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

  1. A Theory of Subjective Learning By David Dillenberger; Philipp Sadowski; Juan Sebastian Lleras; Norio Takeoka
  2. All Types Naive and Canny By Aviad Heifetz; Willemien Kets
  3. Can't We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World By Acemoglu, Daron; Robinson, James A; Verdier, Thierry
  4. Symmetric play in repeated allocation games By Christoph Kuzmics; Thomas Palfrey; Brian Rogers
  5. Adverse Selection in Insurance Contracting By Georges Dionne; Nathalie Fombaron; Neil Doherty
  6. The Allocation of a Prize (Expanded) By Pradeep Dubey; Siddhartha Sah
  7. Innovation Contests By David Pérez-Castrillo; David Wettstein
  8. Bargaining over an Endogenous Agenda By Vincent Anesi; Daniel J Seidmann
  9. Coalitional Games with Veto Players: Myopic and Rational Behavior By J Arin; V Feltkamp; M Montero
  10. Strategic delegation in price competition By Güth, Werner; Pull, Kerstin; Stadler, Manfred
  11. Truthful Reporting, Moral Hazard and Purely Soft Information By Alessandro De Chiara; Luca Livio
  12. Mechanism design by an informed principal: the quasi-linear private-values case By Tröger, Thomas; Mylovanov, Timofiy
  13. Strategic Immunization and Group Structure By Andrea Galeotti; Brian Rogers
  14. Clausewitz on Auctions By Samuel Haefner
  15. Coase meets Tarski: New Insights from Coase's Theory of the Firm By Tomoo Kikuchi; Kazuo Nishimura; John Stachurski
  16. Stationary consistent equilibrium coalition structures constitute the recursive core By László Á. Kóczy
  17. A Mind is a Terrible Thing to Change: Confirmation Bias in Financial Markets By Pouget, Sébastien; Villeneuve, Stéphane
  18. Monotone Comparative Statics in Games with both Strategic Complements and Strategic Substitutes By Andrew Monaco; Tarun Sabarwal
  19. Costs and Benefits of Immigration and Multicultural Interaction By Moritz Bonn
  20. Noncooperative Oligopoly in Markets with a Continuum of Traders: A Limit Theorem By Busetto, Francesca; Codognato, Giulio; Ghosal, Sayantan

  1. By: David Dillenberger (Department of Economics, University of Pennsylvania); Philipp Sadowski (Department of Economics, Duke University); Juan Sebastian Lleras (Department of Social and Decision Sciences, CMU); Norio Takeoka (Department of Economics, Yokohama National University)
    Abstract: We study an individual who faces a dynamic decision problem in which the process of information arrival is unobserved by the analyst. We derive two utility representations of preferences over menus of acts that capture the individual’s uncertainty about his future beliefs. The most general representation identifies a unique probability distribution over the set of posteriors that the decision maker might face at the time of choosing from the menu. We use this representation to characterize a notion of “more preference for flexibility” via a subjective analogue of Blackwell’s (1951, 1953) comparisons of experiments. A more specialized representation uniquely identifies information as a partition of the state space. This result allows us to compare individuals who expect to learn differently, even if they do not agree on their prior beliefs. We conclude by extending the basic model to accommodate an individual who expects to learn gradually over time by means of a subjective filtration.
