
on Microeconomics 
Issue of 2012‒02‒27
sixteen papers chosen by JingYuan Chiou IMT Lucca Institute for Advanced Studies 
By:  Alex Gershkov; Jacob Goeree; Alexey Kushnir; Benny Moldovanu; Xianwen Shi 
Abstract:  We consider a standard social choice environment with linear utilities and independent, onedimensional, private types. We prove that for any Bayesian incentive compatible mechanism there exists an equivalent dominant strategy incentive compatible mechanism that delivers the same interim expected utilities for all agents and the same ex ante expected social surplus. The short proof is based on an extension of an elegant result due to Gutmann et al. (Annals of Probability, 1991). We also show that the equivalence between Bayesian and dominant strategy implementation generally breaks down when the main assumptions underlying the social choice model are relaxed, or when the equivalence concept is strengthened to apply to interim expected allocations. 
Keywords:  Bayesian Implementation, Dominant Strategy Implementation, Equivalence 
JEL:  D82 
Date:  2012–02–16 
URL:  http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa445&r=mic 
By:  Lombardi, Michele; Yoshihara, Naoki 
Abstract:  The paper proposes necessary and suffi cient conditions for the natural implementation of (efficient) social choice correspondences (SCCs) in pure finite exchange economies when some of the agents are partially honest. A partially honest agent is an agent who strictly prefers to tell the truth when lying has no better material consequences for her. Firstly, it is shown that if there is even one partially honest agent in the economy (and the planner does not know her identity), then any SCC is Nash implementable by a natural priceallocation mechanism. Secondly, and in sharp contrast with the results of conventional models of natural implementation, it is shown that the equivalence relationship between natural priceallocation mechanisms and natural pricequantity2 mechanisms no longer holds. Finally, and even more strikingly, the paper reports that the class of implementable SCCs by natural pricequantity mechanisms is significantly enlarged. 
Keywords:  Natural implementation, Nash equilibrium, exchange economies, intrinsic preferences for honesty 
JEL:  C72 D71 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:hit:hituec:561&r=mic 
By:  Corchon, Luis C.; Triossi, Matteo 
Abstract:  In this paper, we present a model of implementation where infeasible allocations are converted into feasible ones through a process of renegotiation that is represented by a reversion function. We describe the maximal set of Social Choice Correspondences that can be implemented in Nash Equilibrium in a class of reversion functions that punish agents for infeasibilities. This is used to study the implementation of the Walrasian Correspondence and several axiomatic solutions to problems of bargaining and taxation. 
Keywords:  Teoría de juegos; Toma de decisiones; Economía del bienestar; 
Date:  2011–02 
URL:  http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/13427&r=mic 
By:  P Battigalli; S CerreiaVioglio; F Maccheroni; M Marinacci 
Date:  2012–02–15 
URL:  http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000376&r=mic 
By:  Menachem Brenner; Yehuda Izhakian; Orly Sade 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:ste:nystbu:1106&r=mic 
By:  Bertrand Wigniolle (Centre d'Economie de la Sorbonne  Paris School of Economics) 
Abstract:  This paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rankdependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Paretooptimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles. 
Keywords:  Rational bubbles, RDU preferences. 
JEL:  D81 D9 G1 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:mse:cesdoc:12005&r=mic 
By:  Tao Wang (Queen's University) 
Abstract:  In this paper, we analyze the asymmetric pure strategy equilibria in a dynamic game of pure information externality. Each player receives a private signal and chooses whether and when to invest. In some of the periods, only a subgroup of the players make decisions, which we call bunching, while the rest of the players do not invest regardless of their signals. Bunching is different from herding; it occurs in the first period and recursively until herding takes place or the game runs out of undecided players. We find that any asymmetric pure strategy equilibrium is more efficient than the symmetric mixed strategy equilibrium. When players become patient enough, herding of investment disappears in the most efficient asymmetric pure strategy equilibrium, while the least efficient asymmetric pure strategy equilibrium resembles those in a fixed timing model, producing an exact match when the discount factor is equal to 1. Bunch sizes are shown to be independent of the total number of players; adding more players to the game need not change early players' behavior. All these are unique properties of the asymmetric pure strategy equilibria. We also show that the asymmetric pure strategy equilibria can accommodate small heterogeneities of the players in costs of acquiring signals, discount factors, or degree of risk aversion. In any of these environments, there exists a unique welfare maximizing equilibrium which provides a natural way for the players to coordinate. 
Keywords:  bunching, herding, endogenous timing, asymmetric equilibrium, information externality 
JEL:  C73 D82 G01 
Date:  2011–11 
URL:  http://d.repec.org/n?u=RePEc:qed:wpaper:1291&r=mic 
By:  Masaki Aoyagi 
Abstract:  A principal acquires information about a shock and then discloses it to an agent. After the disclosure, the principal and agent each decide whether to take costly preparatory actions that yield benefits only when the shock strikes. The principal maximizes his expected payoff by controlling the quality of his information, and the disclosure rule. We show that even when the acquisition of perfect information is costless, the principal may optimally acquire imperfect information when his own action eliminates the agent's incentive to take action against the risk. 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:dpr:wpaper:0832&r=mic 
By:  Paulo Barelli (University of Rochester); Suren Basov (La Trobe University); Mauricio Bugarin (Insper Institute); Ian King (University of Melbourne) 
Abstract:  We extend Armstrong's result on exclusion in multidimensional screening models in two key ways, providing support for the view that this result is generic and applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to generalized oligopoly settings with entry. We also analyze applications to several quite different settings: credit markets, the automobile industry, research grants, the regulation of a monopolist with unknown demand and cost functions, and involuntary unemployment in the labor market. 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:roc:rocher:571&r=mic 
By:  Johannes Horner (Cowles Foundation, Yale University); Satoru Takahashi (Dept. of Economics, Princeton University); Nicolas Vieille (HEC Paris) 
Abstract:  This paper provides a dual characterization of the limit set of perfect public equilibrium payoffs in stochastic games (in particular, repeated games) as the discount factor tends to one. As a first corollary, the folk theorems of Fudenberg, Levine and Maskin (1994), Kandori and Matsushima (1998) and Hörner, Sugaya, Takahashi and Vieille (2011) obtain. As a second corollary, in the context of repeated games, it follows that this limit set of payoffs is a polytope (a bounded polyhedron) when attention is restricted to equilibria in pure strategies. We provide a twoplayer game in which this limit set is not a polytope when mixed strategies are considered. 
