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on Microeconomics |
| By: | Junichiro Ishida; Takashi Shimizu |
| Abstract: | It is often touted that decisiveness is one of the most important qualities to be possessed by leaders, broadly defined. To see how and why decisiveness can be a valuable asset in organizations, we construct a model of strategic information transmission where: (i) a decision maker solicits opinions sequentially from experts; (ii) how many experts to solicit opinions from is the decision maker's endogenous choice. We show that communication is less efficient when the decision maker is indecisive and cannot resist the temptation to ask for a second opinion. This result suggests that the optimal diversity of information sources depends critically on the strategic nature of communication: when communication is strategic, it is optimal to delegate information acquisition to a single party and rely exclusively on it; when it is not, it is optimal to diversify information sources and aggregate them via communication. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0857&r=mic |
| By: | Herweg, Fabian; Schmidt, Klaus M. |
| Abstract: | We propose a theory of ex post inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversion makes the renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of long-term contracts. First, it explains why parties often abstain from writing a beneficial long-term contract or why some contracts specify transactions that are never ex post efficient. Second, it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship-specific investments rather than writing a specific performance contract. Third, it shows that employment contracts can be strictly optimal even if parties are free to renegotiate. |
| Keywords: | Renegotiation; Incomplete Contracts; Reference Points; Employment Contracts; Behavioral Contract Theory. |
| JEL: | C78 D03 D86 |
| Date: | 2012–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:390&r=mic |
| By: | Thomas F. Hellmann; Veikko Thiele |
| Abstract: | We develop a new theory of the firm where asset owners sometimes want to change partners ex-post. The model identifies a fundamental trade-off between (i) a “displacement externality” under non-integration, where a partner leaves a relationship even though the benefit is worth less than the loss to the displaced partner, and (ii), a “retention externality” under integration, where a partner inefficiently retains the other. Renegotiation cannot eliminate these inefficiencies when agents are wealth constrained. When there is more asset specificity, displacement externalities matter more and retention externality less, so that integration becomes more attractive. Our model also predicts that integration always provides stronger incentives for specific investments, and that wealthy owners actually want to commit to ex-post wealth constraints. Our analysis differs from the received theories of the firm because of our emphasis on dynamic partner changes. |
| JEL: | D23 D82 D86 L22 M20 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18495&r=mic |
| By: | N. Roketskiy (Department of Economics, UCL) |
| Abstract: | We study the properties of von Neumann-Morgenstern farsightedly stable sets in application to matching models. We show that the result by Diamantoudi and Xue (2003) for hedonic games can be extended to a general matching with contracts framework: a collection of singleton stable sets constitutes a weak core of the matching with contracts game. We also show that singleton stable sets are invariant under different contractual languages. |
| Keywords: | farsighted stable sets |
| JEL: | C71 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1226&r=mic |
| By: | Marco di Maggio (MIT); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR) |
| Abstract: | We study a model where some investors (“hedgers”) are bad at information processing, while others (“speculators”) have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators’ trades more visible to hedgers. As a consequence, asset sellers will oppose both the disclosure of fundamentals and trading transparency. This is socially inefficient if a large fraction of market participants are speculators and hedgers have low processing costs. But in these circumstances, forbidding hedgers’ access to the market may dominate mandatory disclosure. |
| Date: | 2012–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:323&r=mic |
| By: | Lionel de Boisdeffre (Centre d'Economie de la Sorbonne) |
| Abstract: | We consider a pure exchange financial economy, where agents, possibly asymetrically informed, face an "exogenous uncertainty", on the future state of nature, and an "endogenous uncertainty", on the future price in each random state. Namely, every agent forms private price anticipations on every prospective market, distributed along an idiosyncratic probability law. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets at every time period. We show that, provided the endogenous uncertainty is large enough, a sequential equilibrium exists under standard conditions for all types of financial structures and information signals across agents. This result suggests that standard existence problems of sequential equilibrium models, following Hart (1975), stem from the perfect foresight assumption. |
| Keywords: | Sequential equilibrium, temporary equilibrium, perfect foresight, existence, rational expectations, financial markets, asymmetric information, arbitrage. |
| JEL: | D52 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12055&r=mic |
| By: | Paola Manzini; Marco Mariotti |
| Abstract: | We model a boundedly rational agent who suffers from limited attention. The agent considers each feasible alternative with a given (unobservable) probability, the attention parameter, and then chooses the alternative that maximises a preference relation within the set of considered alternatives. Both the preference and the attention parameters are identified uniquely by stochastic choice data. The model is the only one for which the impact of removing any alternative a on the choice probability of any other alternative b is non-negative, asymmetric (either a impacts b or vice-versa), menu independent, neutral (the same on any alternative in the menu), and consistent with the impacts on a and b by a common third alternative. |
| Keywords: | Discrete choice, Random utility, Logit model, Consideration sets, bounded rationality, revealed preferences |
| JEL: | D0 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpce:1205&r=mic |
| By: | Peter A. Streufert (University of Western Ontario) |
| Abstract: | The nodes of an extensive-form game are commonly specified as sequences of actions. Rubinstein calls such nodes histories. We find that this sequential notation is superfl uous in the sense that nodes can also be specified as sets of actions. The only cost of doing so is to rule out games with absent-minded agents. Our set-theoretic analysis accommodates general finite-horizon games with arbitrarily large action spaces and arbitrarily configured information sets. One application is Streufert (2012),which specifies nodes as sets in order to formulate and prove new results about Kreps-Wilson consistency. |
| Keywords: | game tree; set tree; extensive-form game. |
| JEL: | C7 C72 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:uwowop:20122&r=mic |
| By: | Maria Goltsman (University of Western Ontario); Gregory Pavlov (University of Western Ontario) |
| Abstract: | We study communication in a static Cournot duopoly model under the assumption that the firms have unverifiable private information about their costs. We show that cheap talk between the firms cannot transmit any information. However, if the firms can communicate through a third party, communication can be informative even when it is not substantiated by any commitment or costly actions. We exhibit a simple mechanism that ensures informative communication and interim Pareto dominates the uninformative equilibrium for the firms. |
| Keywords: | Cournot oligopoly; communication; information; cheap talk; mediation |
| JEL: | C72 D21 D43 D82 D83 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:uwowop:20121&r=mic |