nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒07‒14
twenty-one papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Self-Rewards and Personal Motivation By Alexander K. Koch,; Julia Nafziger; Anton Suvorov; Jeroen van de Ven
  2. Dynamics of Inductive Inference in a Unified Framework By Itzhak Gilboa; Larry Samuelson; David Schmeidler
  3. Subjectivity in Inductive Inference By Itzhak Gilboa; Larry Samuelson
  4. Analogies and Theories: The Role of Simplicity and the Emergence of Norms By Gabrielle Gayer; Itzhak Gilboa
  5. Incomplete Contracts and Firm Boundaries: New Directions By Dessein, Wouter
  6. On Sharing the Benefits of Communication By Efthymios Athanasiou; Santanu Dey; Giacomo Valleta
  7. Networks in Economics By Zenou, Yves
  8. Players Indifferent to Cooperate and Characterizations of the Shapley Value By Conrado Manuel; Enrique Gonzalez-Aranguena; Rene van den Brink|
  9. A Unified Approach to Equilibrium Existence in Discontinuous Strategic Games. By Philippe Bich; Rida Laraki
  10. Assigning agents to a line By Hougaard, Jens Leth; Moreno-Ternero, Juan D.; Østerdal, Lars Peter
  11. Winning Losers in the Italian Football League “Auction” for Co-Ownership Resolution By Nicola Dimitri
  12. Intermediation in Networks By Jan-Peter Siedlarek
  13. Decidability and manipulability in social choice By Gennaro Amendola; Luigi Marengo; Simona Settepanella
  14. A Top Dog Tale with Preference Rigidities By E. Randon; P. Simmons
  15. Open-Loop Nash Equilibria in the Non-cooperative Infinite-planning Horizon LQ Game By Engwerda, J.C.
  16. No-regret Dynamics and Fictitious Play By Yannick Viossat; Andriy Zapechelnyuk
  17. Monge assignment games By F. Javier Martinez de Albeniz; Carles Rafels
  18. Procurement with Unenforceable Contract Time and the Law of Liquidated Damages By Cesare Dosi; Michele Moretto
  19. Decidability in complex social choices By Luigi Marengo; Davide Pirino; Simona Settepanella; Akimichi Takemura
  20. A theory of search with deadlines and uncertain recall By S. Nuray Akin; Brennan Platt
  21. Bargaining, vertical mergers and entry By Sapi, Geza

  1. By: Alexander K. Koch, (Department of Economics and Business, Aarhus University, Denmark); Julia Nafziger (Department of Economics and Business, Aarhus University, Denmark); Anton Suvorov (CEFIR and New Economic School); Jeroen van de Ven (University of Amsterdam and Tinbergen Institute)
    Abstract: Self-administered rewards are ubiquitous. They serve as incentives for personal accomplishments and are widely recommended to increase personal motivation. We show that in a model with time-inconsistent and reference-dependent preferences, self-rewards can be a credible and effective tool to overcome self-control problems. We also characterize the type of self-rewards that can be used, such as vice goods and virtue goods, and analyze which types of goods will be preferred by the individual.
    Keywords: Quasi-hyperbolic discounting, reference-dependent preferences, loss aversion, self-control, self-rewards, goals
    JEL: D03 D81 D91
    Date: 2012–07–04
  2. By: Itzhak Gilboa (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959, Tel-Aviv University - Tel-Aviv University, Cowles Foundation for Research in Economics - Université Yale - New Haven); Larry Samuelson (Department of Economics - Yale University); David Schmeidler (Department of Cell and Developmental Biology - Tel Aviv University - Sackler Faculty of Medicine, The Ohio State University - The Ohio State University)
    Abstract: We present a model of inductive inference that includes, as special cases, Bayesian reasoning, case-based reasoning, and rulebased reasoning. This uni ed framework allows us to examine how the various modes of inductive inference can be combined and how their relative weights change endogenously. For example, we establish conditions under which an agent who does not know the structure of the data generating process will decrease, over the course of her reasoning, the weight of credence put on Bayesian vs. non-Bayesian reasoning. We illustrate circumstances under which probabilistic models are used until an unexpected outcome occurs, whereupon the agent resorts to more basic reasoning techniques, such as case-based and rule-based reasoning, until enough data are gathered to formulate a new probabilistic model.
