nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒04‒03
twelve papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Beliefs, Payoffs, Information: On the Robustness of the BDP Property in Models with Endogenous Beliefs By Alia Gizatulina; Martin Hellwig
  2. Static vs Dynamic Auctions with Ambiguity Averse Bidders By Carvalho, M.
  3. Behavioral Biases and the Representative Agent. By Napp, Clotilde; Jouini, Elyès
  4. The Free Rider Problem: a Dynamic Analysis By Marco Battaglini; Salvatore Nunnari; Thomas Palfrey
  5. "Agreeing to Disagree" Type Results under Ambiguity. By Lefort, Jean-Philippe; Dominiak, Adam
  6. Allais, Ellsberg, and Preferences for Hedging By Mark Dean; Pietro Ortoleva
  7. Public Input Competition, Stackelberg Equilibrium and Optimality By Yongzheng Liu; Jorge Martinez-Vazquez
  8. Mechanism Design and Voting for Public-Good Provision By Felix Bierbrauer; Martin Hellwig
  9. Dynamically Sabotage-Proof Tournaments By Junichiro Ishida
  10. ON ADMISSIBLE STRATEGIES IN ROBUST UTILITY MAXIMIZATION (Forthcoming in "Mathematics and Financial Economics") By Keita Owari
  11. Warm-Glow Giving and Freedom to be Selfish By Özgür Evren; Stefania Minardi
  12. Towards a Purely Behavioral Definition of Loss Aversion By Ghossoub, Mario

  1. By: Alia Gizatulina (Max Planck Institute for Research on Collective Goods, Bonn); Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Neeman (2004) and Heifetz and Neeman (2006) have shown that, in auctions with incomplete information about payoffs, full surplus extraction is only possible if agents’ beliefs about other agents are fully informative about their own payoff parameters. They argue that the set of incomplete-information models satisfying this so-called BDP property ("beliefs determine preferences") is negligible, in a geometric and a measure-theoretic sense. In contrast, we show that, in models with finite-dimensional type spaces, this property is topologically generic if the set of objects about which beliefs are formed is sufficiently rich and beliefs are derived by conditioning on the available information; for any agent, this information includes his own payoff parameters.
    Keywords: Mechanism Design, surplus extraction, BDP, correlated information, universal type space
    JEL: D82 D44 D40 D80
    Date: 2012–03
  2. By: Carvalho, M. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper presents the outcome of a dynamic price-descending auction when the distribution of the private values is uncertain and bidders exhibit ambiguity aversion. In contrast to sealed-bid auctions, in open auctions the bidders get information about the other bidders' private values and may therefore update their beliefs on the distribution of the values. The bidders have smooth ambiguity preferences and update their priors using consequentialist Bayesian updating. It is shown that ambiguity aversion usually affects bidding behavior the same way risk aversion does, but the main result is that this is not the case for continuous price descending auctions. This is new among a few theoretical cases where ambiguity aversion does not reinforce the risk aversion implications.
    Keywords: Ambiguity;Auctions;Revenue Equivalence.
    JEL: D03 D44 D89
    Date: 2012
  3. By: Napp, Clotilde; Jouini, Elyès
    Abstract: In this paper, we show that behavioral features can be obtained at a group level when the individuals of the group are heterogeneous enough. Starting from a standard model of Pareto optimal allocations, with expected utility maximizers but allowing for heterogeneity among individual beliefs, we show that the representative agent has an inverse S-shaped probability distortion function. As an application of this result, we show that an agent with a probability weighting function as in Cumulative Prospect Theory may be represented as a collection of agents with noisy beliefs.
    Keywords: probability weighting function; ambiguity aversion; behavioral agent; representative agent;
    JEL: D81 G11 D84 D87 D03
    Date: 2011
  4. By: Marco Battaglini; Salvatore Nunnari; Thomas Palfrey
    Abstract: We present a dynamic model of free riding in which n infinitely lived agents choose between private consumption and contributions to a durable public good g. We characterize the set of continuous Markov equilibria in economies with reversibility, where investments can be positive or negative; and in economies with irreversibility, where investments are non negative and g can only be reduced by depreciation. With reversibility, there is a continuum of equilibrium steady states: the highest equilibrium steady state of g is increasing in n, and the lowest is decreasing. With irreversibility, the set of equilibrium steady states converges to a unique point as depreciation converges to zero: the highest steady state possible with reversibility. In both cases, the highest steady state converges to the efficient steady state as agents become increasingly patient. In economies with reversibility there are always non-monotonic equilibria in which g converges to the steady state with damped oscillations; and there can be equilibria with no stable steady state, but a unique persistent limit cycle.
