fellows and officers of the society who determine merit after reviewing nominations and written assessments. Human judgment inevitably plays a central role in these determinations and, notwithstanding its limitations, is usually regarded as being a necessary ingredient in making an overall assessment of qualifications for fellowship. The present paper suggests a mechanism by which these merit assessments may be complemented with a quantitative rule that incorporates both subjective and objective elements. The goal of 'measuring merit' may be elusive but quantitative assessment rules can help to widen the effective electorate (for instance, by including the decisions of editors, the judgments of independent referees, and received opinion about research) and mitigate distortions that can arise from cluster effects, invisible college coalition voting and inner sanctum bias. The rule considered here is designed to assist the selection process by explicitly taking into account subjective assessments of individual candidates for election as well as direct quantitative measures of quality obtained from bibliometric data. The methodology has application to a wide arena of quality assessment and professional ranking exercises.
    Keywords: Bibliometric data, Election, Fellowship, Measurement, Meritocracy, Peer review, Quantification, Subjective assessment, Voting
    JEL: A14 Z13
    Date: 2011–10
  16. By: Juergen Huber (University of Innsbruck); Martin Shubik (Cowles Foundation, Yale University); Shyam Sunder (Yale School of Management)
    Abstract: We compare general equilibrium economies in which building and maintenance of a depreciating public facility is financed either by anonymous voluntary contributions or by taxing agents on their income from private production. Agents start with an endowment of private goods and money, while the government starts with an endowment of public good and money. All private goods produced are tendered for sale in exchange for money in a sell-all market mechanism. Agents' proceeds from sale are taxed, and they individually allocate their private goods between current consumption and investment in production for the following period. The optimal levels of supply of the public good, and tax rate to sustain it over time, are defined and calculated for infinite and finite horizons. These equilibrium theoretical predications are compared to the outcomes of laboratory economies when (1) the starting public facility is either at or below the optimal level; and (2) the tax rate is either exogenously set at the optimal level, or at the median of rates proposed by individual agents. We find that the experimental economies sustain public goods at about 70-90 percent of the infinite horizon but considerably more than the finite horizon optimum. Payoffs (efficiency) is at 90 percent of the infinite horizon equilibrium level even when the rate of taxation is determined by voting. Starting conditions play only a minor role for outcomes of the economies, as efficiency and the stock of public good adjusts to about the same level irrespective of the starting level. These results contrast with rapid decline in provision of public goods under anonymous voluntary contributions, and point to the possibility that the social institution of government enforced taxation may have evolved to address the problem of under-production of public goods through anonymous voluntary contributions.
    Keywords: Public goods, Experimental gaming, Voting, taxation, Evolution of institutions
    JEL: C72 C91 C92
    Date: 2011–10
  17. By: Aviad Heifetz; Martin Meier; Burkhard Schipper
    Abstract: We define a generalized state-space model with interactive unawareness and probabilistic beliefs. Such models are desirable for potential applications of asymmetric unawareness. Applying our unawareness belief structures, we show that the common prior assumption is too weak to rule out speculative trade in all states. Yet, we prove a generalized "No-speculative-trade" theorem according to which there can not be common certainty of strict preference to trade. Moreover, we prove a generalization of the "No-agreeing-to-disagree" theorem. Finally, we show the existence of a universal unawareness belief type space.
    Keywords: Unawareness, awareness, common prior, agreement, speculative trade, universal type-space, interactive epistemology, inattention
    JEL: C70 C72 D53 D80 D82
  18. By: David Dillenberger (Department of Economics, University of Pennsylvania); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Kareen Rozen (Department of Economics, Yale University)
    Abstract: Savage (1954) provided a set of axioms on preferences over acts that were equivalent to the existence of an expected utility representation. We show that in addition to this representation, there is a continuum of other .expected utility.representations in which for any act, the probability distribution over states depends on the corresponding outcomes. We suggest that optimism and pessimism can be captured by the stake-dependent probabilities in these alternative representations; e.g., for a pessimist, the probability of every outcome except the worst is distorted down from the Savage probability. Extending the DM.s preferences to be defined on both subjective acts and objective lotteries, we show how one may distinguish optimists from pessimists and separate attitude towards uncertainty from curvature of the utility function over monetary prizes.
    Keywords: Subjective expected utility, optimism, pessimism, stake-dependent probability
    JEL: D80 D81
    Date: 2011–08–01

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