nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒12‒06
25 papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Individual Learning and Cooperation in Noisy Repeated Games By Yuichi Yamamoto
  2. Games with Strategic Heterogeneity By Andrew Monaco; Tarun Sabarwal
  3. Games with perceptions By Laruelle, Annick; Iñarra García, María Elena; Zuazo Garín, Peio
  4. Equilibrium in Two-Player Nonzero-Sum Dynkin Games in Continuous Time By Rida Laraki; Eilon Solan
  5. Certi able Pre-Play Communication: Full Disclosure By Jeanne Hagenbach; Frédéric Koessler; Eduardo Perez-Richet
  6. Asymmetric Nash Bargaining Solutions: A Simple Nash Program By Nejat Anbarci; Ching-jen Sun
  7. "Process Manipulation in Unique Implementation" By Hitoshi Matsushima
  8. Rationality and Solutions to Nonconvex Bargaining Problems: Rationalizability and Nash Solutions By Xu, Yongsheng; Yoshihara, Naoki
  9. Robustness of Intermediate Agreements and Bargaining Solutions By Nejat Anbarci; Ching-jen Sun
  10. The housing problem and revealed preference theory: duality and an application. By Ekeland, Ivar; Galichon, Alfred
  11. Delegation to a potentially uninformed agent By Aggey Semenov
  12. Dynamic Contracts Under Loss Aversion By Andrea Repetto
  13. Price Reveal Auctions By Andrea Gallice
  14. Auctioning risk: The all-pay auction under mean-variance preferences By Bettina Klose and Paul Schweinzer
  15. Search engine competition with network externalities. By Argenton, C.; Prüfer, J.
  16. Works councils: An agency perspective By Juan M. Gallego
  17. On the Optimal Size of Committees of Experts By Volker Hahn
  18. Sunk Cost and Reputation Effect By Sunku Hahn
  19. Monopoly R&D and Compatibility Decisions in Network Industries By Jong-Hee Hahn; Jin-Hyuk Kim
  20. Internet Interconnection and Network Neutrality By Choi, Jay; Jeon, Doh-Shin; Kim, Byung-Cheol
  21. Do buyer groups facilitate collusion? By Normann, Hans-Theo; Rösch, Jürgen; Schultz, Luis Manuel
  22. Additive Plausibility Characterizes the Supports of Consistent Assessments By Peter A. Streufert
  23. On the Third Order Stochastic Dominance for Risk-Averse and Risk-Seeking Investors By Chan, Raymond H.; Clark, Ephraim; Wong, Wing-Keung
  24. Elementary Results on Solutions to the Bellman Equation of Dynamic Programming: Existence, Uniqueness, and Convergence By Takashi Kamihigashi
  25. Academic faculty governance and recruitment decisions (online first). By Prüfer, J.; Walz, U.

  1. By: Yuichi Yamamoto (Department of Economics, University of Pennsylvania)
    Abstract: We investigate whether two players in a long-run relationship can maintain cooperation when the details of the underlying game are unknown. Specifically, we consider a new class of repeated games with private monitoring, where an unobservable state of the world influences the payoff functions and/or the monitoring structure. Each player privately learns the state over time, but cannot observe what the opponent learns. We show that there are robust equilibria where players eventually obtain payoffs as if the true state were common knowledge and players played a “belief-free” equilibrium. The result is applied to various examples, including secret pricecutting with unknown demand.
    Keywords: repeated game, private monitoring, incomplete information, belief-free equilibrium, ex-post equilibrium, individual learning
    JEL: C72 C73
    Date: 2012–11–10
  2. By: Andrew Monaco (Department of Economics, Colgate University); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: This paper studies games with both strategic substitutes and strategic complements, and more generally, games with strategic heterogeneity (GSH). Such games may behave differ- ently from either games with strategic complements or games with strategic substitutes. Under mild assumptions (on one or two players only), the equilibrium set in a GSH is totally unordered (no two equilibria are comparable in the standard product order). Moreover, under mild assumptions (on one player only), parameterized GSH do not allow decreasing equilibrium selections. In general, this cannot be strengthened to conclude in- creasing selections. Monotone comparative statics results are presented for games in which some players exhibit strategic substitutes and others exhibit strategic complements. For two-player games with linearly ordered strategy spaces, there is a characterization. More generally, there are sufficient conditions. The conditions apply only to players exhibiting strategic substitutes; no conditions are needed for players with strategic complements. Several examples highlight the results.
