nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒08‒23
29 papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Reference points in renegotiations: The role of contracts and competition By Björn Bartling; Klaus M. Schmidt
  2. On the Merits of Meritocracy By John Morgan; Dana Sisak; Felix Vardy
  3. Competition for a Majority By Barelli, Paulo; Govindan, Srihari; Wilson, Robert
  4. A Game with No Bayesian Approximate Equilibria By Ziv Hellman
  5. Extending the Nash solution to choice problems with reference points By Sudhölter, Peter; Zarzuelo, José M.
  6. Optimal mechanism design for the private supply of a public good By Csapó Gergely; Müller Rudolf
  7. An Efficient Double-Track Auction for Substitutes and Complements By Ning Sun and Zaifu Yang
  8. Implementation without Incentive Compatibility: Two Stories with Partially Informed Planners By Makoto Shimoji and Paul Schweinzer
  9. An Approximate Dual-Self Model and Paradoxes of Choice under Risk By Drew Fudenberg; David K. Levine; Zacharias Maniadis
  10. Endogenous Entry in Markets with Unobserved Quality By Anthony Creane; Thomas D. Jeitschko
  11. The Conflict Between General Equilibrium and the Marshallian Cross By Ismail Saglam; Asad Zaman
  12. Social Relations and Relational Incentives By Robert Dur; Jan Tichem
  13. Confirming Information Flows in Networks By Pascal Billand; Christophe Bravard; Jurjen Kamphorst; Sudipta Sarangi
  14. Strategy-proofness and Efficiency with Nonquasi-linear Preferences: A Characterization of Minimum Price Walrasian Rule By Shuhei Morimoto; Shigehiro Serizawa
  15. Competition between Multiproduct Firms with Heterogeneous Costs By Roberto Roson
  16. Orchestrating Contests with Heterogeneous Participants By Stracke, Rudi
  17. The marginal utility of money: A modern Marshallian approach to consumer choice By Friedman, Daniel; Sákovics, József
  18. A Concessions-Based Mechanism for Meta-Bargaining Problems By Marco-Gil, Maria del Carmen; Peris, Josep E.; Subiza, Begoña
  19. Codes of Conduct, Private Information and Repeated Games By Juan I Block; David K Levine
  20. Level-k Reasoning and Incentives By Larbi Alaoui; Antonio Penta
  21. Aggregation of Scale Efficiency By Valentin Zelenyuk
  22. Exponential Discounting Bias By Orlando Gomes; Alexandra Ferreira-Lopes; Tiago Neves Sequeira
  23. Share Functions for Cooperative Games with Levels Structure of Cooperation By Mikel Alvarez-Mozos; Rene van den Brink; Gerard van der Laan; Oriol Tejada
  24. The Intrinsic Comparative Dynamics of Locally Differentiable Feedback Nash Equilibria of Autonomous and Exponentially Discounted Infinite Horizon Differential Games By Micahel Caputo; Chen Ling
  25. Bounded Rationality and Limited Datasets By Geoffroy de Clippel; Kareen Rozen
  26. Cycles of Distrust: An Economic Model By Daron Acemoglu; Alexander Wolitzky
  27. Structural Homophily By Vincent Boucher
  28. Ambiguous Life Expectancy and the Demand for Annuities. By Hippolyte d'Albis; Emmanuel Thibault
  29. A New Stationary Game Equilibrium Induced by Stochastic Group Evolution and Rational Individual Choice By Dai, Darong; Shen, Kunrong

  1. By: Björn Bartling; Klaus M. Schmidt
    Abstract: Several recent papers argue that contracts provide reference points that affect ex post behavior. We test this hypothesis in a canonical buyer-seller relationship with renegotiation. Our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threatpoints. We compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex ante contract was written. The ex ante contract causes sellers to ask for markups that are 45 percent lower than in strategically equivalent bargaining situations without an initial contract. Moreover, buyers are more likely to reject given markups in renegotiations than in negotiations. We do not find that these effects are stronger when the initial contract is concluded under competitive rather than monopolistic conditions.
    Keywords: Renegotiation, bargaining, reference points, contracts, competition
    JEL: C78 C91 D03 D86
    Date: 2012–08
  2. By: John Morgan (University of California, Berkeley); Dana Sisak (Erasmus University Rotterdam); Felix Vardy (University of California, Berkeley and IMF)
    Abstract: We study career choice when competition for promotion is a contest. A more meritocratic profession always succeeds in attracting the highest ability types, whereas a profession with superior promotion benefits attracts high types only if the hazard rate of the noise in performance evaluation is strictly increasing. Raising promotion opportunities produces no systematic effect on the talent distribution, while a higher base wage attracts talent only if total promotion opportunities are sufficiently plentiful.