    Keywords: Subjective learning, partitional learning, preference for flexibility, resolution of uncertainty, valuing more binary bets, subjective filtration
    JEL: D80 D81 D83
    Date: 2012–08–31
  2. By: Aviad Heifetz; Willemien Kets
    Abstract: This paper constructs a type space that contains all types with a finite depth of reasoning, as well as all types with an infinite depth of reasoning - in particular those types for whom finite-depth types are conceivable, or think that infnite-depth types are conceivable in the mind of other players, etcetera. We prove that this type space is uni- versal with respect to the class of type spaces that include types with a finite or infinite depth of reasoning. In particular, we show that it contains the standard universal type space of Mertens and Zamir (1985) as a belief-closed subspace, and that this subspace is characterized by common belief of infinite-depth reasoning. This framework allows us to study the robustness of classical results to small deviations from perfect rationality. As an example, we demonstrate that in the global games of Carlsson and van Damme (1993), a small ‘grain of naivete’ suffices to overturn the classical uniqueness results in that literature. JEL Code: C700, C720, D800, D830
    Keywords: Level-k models, cognitive hierarchy models, universal type space, global games
    Date: 2012–08–04
  3. By: Acemoglu, Daron; Robinson, James A; Verdier, Thierry
    Abstract: Because of their more limited inequality and more comprehensive social welfare systems, many perceive average welfare to be higher in Scandinavian societies than in the United States. Why then does the United States not adopt Scandinavian-style institutions? More generally, in an interdependent world, would we expect all countries to adopt the same institutions? To provide theoretical answers to this question, we develop a simple model of economic growth in a world in which all countries bene…t and potentially contribute to advances in the world technology frontier. A greater gap of incomes between successful and unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial e¤ort and hence a country’s contribution to the world technology frontier. We show that, under plausible assumptions, the world equilibrium is asymmetric: some countries will opt for a type of “cutthroat”capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free- ride on the cutthroat incentives of the leaders and choose a more “cuddly” form of capitalism. Paradoxically, those with cuddly reward structures, though poorer, may have higher welfare than cutthroat capitalists; but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of capitalism. We also show that domestic constraints from social democratic parties or unions may be bene…cial for a country because they prevent cutthroat capitalism domestically, instead inducing other countries to play this role.
    Keywords: cutthroat capitalism; economic growth; inequality; innovation; interdependency
    JEL: O33 O40 O43 P10 P16
    Date: 2012–09
  4. By: Christoph Kuzmics; Thomas Palfrey; Brian Rogers
    Abstract: We study symmetric play in a class of repeated games when players are patient. We show that, while the use of symmetric strategy profiles essentially does not restrict the set of feasible payoffs, the set of equilibrium payoffs is an interesting proper subset of the feasible and individually rational set. We also provide a theory of how rational individuals play these games, identifying particular strategies as focal through the considerations of Pareto optimality and simplicity. We report experiments that support many aspects of this theory. JEL Code: C73, C92, D63
    Keywords: symmetry, repeated games, focal points, experiments
    Date: 2012–07–01
  5. By: Georges Dionne; Nathalie Fombaron; Neil Doherty
    Abstract: In this survey we present some of the more significant results in the literature on adverse selection in insurance markets. Sections 1 and 2 introduce the subject and Section 3 discusses the monopoly model developed by Stiglitz (1977) for the case of single-period contracts extended by many authors to the multi-period case. The introduction of multi-period contracts raises many issues that are discussed in detail; time horizon, discounting, commitment of the parties, contract renegotiation and accidents underreporting. Section 4 covers the literature on competitive contracts. The analysis is more complicated because insurance companies must take into account competitive pressures when they set incentive contracts. As pointed out by Rothschild and Stiglitz (1976), there is not necessarily a Cournot-Nash equilibrium in the presence of adverse selection. However, market equilibrium can be sustained when principals anticipate competitive reactions to their behavior or when they adopt strategies that differ from the pure Nash strategy. Multi-period contracting is discussed. We show that different predictions on the evolution of insurer profits over time can be obtained from different assumptions concerning the sharing of information between insurers about individual's choice of contracts and accident experience. The roles of commitment and renegotiation between the parties to the contract are important. Section 5 introduces models that consider moral hazard and adverse selection simultaneously and Section 6 covers adverse selection when people can choose their risk status. Section 7 discusses many extensions to the basic models such as risk categorization, multidimensional adverse selection, symmetric imperfect information, reversed or double-sided adverse selection, principals more informed than agents, uberrima fides and participating contracts.
    Keywords: Adverse selection, insurance markets, monopoly, competitive contracts, self-selection mechanisms, single-period contracts, multi-period contracts, commitment, contract renegotiation, accident underreporting, risk categorization, participating contracts.