    Keywords: Lattice games, strategic complements, strategic substitutes, strategic hetergeneity, equilibrium set, monotone comparative statics
    JEL: C70 C72
    Date: 2012–11
  3. By: Laruelle, Annick; Iñarra García, María Elena; Zuazo Garín, Peio
    Abstract: We assume that 2 x 2 matrix games are publicly known and that players perceive a dichotomous characteristic on their opponents which defines two types for each player. In turn, each type has beliefs concerning her opponent's types, and payoffs are assumed to be type-independent. We analyze whether the mere possibility of different types playing different strategies generates discriminatory equilibria. Given a specific information structure we find that in equilibrium a player discriminates between her types if and only if her opponent does so. We also find that for dominant solvable 2x2 games no discriminatory equilibrium exists, while under different conditions of concordance between players' beliefs discrimination appears for coordination and for competitive games. A complete characterization of the set of Bayesian equilibria is provided.
    Keywords: incomplete information, 2x2 matrix games
    JEL: C72
    Date: 2012–10–23
  4. By: Rida Laraki (Ecole Polytechnique - Ecole Polytechnique, IMJ - Institut de Mathématiques de Jussieu - CNRS : UMR7586 - Université Paris VI - Pierre et Marie Curie - Université Paris VII - Paris Diderot); Eilon Solan (School of Mathematical Sciences [Tel Aviv] - Raymond and Beverly Sackler Faculty of Exact Sciences)
    Abstract: We prove that every two-player nonzero-sum Dynkin game in continuous time admits an "epsilon" equilibrium in randomized stopping times. We provide a condition that ensures the existence of an "epsilon" equilibrium in nonrandomized stopping times.
    Keywords: Dynkin games, stopping games, equilibrium, stochastic analysis, continuous time.
    Date: 2012–11–19
  5. By: Jeanne Hagenbach (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Frédéric Koessler (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris); Eduardo Perez-Richet (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)
    Abstract: This article asks when communication with certi able information leads to complete information sharing. We consider Bayesian games augmented by a pre-play communication phase in which announcements are made publicly. We characterize the augmented games in which there exists a full disclosure sequential equilibrium with extremal beliefs (i.e., any deviation is attributed to a single type of the deviator). This characterization enables us to provide di erent sets of su cient conditions for full information disclosure that encompass and extend all known results in the literature, and are easily applicable. We use these conditions to obtain new insights in senders-receiver games, games with strategic complementarities, and voting with deliberation.
    Keywords: Strategic Communication; Hard Information; Information Disclosure; Masquerade Relation; Belief Consistency; Single Crossing Di erences; Supermodular Games
    Date: 2012–11–19
  6. By: Nejat Anbarci; Ching-jen Sun
    Abstract: This article proposes a simple Nash program. Both our axiomatic characterization and our noncooperative procedure consider each distinct asymmetric and symmetric Nash solution. Our noncooperative procedure is a generalization of the simplest known sequential Nash demand game analyzed by Rubinstein, Safra and Thomson (1992). We then provide the simplest known axiomatic characterization of the class of asymmetric Nash solutions, in which we use only Nash’s crucial Independence of Irrelevant Alternatives axiom and an asymmetric modification of the well-known Midpoint Domination axiom.
    Keywords: Asymmetric Nash bargaining solutions, Nash program, axiomatic characterization, noncooperative foundations, economics of search.
