nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒05‒15
23 papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Switching Costs and Equilibrium Prices By Luis Cabral
  2. Approximate Revenue Maximization with Multiple Items By Sergiu Hart; Noam Nisan
  3. Sand in the Wheels: A Dynamic Global-Game Approach By Laurent Mathevet; Jakub Steiner
  4. Multidimensional Screening in a Monopolistic Insurance Market By Pau Olivella; Fred Schroyen
  5. (Un)Informed Charitable Giving By Silvana Krasteva; Huseyin Yildirim
  6. Coordination structures By Alfonso Rosa García; Hubert Janos Kiss
  7. A Detail-Free Mediator By Vida, Péter; Azacis, Helmuts
  8. Collusive Communication Schemes in a First-Price Auction By Azacis, Helmuts; Vida, Péter
  9. Simple Mediation in a Cheap-Talk Game By Chirantan Ganguly; Indrajit Ray
  10. The value of useless information By Larbi Alaoui
  11. Stochastic signaling: information substitutes and complements By Tom TRUYTS
  12. Strategic interactions, incomplete information and learning By Berardi, Michele
  13. Deludedly Agreeing to Agree By Ziv Hellman
  14. Countable Spaces and Common Priors By Ziv Hellman
  15. Agree or Convince By Ozkaya, Ata
  16. Probabilistic Risk Attitudes and Local Risk Aversion: a Paradox By Vjollca Sadiraj
  17. Quotient Spaces of Boundedly Rational Types By Davide Cianciaruso; Fabrizio Germano
  18. Choice By Sequential Procedures By Jose Apesteguia; Miguel Angel Ballester
  19. A generalized unification theorem for choice theoretic foundations: Avoiding the necessity of pairs and triplets By He, Junnan
  20. A Cantor Set of Games with No Shift-Homogeneous Equilibrium Selection By Yehuda (John) Levy
  21. A Strategic Implementation of the Average Tree Solution for Cycle-Free Graph Games By Rene van den Brink; Gerard van der Laan; Nigel Moes
  22. Two Necessary Conditions for Strategy-Proofness: on What Domains are they also Sufficient? By Salvador Barberà; Dolors Berga; Bernardo Moreno
  23. A Measure of Rationality and Welfare By Jose Apesteguia; Miguel A. Ballester

  1. By: Luis Cabral
    Date: 2012
  2. By: Sergiu Hart; Noam Nisan
    Abstract: Myerson’s classic result provides a full description of how a seller can maximize revenue when selling a single item. We address the question of revenue maximization in the simplest possible multi-item setting: two items and a single buyer who has independently distributed values for the items, and an additive valuation. In general, the revenue achievable from selling two independent items may be strictly higher than the sum of the revenues obtainable by selling each of them separately. In fact, the structure of optimal (i.e., revenue-maximizing) mechanisms for two items even in this simple setting is not understood. In this paper we obtain approximate revenue optimization results using two simple auctions: that of selling the items separately, and that of selling them as a single bundle. Our main results (which are of a “direct sum” variety, and apply to any distributions) are as follows. Selling the items separately guarantees at least half the revenue of the optimal auction; for identically distributed items, this becomes at least 73% of the optimal revenue. For the case of k > 2 items, we show that selling separately guarantees at least a c/log^2 k fraction of the optimal revenue; for identically distributed items, the bundling auction yields at least a c/log k fraction of the optimal revenue.
    Date: 2012–04–18
  3. By: Laurent Mathevet; Jakub Steiner
    Abstract: We study the impact of frictions on the prevalence of systemic crises. Agents privately learn about a fixed payoff parameter, and repeatedly adjust their investments while facing transaction costs in a dynamic global game. The model has a rich structure of externalities: payoffs may depend on the volume of aggregate investment, on the concentration of investment, or on its volatility. We examine how small frictions, including those similar to the Tobin tax, affect the equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume. The analysis is driven by a robust invariance result: the volume of aggregate investment (measured in a pivotal contingency) is invariant to a large family of frictions.