    JEL: D80 D81 G22
    Date: 2012
  6. By: Pradeep Dubey (Department of Economics, Stony Brook University); Siddhartha Sah (Department of Mathematics, Rutgers University, New Brunswick, New Jersey)
    Abstract: Consider agents who undertake costly effort to produce stochastic outputs observable by a principal. The principal can award a prize deterministically to the agent with the highest output, or to all of them with probabilities that are proportional to their outputs. We show that, if there is sufficient diversity in agents' skills relative to the noise on output, then the proportional prize will, in a precise sense, elicit more output on average, than the deterministic prize. Indeed, assuming agents know each others?skills (the complete information case), this result holds when any Nash equilibrium selection, under the proportional prize, is compared with any individually rational selection under the deterministic prize. When there is incomplete information, the result is still true but now we must restrict to Nash selections for both prizes. We also compute the optimal scheme, from among a natural class of probabilistic schemes, for awarding the prize; namely that which elicits maximal effort from the agents for the least prize. In general the optimal scheme is a monotonic step function which lies ?between?the proportional and deterministic schemes. When the competition is over small fractional increments, as happens in the presence of strong contestants whose base levels of production are high, the optimal scheme awards the prize according to the "log of the odds", with odds based upon the proportional prize.
    JEL: C70 C72 C79 D44 D63 D82
    Date: 2012–03
  7. By: David Pérez-Castrillo; David Wettstein
    Abstract: We study innovation contests with asymmetric information and identical contestants, where contestants' efforts and innate abilities generate inventions of varying qualities. The designer offers a reward to the contestant achieving the highest quality and receives the revenue generated by the innovation. We characterize the equilibrium behavior, outcomes and payoffs for both nondiscriminatory and discriminatory (where the reward is contestant-dependent) contests. We derive conditions under which the designer obtains a larger payoff when using a discriminatory contest and describe settings where these conditions are satisfied.
    Keywords: contests, auctions, innovations, discrimination
    JEL: O31 D44 J71
    Date: 2012–08
  8. By: Vincent Anesi (School of Economics, University of Nottingham); Daniel J Seidmann (School of Economics, University of Nottingham)
    Abstract: We present a model of bargaining in which a committee searches over the policy space, successively amending the default by voting over proposals. Bargaining ends when proposers are unable or unwilling to amend the existing default, which is then implemented. We characterize the policies which can be implemented from any initial default in a pure strategy stationary Markov perfect equilibrium for an interesting class of environments including multi-dimensional and infinite policy spaces. Minimumwinning coalitions may not form, and a player who does not propose may nevertheless earn all of the surplus from agreement. The set of immovable policies (which are implemented, once reached as default) forms a weakly stable set; and conversely, any weakly stable set is supported by some equilibrium. If the policy space is well ordered then the committee implements the ideal policy of the last proposer in a subset of a weakly stable set. However, this result does not generalize to other cases, allowing us to explore the effects of protocol manipulation. Variations in the quota and in the set of proposers may have surprising effects on the set of immovable policies. We also show that equilibria of our model are contemporaneous perfect e-equilibria of a related model of repeated implementation with an evolving default; and that immovable policies in semi-Markovian equilibria form the largest consistent set.
    Keywords: bargaining, committee voting, evolving default, stable set
    Date: 2012–03
  9. By: J Arin (Dpto. Ftos. A. Económico I, University of the Basque Country); V Feltkamp (Maastricht School of Management); M Montero (School of Economics, University of Nottingham)
    Abstract: This paper studies a noncooperative allocation procedure for coali- tional games with veto players. The procedure is similar to the one presented by Dagan et al. (1997) for bankruptcy problems. According to it, a player, the proposer, makes a proposal that the remaining play-ers must accept or reject. We present a model where the proposer can make sequential proposals over n periods. If responders are myopic maximizers (i.e. consider each period in isolation), the only subgame perfect equilibrium outcome is the serial rule of Arin and Feltkamp (2012) regardless of the order of moves. If all players are rational, the serial rule still arises as the unique subgame perfect equilibrium out- come if the order of moves is such that stronger players must respond to the proposal after weaker ones.
