nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒03‒08
23 papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Boundedly Rational Dynamic Programming: Some Preliminary Results By Xavier Gabaix
  2. Optimization, Path Dependence and the Law: Can Judges Promote Efficiency? By Marciano, Alain; Khalil, Elias L.
  3. The Bounded Core for Games with Precedence Constraints By Michel Grabisch; Peter Sudhölter
  4. Optimism, pessimism and financial bubbles By Bertrand Wigniolle
  5. Equilibrium Uniqueness in Network Games with Strategic Substitutes By Yann Rébillé; Lionel Richefort
  6. On the Private Provision of Public Goods on Networks By Nizar Allouch
  7. On the Existence of Markov Perfect Equilibria in Perfect Information Games By Hannu Salonen; Hannu Vartiainen
  8. Multidimensional Political Competition with Non-Common Beliefs By Kazuya Kikuchi
  9. Scoring Auction by an Informed Principal By Takeshi Nishimura
  10. Search Capital By Carrillo-Tudela, Carlos; Smith, Eric
  11. Information acquisition during a Dutch auction By Miettinen, Paavo
  12. Bilateral Trading in Networks By Daniele Condorelli; Andrea Galeotti
  13. Endogenous Trading Networks By Daniele Condorelli; Andrea Galeotti
  14. On Marginal Returns and Inferior Inputs By Paolo Bertoletti; Giorgio Rampa
  15. Pairwise interactive knowledge and Nash equilibrium By Bach Christian W.; Tsakas Elias
  16. Natural implementation with partially hones agents By Lombardi Michele; Yoshihara Naoki
  17. The Asymmetric Leximin Solution By Driesen, Bram W.
  18. Price and quality decisions under network effects By Noemí Navarro
  19. Robust mechanism design and dominant strategy voting rules By Borgers, Tilman; Smith, Doug
  20. Public Good Provision with Convex Costs By Senatore, L
  21. Culture and diversity in knowledge creation By Berliant, Marcus; Fujita, Masahisa
  22. Characterizing Belief-Free Review-Strategy Equilibrium Payoffs under ConditionalIndependence By Yuichi Yamamoto
  23. Search Fatigue By Bruce Ian Carlin; Florian Ederer

  1. By: Xavier Gabaix
    Abstract: A key open question in economics is the practical, portable modeling of bounded rationality. In this short note, I report ongoing progress that is more fully developed elsewhere. I present some results from a new model in which the decision-maker builds a simplified representation of the world. The model allows to model boundedly rational dynamic programming in a parsimonious and quite tractable way. I illustrate the approach via a boundedly rational version of the consumption-saving life cycle problem. The consumer can pay attention to the variables such as the interest rate and his income, or replace them, in his mental model, by their average values. Endogenously, the consumer pays little attention to interest rate but pays keen attention to his income. One consequence of this is that Euler equations will be biased, and the intertemporal elasticity of substitution will be biased toward 0, in a manner that is quantitatively important.
    JEL: D03 E21
    Date: 2012–01
  2. By: Marciano, Alain; Khalil, Elias L.
    Abstract: The thesis that judges could (voluntarily or not) promote efficiency through their decisions has largely been discussed since Posner put it forward in the early 1970s. There nonetheless remains a methodological aspect that has never (to our knowledge) been analyzed and that we address in this paper. We thus show that both promoters and critics of the judge-and-efficiency thesis similarly use a definition of optimization in which history, constraints and path-dependency are viewed as obstacles that must be removed to reach the most efficient outcome. This is misleading. Efficiency cannot be defined in absolute terms, as a “global ideal” that would mean being free from any constraint, including historically deposited ones. That judges are obliged to refer to the past does not mean that they are unable to make the most efficient decision because constraints are part of the optimization process; or optimization is necessarily path- dependent. Thus, the output of legal systems cannot be efficient or inefficient per se. This is what we argue in this paper.