    Keywords: career choice; promotion competition; selection; meritocracy
    JEL: J45 J24 M52
    Date: 2012–07–20
  3. By: Barelli, Paulo (University of Rochester); Govindan, Srihari (University of Rochester); Wilson, Robert (Stanford University)
    Abstract: We define the class of two-player zero-sum games with payoffs having mild discontinuities, which in applications typically stem from how ties are resolved. For games in this class we establish sufficient conditions for existence of a value of the game and minimax or Nash equilibrium strategies for the players. We prove first that if all discontinuities favor one player then a value exists and that player has a minimax strategy. Then we establish that a general property called payoff approachability implies that the value results from equilibrium. We prove further that this property implies that every modification of the discontinuities yields the same value; in particular, for every modification, epsilon-equilibria exist. We apply these results to models of elections in which two candidates propose policies and a candidate wins election if a weighted majority of voters prefer his policy. We provide tie-breaking rules and assumptions on voters' preferences sufficient to imply payoff approachability, hence existence of equilibria, and each other tie-breaking rule yields the same value and has epsilon-equilibria. These conclusions are also derived for the special case of Colonel Blotto games in which each candidate allocates his available resources among several constituencies and the assumption on voters' preferences is that a candidate gets votes from those constituencies allocated more resources than his opponent offers. Moreover, for the case of simple-majority rule we prove existence of an equilibrium that has zero probability of ties.
    JEL: C62 C72 D72
    Date: 2012–06
  4. By: Ziv Hellman
    Abstract: Simon (2003) presented an example of a 3-player Bayesian games with no Bayesian equilibria but it has been an open question whether or not there are games with no approximate Bayesian equilibria. We present an example of a Bayesian game with two players, two actions and a continuum of states that possesses no approximate Bayesian equilibria, thus resolving the question. As a side benefit we also have for the first time an an example of a 2-player Bayesian game with no Bayesian equilibria and an example of a strategic-form game with no approximate Nash equilibria. The construction makes use of techniques developed in an example by Y. Levy of a discounted stochastic game with no stationary equilibria.
    Date: 2012–07
  5. By: Sudhölter, Peter (Department of Business and Economics); Zarzuelo, José M. (Faculty of Economics and Business Administration)
    Abstract: In 1985 Aumann axiomatized the Shapley NTU value by non-emptiness, efficiency, unanimity, scale covariance, conditional additivity, and independence of irrelevant alternatives. We show that, when replacing unanimity by "unanimity for the grand coalition" and translation covariance, these axioms characterize the Nash solution on the class of n-person choice problems with reference points. A classical bargaining problem consists of a convex feasible set that contains the disagreement point here called reference point. The feasible set of a choice problem does not necessarily contain the reference point and may not be convex. However, we assume that it satisfies some standard properties. Our result is robust so that the characterization is still valid for many subclasses of choice problems, among those is the class of classical bargaining problems. Moreover, we show that each of the employed axioms – including independence of irrelevant alternatives – may be logically independent of the remaining axioms.
    Keywords: Bargaining problem; Nash set; Shapley NTU value
    JEL: C71 C78
    Date: 2012–08–13
  6. By: Csapó Gergely; Müller Rudolf (METEOR)
    Abstract: We study the problem of finding the profit-maximizing mechanism for a monopolistic provider of asingle, non-excludable public good. This problem has been well studied for the case when agents''types are independently distributed, but the literature is almost silent about the case of generaljoint distributions. We investigate the problem from an automated mechanism design perspective,meaning that we want to understand the algorithmic complexity of finding the optimal mechanismwhen we are given a finite set of type profiles and their distribution. We show that the optimaldeterministic, dominant strategy incentive compatible, ex-post individual rational mechanism canbe computed in polynomial time by reducing the problem to finding a maximal weight closure in adirected graph. Node weights in the graph correspond to conditional virtual values. Whenvaluations are independently distributed, the constructed mechanism is also optimal among allBayes-Nash implementable and ex-interim individual rational mechanisms. In contrast, for dependentvaluations strictly higher profit can be achieved if one allows for ex-interim individualrationality. By invoking techniques due to Crémer and McLean, we show that optimal deterministic,ex-interim individual rational, Bayes-Nash implementable or dominant strategy implementablemechanisms still can be found in polynomial time if the joint distribution of types satisfiescertain regularity conditions.