    JEL: D78 H41
    Date: 2012–03
  5. By: Lefort, Jean-Philippe; Dominiak, Adam
    Abstract: In this paper we show that unlike in Bayesian frameworks asymmetric information does matter and can explain differences in common knowledge decisions due to ambiguous character of agents' private information. Agents share a common-but-not-necessarily-additive prior beliefs represented by capacities. It is shown that, if each agent's information partition is made up of unambiguous events in the sense of Nehring (1999, Mat. Soc. Sci. 38, 197-213), then it is impossible that the agents disagree on their commonly known decisions, whatever these decisions are : whether posterior beliefs or conditional expectations. Conversely, an agreement on conditional expectations, but not on posterior beliefs, implies that agents' private information must consist of Nehring-unambiguous events. The results obtained allow to attribute the existence of a speculative trade to the presence of agents' diverse and ambiguous information.
    Keywords: capacities; Ambiguity; No-Trade Theorem; Choquet expected utility theory; unambiguous events; Agreement Theorem; common knowledge; asymmetric information;
    JEL: D81 D82
    Date: 2011
  6. By: Mark Dean; Pietro Ortoleva
    Abstract: We study the relation between ambiguity aversion and the Allais paradox. To this end, we introduce a novel denition of hedging which applies to objective lotteries as well as to uncertain acts, and we use it to dene a novel axiom that captures a preference for hedging which generalizes the one of Schmeidler (1989). We argue how this generalized axiom captures both aversion to ambiguity, and attraction towards certainty for objective lotteries. We show that this axiom, together with other standard ones, is equivalent to to two representations both of which generalize the MaxMin Expected Utility model of Gilboa and Schmeidler (1989). In both, the agent reacts to ambiguity using multiple priors, but does not use expected utility to evaluate objective lotteries. In our rst representation, the agent treats objective lotteries as `ambiguous objects,' and use a set of priors to evaluate them. In the second, equivalent representation, lotteries are evaluated by distorting probabilities as in the Rank-Dependent Utility model, but using the worst from a set of such distortions. Finally, we show how a preference for hedging is not sucient to guarantee an Ellsberg-like behavior if the agent violate expected utility for objective lotteries. We then provide an axiom that guarantees that this is the case, and nd an associated representation in which the agent rst maps acts to an objective lottery using the worst of the priors in a set; then evaluates this lottery using the worst distortion from a set of concave Rank-Dependent Utility functionals.
    Keywords: Ambiguity Aversion, Allais Paradox, Ellsberg Paradox, Hedging, Multiple Priors, Subjective Mixture, Probability Weighting, Rank Dependent Expected Utility
    Date: 2012
  7. By: Yongzheng Liu (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: In this paper we examine the Stackelberg equilibrium in a public input competition model. We demonstrate that the issue of over-provision of public inputs raised in the standard fiscal competition literature may be less strong than predicted, provided that competing jurisdictions are more likely to behave in a Stackelberg fashion than in a non-cooperative one. For the mix of public expenditures, this paper shows that policy coordination contributes to higher welfare. However, the directions of policy coordination through which social welfare can be improved are indeed the opposite for the leading jurisdiction and the follower jurisdiction(s). That is, the changing pattern of decreased public inputs and increased residential public goods, as pioneered by Keen and Marchand [Keen, M., Marchand, M., 1997. Fiscal competition and the pattern of public spending. Journal of Public Economics 66, 33-53.], would only improve the social welfare of the follower jurisdictions. For the leading jurisdiction, improvement of social welfare requires a shift of expenditures from residential public goods to public inputs.
    Keywords: Public input competition; Stackelberg equilibrium; simultaneous equilibrium; policy coordination.
