nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒02‒20
twenty-one papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. A model of influence with a continuum of actions By Michel Grabisch; Agnieszka Rusinowska
  2. Aggregation of multiple prior opinions. By Crès, Hervé; Gilboa, Itzhak; Vieille, Nicolas
  3. Discounting and confidence By Traeger, Christian P.
  4. Comparative Ross Risk Aversion in the Presence of Mean Dependent Risks By Georges Dionne; Jingyuan Li
  5. Laws and Norms By Benabou, Roland; Tirole, Jean
  6. Network formation under institutional constraints By Olaizola Ortega, María Norma; Valenciano Llovera, Federico
  7. Public Monitoring with Uncertainty in the Time Repetitions By Osório, Antonio
  8. A Folk Theorem for Games when Frequent Monitoring Decreases Noise By Osório, Antonio
  9. Robust stochastic stability By Carlos Alós–Ferrer; Nick Netzer
  10. Inequality aversion and externalities By Gürtler, Marc; Gürtler, Oliver
  11. Noisy Stochastic Games By John Duggan
  12. Competition Among the Big and the Small By Ken-Ichi Shimomura; Jacques-François Thisse
  13. Collusion and downstream entry in a vertically integrated industry By Éric Avenel, University of Rennes 1 - CREM-CNRS, France; Stéphane Caprice, Toulouse School of Economics (GREMAQ, INRA)
  14. Standards and Incentives under Moral Hazard with Limited Liability By Reinshagen, Felix
  15. On the existence of pure strategy equilibria in large generalized games with atomic players By Riascos Villegas, Alvaro; Torres-Martínez, Juan Pablo
  16. Trading mechanism selection with budget constraints By Selcuk, Cemil
  17. Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment By Grochulskiy, Borys; Zhang, Yuzhe
  18. Essential Data, Budget Sets and Rationalization By Forges, Françoise; Iehlé, Vincent
  19. Essential stability for large generalized games By Correa, Sofía; Torres-Martínez, Juan Pablo
  20. Your right arm for a publication in AER? By Attema, Arthur; Brouwer, Werner; van Exel, J
  21. A dynamic model of interactions between conscious and unconscious By Lotz, Aileen; Gosselin, Pierre

  1. By: Michel Grabisch (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: We generalize a two-action (yes-no) model of influence to a framework in which every player has a continuum of actions, among which he has to choose one. We assume the set of actions to be an interval. Each player has an inclination to choose one of the actions. Due to influence among players, the final decision of a player, i.e., his choice of one action, may be different from his original inclination. In particular, a coalition of players with the same inclination may influence another player with different inclination, and as a result of this influence, the decision of the player is closer to the inclination of the influencing coalition than his inclination was. We introduce a measure of such a positive influence of a coalition on a player. Several unanimous influence functions in this generalized framework are considered. Also the set of fixed points under a given influence function is analyzed. Furthermore, we study linear influence functions and discuss their convergence. For a linear unanimous function, we find necessary and sufficient conditions for the existence of the positive influence of a coalition on a player, and we calculate the value of the influence index. We also introduce a measure of a negative influence of a coalition on a player.
    Date: 2011
  2. By: Crès, Hervé (Département d'économie); Gilboa, Itzhak; Vieille, Nicolas
    Abstract: Experts are asked to provide their advice in a situation of uncertainty. They adopt the decision maker’s utility function, but each has a potentially different set of prior probabilities, and so does the decision maker. The decision maker and the experts maximize the minimal expected utility with respect to their sets of priors. We show that a natural Pareto condition is equivalent to the existence of a set Λ of probability vectors over the experts, interpreted as possible allocations of weights to the experts, such that (i) the decision maker’s set of priors is precisely all the weighted-averages of priors, where an expert’s prior is taken from her set and the weight vector is taken from Λ; (ii) the decision maker’s valuation of an act is the minimal weighted valuation, over all weight vectors in Λ, of the experts’ valuations.
