nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒05‒29
fourteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Recursive Ambiguity and Machina’s Examples By David Dillenberger; Uzi Segal
  2. Optimal insurance design of ambiguous risks By Gollier, Christian
  3. The bipolar Choquet integral representation By Greco, Salvatore; Rindone , Fabio
  4. Reputation for a Servant of Two Masters By Heski Bar-Isaac; Joyee Deb
  5. Expectational coordination failures and Market outcomes' volatility By Roger Guesnerie
  6. Full Disclosure in Decentralized Organizations By Jeanne Hagenbach; Frédéric Koessler
  7. Quantum Type Indeterminacy in Dynamic Decision-Making: Self-control Through Identity Management By Jérôme Busemeyer; Ariane Lambert-Mogiliansky
  8. Entropy and the value of information for investors By Antonio Cabrales; Olivier Gossner; Roberto Serrano
  9. Strategic loyalty reward in dynamic price Discrimination By Bernard Caillaud; Romain De Nijs
  10. Optimal nondiscriminatory auctions with favoritism By Federico Weinschelbaum; Leandro Arozamena; Nicolas Shunda
  11. Robustness of equilibrium price dispersion in finite market games By Breton, Régis; Gobillard, Bertrand
  12. Pricing and Signaling with Frictions By Alain Delacroix; Shouyong Shi
  13. Vertical Exclusion with Endogenous Competiton Externalities By Hansen, Stephen; Motta, Massimo
  14. Repeating voting with complete information By Kwiek, Maksymilian

  1. By: David Dillenberger (Department of Economics, University of Pennsylvania); Uzi Segal (Department of Economics, Boston College)
    Abstract: Machina (2009, 2012) lists a number of situations where standard models of ambiguity aversion are unable to capture plausible features of ambiguity attitudes. Most of these problems arise in choice over prospects involving three or more outcomes. We show that the recursive non-expected utility model of Segal (1987) is rich enough to accommodate all these situations.
    Keywords: Ambiguity, Ellsberg paradox, Choquet expected utility, recursive non-expected utility
    JEL: D81
    Date: 2012–05–20
  2. By: Gollier, Christian
    Abstract: We examine the characteristics of the optimal insurance contract under linear transaction cost and an ambiguous distribution of losses. Under the standard expected utility model, we know from Arrow (1965) that it contains a straight deductible. In this paper, we assume that the policyholder is ambiguity-averse in the sense of Klibanoff, Marinacci and Mukerji (2005). The optimal contract depends upon the structure of the ambiguity. For example, if the set of possible priors can be ranked according to the monotone likelihood ratio order, the optimal contract contains a disappearing deductible. We also show that the policyholder’s ambiguity aversion can reduce the optimal insurance coverage.
    Keywords: Deductible, risk-sharing, ambiguity, monotone likelihood ratio order
    JEL: D81 G22
    Date: 2012–05
  3. By: Greco, Salvatore; Rindone , Fabio
    Abstract: Cumulative Prospect Theory of Tversky and Kahneman (1992) is the modern version of Prospect Theory (Kahneman and Tversky (1979)) and is nowadays considered a valid alternative to the classical Expected Utility Theory. Cumulative Prospect theory implies Gain-Loss Separability, i.e. the separate evaluation of losses and gains within a mixed gamble. Recently, some authors have questioned this assumption of the theory, proposing new paradoxes where the Gain-Loss Separability is violated. We present a generalization of Cumulative Prospect Theory which does not imply Gain-Loss Separability and is able to explain the cited paradoxes. On the other hand, the new model, which we call the bipolar Cumulative Prospect Theory, genuinely generalizes the original Prospect Theory of Kahneman and Tversky (1979), preserving the main features of the theory. We present also a characterization of the bipolar Choquet Integral with respect to a bi-capacity in a discrete setting.