    Keywords: operations research and management science;
    Date: 2012
  7. By: Ning Sun and Zaifu Yang
    Abstract: We propose a dynamic auction mechanism for efficiently allocating multiple heterogeneous indivisible items. These goods can be split into two distinct sets so that items in each of the two sets are substitutes but are complementary to items in the other. The seller has a reserve value for each bundle of goods. In each round of the auction, the auctioneer announces the current prices for all items, bidders respond by reporting their demands at these prices, and then the auctioneer adjusts simultaneously the prices of items in one set upwards but those of items in the other downwards. We prove that despite the fact that bidders are not assumed to be price-takers and thus can strategically exercise their market power, this dynamic auction always yields an efficient outcome and induces the bidders to bid truthfully and at the same time protects them from fully exposing their private values.
    Keywords: Dynamic auction, gross substitutes and complements, incentives, efficiency, indivisibility
    JEL: D44
    Date: 2012–08
  8. By: Makoto Shimoji and Paul Schweinzer
    Abstract: We consider implementation problems under incomplete information without incentive compatibility. If the social choice functions do not satisfy incentive compatibility, full implementation is unattainable via the existing approaches. By focusing on the actual problems from Typhoon by Joseph Conrad and The Traveler's Dilemma by Kaushik Basu (1994, 2007), we provide a new approach to such implementation problems. For each problem, we first construct a mechanism which takes advantage of a unique feature of these problems, i.e., the planners possess some information regarding the actual state. We then provide a sufficient condition on players' beliefs for each problem under which every player has a unique rationalizable action. The conditions we identify however depend on the informational structures, suggesting that obtaining a general result within this type of frameworks is nontrivial.
    Keywords: Implementation, Rationalizability, Incentive Compatibility, Incomplete Information
    JEL: C72 D82
    Date: 2012–08
  9. By: Drew Fudenberg; David K. Levine; Zacharias Maniadis
    Date: 2012
  10. By: Anthony Creane (Department of Economics, Michigan State University); Thomas D. Jeitschko (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: In markets for experience or credence goods adverse selection can drive out higher quality products and services. This negative implication of asymmetric information about product quality for trading and welfare, poses the question of how such markets first originate. We consider a market in which sellers make observable investment decisions to enter a market in which each seller's quality becomes private information. Entry has the tendency to lower prices, which may lead to adverse selection. The implied price collapse limits the amount of entry so that high prices are sustained in equilibrium, which results in above normal profits. The analysis suggests that rather than observing the canonical market collapse, markets with asymmetric information about product quality may instead be characterized by above normal profits even in markets with low measures of concentration and less entry than would be expected.
    Keywords: adverse selection, asymmetric information, quality, experience goods, cre- dence goods, entry, entry barriers
    JEL: D8 D4 L1
    Date: 2012–08
  11. By: Ismail Saglam (Department of Economics, TOBB University of Economics and Technology); Asad Zaman (International Institute of Islamic Economics, International Islamic University)
    Abstract: There is a conflict in the mechanism for price determination used in a Marshallian partial equilibrium supply and demand framework and the Walrasian general equilibrium framework. It is generally thought that partial equilibrium is a simplified approximation to the complexities of the general model. The goal of this paper is to show that there is a strong conflict between the two models - intuitions and heuristics suggested by partial equilibrium are contradicted by extensions to the general equilibrium case. We review the literature on the conflict and also provide a very simple model where partial equilibrium analysis fails completely. Several intuitively plausible remedies fail to restore partial equilibrium results. We show that Marshallian analysis can be made to work only under rather stringent conditions requiring joint production with low fixed costs and decreasing returns resulting in identical production proportions by all producers.
    Date: 2012–07
  12. By: Robert Dur (Erasmus University Rotterdam, CESifo, and IZA); Jan Tichem (Erasmus University Rotterdam)
    Abstract: This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players' utility in equilibrium.
