nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒01‒18
fourteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Social interactions and spillovers. By Cabrales, Antonio; Calvo-Armengol, Antoni; Zenou, Yves
  2. Two Necessary Conditions for Strategy-Proofness: on What Domains are they also Sufficient? By Salvador Barberà; Dolors Berga; Bernardo Moreno
  3. Implementation of Reduced Form Mechanisms: A Simple Approach and a New Characterization By Sergiu Hart; Philip J. Reny
  4. A Discounted Stochastic Game with No Stationary Nash Equilibrium By Yehuda Levy
  5. Uncertainty in the Traveler's Dilemma By Gilad Bavly
  6. Transaction costs and institutions By Charles Nolan; Alex Trew
  7. Loss Aversion in Contests By Richard Cornes; Roger Hartley
  8. Risk aversion for nonsmooth utility functions. By Wuerth, A.M.; Schumacher, J.M.
  9. Efficiency versus Optimality in Procurement By Peter Postl
  10. The Independence Axiom and the Bipolar Behaviorist By Glenn W. Harrison; J. Todd Swarthout
  11. Optimism and Pessimism with Expected Utility By David Dillenberger; Andrew Postlewaite; Kareen Rozen
  12. Prizes Versus Wages with Envy and Pride By Pradeep K. Dubey; John Geanakoplos; Ori Haimanko
  13. Restricted Coasean Bargaining By Ian A. MacKenzie; Markus Ohndorf
  14. A model of descending auction with hidden starting price and endogenous price decrease By Di Gaetano, Luigi

  1. By: Cabrales, Antonio; Calvo-Armengol, Antoni; Zenou, Yves
    Abstract: The aim of this paper is to provide a tractable model where both socialization (or network formation) and productive efforts can be analyzed simultaneously. This permits a fullfledged equilibrium/welfare analysis of network formation with endogenous productive efforts and heterogeneous agents. We show that there exist two stable interior equilibria, which we can Pareto rank. The socially efficient outcome lies between these two equilibria. When the intrinsic returns to production and socialization increase, all equilibrium actions decrease at the Pareto-superior equilibrium, while they increase at the Pareto-inferior equilibrium. In both cases, the percentage change in socialization effort is higher (in absolute value) than that of the productive effort
    Keywords: Peer effects; Network formation; Welfare;
    JEL: L22 L51 O31 O38
    Date: 2011
  2. By: Salvador Barberà; Dolors Berga; Bernardo Moreno
    Abstract: A social choice function may or may not satisfy a desirable property depending on its domain of definition. For the same reason, different conditions may be equivalent for functions defined on some domains, while different in other cases. Understanding the role of domains is therefore a crucial issue in mechanism design. We illustrate this point by analyzing the role of different conditions that are always related, but not always equivalent to strategy-proofness. We define two very natural conditions that are necessary for strategy-proofness: monotonicity and reshuffling invariance. We remark that they are not always sufficient. Then, we identify a domain condition, called intertwinedness, that ensures the equivalence between our two conditions and that of strategy-proofness. We prove that some important domains are intertwined: those of single-peaked preferences, both with public and private goods, and also those arising in simple models of house allocation. We prove that other necessary conditions for strategy-proofness also become equivalent to ours when applied to functions defined on intertwined domains, even if they are not equivalent in general. We also study the relationship between our domain restrictions and others that appear in the literature, proving that we are indeed introducing a novel proposal.
    Keywords: strategy-proofness, reshuffling invariance, monotonicity, intertwined domains
    JEL: D71
    Date: 2011–12–07
  3. By: Sergiu Hart; Philip J. Reny
    Abstract: We provide a new characterization of implementability of reduced form mechanisms in terms of straightforward second-order stochastic dominance. In addition, we present a simple proof of Matthews' (1984) conjecture, proved by Border (1991), on implementability.
    Date: 2011–12
  4. By: Yehuda Levy
    Abstract: We present an example of a discounted stochastic game with a continuum of states, finitely many players and actions, and deterministic transitions, that possesses no measurable stationary equilibria, or even stationary approximate equilibria. The example is robust to perturbations of the payoffs, the transitions, and the discount factor, and hence gives a strong nonexistence result for stationary equilibria. The example is a game of perfect information, and hence it also does not possess stationary extensive-form correlated equilibrium. Markovian equilibria are also shown not to exist in appropriate perturbations of our example.
    Keywords: Stochastic Game, Discounting, Stationary Equilibrium
    Date: 2012–01–11
  5. By: Gilad Bavly
    Abstract: The paper analyzes a perturbation on the players’ knowledge of the game in the traveler’s dilemma, by introducing some uncertainty about the range of admissible actions. The ratio between changes in the outcomes and the size of perturbation is shown to grow exponentially in the range of the given game. This is consistent with the intuition that a wider range makes the outcome of the traveler’s dilemma more paradoxical. We compare this with the growth of the elasticity index (Bavly (2011)) of this game.