    Keywords: Aggregation of opinions, Ambiguity, Multiple priors;
    JEL: D7 D8
    Date: 2011
  3. By: Traeger, Christian P. (University of California, Berkeley. Dept of agricultural and resource economics)
    Abstract: The paper analyzes the discount rate under uncertainty. The analysis complements the probabilistic characterization of uncertainty by a measure of confidence. Special cases of the model comprise discounting under smooth ambiguity aversion as well as discounting under a disentanglement of risk aversion from aversion to intertemporal substitution. The paper characterizes the general class of preferences for which uncertainty implies a reduction of the discount rate. It also characterizes how the more comprehensive description of uncertainty changes the discount rate with respect to the standard model. The paper relates different results in the literature by switching between different risk measures. It presents a parametric extension of the Ramsey discounting formula that takes into account confidence into future growth estimates and a measure of aversion to the lack of confidence. If confidence decreases in the futurity of the growth forecast, the discount rates have a falling term structure even in the case of an iid growth process.
    Keywords: uncertainty, discounting, climate change, ambiguity, confidence, subjective beliefs, prudence, pessimism, expected utility, intertemporal substitutability, intertemporal risk aversion
    JEL: D61 Q54 D81 D90
    Date: 2011–06
  4. By: Georges Dionne; Jingyuan Li
    Abstract: This paper studies comparative risk aversion between risk averse agents in the presence of a background risk. Although the literature covers this question extensively, our contribution differs from most of the literature in two respects. First, background risk does not need to be additive or multiplicative. Second, the two risks are not necessary mean independent, and may be conditional expectation increasing or decreasing. We show that our order of cross Ross risk aversion is equivalent to the order of partial risk premium, while our index of decreasing cross Ross risk aversion is equivalent to decreasing partial risk premium. These results generalize the comparative risk aversion model developed by Ross (1981) for mean independent risks. Finally, we show that decreasing cross Ross risk aversion gives rise to the utility function family belonging to the class of n-switch utility functions.
    Keywords: Comparative cross Ross risk aversion, Dependent background risk, Partial risk premium, Decreasing cross Ross risk aversion, n-switch utility function
    JEL: D81
    Date: 2012
  5. By: Benabou, Roland (Princeton University); Tirole, Jean (IDEI)
    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: motivation, incentives, esteem, reputation, honor, stigma, social norms, culture, taxation, law, punishments, norms-based interventions, expressive content
    JEL: D64 D82 H41 K1 K42 Z13
    Date: 2012–01
  6. By: Olaizola Ortega, María Norma; Valenciano Llovera, Federico
    Abstract: We study the effects of institutional constraints on stability, efficiency and network formation. An exogenous "societal cover" consisting of a collection of possibly overlapping subsets covering the set of players specifies the social organization in different groups or "societies". It is assumed that a player may imitiate links only with players that belong to at least one society that she also belongs to, thus restricting the feasible strategies and networks. In this setting, we examine the impact of such societal constraints on stable/efficient architectures and on dynamics. We also study stability and stochastic stability in the presence of decay.
    Keywords: network, stability, dynamics, decay, stochastic stability
    JEL: A14 C72 D20 J00
    Date: 2011–05
  7. By: Osório, Antonio
    Abstract: This paper study repeated games where the time repetitions of the stage game are not known or controlled by the players. We call this feature random monitoring. Kawamori's (2004) shows that perfect random monitoring is always better than the canonical case. Surprisingly, when the monitoring is public, the result is less clear-cut and does not generalize in a straightforward way. Unless the public signals are sufficiently informative about player's actions and/or players are patient enough. In addition to a discount effect, that tends to consistently favor the provision of incentives, we found an information effect, associated with the time uncertainty on the distribution of public signals. Whether payoff improvements are or not possible, depends crucially on the direction and strength of these effects. JEL: C73, D82, D86. KEYWORDS: Repeated Games, Frequent Monitoring, Random Public Monitoring, Moral Hazard, Stochastic Processes.
