nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒09‒03
23 papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Matching with Incomplete Information By Quingmin Liu; George J. Mailath; Andrew Postlewaite; Larry Samuelson
  2. A framework for analyzing language and welfare By Mélitz, Jacques
  3. Optimal contracts based on subjective evaluations and reciprocity By Alexander Sebald; Markus Walzl
  4. A Theory of Reciprocity with Incomplete Information By Vostroknutov Alexander
  5. Incentive Contracts and Efficient Unemployment Benefits in a Globalized World By Carsten Helm; Dominique Demougin
  6. Premise-Based versus Outcome-Based Information Aggregation By Geoffroy de Clippel; Kfir Eliaz
  7. Asymmetry and rent dissipation in contests By Kiho Yoon
  8. Veblen effect, search for status goods, and negative utility of conspicuous leisure. By Malakhov, Sergey
  9. Imperfect Evaluation in Project Screening By Barbos, Andrei
  10. Project Screening with Tiered Evaluation By Barbos, Andrei
  11. Competing Through Information Provision By Jean Guillaume Forand
  12. Social Welfare and the Benefits to Crime By Philip A. Curry; Matthew Doyle
  13. Scalarization Methods and Expected Multi-Utility Representations By Özgür Evren
  14. Rational belief hierarchies By Tsakas Elias
  15. Behavioral Implementation By Geoffroy de Clippel
  16. Destroy to Save By Geoffroy de Clippel; Louis Putterman; Victor Naroditskiy; Maria Polukarov; Amy Greenwald; Nicholas R. Jennings
  17. Transaction Costs can Encourage Coasean Bargaining By Robson, Alex
  18. Evolution of mindsight, transparency and rule-rationality By Rtischev, Dimitry
  19. (De)Regulation and Market Thickness By Jean Guillaume Forand; Vikram Maheshri
  20. Point-Rationalizability in Large Games By Haomiao Yu
  21. On existence, efficiency and bubbles of Ramsey equilibrium with borrowing constraints By Robert Becker; Stefano Bosi; Cuong Le Van; Thomas Seegmuller
  22. On extensions of the core and the anticore of transferable utility games By Derks Jean; Peters Hans; Sudhölter Peter
  23. Population Monotonic and Strategy-Proof Mechanisms Respecting Welfare Lower Bounds By Duygu Yengin

  1. By: Quingmin Liu (Dept. of Economics, Columbia University); George J. Mailath (Dept. of Economics, University of Pennsylvania); Andrew Postlewaite (Dept. of Economics, University of Pennsylvania); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: A large literature uses matching models to analyze markets with two-sided heterogeneity, studying problems such as the matching of students to schools, residents to hospitals, husbands to wives, and workers to firms. The analysis typically assumes that the agents have complete information, and examines core outcomes. We formulate a notion of stable outcomes in matching problems with one-sided asymmetric information. The key conceptual problem is to formulate a notion of a blocking pair that takes account of the inferences that the uninformed agent might make from the hypothesis that the current allocation is stable. We show that the set of stable outcomes is nonempty in incomplete information environments, and is a superset of the set of complete-information stable outcomes. We provide sufficient conditions for incomplete-information stable matchings to be efficient.
    Keywords: Matching, Stability, Stable outcome, Incomplete information, Core
    JEL: C71 C78 D5 D8
    Date: 2012–08
  2. By: Mélitz, Jacques
    Abstract: The paper proposes a general model that will encompass trade and social benefits of a common language, a preference for a variety of languages, the fundamental role of translators, an emotional attachment to maternal language, and the threat that globalization poses to the vast majority of languages. With respect to people’s emotional attachment, the model considers minorities to suffer losses from the subordinate status of their language. In addition, the model treats the threat to minority language as coming from the failure of the parents in the minority to transmit their maternal language (durably) to their children. Some familiar results occur. In particular, we encounter the usual social inefficiencies of decentralized solutions to language learning when the sole benefits of the learning are communicative benefits (though translation intervenes). However, these social inefficiencies assume a totally different air when the consumer gains of variety are brought in. One fundamental aim of the paper is to bring together contributions to the economics of language from labor economics, network externalities and international trade that are typically treated separately.
