nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒09‒30
twenty-one papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Rules with Discretion and Local Information By Bowen, T. Renee; Kreps, David M.; Skrzypacz, Andrzej
  2. New Results in Recursive Contract Theory By Ramon Marimon
  3. Deliberation, Leadership and Information Aggregation By Javier Rivas; Carmelo Rodriguez-Alvarez
  4. Incentive provision when contracting is costly By Kvaløy, Ola; Olsen, Trond
  5. The Appeal of Information Transactions By Antonio Cabrales; Olivier Gossner; Roberto Serrano
  6. Strategic information transmission and stochastic orders By Szalay, Dezsö
  7. Evidential equilibria in static games By Sanjit Dhami; ali al-Nowaihi
  8. Equilibrium Existence and Uniqueness In Network Games with Additive Preferences By Yann Rébillé; Lionel Richefort
  9. Welfare Analysis in Games with substitutabilities By Yann Rébillé; Lionel Richefort
  10. Liberty and the post-utilitarian society By Saint-Paul, Gilles
  11. Level-k reasoning and incentives By Larbi Alaoui; Antonio Penta
  12. Some Conceptual Difficulties Regarding 'Net' Multipliers By Ferran Sancho
  13. Approximating Values of MinSup Problems with Quasi-variational Inequality Constraints By M. Beatrice Lignola; Jacqueline Morgan
  14. Strategic Immunization and Group Structure By Andrea Galeotti; Brian W. Rogers
  15. Information Inertia By Jayant Ganguli; Scott Condie; Philipp Karl Illeditsch
  16. On Axiomatizations of the Shapley Value for Assignment Games By Rene van den Brink; Miklos Pinter
  17. An approximate dual-self model and paradoxes of choice under risk By Drew Fudenberg; David K. Levine; Zacharias Maniadis
  18. Codes of conduct, private information, and repeated games By Juan I. Block; David K. Levine
  19. Conflict and the evolution of societies By David K. Levine; Salvatore Modica
  20. Integer Programming and Nondictatorial Arrovian Social Welfare Functions By Francesca Busetto; Giulio Codognato; Simone Tonin
  21. Asymmetric flow networks By Olaizola Ortega, María Norma; Valenciano Llovera, Federico

  1. By: Bowen, T. Renee (Stanford University); Kreps, David M. (Stanford University); Skrzypacz, Andrzej (Stanford University)
    Abstract: To ensure that individual actors take certain actions, community enforcement may be required. This can present a rules-versus-discretion dilemma: It can become impossible to employ discretion based on information that is not widely held, because the wider community is unable to tell whether the information was used correctly. Instead, actions may need to conform to simple and widely verifiable rules. We study when discretion in the form of permitted exceptions to the simple rule can be permitted, if the information is shared by the action taker and a second party, who is able to verify for the larger group that an exception is warranted. In particular, we compare protocols where the second party excuses the action taker from taking the action ex ante with protocols where the second party instead forgives a rule-breaking actor ex post, finding that the latter is, in general, useful in a wider variety of circumstances.
    JEL: C73 D82
    Date: 2012–08
  2. By: Ramon Marimon (European University Institute and UPF-BarcelonaGSE)
    Abstract: Presentation of some new results showing how, under very general conditions, the recursive saddle-point method, pioneered by Marcet and Marimon, delivers the appropriate solution for contracting problems with intertemporal incentive constraints, with or without unique solutions. These results summarize work from: Marimon and Marcet "Recursive Contracts" (2011) and Marimon, Messner and Pavoni "Solving Recursive Contracts with Non-unique Solutions" (2011), as well as from ongoing work with Jan Werner: "On the Envelope Theorem without Differentiability" (2010).
    Date: 2011
  3. By: Javier Rivas; Carmelo Rodriguez-Alvarez
    Abstract: We analyze committees of voters who take a decision between two options as a two stage process. In a discussion stage, voters share non verifiable information about a private signal concerning what is the best option. In a voting stage, votes are cast and one of the options is implemented. We introduce the possibility of leadership whereby a certain voter, the leader, is more influential than the rest at the discussion stage even though she is not better informed. We study information transmission and find, amongst others, a non-monotonic relation between how influential the leader is and how truthful voters are at discussion stage.
