nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒03‒21
twenty-two papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning. By Tirole, Jean
  2. Premuneration Values and Investments in Matching Markets By George Mailath; Andrew Postlewaite; Larry Samuelson
  3. Subjective Learning, Second Version By David Dillenberger; Philipp Sadowski
  4. Revenue Comparison in Asymmetric Auctions with Discrete Valuations By Nicola Doni; Domenico Menicucci
  5. Flexible contracts By Piero Gottardi; Jean Marc Tallon; Paolo Ghirardato
  6. Dynamic Rawlsian Policy By Charles Brendon; Martin Ellison
  7. Competing with Equivocal Information By Eduardo Perez-Richet
  8. Mechanism Design and Intentions By Felix Bierbrauer; Nick Netzer
  9. The Second Fundamental Theorem of Positive Economics. By Mukherji, Anjan
  10. Rationing in the presence of baselines By Hougaard, Jens Leth; Moreno-Ternero, Juan D.; Østerdal, Lars Peter
  11. Allocation Rules on Networks By Rahmi Ilkiliç; Çâatay Kayi
  12. Asymmetrically fair rules for an indivisible good problem with a budget constraint By Paula Jaramillo; Çâatay Kayi; Flip Klijn
  13. Aggregate Uncertainty Can Lead to Herds By Ignacio Monzón
  14. Lottery versus All-Pay Auction Contests – A Revenue Dominance Theorem By Jörg Franke; Christian Kanzow; Wolfgang Leininger; Alexandra Schwartz
  15. The value of Repeated Games with an informed controller. By Renault, Jérôme
  16. Optimal regulation in the presence of reputation concerns By Andrew Atkeson; Christian Hellwig; Guillermo L. Ordonez
  17. Kantian Optimization, Social Ethos, and Pareto Efficiency By John E. Roemer
  18. Stability versus rationality in choice functions By Subiza, Begoña; Peris, Josep E.
  19. M-stability: A reformulation of Von Neumann-Morgenstern stability By Peris, Josep E.; Subiza, Begoña
  20. Inferring preferences from choices under uncertainty By Christoph Kuzmics
  21. Asymmetric Awareness and Moral Hazard By Sarah Auster
  22. Risk-Sharing and Retrading in Incomplete Markets By Piero Gottardi; Rohit Rahi

  1. By: Tirole, Jean
    Abstract: The paper provides a first analysis of market jumpstarting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound, but not too much, so as to limit the cost of intervention. The existence of a market imposes no welfare cost.
    JEL: H81
    Date: 2012–02
  2. By: George Mailath (Department of Economics, University of Pennsylvania); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, Yale University)
    Abstract: We examine markets in which agents make investments and then match into pairs, creating surpluses that depend on their investments and that can be split between the matched agents. In general, each of the matched agents would ”own" part of the surplus in the absence of interagent transfers. Most of the work in the large bargaining-and matching literature ignores this initial ownership of the surplus. We show that when investments are not observable to potential partners, initial ownership affects the efficiency of equilibrium investments and affects the agents' payoffs. In particular, it is possible that reallocating initial ownership could increase welfare on both sides of the match.
    Keywords: Directed search, matching, premuneration value, prematch investments, search
    JEL: C78 D40 D41 D50 D83
    Date: 2012–03–12
  3. By: David Dillenberger (Department of Economics, University of Pennsylvania); Philipp Sadowski (Department of Economics, Duke University)
    Abstract: We study an individual who faces a dynamic decision problem in which the process of information arrival is unobserved by the analyst. We derive a sequence of representations of preferences over menus of acts that capture the individual's uncertainty about his future beliefs. Using the most general representation, we characterize a notion of "more preference for flexibility" via a subjective analogue of Blackwell's (1951, 1953) comparisons of experiments. A more refined representation allows us to compare individuals who expect to learn differently, even if they do not agree on their prior beliefs. The class of information structures that can support such a representation generalizes the notion of a partition of the state space. We apply the model to study an individual who anticipates gradual resolution of uncertainty over time. Both the filtration (the timing of information arrival with the sequence of partitions it induces) and prior beliefs are uniquely identified.
    Keywords: Resolution of uncertainty, second-order beliefs, preference for flexibility, valuing binary bets more, generalized partition, subjective filtration.