    Keywords: Judicial decision making; Historical inertia; Inefficiency; Adaptationism; Spandrelism; Global ideal; Rationality; Lock-in institutions.
    JEL: B40 B52 K00
    Date: 2012–02
  3. By: Michel Grabisch (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Peter Sudhölter (University of Southern Denmark - Department of Business and Economics and COHERE)
    Abstract: An element of the possibly unbounded core of a cooperative game with precedence constraints belongs to its bounded core if any transfer to a player from any of her subordinates results in payoffs outside the core. The bounded core is the union of all bounded faces of the core, it is nonempty if the core is nonempty, and it is a continuous correspondence on games with coinciding precedence constraints. If the precedence constraints generate a connected hierarchy, then the core is always nonempty. It is shown that the bounded core is axiomatized similarly to the core for classical cooperative games, namely by boundedness (BOUND), nonemptiness for zero-inessential two-person games (ZIG), anonymity, covariance under strategic equivalence (COV), and certain variants of the reduced game property (RGP), the converse reduced game property (CRGP), and the reconfirmation property. The core is the maximum solution that satisfies a suitably weakened version of BOUND together with the remaining axioms. For games with connected hierarchies, the bounded core is axiomatized by BOUND, ZIG, COV, and some variants of RGP and CRGP, whereas the core is the maximum solution that satisfies the weakened version of BOUND, COV, and the variants of RGP and CRGP.
    Keywords: TU game, core, restricted cooperation.
    Date: 2012–01
  4. By: Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    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.
    Date: 2012–02
  5. By: Yann Rébillé (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Lionel Richefort (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: A local public goods game in weighted and directed networks is analyzed. Individual efforts are imperfect substitutes, players' preferences are heterogeneous and local externalities are non-uniform and asymmetric. Sufficient conditions under which the game admits a unique equilibrium are established in terms of the number of links between agents in the original network. It appears that these latter conditions for uniqueness are met if, and only if, the structure of relationships is \emph{productive}. That is, a parallel can be established between network games with strategic substitutes and the input-output theory pioneered by Wassily Leontief.
    Keywords: local public goods ; Nash equilibrium ; generalized degree ; productive matrix ; Leontief model
    Date: 2012–02–17
  6. By: Nizar Allouch (Queen Mary, University of London)
    Abstract: This paper analyzes the private provision of public goods where consumers interact within a fixed network structure and may benefit only from their direct neighbors' provisions. We present a proof for existence and uniqueness of a Nash equilibrium with general best-reply functions. Our uniqueness result simultaneously extends similar results in Bergstrom, Blume, and Varian (1986) on the private provision of public goods to networks and Bramoullé, Kranton, and D'Amours (2011) on games of strategic substitutes to nonlinear best-reply functions. In addition, we investigate the neutrality result of Warr (1983) and Bergstrom, Blume, and Varian (1986) whereby consumers are able to offset income redistributions and tax-financed government contributions. To this effect, we establish that the neutrality result has a limited scope of application beyond regular networks.
    Keywords: Public goods, Uniqueness of Nash equilibrium, Network games, Neutrality, Bonacich centrality, Main eigenvalue
    JEL: C72 D31 H41
    Date: 2012–02
  7. By: Hannu Salonen (Department of Economics and PCRC, University of Turku, 20014 Turku, Finland); Hannu Vartiainen (HECER, P.O. Box 17 (Arkadiankatu 7), FI-00014 University of Helsinki)
    Abstract: We study the existence of pure strategy Markov perfect equilibria in two-person perfect information games. There is a state space X and each period player's possible actions are a subset of X. This set of feasible actions depends on the current state, which is determined by the choice of the other player in the previous period. We assume that X is a compact Hausdorff space and that the action correspondence has an acyclic and asymmetric graph. For some states there may be no feasible actions and then the game ends. Payoffs are either discounted sums of utilities of the states visited, or the utility of the state where the game ends. We give sufficient conditions for the existence of equilibrium e.g. in case when either feasible action sets are finite or when players' payoffs are continuously dependent on each other. The latter class of games includes zero-sum games and pure coordination games.