    Keywords: coordination; dynamic global game; frictions; Tobin tax;
    JEL: C72 D82 H23
    Date: 2012–04
  4. By: Pau Olivella; Fred Schroyen
    Abstract: In this paper, we consider a population of individuals who differ in two dimensions: their risk type (expected loss) and their risk aversion. We solve for the profit maximizing menu of contracts that a monopolistic insurer puts out on the market. First, we find that it is never optimal to fully separate all the types. Second, if heterogeneity in risk aversion is sufficiently high, then some high-risk individuals (the risk-tolerant ones) will obtain lower coverage than some low-risk individuals (the risk-averse ones). Third, we show that when the average man and woman differ only in risk aversion, gender discrimination may lead to a Pareto improvement.
    Keywords: insurance markets, asymmetric information, screening, gender discrimination, positive correlation test
    JEL: D82 G22
    Date: 2012–02
  5. By: Silvana Krasteva; Huseyin Yildirim
    Abstract: Evidence suggests that donors have little demand for information before giving to charity. To understand this behavior and its policy implications, we present a model in which each individual can acquire costly information about her true value of charity. We observe that an individual who considers giving less is less likely to become informed; and indeed, an uninformed donor is, on average, less generous than an informed one. This implies that since the free-rider problem in giving worsens in a larger population, the percentage of informed givers becomes vanishingly small, leaving the total expected donations strictly below its highest level to be reached by a fully informed population. We show that while a direct government grant to the charity causes severe crowding-out by discouraging information acquisition, a matching grant increases donations by encouraging it. We further show that a “warm-glow” motive for giving does not necessarily weaken incentives to be informed, and that a (first-order) stochastic increase in true values for charity may actually decrease donations.
    Keywords: charitable giving, search cost, value of information, crowding-out, warm-glow
    JEL: H00 H41 D82 D83
    Date: 2011
  6. By: Alfonso Rosa García (Universidad de Murcia); Hubert Janos Kiss (Universidad Autónoma de Madrid)
    Abstract: We study a coordination problem where agents act sequentially. Agents are embedded in anobservation network that allows them to observe the actions of their neighbors. We find thatcoordination failures do not occur if there exists a sufficiently large clique. Its existence isnecessary and sufficient when agents are homogenous and sufficient when agents differ and theirtypes are private. Other structures guarantee coordination when agents decide in some particularsequences or for particular payoffs. The coordination problem embodied in our game is appliedto the problems of revolts and bank runs.
    Keywords: Social networks, coordination failures, multiple equilibria, revolts, bank runs.
    JEL: C72 D82 D85 G21 Z13
    Date: 2012–04
  7. By: Vida, Péter; Azacis, Helmuts (Cardiff Business School)
    Abstract: We present an extension to any finite complete information game with two players. In the extension, players are allowed to communicate directly and, additionally, send private messages to a simple, detail-free mediator, which, in turn, makes public announcements as a deterministic function of the private messages. The extension captures situations in which people engage in face-to-face communication and can observe the opponent's face during the conversation before choosing actions in some underlying game. We prove that the set of Nash equilibrium payoffs of the extended game approximately coincides with the set of correlated equilibrium payoffs of any underlying game.
    Keywords: Correlated equilibrium; detail-free mechanism; mediated pre-play communication
    JEL: C72
    Date: 2012–05
  8. By: Azacis, Helmuts (Cardiff Business School); Vida, Péter
    Abstract: We study optimal bidder collusion at first-price auctions when the collusive mechanism only relies on signals about bidders’ valuations. We build on Fang and Morris (2006) when two bidders have low or high private valuation of a single object and additionally each receives a private noisy signal from an incentiveless center about the opponent’s valuation. We derive the unique symmetric equilibrium of the first price auction for any symmetric, possibly correlated, distribution of signals, when these can only take two values. Next, we find the distribution of 2-valued signals, which maximizes the joint payoffs of bidders. We prove that allowing signals to take more than two values will not increase bidders’ payoffs if the signals are restricted to be public. We also investigate the case when the signals are chosen conditionally independently and identically out of n = 2 possible values. We demonstrate that bidders are strictly better off as signals can take on more and more possible values. Finally, we look at another special case of the correlated signals, namely, when these are independent of the bidders’ valuations. We show that in any symmetric 2-valued strategy correlated equilibrium, the bidders bid as if there were no signals at all and, hence, are not able to collude.