    Keywords: Teoria de jocs, 33 - Economia, 65 - Gestió i organització. Administració i direcció d'empreses. Publicitat. Relacions públiques. Mitjans de comunicació de masses,
    Date: 2011–12–18
  8. By: Osório, Antonio
    Abstract: This paper studies frequent monitoring in an infinitely repeated game with imperfect public information and discounting, where players observe the state of a continuous time Brownian process at moments in time of length _. It shows that a limit folk theorem can be achieved with imperfect public monitoring when players monitor each other at the highest frequency, i.e., _. The approach assumes that the expected joint output depends exclusively on the action profile simultaneously and privately decided by the players at the beginning of each period of the game, but not on _. The strong decreasing effect on the expected immediate gains from deviation when the interval between actions shrinks, and the associated increase precision of the public signals, make the result possible in the limit. JEL: C72/73, D82, L20. KEYWORDS: Repeated Games, Frequent Monitoring, Public Monitoring, Brownian Motion.
    Keywords: Teoria de jocs, 33 - Economia, 65 - Gestió i organització. Administració i direcció d'empreses. Publicitat. Relacions públiques. Mitjans de comunicació de masses,
    Date: 2011–10–27
  9. By: Carlos Alós–Ferrer; Nick Netzer
    Abstract: A strategy profile of a game is called robustly stochastically stable if it is stochastically stable for a given behavioral model independently of the specification of revision opportunities and tie-breaking assumptions in the dynamics. We provide a simple radius-coradius result for robust stochastic stability and examine several applications. For the logit-response dynamics, the selection of potential maximizers is robust for the subclass of supermodular N-player binary-action games. For the mistakes model, robust selection results obtain for best-reply dynamics in the same class of games under the weaker condition of strategic complementarity. Further, both the selection of risk-dominant strategies in coordination games under best-reply and the selection of “Walrasian” strategies in aggregative games under imitation are robust.
    Keywords: Learning in games, stochastic stability, radius-coradius theorems, logit-response dynamics, mutations, imitation
    JEL: C72 D83
    Date: 2012–02
  10. By: Gürtler, Marc; Gürtler, Oliver
    Abstract: We conduct a general analysis of the effects of inequality aversion on decisions by homogeneous players in static and dynamic games. We distinguish between direct and indirect effects of inequality aversion. Direct effects are present when a player changes his action to affect disutility caused by inequality. Indirect effects occur when the own action is changed to affect other players' actions. We provide necessary and sufficient conditions for the occurrence of either effect. Moreover, we examine the direction of the effects. Whereas indirect effects induce players to internalize externalities they impose on others, direct effects act in the opposite direction. --
    Keywords: inequality aversion,externalities,direct effects,indirect effects
    JEL: C72 D62 D63
    Date: 2011
  11. By: John Duggan (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158)
    Abstract: This paper establishes existence of a stationary Markov perfect equilibrium in general stochastic games with noise—a component of the state that is nonatomically distributed and not directly affected by the previous period’s state and actions. Noise may be simply a payoff-irrelevant public randomization device, delivering known results on existence of correlated equilibrium as a special case. More generally, noise can take the form of shocks that enter into players’ stage payoffs and the transition probability on states. The existence result is applied to a model of industry dynamics and to a model of dynamic electoral competition.
    Date: 2012–02
  12. By: Ken-Ichi Shimomura (Research Institute for Economics and Business Administration, Kobe University, Nada-ku, Kobe, Japan); Jacques-François Thisse (CORE-Université catholique de Louvain (Belgium), CREA-Université du Luxembourg and CEPR)
    Abstract: Many industries are made of a few big firms, which are able to manipulate the market outcome, and of a host of small businesses, each of which has a negligible impact on the market. We provide a general equilibrium framework that encapsulates both market structures. Due to the higher toughness of competition, the entry of big firms leads them to sell more through a market expansion effect generated by the shrinking of the monopolistically competitive fringe. Furthermore, social welfare increases with the number of big firms because the pro-competitive effect associated with entry dominates the resulting decrease in product diversity.