    Keywords: dynamic games, Markov perfect equilibrium
    JEL: C72 C73
    Date: 2011–10
  8. By: Kazuya Kikuchi
    Abstract: This paper extends a probabilistic voting model with a multidimensional policy space, allowing candidates to have different prior probability distributions of the distribution of voters' ideal policies. In this model, we show that a platform pair is a Nash equilibrium if and only if both candidates choose a common generalized median of expected ideal policies. Thus, the existence of a Nash equilibrium requires not only that each candidate's belief have an expected generalized median, which is already a knife-edge condition, but also that the two medians coincide. We also study limits of ε-equilibria of Radner (1980) as ε → 0, which we call "limit equilibria." Limit equilibria are policy pairs that approximate choices by the candidates who almost perfectly optimize. We show that a policy pair is a limit equilibrium if and only if both candidates choose the same policy around which they form "opposite expectations" in a certain sense. For a limit equilibrium to exist (equivalently, for ε-equilibria to exist for all ε > 0), it is sufficient, though not necessary, that either candidate has an expected generalized median.
    Date: 2012–02
  9. By: Takeshi Nishimura
    Abstract: This paper considers a scoring auction used in procurement. In this auction, each supplier offers both price and quality, and a supplier whose offer achieves the highest score wins. The environment we consider has two features: the buyer has private information and quality is multi-dimensional. We show that a scoring auction implements the ex ante optimal mechanism for the buyer when the value complementarity between quality attributes is sufficiently greater than the cost substitutability. We further show how the buyer should design scoring rules.
    Date: 2012–02
  10. By: Carrillo-Tudela, Carlos (University of Essex); Smith, Eric (University of Essex)
    Abstract: We construct a simple equilibrium search model in which workers accumulate information about previously met employment contacts. We term the latter search capital. Here search capital (partially) insures workers against adverse shocks. The model provides a theory of job-to-job transitions that are associated with voluntary or involuntary mobility and with wage rises or wage cuts. It also shows why low wage and younger workers are associated with a higher probability of becoming unemployed.
    Keywords: search capital, turnover, wage cuts
    JEL: J62 J63 J64
    Date: 2012–02
  11. By: Miettinen, Paavo (Bank of Finland Research)
    Abstract: In this paper we consider equilibrium behavior in a Dutch (descending price) auction where the bidders are uninformed of their valuations with probability q and can acquire information about their valuation at a positive cost during the auction. We assume that the information acquisition activity is covert. We characterize the equilibrium behavior in a setting where bidders are ex ante symmetric and have independent private values. We show that, if the number of bidders is large, the Dutch auction produces more revenue than would a first price auction.
    Keywords: auctions; information acquisition
    JEL: D44 D82 D83
    Date: 2012–02–14
  12. By: Daniele Condorelli; Andrea Galeotti
    Abstract: We study an incomplete-information model of sequential bargaining for a single object, with the novel feature that agents are located in a network. In each round of trade, the current owner of the object either consumes it or makes a take-it-or-leave-it offer to some connected trader. Traders may buy in order to consume or to resale to others. We show that the equilibrium price dynamics is non-monotone and that traders that intermediate the object arise endogenously and attain a pro t. We also provide insights on how traders' equilibrium payoffs depend on their location in the network.
