nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒12‒13
25 papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Multiple Equilibria in Asymmetric First-Price Auctions By Todd R. Kaplan; Shmuel Zamir
  2. The Effect of Bidding Information in Ascending Auctions. By Mun Chuia; David Porter; Stephen Rassenti; Vernon Smith
  3. Seller Reputation and Trust in Pre-Trade Communication By Bruno Jullien; In-Uck Park
  4. Decentralization of contracts with interim sidecontracting By Theilen, Bernd, 1965-
  5. Laws and Norms By Bénabou, Roland; Tirole, Jean
  6. The Social Cost of Blackmail By Oleg Yerokhin
  7. Group outcomes and reciprocity By Ioannou, Christos; Qi, Shi; Rustichini, Aldo
  8. Prizes versus Wages with Envy and Pride By Pradeep Dubey; John Geanakoplos; Ori Haimanko
  9. Word-of-mouth interaction and the organization of behaviour By Zakaria Babutsidze; Robin Cowan
  10. How to consult an expert? Opinion vs Evidence. By Lanzi, Thomas; Mathis, Jérôme
  11. Manipulation in group argument evaluation. By Podlaszewski, Mikolaj; Pigozzi, Gabriella; Caminada, Martin
  12. Preference for Variety By Karen Kaiser; Rainer Schwabe
  13. A new approach to the envelope theorem By Francesco Ruscitti
  14. Gross substitution and complementarity are not symmetric relations By Rachmilevitch, Shiran
  15. Existence of exact Walrasian equilibria in non convex economies By D'Agata, Antonio
  16. On the core and Walrasian expectations equilibrium in infinite dimensional commodity spaces By Bhowmik, Anuj; Cao, Jiling
  17. On Large Games with a Bio-Social Typology By M. Ali Khan; Kali P. Rath; Yeneng Sun; Haomiao Yu
  18. Admissibility and event-rationality By Barelli, Paulo; Galanis, Spyros
  19. Strategic behavior in Schelling dynamics: A new result and experimental evidence By Juan Miguel Benito; Pablo Branas-Garz; Penelope Hernandez; Juan A. Sanchis
  20. Quotient Spaces of Boundedly Rational Types By Davide Cianciaruso; Fabrizio Germano
  21. Approximate Judgement Aggregation By Ilan Nehama
  22. Elasticity of Games By Gilad Bavly
  23. A Limit Theorem for Equilibria under Ambiguous Beliefs Correspondences By Giuseppe De Marco; Maria Romaniello
  24. Approximation Results for Discontinuous Games with an Application to Equilibrium Refinement By Oriol Carbonell-Nicolau; Richard McLean
  25. Refinements of Nash equilibrium in potential games By Oriol Carbonell-Nicolau; Richard McLean

  1. By: Todd R. Kaplan; Shmuel Zamir
    Abstract: Maskin and Riley (2003) and Lebrun (2006) prove that the Bayes-Nash equilibrium of first-price auctions is unique. This uniqueness requires the assumption that a buyer never bids above his value. We demonstrate that, in asymmetric first-price auctions (with or without a minimum bid), the relaxation of this assumption results in additional equilibria that are "substantial." Although in each of these additional equilibria no buyer wins with a bids above his value, the allocation of the object and the selling price may vary among the equilibria. Furthermore, we show that such phenomena can only occur under asymmetry in the distributions of values.
    Keywords: asymmetric auctions, first-price auctions, multiple equilibria
    JEL: C72 D44
    Date: 2011–11
  2. By: Mun Chuia (School of Economics and Smith's Center for Experimental Economics Research, Shanghai Jiao Tong University, China); David Porter (Economic Science Institute, Chapman University); Stephen Rassenti (Economic Science Institute, Chapman University); Vernon Smith (Economic Science Institute, Chapman University)
    Abstract: We study the effect of the drop out and reenter information in an environment where bidders' values involve both private and common value components. We find that (1) providing bidding information does not have a significant effect on expected revenue and expected efficiency. (2) The effect of information on winner's expected profit depends on the range of uncertainty of the common value component and the level of Nash profit prediction, which the auctioneer has no a priori knowledge. In our environment, where bidders have a private component to their value and the auction takes place in ascending clock format, (3) bidders do not suffer from the winner's curse when information is not provided. (4) Information substantially increases the variability of revenue and winner?s profit when the range of uncertainty of the common value component is large. (5) Bidders? response to information depends on the range of uncertainty.