    Date: 2012–09
  4. By: Kvaløy, Ola (UiS); Olsen, Trond (NHH)
    Abstract: We analyze optimal incentive contracts in a model where the probability of court enforcement is determined by the costs spent on contracting. The analysis shows that contract costs matter for incentive provision, both in static spot contracts and repeated game relational contracts. We show that there is not a monotonic relationship between contracting costs and incentive intensity, and that an increase in contracting costs may lead to higher-powered incentives. Moreover, we formulate hypotheses about the relationship between legal systems and incentive provision. Specifically, the model predicts higher-powered incentives in common law than in civil law systems.
    Keywords: .
    JEL: A10
    Date: 2012–09–19
  5. By: Antonio Cabrales; Olivier Gossner; Roberto Serrano
    Abstract: An information transaction entails the purchase of information. Formally, it consists of an information structure together with a price. We develop an index of the appeal of information transactions, which is derived as a dual to the agent’s preferences for information. The index of information transactions has a simple analytic characterization in terms of the relative entropy from priors to posteriors, and it also connects naturally with a recent index of riskiness.
    Keywords: Informativeness, Information transactions, Kullback-Leibler divergence ,Relative entropy, Decision under uncertainty ,Investment, Blackwell ordering
    JEL: C00 C43 D00 D80 D81 G00 G11
    Date: 2012–09
  6. By: Szalay, Dezsö
    Abstract: I develop new results on uniqueness and comparative statics of equilibria in the Crawford and Sobel (1982) strategic information transmission game. For a class of utility functions, I demonstrate that logconcavity of the density implies uniqueness of equilibria inducing a given number of Receiver actions. I provide comparative statics results with respect to the distribution of types for distributions that are comparable in the likelihood ratio order, implying, e.g., that advice from a better informed Sender induces the Receiver to choose actions that are more spread out.
    Keywords: strategic information transmission; cheap talk; uniqueness; comparative statics; logconcavity; likelihood ratio order
    JEL: D82
    Date: 2012–09
  7. By: Sanjit Dhami; ali al-Nowaihi
    Abstract: Under uncertainty about what others will do, evidence suggests that people often use evidential reasoning (ER), i.e., they assign diagnostic significance to their own actions in forming beliefs about the actions of others. ER successfully explains the evidence from many important games. We provide a formal theoretical framework for discussing ER by proposing evidential games and the relevant solution concept evidential equilibrium (EE). We derive the relation between a Nash equilibrium and an EE. We apply EE to several common games including the prisoners’ dilemma and oligopoly games.
    Keywords: Evidential and causal reasoning; evidential games; social projection functions; ingroups and outgroups; evidential equilibria and consistent evidential equilibria; Nash equilibria, common knowledge and epistemic foundations.
    Date: 2012–07
  8. By: Yann Rébillé (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Lionel Richefort (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: A directed network game of imperfect strategic substitutes with heterogeneous players is analyzed. We consider concave additive separable utility functions that encompass the quasi-linear ones. It is found that pure strategy Nash equilibria verify a non-linear complementarity problem. By requiring appropriate concavity in the utility functions, the existence of an equilibrium point is shown and equilibrium uniqueness is established with a P -matrix. Then, it appears that previous findings on network structure and sparsity hold for many more games.
    Keywords: network game ; additive preferences ; complementarity problem ; P -matrix ;
    Date: 2012–09–17
  9. By: Yann Rébillé (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Lionel Richefort (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: This paper investigates the social optimum in network games of strategic substitutes and identifies how network structure shapes optimal policies. First, we show that the socially optimal profile is ob-tained through a combination of two opposite network effects, generated by the incoming and the outgoing weighted Bonacich centrality measures. Next, three different policies that restore the social optimum are derived, and the implications of the predecessor(s)-successor(s) relationship between the agents on each policy instrument are explored. Then, the link between optimal taxes and the density of the network is established.
    Keywords: network game ; social optimum ; Bonacich centrality ; opti- mal policy ; spectral radius.