    Date: 2011–11–02
  8. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We propose a new approach to the normative analysis of public-good provision. In addition to individual incentive compatibility, we impose conditions of robust implementability and coalition proofness. Under these additional conditions, participants' contributions can only depend on the level of public-good provision. For a public good that comes as a single indivisible unit, provision can only depend on the population share of people in favour of provision. Robust implementability and coalition proofness thus provide a foundation for the use of voting mechanisms. The analysis is also extended to a specifi cation with more than two public-good provision levels.
    Keywords: Mechanism Design, Public-good provision, Large Economy, Voting Mechanisms
    JEL: D82 H41 D70 D60
    Date: 2011–12
  9. By: Junichiro Ishida
    Abstract: This paper explores the consequences of sabotage for the design of incentive contracts. The possibility of sabotage gives rise to a dynamic concern, similar to the Ratchet effect, which distorts the agents' incentives. We first show that the mere possibility of sabotage may make it impossible to implement the first-best effort, and then offer two distinct incentive schemes, fast track and late selection, to circumvent this problem. The present model offers a mechanism through which these two schemes arise in a unified framework.
    Date: 2012–03
  10. By: Keita Owari (Faculty of Economics, University of Tokyo)
    Abstract: The existence of optimal strategy in robust utility maximization is addressed when the utility function is finite on the entire real line. A delicate problem in this case is to find a ggood definitionh of admissible strategies to obtain an optimizer. Under certain assumptions, especially a time-consistency property of the set ‚o of probabilities which describes the model uncertainty, we show that an optimal strategy is obtained in the class of those whose wealths are supermartingales under all local martingale measures having a finite generalized entropy with one of P ¸ ‚o.
    Date: 2011–10
  11. By: Özgür Evren (New Economic School); Stefania Minardi (Department of Economics, New York University)
    Abstract: Warm-glow refers to other-serving behavior that is valuable for the actor per se, apart from its social implications. We provide axiomatic foundations for warm-glow by viewing it as a form of preference for larger choice sets, in the sense of the literature on freedom of choice. Specically, an individual who experiences warm-glow prefers the freedom to be sel…sh: she values the availability of sel…sh options even if she plans to act unsel…shly. Our theory also provides foundations for empirically distinguishing between warm-glow and other motivations for prosocial behavior. The implied choice behavior subsumes Riker and Ordeshook (1968) and Andreoni (1990).
    Keywords: Altruism, Warm-Glow, Freedom of Choice, Philanthropy, Charitable Giving, Public Goods
    JEL: D11 D64 D81
    Date: 2011–12
  12. By: Ghossoub, Mario
    Abstract: This paper suggests a behavioral, preference-based definition of loss aversion for decision under risk. This definition is based on the initial intuition of Markowitz [30] and Kahneman and Tversky [19] that most individuals dislike symmetric bets, and that the aversion to such bets increases with the size of the stake. A natural interpretation of this intuition leads to defining loss aversion as a particular kind of risk aversion. The notions of weak loss aversion and strong loss aversion are introduced, by analogy to the notions of weak and strong risk aversion. I then show how the proposed definitions naturally extend those of Kahneman and Tversky [19], Schmidt and Zank [48], and Zank [54]. The implications of these definitions under Cumulative Prospect Theory (PT) and Expected-Utility Theory (EUT) are examined. In particular, I show that in EUT loss aversion is not equivalent to the utility function having an S shape: loss aversion in EUT holds for a class of utility functions that includes S-shaped functions, but is strictly larger than the collection of these functions. This class also includes utility functions that are of the Friedman-Savage [14] type over both gains and losses, and utility functions such as the one postulated by Markowitz [30]. Finally, I discuss possible ways in which one can define an index of loss aversion for preferences that satisfy certain conditions. These conditions are satisfied by preferences having a PT-representation or an EUT-representation. Under PT, the proposed index is shown to coincide with Kobberling and Wakker’s [22] index of loss aversion only when the probability weights for gains and losses are equal. In Appendix B, I consider some extensions of the study done in this paper, one of which is an extension to situations of decision under uncertainty with probabilistically sophisticated preferences, in the sense of Machina and Schmeidler [27].
    Keywords: Loss Aversion; Risk Aversion; Mean-Preserving Increase in Risk; Prospect Theory; Probability Weights; S-Shaped Utility
    JEL: D03 D81
    Date: 2011–08–11

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