nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒04‒17
twenty papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Bounded Reasoning and Higher-Order Uncertainty By Willemien Kets
  2. Choice Probability Generating Functions By Mogens Fosgerau; Daniel L. McFadden; Michel Bierlaire
  3. Even (mixed) risk lovers are prudent By David Crainich; Louis Eeckhoudt; Alain Trannoy
  4. Does habit formation always increase the agents' desire to smooth consumption? By Emmanuelle Augeraud-Veron; Mauro Bambi
  5. Ambiguity Aversion and Variance Premium By Jianjun Miao; Bin Wei; Hao Zhou
  6. Revealed Preference and Nonparametric Analysis – Continuous Extensions and Recoverability By Jan Heufer
  7. Dynamic Strategic Information Transmission By Mikhail Golosov; Vasiliki Skreta; Aleh Tsyvinski; Andrea Wilson
  8. Learning and Model Validation By In-Koo Cho; Ken Kasa
  9. Information and the Equity Premium. By Gollier, Christian; Schlee, Edward
  10. Optimal Interventions in Markets with Adverse Selection By Thomas Philippon; Vasiliki Skreta
  11. Experience Benefits and Firm Organization By Ching-to Albert MA; Ingela Alger; Regis Renault
  12. Dynamic Quality Signaling with Moral Hazard By Francesc Dilmé
  13. Dynamic Competing Mechanisms By Ghosh, Sambuddha; Han, Seungjin
  14. A Robustly Efficient Auction By Kyungmin Kim; Antonio Penta
  15. Persuasive Silence By Toru Suzuki
  16. Renegotiation-Proof Third-Party Contracts under Asymmetric Information By Emanuele Gerratana; Levent Kockesen
  17. Eliciting Information from a Committee By Andriy Zapechelnyuk
  18. Exploding Offers and Buy-Now Discounts By Mark Armstrong; Jidong Zhou
  19. Price Competition with Consumer Confusion By Ioanna Chioveanu; Jidong Zhou
  20. Corruption By Abhijit Banerjee; Sendhil Mullainathan; Rema Hanna

  1. By: Willemien Kets
    Abstract: The standard framework for analyzing games with incomplete information models players as if they form beliefs about their opponents' beliefs about their opponents' beliefs and so on, that is, as if players have an infinite depth of reasoning. This strong assumption has nontrivial implications, as is well-known. This paper therefore generalizes the type spaces of Harsanyi (1967-1968) to model that players can have a finite depth of reasoning. The innovation is that players can have a coarse perception of the higher-order beliefs of other players, thus formalizing the small-world idea of Savage (1954) in a type-space context. Unlike the case in other models of finite-order reasoning, players with a finite depth of reasoning can have nontrivial higher-order beliefs about certain events. Intuitively, some higher-order events are generated by events of lower orders, making it possible for players to reason about them, even if they have a finite depth of reasoning.
    Date: 2012–03–19
  2. By: Mogens Fosgerau; Daniel L. McFadden; Michel Bierlaire
    Abstract: This paper considers discrete choice, with choice probabilities coming from maximization of preferences from a random utility field perturbed by additive location shifters (ARUM). Any ARUM can be characterized by a choice-probability generating function (CPGF) whose gradient gives the choice probabilities, and every CPGF is consistent with an ARUM. We relate CPGF to multivariate extreme value distributions, and review and extend methods for constructing CPGF for applications.
