nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒11‒11
23 papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Survival with Ambiguity By Ani Guerdijkova; Emanuela Sciubba
  2. Learning in Advance Selling with Heterogeneous Consumers By Oksana Loginova; X. Henry Wang; Chenhang Zeng
  3. Moral Hazard in Hierarchies and Soft Information By Angelucci, Charles; Russo, Antonio
  4. On the Role of Information in Contests By Pradeep Dubey
  5. The Appeal of Information Transactions By Antonio Cabrales; Olivier Gossner; Roberto Serrano
  6. A Theory of Ex Post Inefficient Renegotiation By Herweg, Fabian; Schmidt, Klaus M.
  7. Robust Predictions in Games with Incomplete Information By Dirk Bergemann; Stephen Morris
  8. Vague Lies: How to Advise Consumers When They Complain By Drugov, Mikhail; Troya Martinez, Marta
  9. Centralized decision making against informed lobbying By Costa Lima, Rafael; Moreira, Humberto; Verdier, Thierry
  10. Sharing the Cost of Redundant Items By Jens Leth Hougaard; Hervé Moulin
  11. Large Distributional Games with Traits By M. Ali Khan; Kali P. Rath; Haomiao Yu; Yongchao Zhang
  12. Vertical Syndication-Proof Competitive Prices in Multilateral Markets By O. Tejada and M. Alvarez-Mozos
  13. Collusive market sharing with spatial competition By Kai Andree; Mike Schwan
  14. Competing for Customers in a Social Network By Pradeep Dubey; Rahul Garg; Bernard De Meyer
  15. The Stationary Equilibrium of Three-Person Cooperative Games: A Classification By Okada, Akira
  16. Cooperation with Externalities and Uncertainty By Habis , Helga; Csercsik, Dávid
  17. An axiomatic characterization of the strong constrained egalitarian solution By Llerena Garrés, Francesc; Vilella Bach, Misericòrdia
  18. The Limits of Discrete Time Repeated Games:Some Notes and Comments By Osório Costa, Antonio Miguel
  19. Formation of Rationally Heterogeneous Expectations By Pfajfar, D.
  21. Subjective risk and disappointment. By Thierry Chauveau
  22. The Stability of Walrasian General Equilibrium. By Herbert Gintis; Antoine Mandel
  23. Punishment-Dominance Condition on Stable Two-Sided Matching Algorithms By Takuya Masuzawa

  1. By: Ani Guerdijkova (THEMA, Université de Cergy-Pontoise); Emanuela Sciubba (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We analyze a market populated by expected utility maximizers and smooth ambiguity-averse consumers. We study conditions under which ambiguity-averse consumers survive and affect prices in the limit. If ambiguity vanishes with time or if the economy exhibits no aggregate risk, ambiguity-averse consumers survive, but have no long-run impact on prices. In both scenarios, ambiguity-averse consumers are fully insured against ambiguity in equilibrium and, thus, behave as expected utility maximizers with correct beliefs. If ambiguity-averse consumers are not fully insured against ambiguity, they behave as expected utility maximizers with effectively wrong beliefs and an effective discount factor which might be higher or lower than their actual discount factor. Using this insight, we demonstrate that consumers with constant absolute ambiguity aversion vanish in expectations, whenever the economy faces aggregate risk. In contrast, consumers with constant relative (and thus, decreasing absolute) ambiguity aversion survive in expectation and with positive probability and have a non-trivial impact on prices in the limit.
    Keywords: ambiguity, ambiguity-aversion, survival
    JEL: D50 D81
    Date: 2012–10
  2. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia); X. Henry Wang (Department of Economics, University of Missouri-Columbia); Chenhang Zeng (Research Center for Games and Economic Behavior, Shandong University)
    Abstract: The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance. The presence of experienced consumers yields new insights. Specifically, pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.
    Keywords: advance selling, the Newsvendor Problem, demand uncertainty, experienced consumers, inexperienced consumers.
    JEL: D43 L13 C72
    Date: 2012–09
  3. By: Angelucci, Charles (Harvard University); Russo, Antonio (Doctorant TSE)
    Abstract: We investigate the scope for supervisory activities in organizations in which information is non-verifiable and opportunism severe. A principal-supervisor-agent hierarchy is considered. Side-contracts between supervisor and agent may be reached both before and after the agent has chosen his hidden action. We find that the supervisor is useful if and only if appointed before the agent has chosen his action. We also show that delegation of payroll authority is suboptimal. Finally, some insights concerning the optimal design of verification activities are provided: when information is non-verifiable, the supervisor should be employed as a monitor rather than as an auditor.