    Keywords: dynamics, inductive inference, uni ed framework
    Date: 2012–06–28
  3. By: Itzhak Gilboa (Tel Aviv University - Tel Aviv University, GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959); Larry Samuelson (Department of Economics - Yale University)
    Abstract: This paper examines circumstances under which subjectivity enhances the effectiveness of inductive reasoning. We consider a game in which Fate chooses a data generating process and agents are characterized by inference rules that may be purely objective (or data-based) or may incorporate subjective considerations. The basic intuition is that agents who invoke no subjective considerations are doomed to "overfit" the data and therefore engage in ineffective learning. The analysis places no computational or memory limitations on the agents -- the role for subjectivity emerges in the presence of unlimited reasoning powers.
    Keywords: induction; simplicity; Bayesian learning; prediction
    Date: 2012–05
  4. By: Gabrielle Gayer (Department of Economics [Israël] - Bar-Ilan University); Itzhak Gilboa (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959, Tel-Aviv University - Tel-Aviv University)
    Abstract: We consider the dynamics of reasoning by general rules (theories) and specific cases (analogies). When an agent faces an exogenous process, we show that, under mild conditions, if reality happens to be simple, the agent will converge to adopt a theory and discard analogical thinking. If, however, reality is complex, the agent may rely on analogies more than on theories. By contrast, when the process is generated by agents' predictions, convergence to a theory is much more likely, as in the emergence of norms in a coordination game. Mixed cases, involving noisy endogenous processes are likely to give rise to complex dynamics of reasoning, switching between theories and analogies.
    Keywords: analogies, theories, simplicity, norms
    Date: 2012–06–28
  5. By: Dessein, Wouter
    Abstract: The seminal work by Grossman and Hart (1986) made the study of firm boundaries susceptible to formal economic analysis, and illuminated an important role for markets in providing incentives. In this essay, I discuss some new directions that the literature has taken since. As a central challenge, I identify the need to provide a formal theory of the firm in which managerial direction and bureaucratic decision-making play a key role. Merging a number of existing incomplete contracting models, I propose two approaches with very different contracting assumptions. As in transaction cost economics, a central element in those theories is the presence of a central office who directs and coordinates the actions of subordinates. More novel, I highlight the superior ability of non-integrated firms to adapt to a changing environment.
    Keywords: Adaptation; Coordination; Firm Boundaries; Incomplete contracts; Managerial direction
    JEL: D23 D83 L23
    Date: 2012–06
  6. By: Efthymios Athanasiou (Dep. of Philosophy, CMU); Santanu Dey (ISYE, Georgia Tech); Giacomo Valleta (Dep. of Economics, Maastricht)
    Abstract: We put forward a model of private goods with externalities. Agents derive benefit from communicating with each other. In order to communicate they need to have a language in common. Learning languages is costly. In this setting no individually rational and feasible Groves mechanism exists. We characterize the best-in-class feasible Groves mechanism and the best-in-class individually rational Groves mechanism.
    Keywords: Groves Mechanisms, Externality, Budget Surplus or Deficit, Pareto Undominated Mechanisms
    JEL: D70 D62 C60
    Date: 2012–05
  7. By: Zenou, Yves
    Abstract: We provide an overview on networks in economics. We first look at the theoretical aspects of network economics using a game-theoretical approach. We derive some results on games on networks and network formation. We also study what happens when agents choose both links and actions. We then examine how these models can be used to address some applied and empirical-relevant questions by mainly focusing on labor-market networks and crime networks. We provide some empirical evidence on these two types of networks and address some policy implications of the models.