    Keywords: Bidder-optimal signal structure; Collusion; (Bayes) correlated equilibrium; First price auction; Public and private signals
    JEL: D44 D82
    Date: 2012–05
  9. By: Chirantan Ganguly; Indrajit Ray
    Abstract: In the Crawford-Sobel (uniform, quadratic utility) cheap-talk model, we consider a simple mediation scheme (a communication device) in which the informed agent reports one of the N possible elements of a partition to the mediator and then the mediator suggests one of the N actions to the uninformed decision-maker according to the probability distribution of the device. We show that no such simple mediated equilibrium can improve unpon the unmediated N-partition Crawford-Sobel equilibrium when the preference divergence parameter (bias is small).
    Keywords: Cheap Talk, Mediated Equilibrium
    JEL: C72
    Date: 2012–04
  10. By: Larbi Alaoui
    Abstract: There are many situations in which individuals have a choice of whether or not to observe eventual outcomes. In these instances, individuals often prefer to remain ignorant. These contexts are outside the scope of analysis of the standard von Neumann-Morgenstern (vNM) expected utility model, which does not distinguish between lotteries for which the agent sees the nal outcome and those for which he does not. I develop a simple model that admits preferences for making an observation or for remaining in doubt. I then use this model to analyze the connection between preferences of this nature and risk-attitude. This framework accommodates a wide array of behavioral patterns that violate the vNM model, and that may not seem related, prima facie. For instance, it admits self-handicapping, in which an agent chooses to impair his own performance. It also accommodates a status quo bias without having recourse to framing e effcts, or to an explicit definition of reference points. In a political economy context, voters have strict incentives to shield themselves from information. In settings with other-regarding preferences, this model predicts observed behavior that seems inconsistent with either altruism or self-interested behavior.
    Keywords: value of information, uncertainty, recursive utility, doubt, unobserved outcomes, unresolved lotteries
    JEL: D03 D80 D81 D64
    Date: 2012–04
  11. By: Tom TRUYTS
    Abstract: I develop a model of stochastic costly signaling in the presence of exogenous imperfect information, and study whether equilibrium signaling decreases (‘information substitutes’) or increases (‘information complements’) if the accuracy of exogenous information increases. A stochastic pure costly signaling model is shown to have a unique sequential equilibrium in which at least one type (and possibly all) engages in costly signaling. In the presence of exogenous information, a unique threshold level of prior beliefs generically exists which separates the cases of information complements and substitutes. More accurate exogenous information can induce a less informative signaling equilibrium, and can result in a lower expected accuracy of the uninformed party’s equilibrium beliefs. An application to signaling in networks, in which a social network is the source of exogenous information, the relation between network characteristics (size, density, centrality, component size) and equilibrium signaling.
    Date: 2012–05
  12. By: Berardi, Michele
    Abstract: In a model of incomplete, heterogeneous information, with externalities and strategic interactions, we analyze the possibility for learning to act as coordination device. We build on the framework proposed by Angeletos and Pavan (2007) and extend it to a dynamic multiperiod setting where agents need to learn to coordinate. We analyze conditions under which adaptive and eductive learning obtain, and show that adaptive learning conditions are less demanding than the eductive ones: in particular, when actions are strategic substitutes, the equilibrium is always adaptively learnable, while it might not be eductively so. In case of heterogeneous preferences, moreover, convergence only depends on the average characteristic of agents in the economy. We also show that adaptive learning dynamics converge to the game theoretical strategic equilibrium, which means that agents can learn to act strategically in a simple and straightforward way.
