nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒10‒13
thirteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Information Sharing between Vertical Hierarchies By Marco Pagnozzi; Salvatore Piccolo
  2. A More General Theory of Commodity Bundling By Mark Armstrong
  3. Dynamic markets for lemons : performance, liquidity, and policy intervention By Diego Moreno; John Wooders
  4. A Simple Theoretical Argument for Affrmative Action By Laurence Kranich
  5. Large Games with a Bio-Social Typology By M. Ali Khan; Kali P. Rath; Yeneng Sun; Haomiao Yu
  6. Sand in the Wheels: A Dynamic Global-Game Approach By Jakub Steiner; Laurent Mathevet
  7. Activity Rules for the Combinatorial Clock Auction By Lawrence M. Ausubel; Peter Cramton
  8. Strategic Information Transmission with Budget Constraint By A.K.S. Chand
  9. Essential Stability for Large Generalized Games By Sofía Correa; Juan Pablo Torres-Martínez
  10. Retaliation and the Role for Punishment in the Evolution of Cooperation By Irenaeus Wolff
  11. Inducible Games: Using Tit-for-Tat to Stabilize Outcomes By Brams, Steven J.; Kilgour, D. Marc
  12. A nested contest: Tullock meets the All-Pay Auction By Amegashie, J. Atsu
  13. Nonmonotone Design Mechanism By Levent Ulku

  1. By: Marco Pagnozzi (University of Napoli "Federico II" and CSEF); Salvatore Piccolo (Università Cattolica di Milano)
    Abstract: When do principals independently choose to share the information obtained from their privately informed agents? Information sharing affects contracting within competing organizations and induces agents’ strategies to be correlated through the distortions imposed by principals to obtain information. We show that the incentives to share information depend on the nature of upstream externalities between principals and the correlation of agents’ information. With small externalities, principals share information when externalities and correlation have opposite signs, and do not share information when externalities and correlation have the same sign. In this second case, principals face a prisoners’ dilemma since they obtain higher profits by sharing information.
    Keywords: communication, information sharing, adverse selection, vertical hierarchies
    JEL: D43 D82 L14
    Date: 2012–10–03
  2. By: Mark Armstrong
    Abstract: This paper discusses the incentive to bundle when consumer valuations are non-additive and/or when products are supplied by separate sellers. Whether integrated or separate, a firm has an incentive to introduce a bundle discount when demand for the bundle is more elastic than the overall demand for products. When separate sellers coordinate on a bundle discount, they can use the discount to relax competition, which can harm welfare.
    Keywords: Price discrimination, Bundling, Discrete choice, Oligopoly, Common agency
    JEL: D11 D43 D82 D86 L13 L41
    Date: 2012
  3. By: Diego Moreno; John Wooders
    Abstract: The inefficiency of competitive markets for lemons raises fundamental questions about market performance and the role of policy intervention. We study the performance of dynamic markets, and show that when the time horizon is finite decentralized markets perform better and high quality is more liquid than centralized ones. When frictions are small, decentralized markets become completely illiquid at all but the first and the last date. When the time horizon is infinite, decentralized markets yield the static competitive surplus, whereas centralized markets have separating equilibria that yield a greater surplus. Subsidizing low quality or taxing high quality tends to increase surplus in both decentralized and centralized markets.
    Keywords: Decentralized dynamic market for lemons, Adverse selection, Efficiency, Liquidity, Policy intervention
    Date: 2012–09
  4. By: Laurence Kranich
    Abstract: We consider a society which is jointly committed to the principle of equal opportunity and to increasing aggregate wealth. However, the society faces the vestiges of past discrimination in the form of a historically skewed distribution of social resources. We consider the problem of allocating the existing quantity of social inputs, and we contrast two policy instruments to redress past differences: redistributing resources in order to compensate for, or offset, the effect of the asymmetry on productive abilities, or granting preferential treatment in employment to members of the disadvantaged group (affirmative action). We show that society is generally better off with affirmative action than without it, and, indeed, that a socially optimal policy may rely solely on affirmative action.