    Keywords: Language; trade; welfare
    JEL: D60 F10 Z10
    Date: 2012–08
  3. By: Alexander Sebald; Markus Walzl
    Abstract: As we have demonstrated in a recent laboratory experiment [see Sebald and Walzl (2012)], individuals tend to sanction others who subjectively evaluate their performance whenever this assessment falls short of the individual's self-evaluation even if their earnings are unaffected by the assessment. Hence, performance assessments which fall short of the agents' self-evaluation can be interpreted as an unkind act that triggers a negatively reciprocal response not only if the assessment determines an agent's earnings but also if it lacks monetary consequences. We propose a principal-agent model that accommodates this kind of payoff independent reciprocity and identify conditions for a positive welfare effect of increasing costs of conflict or increasing psychological sensitivity, and a negative welfare effect of a more informative information technology. As a consequence, principals may choose imperfect information technologies in equilibrium even if the signal quality is costless.
    Keywords: Contracts, Subjective Evaluations, Self-Esteem, Ego-Threats, Reciprocity
    JEL: D01 D02 D82 D86 J41
    Date: 2012–08
  4. By: Vostroknutov Alexander (METEOR)
    Abstract: A model of belief dependent preferences in finite multi-stage games with observable actions isproposed. It combines two dissimilar approaches: incomplete information (Levine, 1998) andintentionality (Dufwenberg and Kirchsteiger, 2004; Falk and Fischbacher, 2006). Incompleteinformation is important because social preferences are not directly observable; intentions arefound to be indispensable in explaining behavior in games (Falk, Fehr, and Fischbacher, 2008). Inthe model it is assumed that the players have social attitudes that define their socialpreferences. In addition, players care differently about the payoffs of other players depending ontheir beliefs about their social attitude and possibly on the beliefs of higher orders. As thegame unfolds players update their beliefs about the types of other players. An action of a playershows intention when she chooses it anticipating future belief updating by others. A reasoningprocedure is proposed that allows players to understand how to update beliefs by constructing asequence of logical implications.
    Keywords: microeconomics ;
    Date: 2012
  5. By: Carsten Helm (University of Oldenburg); Dominique Demougin (European Business School at the EBS University, Wiesbaden)
    Abstract: Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyse this issue in a principal-agent model, higher level of unemployment benefits improves the workers' position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.
    Keywords: Unemployment benefits, incentive contracts, Nash bargaining, moral hazard, globalization
    JEL: J65 D82 J41 E24
    Date: 2012–08
  6. By: Geoffroy de Clippel; Kfir Eliaz
    Abstract: A group of rational individuals with common interest need to select one of two outcomes. The optimal decision depends on whether certain premises or pieces of evidence are established as being true, and each member receives a noisy signal of the truth value of the relevant premises. Should the group reach a decision by voting whether each premise is true or false, or should they simply vote on the outcome? We show that for any nite number of individuals, the premise-based voting rule is more efficient in aggregating information than the outcome-based rule. However, generically, the gain from using the premise-based over the outcome-based rule can only be marginal when numerous individuals express independent opinions. Indeed, the outcome-based game is almost always asymptotically efficient.
    Keywords: #
    Date: 2012
  7. By: Kiho Yoon (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: This paper studies the e¢çect of relative strength of the players in incomplete information all-pay auctions. The analysis shows that total expenditures decrease as relative asymmetry increases. Hence, asymmetry does reduce competitiveness between players and rent dissipation. This implies that the result of Kirkegaard(2012, International Journal of Industrial Organization) holds due to the absolute increase in valuation. This paper also analyzes optimal contest mechanisms and obtains quite different comparative static results.
    Keywords: Asymmetry, Relative strength, All-pay auctions, Optimal contest mechanisms
    JEL: C72 D44 D72 D82
    Date: 2012
  8. By: Malakhov, Sergey
    Abstract: When expected savings on purchases are greater than the wage rate, the optimal search results in the negative marginal utility of leisure. The search transforms the classical backward bending effect and the leisure becomes complementary to the search. Consumers compensate “bad” leisure by status goods of exceptional quality on markets with high price dispersion. Status consumption complements “bad” conspicuous leisure and produces the Veblen effect as well as the “gardening aboard the boat” effect.
    Keywords: Veblen effect, search, status goods, negative utility, conspicuous leisure
    JEL: D11 D83
    Date: 2012–08–20
  9. By: Barbos, Andrei
    Abstract: This paper studies a model in which an agent considers proposing a project of unknown quality to an evaluator, who decides whether or not to accept it. First, we show that there exist instances where an agent with a better track record of producing high-quality projects should be subjected to more stringent standards. Second, we show that an increase in the submission fee may lead to a decrease in the quality of projects that are implemented because of its effects on the evaluator's acceptance policy.
