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on Microeconomics |
| By: | Ayala Arad; Ariel Rubinstein |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000497&r=mic |
| By: | Anna Gumena; Andrei Savochkin |
| Abstract: | In the framework of dynamic choice under uncertainty, we define dynamic stability as a combination of two assumptions prevalent in the literature: dynamic consistency and the requirement that updated preferences belong to the same class as ex ante ones. Maxmin preferences are shown to be not dynamically stable, and any dynamically stable subset in that class can contain only expected utility preferences. Dynamic stability also turns out to be a defining characteristic of the multiplier preferences of Hansen and Sargent (2001) within the scope of variational preferences. Restrictions imposed by dynamic stability are shown to be related to invariance of preferences. |
| Keywords: | dynamic consistency, dynamic stability, ambiguity, invariance, consequentialism, Sure Thing Principle, multiplier preferences |
| JEL: | D81 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:263&r=mic |
| By: | Antoine Nebout |
| Abstract: | This paper is a critical reflection on the notion of dynamic consistency that is commonly used in the literature in Economics and Decision Theory and on the difficulty to test it in an experimental set up. Building on the possible characteristics of individual dynamic preferences, we propose a conceptual categorisation of possible sequential decision making behaviors. In particular, we show that not conforming to Expected Utility Theory does not necessarily implies a violation of dynamic consistency and propose a simple set of decision tasks that allows to reveal different strategic types of resolution of a sequential decision problem by a non-expected utility maximizers. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:12-27&r=mic |
| By: | Attila Ambrus; Kareen Rozen |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000512&r=mic |
| By: | Carlos Oyarzun; Rajiv Sarin |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000572&r=mic |
| By: | Johanna Etner; Meglena Jeleva |
| Abstract: | The aim of this paper is to propose a behavioral characterization of individuals who underestimate probability modifications and to characterize this behavior in the standard preferences representation models under risk (Expected utility, Dual theory, Rank Dependant Utility Theory and MaxMin Expected Utility). Our main results are the following. Underreaction to probability modifications is in general independent from standard risk aversion and prudence. In models involving probability transformation functions, it is characterized by the slope of the probability transformation function. In the MaxMin Expected utility model under risk, it is related to the weights of the maximal and minimal consequences in the preferences representation function. Considering a simple prevention decision, consisting in the reduction of the probability of a monetary loss, we show that individuals who underreact to probability modifications invest less in prevention than individuals who objectively evaluate these modifications. Underreaction to probability modification is thus a possible explanation for low investment in prevention. |
| Keywords: | probability perception, non expected utility, prevention |
| JEL: | D81 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-33&r=mic |
| By: | Ekaterina Svetlova (Karlshochschule International University); Henk van Elst (Karlshochschule International University) |
| Abstract: | In this article, we address the question of how non-knowledge about future events that influence economic agents' decisions in choice settings has been formally represented in economic theory up to date. To position our discussion within the ongoing debate on uncertainty, we provide a brief review of historical developments in economic theory and decision theory on the description of economic agents' choice behaviour under conditions of uncertainty, understood as either (i) ambiguity, or (ii) unawareness. Accordingly, we identify and discuss two approaches to the formalisation of non-knowledge: one based on decision-making in the context of a state space representing the exogenous world, as in Savage's axiomatisation and some successor concepts (ambiguity as situations with unknown probabilities), and one based on decision-making over a set of menus of potential future opportunities, providing the possibility of derivation of agents' subjective state spaces (unawareness as situation with imperfect subjective knowledge of all future events possible). We also discuss impeding challenges of the formalisation of non-knowledge. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1209.2204&r=mic |
| By: | Dietrich, Franz; List, Christian; Bradley, Richard |