    Date: 2012
  5. By: M. Ali Khan (Department of Economics, Johns Hopkins University); Kali P. Rath (Department of Economics, University of Notre Dame); Yeneng Sun (Department of Economics, National University of Singapore); Haomiao Yu (Department of Economics, Ryerson University)
    Abstract: We present a comprehensive theory of large games in which players have names and determinate social-types and/or biological traits, and identify through four decisive examples, essentially based on a matching-pennies type game, pathologies arising from the use of a Lebesgue interval for player's names. In a sufficiently general context of traits and actions, we address this dissonance by showing a saturated probability space as being a necessary and sufficient name-space for the existence and upper hemi-continuity of pure-strategy Nash equilibria in large games with traits. We illustrate the idealized results by corresponding asymptotic results for an increasing sequence of finite games.
    Keywords: Large games, social-type, traits, idealized limit game, saturated probability space, pure-strategy Nash equilibrium, closed-graph property, upper hemi-continuity, asymptotic implementation
    JEL: C62 D50 D82 G13
    Date: 2012–10
  6. By: Jakub Steiner (Northwestern University); Laurent Mathevet (University of Texas at Austin)
    Abstract: We study the impact of frictions on the prevalence of systemic crises. Agents privately learn about a fixed payoff parameter, and repeatedly adjust their investments while facing transaction costs in a dynamic global game. The model has a rich structure of externalities: payoffs may depend on the volume of aggregate investment, on the concentration of investment, or on its volatility. We examine how small frictions, including those similar to the Tobin tax, affect the equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume. The analysis is driven by a robust invariance result: the volume of aggregate investment (measured in a pivotal contingency) is invariant to a large family of frictions.
    Date: 2012
  7. By: Lawrence M. Ausubel (Economics Department, University of Maryland); Peter Cramton (Economics Department, University of Maryland)
    Abstract: In the original proposal for the combinatorial clock auction (Ausubel, Cramton and Milgrom, 2006), a revealed-preference approach was taken to limiting bidders’ activity, based on their earlier activity. However, empirical implementations of the CCA to spectrum auctions have tended to place most or all reliance on a monotonicity condition in eligibility points. This paper proposes activity rules which strike a balance between revealed preference and eligibility-point monotonicity. For the clock auction stage, we propose a hybrid revealed-preference/eligibility-point approach, in which the current round’s bid should satisfy a simplified revealed-preference constraint relative to prior rounds’ bids, but with an eligibility-point safe harbor. For the supplementary round, we propose a tightening of Ofcom’s relative cap, in which supplementary bids must satisfy revealed preference relative to the final clock bid, as well as relative to bids in all eligibility-reducing rounds in which the bidder’s eligibility went below the eligibility points associated with the bid in question.
    Keywords: Auctions, spectrum auctions, market design, package auction, clock auction, combinatorial auction
    JEL: D44 C78 L96
    Date: 2012
  8. By: A.K.S. Chand (Department of Economics, University Of Venice Ca’ Foscari)
    Abstract: In this paper, I discuss a Cheap Talk model that arises during the allocation of a limited budget to multiple Senders by a Receiver with private communication. The Receiver's utility is the sum of the utilities of the Senders. Considering quadratic utility functions, I show that there is no fully revealing equilibrium with budget constraint. I also show that a higher budget facilitates information transmission to the Receiver in terms of ex-ante expected utility by considering (1) an equilibrium where only one Sender reveals truthfully, (2) a symmetric equilibrium with two intervals and (3) a commitment strategy by the Receiver where only one Sender receives his desired amount. The commitment strategy is doing better than the other two types of equilibria for budget more than a particular value. This requires us to look for equilibria with higher number of intervals which does better than the commitment strategy.
    Keywords: Cheap Talk, Multiple Senders, Budget Constraint
    JEL: C72 D82 D83
    Date: 2012
  9. By: Sofía Correa; Juan Pablo Torres-Martínez
    Abstract: We address essential stability properties of Cournot-Nash equilibria for generalized games with a continuum of players, where only a finite number of them are atomic. Given any set of generalized games continuously parameterized by a complete metric space, we analyze the robustness of equilibria to perturbations on parameters. As an application of our results, we show that essential stability can provide a rationale for electoral participation of politically engaged individuals.