    JEL: C25 D11
    Date: 2012–04
  3. By: David Crainich (CNRS-LEM and IESEG School of Management); Louis Eeckhoudt (IESEG School of Management (LEM-CNRS) and CORE (Université Catholique de Louvain)); Alain Trannoy (Aix-Marseille School of Economics, EHESS)
    Date: 2011–10
  4. By: Emmanuelle Augeraud-Veron; Mauro Bambi
    Abstract: In the literature, habit formation has been often introduced to enhance the agents' desire to smooth consumption over time. This characteristic was found particularly useful in solving the equity premium puzzle and in matching several stylized facts in growth, and business cycles theory as, for example, the high persistence in the U.S. output volatility. In this paper we propose a definition of habit formation, which is ``general'' relative to the assumptions on the intensity, persistence, and lag structure, and we unveil two mechanisms which point to the opposite direction: habits may reduce the desire of smoothing consumption over time and then may potentially decrease the power of a model in explaining the previously mentioned facts. More precisely, we propose a complete taxonomy of the rich dynamics which may emerge in an AK model with external addictive habits for all the feasible combinations of the intensity, persistence and lag structure characterizing their formation and we point out to the region in the parameters' space coherent with less smoothing in consumption. An economic explanation of these mechanisms is suggested and the robustness of our results in the case of internal habits verified. Finally and crucially habit formation always reduces the desire of consumption smoothing once the model is calibrated to match the average U.S. output and utility growth rates observed in the data.
    Keywords: Habit formation; endogenous fluctuations, delayed functional differential equations.
    JEL: E00 E30 O40
    Date: 2012–04
  5. By: Jianjun Miao (Department of Economics, Boston University); Bin Wei (Capital Markets Section, Federal Reserve Board); Hao Zhou (Capital Markets Section, Federal Reserve Board)
    Abstract: This paper offers an ambiguity-based interpretation of variance premium - the differ- ence between risk-neutral and objective expectations of market return variance - as a com- pounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our approach endogenously generates variance premium without impos- ing exogenous stochastic volatility or jumps in consumption process. Such a framework can reasonably match the mean variance premium as well as the mean equity premium, equity volatility, and the mean risk-free rate in the data. We find that about 96 percent of the mean variance premium can be attributed to ambiguity aversion. Applying the model to historical consumption data, we find that variance premium mostly captures depressions, deep recessions, and financial panics, with a post war peak in 2009.
    Keywords: Ambiguity aversion, learning, variance premium, regime-shift, belief distortion
    JEL: G12 G13 D81 E44
    Date: 2012–01
  6. By: Jan Heufer
    Abstract: This paper shows how revealed preference relations, observed under general budget sets, can be extended using closure operators which impose certain assumptions on preferences. Common extensions are based on the assumption that preferences are convex and/or monotonic, but we also consider satiated single-peaked preferences. For the obtained extended relations, the paper provides necessary and sufficient conditions for the existence of continuous complete extensions of the revealed preference relation. These results lead to a nonparametric analysis of revealed preference data which allows to recover all that can be said about a decision maker's preferences. The approach makes explicit what additional assumptions are imposed on the revealed preference relation. For example, Varian's (1982) "revealed preferred set" imposes monotonicity and convexity. The approach focuses strictly on what is observable. In particular, it does not assume that we observe all bundles on a budget among which the decision maker is indifferent.
    Keywords: Consistency of binary relations; continuous extension; decision theory; demand theory; GARP; nonparametric analysis; revealed preference
    JEL: C12 C14 C91 D00
    Date: 2012–03
  7. By: Mikhail Golosov; Vasiliki Skreta; Aleh Tsyvinski; Andrea Wilson
    Date: 2011
  8. By: In-Koo Cho; Ken Kasa (Simon Fraser University)
    Abstract: This paper studies adaptive learning with multiple models. An agent operating in a self-referential environment is aware of potential model misspecification, and tries to detect it, in real-time, using an econometric specification test. If the current model passes the test, it is used to construct an optimal policy. If it fails the test, a new model is selected from a fixed set of models. As the rate of coefficient updating decreases, one model becomes dominant, and is used 'almost always'. Dominant models can be characterized using the tools of large deviations theory. The analysis is applied to Sargent's (1999) Phillips Curve model.