    Keywords: collusion, extortion, delegation, mechanism design
    Date: 2012–10
  4. By: Pradeep Dubey (Department of Economics, Stony Brook University)
    Abstract: Consider a contest for a prize in which each player knows his own ability, but may or may not know those of his rivals (the complete or incomplete information regimes). Our main result is that, if the value of the prize is high, more e¤ort and output are engendered under incomplete information; whereas, if the value is low, that distinction goes to complete information. We also examine strategic behavior of a "contest manager" who is privy to information about the abilities of all the players. It turns out that, in order to inspire performance, it is often better for him neither to reveal all nor to conceal all, but to follow a middle path of partial revelation.
    JEL: C70 C72 C79 D44 D63 D82
    Date: 2012–10
  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 di- vergence, relative entropy, decision under uncertainty, investment, Blackwell ordering.
    Date: 2012
  6. 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 relationshipspecific 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
  7. By: Dirk Bergemann; Stephen Morris
    Date: 2012
  8. By: Drugov, Mikhail; Troya Martinez, Marta
    Abstract: This paper analyzes the incentives of a seller to provide (un)biased and (im)precise advice about a complex product such as insurance, banking and telecommunication services. Misleading the buyers by biasing the advice upwards increases the revenues but also the expected fine imposed by the authority. Making the advice less precise does not affect the revenues in equilibrium but interferes with the authority's inference and affects the expected fine in a non-monotonic way. In particular, making the advice less precise makes it harder to convict the seller but increases the expected fine when the seller is found guilty. We find that, in the equilibrium, biasing the advice and making it noisier are complements; in particular, a higher buyers' heterogeneity, a stricter standard of proof employed by the authority and a larger share of credulous consumers make the advice more biased and less precise.
    Keywords: advice; consumer protection; legal procedure; persuasion
    JEL: D18 D8 K4 L1
    Date: 2012–10
  9. By: Costa Lima, Rafael; Moreira, Humberto; Verdier, Thierry
    Abstract: We re-address the tradeoff between centralized and decentralized decision making of local policies when policymakers are subject to capture by special interest groups. In particular, we consider the case where lobbies have private information about their ability to exert influence. We find a new informational effect in the political game under centralized structures that gives the policymaker additional bargaining power against lobbies. Thus, when compared to decentralization, centralization reduces capture, and is more likely to be welfare enhancing in the presence of information asymmetries. Then, we apply the model to the classical problem of local public goods provision and to the incentives towards the creation of customs unions agreements.
    Keywords: Asymmetric information; Centralization; custom unions; lobbying; public goods
    JEL: D72 D82 F15 H41
    Date: 2012–10
  10. By: Jens Leth Hougaard (Institute of Food and Resource Economics, University of Copenhagen); Hervé Moulin (Department of Economics, Rice University)
    Abstract: We ask how to share the cost of finitely many public goods (items) among users with different needs: some smaller subsets of items are enough to serve the needs of each user, yet the cost of all items must be covered, even if this entails inefficiently paying for redundant items. Typical examples are network connectivity problems when an existing (possibly inefficient) network must be maintained. We axiomatize a family of simple usage indices, one for each agent and for each item, measuring the relative worth of this item across agents, and generating cost sharing rules additive in costs.
    Keywords: Cost sharing; Redundant costs; Connection networks; Connectivity
    JEL: C71 D30 D85 M41
    Date: 2012–09
  11. By: M. Ali Khan (Department of Economics, Johns Hopkins University); Kali P. Rath (Department of Economics, University of Notre Dame); Haomiao Yu (Department of Economics, Ryerson University); Yongchao Zhang (School of Economics, Shanghai University of Finance and Economics)
    Abstract: A comprehensive theory of large strategic games with (socioeconomic and biological) traits (LSGT) has recently been presented in Khan et al. (2012 a and b), and in this paper, we present a reformulation pertaining to large distributional games with traits (LDGT). In addition to a generalization of work initiated and advocated by Mas-Colell (1984), we delineate the role of saturated spaces, as studied in Keisler-Sun (2009) in the reformulated theory, and consider questions pertaining to \lq\lq realizations" of equilibrium distributions that were not previously asked.