    Date: 2012–09–17
  10. By: Saint-Paul, Gilles (TSE)
    Abstract: Utilitarian foundations for limited government are shaky insofar as they assume rational and consistent individuals. Recently economists’ assumption of rational actors has come under sustained attack. Behavioural economics has suggested that people are plagued by irrational biases and inconsistencies. The author elucidates how these developments have led to a post-utilitarianism which is held to justify paternalistic interventions by the state via ‘sin taxes’ , direct bans or new obligations. Individual responsibility is seriously undermined, as is faith in markets. He concludes that supporters of individual freedom need to move away from utilitarian reasoning, reassert core values of autonomy and responsibility, and define strict limits on the scope of government intervention.
    Keywords: behavioural economics, utilitarianism, government, paternalism
    Date: 2012–09
  11. 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 payoffs 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 payoffs 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
  12. By: Ferran Sancho
    Abstract: Multipliers are routinely used for impact evaluation of private projects and public policies at the national and subnational levels. Oosterhaven and Stelder (2002) correctly pointed out the misuse of standard 'gross' multipliers and proposed the concept of 'net' multiplier as a solution to this bad practice. We prove their proposal is not well founded. We do so by showing that supporting theorems are faulty in enunciation and demonstration. The proofs are flawed due to an analytical error but the theorems themselves cannot be salvaged as generic, non-curiosum counterexamples demonstrate. We also provide a general analytical framework for multipliers and, using it, we show that standard 'gross' multipliers are all that is needed within the interindustry model since they follow the causal logic of the economic model, are well defined and independent of exogenous shocks, and are interpretable as predictors for change.
    Keywords: : gross multipliers, net multipliers, interindustry accounting, interindustry models.
    JEL: C67 D57 R15
    Date: 2012–09–21
  13. By: M. Beatrice Lignola (Università di Napoli Federico II); Jacqueline Morgan (Università di Napoli Federico II and CSEF)
    Abstract: We consider a two-stage model where a leader, according to its risk-averse proneness, solves a MinSup problem with constraints corresponding to the reaction sets of a follower and defined by the solutions of a quasi-variational inequality (i.e. a variational inequality having constraint sets depending on its own solutions) which appear in concrete economic models such as social and economic networks, financial derivative models, transportation network congestion and traffic equilibrium. In general the infimal value of a MinSup (or the maximal value of a MaxInf) problem with quasi-variational inequality constraints is not stable under perturbations in the sense that the sequence of optimal values for the perturbed problems may not converge to the optimal value of the original problem even in presence of nice data. Thus, we introduce different types of approximate values for this problem, we investigate their asymptotical behavior under perturbations and we emphasized the results concerning MinSup problems with variational inequality constraints as well results holding under strict assumptions and that can be easily employed in applications.
    Date: 2012–09–14
  14. By: Andrea Galeotti; Brian W. 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 difference, even a small amount of inter-group contacts generates large asymmetries. We study the diffusion of a harmful state through a population. Immunity is available, but is costly. The state is meant to capture various kinds of choices or risky behaviors such as, for example, tobacco use, in which case immunity is interpreted as a commitment to avoid the temptation of smoking. The state can also capture the presence of an electronic virus on a computer network; in this case immunity represents the purchase of anti-virus software, or other costly measures taken to avoid the virus. But perhaps the most conventional interpretation is that the state represents human infection of various communicable diseases that spread through social contacts; in this case immunity captures a decision to vaccinate oneself.
    Date: 2012–07–25
  15. By: Jayant Ganguli; Scott Condie; Philipp Karl Illeditsch
    Abstract: We study how information about an asset affects optimal portfolios and equilibrium asset prices when investors are not sure about the model that predicts future asset values and thus treat the information as ambiguous. We show that this ambiguity leads to optimal portfolios that are insensitive to news even though there are no information processing costs or other market frictions. In equilibrium, we show that stock prices may not react to public information that is worse than expected and this mispricing of bad news leads to profitable trading strategies based on public information.