    Keywords: Learning; heterogeneity; interaction; coordination
    JEL: D83 C73 C62
    Date: 2012–05–06
  13. By: Ziv Hellman
    Abstract: We study conditions relating to the impossibility of agreeing to disagree in models of interactive KD45 belief (in contrast to models of S5 knowledge, which are used in nearly all the agreements literature). Agreement and disagreement are studied under models of belief in three broad settings: non-probabilistic decision models, probabilistic belief revision of priors, and dynamic communication among players. We show that even when the truth axiom is not assumed it turns out that players will find it impossible to agree to disagree under fairly broad conditions.
    Date: 2012–04
  14. By: Ziv Hellman
    Abstract: We show that the no betting characterisation of the existence of common priors over finite type spaces extends only partially to improper priors in the countably infinite state space context: the existence of a common prior implies the absence of a bounded agreeable bet, and the absence of a common improper prior implies the existence of a bounded agreeable bet. However, a type space that lacks a common prior but has a common improper prior may or may not have a bounded agreeable bet. The iterated expectations characterisation of the existence of common priors extends almost as is, as a sufficient and necessary condition, from finite spaces to countable spaces, but fails to serve as a characterisation of common improper priors. As a side-benefit of the proofs here, we also obtain a constructive proof of the no betting characterisation in finite spaces.
    Date: 2012–04
  15. By: Ozkaya, Ata (Galatasaray University Economic Research Center)
    Abstract: We continue the work of Aumann (Ann. Statist. 4 (1976), 1236-1239), Geanakoplos and Polemarchakis (J. Econ. Theory 28 (1982), 192-200) on common knowledge and consensus, reconsidering the arguments and the findings of both Aumann (1976) and Geanakoplos and Polemarchakis (1982) and offering different insights into the revision process. By revealing set inclusion property of the revision process, we show that the consensus conditions should be redefined. This redefinition enables us to demonstrate that until consensus is reached, in fact neither of the agents make apparent revision and each agent keeps repeating his initial posterior. Therefore the equilibrium posterior should be equal to initial posterior of the agent who does not make any apparent revision through the communication process. Our results show that regardless of the length of the communication process, it is impossible for the agents to agree on a value which is different from the initial posteriors. Finally, we shed light on some crucial points left unclear by Aumann (1976) and Geanakoplos and Polemarchakis (1982).
    Keywords: Communication; consensus; information; agreeing to disagree
    JEL: C62 D70 D82 D83
    Date: 2012–05–07
  16. By: Vjollca Sadiraj
    Abstract: Prominent theories of decision under risk that challenge expected utility theory model risk attitudes at least partly with transformation of probabilities. This paper shows how attributing local risk aversion (partly or wholly) to attitudes towards probabilities can produce extreme probability distortions that imply paradoxical risk aversion.
    Keywords: risk aversion, probability transformation, calibration
    JEL: D81
    Date: 2012–05
  17. By: Davide Cianciaruso; Fabrizio Germano
    Abstract: By identifying types whose low-order beliefs up to level ℓ<sub>i</sub> about the state of nature coincide, we obtain quotient type spaces that are typically smaller than the original ones, preserve basic topological properties, and allow standard equilibrium analysis even under bounded reasoning. Our Bayesian Nash (ℓ<sub>i</sub>; ℓ<sub>ii</sub>)-equilibria capture players inability to distinguish types belonging to the same equivalence class. The case with uncertainty about the vector of levels (ℓ<sub>i</sub>; ℓ<sub>ii</sub>) is also analyzed. Two examples illustrate the constructions.
    Keywords: Incomplete-information games, high-order reasoning, type space, quotient space, hierarchies of beliefs, bounded rationality
    JEL: C72 D03 D83
    Date: 2011–09
  18. By: Jose Apesteguia; Miguel Angel Ballester
    Abstract: We propose a rule of decision-making, the sequential procedure guided by routes, and show that three influential boundedly rational choice models can be equivalently understood as special cases of this rule. In addition, the sequential procedure guided by routes is instrumental in showing that the three models are intimately related. We show that choice with a status-quo bias is a refinement of rationalizability by game trees, which, in turn, is also a refinement of sequential rationalizability. Thus, we provide a sharp taxonomy of these choice models, and show that they all can be understood as choice by sequential procedures.
