nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒02‒27
sixteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. On the Equivalence of Bayesian and Dominant Strategy Implementation By Alex Gershkov; Jacob Goeree; Alexey Kushnir; Benny Moldovanu; Xianwen Shi
  2. Natural Implementation with Partially Honest Agents By Lombardi, Michele; Yoshihara, Naoki
  3. Implementation with renegotiation when preferences and feasible sets are state dependent. By Corchon, Luis C.; Triossi, Matteo
  4. Selfconfirming Equilibrium and Model Uncertainty By P Battigalli; S Cerreia-Vioglio; F Maccheroni; M Marinacci
  5. Ambiguity and Overconfidence By Menachem Brenner; Yehuda Izhakian; Orly Sade
  6. Optimism, pessimism and financial bubbles. By Bertrand Wigniolle
  7. Dynamic Equilibrium Bunching By Tao Wang
  8. Optimal Obscurity in the Acquisition and Disclosure of Information about a Shock By Masaki Aoyagi
  9. The Robustness of Exclusion in Multi-dimensional Screening By Paulo Barelli; Suren Basov; Mauricio Bugarin; Ian King
  10. On the Limit Equilibrium Payoff Set in Repeated and Stochastic Games By Johannes Horner; Satoru Takahashi; Nicolas Vieille
  11. A Model of Equilibrium Institutions By Bernardo Guimaraes; Kevin D. Sheedy
  12. A simple axiomatization of the egalitarian solution By Saglam, Ismail
  13. Revealed Preference in a Discrete Consumption Space By Matthew Polisson; John Quah
  14. Learning generates Long Memory By Chevillon, Guillaume; Mavroeidis, Sophocles
  15. Out of sight, out of mind: Modern economics, social interactions, and Smith’s sympathy By Andrés Álvarez; Jimena Hurtado
  16. On Expected Demand Functions without Utility Maximization By Larsson, Lars-Göran

  1. By: Alex Gershkov; Jacob Goeree; Alexey Kushnir; Benny Moldovanu; Xianwen Shi
    Abstract: We consider a standard social choice environment with linear utilities and independent, one-dimensional, 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
  2. 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 price-allocation mechanism. Secondly, and in sharp contrast with the results of conventional models of natural implementation, it is shown that the equivalence relationship between natural price-allocation mechanisms and natural price-quantity2 mechanisms no longer holds. Finally, and even more strikingly, the paper reports that the class of implementable SCCs by natural price-quantity mechanisms is significantly enlarged.
    Keywords: Natural implementation, Nash equilibrium, exchange economies, intrinsic preferences for honesty
    JEL: C72 D71
    Date: 2012–02
  3. 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
  4. By: P Battigalli; S Cerreia-Vioglio; F Maccheroni; M Marinacci
    Date: 2012–02–15
  5. By: Menachem Brenner; Yehuda Izhakian; Orly Sade
    Date: 2011
  6. 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 rank-dependent 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) Pareto-optimality 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
  7. 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
  8. 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
  9. 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 multi-dimensional 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
  10. 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 two-player 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
  11. 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
  12. By: Saglam, Ismail
    Abstract: In this paper, we present a simple axiomatization of the n-person 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
  13. 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
  14. By: Chevillon, Guillaume (ESSEC Business School); Mavroeidis, Sophocles (University of Oxford)
    Abstract: We consider a prototypical representative-agent forward-looking 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 low-frequency variability of the data. Hence long memory arises endogenously, due to the self-referential 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 well-known empirical puzzles.
    Keywords: Learning; Long Memory; Persistence; Present-Value Models
    Date: 2011–11–24
  15. 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
  16. By: Larsson, Lars-Göran (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

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