    Keywords: criminal networks; games on networks; labor networks; network formation; Social networks
    JEL: A14 C72 D85
    Date: 2012–06
  8. By: Conrado Manuel (Universidad Complutense de Madrid); Enrique Gonzalez-Aranguena (Universidad Complutense de Madrid); Rene van den Brink| (VU University Amsterdam)
    Abstract: In this paper we provide new axiomatizations of the Shapley value for TU-games using axioms that are based on relational aspects in the interactions among players. Some of these relational aspects, in particular the economic or social interest of each player in cooperating with each other, can be found embedded in the characteristic function. We define a particular relation among the players that it is based on mutual indifference. The first new axiom expresses that the payoffs of two players who are not indifferent to each other are affected in the same way if they become enemies and do not cooperate with each other anymore. The second new axiom expresses that the payoff of a player is not affected if players to whom it is indifferent leave the game. We show that the Shapley value is characterized by these two axioms together with the well-known efficiency axiom. Further, we show that another axiomatization of the Shapley value is obtained if we replace t he second axiom and efficiency by the axiom which applies the efficiency condition to every class of indifferent players. Finally, we extend the previous results to the case of weighted Shapley values.
    Keywords: TU-game; Shapley value; axiomatization; indifferent players; weighted Shapley values
    JEL: C71
    Date: 2012–04–11
  9. By: Philippe Bich (Centre d'Economie de la Sorbonne - Paris School of Economics); Rida Laraki (Ecole Polytechnique - Economics Department et IMJ - Equipe Combinatoire et Optimisation)
    Abstract: Several relaxations of Nash equilibrium are shown to exist in strategic games with discontinuous payoff functions. Those relaxations are used to extend and unify several recent results and link Reny's better-reply security condition [Reny, P.J. (1999). On the existence of Pure and Mixed Strategy Nash Equilibria in Discontinuous Games] to Simon-Zame's endogenous tie-breaking rules [Simon, L.K. and Zame, W.R. (1990). Discontinuous Games and Endogenous Sharing Rules].
    Keywords: Discontinuous games, Nash equilibrium, Reny equilibrium, better-reply security, endogenous sharing rule, quasi equilibrium, finite deviation equilibrium, symmetric games.
    JEL: C02 C62 C72
    Date: 2012–06
  10. By: Hougaard, Jens Leth (University of Copenhagen); Moreno-Ternero, Juan D. (Universidad Pablo de Olavide, and CORE, Univeristé catholique de Louvain); Østerdal, Lars Peter (Department of Business and Economics)
    Abstract: We consider the problem of assigning agents to a facility, represented by slots on a line, where only one agent can be served at a time. There is a finite number of agents, and each one wants to be served as close as possible to his preferred slot. We first consider deterministic assignment of agents to slots. We characterize (Pareto) efficiency in such setting and provide an algorithm for testing if a given deterministic assignment is efficient. We also characterize utilitarianism (minimization of the total gap between preferred and assigned slots) and provide a quick algorithm for testing if a given deterministic assignment is utilitarian. We then consider probabilistic assignment of agents to slots. In such framework, we characterize, making use of the previous algorithms, a method which is ordinally efficient and utilitarian.
    Keywords: Random assignment; ordinal efficiency; ex post efficiency; congested facility; utilitarianism
    JEL: C78 D61 D63
    Date: 2012–07–01
  11. By: Nicola Dimitri (Department of Economics and Statistics, University of Sienna, and Research Fellow, Maastricht School of Management)
    Abstract: In the Italian Football League rights to a player’s performance could be co-owned by two clubs for one year. Co-ownership must then be resolved and if the clubs fail finding an agreement they are asked by the League to participate to an auction, where each of them submits a price offer for the missing half of the rights. The player offering the highest price obtains the missing half of the rights paying that price to the opponent. In the paper we characterize the auction equilibrium structure with both complete and incomplete information. Due to its features, a main finding in such auction is that “losers” can obtain a higher payoff than “winners”, and in this sense be the real winners. Then, by considering the auction as a more general mechanism for co-ownership resolution, we extend the model to any finite number of players and argue how some of the results with two players do not necessarily generalize. In particular, while with two players the equilibrium expected payoffs can never be negative this may not be so with a higher number of players. Finally, also with incomplete information the symmetric bidding equilibrium function with any finite number of players is in the “winning losers” spirit. Indeed, bids range between one’s value and twice of it, and increase with the number of players since it becomes more likely that some opponent will have a higher value.