    Keywords: oligopoly, monopolistic competition, product differentiation, welfare
    JEL: L13 L40
    Date: 2012–02
  13. By: Éric Avenel, University of Rennes 1 - CREM-CNRS, France; Stéphane Caprice, Toulouse School of Economics (GREMAQ, INRA)
    Abstract: We analyse the impact of an entry threat at the downstream level on the ability of a pair of vertically integrated incumbents to collude. We present an original model of horizontal product differentiation on the final market and characterize the structures of this market for which an entry threat facilitates collusion between incumbents. While the entry threat leaves collusion and deviation profits unchanged, it lowers profits in punishment periods. Consequently, an entry threat discourages deviations and facilitates collusion, thus benefiting incumbents.
    Keywords: collusion, foreclosure, entry, vertical integration
    JEL: D43 L13 L23 L40
    Date: 2012–01
  14. By: Reinshagen, Felix
    Abstract: We consider a model of moral hazard with limited liability of the agent and effort that is two-dimensional. One dimension of the agent’s effort is observable and the other is not. The principal can thusmake the contract conditional not only on outcome but also on observable effort. The principal’s optimal contract gives the agent no rent and – in contrast to the first-best allocation – uses toomuch observable effort and too little unobservable effort. This distortion in the relative use of the two kinds of effort increases if the agent’s liability becomes more limited.
    Keywords: moral hazard; two-dimensional effort; regulation
    JEL: D82 D86 K32
    Date: 2012–02
  15. By: Riascos Villegas, Alvaro; Torres-Martínez, Juan Pablo
    Abstract: We consider a game with a continuum of players where only a finite number of them are atomic. Objective functions and admissible strategies may depend on the actions chosen by atomic players and on aggregate information about the actions chosen by non-atomic players. Only atomic players are required to have convex sets of admissible strategies and quasi-concave objective functions. We prove the existence of a pure strategy Nash equilibria. Thus, we extend to large generalized games with atomic players the results of equilibrium existence for non-atomic games of Schemeidler (1973) and Rath (1992). We do not obtain a pure strategy equilibrium by purification of mixed strategy equilibria. Thus, we have a direct proof of both Balder (1999, Theorem 2.1) and Balder (2002, Theorem 2.2.1), for the case where non-atomic players have a common non-empty set of strategies and integrable bounded codification of action profiles. Our main result is readily applicable to many interesting problems in general equilibrium. As an application, we extend Aumann (1966) result on the existence of equilibrium with a continuum of traders to a standard general equilibrium model with incomplete asset markets.
    Keywords: Generalized games; Non-convexities; Pure-strategy Nash equilibrium
    JEL: C72 C62
    Date: 2012–01
  16. By: Selcuk, Cemil
    Abstract: We present an equilibrium search model of competing mechanisms where some buyers are budget constrained. Absent budget constraints, the existing literature capitulates that if buyers differ in their valuations then in the unique equilibrium all sellers hold second price auctions (e.g. McAfee (1993)) whereas if buyers are homogeneous then sellers are indifferent across a large number of payoff-equivalent mechanisms (e.g. Eeckhout and Kircher (2010)). We show that these results are not robust to the presence of budget constrained buyers; merely lowering the budgets of a few buyers renders the auction equilibrium as well as payoff equivalence unsustainable. If buyers differ only slightly in terms of their ability to pay then sellers prefer fixed price trading; otherwise they prefer auctions.
    Keywords: Trading Mechanisms; Budget Constraints; Competitive Search
    JEL: C78 D40 D83
    Date: 2011–03–12
  17. By: Grochulskiy, Borys; Zhang, Yuzhe
    Abstract: We study a continuous-time version of the optimal risk-sharing problem with one-sided commitment. In the optimal contract, the agent's consumption is a time-invariant, strictly increasing function of a single state variable: the maximal level of the agent's income realized to date. We characterize this function in terms of the agent's outside option value function and the discounted amount of time in which the agent's income process is expected to reach a new to-date maximum. Under constant relative risk aversion we solve the model in closed-form: optimal consumption of the agent equals a constant fraction of his maximal income realized to date. In the complete-markets implementation of the optimal contract, the Alvarez-Jermann solvency constraints take the form of a simple borrowing constraint familiar from the Bewley-Aiyagari incomplete-markets models.