| Abstract: | This paper characterizes different belief revision rules in a unified framework: Bayesian revision upon learning some event, Jeffrey revision upon learning new probabilities of some events, Adams revision upon learning some new conditional probabilities, and `dual-Jeffrey' revision upon learning an entire new conditional probability function. Though seemingly different, these revision rules follow from the same two principles: responsiveness, which requires that revised beliefs be consistent with the learning experience, and conservativeness, which requires that those beliefs of the agent on which the learning experience is `silent' (in a technical sense) do not change. So, the four revision rules apply the same revision policy, yet to different kinds of learning experience. |
| Keywords: | Subjective probability; Bayes's rule; Jeffrey's rule; axiomatic foundations; unawareness |
| JEL: | C00 D83 D80 D00 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41240&r=mic |
| By: | Pivato, Marcus |
| Abstract: | A ``difference preorder'' is a (possibly incomplete) preorder on a space of state changes (rather than the states themselves); it encodes information about preference intensity, in addition to ordinal preferences. We find necessary and sufficient conditions for a difference preorder to be representable by a family of cardinal utility functions which take values in linearly ordered abelian groups. This has applications to interpersonal comparisons, social welfare, and decisions under uncertainty. |
| Keywords: | Preference intensity; cardinal utility; linearly ordered abelian group; social welfare; uncertainty |
| JEL: | D81 D60 |
| Date: | 2012–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41182&r=mic |
| By: | David Dillenberger (Department of Economics, University of Pennsylvania); Philipp Sadowski (Department of Economics, Duke University) |
| Abstract: | We study an individual who faces a dynamic decision problem in which the process of information arrival is unobserved by the analyst, and hence should be identified from observed choice data. An information structure is objectively describable if signals correspond to events of the objective state space. We derive a representation of preferences over menus of acts that captures the behavior of a Bayesian decision maker who expects to receive such signals. The class of information structures that can support such a representation generalizes the notion of a partition of the state space. The representation allows us to compare individuals in terms of the preciseness of their information structures without requiring that they share the same prior beliefs. We apply the model to study an individual who anticipates gradual resolution of uncertainty over time. Both the filtration (the timing of information arrival with the sequence of partitions it induces) and prior beliefs are uniquely identified. |
| Keywords: | Resolution of uncertainty, valuing binary bets more, generalized partition, subjective filtration |
| JEL: | D80 D81 D83 |
| Date: | 2012–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:12-036&r=mic |
| By: | Blanchet, Adrien (GREMAQ, TSE); Carlier, Guillaume (CEREMAD, Dauphine) |
| Abstract: | We study a class of games with a continuum of players for which Cournot-Nash equilibria can be obtained by the minimisation of some cost, related to optimal transport. This cost is not convex in the usual sense in general but it turns out to have hidden strict convexity properties in many relevant cases. This enables us to obtain new uniqueness results and a characterisation of equilibria in terms of some partial differential equations, a simple numerical scheme in dimension one as well as an analysis of the inefficiency of equilibria. |
| Keywords: | Cournot-Nash equilibria, mean-field games, optimal transport, externalities, Monge-Amp`ere equations, convexity along generalised geodesics. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:26030&r=mic |
| By: | Martin Shubik |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000541&r=mic |
| By: | Dirk Bergemann; Ji Shen; Yun Xu; Edmund M. Yeh |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000559&r=mic |
| By: | Farhi, Emmanuel; Tirole, Jean |
| Abstract: | The paper revisits and qualifies existing insights on security design. A rich literature argues that tranching creates debt-like instruments that are robust to adverse selection or discourage wasteful information acquisition. Yet, for a given information structure, while tranching confines and liquefies the safe part of a cash flow (the insulation effect), bundling makes the risky part more liquid (the trading adjuvant effect). Moreover, tranching always has adverse welfare effects on information acquisition: It encourages (discourages) information acquisition when it should be deterred (encouraged). The paper provides conditions under which tranching reduces welfare even when the insulation effect dominates the trading adjuvant effect. The paper’s second contribution is to analyze the velocity of assets that are repeatedly traded. The dynamic model can be nested into the static one and insights are shown to be closely related to those on tranching. The central insight is that liquidity is self-fulfilling: A perception of future illiquidity creates current illiquidity. |