    Date: 2012–07
  12. By: Jan-Peter Siedlarek (Department of Economics, European University Institute)
    Abstract: This paper studies bargaining and exchange in a networked market with intermediation. Possibilities to trade are restricted through a network of existing relationships and traders bargain over the division of available gains from trade along different feasible routes. Using a stochastic model of bargaining, I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the relationship between network structure and payoffs. In equilibrium, trade is never unduly delayed but it may take place too early and in states where delay would be efficient. The inefficiency arises from a hold-up threat and the inability of bargaining parties credibly to commit to a split in a future period. The model also shows how with competing trade routes as trade frictions go to zero agents that are not essential to a trade opportunity receive a payoff of zero.
    Keywords: Stochastic Games, Bargaining, Random Matching, Middlemen, Network
    JEL: C73 C78 L14
    Date: 2012–05
  13. By: Gennaro Amendola; Luigi Marengo; Simona Settepanella
    Abstract: We present a geometric model of social choice when the latter takes place among bundles of interdependent elements, that we will call objects. We show that the outcome of the social choice process is highly dependent on the way these bundles are formed. By bundling and unbundling the same set of constituent elements an authority enjoys a vast power of determining the social outcome, as locally or globally stable social optima can be created or eliminated. At the same time, by bundling and unbundling elements, it is also possible to greatly increase or decrease decidability both because the likelihood of intransitive cycles varies and because the time required to reach a social optimum varies. In this paper we present a rigorous framework which allow us to study this trade-off between decidability and manipulability.
    Keywords: Social choice, agenda, object construction, hyperplane arrangement, directed graphs, algorithm
    Date: 2012–07–03
  14. By: E. Randon; P. Simmons
    Abstract: With preference rigidities we find Pareto optima of an exchange economy, some of which involve unconsumed endowments. We show that such Pareto Optima can only be attained as market equilibria if there is a top dog in the initial endowment distribution who is richer than the other individuals. The most inegalitarian efficient allocation favouring the top dog is globally stable and is in the core. For endowment distributions with a top dog, the core contains efficient allocations more equal than the market equilibrium. A voting mechanism or government policy can also offset the top dog’s power.
    JEL: D50 D61
    Date: 2012–07
  15. By: Engwerda, J.C. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: In this note we reconsider Nash equilibria for the linear quadratic differential game for an infinite planning horizon. We consider an open-loop information structure. In the standard literature this problem is solved under the assumption that every player can stabilize the system on his own. In this note we relax this assumption and provide both necessary and sufficient conditions for existence of Nash equilibria for this game under the assumption that the system as a whole is stabilizable.
    Keywords: linear-quadratic differential games;open-loop Nash equilibrium;solvability conditions;Riccati equations.
    JEL: C61 C72 C73
    Date: 2012
  16. By: Yannick Viossat (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Andriy Zapechelnyuk (QMUL - School of Economics and Finance - Queen Mary, University of London)
    Abstract: Potential based no-regret dynamics are shown to be related to fictitious play. This allows to give alternative and sometimes much shorter proofs of known results on convergence of no-regret dynamics to the set of Nash equilibria.
    Keywords: Regret minimization; no-regret strategy; fictitious play; best reply dynamics; Nash equilibrium; Hannan set; curb set
    Date: 2012–07–02
  17. By: F. Javier Martinez de Albeniz; Carles Rafels (Universitat de Barcelona)
    Abstract: An assignment game is defined by a matrix A, where each row represents a buyer and each column a seller. If buyer i is matched with seller j, the market produces aij units of utility. We study Monge assignment games, that is bilateral cooperative assignment games where the assignment matrix satisfies the Monge property. These matrices can be characterized by the fact that in any submatrix of 2 2 an optimal matching is placed in its main diagonal. For square markets, we describe their cores by using only the central tridiagonal band of the elements of the matrix. We obtain a closed formula for the buyers-optimal and the sellers-optimal core allocations. Non- square markets are analyzed also by reducing them to appropriate square matrices.