    JEL: D80 D81
    Date: 2011–09–30
  4. By: Nicola Doni; Domenico Menicucci
    Abstract: We consider an asymmetric auction setting with two bidders such that the valuation of each bidder has a binary support. We prove that in this context the second price auction yields a higher expected revenue than the first price auction for a broad set of parameter values, although the opposite result is common in the literature on asymmetric auctions. For instance, the second price auction is superior both when a bidder’s valuation is more uncertain that the valuation of the other bidder, and in case of a not too large distribution shift or rescaling. In addition, we show that in some cases the revenue in the first price auction decreases when all the valuations increase [in doing so, we correct a claim in Maskin and Riley (1985)], and we derive the bidders’ preferences between the two auctions.
    Keywords: Asymmetric auctions, First price auctions, Second price auctions
    JEL: D44 D82
    Date: 2011
  5. By: Piero Gottardi; Jean Marc Tallon; Paolo Ghirardato
    Abstract: This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agent’s degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties to not have sharp probability beliefs, the agent’s degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts.
    Keywords: Delegation, Flexibility, Agency Costs, Multiple Priors, Imprecision Aversion
    JEL: D86 D82 D81
    Date: 2011
  6. By: Charles Brendon; Martin Ellison
    Abstract: A well-known time-inconsistency problem hinders optimal decision-making when policymakers are constrained in their pesent choices by expectations of future outcomes. The time-inconsistency problem is caused by differences in the preferences of policymakers who exist at different points in time. Adapting the arguments of Rawls (1971), we propose that these differences can be eliminated if policy is set from behind a ‘veil of ignorance’, without knowledge of when the policy will be implemented. We set up a well-defined choice problem that captures this normative perspective. The policies that it generates have a number of appealing properties.
    Keywords: Macroeconomic policy, Rawls, Time inconsistency, Veil of ignorance
    JEL: E52 E61
    Date: 2012
  7. By: Eduardo Perez-Richet (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)
    Abstract: This paper studies strategic disclosure by multiple senders competing for prizes awarded by a single receiver. They decide whether to disclose a piece of information that is both verifiable and equivocal (it can inuence the receiver both ways). The standard unrav- eling argument breaks down: if the commonly known probability that her information is favorable is high, a single sender never discloses. Competition restores full disclosure only if some of the senders are sufficiently unlikely to have favorable information. When the senders are uncertain about each other's strength, however, all symmetric equilibria approach full disclosure as competition increases.
    Keywords: Strategic Information Transmission, Persuasion Games, Communication, Competition, Multiple Senders.
    Date: 2012–02–29
  8. By: Felix Bierbrauer; Nick Netzer
    Abstract: We introduce intentions-based social preferences into a Bayesian mechanism design framework. If social preferences are observable, any tension between material efficiency, incentive compatibility, and voluntary participation can be resolved. Hence, the classical impossibility results that the conventional mechanism design literature has established are turned into possibility results. We also investigate different possibilities how to incorporate kindness sensations into assessments of welfare. For the case of unobservable social preferences, we suggest a notion of psychological robustness. Psychologically robust mechanisms can be implemented without any need to acquire information about the intensity of social preferences. We show that the mechanisms which have been the focus of the conventional mechanism design literature need to be modified only slightly to achieve psychological robustness.
    Keywords: Mechanism Design, Psychological Games, Social Preferences, Intentions, Reciprocity, Revelation Principle
    JEL: C70 C72 D02 D03 D82 D86
    Date: 2012–03–12
  9. By: Mukherji, Anjan (National Institute of Public Finance and Policy)
    Abstract: Welfare Economics is fortunate that there are two Fundamental Theorems of Welfare Economics. Positive Economics on the other hand is seemingly endowed with none. One of the fundamental results of Positive Economics is that a competitive equilibrium exists under fairly general conditions; this then may be called the First Fundamental Theorem of Positive Economics (FFTPE). The existing results on uniqueness and stability of competitive equilibrium are far too restrictive to be up for consideration as a Fundamental Theorem. It is to re-examine this question that we revisit the question of stability of competitive equilibrium. It is shown that if, for all distributions of the aggregate endowment, the matrix sum of the Jacobian of the excess demand function plus its transpose, evaluated at the equilibrium, have maximal rank then equilibria will be locally asymptotically stable. When this condition is not met, it is shown how redistributing resources will always make a competitive equilibrium price configuration stable and this need not involve redistributing endowments so that trades do not exist at equilibrium. This last result is quite general and the only requirement is that the rank condition referred to earlier hold at zero trade competitive equilibria and consequently may qualify to be called the Second Fundamental Theorem of Positive Economics (SFTPE).