    JEL: D44
    Date: 2011
  3. By: Bruno Jullien; In-Uck Park
    Abstract: We characterize the unique equilibrium in which high ability sellers always announce the quality of their items truthfully, in a repeated game model of experienced good markets with adverse selection on a seller's propensity to supply good quality items. In this equilibrium a seller's value function strictly increases in reputation and a seller's type is revealed within finite time. The analysis highlights a new reputation mechanism based on an endogenous complementarity the market places between a seller's honesty in pre-trade communication (trust) and his/her ability to deliver good quality (reputation). As maintaining honesty is less costly for high ability sellers who anticipate less “bad news” to disclose, they can signal their ability by communicating in a more trustworthy manner. Applying this model, we examine the extent to which consumer feedback systems foster trust in online markets, including the possibility that sellers may change identities or exit.
    Keywords: cheap talk, consumer rating system, reputation, trust.
    JEL: C73 D82 D83 L14
    Date: 2011–03
  4. By: Theilen, Bernd, 1965-
    Abstract: This paper gives a new explanation for the phenomena of subcontracting. A model in which a principal contracts two agents who work in a sequence on a project, have soft information and can collude is considered. Side-contracts between agents can be signed at any stage of the game. Due to limited liability and moral hazard agents obtain a rent. The principal’s problem is to find the preferable contracting structure. It is shown that in this setting a decentralized contracting structure can be superior to a centralized structure for the principal. The paper derives the conditions under which this holds. Journal of Economic Literature Classification Numbers: D23, D82, L14, L22. Keywords: Contract delegation, Collusion, Interim side-contracting, Moral hazard.
    Keywords: Subcontractació, 33 - Economia,
    Date: 2011
  5. By: Bénabou, Roland; Tirole, Jean
    Abstract: This paper analyzes how private decisions and public policies are shaped by personal and societal preferences (values), material or other explicit incentives (laws) and social sanctions or rewards (norms). It first examines how honor, stigma and social norms arise from individuals’ behaviors and inferences, and how they interact with material incentives. It then characterizes optimal incentive-setting in the presence of norms, deriving in particular appropriately modified versions of Pigou and Ramsey taxation. Incorporating agents’ imperfect knowledge of the distribution of preferences opens up to analysis several new questions. The first is social psychologists’ practice of norms-based interventions, namely campaigns and messages that seek to alter people’s perceptions of what constitutes normal behavior or values among their peers. The model makes clear how such interventions operate, but also how their effectiveness is limited by a credibility problem, particularly when the descriptive and prescriptive norms conflict. The next main question is the expressive role of law. The choices of legislators and other principals naturally reflect their knowledge of societal preferences, and these same community standards are also what shapes social judgements and moral sentiments. Setting law thus means both imposing material incentives and sending a message about society’s values, and hence about the norms that different behaviors are likely to encounter. The analysis, combining an informed principal with individually signaling agents, makes precise the notion of expressive law, determining in particular when a weakening or a strengthening of incentives is called for. Pushing further this logic, the paper also sheds light on why societies are often resistant to the message of economists, as well as on why they renounce certain policies, such as "cruel and unusual punishments", irrespective of effectiveness considerations, in order to express their being "civilized".