    Keywords: core, sellers-optimal core allocation, assignment game, buyers-optimal core allocation, monge matrix
    JEL: C71
    Date: 2012
  18. By: Cesare Dosi (Department of Economics and Management, University of Padova); Michele Moretto (Department of Economics and Management, University of Padova, Centro Studi Levi Cases, Fondazione Eni Enrico Mattei)
    Abstract: Time overruns are common in public works and are not confined to inherently complex tasks. One explanation advanced in this paper is that bidders can undergo unpredictable changes in production costs which generate an option value of waiting. By exploiting the real-option approach, we examine how the inability to force sellers to meet the contract time influences their bidding behaviour, and how this can ultimately affect the parties’ expected payoffs. Further, we examine the outcome of the bidding process when legal rules prevent the promisee from contracting for damage measures which would grant more than her lost expectation. We show that when the pre-agreed compensatory payments prove insufficient to discourage delayed orders, setting a liquidated damages clause would not lead to a Pareto superior outcome with respect to the no-damage-for delay condition. While such a clause would increase the seller’s expected payoff, the buyer’s expected payoff is lower than when the contract does not provide for any compensation for late-delivery.
    Keywords: Public Procurement, Fixed-Price Contracts, Cost Uncertainty, Time Overruns, Liquidated Damages, Real Options
    JEL: C61 D44 D86 K12
    Date: 2012–06
  19. By: Luigi Marengo; Davide Pirino; Simona Settepanella; Akimichi Takemura
    Abstract: Recently, Marengo and Settepanella (2010) introduced a model of social choice among bundles of interdependent elements. In this paper we prove that their voting model is highly decidable, i.e. a group of agents that agrees to use such voting process has an high probability to reach a final decision. We also better qualify the degree of manipulability of such a final decision, showing that it is independent not only from the agenda, but also from the initial condition. Therefore we show that the Marengo and Settepanella (2010) model has nice properties of decidability and can be fruitfully used both for normative and positive analyzes of collective choices among complex interdependent elements.
    Keywords: Social rule, object, optimum, probability, tournament m
    Date: 2012–07–05
  20. By: S. Nuray Akin (Department of Economics, University of Miami); Brennan Platt (Department of Economics, Brigham Young University)
    Abstract: We analyze an equilibrium search model where buyers seek to purchase a good before a deadline and face uncertainty regarding the availability of past price quotes in the future. Sellers cannot observe a potential buyer's remaining time until deadline nor his quote history, and hence post prices that weigh the probability of sale versus the profit once sold. The model's equilibrium can take one of three forms. In a late equilibrium, buyers initially forgo purchases, preferring to wait until the deadline. In an early equilibrium, any equilibrium offer is accepted as soon as it is received. In a full equilibrium, higher prices are turned down until near the deadline, while lower prices are immediately accepted. Equilibrium price and sales dynamics are determined by the time remaining until the deadline and the quote history of the consumer.
    Keywords: Equilibrium Search; Deadlines; Uncertain Recall; Price Posting; Reservation Prices
    JEL: D40 D83
    Date: 2012–01–12
  21. By: Sapi, Geza
    Abstract: This paper analyzes vertical integration incentives in a bilaterally duopolistic industry where upstream producers bargain with downstream retailers on terms of supply. In the applied framework integration does not affect the total output produced, but it affects the distribution of rents among players. Vertical integration incentives depend on the strength of substitutability or complementarity between products and the shape of the unit cost function. I demonstrate furthermore that in contrast to the widely prevailing view in competition policy, vertical integration can under particular circumstances convey more bargaining power to the merged entity than a horizontal merger to monopoly. The model is applied to analyze strategic merger incentives to influence entry decisions. Mergers can facilitate and deter entry. While horizontal mergers to deter entry are never profitable, firms on different market levels may strategically choose to integrate vertically to keep a potential entrant out of the market. I provide conditions for such entry-deterring vertical mergers to occur. --
    Keywords: Bargaining,Vertical Mergers,Entry
    JEL: L13 L22 L42
    Date: 2012

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