    Keywords: Altruism; spite; social relations; incentives; relational contracts; efficiency wages; subjective performance evaluation; Nash bargaining
    JEL: D23 J33 M52 M55
    Date: 2012–05–16
  13. By: Pascal Billand (Universite de Lyon, Universite Jean Monnet, Saint-Etienne, CNRS, GATE); Christophe Bravard (Universite de Lyon, Universite Jean Monnet, Saint-Etienne, CNRS, GATE); Jurjen Kamphorst (Erasmus University Rotterdam); Sudipta Sarangi (DIW Berlin and Louisiana State University)
    Abstract: Social networks, be it on the internet or in real life, facilitate information flows. We model this by giving agents incentives to link with others and receive information through those links. In many networks agents will value confirmation of the information they receive from others. Our paper analyzes the impact such a need for confirmation has on the social networks which are formed. We first study the existence of Nash equilibria and then characterize the set of strict Nash networks. Next, we characterize the set of strictly efficient networks and discuss the relationship between strictly efficient networks and strict Nash networks.
    Keywords: connections model; confirmation; two-way flow models
    JEL: C72 D85
    Date: 2012–03–01
  14. By: Shuhei Morimoto; Shigehiro Serizawa
    Abstract: We consider the problems of allocating several heterogeneous objects owned by governments to a group of agents and how much agents should pay. Each agent receives at most one object and has nonquasi-linear preferences. Nonquasi-linear preferences describe environments in which large-scale payments influence agents' abilities to utilize objects or derive benefits from them. The "minimum price Walrasian (MPW) rule" is the rule that assigns a minimum price Walrasian equilibrium allocation to each preference profile. We establish that the MPW rule is the unique rule that satisfies the desirable properties of strategy-proofness, Pareto-efficiency, individual rationality, and nonnegative payment on the domain that includes nonquasi-linear preferences. This result does not only recommend the MPW rule based on those desirable properties, but also suggest that governments cannot improve upon the MPW rule once they consider them essential. Since the outcome of the MPW rule coincides with that of the simultaneous ascending (SA) auction, our result explains the pervasive use of the SA auction.
    Date: 2012–08
  15. By: Roberto Roson (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This paper draws upon Feenstra and Ma (2007, 2008), to develop a model of asymmetric competition between multiproduct firms. The model is used to analyze how cost asymmetry affects the equilibrium, with determination of quantity/price as well as product scope per firm. By treating the number of firms as a continuous variable, the model is extended to account for the endogenous determination of the number of firms in a long-run, monopolistically competitive equilibrium, with free entry by heterogeneous firms.
    Keywords: Multiproduct firm, monopolistic competition, product scope, cost asymmetry.
    JEL: D43 L11 L13
    Date: 2012
  16. By: Stracke, Rudi
    Abstract: This paper compares static one-stage and dynamic two-stage contests with heterogeneous participants. I find that aggregate effort provision (AEP) is strictly higher in the dynamic than in the static format in any interior equilibrium with heterogeneous contestants. Since AEP is identical in both formats in case of homogeneity, this finding suggests that the well-known (adverse) incentive effect of heterogeneity crucially depends on the structure of the competition – the effect is lower in dynamic than in static formats. The paper also shows that heterogeneity between contestants is crucial to explain recent empirical evidence on the comparison of different contest structures.
    Keywords: Multi-Stage Contest, Heterogeneity, Contest Design
    JEL: D72 D23 J33
    Date: 2012–08
  17. By: Friedman, Daniel; Sákovics, József
    Abstract: We reformulate neoclassical consumer choice by focusing on lambda, the marginal utility of money. As the opportunity cost of current expenditure, lambda is approximated by the slope of the indirect utility function of the continuation. We argue that lambda can largely supplant the role of an arbitrary budget constraint in partial equilibrium analysis. The result is a better grounded, more flexible and more intuitive approach to consumer choice.
    Keywords: budget constraint, separability, value for money,
    Date: 2012
  18. By: Marco-Gil, Maria del Carmen (Universidad Politécnica de Cartagena, Department of Economics); Peris, Josep E. (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica); Subiza, Begoña (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica)
    Abstract: In 1950, Nash's seminal paper introduced the axiomatic approach to the analysis of bargaining situations. Since then, many bargaining solutions have appeared and been axiomatically analyzed. The fact that agents, when face a bargaining problem, can come up with different solution concepts (that is, di§erent notions of fairness and equity) was first introduced by van Damme (1986) by means of the meta-bargaining model. In this paper we present and axiomatically analyze a mechanism for solving meta-bargaining problems, which we call Unanimous-Concession. As an example, we show that the Nash solution is the result of the meta-bargaining process we define, when agents have dual egalitarian criteria. Finally, we compare, from an axiomatic and descriptive point of view, our proposal with other meta-bargaining mechanisms.
