
on Microeconomics 
Issue of 2012‒04‒10
seventeen papers chosen by JingYuan Chiou IMT Lucca Institute for Advanced Studies 
By:  Daniel L. McFadden; Mogens Fosgerau 
Abstract:  We consider demand systems for utilitymaximizing consumers facing general budget constraints whose utilities are perturbed by additive linear shifts in marginal utilities. Budgets are required to be compact but are not required to be convex. We define demand generating functions (DGF) whose subgradients with respect to these perturbations are convex hulls of the utilitymaximizing demands. We give necessary as well as sufficient conditions for DGF to be consistent with utility maximization, and establish under quite general conditions that utilitymaximizing demands are almost everywhere singlevalued and smooth in their arguments. We also give sufficient conditions for integrability of perturbed demand. Our analysis provides a foundation for applications of consumer theory to problems with nonlinear budget constraints. 
JEL:  C25 D11 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:17953&r=mic 
By:  Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer 
Abstract:  We present a theory of contextdependent choice in which a consumer's attention is drawn to salient attributes of goods, such as quality or price. An attribute is salient for a good when it stands out among the good's characteristics, in the precise sense of being furthest away in that good from its average level in the choice set (or more generally, an evoked set). A local thinker chooses among goods by attaching disproportionately high weights to their salient attributes. When goods are characterized by only one quality attribute and price, salience tilts choices toward goods with higher ratios of quality to price. We use the model to account for a variety of disparate bits of evidence, including decoy effects in consumer choice, contextdependent willingness to pay, balance of qualities in desirable goods, and shifts in demand toward low quality goods when all prices in a category rise. We then apply the model to study discounts and sales, and to explain demand for low deductible insurance. 
JEL:  D03 D11 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:17947&r=mic 
By:  Matthias Messner; Nicola Pavoni; Sleet Christopher 
Abstract:  We bring together the theories of duality and dynamic programming. We show that the dual of an additively separable dynamic optimization problem can be recursively decomposed using summaries of past Lagrange multipliers as state variables. Analogous to the Bellman decomposition of the primal problem, we prove equality of values and solution sets for recursive and sequential dual problems. In nonadditively separable settings, the equivalence of the recursive and sequential dual is not guaranteed. We relate recursive dual and recursive primal problems. If the Lagrangian associated with a constrained optimization problem admits a saddle then, even in nonadditively separable settings, the values of the recursive dual and recursive primal problems are equal. Additionally, the recursive dual method delivers necessary conditions for a primal optimum. If the problem is strictly concave, the recursive dual method delivers necessary and sufficient conditions for a primal optimum. When a saddle exists, states on the optimal dual path are subdifferentials of the primal value function evaluated at states on the optimal primal path and vice versa. 
Date:  2011–10 
URL:  http://d.repec.org/n?u=RePEc:cmu:gsiawp:1772106779&r=mic 
By:  Uzi Segal (Boston College) 
Abstract:  Preferences may arise from regret, i.e., from comparisons with alternatives forgone by the decision maker. We show that when the choice set consists of pairwise statistically independent lotteries, transitive regretbased behavior is consistent with betweenness preferences and with a family of preferences that is characterized by a consistency property. Examples of consistent preferences include CARA, CRRA, and anticipated utility. 
Keywords:  Regret, transitivity, nonexpected utility 
Date:  2012–04–02 
URL:  http://d.repec.org/n?u=RePEc:boc:bocoec:796&r=mic 
By:  Alon Harel (Hebrew University School of Law); Uzi Segal (Boston College) 
Abstract:  Since Becker (1971), a common argument against asymmetric norms that promote minority rights over those of the majority is that such policies reduce total welfare. While this may be the case, we show that there are simple environments where aggregate sum of individual utilities is actually maximized under asymmetric norms that favor minorities. We thus maintain that without information regarding individual utilities one cannot reject or promote segregationrelated policies based on utilitarian arguments. 