    Keywords: individual rationality, bounded rationality, behavioral economics
    JEL: D01
    Date: 2012–03
  19. By: He, Junnan
    Abstract: This paper is concerned with the axiomatic foundation of the revealed preference theory. Many well-known results in literature rest upon the ability to choose over budget sets that contains only 2 or 3 elements, the situations which are not observable in real life. In order to give a more realistic approach, this paper shows that many of the famous consistency requirements, such as those proposed by Arrow, Sen, Samuelson etc., are equivalent if the domain of choice functions satisfy some set theoretical properties. And these properties, unions and inclusions for example, are proposed in a way that gives observability. --
    Keywords: Revealed preference theory,rationality,preference,choice functions
    JEL: B00 C00 D01 D11
    Date: 2012
  20. By: Yehuda (John) Levy
    Abstract: We construct a continuum of games on a countable set of players that does not possess a measurable equilibrium selection that satisfies a natural homogeneity property. The explicit nature of the construction yields counterexamples to the existence of equilibria in models with overlapping generations and in games with a continuum of players.
    Date: 2012–04
  21. By: Rene van den Brink (VU University Amsterdam); Gerard van der Laan (VU University Amsterdam); Nigel Moes (VU University Amsterdam)
    Abstract: In this note we provide a strategic implementation of the average tree solution for zero-monotonic cycle-free graph games. That is, we propose a non-cooperative mechanism of which the unique subgame perfect equilibrium payoffs correspond to the average hierarchical outcome of the game. This mechanism takes into account that a player is only able to communicate with other players (i.e., to make proposals about a division of the surplus of cooperation) when they are connected in the graph.
    Keywords: implementation; cycle-free graph game; tree game; hierarchical outcome; average tree solution; weighted hierarchical outcome
    JEL: C71 C72
    Date: 2012–05–07
  22. By: Salvador Barberà; Dolors Berga; Bernardo Moreno
    Abstract: A social choice function may or may not satisfy a desirable property depending on its domain of definition. For the same reason, different conditions may be equivalent for functions defined on some domains, while different in other cases. Understanding the role of domains is therefore a crucial issue in mechanism design. We illustrate this point by analyzing the role of different conditions that are always related, but not always equivalent to strategy-proofness. We define two very natural conditions that are necessary for strategy-proofness: monotonicity and reshuffling invariance. We remark that they are not always sufficient. Then, we identify a domain condition, called intertwinedness, that ensures the equivalence between our two conditions and that of strategy-proofness. We prove that some important domains are intertwined: those of single-peaked preferences, both with public and private goods, and also those arising in simple models of house allocation. We prove that other necessary conditions for strategy-proofness also become equivalent to ours when applied to functions defined on intertwined domains, even if they are not equivalent in general. We also study the relationship between our domain restrictions and others that appear in the literature, proving that we are indeed introducing a novel proposal.
    Keywords: strategy-proofness, reshuffling invariance, monotonicity, intertwined domains
    JEL: D71
    Date: 2011–12
  23. By: Jose Apesteguia; Miguel A. Ballester
    Abstract: There is evidence showing that individual behavior often deviates from the classical principle of maximization. This evidence raises at least two important questions: (i) how severe the deviations are and (ii) which method is the best for extracting relevant information from choice behavior for the purposes of welfare analysis. In this paper we address these two questions by identifying from a foundational analysis a new measure of the rationality of individuals that enables the analysis of individual welfare in potentially inconsistent subjects, all based on standard revealed preference data. We call such measure minimal index.
    Keywords: Rationality; Individual Welfare; Revealed Preference
    JEL: D01 D60
    Date: 2011–09

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