    Keywords: Stability of equilibrium ; Redistribution of resources ; Rank condition ; Fundamental theorems
    Date: 2012–03
  10. By: Hougaard, Jens Leth (Institute of Food and Resource Economics); Moreno-Ternero, Juan D. (Department of Economics); Østerdal, Lars Peter (Department of Business and Economics)
    Abstract: We analyze a general model of rationing in which agents have baselines, in addition to claims against the (insufficient) endowment of the good to be allocated. Many real-life problems fit this general model (e.g., bankruptcy with prioritized claims, resource allocation in the public health care sector, water distribution in drought periods). We introduce (and characterize) a natural class of allocation methods for this model. Any method within the class is associated with a rule in the standard rationing model, and we show that if the latter obeys some focal properties, the former obeys them too.
    Keywords: Rationing; baselines; claims; operators; solidarity
    JEL: D63
    Date: 2012–03–12
  11. By: Rahmi Ilkiliç; Çâatay Kayi
    Abstract: ABSTRACT: When allocating a resource, geographical and infrastructural constraints have to be taken into account. We study the problem of distributing a resource through a network from sources endowed with the resource to citizens with claims. A link between a source and an agent depicts the possibility of a transfer from the source to the agent. Given the supplies at each source, the claims of citizens, and the network, the question is how to allocate the available resources among the citizens. We consider a simple allocation problem that is free of network constraints, where the total amount can be freely distributed. The simple allocation problem is a claims problem where the total amount of claims is greater than what is available. We focus on consistent and resource monotonic rules in claims problems that satisfy equal treatment of equals. We call these rules fairness principles and we extend fairness principles to allocation rules on networks. We require that for each pair of citizens in the network, the extension is robust with respect to the fairness principle. We call this condition pairwise robustness with respect to the fairness principle. We provide an algorithm and show that each fairness principle has a unique extension which is pairwise robust with respect to the fairness principle. We give applications of the algorithm for three fairness principles: egalitarianism, proportionality and equal sacrice.
    Date: 2012–03–11
  12. By: Paula Jaramillo; Çâatay Kayi; Flip Klijn
    Abstract: Abstract:We study a particular restitution problem where there is an indivisible good (land or property) over which two agents have rights: the dispossessed agent and the owner. A third party, possibly the government, seeks to resolve the situation by assigning rights to one and compensate the other. There is also a maximum amount of money available for the compensation. We characterize a family of asymmetrically fair rules that are immune to strategic behavior, guarantee minimal welfare levels for the agents, and satisfy the budget constraint.
    Date: 2012–03–11
  13. By: Ignacio Monzón
    Abstract: This paper presents a model in which homogeneous rational agents choose between two competing technologies. Agents observe a private signal and a sample of other agents’ previous choices. The signal has both an idiosyncratic and an aggregate component of uncertainty. I derive the optimal decision rule when each agent observes the decision of exactly two agents. Due to aggregate uncertainty, aggregate behavior does not necessarily reflect the true state of nature. Nonetheless, agents still find others’ choices a good source of information, and they base their decisions partly on the behavior of others. Consequently, bad choices can be perpetuated in this environment: I show that aggregate uncertainty can lead to agents herding on the inferior technology with positive probability. I also present examples in which herding occurs for arbitrarily large sample sizes.
    Keywords: observational learning, social learning, word-of-mouth, herding
    JEL: C72 C79 D83
    Date: 2012
  14. By: Jörg Franke; Christian Kanzow; Wolfgang Leininger; Alexandra Schwartz
    Abstract: We allow a contest organizer to bias a contest in a discriminatory way, that is, she can favor specific contestants through the choice of contest success functions in order to maximize total equilibrium effort (resp. revenue). The scope for revenue enhancement through biasing is analyzed and compared for the two predominant contest regimes; i.e. all-pay auctions and lottery contests. Our main result reveals that an appropriately biased all-pay auction revenue dominates the optimally biased lottery contest for all levels of heterogeneity among contestants. Moreover, such a biased all-pay auction will never make use of the celebrated exclusion principle advanced by Baye et al. (1993).
    Keywords: All-pay auction; lottery contest; bias; revenue
    JEL: C72 D72
    Date: 2012–02
  15. By: Renault, Jérôme
    Date: 2012–02
  16. By: Andrew Atkeson; Christian Hellwig; Guillermo L. Ordonez
    Abstract: We study a market with free entry and exit of firms who can produce high-quality output by making a costly but efficient initial unobservable investment. If no learning about this investment occurs, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. If the market operates with spot prices, simple regulation can enhance the role of reputation to induce investment, thus mitigating the “lemons problem” and improving welfare.