    Keywords: Cumulative Prospect Theory; Gains-Loss Separability; bi- Weighting Function; Bipolar Choquet Integral
    JEL: D81 C60
    Date: 2011–08
  4. By: Heski Bar-Isaac; Joyee Deb
    Date: 2012
  5. By: Roger Guesnerie (CDF - Collège de France - Collège de France, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: The first part of this text reviews the standard economic viewpoint on expectational coordination, a viewpoint that the recent events have challenged. The second part reviews different existing directions assessments of the rational expectations hypothesis that have been made to-date. The third part shows how such a critical assessment, along the lines of the so-called "eductive" learning approach, radically modifies our view of three key problems : the economic role of speculation, the informational efficiency of markets and, last but not least, the ability of agents with long horizon to anticipate the future. The fourth part stresses what has been achieved so far well as the future challenges of the approaches advocated in this paper.
    Keywords: expectational coordination ; rational expectations hypothesis
    Date: 2011–06
  6. By: Jeanne Hagenbach (Ecole Polytechnique - Ecole Polytechnique); Frédéric Koessler (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We characterize sufficient conditions for full and decentralized disclosure of hard information in organizations with asymmetrically informed and self interested agents with quadratic loss functions. Incentive conflicts arise because agents have different (and possibly interdependent) ideal actions and different incentives to coordinate with each others. A fully revealing sequential equilibrium exists in the disclosure game if each player's ideal action is monotonic in types and types are independently distributed, but may fail to exist with non-monotonic ideal actions or correlated types. When biases between players' ideal actions are constant across states, complete information is the Pareto dominant information structure. In that case, there is a fully revealing sequential equilibrium in which informational incentive constraints are satisfied ex-post, so it exists for all possible prior beliefs, even when players' types are correlated. This existence result applies whether information disclosure is private or public, and is extended to partial certifiability of information.
    Keywords: Certifiable types ; Coordination ; Information disclosure ; Multi-divisional organizations
    Date: 2011–12
  7. By: Jérôme Busemeyer (Indiana University - Indiana University); Ariane Lambert-Mogiliansky (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: The Type Indeterminacy model is a theoretical framework that uses some elements of quantum formalism to model the constructive preference perspective suggested by Kahneman and Tversky. In a dynamic decision context type indeterminacy induces a game with multiple selves associated with a state transition process. We define a Markov perfect equilibrium among the selves with individual identity (preferences) as the state variable. The approach allows to characterize generic personality types and derive some comparative static results.
    Keywords: Indeterminacy ; Decision-making ; Self-control ; Identity
    Date: 2012–04
  8. By: Antonio Cabrales (Departamento de Economía - Universidad Carlos III de Madrid); Olivier Gossner (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, LSE - London School of Economics and Political Science - LSE); Roberto Serrano (Department of Economics - Brown University, IMDEA - Madrid Institute for Advanced Studies - Universidad Politécnica de Madrid)
    Abstract: Consider any investor who fears ruin when facing any set of investments that satisfy no-arbitrage. Before investing, he can purchase information about the state of nature in the form of an information structure. Given his prior, information structure $\alpha$ is more informative than information structure $\beta$ if, whenever he is willing to buy $\beta$ at some price, he is also willing to buy $\alpha$ at that price. We show that this informativeness ordering is complete and is represented by the decrease in entropy of his beliefs, regardless of his preferences, initial wealth, or investment problem. We also show that no prior-independent informativeness ordering based on similar premises exists.
    Keywords: Informativeness ; Information structures ; Entropy ; Decision under uncertainty ; Investment ; Blackwell ordering
    Date: 2011–12
  9. By: Bernard Caillaud (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA); Romain De Nijs (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: This paper proposes a dynamic model of duopolistic competition under behaviorbased price discrimination with the following property: in equilibrium, a firm may reward its previous customers although long term contracts are not enforceable. A firm can offer a lower price to its previous customers than to its new customers as a strategic means to hamper its rival to gather precise information on the young generation of customers for subsequent profitable behavior-based pricing. The result holds both with myopic and forward-looking, impatient enough consumers.
    Keywords: Price discrimination ; Dynamic pricing ; Loyalty reward
    Date: 2011–09
  10. By: Federico Weinschelbaum (Department of Economics, Universidad de San Andres & CONICET); Leandro Arozamena (Department of Economics, UTDT & CONICET); Nicolas Shunda (University of Redlands)
    Abstract: In many auction settings, there is favoritism: the seller's welfare depends positively on the utility of a subset of potential bidders. However, laws or regulations may not allow the seller to discriminate among bidders. We find the optimal nondiscriminatory auction in a private value, single-unit model under favoritism. At the optimal auction there is a reserve price, or an entry fee, which is decreasing in the proportion of preferred bidders and in the intensity of the preference. Otherwise, the highest-valuation bidder wins. We show that, at least under some conditions, imposing a no-discrimination constraint raises expected seller revenue.
