
on Microeconomics 
Issue of 2012‒03‒28
nineteen papers chosen by JingYuan Chiou IMT Lucca Institute for Advanced Studies 
By:  Gabaix, Xavier 
Abstract:  A key open question in economics is the practical, portable modeling of bounded rationality. In this short note, I report on ongoing progress that is more fully developed elsewhere. I present some results from a new model with boundedly rational features in which the decisionmaker (DM) 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 consumptionsaving 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. 
Keywords:  behavioral economics; bounded rationality; inattention; intertemporal elasticity of substitution 
JEL:  D03 E21 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:8813&r=mic 
By:  Alger, Ingela; Weibull, Jörgen 
Abstract:  What preferences will prevail in a society of rational individuals when preference evolution is driven by their success in terms of resulting payoffs? We show that when individuals’ preferences are their private information, a convex combinations of selfishness and morality stand out as evolutionarily stable. We call individuals with such preferences homo moralis. At one end of the spectrum is homo oeconomicus, who acts so as to maximize his or her material payoff. At the opposite end is homo kantiensis, who does what would be “the right thing to do,” in terms of material payoffs, if all others would do likewise. We show that the stable degree of morality  the weight placed on the moral goal  equals the index of assortativity in the matching process. The motivation of homo moralis is arguably compatible with how people often reason, and the induced behavior agrees with prosocial behaviors observed in many laboratory experiments. 
JEL:  C73 D03 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:tse:wpaper:25607&r=mic 
By:  D Peel; Ivan Paya; T M Niguez; J Perote 
Abstract:  Economic growth models under uncertainty and rational agents with CRRA utility have been shown to provide quite fragile explanations of consumers.choice as equlib rium comsumption paths (expected utility) are drastically dependant on distributional assumptions. We show that assuming a SNP distribution for random consumption provides stability to general equilibrium models as expected utility exists for any value of the marginal rate of substitution over time. 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:lan:wpaper:2350&r=mic 
By:  Armstrong, Mark 
Abstract:  This paper extends the standard model of bundling as a price discrimination device to allow products to be substitutes and for products to be supplied by separate sellers. Whether integrated or separate, firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for standalone products. Product substitutability typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the model with additive preferences), while substitutability is often the sole reason why separate sellers wish to offer interfirm discounts. When separate sellers coordinate on an interfirm discount, they can use the discount to overturn product substitutability and relax competition. 
Keywords:  Price discrimination; bundling; oligopoly 
JEL:  L13 D82 D4 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:37375&r=mic 
By:  Burkart, Mike; Lee, Samuel 
Abstract:  In many bilateral transactions, the seller fears being underpaid because its outside option is better known to the buyer. We rationalize a variety of observed contracts as solutions to such smart buyer problems. The key to these solutions is to grant the seller upside participation. In contrast, the lemons problem calls for offering the buyer downside protection. Yet in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts commonly associated with the lemons problem can equally well be manifestations of the smart buyer problem. Nevertheless, the information asymmetries have opposite crosssectional implications. To avoid underestimating the empirical relevance of adverse selection problems, it is therefore critical to properly identify the underlying information asymmetries in the data. 
Keywords:  Asymmetric Information; Bilateral trade; CashEquity Offers; Commissions; Contingent Value Rights; DebtEquity Swaps; Lemons Problem; Royalties 
JEL:  D82 D84 
Date:  2012–01 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:8774&r=mic 
By:  Barlo, Mehmet; Ayca, Ozdogan 
Abstract:  This paper analyzes optimal contracts in a linear hiddenaction model with normally distributed returns possessing two moments that are governed jointly by two agents, who can observe each others' effort levels and draft enforceable sidecontracts on chosen effort levels and realized returns. After showing that standard constraints, resulting in incentivecontracts, may fail to ensure implementability, we examine (centralized) collusionproof contracts and (decentralized) teamcontracts. We prove that optimal teamcontracts provide the highest implementable returns to the principal. In other words, the principal may restrict attention to outsourcing/decentralization without any loss of generality. Moreover, situations in which incentivecontracts are collusionproof, thus implementable, are fully characterized. 
