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on Microeconomics |
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Issue of 2012‒07‒08
twelve papers chosen by Jing-Yuan Chiou IMT Lucca Institute for Advanced Studies |
| By: | Xavier Freixas; Jean-Charles Rochet |
| Abstract: | We model a Systemically Important Financial Institution (SIFI) that is too big (or too interconnected) to fail. Without credible regulation and strong supervision, the shareholders of this institution might deliberately let its managers take excessive risk. We propose a solution to this problem, showing how insurance against systemic shocks can be provided without generating moral hazard. The solution involves levying a systemic tax needed to cover the costs of future crises and more importantly establishing a Systemic Risk Authority endowed with special resolution powers, including the control of bankers' compensation packages during crisis periods. |
| Keywords: | SIFI, dynamic moral hazard, risk taking |
| JEL: | G21 G32 G34 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1328&r=mic |
| By: | Markus Kinateder (Dpto. Economía); Hubert Janos Kiss (Universidad Autónoma de Madrid) |
| Abstract: | We study the Diamond-Dybvig model of financial intermediation (JPE, 1983) under theassumption that depositors have information about previous decisions. Depositors decidesequentially whether to withdraw their funds or continue holding them in the bank. If depositorsobserve the history of all previous decisions, we show that there are no bank runs in equilibriumindependently of whether the realized type vector selected by nature is of perfect or imperfectinformation.JEL classification numbers: |
| Keywords: | Bank Run, Imperfect Information, Perfect Bayesian Equilibrium |
| JEL: | C72 D82 G21 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2012-16&r=mic |
| By: | Matthias Lang (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | Should principals explain and justify their evaluations? In this paper the principal's evaluation is private information, but she can provide some justifications by sending a costly message. Indeed, it is optimal for the principal to explain her evaluation to the agent if and only if the evaluation turns out to be bad. The justification guarantees the agent that the principal has not distorted the evaluation downwards. On the equilibrium path, as long as the principal provides a justification, the wage increases in the performance of the agent. For good performances, however, the principal pays a given high wage without providing justifications. This wage pattern fits empirical observations that subjective evaluations are lenient and discriminate poorly between good performances. I show that this pattern is part of the optimal contract instead of biased behavior. Furthermore, it is possible to implement the optimal contract in an ex-post budget-balanced way if stochastic contracts are feasible. |
| Keywords: | disclosure, Communication, Subjective evaluation, Stochastic contracts, Message games, Centrality bias |
| JEL: | D82 D86 M52 J41 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2012_14&r=mic |
| By: | Andersson, Tommy (Department of Economics, Lund University); Erlanson, Albin (Department of Economics, Lund University) |
| Abstract: | Assuming that bidders wish to acquire at most one item, this paper defines a polynomial time multi-item auction that locates the VCG prices in a finite number of iterations for any given starting prices. This auction is called the Vickrey-English-Dutch auction and it contains the Vickrey-English auction (J.K. Sankaran, Math. Soc. Sci. 28:143-150, 1994) and the Vickrey-Dutch auction (D. Mishra and D. Parkes, Games Econ. Behav. 66:326-347, 2009) as special cases. Several properties of this iterative auction are provided. It is, for example, demonstrated that the number of iterations from the starting prices to the VCG prices can be calculated using a measure based on the Chebyshev metric. By means of numerical experiments, it is showed that when the auctioneer knows the bidders' value distributions, the Vickrey-English-Dutch auction is weakly faster than the Vickrey-English auction and the Vickrey-Dutch auction in 89 percent and 99 percent, respectively, of the investigated problems. |
| Keywords: | Polynomial time algorithms; Multi-item auctions; Unit-demand bidders; Iterations |
| JEL: | C71 C78 D63 D71 D78 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2012_017&r=mic |
| By: | Yehuda (John) Levy |
| Abstract: | We present a discounted stochastic game with a continuum of states, finitely many players and actions, such that although all transitions are absolutely continuous w.r.t. a fixed measure, it possesses no stationary equilibria. This absolute continuity condition has been assumed in many equilibrium existence results, and the game presented here complements a recent example of ours of a game with no stationary equilibria but which possess deterministic transitions. We also show that if one allows for compact action spaces, even games with state-independent transitions need not possess stationary equilibria. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp612&r=mic |
| By: | Rafael Hortala-Vallve (Government Department, London School of Economics); Aniol Llorente-Saguer (Max Planck Institute for Research on Collective Goods, Bonn); Rosemarie Nagel (Universitat Pompeu Fabra, ICREA) |