    Date: 2012–01–10
  6. By: Charles Nolan; Alex Trew
    Abstract: This paper proposes a simple framework for understanding endogenous transaction costs - their composition, size and implications. In a model of diversification against risk, we distinguish between inverstments in instituations that facilitate exchange and the costs of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk averse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction cost are exogenous, including the implications for taxation and measurement issues.
    Keywords: Exchange costs, transaction costs, general equilibrium, institutions.
    JEL: D02 D51 L14
    Date: 2011–01
  7. By: Richard Cornes; Roger Hartley
    Date: 2012
  8. By: Wuerth, A.M.; Schumacher, J.M. (Tilburg University)
    Date: 2011
  9. By: Peter Postl
    Abstract: We study procurement procedures that simultaneously determine specification and price of a good. Suppliers can offer and produce the good in either of two possible specifications, both of which are equally good for the buyer. Production costs are interdependent and unknown at the time of bidding. Each supplier receives two signals about production cost, one per specification. Our model is a special case of the interdependent-value settings with multi-dimensional types in Jehiel and Moldovanu (2001) where an efficient and incentive compatible mechanism exists. We characterize equilibrium bidding behavior if the winning supplier is selected purely on the basis of price, regardless of the specification offered. While there is a positive chance of obtaining an inefficient specification, this procurement mechanism involves lower information rents than efficient mechanisms, suggesting that there is a trade-off between minimizing expected expenditure for the good, and ensuring that the efficient specification is chosen.
    Keywords: Procurement, interdependent valuations, multi-dimensional information, efficient mechanisms, optimal mechanisms
    JEL: C72 D44 D82
    Date: 2011–12
  10. By: Glenn W. Harrison; J. Todd Swarthout
    Abstract: Developments in the theory of risk require yet another evaluation of the behavioral validity of the independence axiom. This axiom plays a central role in most formal statements of expected utility theory, as well as popular alternative models of decision-making under risk, such as rank-dependent utility theory. It also plays a central role in experiments used to characterize the way in which risk preferences deviate from expected utility theory. If someone claims that individuals behave as if they "probability weight" outcomes, and hence violate the independence axiom, it is invariably on the basis of experiments that must assume the independence axiom. We refer to this as the Bipolar Behavioral Hypothesis: behavioral economists are pessimistic about the axiom when it comes to characterizing how individuals directly evaluate two lotteries in a binary choice task, but are optimistic about the axiom when it comes to characterizing how individuals evaluate multiple lotteries that make up the incentive structure for a multiple-task experiment. Building on designs that have a long tradition in experimental economics, we offer direct tests of the axiom and the evidence for probability weighting. We reject the Bipolar Behavioral Hypothesis: we find that nonparametric preferences estimated for the rank-dependent utility model are significantly affected when one elicits choices with procedures that require the independence assumption, as compared to choices with procedures that do not require that assumption. We also demonstrate this result with familiar parametric preference specifications, and draw general implications for the empirical evaluation of theories about risk.
    Date: 2012–01
  11. By: David Dillenberger; Andrew Postlewaite; Kareen Rozen
    Date: 2012–01–09
  12. By: Pradeep K. Dubey; John Geanakoplos; Ori Haimanko
    Date: 2012–01–09
  13. By: Ian A. MacKenzie (ETH Zurich, Switzerland); Markus Ohndorf (ETH Zurich, Switzerland)
    Abstract: We investigate the efficiency of Coasean bargaining when restrictions are placed on the set of feasible bargaining outcomes. When property rights are costly to (defend) appropriate, we find bargaining restrictions may be Pareto superior to unconstrained voluntary exchange. Under cost uncertainty over the externality, we show an efficient configuration of restrictions must balance the potential reduction in appropriation costs with the possibility of allocatively inefficient bargaining restrictions. For cases where the restrictions are contested, we show conditions for the continuing existence of welfare improvements.
    Keywords: Coase theorem, bargaining restrictions, appropriation.
    JEL: D62 D72 K1
    Date: 2012–01
  14. By: Di Gaetano, Luigi
    Abstract: Several new auction formats are spreading over the Internet. They have usually the aim of raising revenues by increasing the number of participant, who will pay a participation fee, rather than selling the object at the highest possible price. The aim of this paper is to study a format of descending price auction with hidden starting price and endogenous price decrease. In this format, usually known as price reveal auction, the price is hidden and players have to pay a fee to observe it. The price decreases only if a bidder observes it and not because of the time, like in the usual Dutch format. In the following pages, we will analyse the effect of the concealment of the price in a standard Dutch auction. We will, then, define a model for price reveal auction, and analyse its most important aspects. We will, finally, derive players' best strategy and the Nash equilibrium of the game. Our result is that players use a threshold strategy to decide whether or not participate the auction (observe the price and pay the fixed fee). However, in our model there is not a separating equilibrium. Moreover, we will find that there is a process of beliefs updating, which takes account of the time as a signal of the price. Therefore, if the game continues, players infer that the price is too high and update their beliefs accordingly. We will finally compare our theoretical results with empirical data about 135 price reveal auctions held between December 2009 and April 2011 on the website
    Keywords: Price reveal auction; Endogenous price; Descending auction
    JEL: D44 D82 C72
    Date: 2011–10–01

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