    JEL: C78 D74
    Date: 2012–11–17
  7. By: Hitoshi Matsushima (Faculty of Economics, University of Tokyo)
    Abstract: We incorporate social influence into implementation theory, and highlight the manner in which an informed agent feels guilty with regard to disobeying an uninformed principal's wishes. The degree of this feeling depends on the agent's expectation of others' behavioral modes. We demonstrate a method of process manipulation, through which the principal employs psychological tactics for incentivizing agents to announce information in keeping with his/her wishes. We indicate that with a version of incentive compatibility, the principal can implement any alternative that he/she wishes as the unique Nash equilibrium without employing any contractual devices. Each agent's psychological cost would be negligible.
    Date: 2012–11
  8. By: Xu, Yongsheng; Yoshihara, Naoki
    Abstract: Conditions α and β are two well-known rationality conditions in the theory of rational choice. This paper examines the implications of weaker versions of these two rationality conditions in the context of solutions to nonconvex bargaining problems. It is shown that, together with the standard axioms of efficiency and strict individual rationality, they imply rationalizability of solutions to nonconvex bargaining problems. We then characterize asymmetric Nash solutions by imposing a continuity and the scale invariance requirements. These results make a further connection between solutions to non-convex bargaining problems and rationalizability of choice function in the theory of rational choice.
    JEL: C71 C78 D63 D71
    Date: 2012–11
  9. By: Nejat Anbarci; Ching-jen Sun
    Abstract: Most real-life bargaining is resolved gradually. During this process parties reach intermediate agreements. These intermediate agreements serve as disagreement points in subsequent rounds. We identify robustness criteria which are satisfied by three prominent bargaining solutions, the Nash, Proportional (and as a special case to the Egalitarian solution) and Discrete Raiffa solutions. We show that the .robustness of intermediate agreements. plus additional well-known and plausible axioms, provide novel axiomatizations of the above-mentioned solutions. Hence, we provide a unified frame-work for comparing these solutions’ bargaining theories.
    Keywords: Nash’s bargaining problem, robustness, intermediate agreements, the Discrete Raiffa solution, the Nash solution, Proportional solutions.
    JEL: C78 D74
    Date: 2012–11–16
  10. By: Ekeland, Ivar; Galichon, Alfred
    Abstract: This paper exhibits a duality between the theory of revealed preference of Afriat and the housing allocation problem of Shapley and Scarf. In particular, it is shown that Afriat’s theorem can be interpreted as a second welfare theorem in the housing problem. Using this duality, the revealed preference problem is connected to an optimal assignment problem, and a geometrical characterization of the rationalizability of experiment data is given. This allows in turn to give new indices of rationalizability of the data and to define weaker notions of rationalizability, in the spirit of Afriat’s efficiency index.
    Keywords: Revealed preferences; Afriat’s theorem; Optimal assignments; Indivisible allocations;
    JEL: D11 C60 C78
    Date: 2012
  11. By: Aggey Semenov (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario)
    Abstract: We consider a delegation problem with a biased and potentially uninformed agent when the principal cannot use monetary payments. If the bias between the principal and the agent is large then the optimal delegation set is an interval. When the bias is small or medium the optimal delegation set is no longer connected. It can be one of two types: 1) with an interval and low option, 2) with two intervals. In all cases the agent has less discretion. However, in the case of medium bias the principal delegates in a wider range than in the case of an informed agent
    Keywords: energy; Information, bias, non-informed agent, delegation set
    JEL: D82 D86
    Date: 2012
  12. By: Andrea Repetto (Escuela de Gobierno, Universidad Adolfo Ibáñez)
    Date: 2012–09
  13. By: Andrea Gallice (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: A price reveal auction is a Dutch auction in which the current price of the item on sale remains hidden. Bidders can privately observe the price only by paying a fee, and every time a bidder does so, the price falls by a predetermined amount. We solve for the perfect Bayesian equilibria of the game. If the number of participants n is common knowledge, then in equilibrium at most one bidder observes the price and the profits that the mechanism raises, if any, are only marginally higher than those that would stem from a normal sale. If instead n is a random variable then multiple entry can occur and profitability is enhanced.