    Keywords: Evaluation; Project Screening; Regulatory Burden
    JEL: D02 D82 L50
    Date: 2012–06–14
  10. By: Barbos, Andrei
    Abstract: We study a Bayesian game of two-sided incomplete information in which an agent, who owns a project of unknown quality, considers proposing it to an evaluator, who has the choice of whether or not to accept it. There exist two distinct tiers of evaluation that differ in the benefits they deliver to the agent upon acceptance of a project. The agent has to select the tier to which the project is submitted for review. Making a proposal incurs a cost on the agent in the form of a submission fee. We examine the effect of a change in the submission fees at the two tiers of evaluation on the expected quality of projects that are implemented by the evaluator.
    Keywords: Evaluation; Project Screening
    JEL: D02 D82
    Date: 2012–08–14
  11. By: Jean Guillaume Forand (Department of Economics, University of Waterloo)
    Abstract: This paper studies the symmetric equilibria of a two-buyer, two-seller model of directed search in which sellers commit to information provision. More informed buyers have better differentiated private valuations and extract higher rents from trade.When sellers cannot commit to sale mechanisms, information provision is higher under competition than under monopoly, yet partial information is provided when sellers are price-setters. In contrast, when sellers commit to both information provision and sale mechanisms, I identify simple conditions under which sellers post auctions and provide full information in every equilibrium, ensuring that all equilibrium outcomes are constrained efficient. Sellers capture the efficiency gains from increased information and compete only over non-distortionary rents offered to buyers.
    JEL: C72 D43 D44 D82
    Date: 2012–04
  12. By: Philip A. Curry (Department of Economics, University of Waterloo); Matthew Doyle (Department of Economics, University of Waterloo)
    Abstract: There exists a large literature on the optimal deterrence of crime. Within the literature, however, there exists a controversy over what the appropriate criterion to determine optimality should be. While the most popular method is that of maximization of a utilitarian welfare function, another criterion sometimes used is that of cost minimization. The controversy stems from the question of whether the benefits to crime enjoyed by criminals ought to be included in the welfare analysis. This paper argues that the controversy is an artifact of the fact that the standard model restricts a potential criminal's choice to one of committing a crime or doing nothing. We show that when potential criminals are given the additional choice of achieving their ends through voluntary methods that maximizing the sum of utilities is in fact equivalent to minimizing the costs of crime. The model developed also provides explanations for sanctions that increase in one's criminal history and why necessity may be a partial defense.
    JEL: K42 D6 H0
    Date: 2012–07
  13. By: Özgür Evren (New Economic School)
    Abstract: I characterize the class of (possibly incomplete) preference relations over lotteries which can be represented by a compact set of (continuous) expected utility functions that preserve both indifferences and strict preferences. This finding contrasts with the representation theorem of Dubra, Maccheroni and Ok (2004) which typically delivers some functions which do not respect strict preferences. For a preference relation of the sort that I consider in this paper, my representation theorem reduces the problem of recovering the associated choice correspondence over convex sets of lotteries to a scalar-valued, parametric optimization exercise. By utilizing this scalarization method, I also provide characterizations of some solution concepts. Most notably, I show that in an otherwise standard game with incomplete preferences, the collection of pure strategy equilibria that one can find using this scalarization method corresponds to a refinement of the notion of Nash equilibrium that requires the (deterministic) action of each player be undominated by any mixed strategy that she can follow, given others’ actions.