Keywords:  Utilitarianism, discrimination, segregation, minority and majority rights 
Date:  2012–02–19 
URL:  http://d.repec.org/n?u=RePEc:boc:bocoec:797&r=mic 
By:  Yakov Babichenko 
Abstract:  We consider smallinfluence anonymous games with a large number of players $n$ where every player has two actions. For this class of games we present a bestreply dynamic with the following two properties. First, the dynamic reaches Nash approximate equilibria fast (in at most $cn\ log n$ steps for some constant $c>0$). Second, Nash approximate equilibria are played by the dynamic with a limit frequency of at least $1e^{c'n}$ for some constant $c'>0$. 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:huj:dispap:dp600&r=mic 
By:  Moti Michaeli 
Abstract:  AumannSerrano (2008) and FosterHart (2009) suggest two new riskiness measures, each of which enables one to elicit a complete and objective ranking of gambles according to their riskiness. Hart (2011) shows that both measures can be obtained by looking at a large set of utility functions and applying "uniform rejection criteria" to rank the gambles in accordance with this set of utilities. We use the same "uniform rejection criteria" to extend these two riskiness measures to the realm of uncertainty and develop complete and objective rankings of sets of gambles, which arise naturally in models of decision making under uncertainty. 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:huj:dispap:dp603&r=mic 
By:  Amnon Schreiber 
Abstract:  In their seminal works, Arrow (1965) and Pratt (1964) defined two aspects of risk aversion: absolute risk aversion and relative risk aversion. Based on their definitions, we define two aspects of risk: absolute risk and relative risk. We consider situations in which, by making an investment, an agent exchanges a certain amount of wealth w by a random distributed level of wealth W. In such situations, we define absolute risk as the riskiness of a gamble that is distributed as Ww, and relative risk as the riskiness of a security that is distributed as W/w. We measure absolute risk by the Aumann and Serrano (2008) index of riskiness and relative risk by an equivalent index that we develop in this paper. The two concepts of risk do not necessarily agree on which one of two investments is riskier, and hence they capture two different aspects of risk. 
Date:  2012–01–31 
URL:  http://d.repec.org/n?u=RePEc:huj:dispap:dp597&r=mic 
By:  Andersson, Ola (Research Institute of Industrial Economics (IFN)); Argenton, Cédric (CentER & TILEC); Weibull, Jörgen W. (Stockholm School of Economics) 
Abstract:  In games with continuum strategy sets, we model a player’s uncertainty about another player’s strategy, as an atomless probability distribution over the other player’s strategy set. We call a strategy profile (strictly) robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence (all sequences) of strategy profiles in which every player’s strategy is optimal under his or her uncertainty about the others. General properties of this robustness criterion are derived and it is shown that it is a refinement of Nash equilibrium when payoff functions are continuous. We apply the criterion to a class of Bertrand competition games. These are discontinuous games that admit a continuum of Nash equilibria. Our robustness criterion selects a unique Nash equilibrium, and this selection agrees with recent experimental findings. 
Keywords:  Nash equilibrium; Refinement; Strategic uncertainty; Bertrand competition; Logconcavity 
JEL:  C72 D43 L13 
Date:  2012–03–30 
URL:  http://d.repec.org/n?u=RePEc:hhs:iuiwop:0910&r=mic 
By:  Ramon Flores (Universidad Carlos III de Madrid); Maurice Koster (University of Amsterdam); Ines Lindner (VU University Amsterdam); Elisenda Molina (Universidad Carlos III de Madrid) 
Abstract:  This paper proposes a new measure for a group's ability to lead society to adopt their standard of behavior, which in particular takes account of the time the group takes to convince the whole society to adopt their position. This notion of a group's power to initiate action is computed as the reciprocal of the resistance against it, which is in turn given by the expected absorption time of a related finite state partial Markov chain that captures the social dynamics. The measure is applicable and meaningful in a variety of models where interaction between agents is formalized through (weighted) binary relations. Using Percolation Theory, it is shown that the group power is monotonic as a function of groups of agents. We also explain the differences between our measure and those discussed in the literature on Graph Theory, and illustrate all these concerns by a thorough analysis of two particular cases: the Wolfe Primate Data and the 11S hijackers' network. 