    Date: 2011–12–14
  13. By: Daniele Condorelli; Andrea Galeotti
    Abstract: We investigate the effects of a class of trading protocols on the architecture and efficiency properties of endogenously formed trading networks. In our model, the opportunity to sell valuable objects occurs randomly to different individuals. A sale can only be realized if two individuals are connected, directly or indirectly, but forming and maintaining a trading relation is a costly investment. When the outcome of trading is efficient and provides no intermediation rents, a tension between equilibrium and efficient networks emerges when the cost of forming a link is at an intermediate level. There are two types of inefficiencies. Either all equilibrium networks are under- connected when compared to efficient networks, or a multiplicity of equilibriam may exist and agents may fail to coordinate on the efficient equilibrium network
    Date: 2011–12–14
  14. By: Paolo Bertoletti (Department of Economics and Quantitative Methods, University of Pavia); Giorgio Rampa (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: A necessary and sufficient condition for an input to be inferior is that, taking into account the input adjustment, an increase of its price raises the marginal productivity of all inputs. Contrary to a widespread opinion, it is not necessary that (some) inputs are “rivals” (i.e., that some marginal productivity cross derivative is negative). We discuss these facts and illustrate them by introducing a few simple functional forms for the production function. Our results suggest that the existence of inferior inputs is naturally associate to the presence of increasing returns, and possibly make the case for inferiority considerably stronger.
    Keywords: inferior and normal inputs, marginal productivity, homotheticity.
    JEL: D11 D21 D24
    Date: 2011–05
  15. By: Bach Christian W.; Tsakas Elias (METEOR)
    Abstract: We provide epistemic conditions for Nash equilibrium, which are considerably weaker than thestandard ones by Aumann and Brandenburger (1995). Indeed, we simultaneously replace commonknowledge of conjectures and mutual knowledge of rationality with strictly weaker epistemicconditions of pairwise common knowledge of conjectures and pairwise mutual knowledge ofrationality respectively. It is also shown that, unlike the Aumann and Brandenburger''s conditions,ours do not imply common knowledge of rationality. Surprisingly, they actually do not even implymutual knowledge of rationality.
    Keywords: microeconomics ;
    Date: 2012
  16. By: Lombardi Michele; Yoshihara Naoki (METEOR)
    Abstract: The paper proposes necessary and sufficient conditions for the natural implementation of(efficient) social choice correspondences (SCCs) in pure finite exchange economies when some ofthe agents are partially honest. A partially honest agent is an agent who strictly prefers to tellthe truth when lying has no better material consequences for her. Firstly, it is shown that ifthere is even one partially honest agent in the economy (and the planner does not know heridentity), 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 isshown that the equivalence relationship between natural price-allocation mechanisms and naturalprice-quantity² mechanisms no longer holds. Finally, and even more strikingly, the paper reportsthat the class of implementable SCCs by natural price-quantity mechanisms is significantly enlarged.
    Keywords: mathematical economics;
    Date: 2012
  17. By: Driesen, Bram W.
    Abstract: In this article we define and characterize a class of asymmetric leximin solutions, that contains both the symmetric leximin solution of Imai[5] and the two-person asymmetric Kalai-Smorodinsky solution of Dubra [3] as special cases. Solutions in this class combine three attractive features: they are defined on the entire domain of convex n-person bargaining problems, they generally yield Pareto efficient solution outcomes, and asymmetries among bargainers are captured by a single parameter vector. The characterization is based on a strengthening of Dubra’s [3] property Restricted Independence of Irrelevant Alternatives (RIIA). RIIA imposes Nash’s IIA (Nash [9]), under the added condition that the contraction of the feasible set preserves the mutual proportions of players’ utopia values. Our axiom, entitled RIIA for Independent Players (RIP), says RIIA holds for a group of players, given that the contraction of the feasible set does not affect players outside that group.
    Keywords: Bargaining; asymmetric bargaining solution; leximin solution
    JEL: C78
    Date: 2012–02–17
  18. By: Noemí Navarro (Département d’économique and GRÉDI, Université de Sherbrooke)
    Abstract: I analyze monopoly pricing and quality decisions under network effects. High quality premium and low quality punishment are found to depend on how the impact of marginal costs on quality relates to the intensity of the network effect and the optimism of the producer about final demand. More precisely, marginal costs have to be low enough (but not too low) with respect to the intensity of the network effects and/or the optimism about final demand so that higher prices reflect higher quality. A similar conclusion can be drawn about incentives for quality provision, whenever quality is considered endogenous together with price.