    Keywords: Large game, strategic game, distributional game, traits, saturated probability space, realization, Nash equilibrium distribution
    JEL: C62 D50 D82 G13
    Date: 2012–12
  12. By: O. Tejada and M. Alvarez-Mozos (Universitat de Barcelona)
    Abstract: A multi-sided Bohm-Bawerk assignment game (Tejada, to appear) is a model for a multilateral market with a finite number of perfectly complementary indivisible com- modities owned by different sellers, and inflexible demand and support functions. We show that for each such market game there is a unique vector of competitive prices for the commodities that is vertical syndication-proof, in the sense that, at those prices, syndication of sellers each owning a different commodity is neither beneficial nor detri- mental for the buyers. Since, moreover, the benefits obtained by the agents at those prices correspond to the nucleolus of the market game, we provide a syndication-based foundation for the nucleolus as an appropriate solution concept for market games. For different solution concepts a syndicate can be disadvantageous and there is no escape to Aummans paradox (Aumann, 1973). We further show that vertical syndication- proofness and horizontal syndication-proofness in which sellers of the same commod- ity collude are incompatible requirements under some mild assumptions. Our results build on a self-interesting link between multi-sided Bohm-Bawerk as- signment games and bankruptcy games (ONeill, 1982). We identify a particular subset of Bohm-Bawerk assignment games and we show that it is isomorphic to the whole class of bankruptcy games. This isomorphism enables us to show the uniqueness of the vec- tor of vertical syndication-proof prices for the whole class of Bohm-Bawerk assignment market using well-known results of bankruptcy problems.
    Keywords: bankruptcy problem, assignment problem, cooperative game, market, syndicate
    JEL: C71 D43
    Date: 2012
  13. By: Kai Andree; Mike Schwan
    Abstract: This paper develops a spatial model to analyze the stability of a market sharing agreement between two firms. We find that the stability of the cartel depends on the relative market size of each firm. Collusion is not attractive for firms with a small home market, but the incentive for collusion increases when the firm’s home market is getting larger relative to the home market of the competitor. The highest stability of a cartel and additionally the highest social welfare is found when regions are symmetric. Further we can show that a monetary transfer can stabilize the market sharing agreement.
    Date: 2012–10
  14. By: Pradeep Dubey (Department of Economics, Stony Brook University); Rahul Garg (Opera Solutions, INDIA); Bernard De Meyer (Cermsem, Univesit´e Paris 1, Paris, FRANCE)
    Abstract: There are many situations in which a customer’s proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. Under quite general circumstances, it turns out that customers’ influence on each other dynamically converges to a steady state. Thus we can model these situations as games in which firms compete for customers located in a “social network”. A canonical example is provided by competition for advertisement on the web. Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. Otherwise there is a tendency towards regionalization, with firms dominating disjoint territories. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valuations of clients are anonymous.
    Date: 2012–09
  15. By: Okada, Akira
    Abstract: We present a classification of all stationary subgame perfect equilibria of the random proposer model for a three-person cooperative game according to the level of efficiency. The efficiency level is characterized by the number of "central" players who join all equilibrium coalitions. The existence of a central player guarantees asymptotic efficiency. The marginal contributions of players to the grand coalition play a critical role in their expected equilibrium payoffs.
    Keywords: cooperative game, noncooperative bargaining, three-person game, random proposer, core, marginal contribution
    JEL: C71 C72 C78
    Date: 2012–10
  16. By: Habis , Helga (Department of Economics, Lund University); Csercsik, Dávid (Institute of Economics, Research Centre for Economic and Regional Studies, Hungarian Academy)
    Abstract: We introduce a new class of cooperative games where the worth of a coalition depends on the behavior of other players and on the state of nature as well. We allow for coalitions to form both before and after the resolution of uncertainty, hence agreements must be stable against both types of deviations. The appropriate extension of the classical core concept, the Sustainable Core, is defined for this new setup to test the stability of allocations in such a complex environment. A prominent application, a game of consumers and generators on an electrical energy transmission network is examined in details, where the power in- and outlets of the nodes have to be determined in a way, that if any line instantaneously fails, none of the remaining lines may be overloaded. We show that fulfilling this safety requirement in a mutually acceptable way can be achieved by choosing an element in the Sustainable Core.
    Keywords: partition function form games; uncertainty; core; sustainability
    JEL: C71 C73 D62 L14 L94
    Date: 2012–10–08
  17. By: Llerena Garrés, Francesc; Vilella Bach, Misericòrdia
    Abstract: In this paper we axiomatize the strong constrained egalitarian solution (Dutta and Ray, 1991) over the class of weak superadditive games using constrained egalitarianism, order-consistency, and converse order-consistency. JEL classification: C71, C78. Keywords: Cooperative TU-game, strong constrained egalitarian solution, axiomatization.