    Keywords: Incomplete preference relations; Expected Utility; Nash Equilibrium; Nonbinary Choice; Social Planning; Incomplete Knowledge
    JEL: D11 D81 C72 D61
    Date: 2012–07
  14. By: Tsakas Elias (METEOR)
    Abstract: We consider agents whose language can only express probabilistic beliefs that attach a rationalnumber to every event. We call these probability measures rational. We introduce the notion of arational belief hierarchy, where the first order beliefs are described by a rational measure overthe fundamental space of uncertainty, the second order beliefs are described by a rational measureover the product of the fundamental space of uncertainty and the opponent''s first order rationalbeliefs, and so on. Then, we derive the corresponding (rational) type space model, thus providinga Bayesian representation of rational belief hierarchies. Our first main result shows that thistype-based representation violates our intuitive idea of an agent whose language expresses onlyrational beliefs, in that there are rational types associated with non-rational beliefs over thecanonical state space. We rule out these types by focusing on the rational types that satisfycommon certainty in the event that everybody holds rational beliefs over the canonical statespace. We call these types universally rational and show that they are characterized by a boundedrationality condition which restricts the agents'' computational capacity. Moreover, theuniversally rational types form a dense subset of the universal type space. Finally, we show thatthe strategies rationally played under common universally rational belief in rationalitygenerically coincide with those satisfying correlated rationalizability.
    Keywords: microeconomics ;
    Date: 2012
  15. By: Geoffroy de Clippel
    Abstract: Implementation theory assumes that participants’ choices are rational,in the sense of being derived from the maximization of a contextindependent preference. The paper investigates implementation under complete information when the mechanism designer is aware that individuals suffer from cognitive biases that lead to violations of IIA, or cannot exclude the possibility of such “irrational” behavior.
    Keywords: #
    Date: 2012
  16. By: Geoffroy de Clippel; Louis Putterman; Victor Naroditskiy; Maria Polukarov; Amy Greenwald; Nicholas R. Jennings
    Abstract: We study the problem of allocating m identical items among n > m agents with unit demand and private value for consuming the good. We allow payments and focus on dominant{strategy implementation. In the absence of an auctioneer who can absorb payments collected from the agents, the payments must be burnt to support dominant{strategy implementation. Recent work modified the classic VCG mechanism by redistributing as much of the payments as possible back to the agents while still satisfying incentive constraints. This approach guarantees allocative efficiency, but in some cases a large percentage of social welfare is lost. In this paper, we provide a mechanism that is not allocatively efficient but is instead guaranteed to achieve at least 80% of the social welfare as n ! 1. Moreover, in the extreme case of m = n ?? 1 where VCG{based mechanisms provide zero welfare, the percentage of social welfare maintained by our mechanism asymptotically approaches 100%.
    Keywords: #
    Date: 2012
  17. By: Robson, Alex
    Abstract: When there are three parties, it is well known that the Coase Theorem may not hold even when there are no transaction costs, due to the emptiness of the core of the corresponding cooperative game [Aivazian and Callen (1981)]. We show that the standard Coasean bargaining game involving three parties is strategically equivalent to an asymmetric three player majority game. Hence, when there are three parties, the Coase Theorem fails if and only if the core of the corresponding three player majority game is empty. We use this equivalence result to derive all instances in which the Coase Theorem will and will not hold with three parties, and show that the Coase Theorem will actually hold most (over 80 per cent) of the time. We also demonstrate, in contrast to Aivazian and Callen (2003), that it is always possible to find a set of transaction costs which, when introduced into a frictionless bargaining situation, will cause an empty core to become non-empty. In other words, with suitably designed transaction costs, it is possible for the Coase Theorem to hold in cases where, in the absence of those transaction costs, it would fail to hold. When there are three parties, rather than hindering agreements, transaction costs can encourage Coasean bargaining.
    Keywords: Coase Theorem; externalities; transaction costs; cooperative games
    JEL: D23 D62 C78 C71 K00
    Date: 2012–08
  18. By: Rtischev, Dimitry
    Abstract: Evolution of preferences models often assume that all agents display and observe preferences costlessly. Instead, we endogenize mindsight (to observe preferences) and transparency (to show preferences) as slightly costly mechanisms that agents may or may not possess. Unlike in the costless models, we show that universal rule-rationality, mindsight and transparency do not constitute an equilibrium but universal act-rationality, mind-blindness, and opaqueness do. We also find that rule-rationality, mindsight, and transparency may exist in evolved populations, albeit only in a portion of the population whose size fluctuates along an orbit around a focal point. We apply our results to Ultimatum and Trust games to explore how costly and optional mindsight may affect economic performance in interactions among evolved agents.