| Keywords: | Liquidity, velocity, security design, tranching, information acquisition. |
| JEL: | D82 E51 G12 G14 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:26065&r=mic |
| By: | Janko Gorter |
| Abstract: | In the wake of the financial crisis, several countries are to ban commission payments to improve the quality of financial advice. This paper investigates the potential impact of commission bans on the source and quality of financial advice. To this end, we extend Inderst and Ottaviani’s (2012) framework by allowing for both direct and intermediary advice. Our extended model has a unique separating equilibrium where customers that are naïve about conflicts of interests prefer direct advice to intermediary advice, though the latter is of better quality. Alert customers rationally prefer intermediary advice. Accordingly, the welfare benefits from commissions bans may be limited in practice. |
| Keywords: | information provision; conflicts of interests; commission bans; distribution channel; consumer financial protection |
| JEL: | D18 D83 G24 G28 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:350&r=mic |
| By: | Yi-Chun Chen; Alfredo Di Tillio; Eduardo Faingold; Siyang Xiong |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000517&r=mic |
| By: | Pradeep K. Dubey; Rahul Garg; Bernard De Meyer |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000526&r=mic |
| By: | Eric Kemp-Benedict |
| Abstract: | General equilibrium is the dominant theoretical framework for economic policy analysis at the level of the whole economy. In practice, general equilibrium treats economies as being always in equilibrium, albeit in a sequence of equilibria as driven by external changes in parameters. This view is sometimes defended on the grounds that internal dynamics are fast, while external changes are slow, so that the economy can be viewed as adjusting instantaneously to any changed conditions. However, the argument has not been presented in a rigorous way. In this paper we show that when conditions are such that: a) economies do respond essentially instantaneously to external influences; b) the external changes are small compared to the values that characterize the economy; and c) the economy's dynamics are continuous and first-order in time (as for Walrasian tatonnement), the resulting economic theory is equivalent to a topological field theory. Because it is a topological theory it has no dynamics in a strict sense, and so perturbatively---that is, when examining dynamics in the region of a critical point---the field theory behaves as general equilibrium posits. However, the field-theoretic form of the theory admits non-perturbative instanton solutions that link different critical points. Thus, in this theory, and in contrast to general equilibrium, the internal dynamics of the model occasionally make an appearance in the form of abrupt, noise-driven transitions between critical points. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1209.1705&r=mic |
| By: | Boris Podobnik; Davor Horvatic; Mark Dickison; H. Eugene Stanley |
| Abstract: | We generalize the scale-free network model of Barab\`asi and Albert [Science 286, 509 (1999)] by proposing a class of stochastic models for scale-free interdependent networks in which interdependent nodes are not randomly connected but rather are connected via preferential attachment (PA). Each network grows through the continuous addition of new nodes, and new nodes in each network attach preferentially and simultaneously to (a) well-connected nodes within the same network and (b) well-connected nodes in other networks. We present analytic solutions for the power-law exponents as functions of the number of links both between networks and within networks. We show that a cross-clustering coefficient vs. size of network $N$ follows a power law. We illustrate the models using selected examples from the Internet and finance. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1209.2817&r=mic |
| By: | D'Agostino , Elena; Lisciandra, Maurizio |
| Abstract: | In this paper we provide a simple model examining the choice between enforceable and non-enforceable contracts when, on the one hand, drafting an enforceable contract is costly and, on the other hand, fulfilling a non-enforceable contract is left to parties’ fairness. According to the previous literature we find that (1) the choice between the two contract settings in equilibrium depends on fairness and enforcement costs, and (2) whenever a non-enforceable contract is chosen in equilibrium it turns out welfare-improving. However, we are able to measure efficiency and make punctual predictions of how distant the decentralized solution is from first-best. Precisely, we find that efficiency is strongly conditioned by the stake of the transaction, so that both contracts allow for very high levels of efficiency in the presence of low-stake transactions, whereas efficiency always collapses to very low levels for high-stake transactions. It implies that a social planner should intervene only in the last case, even in the presence of high levels of fairness. Our results are robust and hold in a repeated game, proving that reputation is not welfare improving unless the number of interactions exceeds a given threshold. |