    Keywords: pay-per-bid auctions, endogenous price decrease
    JEL: C72 D44
    Date: 2012–11
  14. By: Bettina Klose and Paul Schweinzer
    Abstract: We develop the idea of using mean-variance preferences for the analysis of the first-price, all-pay auction. On the bidding side, we characterise the optimal strategy in symmetric allpay auctions under mean-variance preferences for general distributions of valuations and any number of bidders. We find that, in contrast to winner-pay auction formats, only hightype bidders increase their bids relative to the risk-neutral case while low types minimise variance exposure by bidding low. Introducing asymmetric variance aversions across bidders into a Uniform valuations, two-player framework, we show that a more variance-averse type bids always higher than her less variance-averse counterpart. Taking mean-variance bidding behaviour as given, we show that an expected revenue maximising seller may want to optimally limit the number of participants. Although expected revenue for risk-neutral bidders typically dominates revenue under mean-variance bidding, if the seller himself takes account of the variance of revenue, he may find it preferable to attract bidders endowed with mean-variance preferences.
    Keywords: Auctions, Contests, Mean-Variance preferences
    JEL: C7 D7 D81
    Date: 2012–11
  15. By: Argenton, C. (Tilburg University); Prüfer, J. (Tilburg University)
    Date: 2012
  16. By: Juan M. Gallego
    Abstract: This paper investigates the role of works councils in a simple agency framework in which works councils are supposed to monitor manager’s information on behalf of the workforce, but they are independent agents who might pursue their private interest. First, we consider that workers can incentivize works councils through contingent monetary payments. In order to deter collusion, workers must pay higher compensations in states of nature where they can be expropriated by potential coalitions among works councils and management. Collusion makes contingent payments costly and reduces workers’ payoffs. Second, when elections are the exclusive mechanisms to align works councils’ interest, only well compensated representatives would face an intertemporal tradeoff between accepting management’s transfers at first period and losing rents at the second period. Elections increase the cost of entering on collusive behavior with management and works councils will try to behave on the employees’ interest.
    Date: 2012–11–19
  17. By: Volker Hahn (Department of Economics, University of Konstanz, Germany)
    Abstract: What is the optimal size of expert committees? To address this question, I present a model of a committee of experts with career concerns. Each expert may observe an argument about the state of the world but be unsure about the argument's soundness. Experts may remain silent or compete for the opportunity to announce an argument. I show that experts become more reluctant to speak in larger committees. This effect is sufficiently strong to make small groups of experts optimal. At the same time, a small committee may be superior to an individual expert.
    Keywords: experts, committees, career concerns, veriable information, information aggregation.
    JEL: D71 D82
    Date: 2012–11–19
  18. By: Sunku Hahn (school of economics, Yonsei University)
    Abstract: Many people are not free from past sunk costs in their decision making processes, even though economic theory tells them to forget the sunk costs. In this paper we will show that it can be a rational behavior for the people not to forget the sunk cost when people are concerned with their future reputations.
    Keywords: sunk cost, reputation
    JEL: D8
    Date: 2012–11–15
  19. By: Jong-Hee Hahn (School of Economics, Yonsei University); Jin-Hyuk Kim
    Abstract: In network industries, we often observe frequent upgrades of existing products as well as delayed introductions of new products. In order to explain these contrasting phenomena, this paper examines a durable-good monopolist's incentive for R&D in- vestment in new product development in a market with network effects. We show that if the network effect is strong the monopolist underinvests in R&D compared to the commitment level, whereas overinvestment occurs when the network effect is weak. The monopolist also chooses full intergenerational compatibility between products. We then extend the analysis to the cases of potential entry and successive innovations, and examine how the results change in these extensions.
    Keywords: Planned Obsolescence, Network Effects, Vaporware
    JEL: L12 L15 M21
    Date: 2012–10
  20. By: Choi, Jay; Jeon, Doh-Shin; Kim, Byung-Cheol
    Abstract: We analyze competition between interconnected networks when content is heterogeneous in its sensitivity to delivery quality. In a two-sided market framework, we characterize the equilibrium in a neutral network constrained to offer the same quality and assess the impact of such a constraint vis-à-vis a non-neutral network where Internet service providers (ISPs) are allowed to engage in second degree price discrimination with a menu of quality-price pairs. We find that the merit of net neutrality regulation depends crucially on content providers' business models. More generally, our analysis can be considered as a contribution to the literature on second-degree price discrimination in two-sided platform markets.