Keywords:  Stochastic games, Repeated games, Folk theorem 
JEL:  C72 C73 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:cwl:cwldpp:1848&r=mic 
By:  Bernardo Guimaraes; Kevin D. Sheedy 
Abstract:  Institutions that serve the interests of an elite are often cited as an important reason for poor economic performance. This paper builds a model of institutions that allocate resources and power to maximize the payoff of an elite, but where any group that exerts sufficient fighting effort can launch a rebellion that destroys the existing institutions. The rebels are then able to establish new institutions as a new elite, which will similarly face threats of rebellion. The paper analyses the economic consequences of the institutions that emerge as the equilibrium of this struggle for power. High levels of economic activity depend on protecting private property from expropriation, but the model predicts this can only be achieved if power is not as concentrated as the elite would like it to be, ex post. Power sharing endogenously enables the elite to act as a government committed to property rights, which would otherwise be time inconsistent. But sharing power entails sharing rents, so in equilibrium power is too concentrated, leading to inefficiently low investment. 
Keywords:  institutions, political economy, power struggle, property rights, time inconsistency 
JEL:  E02 O43 P48 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:cep:cepdps:dp1123&r=mic 
By:  Saglam, Ismail 
Abstract:  In this paper, we present a simple axiomatization of the nperson egalitarian solution. The single axiom sufficient for characterization is a new condition which we call symmetric decomposition. 
Keywords:  Cooperative bargaining; egalitarian solution 
JEL:  C78 C71 
Date:  2012–02–19 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:36773&r=mic 
By:  Matthew Polisson; John Quah 
Abstract:  We show that an agent maximizing some utility function on a discrete (as opposed to continuous) consumption space will obey the generalized axiom of revealed preference (GARP) so long as the agent obeys cost efficiency. Cost efficiency will hold if there is some good, outside the set of goods being studied by the modeler, that can be consumed by the agent in continuous quantities. An application of Afriat's Theorem then guarantees that there is a strictly increasing utility function on the discrete consumption space that rationalizes price and demand observations in that space. 
Keywords:  Generalized axiom of revealed preference; Afriat's Theorem; discrete demand; utility maximization 
Date:  2012–01 
URL:  http://d.repec.org/n?u=RePEc:lec:leecon:12/02&r=mic 
By:  Chevillon, Guillaume (ESSEC Business School); Mavroeidis, Sophocles (University of Oxford) 
Abstract:  We consider a prototypical representativeagent forwardlooking model, and study the low frequency variability of the data when the agent's beliefs about the model are updated through linear learning algorithms. We nd that learning in this context can generate strong persistence. The degree of persistence depends on the weights agents place on past observations when they update their beliefs, and on the magnitude of the feedback from expectations to the endogenous variable. When the learning algorithm is recursive least squares, long memory arises when the coefficient on expectations is sufficiently large. In algorithms with discounting, long memory provides a very good approximation to the lowfrequency variability of the data. Hence long memory arises endogenously, due to the selfreferential nature of the model, without any persistence in the exogenous shocks. This is distinctly dierent from the case of rational expectations, where the memory of the endogenous variable is determined exogenously. Finally, this property of learning is used to shed light on some wellknown empirical puzzles. 
Keywords:  Learning; Long Memory; Persistence; PresentValue Models 
Date:  2011–11–24 
URL:  http://d.repec.org/n?u=RePEc:ebg:essewp:dr11013&r=mic 
By:  Andrés Álvarez; Jimena Hurtado 
Abstract:  After having reviewed some of the recent advances in Economics trying to incorporate new elements in our understanding of human interactions, we aim at contributing to this line of research using Adam Smith’s system of sympathy. The features Smith attributes to the intersubjective identification mechanism of sympathy lead not only to conceive the construction of a community but also the possibility of exclusion of some of its members. The asymmetry of sympathy allows explaining emulation of those seen as more fortunate as well as the exclusion of those perceived as miserable. Through a formal representation we try to illustrate the phenomena of inclusion and exclusion present in intersubjetive relations and the construction of communities. Keywords: Adam Smith, sympathy, emulation, exclusion. JEL Codes: B12, B31, D03. 
Date:  2012–01–11 
URL:  http://d.repec.org/n?u=RePEc:col:000089:009312&r=mic 
By:  Larsson, LarsGöran (Department of Economics, School of Business, Economics and Law, Göteborg University) 
Abstract:  See paper 
Keywords:  Properties of expected consumer demand functions; Microeconomics; Consumer theory; Consumer behaviour; Choice described in random terms; Expected individual and market demand. 
JEL:  C60 D01 D11 
Date:  2012–02–15 
URL:  http://d.repec.org/n?u=RePEc:hhs:gunwpe:0527&r=mic 