    Keywords: bargaining problem; mechanism; meta-bargaining; axiomatic approach
    JEL: C71 D63 D71
    Date: 2012–07–24
  19. By: Juan I Block; David K Levine
    Date: 2012
  20. By: Larbi Alaoui; Antonio Penta
    Abstract: Level-k theories are agnostic over whether individuals stop the iterated reasoning because of their own cognitive constraints, or because of their beliefs over the cognitive constraints of their opponents. In practice, individual level of play may be a function both of their own constraints and their beliefs over their opponents' reasoning process. Moreover, the rounds of introspection that players perform may depend on their incentives to think more deeply. We develop a theory which explicitly models players' reasoning procedure. The rounds of introspection that individuals perform and their actual level of play both follow endogenously. This model delivers testable implications as payoff s and opponents change, and it allows for comparisons across games. It also disentangles the cognitive bound of players for a given game from their beliefs about the play of their opponents. In conjunction with the framework, we present an experiment designed to test its predictions. We modify the Arad and Rubinstein (2012) '11-20' game to serve this precise purpose, and administer different treatments which vary beliefs over payoff s and opponents. The results of this experiment are consistent with the model, and appear to lend support to our theory. This experiment also confirms the central premise that individuals change their level of play as incentives to think more and beliefs over opponents vary.
    Keywords: beliefs, bounded rationality, cognitive cost, higher order beliefs, incentives, level-k reasoning, value of reasoning
    JEL: C72 C92 D80 D83
    Date: 2012–07
  21. By: Valentin Zelenyuk (CEPA - School of Economics, The University of Queensland)
    Abstract: In this article we extend the aggregation theory in efficiency and productivity analysis by deriving solutions to the problem of aggregation of individual scale efficiency measures, primal and dual, into aggregate primal and dual scale efficiency measures of a group. The new aggregation result is coherent with aggregation framework and solutions for the other related efficiency measures that already exist in the literature.
    Date: 2012
  22. By: Orlando Gomes (ISCAL - Lisbon Polytechnic Institute and BRU-IUL); Alexandra Ferreira-Lopes (ISCTE-IUL, Business School, Department of Economics and BRU-IUL and CEFAGE - UBI); Tiago Neves Sequeira (Universidade da Beira Interior, Management and Economics Department and CEFAGE - UBI)
    Abstract: We address intertemporal utility maximization under a general discount function that nests the exponential discounting and the quasi-hyperbolic discounting cases as particular specifi?cations. The suggested framework intends to capture one important anomaly typically found when addressing the way agents discount the future, namely the evidence pointing to the prevalence of decreasing impatience. The referred anomaly can be perceived as a bias relatively to what would be a benchmark exponential discounting setting, and is modeled as such. The general discounting framework is used to address a standard optimal growth model in discrete time. Transitional dynamics and stability properties of the corresponding dynamic setup are studied. An extension of the standard growth model to the case of habit persistence is also considered.
    Keywords: Intertemporal Preferences, Exponential Discounting, Quasi-hyperbolic Discounting, Optimal Growth, Habit Persistence, Transitional Dynamics
    JEL: C61 D91 O4
    Date: 2012–07–15
  23. By: Mikel Alvarez-Mozos (University of Santiago de Compostela); Rene van den Brink (VU University Amsterdam); Gerard van der Laan (VU University Amsterdam); Oriol Tejada (ETH Zuerich)
    Abstract: In a standard TU-game it is assumed that every subset of the player set can form a coalition and earn its worth. One of the first models where restrictions in cooperation are considered is the one of games with coalition structure. In such games the player set is partitioned into unions and players can only cooperate within their own union. Owen introduced a value for games with coalition structure under the assumption that also the unions can cooperate among them. Winter extended this value to games with levels structure of cooperation, which consists of a game and a finite sequence of partitions defined on the player set, each of them being coarser than the previous one. A share function for TU-games is a type of solution that assigns to every game a vector whose components add up to one, and thus they can be interpreted as players' shares in the worth to be allocated. Extending the approach to games with coalition structure developed by van den Brink and van der Laan (2005), we introduce a class of share functions for games with levels structure of cooperation by defining, for each player and each level, a standard TU-game. The share given to each player is then defined as the product of her shares in the games at every level. We show several desirable properties and provide axiomatic characterizations of this class of LS-share functions.