| Keywords: | fairness; enforceability; contract choice; welfare analysis |
| JEL: | D03 D86 |
| Date: | 2012–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41261&r=mic |
| By: | Kaminski, Bogumil; Latek, Maciej |
| Abstract: | We examine a market in which consumers are forced to rely on noisy price signals to select between homogeneous products. The noise originates either from firms' price obfuscation or consumers' bounded information processing capabilities. Standard models and empirical experiments of markets with noise or price obfuscation show that it leads to higher prices detrimental to consumers' welfare. This paper identifies conditions under which an opposite result can be expected. In particular, it shows that a moderate level of noise is beneficial to consumers in a market with a cost leader. |
| Keywords: | noisy pricing; bounded rationality; Bertrand oligopoly; game theory |
| JEL: | L13 C02 D43 C72 |
| Date: | 2012–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41333&r=mic |
| By: | Cao, Xiaoyong; Tian, Guoqiang |
| Abstract: | This paper studies equilibria of second price auctions in independent private value envi- ronments with different participation costs. Two types of equilibria are identified: monotonic equilibria in which a bidder with a lower participation cost results in a lower cutoff for sub- mitting a bid, and non-monotonic equilibria in which a lower participation cost results in a higher cutoff. We show that there always exists a monotonic equilibrium, and further, that the monotonic equilibrium is unique for either concave distribution functions or strictly convex distribution functions with non-increasing reverse hazard rates. There exist non- monotonic equilibria when the distribution functions are strictly convex and the difference of the participation costs is sufficiently small. We also provide comparative static analysis and study the limiting properties of equilibria when the difference in bidders’ participation costs approaches zero. |
| Keywords: | Private Values; Differentiated Participation Costs; Second Price Auctions; Non-monotonic Equilibrium; Existence and Uniqueness of Equilibrium |
| JEL: | D44 D61 D82 C72 C62 |
| Date: | 2012–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41200&r=mic |
| By: | Kohler, Stefan |
| Abstract: | Parties in a bargaining situation may perceive guilt, a utility loss caused by receiving the larger share that is modeled in some social preferences. I extend Rubinstein (1982)'s solution of the open-ended alternating-offer bargaining problem for self-interested bargainers to a game with equally patient bargainers that exhibit a similar degree of guilt. The bargaining parties still reach agreement in the first period. If guilt is strong, they split the bargaining surplus equally. In contrast, if guilt is weak, the bargaining outcome is tilted away from the Rubinstein division towards a more unequal split. As both bargainers sensation of guilt diminishes, the bargaining outcome converges to the Rubinstein division. |
| Keywords: | alternating offers; bargaining; bargaining power; behavioral economics; equity; fairness; guilt; inequality aversion; negotiation; social preferences |
| JEL: | D03 C78 D63 |
| Date: | 2012–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40760&r=mic |
| By: | Kohler, Stefan |
| Abstract: | Bargainers in an open-ended alternating-offer bargaining situation may perceive envy, a utility loss caused by receiving the smaller share that is modeled in some social preferences in addition to self-interest. I extend Rubinstein (1982)'s original solution of the bargaining problem for two self-interested bargainers to this strategic situation. Bargainers still reach agreement in the first period and their bargaining shares increase in the strength of their own envy. As both bargainers' envy diminishes, the agreed partition converges to the Rubinstein division. If equally patient bargaining parties exhibit similar envy, then the agreed partition is tilted away from the Rubinstein division towards the equal division. Notably, the potential sensation of envy also boosts the share of the eventually envy-free party who leaves the bargaining with the larger share under the agreed partition. This gain in bargaining strength through envy can result in a bargaining outcome that is more unequal than predicted by the Rubinstein division. |
| Keywords: | alternating offers; bargaining; bargaining power; behavioral economics; envy; equity; fairness; inequality aversion; negotiation; social preferences |
| JEL: | D03 C78 D63 |
| Date: | 2012–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40761&r=mic |