    Keywords: culture; esteem; expressive content; honor; incentives; law; motivation; norms-based interventions; punishments; reputation; social norms; stigma; taxation
    JEL: D64 D82 H41 K1 K42 Z13
    Date: 2011–11
  6. By: Oleg Yerokhin (University of Wollongong)
    Abstract: Despite the fact that blackmail constitutes a voluntary transaction between two parties, it is deemed to be a criminal offence in most legal systems. Traditional economic approach to this so-called ‘paradox of blackmail’ emphasizes welfare loss generated by the costly rentseeking activities of potential blackmailers as the primary justification for its criminalization. This argument however does not extend to cases in which potentially damaging information about the victim was acquired by the blackmailer at no cost. It also does not seem to shed light on a related puzzle: why is it legal for a potential victim to bribe the other party with the purpose of achieving the same final outcome (suppression of information) as in the case of blackmail? This paper addresses these questions in a simple model of bargaining under asymmetric information which is used as a unified framework for studying both blackmail and bribery. Under asymmetric information the bargaining outcome is not efficient regardless of the distribution of the bargaining power. However, when the blackmailer is the monopolist seller of the information inefficiency results from his demands being too high relative to the social optimum, providing justification for the practice of penalizing blackmail. On the other hand, when a victim is the monopolist buyer of the information the equilibrium offer is inefficiently low implying that its punishment would be counterproductive. These arguments provide further support for the claim that under reasonable assumptions criminalization of blackmail can be justified on efficiency grounds.
    Keywords: blackmail, bribery, bargaining
    JEL: D82 K42
    Date: 2011
  7. By: Ioannou, Christos; Qi, Shi; Rustichini, Aldo
    Abstract: Group membership affects an agent's individual behavior. We determine how, by testing two competing hypotheses. One is that group membership operates through social identity, and the other is that group membership implements a correlation among the actions of in-group members in response to an implicit signal. We introduce two novel features in the experimental design. The first feature is the display of group outcomes. This allows us to assess directly the importance of relative group performance on subjects' decisions. The second is a careful manipulation of the Dictator game and the Trust game. More specifically, we choose parameters strategically so as to ensure no change in the pecuniary incentives across the two games. For a precise quantitative test of the two hypotheses we develop a structural model to describe an agent's behavior across treatments. Our findings suggest that the role of social identity on motivating agents' decisions has been exaggerated. The display of group outcomes induces a group effect, but a careful analysis of this effect reveals that participants use group outcomes as a signal to coordinate in-group members on favorable outcomes. Furthermore, we find evidence in support of recent experimental studies which demonstrate that an agent's allocation choice is sensitive to the behavior of the agent that generated the choice set. <br><br> Keywords; groups, trust game, dictator game, reciprocity
    Date: 2011–04–08
  8. By: Pradeep Dubey (Center for Game Theory, Dept. of Economics, SUNY at Stony Brook); John Geanakoplos (Cowles Foundation, Yale University); Ori Haimanko (Dept. of Economics, Ben-Gurion University of the Negev)
    Abstract: We show that if agents are risk neutral, prizes outperform wages if and only if there is sufficient pride and envy relative to the noisiness of performance. If agents are risk averse, prizes are a necessary supplement to wages (as bonuses).
    Keywords: Envy, Pride, Wages, Prizes, Bonus
    JEL: C72 D01 D23 L14
    Date: 2011–11
  9. By: Zakaria Babutsidze (Observatoire Français des Conjonctures Économiques and SKEMA Business School); Robin Cowan (MERIT, Maastricht University and BETA, University of Strasbourg)
    Abstract: We present a discrete choice model based on agent interaction. The framework combines the features of two well-known models of word-of-mouthcommunication (Ellison and Fudenberg, 1995 and Bala and Goyal, 2001).Interaction structure is a regular periodic lattice with decision-makers interacting only with immediate neighbours. We investigate the long-runequilibrium) behaviour of the resulting system and show that for a largerange of initial conditions clustering in economic behaviour emerges andpersists inde?nitely. The setup allows for the analysis of multi-option environments. For these environments we derive the distribution of optionpopularity in equilibrium.
    Keywords: word-of-mouth, inertia, clustering, choice.
    JEL: D83
    Date: 2011–06
  10. By: Lanzi, Thomas; Mathis, Jérôme
    Date: 2011–04
  11. By: Podlaszewski, Mikolaj; Pigozzi, Gabriella; Caminada, Martin
    Abstract: Given an argumentation framework and a group of agents, the individuals may have divergent opinions on the status of the arguments. If the group needs to reach a common po- sition on the argumentation framework, the question is how the individual evaluations can be mapped into a collective one. This problem has been recently investigated in [1]. In this paper, we study under which conditions these operators are Pareto optimal and whether they are manipulable.