Keywords:  Collective action; Social networks; Influence and diffusion models; Network intervention; Group centrality measures 
JEL:  C79 D01 D71 
Date:  2012–03–29 
URL:  http://d.repec.org/n?u=RePEc:dgr:uvatin:20120032&r=mic 
By:  Dufresne, Daniel; VázquezAbad, Felisa 
Abstract:  The classical cobweb theorem is extended to include production lags and price forecasts. Price forecasting based on a longer period has a stabilizing effect on prices. Longer production lags do not necessarily lead to unstable prices; very long lags lead to cycles of constant amplitude. The classical cobweb requires elasticity of demand to be greater than that of supply; this is not necessarily the case in a more general setting, price forecasting has a stabilizing effect. Random shocks are also considered.  
Keywords:  Cobweb theorem,production lags,stable markets,price fluctuations 
JEL:  C02 C62 C65 D58 E32 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:zbw:ifwedp:201217&r=mic 
By:  Marta Faias (Department of Economics, Universidade Nova de Lisboa); Emma MorenoGarcia (Department of Economics, Universidad de Salamanca); Myrna Wooders (Department of Economics, Vanderbilt University) 
Abstract:  Bergstrom, Blume and Varian (1986) provides an elegant gametheoretic model of an economy with one private good and one public good. Strategies of players consist of voluntary contributions of the private good to public good production. Without relying on first order conditions, the authors demonstrate existence of Nash equilibrium and an extension of Warr's neutrality result  any redistribution of endowment that left the set of contributors unchanged would induce a new equilibrium with the same total public good provision. The assumption of oneprivate good greatly facilities the results. We provide analogues of the Bergstrom, Blume and Varian results in a model allowing multiple private and public goods. In addition, we relate the strategic market game equilibrium to the private provision of equilibrium of Villanaci and Zenginobuz (2005), which provides a counterpart to the Walrasian equilibrium for a public goods economy. Our techniques follow those of Dubey and Geanakoplos (2003), which itself grows out of the seminal work of Shapley and Shubik (1977). Our approach also incorporates, into the strategic market game literature, economies with production, not previously treated and, as a byproduct, establishes a new existence of privateprovision equilibrium. 
Keywords:  Public goods, market games, equilibrium, Nash equilibrium, private provision, voluntary contributions 
JEL:  D01 D40 D51 
Date:  2012–02 
URL:  http://d.repec.org/n?u=RePEc:van:wpaper:1201&r=mic 
By:  Britta Hoyer 
Abstract:  "The enemy of my enemy is my friend." This common adage, which seems to be adhered to in social interactions (e.g. high school cliques or work relationships) as well as in political alliances within countries and between countries, describes the ability of groups or people to work together when they face an opponent, although otherwise they have little in common. In social psychology this phenomenon has been termed the "common enemy effect". Such group behavior can be studied using networks to depict the players within a group and the relationships between them. In this paper we study the effect of a common enemy on a model of network formation, where selfinterested, myopic players can use links to build a network, knowing that they are facing a common enemy who can disrupt the links within the network and whose goal it is to minimize the overall value of the network. We find that introducing such a common enemy can lead to the formation of stable and efficient networks which would not be stable without the threat of disruption. However, we also find that fragmented networks as well as the empty networks are also stable. While the common enemy can thus have a positive effect on the incentives of players to form an efficient network, it can also lead to fragmentation and disintegration of the network. 