    Date: 2012
  17. By: John E. Roemer (Dept. of Political Science, Yale University)
    Abstract: Although evidence accrues in biology, anthropology and experimental economics that homo sapiens is a cooperative species, the reigning assumption in economic theory is that individuals optimize in an autarkic manner (as in Nash and Walrasian equilibrium). I here postulate an interdependent kind of optimizing behavior, called Kantian. It is shown that in simple economic models, when there are negative externalities (such as congestion effects from use of a commonly owned resource) or positive externalities (such as a social ethos reflected in individuals’ preferences), Kantian equilibria dominate Nash-Walras equilibria in terms of efficiency. While economists schooled in Nash equilibrium may view the Kantian behavior as utopian, there is some -- perhaps much -- evidence that it exists. If cultures evolve through group selection, the hypothesis that Kantian behavior is more prevalent than we may think is supported by the efficiency results here demonstrated.
    Keywords: Kantian equilibrium, Social ethos, Implementation
    JEL: D60 D62 D64 C70 H30
    Date: 2012–03
  18. By: Subiza, Begoña (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica); Peris, Josep E. (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica)
    Abstract: If we analyze the notion of stability (von Neumann and Morgenstern, 1944) it seems a desirable property to be fulfilled by any choice function. Paradoxically, the usual Condorcet choice functions (maximal set, top cycle, uncovered set, minimal covering, ...) are not stable in the VNM sense. In this study, we show the relationship between stability and rational choice functions, and propose an alternative notion of stability (wich we call c-stability) that solves this incompatibility problem. This new notion is closely related to the admissible set defined in Kalai and Schmeidler (1977).
    Keywords: stable set; admissible set; Condorcet choice function
    JEL: D11
    Date: 2012–03–13
  19. By: Peris, Josep E. (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica); Subiza, Begoña (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica)
    Abstract: The notion of a stable set (introduced by von Neumann and Morgenstern, 1944) is an important tool in the field of Decision Theory. However, unfortunately, the stable set has some disadvantages: it is not unique, it may select too many alternatives and, most importantly, it may fail to exist. Other stability notions have been introduced in the literature in order to solve the non-existence but, in some cases, they may fail to select "optimal outcomes", in the sense that they can select dominated alternatives although non dom-inated ones exist. We propose a new notion (M-stability) and compare it with previous proposals. Moreover, we analyze some properties (existence, uniqueness, optimality, unions and intersections, ...) of the different notions of stable set.
    Keywords: stable set; generalized-stable; socially-stable; m-stable; admissible set
    JEL: D11
    Date: 2012–03–07
  20. By: Christoph Kuzmics (Institute of Mathematical Economics, Bielefeld University)
    Abstract: If a decision maker, in a world of uncertainty a la Anscombe and Aumann (1963), can choose acts according to some objective probability distribution (by throwing dice for instance) from any given set of acts, then there is no set of acts that allows an experimenter to test more than the Axiom of EUOL (that the DM evaluates objective lotteries with an expected utility function). In fact there is no (common) experimental design that allows an experimenter to test more than EUOL. For any decision problem (or set of decision problems), for any preference relation that satisfies the Axiom EUOL, and for any optimal choice (or collection of choices) given this preference relation, there is another preference relation that satisfies EUOL plus the Savage axioms, for which this choice is also optimal.
    Keywords: ambiguity, decision theory, Knightian uncertainty, experiments
    JEL: C72 C81 C90 D01 D03 D81
    Date: 2012–03
  21. By: Sarah Auster
    Abstract: This paper introduces asymmetric awareness into the classical principal-agent model and discusses the optimal contract between a fully aware principal and an unaware agent. The principal enlarges the agent’s awareness strategically when proposing the contract. He faces a trade off between participation and incentives. Leaving the agent unaware allows him to exploit the agent’s incomplete understanding of the world. Making the agent aware enables the principal to use the revealed contingencies as signals about the agent’s action choice. The optimal contract reveals contingencies that have low probability but are highly informative about the agent’s effort.
    Keywords: Unawareness, Moral Hazard, Incomplete Contracts.
    Date: 2011
  22. By: Piero Gottardi; Rohit Rahi
    Abstract: At a competitive equilibrium of an incomplete-markets economy agents’ marginal valuations for the tradable assets are equalized ex-ante. We characterize the finest partition of the state space conditional on which this equality holds for any economy. This leads naturally to a necessary and sufficient condition on information that would lead to retrade, if such information were to become publicly available after the initial round of trade.
    Keywords: Competitive Equilibrium; Incomplete Markets; Information; Re-trading;
    JEL: D52 D80
    Date: 2012

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