Keywords:  Principalagent problems; moral hazard; linear contracts; sidecontracting; collusion; team; outsourcing; decentralization 
JEL:  D82 M12 J30 
Date:  2012–03–19 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:37449&r=mic 
By:  Traeger, Christian P. 
Abstract:  The paper incorporates qualitative differences of probabilistic beliefs into a rational (or normatively motivated) decision framework. Probabilistic beliefs can range from objective probabilities to pure guesstimates. The decision maker in the present model takes into account his confidence in beliefs when evaluating general uncertain situations. From an axiomatic point of view, the approach stays as close as possible to the widespread von NeumannMorgenstern framework. The resulting representation uses only basic tools from risk analysis, but employs them recursively. The paper extends the concept of smooth ambiguity aversion to a more general notion of aversion to the subjectivity of belief. As a special case, the framework permits a threefold disentanglement of intertemporal substitutability, ArrowPratt risk aversion, and smooth ambiguity aversion. A decision makerâ€™s preferences can nest a variety of widespread decision criteria, which are selected according to his confidence in the uncertainty assessment of a particular setting. 
Keywords:  ambiguity, confidence, subjective beliefs, expected utility, intertemporal substitutability, intertemporal risk aversion, recursive utility, uncertainty, climate change, behavior, Agricultural and Resource Economics 
Date:  2011–05–01 
URL:  http://d.repec.org/n?u=RePEc:cdl:agrebk:qt0gw7t7vn&r=mic 
By:  Traeger, Christian P. 
Abstract:  Uncertainty has an almost negligible impact on project value in the economicstandard model. I show that a comprehensive evaluation of uncertainty and uncertainty attitude changes this picture fundamentally. The analysis relies on the discount rate, which is the crucial determinant in balancing immediate costs against future benefits and the single most important determinant of optimal mitigationÂ policies in the integrated assessment of climate change. The paper examines two shortcomings in the recent debate and the current models addressing climate change assessment. First, removing an implicit assumption of (intertemporal) risk neutrality reduces the growth effect in social discounting and significantly amplifies the importance of risk and correlation. Second, debate and models largely overlook the difference in attitude with respect to risk and with respect to nonrisk uncertainty. The paper derives the resulting changes of the riskfree and the stochastic social discount rate and points out the importance of even thin tailed uncertainty for climate change evaluation. It discusses combinations ofuncertainty and correlation that reduce the social discount rate to pure preference. In a theoretical contribution, the paper extends the smooth ambiguity model by providing a threefold disentanglement between, risk aversion, ambiguity aversion, and the propensityto smooth consumption over time. 
Keywords:  ambiguity, climate change, cost benefit analysis, discounting, intertemporal substitutability, risk aversion, uncertainty, Agricultural and Resource Economics, Natural Resources and Conservation 
Date:  2012–01–26 
URL:  http://d.repec.org/n?u=RePEc:cdl:agrebk:qt2w614303&r=mic 
By:  Traeger, Christian P. 
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, Agricultural and Resource Economics 
Date:  2011–09–01 
URL:  http://d.repec.org/n?u=RePEc:cdl:agrebk:qt61m836d1&r=mic 
By:  Pavlo Prokopovych (Kyiv School of Economics, Kyiv Economic Institute); Nicholas C. Yannelis (University of Iowa/ The University of Manchester) 
Abstract:  Embarking from the concept of uniform payoff security (Monteiro P.K., Page F.H, J Econ Theory 134: 566575, 2007), we introduce two other uniform conditions and then study the existence of mixed strategy Nash equilibria in games where the sum of the payoff functions is not necessarily upper semicontinuous. 
Keywords:  Discontinuous game; Diagonally transfer continuous game; Payoff secure game; Mixed strategy equilibrium; Transfer lower semicontinuity 
JEL:  C65 C72 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:kse:dpaper:48&r=mic 
By:  Nizar Allouch (Queen Mary, University of London); Monique Florenzano (Paris School of Economics) 
Abstract:  For an exchange economy, under assumptions which did not bring about the existence of equilibrium with dividends as yet, we prove the nonemptiness of the fuzzy rejective core. Then, via Konovalov (1998, 2005)'s equivalence result, we solve the equilibrium with dividends existence problem. Adding to the same assumptions a weak nonsatiation condition which differs from the weak nonsatiation assumption introduced by AllouchLe Van (2009), we show in a last section the existence of a Walrasian quasiequilibrium. This result, which fits with exchange economies whose consumers' utility functions are not assumed to be upper semicontinuous, complements the one obtained by MartinsdaRocha and Monteiro (2009). 