    Keywords: Collective decision making; Argumentation; Judgment aggregation; Social choice theory;
    JEL: C44 D7
    Date: 2011
  12. By: Karen Kaiser; Rainer Schwabe
    Abstract: We consider a decision maker who enjoys choosing from a varied set of alternatives. Building on behavioral evidence, we propose testable axioms which characterize preference for variety, and provide a representation theorem. We go on to illustrate the potential effects of preference for variety in a model of retailing. Consumer welfare may be decreasing in the competitiveness of the retailing sector as competition eliminates the scope for retailers to offer variety. Mainstream consumers with a preference for variety and consumers with eccentric tastes enjoy a symbiotic relationship. Competition over mainstream consumers makes retailers offer more exotic goods, while eccentric consumers subsidize their carrying costs.
    Keywords: Preferences, variety, representation theorem, retail, competition.
    JEL: D0 D03 D4
    Date: 2011–12
  13. 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, differentiability, correspondences
    JEL: C60 C61 C65
    Date: 2011–09
  14. By: Rachmilevitch, Shiran (Department of Economics, University of Haifa)
    Abstract: I construct an example of well-behaved (convex, continuous, monotone) preferences over two goods, x and y, such that x is a gross substitute for y but y is a gross complement for x. A sufficient (but not necessary) condition for preventing this "pathology" is that the demand for either good be a strictly increasing function of income.
    Keywords: Substitution; complementarity; consumer theory;
    JEL: D01 D11
    Date: 2011–11–28
  15. By: D'Agata, Antonio
    Abstract: The existence of an exact Walrasian equilibrium in non convex economies is still a largely unexplored issue. In this paper an existence result for exact equilibrium in non convex economies is provided by following the almost-near approach introduced by Postlewaite and Schmeidler for convex economies. More precisely, we show that for any non convex economy there is a set of perturbed economies with the same number of agents exhibiting an exact Walrasian equilibrium; moreover as the number of agents tends to infinity the perturbed economies can be chosen as much close as we like to the original one. --
    Keywords: exact Walrasian equilibrium,non convex economies,perturbed economies
    JEL: C62 D51
    Date: 2011
  16. By: Bhowmik, Anuj; Cao, Jiling
    Abstract: In this paper, we establish two different characterizations of Walrasian expectations allocations by the veto power of the grand coalition in an asymmetric information economy having finitely many agents and states of nature and whose commodity space is a Banach lattice. The first one deals with Aubin non-dominated allocations, and the other claims that an allocation is a Walrasian expectations allocation if and only if it is not privately dominated by the grand coalition, by considering perturbations of the original initial endowments in precise directions.
    Keywords: Asymmetric information economy; Aubin non-dominated allocation; Private core; Privately non-dominated allocation; Properness; Walrasian expectations allocation
    JEL: D11 D82 D51
    Date: 2011–06–23
  17. By: M. Ali Khan; Kali P. Rath; Yeneng Sun; Haomiao Yu
    Abstract: We present a comprehensive theory of large non-anonymous games in which agents have a name and a determinate social-type and/or biological trait to resolve the dissonance of a (matching-pennies type) game with an exact pure-strategy Nash equilibrium with finite agents, but without one when modeled on the Lebesgue unit interval. We (i) establish saturated player spaces as both necessary and sufficient for an existence result for Nash equilibrium in pure strategies, (ii) clarify the relationship between pure, mixed and behavioral strategies via the exact law of large numbers in a framework of Fubini extension, (iii) illustrate corresponding asymptotic results.