    Keywords: auctions,favoritism,nondiscriminatorymechanisms
    JEL: C72 D44
    Date: 2012–03
  11. By: Breton, Régis; Gobillard, Bertrand
    Abstract: We propose an approach to restricting the set of equilibria in a market game and use it to assess the robustness of the price dispersion results obtained by Koutsougeras [2003, J. Econ. Theory 108, 169–175] in the multiple trading posts setup. More precisely, we perturb the initial game by the introduction of transaction costs and our main results are the following. (i) No equilibrium with price dispersion of the game with costless transactions can be approached by equilibria with positive transaction costs as costs get arbitrarily small. (ii) When this type of perturbation is considered the set of equilibrium outcomes is not affected by the number of trading posts. In addition, the analysis hints at conditions required for non-zero transaction costs to serve as a source of price dispersion in this class of exchange economies.
    Keywords: Strategic market games, law of one price, perturbed games, equilibrium refinement.
    JEL: C72 D43 D50
    Date: 2011–08
  12. By: Alain Delacroix; Shouyong Shi
    Abstract: We study a large market with directed search and signaling. Each seller chooses an investment that determines the quality of the good which is the seller's private information. A seller also chooses the price of the good and the number of selling sites. After observing sellers' choices of prices and sites, but not quality, buyers choose which price to search. The sites posting the same price and the buyers searching for that price match with each other randomly. In this environment, a seller's choices of prices and sites can direct buyers' search decisions and signal quality ex-ante. After matching, a buyer also receives an imperfectly informative signal about the quality of the good and decides whether to trade at the posted price. When the latter signal received is sufficiently accurate, we prove that there is a unique equilibrium. Moreover, when the quality differential is large, the equilibrium (under private information) implements the socially efficient allocation under public information. When the quality differential is small, the equilibrium is inefficient in the quality of goods produced or/and the number of sites created. This inefficiency is caused by a conflict between the search-directing role and the signaling role of a posted price. We also compare the price-posting equilibrium with the equilibrium under bargaining. The bargaining equilibrium features efficient quality, but inefficient entry. It is superior to the price-posting equilibrium when a seller's bargaining power is intermediate and the quality differential is small.
    Keywords: Directed search; Search, Signaling; Pricing; Efficiency
    JEL: D8 C78 E24
    Date: 2012–05–18
  13. By: Hansen, Stephen; Motta, Massimo
    Abstract: In a vertical market in which downstream firms have private information about their productivity and compete for consumers, an upstream firm posts public bilateral contracts. When downstream firms are risk-neutral without wealth constraints, the upstream firm offers the input to all retailers. When they are sufficiently risk averse it sells to one, thereby eliminating externalities among downstream firms that necessitate the payment of risk premia. By similar reasoning exclusion is also optimal with downstream wealth constraints. Thus exclusion arises when contracts are fully observable and downstream firms are ex ante symmetric. The result is robust to a number of extensions.
    Keywords: Adverse selection; Exclusive contracts; Limited liability; Risk
    JEL: D82 L22 L42
    Date: 2012–05
  14. By: Kwiek, Maksymilian
    Abstract: A committee is choosing from two alternatives. If required supermajority is not reached, voting is repeated indefinitely, although there is a cost of delay. Under suitable assumptions the equilibrium analysis provides a sharp prediction. The result can be interpreted as a generalization of the seminal median voter theorem known from the simple majority case. If supermajority is required instead, then the power to select the outcome moves from the median voter to the more extreme voters. Normative analysis indicates that the simple majority is not constrained efficient because it does not reflect the strengths of voters' opinion. Even if unanimity is a bad voting rule, voting rules close to unanimity may be efficient. The more likely it is to have a very many almost indifferent voters and some very opinionated ones, the more stringent supermajority is required for efficiency
    Date: 2012–01–01

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