    Keywords: Limited commitment; Borrowing constraints
    JEL: D86 C61
    Date: 2011–07–22
  18. By: Forges, Françoise; Iehlé, Vincent
    Abstract: According to a minimalist version of Afriat’s theorem, a consumer behaves as a utility maximizer if and only if a feasibility matrix associated with his choices is cyclically consistent. An ”essential experiment” consists of observed consumption bundles (x1,xn) and a feasibility matrix α. Starting with a standard experiment, in which the economist has specific budget sets in mind, we show that the necessary and sufficient condition for the existence of a utility function rationalizing the experiment, namely, the cyclical consistency of the associated feasibility matrix, is equivalent to the existence, for any budget sets compatible with the deduced essential experiment, of a utility function rationalizing them (and typically depending on them). In other words, the conclusion of the standard rationalizability test, in which the economist takes budget sets for granted, does not depend on the full specification of the underlying budget sets but only on the essential data that these budget sets generate. Starting with an essential experiment (x1,...,xn;α), we show that the cyclical consistency of α, together with a further consistency condition involving both (x1,...,xn) and α, guarantees that the essential experiment is rationalizable almost robustly, in the sense that there exists a single utility function which rationalizes at once almost all budget sets which are compatible with (x1,...,xn;α). The conditions are also trivially necessary.
    Keywords: Afriat’s theorem; budget sets; cyclical consistency; rational choice; revealed preference
    JEL: D11 C81
    Date: 2012–02–07
  19. By: Correa, Sofía; Torres-Martínez, Juan Pablo
    Abstract: We address the essential stability of Cournot-Nash equilibria for generalized games with a continuum of players, where only a finite number of them are atomic. Given any set of generalized games continuously parameterized by a complete metric space, we analyze the robustness of equilibria to perturbations on parameters.
    Keywords: Essential equilibria; Essential sets and components; Generalized games
    JEL: C72 C62
    Date: 2012–01
  20. By: Attema, Arthur; Brouwer, Werner; van Exel, J
    Abstract: The time tradeoff (TTO) method is popular in medical decision making for valuing health states. We use it to elicit economists’ preferences for publishing in top economic journals and living without limbs. The economists value the journals highly, and have a clear preference between them, with American Economic Review (AER) the most preferred. Their responses imply they would sacrifice more than half a thumb for publishing in AER. The TTO results are consistent with ranking and willingness to pay results, and indicate that preferences for journals are neither guided by influence factors, nor by expectations of a resulting salary rise.
    Keywords: Utility Measurement; Time Tradeoff; Willingness to pay; Publications
    JEL: A10 B41 I10
    Date: 2012–01–31
  21. By: Lotz, Aileen; Gosselin, Pierre
    Abstract: This paper advocates that some limits of the rational agent hypothesis result from the improper assumption that one individual should be modeled as a single rational agent. We model an individual composed of two autonomous and interacting structures, conscious and unconscious. Each agent utility form depends both on external signals and other structures' actions. The perception of the signal depends on its recipient and its grid of interpretation. We study both the static and dynamic version of this interaction mechanism. We show that the dynamics may display instability, depending on the structures interactions'strength. However, if unconscious has a strategic advantage, greater stability is reached. By manipulating other structuresgoals, the strategic agent can lead the whole system to an equilibrium closer to its own optimum. This result shows that some switch in the consciousobjective can appear. Behaviors that can't be explained with a single utility can thus be rational if we add a rational unconscious agent. Our results justify our hypothesis of a rational interacting unconscious. It supports the widening of the notion of rationality to multi-rationnality in interaction.
    Keywords: dual agent; conscious and unconscious; rationality; multi-rationality; emotions; choices and preferences; multi-agent model; consistency;
    JEL: D70 D01 D87
    Date: 2012–02–15

This nep-mic issue is ©2012 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.