| Abstract: | We analyze a bargaining protocol recently proposed in the literature vis-à-vis unconstrained negotiation. This new mechanism extracts “gains from trade” inherent in the differing valuation of two parties towards various issues where conflict exists. We assess the role of incomplete vs. complete information in the efficiency achieved by this new mechanism and by unconstrained negotiation. We find that unconstrained negotiation does best under a situation of complete information where the valuations of both bargaining parties are common knowledge. Instead, the newly proposed mechanism does best in a situation with incomplete information. The sources of inefficiencies in each of the two cases arise from the different strategic use of the available information. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2012_12&r=mic |
| By: | Laure ATHIAS; Raphael SOUBEYRAN |
| Abstract: | This article investigates the allocation of demand risk within an incomplete contract frame- work. We consider an incomplete contractual relationship between a public authority and a private provider (i.e. a public-private partnership), in which the latter invests in non-verifiable cost-reducing efforts and the former invests in non-verifiable adaptation efforts to respond to changing consumer demand over time. We show that the party that bears the demand risk has fewer hold-up opportunities and that this leads the other contracting party to make more effort. Thus, in our model, bearing less risk can lead to more effort, which we describe as a new example of ‘counter-incentives’. We further show that when the benefits of adaptation are important, it is socially preferable to design a contract in which the demand risk remains with the private provider, whereas when the benefits of cost-reducing efforts are important, it is socially preferable to place the demand risk on the public authority. We then apply these results to explain two well-known case studies. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:12-20&r=mic |
| By: | Juan-Pablo Montero; Esperanza Johnson |
| Abstract: | We study the static and dynamic implications of non-linear pricing schemes (i.e., bundling) for otherwise unrelated products but for multimarket contact. Bundling is always present in competition but unlikely in a cartel agreement. Although it brings extra profits to the cartel –sometimes charging a premium rather than a discount for the bundle–, bundling makes deviation from the agreement far more attractive. Depending on the correlation of consumers’ preferences, this deviation effect is either reinforced with milder punishments (for positive correlations) or partially offset with harsher punishments (for negative correlations). The deviation effect is so strong that it even dominates a zero-profit (pure-bundling) punishment. |
| Keywords: | multimarket contact, conglomerate merger, bundling, collusion |
| JEL: | L13 L41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:420&r=mic |
| By: | Bruno Bouchard; Ludovic Moreau; Marcel Nutz |
| Abstract: | We study a stochastic game where one player tries to find a strategy such that the state process reaches a target of controlled-loss-type, no matter which action is chosen by the other player. We provide, in a general setup, a relaxed geometric dynamic programming for this problem and derive, for the case of a controlled SDE, the corresponding dynamic programming equation in the sense of viscosity solutions. As an example, we consider a problem of partial hedging under Knightian uncertainty. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1206.6325&r=mic |
| By: | Erhan Bayraktar; Virginia R. Young |
| Abstract: | In this note, we explicitly solve the problem of maximizing utility of consumption (until the minimum of bankruptcy and the time of death) with a constraint on the probability of lifetime ruin, which can be interpreted as a risk measure on the whole path of the wealth process. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1206.6268&r=mic |
| By: | David Aadland; Sherrill Shaffer |
| Abstract: | Economists have generally ignored the notion that perceived time may differ from clock time. Borrowing from the behavioral psychology literature, we investigate the case of time compression whereby perceived time passes more quickly than actual time. A framework is presented to embed time compression in economic models. We then apply the principle to a standard lifecycle permanent income model with endogenous labor. Time compression provides an alternative explanation of why older individuals, even those without declining labor productivity, may choose to reduce their work effort. |
| JEL: | D03 D91 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-28&r=mic |
| By: | Shurojit Chatterji (School of Economics, Singapore Management University); Arunava Sen (Indian Statistical Institute, New Delhi, India.); Huaxia Zeng (Singapore Management University, Singapore.) |
| Abstract: | A domain of preference orderings is a random dictatorship domain if every strategy- proof random social choice function satisfying unanimity dened on the domain, is a random dictatorship. Gibbard (1977) showed that the universal domain is a random dictatorship domain. We investigate the relationship between dictatorial and random dictatorship domains. We show that there exist dictatorial domains that are not ran- dom dictatorship domains. We provide stronger versions of the linked domain condition (introduced in Aswal et al. (2003)) that guarantee that a domain is a random dicta- torship domain. A key step in these arguments that is of independent interest, is a ramification result that shows that under certain assumptions, a domain that is a ran- dom dictatorship domain for two voters is also a random dictatorship domain for an arbitrary number of voters. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:27-2012&r=mic |