    Keywords: evolution of preferences; act-rationality; rule-rationality; ultimatum game; trust game
    JEL: D83 C73 D87
    Date: 2012–08–10
  19. By: Jean Guillaume Forand (Department of Economics, University of Waterloo); Vikram Maheshri (Department of Economics, University of Houston)
    Abstract: In this paper, we develop a general concept of regulation as a set of constraints imposed on market transactions by a welfare-maximizing authority. We present a model of regulated exchange in a dynamic matching framework with horizontal differentiation and argue that in less developed, or ‘thin’, markets, regulation is an important tool tocorrect market failure arising from mismatch between buyers and sellers. However, if markets develop and become ‘thick’, regulations can become onerous vestiges and deregulation is welfare-enhancing. When market thickness reduces trade frictions, a regulator can rely on market participants’ equilibrium behavior instead of explicit constraints on economic activities to ensure that transactions occur efficiently.
    JEL: D04 L51 C73 C78
    Date: 2012–04
  20. By: Haomiao Yu (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: In this paper, I characterize point-rationalizability in large non-anonymous games with three dierent formulations of societal responses, and also propose an implicit dynamic process that is informed by Guesnerie's eductive notions. Given the introspection and 'mentalizing' that the point-rationalizability notions presuppose, a motivation behind the work is to examine their viability in situations where the terms rationality and full information can be given a more parsimonious, and thereby more analytically viable, expression.
    Keywords: Large games, Nash equilibria, point-rationalizability, closed under rational behavior (curb), societal response, distribution, integration, transformed statistics.
    JEL: C62 C72 D50 D80
    Date: 2012–08
  21. By: Robert Becker (Indiana University); Stefano Bosi (EPEE, University of Evry); Cuong Le Van (CES, CNRS, VCREME and Hanoi WRU); Thomas Seegmuller (GREQAM, Aix-Marseille University)
    Abstract: We address the fundamental issues of existence and efficiency of a Ramsey equilibrium with heterogenous discounting, elastic labor supply and borrowing constraints. In the first part, we prove the equilibrium existence in a truncated bounded economy through a fixed-point argument by Gale and Mas-Colell (1975). This equilibrium is also an equilibrium of any unbounded economy with the same fundamentals. The proof of existence is eventually given for an infinite-horizon economy as a limit of a sequence of truncated economies. Our general approach is suitable for applications to other models with different market imperfections. In the second part, we show the impossibility of bubbles in a productive economy and we give sufficient conditions for equilibrium efficiency.
    Date: 2012–02
  22. By: Derks Jean; Peters Hans; Sudhölter Peter (METEOR)
    Abstract: We consider several related set extensions of the core and the anticore of games with transferableutility. An efficient allocation is undominated if it cannot be improved, in a specific way, bysidepayments changing the allocation or the game. The set of all such allocations is called theundominated set, and we show that it consists of finitely many polytopes with a core-likestructure. One of these polytopes is the L1-center, consisting of all efficient allocations thatminimize the sum of the absolute values of the excesses. Theexcess Pareto optimal set contains the allocations that are Pareto optimal in the set obtained byordering the sums of the absolute values of the excesses of coalitions and the absolute values ofthe excesses of their complements. The L1-center is contained in the excess Pareto optimal set,which in turn is contained in the undominated set. For three-person games all these sets coincide.These three sets also coincide with the core for balanced games and with the anticore forantibalanced games. We study properties of these sets and provide characterizations in terms ofbalanced collections of coalitions. We also propose a single-valued selection from the excessPareto optimal set, the min-prenucleolus, which is defined as the prenucleolus ofthe minimum of a game and its dual.
    Keywords: microeconomics ;
    Date: 2012
  23. By: Duygu Yengin (School of Economics, University of Adelaide)
    Abstract: The significance of population monotonicity and welfare bounds is well-recognized in the fair division literature. We characterize population monotonic and incentive compatible mechanisms which allocate the goods efficiently and respect a welfare lower bound chosen in the fair allocation problem of allocating collectively owned indivisible goods or bads when monetary transfers are possible and preferences are private information. We consider the welfare bounds that are central to the fair allocation literature, namely, the identical-preferences lower-bound, individual rationality, the stand-alone lower-bound, and k-fairness. We also compare the strength and associated budget deficits of and the logical relations between the aforementioned lower bounds.
    Keywords: welfare bounds, the identical-preferences lower-bound, individual rationality, the stand-alone lower-bound, k-fairness, population monotonicity, collective ownership, allocation of indivisible goods and money, NIMBY problems, imposition of tasks, Groves mechanisms, strategy-proofness
    JEL: C79 D61 D63
    Date: 2012–08

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