    Keywords: veto players, noncooperative bargaining, myopic behavior, serial rule
    Date: 2012–11
  10. By: Güth, Werner; Pull, Kerstin; Stadler, Manfred
    Abstract: We study price competition in heterogeneous markets where price decisions are delegated to agents. Principals implement a revenue sharing scheme to which agents react by commonly charging a sales price. The results of our model exemplify the importance of both intrafirm- and interfirm interactions of principals and agents in competition. We show that price delegation can increase or decrease the firms' surplus depending on the heterogeneity of the market and the number of agents employed by the firms. --
    Keywords: Strategic delegation,Agency theory,Revenue sharing
    JEL: C72 L22 M52
    Date: 2012
  11. By: Alessandro De Chiara; Luca Livio
    Abstract: We examine a hierarchical model where a principal hires a risk averse supervisor to monitor the e ort exerted by a productive agent. We assume that the supervisor can misreport the collected evidence without incurring any cost. We develop a corruption-proof contract which makes it sequentially rational for the supervisor to report truthfully. Crucial features of our contract are the timing at which the report is sent and the supervisor's payment scheme. In particular, the report must be sent before the outcome observation and the principal must reward the supervisor if and only if her report maximizes the conditional probability of the realized outcome. We also highlight a non-trivial interplay between corruption incentives, the signal precision and the supervisor's risk aversion.
    Keywords: corruption; moral hazard; soft information; supervision; truthful reporting
    Date: 2012–08
  12. By: Tröger, Thomas; Mylovanov, Timofiy
    Abstract: We show that, in environments with independent private values and transferable utility, a privately informed principal can solve her mechanism selection problem by implementing an allocation that is ex-ante optimal for her. No type of the principal can gain from proposing an alternative mechanism that is incentivefeasible with any belief that puts probability 0 on types that would strictly lose from proposing the alternative. We show that the solution exists in essentially any environment with finite type spaces, and in any linear-utility environment with continuous type spaces, allowing for arbitrary disagreement outcomes. As an application, we consider a bilateral exchange environment (Myerson and Satterthwaite, 1983) in which the principal is one of the traders. If the property rights over the good are dispersed among the traders, then the principal will implement an allocation in which she is almost surely better off than if her type is commonly known. The optimal mechanism is a combination of a participation fee, a buyout option for the principal, and a resale stage with posted prices and, hence, is a generalization of the posted price that would optimal if the principal's valuation were commonly known.
    Keywords: mechanism design, informed principal, ex-ante optimality, buyout option
    JEL: D82
    Date: 2012
  13. By: Andrea Galeotti; Brian Rogers
    Abstract: We consider the spread of a harmful state through a population divided into two groups. Interaction patterns capture the full spectrum of assortativity possibilities. We show that a central planner who aims for eradication optimally either divides equally the resources across groups, or concentrates entirely on one group, depending on whether there is positive or negative assortativity, respectively. We study a game in which agents can, at a cost, immunize. Negative assortative interactions generate highly asymmetric equilibrium outcomes between ex-ante identical groups. When groups have an underlying dierence, even a small amount of inter-group contacts generates large asymmetries. JEL Code: D61, H51, i14
    Keywords: Diffusion, SIS, externalities
    Date: 2012–07–26
  14. By: Samuel Haefner (University of Basel)
    Abstract: A multi-stage model on the course of war is presented: Individual battles are modeled as private value all-pay auctions with asymmetric combatants of two opposing teams. These auctions are placed within a multi-stage framework with a tug-of-war structure. Such framing provides a microfounded rationale for the use of the popular logit Tullock contest success function in models of militarized conflicts, yields new theoretical justification for existing empirical findings with respect to war, and provides new hypotheses regarding strategic battlefield behavior.
    Keywords: Auction, War, Multi-Stage Contest, Tug-of War, Tullock Contest Success Function, Microfoundation
    JEL: D74 F51 H56
    Date: 2012
  15. By: Tomoo Kikuchi (Department of Economics, National University of Singapore); Kazuo Nishimura (Institute of Economic Research, Kyoto University); John Stachurski (Research School of Economics, The Australian National University)
    Abstract: This paper formulates a model embedding the key ideas from Ronald Coase’s famous essay on the theory of the firm in a simple competitive equilibrium setting with anarbitrary number of firms. The model studies the structure of production when transaction costs and diminishing returns to management are treated as given. In addition to recovering Coase’s main insights as equilibrium conditions, the model yields many new predictions on prices, firm boundaries and division of the value chain.