    Date: 2012–09–19
  16. By: Rene van den Brink (VU University Amsterdam); Miklos Pinter (Corvinus University)
    Abstract: We consider the problem of axiomatizing the Shapley value on the class of assignment games. We first show that several axiomatizations of the Shapley value on the class of all TU-games do not characterize this solution on the class of assignment games by providing alternative solutions that satisfy these axioms. However, when considering an assignment game as a communication graph game where the game is simply the assignment game and the graph is a corresponding bipartite graph buyers are connected with sellers only, we show that Myerson's component efficiency and fairness axioms do characterize the Shapley value on the class of assignment games. Moreover, these two axioms have a natural interpretation for assignment games. Component efficiency yields submarket efficiency stating that the sum of the payoffs of all players in a submarket equals the worth of that submarket, where a submarket is a set of buyers and sellers such that all buyers in this set hav e zero valuation for the goods offered by the sellers outside the set, and all buyers outside the set have zero valuations for the goods offered by sellers inside the set. Fairness of the graph game solution boils down to valuation fairness stating that only changing the valuation of one particular buyer for the good offered by a particular seller changes the payoffs of this buyer and seller by the same amount.
    Keywords: Assignment game; Shapley value; communication graph game; submarket efficiency; valuation fairness
    JEL: C71 C78
    Date: 2012–09–13
  17. By: Drew Fudenberg; David K. Levine; Zacharias Maniadis
    Abstract: We derive a simplified version of the model of Fudenberg and Levine [2006, 2011] and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out” in the Marshack-Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.
    Keywords: Macroeconomics - Econometric models
    Date: 2012
  18. By: Juan I. Block; David K. Levine
    Abstract: We examine self-referential games in which there is a chance of understanding an opponent’s intentions. Our main focus is on the interaction of two sources of information about opponents’ play: direct observation of the opponent’s code-of-conduct, and indirect observation of the opponent’s play in a repeated setting.
    Keywords: Game theory
    Date: 2012
  19. By: David K. Levine; Salvatore Modica
    Abstract: The Malthusian theory of evolution disregards a pervasive fact about human societies: they expand through conflict. When this is taken account of the long-run favors not a large population at the level of subsistence, nor yet institutions that maximize welfare or per capita output, but rather institutions that maximize free resources. These free resources are the output available to society after deducting the payments necessary for subsistence and for the incentives needed to induce pro- duction, and the other claims to production such as transfer payments and resources absorbed by elites. We develop the evolutionary underpinnings of this model, and examine the implications of free resource maximization for the evolution of societies in several applications. Since free resources are increasing both in per capita income and population, evolution will favor large rich societies. We will show how technological improvement is likely to increase per capita output as well as increase population, and how economically inefficient institutions such as bureaucracy arise.
    Keywords: Demography ; Economic conditions
    Date: 2012
  20. By: Francesca Busetto; Giulio Codognato; Simone Tonin
    Abstract: Following Sethuraman, Teo and Vohra ((2003), (2006)), we apply integer programming tools to the analysis of fundamental issues in social choice theory. We generalize Sethuraman et al.'s approach specifying integer programs in which variables are allowed to assume values in the set {0; 1/2 ; 1}. We show that there exists a one-to-one correspondence between the solutions of an integer program defined on this set and the set of the Arrovian social welfare functions with ties (i.e. admitting indifference in the range). We use our generalized integer programs to analyze nondictatorial Arrovian social welfare functions, in the line opened by Kalai and Muller (1977). Our main theorem provides a complete characterization of the domains admitting non- dictatorial Arrovian social welfare functions with ties by introducing a notion of strict decomposability.
    JEL: D71
    Date: 2012
  21. By: Olaizola Ortega, María Norma; Valenciano Llovera, Federico
    Abstract: This paper provides a new model of network formation that bridges the gap between the two benchmark models by Bala and Goyal, the one-way flow model, and the two-way flow model, and includes both as particular extreme cases. As in both benchmark models, in what we call an "asymmetric flow" network a link can be initiated unilaterally by any player with any other, and the flow through a link towards the player who supports it is perfect. Unlike those models, in the opposite direction there is friction or decay. When this decay is complete there is no flow and this corresponds to the one-way flow model. The limit case when the decay in the opposite direction (and asymmetry) disappears, corresponds to the two-way flow model. We characterize stable and strictly stable architectures for the whole range of parameters of this "intermediate" and more general model. We also prove the convergence of Bala and Goyal's dynamic model in this context.
    Keywords: non-cooperative network formation, asymmetric flow, stability, efficiency, dynamics
    JEL: D20 A14 C72
    Date: 2012–06–22

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.