    Date: 2012–09
  10. By: Irenaeus Wolff
    Abstract: Models of evolutionary game theory have shown that punishment may be an adaptive behaviour in environments characterised by a social-dilemma situation. Experimental evidence closely corresponds to this nding but questions the cooperation-enhancing eect of punishment if players are allowed to retaliate against their punishers. This study provides a theoretical explanation for the existence of retaliating behaviour in the context of repeated social dilemmas and analyses the role punishment can play in the evolution of cooperation under these conditions. We show a punishing strategy can pave the way for a partially-cooperative equilibrium of conditional cooperators and defecting types and, under positive mutation rates, foster the cooperation level in this equilibrium by prompting reluctant cooperators to cooperate. However, when rare mutations occur, it cannot sustain cooperation by itself as punishment costs favour the spread of non-punishing cooperators.
    Keywords: Public goods, Prisoner's Dilemma, Strong reciprocity, Counterpunishment
    Date: 2012
  11. By: Brams, Steven J.; Kilgour, D. Marc
    Abstract: Assume it is known that one player in a 2 x 2 game can detect the strategy choice of its opponent with some probability before play commences. We formulate conditions under which the detector can, by credibly committing to a strategy of probabilistic tit-for-tat (based on its imperfect detector), induce an outcome favorable to itself. A non-Nash, Pareto-optimal outcome is inducible—that is, it can be stabilized via probabilistic tit-for-tat—in 20 of the 57 distinct 2 x 2 strict ordinal games without a mutually best outcome (35 percent). Sometimes the inducement is “weak,” but more often it is “strong.” As a case study, we consider the current conflict between Israel and Iran over Iran’s possible development of nuclear weapons and show that Israel’s credible commitment to probabilistic tit-for-tat can, with sufficiently accurate intelligence, induce a cooperative choice by Iran in one but not the other of two plausible games that model this conflict.
    Keywords: 2 x 2 games; tit-for-tat; inducubility; Israel-Iran conflict; nuclear weapons
    JEL: C78 D74 C72
    Date: 2012–10
  12. By: Amegashie, J. Atsu
    Abstract: I present a two-player nested contest which is a convex combination of two widely studied contests: the Tullock (lottery) contest and the all-pay auction. A Nash equilibrium exists for all parameters of the nested contest. If and only if the contest is sufficiently asymmetric, then there is an equilibrium in pure strategies. In this equilibrium, individual and aggregate efforts are lower relative to the efforts in a Tullock contest. This leads to the surprising result that if aggregate efforts in the all-pay auction are higher than the aggregate efforts in the Tullock contest, then aggregate efforts in the nested contest may not lie between aggregate efforts in the all-pay auction and aggregate efforts in the Tullock contest. When the contest is symmetric or asymmetric, I find a mixed-strategy equilibrium and describe some properties of the equilibrium distribution function; I also find the equilibrium payoffs and expected bids. When the weight on the all-pay auction component of this nested contest lies in an intermediate range, then there exist multiple non-payoff-equivalent equilibria such that there is an all-pay auction equilibrium as defined in Alcade and Dahm (2010) and another equilibrium which is not an all-pay auction equilibrium; these equilibria cannot be ranked using the Pareto criterion. If the goal of a contest-designer is to reduce aggregate effort (i.e., wasteful rent-seeking efforts), then this nested contest may be better than both the Tullock contest and the all-pay auction.
    Keywords: all-pay auction; discontinuous games; mixed strategy; pure strategy; Tullock contest
    JEL: B21 D44 D72 C72
    Date: 2012–06–19
  13. By: Levent Ulku (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    Abstract: I characterize the set of implementable allocation functions in the standard one dimensional mechanism design environment where the relationship between private information and payoffs is possibly non-monotone. The characterization is useful in two aspects. First it leads to a rather mild condition under which individual rationality follows directly from incentive compatibility. Second, it can be conveniently used to determine the implementability of allocation functions in certain novel applications. In particular I show that neither monotonicity of allocations, nor the monotone differences property on values is necessary for implementation. In an application, I study a buyer-seller relationship where the buyer’s value displays habit formation, which enters into his payoff through a commonly known parameter. Habit implies that the agent’s value is a nonmonotone function of his type and that monotone diferences condition can not be satisfied for all parameters. For a set of parameters, the seller-optimal mechanism is nonmonotone: the seller screens out low and high types.
    Keywords: Implementation, Monotonicity, Monotone differences, Habits
    JEL: D42 D61 D82
    Date: 2012

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