    Keywords: Jocs cooperatius, Negociacions -- Models matemàtics, 33 - Economia,
    Date: 2012
  18. By: Osório Costa, Antonio Miguel
    Abstract: This paper studies the limits of discrete time repeated games with public monitoring. We solve and characterize the Abreu, Milgrom and Pearce (1991) problem. We found that for the "bad" ("good") news model the lower (higher) magnitude events suggest cooperation, i.e., zero punishment probability, while the highrt (lower) magnitude events suggest defection, i.e., punishment with probability one. Public correlation is used to connect these two sets of signals and to make the enforceability to bind. The dynamic and limit behavior of the punishment probabilities for variations in ... (the discount rate) and ... (the time interval) are characterized, as well as the limit payo¤s for all these scenarios (We also introduce uncertainty in the time domain). The obtained ... limits are to the best of my knowledge, new. The obtained ... limits coincide with Fudenberg and Levine (2007) and Fudenberg and Olszewski (2011), with the exception that we clearly state the precise informational conditions that cause the limit to converge from above, to converge from below or to degenerate. JEL: C73, D82, D86. KEYWORDS: Repeated Games, Frequent Monitoring, Random Pub- lic Monitoring, Moral Hazard, Stochastic Processes.
    Keywords: Teoria de jocs, Incertesa -- Models matemàtics, Contractes -- Aspectes econòmics, 33 - Economia,
    Date: 2012
  19. By: Pfajfar, D. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper models expectation formation by taking into account that agents produce heterogeneous expectations due to model uncertainty, informational frictions and different capacities for processing information. We show that there are two general classes of steady states within this framework: those where strictly dominated forecasting rules vanish, and intrinsic heterogeneous steady states where a positive proportion of agents use a more costly perfect foresight. This demonstrates that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly, and do not exhibit identical performance in the long run.
    Keywords: Heterogeneous expectations;cobweb model;adaptive learning;rational expectations.
    JEL: C62 D83 D84 E30
    Date: 2012
  20. By: MASTERS, ADRIAN; MUTHOO, ABHINAY (Department of Economics, University of Warwick)
    Abstract: This paper studies a dynamic model of a market such as a labour market in which firms post wages and search for workers but trade may occur at a negotiated wage procedure in markets characterized by match-specific heterogeneity. We study a model of a market in which, in each time period, agents on one side (e.g., sellers) choose whether or not to post a price before they encounter agents of the opposite type. After a pair of agents have encountered each other, their match-specific values from trading with each other are realized. If a price was not posted, then the terms of trade (and whether or not it occurs) are determined by bargaining. Otherwise, depending upon the agents’ match-specific trading values, trade occurs (if it does) either on the posted price or at a renegotiated price. We analyze the symmetric Markov subgame perfect equilibria of this market game, and address a variety of issues such as the impact of market frictions on the equilibrium proportion of trades that occur at a posted price rather than at a negotiated price.
    Keywords: Match-specific heterogeneity ; Ex-ante Price Posting ; Ex-Post Mutually Beneficial Renegotiation ; Markov Subgame Perfect Equilibrium.
    Date: 2012
  21. By: Thierry Chauveau (Centre d'Economie de la Sorbonne)
    Abstract: If an investor does care for utilities –and not for monetary outcomes– stochastic dominances should be expresed in terms of utility units ("utils"). If so, any "rational" investor may be characterized by an elementary function u(.) which is such that the random variables u (w) –where w is a random prospect– never violate the second-order stochastic dominance property and that the partial weak order induced by stochastic dominance over utils is as "close" to the weak order of preferences as possible. Similarly "subjective" risk must be substituted for "objective" risk à la Rothschild and Stiglitz (1970). A weakened independence axiom may then be set over comparable prospects, i.e. those which exhibit the same expected utility. This leads to a fully choice-based theory of disappointment. The functional is lottery-dependent (Becker and Sarin 1987). When constant marginal utility is assumed, it is but the opposite to a convex measure of risk (Föllmer and Shied 2002). It may be viewed as a theoretical justification for choosing this measure of risk.
    Keywords: Disappointment, risk-aversion, subjective risk, risk premium, expected utility.
    JEL: D81
    Date: 2012–10
  22. By: Herbert Gintis (Santa Fe Institute and Central European University); Antoine Mandel (Centre d'Economie de la Sorbonne)
    Abstract: We prove the stability of equilibrium in a completely decentralized Walrasian general equilibrium economy in which prices are fully controlled by economic agents, with production and trade occuring out of equilibrium.
    Date: 2012–10
  23. By: Takuya Masuzawa (Faculty of Economics, Keio University)
    Abstract: In this article, we consider a many-to-one two-sided matching market and define a canonical strategic form game, in which any worker applies to the top k firms and is assigned to the most preferred firm that does not reject him/her. Under the substitute property of firms' preferences, the game satisfies the punishment-dominance condition. The deferred-acceptance algorithm by Gale and Shapley (Amer. Math. Monthly 69: 1962), which finds the maximum and minimum of stable matchings, is described as an instance of the algorithm by Masuzawa (Int. Jour. Game Theory 38: 2008), which determines the α-cores of the strategic form games with the punishment-dominance condition.
    Date: 2012–10

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