    Keywords: Learning; Model validation
    JEL: C12 E59
    Date: 2012–04
  9. By: Gollier, Christian; Schlee, Edward
    JEL: D8 D9 G12
    Date: 2011
  10. By: Thomas Philippon; Vasiliki Skreta
    Date: 2011
  11. By: Ching-to Albert MA (Department of Economics, Boston University.); Ingela Alger (TSE (LERNA, CNRS) and Economics Department, Carleton University); Regis Renault (Universite de Cergy-Pontoise, THEMA, Cergy-Pontoise Cedex FRANCE, and Institut Universitaire de France;)
    Abstract: A principal chooses between in-house production and outsourcing. An agent will be hired when production is in-house. An agent will be contracted upon when production is outsourced. In each case, the agent earns experience benefits: future monetary returns from managing production, reputation, and enjoyment. The principal would like to extract experience benets. He can do so when production is outsourced. But the external agent earns information rent from private information about production costs. The principal cannot fully extract experience benets when production is in-house because the internal agent must receive a minimum income, although the principal has full information on production costs. Our theory proposes a new trade-off, between information rent under outsourcing, and experience rent under in-house production. The principal chooses outsourcing when experience benefits are high. The principal's organizational choice may be socially inefficient.
    Keywords: vertical integration, experience benets, experience rents, informational rents.
    JEL: D23 L22
    Date: 2012–01
  12. By: Francesc Dilmé (Department of Economics, University of Pennsylvania)
    Abstract: Asymmetric information is an important source of inefficiency when assets (like firms) are transacted. The two main sources of this asymmetry are unobserved idiosyncratic characteristics of the asset (for example, quality) and unobserved idiosyncratic choices (actions done by the current owners). We introduce moral hazard in a dynamic signaling model where heterogeneous sellers exert effort to affect the distribution of a stochastic signal (for example sales or profits) of their firms. Buyers observe the signal history and make price offers to the sellers. High-quality sellers try to separate themselves from the less quality ones in order to receive high price offers, while the latter try to pool with the first group to avoid receiving a low price. We characterize the competitive equilibria of the model, and we propose an adaptation of existing refinements to the incorporation of moral hazard in dynamic signaling that implies uniqueness of equilibria. We find that similar individual characteristics across types of sellers make everyone worse off, since competition increases signaling waste. Also, due to the new intensive margin (effort), non-trivial signaling will take place even when the cost of signaling is large. In particular cases, we find analytical solutions, that allow transparent comparative statics analysis. The model can be applied to education where grades depend not only on the students’ skills, but also on their effort.
    Keywords: Dynamic Signaling, Dynamic Moral Hazard, Endogenous Effort
    JEL: D82 D83 C73 J24
    Date: 2012–03–19
  13. By: Ghosh, Sambuddha; Han, Seungjin
    Abstract: Competing mechanism games involve multiple principals contracting with one or more agents. This paper extends the static model of Epstein and Peters (1999) to the repeated setting, allowing agents' types to evolve over time according to a Markov process. Actions are perfectly monitored, but types and messages are private information. Perhaps surprisingly, when discounting is low the dynamic game is more tractable in the following senses. First, each principal's minmax value relative to arbitrarily general mechanisms equals that relative to simpler mechanisms, often direct mechanisms. This contrasts with one-shot games, where the minmax cannot be explicitly computed because it is not expresssible in terms of simple mechanisms. Second, the above result allows equilibrium payoffs to be expressed in terms of primitives of the model. From the applied perspective, this paper provides a sufficient class of simple mechanisms to which one can restrict attention without loss of generality.
    Keywords: dynamic competing mechanisms, minmax values, direct mechanisms, folk theorem, robust equilibria
    JEL: C73 D82
    Date: 2012–04–04
  14. By: Kyungmin Kim; Antonio Penta
    Abstract: We study the problem of efficient auction design in environments with interdependent values, under arbitrary common knowledge assumptions. We propose a simple mechanism and show that, under a rather mild condition, it "robustly" achieves efficiency. Our mechanism consists in a standard Vickrey auction, preceded by one round of communication, where agents report their private signals and receive transfers from the designer. We interpret the transfers as the cost for the designer to robustly achieve efficiency. We introduce a notion of robust informational size and show that the transfers are small if agents are informationally small in our sense. Furthermore, the transfers are decreasing in the amount of information available to the designer and in the strength of the common knowledge assumptions. In other words, the more robust the efficient implementation result, the higher the cost of achieving efficiency. We thus formalize the intuitive idea of a trade-off between robustness and efficient implementation and analyze the determinants of the "cost of robustness".