    Keywords: cooperative game; Shapley value; coalition structure; share functions; levels structure of cooperation
    JEL: C71
    Date: 2012–05–11
  24. By: Micahel Caputo (University of Central Florida, Orlando, FL); Chen Ling (Southwestern University of Finance and Economics, Chengdu, Sichuan, China)
    Abstract: The comparative dynamics of locally differentiable feedback Nash equilibria are derived for the ubiquitous class of autonomous and exponentially discounted infinite horizon differential games. The resulting refutable implications are intrinsic to the said class of differential games, and thus form their basic, empirically testable, properties. Their relationship with extant results in optimal control theory and static game theory is discussed. Separability conditions are identified on the instantaneous payoff and transition functions under which the intrinsic comparative dynamics collapse, in form, to those in optimal control problems. Applications of the results to capital accumulation and sticky-price games are provided.
    Keywords: comparative dynamics, differential games, feedback Nash equilibria
    JEL: C72 C73 L13
    Date: 2012–07
  25. By: Geoffroy de Clippel; Kareen Rozen
    Date: 2012–08–15
  26. By: Daron Acemoglu; Alexander Wolitzky
    Abstract: We propose a model of cycles of distrust and conflict. Overlapping generations of agents from two groups sequentially play coordination games under incomplete information about whether the other side consists of “extremists” who will never take the good/trusting action. Good actions may be mistakenly perceived as bad/distrusting actions. We also assume that there is limited information about the history of past actions, so that an agent is unable to ascertain exactly when and how a sequence of bad actions originated. Assuming that both sides are not extremists, spirals of distrust and conflict get started as a result of a misperception, and continue because the other side interprets the bad action as evidence that it is facing extremists. However, such spirals contain the seeds of their own dissolution: after a while, Bayesian agents correctly conclude that the probability of a spiral having started by mistake is sufficiently high, and bad actions are no longer interpreted as evidence of extremism. At this point, one party experiments with a good action, and the cycle restarts. We show how this mechanism can be useful in interpreting cycles of ethnic conflict and international war, and how it also emerges in models of political participation, dynamic inter-group trade, and communication - leading to cycles of political polarization, breakdown of trade, and breakdown of communication.
    JEL: D72 D74
    Date: 2012–07
  27. By: Vincent Boucher (CIREQ - Centre interuniversitaire de recherche en économie quantitative - Université de Montréal)
    Abstract: Homophily, or the fact that similar individuals tend to interact with each other, is a prominent feature of economic and social networks. Most existing theories of homophily are based on a descriptive approach and abstract away from equilibrium considerations. I show that the equilibrium structure of homophily has empirical power, as it can be used to recover underlying preference parameters. I build a non-cooperative model of network formation, which produces a unique, empirically realistic equilibrium network. Individuals have homophilic preferences and face capacity constraints on the number of links. I develop a novel empirical method, based on the shape of the equilibrium network, which allows for the identification and estimation of the underlying homophilic preferences. I apply this new methodology to race-based choices regarding friendship decisions among American teenagers.
    Date: 2012–07–25
  28. By: Hippolyte d'Albis (Centre d'Economie de la Sorbonne - Paris School of Economics); Emmanuel Thibault (Toulouse School of Economics - Université de Perpignan, CDED and IDEI)
    Abstract: In this paper, ambiguity aversion to uncertain survival probabilities is introduced in a life-cycle model with a bequest motive to study the optimal demand for annuities. Provided that annuities return is sufficiently large, and notably when it is fair, positive annuitization is known to be optimal strategy of ambiguity neutral individuals. Conversely, we show that the demand for annuities decreases with ambiguity aversion and that there exists a finite degree of aversion above which the demand is non positive : the optimal strategy is then to either sell annuities short or to hold zero annuities if the former option is not available. To conclude, ambiguity aversion appears as a relevant candidate for explaining the annuity puzzle.
    Keywords: Demand for annuities, uncertain survival probabilities, ambiguity aversion.
    JEL: D11 D81 G11 G22
    Date: 2012–07
  29. By: Dai, Darong; Shen, Kunrong
    Abstract: In the present paper, a new approach to equilibrium selection for very general normal form games has been constructed by introducing stochastic optimal stopping theory into classical evolutionary game theory. That is, the new game equilibrium is induced by both stochastic group evolution and decentralized rational individual choice. Moreover, stability of the game equilibrium is confirmed from both time and space dimensions.
    Keywords: Stochastic replicator dynamics; Rational choice; Normal-form game; Stability
    JEL: C70 C62
    Date: 2012–01–15

This nep-mic issue is ©2012 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.