Keywords:  Exchange economy, Satiation, Equilibrium with dividends, Rejective core, Fuzzy rejective core, Core equivalence 
JEL:  D50 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp690&r=mic 
By:  Michael Trost (Albert Ludwig University Freiburg, and Max Planck Institute of Economics, Jena) 
Abstract:  The issue of the orderdependence of iterative deletion processes is wellknown in the game theory community, and meanwhile conditions on the dominance concept underlying these processes have been detected which ensure orderindependence (see e.g. the criteria of Gilboa et al., 1990 and Apt, 2011). While this kind of research deals with the technical issue, whether certain iterative deletion processes are orderindependent, or not, our focus is on the normative issue, whether there are good reasons for employing orderindependent iterative deletion processes on strategic games. We tackle this question from an epistemic perspective and attempt to figure out, whether orderindependence contains some specific epistemic meaning. It turns out that, under fairly general preconditions on the choice rules underlying the iterative deletion processes, the orderindependence of these deletion processes coincides with the epistemic characterization of their solutions by the common belief of choicerule following behavior. The presumably most challenging precondition of this coincidence is the property of the independence of irrelevant acts. We also examine the consequences of two weakenings of this property on our epistemic motivation for orderindependence. Although the coincidence mentioned above breaks down for both weakenings, still there exist interesting links between the orderindependence of iterative deletion processes and the common belief of following the choice rules, on which these processes are based. 
Keywords:  Iterative deletion process, orderindependence, choice rule, epistemic game theory 
JEL:  C72 D83 
Date:  2012–03–20 
URL:  http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2012010&r=mic 
By:  Eric Bahel; Hans Haller 
Abstract:  The present paper examines zerosum games that are based on a cyclic preference relation deï¬ned over anonymous actions. For each of these games, the set of Nash equilibria is characterized. When the number of actions is odd, a unique Nash equilibrium is always obtained. On the other hand, in the case of an even number of actions, every such game exhibits an inï¬nite number of Nash equilibria. As a special case, a proof of the uniqueness of the Nash equilibrium for the RockPaperScissors game obtains. 
Keywords:  cycle, Nash equilibrium, minimax theorem. 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:vpi:wpaper:e0734&r=mic 
By:  Monisankar Bishnu (Indian Statistical Institute, New Delhi); Min Wang (Michigan State Universitywth) 
Abstract:  In the presence of temptation and selfcontrol preferences as in Gul and Pesendorfer, the optimal policy is to subsidize savings when consumers are tempted by "excessive" impatience (Krusell, Kuruscu and Smith, 2010). However, in the homogeneous agents model, taxation loses an important property in that it fails to reduce the inequality through redistribution. Thus the phenomenon that welfare improves on subsidizing savings may vanish when the agents differ in their abilities to earn income. They may well choose a positive tax if they are from low ability group where the redistribution effect of tax dominates the temptation effect. In a political economy, a situation may easily arise where a negative tax will never be implemented. When agents are homogeneous, as temptation grows, optimal subsidy on saving increases. The corresponding result in the heterogeneous agents case is that as temptation grows, the political support for the subsidy increases. 
Keywords:  Temptation, selfcontrol, optimal tax, voting 
Date:  2012–01 
URL:  http://d.repec.org/n?u=RePEc:ind:isipdp:1203&r=mic 
By:  Debasis Mishra (Indian Statistical Institute, New Delhi); Souvik Roy (University of Caen) 
Abstract:  We consider the problem of choosing a partition of a set of objects by a set of agents. The private information of each agent is a strict ordering over the set of partitions of the objects. A social choice function chooses a partition given the reported preferences of the agents. We impose a natural restriction on the allowable set of strict orderings over the set of partitions, which we call an intermediate domain. Our main result is a complete characterization of strategyproof and topsonly social choice functions in the intermediate domain. We also show that a social choice function is strategyproof and unanimous if and only if it is a meet social choice function. 