    Date: 2011–12
  18. By: Barelli, Paulo; Galanis, Spyros
    Abstract: Brandenburger et al. (2008) establish epistemic foundations for rationality and common assumption of rationality (RCAR), where rationality includes admissibility, using lexicographic type structures. Their negative result that RCAR is empty whenever the type structure is complete and continuous suggests that iterated admissibility (IA) requires players to have prior knowledge about each other, and therefore is a strong solution concept, not at the same level as iterated elimination of strongly dominated strategies (IEDS). We follow an alternative approach using standard type structures and show that IA can be generated in a complete and continuous type structure. A strategy is event-rational if it is a best response to a conjecture, as usual, and in addition it passes a “tie-breaking†test based on a set E of strategies of the other player. Event-rationality and common belief in event-rationality (RCBER) is characterized by a solution concept we call hypo-admissible sets and, in a complete structure, generates the strategies that are admissible and survive the iterated elimination of strongly dominated strategies (Dekel and Fudenberg (1990)). Extending event-rationality by adding what a player is certain about the other’s strategies as a tie-breaking set to each round of mutual belief we get common belief of extended event-rationality (RCBeER), which generates a more restrictive solution concept than the SAS (Brandenburger et al. (2008)) and in a complete structure produces the IA strategies. Contrary to the negative result in Brandenburger et al. (2008), we show that RCBER and RCBeER are nonempty in complete, continuous and compact type structures, therefore providing an epistemic criterion for IA <br><br> Keywords; epistemic game theory, admissibility, iterated weak dominance, common knowledge, rationality, completeness
    Date: 2011–05–01
  19. By: Juan Miguel Benito (Departamento de Economia, Universidad Publica de Navarra, Spain); Pablo Branas-Garz (Departamento de Teoria e Historia Economica, Universidad de Granada, Spain and Economic Science Institute Affliate, Chapman University); Penelope Hernandez (Departamento de Analisis Economico y ERI-CES, Spain); Juan A. Sanchis (Departamento de Estructura Econ´omica y ERI-CES, Spain)
    Abstract: In this paper we experimentally test Schelling’s (1971) segregation model and confirm the striking result of segregation. In addition, we extend Schelling’s model theoretically by adding strategic behavior and moving costs. We obtain a unique subgame perfect equilibrium in which rational agents facing moving costs may find it optimal not to move (anticipating other participants’ movements). This equilibrium is far for full segregation. We run experiments for this extended Schelling model. We find that the percentage of strategic players dramatically increases with the cost of moving and that the degree of segregation depends on the distribution of rational subjects.
    Keywords: Subgame perfect equilibrium, segregation, experimental games
    Date: 2011
  20. By: Davide Cianciaruso; Fabrizio Germano
    Abstract: I analyze common agency games in which the principals, and possibly the agent,have private information. I distinguish between games in which the principals delegate the fi…nal decisions to the agent, and games in which they retain some decision power after offering their mechanisms. I show that,in contrast with mechanism design models with one informed Myerrson's Inscrutability Principle fails when there are many informed principals. I also …find that, in contrast with common agency models with uninformed principals, the Delegation Principle (Menu Theorem) fails when principals are informed. I then focus on Perfect Bayesian Equilibria in which principals offer their mechanisms without randomizing. I characterize the outcomes of arbitrary games with delegation as outcomes of a new game in which principals offer menus and send cheap-talk signals. Next, I characterize the outcomes of arbitrary games without delegation as outcomes of a new game in which principals offer menus of direct revelation mechanisms, to which they truthfully report their types. JEL Code: C72, D03, D83
    Keywords: Incomplete-information games, high-order reasoning, type space, quotient space, hierarchies of beliefs, bounded rationality Principle, menus, signals, direct revelation mechanisms.
    Date: 2011–09–20
  21. By: Ilan Nehama (The Hebrew University of Jerusalem, Israel)
    Abstract: In this paper we analyze judgement aggregation problems in which a group of agents independently votes on a set of complex propositions that has some interdependency constraint between them (e.g., transitivity when describing preferences). We consider the issue of judgement aggregation from the perspective of approximation. That is, we generalize the previous results by studying approximate judgement aggregation. We relax the main two constraints assumed in the current literature, Consistency and Independence and consider mechanisms that only approximately satisfy these constraints, that is, satisfy them up to a small portion of the inputs. The main question we raise is whether the relaxation of these notions significantly alters the class of satisfying aggregation mechanisms. The recent works for preference aggregation of Kalai, Mossel, and Keller fit into this framework. The main result of this paper is that, as in the case of preference aggregation, in the case of a subclass of a natural class of aggregation problems termed `truth-functional agendas', the set of satisfying aggregation mechanisms does not extend non-trivially when relaxing the constraints. Our proof techniques involve Boolean Fourier transform and analysis of voter influences for voting protocols. The question we raise for Approximate Aggregation can be stated in terms of Property Testing. For instance, as a corollary from our result we get a generalization of the classic result for property testing of linearity of Boolean functions.