    Keywords: Cost of robustness; efficient auctions; informational size; interdependent values; robust mechanism design
    JEL: C72 D82
    Date: 2012
  15. By: Toru Suzuki (Max Planck Institute of Economics, Jena, Germany)
    Abstract: In the market where inattentive buyers can fail to notice some feasible choices, the key role of marketing is to make buyers aware of products. However, the eective marketing strategy is often subtle since marketing tactics can make buyers cautious. This paper provides a framework to analyze an eective marketing strategy to persuade an inattentive buyer in an adverse selection environment. We investigate how an attention-grabbing marketing can "backfire" and when it can be eective.
    Keywords: Signaling game, Consideration set, Counter signaling, Limited attention, Marketing, Advertising
    JEL: D03 D82 D83 L15
    Date: 2012–04–04
  16. By: Emanuele Gerratana (SIPA, Columbia University); Levent Kockesen (Koç University)
    Abstract: This paper characterizes the equilibrium outcomes of two-stage games in which the second mover has private information and can sign renegotiable contracts with a neutral third-party. Our aim is to understand whether renegotiation-proof third-party contracts can confer a strategic advantage on the second mover. We first analyze non-renegotiable contracts and show that a “folk theorem” holds: Any outcome in which the second mover best responds to the first mover’s action and the first mover obtains a payoff at least as large as his “individually rational payoff” can be supported. Renegotiation-proofness imposes some restrictions, which is most transparent in games with externalities, i.e., games in which the first mover’s payoff increases (or decreases) in the second mover’s action. In such games, a similar folk theorem holds with renegotation-proof contracts as well, but the firstmover’s individually rational payoff is in general higher.
    Keywords: Third-Party Contracts, Strategic Delegation, Renegotiation, Asymmetric Information, Renegotiation-Proofness, Durability.
    JEL: C72 D80 L13
    Date: 2012–04
  17. By: Andriy Zapechelnyuk (Queen Mary, University of London)
    Abstract: The paper addresses the mechanism design problem of eliciting truthful information from a committee of informed experts who collude in their information disclosure strategies. It is shown that under fairly general conditions full information disclosure is possible if and only if the induced outcome is Pareto undominated for the committee members.
    Keywords: Communication, Multidimensional mechanism design, Experts, Collusion, Axiomatic bargaining, Closed rule
    JEL: D82 C78 D72
    Date: 2012–04
  18. By: Mark Armstrong; Jidong Zhou
    Date: 2011
  19. By: Ioanna Chioveanu; Jidong Zhou
    Date: 2011
  20. By: Abhijit Banerjee; Sendhil Mullainathan; Rema Hanna
    Abstract: In this paper, we provide a new framework for analyzing corruption in public bureaucracies. The standard way to model corruption is as an example of moral hazard, which then leads to a focus on better monitoring and stricter penalties with the eradication of corruption as the final goal. We propose an alternative approach which emphasizes why corruption arises in the first place. Corruption is modeled as a consequence of the interaction between the underlying task being performed by bureaucrat, the bureaucrat's private incentives and what the principal can observe and control. This allows us to study not just corruption but also other distortions that arise simultaneously with corruption, such as red-tape and ultimately, the quality and efficiency of the public services provided, and how these outcomes vary depending on the specific features of this task. We then review the growing empirical literature on corruption through this perspective and provide guidance for future empirical research.
    JEL: D02 O10 O12 O43
    Date: 2012–04

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