Keywords:  strategic network disruption, strategic network design, noncooperative network games 
JEL:  C72 D85 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:use:tkiwps:1206&r=mic 
By:  Pierre Chaigneau 
Abstract:  We use a comparative approach to study the incentives provided by dierent types of compensation contracts, and their valuation by risk averse managers, in a fairly general setting. We show that concave contracts tend to provide more incentives to risk averse managers, while convex contracts tend to be more valued by prudent managers. Thus, prudence can contribute to explain the prevalence of stockoptions in executive compen sation. We also present a condition on the utility function which enables to compare the structure of optimal contracts associated with dierent risk preferences. 
Date:  2012–01 
URL:  http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp697&r=mic 
By:  Pradeep Dubey (Center for Game Theory, Department of Economics, Stony Brook University); Siddhartha Sahi (Dept. of Mathematics, Rutgers University, New Brunswick) 
Abstract:  Consider agents who undertake costly effort to produce stochastic outputs observable by a principal. The principal can award a prize deterministically to the agent with the highest output, or to all of them with probabilities that are proportional to their outputs. We show that, if there is sufficient diversity in agents' skills relative to the noise on output, then the proportional prize will, in a precise sense, elicit more output on average, than the deterministic prize. Indeed, assuming agents know each others' skills (the complete information case), this result holds when any Nash equilibrium selection, under the proportional prize, is compared with any individually rational selection under the deterministic prize. When there is incomplete information, the result is still true but now we must restrict to Nash selections for both prizes. We also compute the optimal scheme, from among a natural class of probabilistic schemes, for awarding the prize; namely that which elicits maximal effort from the agents for the least prize. In general the optimal scheme is a monotonic step function which lies "between" the proportional and deterministic schemes. When the competition is over small fractional increments, as happens in the presence of strong contestants whose base levels of production are high, the optimal scheme awards the prize according to the "log of the odds," with odds based upon the proportional prize. 
Keywords:  Deterministic/proportional/optimal prizes, Games of complete/incomplete information, Nash equilibrium, Individually rational strategies 
JEL:  C70 C72 C79 D44 D63 D82 
Date:  2012–04 
URL:  http://d.repec.org/n?u=RePEc:cwl:cwldpp:1858&r=mic 
By:  Richard G. Lipsey (Simon Fraser University); 
Abstract:  The theory of second best established that the effect on community welfare of any one policy change varies with the specific context in which that change occurs. In paper that has been frequently quoted to justify specific policies, Ng argues that fulfilling firstbest conditions piecemeal is an optimal policy under quite general conditions when neither full first nor second best optima are achievable. This paper first argues that Ng's conclusion does not follow from his own assumptions, which imply instead that the status quo should be maintained, whatever it might be. Next it gives one illustrative example showing how much damage can be caused by following Ng's advice. It then argues that when Ng's key assumption is replaced by one that is closer to the facts, there is no general a priori presumption for adopting any specific policy, including maintaining the status quo. The paper closes with some observations on the usefulness of welfare economics even when the full implications of second best theory are accepted. 
Keywords:  Second best; third best; reaction function; piecemeal welfare policies 
JEL:  D60 D61 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:sfu:sfudps:dp1202&r=mic 
By:  Kenneth Kasa (Simon Fraser University); 
Abstract:  This paper studies decision making by agents who value optimism, but are unsure of their environment. As in Brunnermeier and Parker (2005), an agent’s optimism is assumed to be tempered by the decision costs it imposes. As in Hansen and Sargent (2008), an agent’s uncertainty about his environment leads him to formulate ‘robust’ decision rules. It is shown that when combined, these two considerations can lead agents to adhere to the Rational Expectations Hypothesis. Rather than being the outcome of the sophisticated statistical calculations of an impassive expected utility maximizer, Rational Expectations can instead be viewed as a useful approximation in environments where agents struggle to strike a balance between doubt and hope. 
Keywords:  Rational expectations; robustness 
JEL:  D81 D84 
Date:  2012–03 
URL:  http://d.repec.org/n?u=RePEc:sfu:sfudps:dp1205&r=mic 