    Keywords: judgement aggregation, truth-functional agendas, computational social choice, computational judgement aggregation, approximate aggregation, inconsistency index, dependency index
    Date: 2011–06–05
  22. By: Gilad Bavly
    Abstract: We develop an elasticity index of a strategic game. The index measures the robustness of the set of rational outcomes of a game. The elasticity index of a game is the maximal ratio between the change of the rational outcomes and the size of an infinitesimal perturbation. The perturbation is on the players’ knowledge of the game. The elasticity of a strategic game is a nonnegative number. A small elasticity is indicative of the robustness of the rational outcomes (for example, if there is only one player the elasticity is 0), and a large elasticity is indicative of non-robustness. For example, the elasticity of the (normalized) n-stage finitely repeated prisoner’s dilemma is at least exponential in n, as is the elasticity of the n-stage centipede game and the n-ranged traveler’s dilemma. The concept of elasticity enables us to look from a different perspective at Neyman’s (1999) repeated games when the number of repetitions is not commonly known, and Aumann’s (1992) demonstration of the effect of irrationality perturbations.
    Date: 2011–12
  23. By: Giuseppe De Marco (Università di Napoli Parthenope); Maria Romaniello (Università di Napoli Federico II)
    Abstract: Previous literature shows that, in many different models, limits of equilibria of perturbed games are equilibria of the unperturbed game when the sequence of perturbed games converges to the unperturbed one in an appropriate sense. The question whether such limit property extends to the equilibrium notions in ambiguous games is not yet clear as it seems; in fact, previous literature shows that the extension fails in simple examples. The contribution in this paper is to show that the limit property holds for equilibria under ambiguous beliefs correspondences (presented by the authors in a previous paper). Key for our result is the sequential convergence assumption imposed on the sequence of beliefs correspondences. Counterexamples show why this assumption cannot be removed.
    Keywords: Ambiguous games, beliefs correspondences, limit equilibria
    Date: 2011–11–28
  24. By: Oriol Carbonell-Nicolau (Rutgers University); Richard McLean (Rutgers University)
    Abstract: We provide approximation results for Nash equilibria in possibly discontinuous games when payoffs and strategy sets are perturbed, and compare these conditions to those considered in the related literature. We then prove existence results for a new "finitistic" infinite-game generalization of Selten's [17] notion of perfection, and study some of its properties. The existence results, which rely on the approximation theorems, relate existing notions of perfection to the new specification.
    Keywords: discontinuous game, Nash equilibrium correspondence, payoff security, trembling-hand perfect equilibrium, limit-of-finite perfect equilibrium
    JEL: C72
    Date: 2011–08–16
  25. By: Oriol Carbonell-Nicolau (Rutgers University); Richard McLean (Rutgers University)
    Abstract: We prove the existence of strategically stable sets of pure-strategy Nash equilibria (and hence the existence of pure-strategy trembling-hand perfect equilibria) in potential games that admit an upper semicontinuous potential, and we show that generic potential games possess pure-strategy strictly perfect and essential equilibria. In addition, we provide a link between upper semicontinuity of a potential and conditions defined directly on the payoff functions of a potential game. Finally, we show that stable sets and (strictly) perfect equilibria are related to the set of maximizers of a potential, which refines the set of Nash equilibria. Specifically, the set of maximizers of a potential contains a strategically stable set of pure-strategy Nash equilibria (and hence a pure-strategy trembling-hand perfect equilibrium) and, for generic games, any maximizer of a potential is a pure-strategy strictly perfect and essential equilibrium.
    Keywords: discontinuous game, potential game, trembling-hand perfect equilibrium, stable set, essential equilibrium
    JEL: C72
    Date: 2011–06–06

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