    Keywords: Net neutrality, Internet interconnection, Two-sided markets, Second-degree price discrimination, Access (Termination) charges, CPs' business models
    JEL: D4 L1 L5
    Date: 2012–11
  21. By: Normann, Hans-Theo; Rösch, Jürgen; Schultz, Luis Manuel
    Abstract: We explore whether buyer groups, in which firms legally purchase inputs jointly, facilitate collusion in the product market. In a repeated game, abandoning the buyer group altogether or excluding single firms from them constitute more severe credible threats, hence, in theory buyer groups facilitate collusion. We run several experimental treatments in a three-firm Cournot framework to test these predictions, and we also explore the impact communication has on buyer groups. The experimental results show that buyer groups lead to lower outputs when groups can exclude single firms. Communication is identified as a main factor causing collusive product markets. --
    Keywords: buyer groups,cartels,collusion,communication,experiments,repeated games
    JEL: C7 C9 L4 L41
    Date: 2012
  22. By: Peter A. Streufert (University of Western Ontario)
    Abstract: We introduce three definitions. First, we let a "basement" be a set of nodes and actions that supports at least one assessment. Second, we derive from an arbitrary basement its implied "plausibility" (i.e. infinite-relative-likelihood) relation among the game's nodes. Third, we say that this plausibility relation is "additive" if it has a completion represented by the nodal sums of a mass function defined over the game's actions. This last construction is built upon Streufert (2012)'s result that nodes can be specified as sets of actions. Our central result is that a basement has additive plausibility if and only if it supports at least one consistent assessment. The result's proof parallels the early foundations of probability theory and requires only Farkas' Lemma. The result leads to related characterizations, to an easily tested necessary condition for consistency, and to the repair of a nontrivial gap in a proof of Kreps and Wilson (1982).
    Keywords: plausibility relation;additive representation; plausibility mass function; infinite relative likelihood
    JEL: C72
    Date: 2012
  23. By: Chan, Raymond H.; Clark, Ephraim; Wong, Wing-Keung
    Abstract: This paper studies some properties of stochastic dominance (SD) for risk-averse and risk-seeking investors, especially for the third order SD (TSD). We call the former ascending stochastic dominance (ASD) and the latter descending stochastic dominance(DSD). We first discuss the basic property of ASD and DSD linking the ASD and DSD of the first three orders to expected-utility maximization for risk-averse and risk-seeking investors. Thereafter, we prove that a hierarchy exists in both ASD and DSD relationships and that the higher orders of ASD and DSD cannot be replaced by the lower orders of ASD and DSD. Furthermore, we study conditions in which third order ASD preferences will be 'the opposite of' or 'the same as' their counterpart third order DSD preferences. In addition, we construct examples to illustrate all the properties developed in this paper. The theory developed in this paper provides investors with tools to identify first, second, and third order ASD and DSD prospects and thus they could make wiser choices on their investment decision.
    Keywords: Third order stochastic dominance; ascending stochastic dominance; descending stochastic dominance; expected-utility maximization; risk averters; risk seekers
    JEL: D81 G11 C02
    Date: 2012–11–16
  24. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: We establish some elementary results on solutions to the Bellman equation without introducing any topological assumption. Under a small number of conditions, we show that the Bellman equation has a unique solution in a certain set, that this solution is the value function, and that the value function can be computed by value iteration with an appropriate initial condition. We also show that the value function can be computed by the same procedure under alternative conditions. We apply our results to two optimal growth models, one with a discontinuous production function, the other with "roughly increasing" returns.
    Keywords: Dynamic programming, Bellman equation, Value function, Fixed point
    JEL: C61
    Date: 2012–11
  25. By: Prüfer, J. (Tilburg University); Walz, U.
    Date: 2012

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