    Keywords: Network effects, optimal pricing, quality provision
    JEL: L12 L14 L15 D42 D82 D83 C7
    Date: 2012–02
  19. By: Borgers, Tilman; Smith, Doug
    Abstract: We develop an analysis of voting rules that is robust in the sense that we do not make any assumption regarding voters’ knowledge about each other. In dominant strategy voting rules, voters’ behavior can be predicted uniquely without making any such assumption. However, on full domains, the only dominant strategy voting rules are random dictatorships. We show that the designer of a voting rule can achieve Pareto improvements over random dictatorship by choosing rules in which voters’ behavior can depend on their beliefs. The Pareto improvement is achieved for all possible beliefs. The mechanism that we use to demonstrate this result is simple and intuitive, and the Pareto improvement result extends to all equilibria of the mechanism that satisfy a mild refinement. We also show that the result only holds for voters’ interim expected utilities, not for their ex post expected utilities.
    Keywords: robust mechanism design; dominant strategies; voting; Gibbard-Satterthwaite theorem
    JEL: D7 C7
    Date: 2011–11–03
  20. By: Senatore, L
    Abstract: This paper considers a model of voluntary public good provision with two players and convex costs. I demonstrate that the provision of public good is higher in the sequential framework under fairly general conditions. This outcome shows that introducing convex costs may reverse under some condition the results of Varian ( 1994).
    Keywords: Public Goods; Contribution Games; Private Provision of Public Goods
    JEL: D0 H40 H41 C72
    Date: 2011–12
  21. By: Berliant, Marcus; Fujita, Masahisa
    Abstract: Is the paradise of effortless communication the ideal environment for knowledge creation? Or, can the development of local culture in regions raise knowledge productivity compared to a single region with a unitary culture? In other words, can a real technological increase in the cost of collaboration and the cost of public knowledge flow between regions, resulting in cultural differentiation between regions, increase welfare? In our framework, a culture is a set of ideas held exclusively by residents of a location. In general in our model, the equilibrium path generates separate cultures in different regions. When we compare this to the situation where all workers are resident in one region, R & D workers become too homogeneous and there is only one culture. As a result, equilibrium productivity in the creation of new knowledge is lower relative to the situation when there are multiple cultures and workers are more diverse.
    Keywords: knowledge creation; knowledge diversity; ideas and culture
    JEL: Z1 D83 O31
    Date: 2012–02–27
  22. By: Yuichi Yamamoto (Department of Economics, University of Pennsylvania)
    Abstract: This paper proposes and studies a tractable subset of Nash equilibria, belief-free review-strategy equilibria, in repeated games with private monitoring. The payoff set of this class of equilibria is characterized in the limit as the discount factor converges to one for games where players observe statistically independent signals. As an application, we develop a simple sufficient condition for the existence of asymptotically efficient equilibria, and establish a folk theorem for N-player prisoner’s dilemma. All these results are robust to a perturbation of the signal distribution, and hence remain true even under almost-independent monitoring.
    Keywords: repeated game, private monitoring, conditional independence, belief-free review-strategy equilibrium, prisoner’s dilemma
    JEL: C72 C73 D82
    Date: 2012–02–22
  23. By: Bruce Ian Carlin; Florian Ederer
    Abstract: Consumer search is not only costly but also tiring. We characterize the intertemporal effects that search fatigue has on oligopoly prices, product proliferation, and the provision of consumer assistance (i.e., advice). These effects vary based on whether search is all-or-nothing or sequential in nature, whether learning takes place, and whether consumers exhibit brand loyalty. We perform welfare analysis and highlight the novel empirical implications that our analysis generates.
    JEL: D43 D83
    Date: 2012–03

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