    Keywords: Transaction costs, vertical integration, production chains
    JEL: D02 D21 L11 L23
    Date: 2012–08
  16. By: László Á. Kóczy (Óbuda University)
    Abstract: We study coalitional games where the coalitional payoffs depend on the entire coalition structure. We introduce a noncooperative, sequential coalition formation model and show that the set of equilibrium outcomes coincides with the recursive core, a generalisation of the core to such games. In order to extend past results limited to totally recursive-balanced partition function form games we introduce subgame-consistency that requires perfectness in relevant subgames only, while some unreached subgames are ignored. Due to the externalities, the profitability of deviations depends on the partition formed by the remaining players: the stability of core payoff configurations is ensured by a combination of the pessimism of players going for certain profits only and the assumption that players base their stationary strategies on a made-up history punishing some of the possible deviators -- and getting this sometimes right.
    Keywords: partition function, externalities, implementation, recursive core, stationary perfect equilibrium, time consistent equilibrium JEL Codes: C71, C72
    Date: 2012–08
  17. By: Pouget, Sébastien; Villeneuve, Stéphane
    Abstract: This paper proposes a dynamic model of financial markets where some investors are prone to the confirmation bias. Following insights from the psychological literature, these agents are assumed to amplify signals that are consistent with their prior views. In a model with public information only, this assumption provides a rationale for the volume-based price momentum documented by Lee and Swaminathan (2000). Our results are also consistent with a variety of other empirically documented phenomena such as bubbles, crashes, reversals and excess price volatility and volume. Novel empirical predictions are derived: i) return continuation should be stronger when biased traders' beliefs are more extreme, and ii) return continuation should be stronger after an increase in trading volume. The implications of our model for short-term quantitative investments are twofold: i) optimal trading strategies involve riding bubbles, and that ii) contrarian trading can be optimal in some market circumstances.
    Keywords: financial markets, psychological biases, confirmation bias, momentum, reversal, bubbles, trading strategies
    Date: 2012–03
  18. By: Andrew Monaco (Department of Economics, University of Kansas); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: This paper analyzes games with both strategic substitutes and strategic complements. Such games may behave differently from either games with strategic complements or games with strategic substitutes. In such games, equilibria do not decrease as the parameter increases. Moreover, natural conditions are presented to guarantee that an increase in the parameter leads to an increase in the equilibrium: in other words, conditions to guarantee monotone comparative statics. These conditions are based on intuitive tradeoffs between direct parameter effects and indirect strategic effects. These conditions are needed only for players with strategic substitutes; no conditions are imposed on players with strategic complements. Several examples highlight the results.
    Keywords: Lattice games, strategic complements, strategic substitutes, equilibrium set, monotone comparative statics
    JEL: C70 C72
    Date: 2012–08
  19. By: Moritz Bonn
    Abstract: This paper studies how the existence of a minority culture infl uences the well-being of the native population and its attitude towards immigrants. In this context, I assume that multicultural interaction can be advantageous for immigrants and natives if intercultural obstacles and communication problems are abolished. It is found that certain shares of the immigrant as well as of the native population have incentives to acquire knowledge of the respective other culture since it enables them to interact with each other. I find that immigrants are more likely to acquire knowledge of the domestic culture than vice versa what I attribute to differences in the respective population size, assortative matching behavior and potentially asymmetric learning costs. The model further predicts that natives who have sufficiently low costs of learning the foreign culture are willing to vote for free migration whereas those who have higher learning costs will be in favor of immigration restrictions
    Keywords: Immigration, Cultural Interaction, Political Economy
    JEL: F22 J15 Z1
    Date: 2012
  20. By: Busetto, Francesca (Dipartimento di Scienze Economiche e Statistiche, Universitµ a degli Studi di Udine); Codognato, Giulio (Dipartimento di Scienze Economiche e Statistiche, Universitµ a degli Studi di Udine); Ghosal, Sayantan (Department of Economics, University of Warwick)
    Abstract: In this paper, in an exchange economy with atoms and an atomless part, we analyze the relationship between the set of the Cournot-Nash equilibrium allocations of a strategic market game and the set of the Walras equilibrium allocations of the exchange economy with which it is associated. In an example, we show that, even when atoms are countably infinite, Cournot-Nash equilibria yield different allocations from the Walras equilibrium allocations of the underlying exchange economy. We partially replicate the exchange economy by increasing the number of atoms without affecting the atomless part while ensuring that the measure space of agents remains ¯nite. We show that any sequence of Cournot-Nash equilibrium allocations of the strategic market game associated with the partially replicated exchange economies approximates a Walras equilibrium allocation of the original exchange economy. JEL classification:
    Date: 2012

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