Date:  2011–06 
URL:  http://d.repec.org/n?u=RePEc:ind:isipdp:1106&r=mic 
By:  Debasis Mishra (Indian Statistical Institute, New Delhi); Souvik Roy (University of Caen) 
Abstract:  We consider deterministic dominant strategy implementation in multidimensional dichotomous domains in private values and quasilinear utility setting. In such multidimensional domains, an agent's type is characterized by a single number, the value of the agent, and a nonempty subset of acceptable alternatives. Each acceptable alternative gives the agent utility equal to his value and other alternatives give him zero utility. We show that generation monotonicity is necessary and sufficient for implementability in any dichotomous domain. If such a domain satisfies a richness condition, then a weaker version of generation monotonicity, which we call 2generation monotonicity (equivalent to 3cycle monotonicity), is necessary and sufficient for implementation. We use this result to derive the optimal mechanism in a onesided matching problem with agents having dichotomous types. 
Keywords:  dominant strategy implementation; cycle monotonicity; dichotomous preferences; generation monotonicity 
JEL:  C78 C79 D02 D44 
Date:  2011–09 
URL:  http://d.repec.org/n?u=RePEc:ind:isipdp:1115&r=mic 
By:  Ruben Juarez (Department of Economics, University of Hawaii at Manoa) 
Abstract:  Every agent reports his willingness to pay for one unit of good. A mechanism allocates goods and cost shares to some agents. We characterize the group strategyproof (GSP) mechanisms under two alternative continuity conditions interpreted as tiebreaking rules. With the maximalist rule (MAX) an indierent agent is always served. With the minimalist rule (MIN) an indierent agent does not get a unit of good. GSP and MAX characterize the crossmonotonic mechanisms. These mechanisms are appropriate whenever symmetry is required. On the other hand, GSP andMIN characterize the sequential mechanisms. These mechanisms are appropriate whenever there is scarcity of the good. Our results are independent of an underlying cost function; they unify and strengthen earlier results for particular classes of cost functions. 
Keywords:  Cost sharing, Mechanism design, Group strategyproof, Tiebreaking rule 
JEL:  C72 D44 D71 D82 
Date:  2012–02–01 
URL:  http://d.repec.org/n?u=RePEc:hai:wpaper:201202&r=mic 
By:  Ruben Juarez (Department of Economics, University of Hawaii at Manoa); Rajnish Kumar (Department of Economics, Louisiana State University) 
Abstract:  We consider the problem of sharing the cost of a network that meets the connection demands of a set of agents. The agents simultaneously choose paths in the network connecting their demand nodes. A mechanism splits the total cost of the network formed among the participants. We introduce two new properties of implementation. The first property, Pareto Nash Implementation (PNI), requires that the ecient outcome always be implemented in a Nash equilibrium and that the efficient outcome Pareto dominates any other Nash equilibrium. The average cost mechanism (AC) and other asymmetric variations are the only rules that meet PNI. These mechanisms are also characterized under Strong Nash Implementation. The second property, Weakly Pareto Nash Implementation (WPNI), requires that the least inefficient equilibrium Pareto dominates any other equilibrium. The egalitarian mechanism (EG), a variation of AC that meets individual rationality, and other asymmetric mechanisms are the only rules that meet WPNI and Individual Rationality. PNI and WPNI provide the first economic justification of the Price of Stability (PoS), a seemingly natural measure in the computer science literature but one not easily embraced in economics. EG minimizes the PoS across all individually rational mechanisms. 
Keywords:  Costsharing, Implementation, Average Cost, Egalitarian Mechanism 
JEL:  C70 C72 D71 D85 
Date:  2012–02–01 
URL:  http://d.repec.org/n?u=RePEc:hai:wpaper:201203&r=mic 
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. Since then, some alternative definitions have appeared in the literature: the admissible set (Kalai and Schmeidler, 1977), the generalized stable set (van Deemen, 1991), the Mstable set (Peris and Subiza, 2006), among others. Now, we are interested in obtaining the existence and the precise form of these stability notions, by according to the type of preference relation we have: total order, partial order, acyclic, tournament or weaktournament. 
Keywords:  stable; gstable; Bstable; admissible set 
JEL:  D71 
Date:  2012–03–16 
URL:  http://d.repec.org/n?u=RePEc:ris:qmetal:2012_006&r=mic 