nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒12‒22
fourteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Maximal Revenue with Multiple Goods: Nonmonotonicity and Other Observations By Sergiu Hart; Philip J. Reny
  2. The Robustness of Exclusion in Multi-dimensional Screening By Paulo Barelli; Suren Basov; Mauricio Bugarin; Ian King
  3. Lotteries vs. All-Pay Auctions in Fair and Biased Contests By Epstein, Gil S.; Mealem, Yosef; Nitzan, Shmuel
  4. Harsanyi's aggregation theorem with incomplete preferences. By Eric Danan; Thilbault Gajdos; Jean-Marc Tallon
  5. Cournot tatonnement and potentials By Kukushkin, Nikolai S.
  6. The Tragedy of the Commons in a Violent World By Petros G. Sekeris
  7. Cooperation and the common enemy effect By Kris De Jaegher; Britta Hoyer
  8. Consumers’ Heterogeneity, Publicness of Goods and the Size of Public Sector By Christos Bilanakos
  9. On the Exhaustiveness of Truncation and Dropping Strategies in Many-to-Many Matching Markets By Paula Jaramillo; Cagatay Kay; Flip Klijn
  10. Opportunities as chances: maximising the probability that everybody succeeds By Marco Mariotti; Roberto Veneziani
  11. Supervision in Firms. By Kouroche Vafaï
  12. Legal Enforcement, Default and Heterogeneity of Project Financing Contracts By Gabriel de Abreu Madeira
  13. Thirty Years of Prospect Theory in Economics: A Review and Assessment By Nicholas C. Barberis
  14. Interview with the 2012 Laureate in Economic Sciences Alvin E. Roth By Roth, Alvin E.

  1. By: Sergiu Hart; Philip J. Reny
    Date: 2012
  2. By: Paulo Barelli (University of Rochester); Suren Basov (La Trobe University); Mauricio Bugarin (Insper Institute); Ian King (University of Melbourne)
    Abstract: We extend Armstrong’s result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result holds true in a large class of models and is applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to some oligopoly settings. We illustrate the results with several examples and applications.
    JEL: C72 D42 D43 D82
    Date: 2012–12
  3. By: Epstein, Gil S. (Bar-Ilan University); Mealem, Yosef (Netanya Academic College); Nitzan, Shmuel (Bar-Ilan University)
    Abstract: The form of contests for a single fixed prize can be determined by a designer who maximizes the contestants' efforts. This paper establishes that, under common knowledge of the two asymmetric contestants' prize valuations, a fair Tullock-type endogenously determined lottery is always superior to an all-pay-auction; it yields larger expected efforts (revenues) for the contest designer. If the contest can be unfair (structural discrimination is allowed), then the designer's payoff under the optimal lottery is equal to his expected payoff under the optimal all-pay auction.
    Keywords: contest design, efforts (revenue) maximization, discrimination, endogenous lottery, all-pay auction
    JEL: D70 D71 D72
    Date: 2012–11
  4. By: Eric Danan (THEMA - Université de Cergy-Pontoise); Thilbault Gajdos (GREQAM - UNiversité d'Aix-Marseille); Jean-Marc Tallon (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We provide a generalization of Harsanyi (1995)'s aggregation theorem to the case of incomplete preferences at the individual and social level. Individuals and society have possibly incomplete expected utility preferences that are represented by sets of expected utility functions. Under Pareto indifference, social preferences are represented through a set of aggregation rules that are utilitarian in a generalized sense. Strengthening Pareto indifference to Pareto preference provides a refinement of the representation.
    Keywords: Incomplete preferences, aggregation, expected multi-utility, utilitarianism.
    JEL: D71 D81
    Date: 2012–12
  5. By: Kukushkin, Nikolai S.
    Abstract: We study what topological assumptions should be added to the acyclicity of individual best response improvements in order to ensure the existence of a (pure strategy) Nash equilibrium as well as the possibility to reach a Nash equilibrium in the limit of a best response improvement path.
    Keywords: Cournot tatonnement; Cournot potential; game with structured utilities; aggregative game
    JEL: C72
    Date: 2012–12–09
  6. By: Petros G. Sekeris (Center for Research in the Economics of Development, University of Namur)
    Abstract: Earlier research has shown that the tragedy of the commons may be resolved by Folk theorems for dynamic games. In this article we graft on a standard natural-resource exploitation game the possibility to appropriate the resource through violent means. Because conflict emerges endogenously as resources get depleted, the threat supporting the cooperative outcome is no longer subgame perfect, and thus credible. The unique equilibrium is such that players exploit non-cooperatively the resource when it is abundant and they revert to conflict when it becomes scarce. The players' utility is shown to be lower even if conflict wastes no resources.
    Keywords: Tragedy of the Commons, Conflict, Dynamic Game
    JEL: C73 D74 Q2
    Date: 2012–12
  7. By: Kris De Jaegher; Britta Hoyer
    Abstract: This paper presents a game-theoretic rationale for the beneficial effect of a common enemy on cooperation. In a defence game against a common natural threat, the value of the public good of defence is equal to the sum of the players' defensive efforts. The game therefore takes the form of a prisoner's dilemma, leading to free-riding. When the same defence game is played against a common enemy, the value of the public good of defence is equal to the smallest defensive effort. The game now takes the form of a stag hunt, so that a cooperative equilibrium becomes possible. For this reason, an informed and benevolent government may not want to inform the public that it is facing a common natural threat rather than a common enemy. At the same time, the common enemy has an incentive to mimic nature, and perform only random rather than targeted attacks.
    Keywords: Common Enemy Effect; Defence Games; Prisoner's Dilemma; Stag Hunt.
    JEL: D74 H41 C72
    Date: 2012–12
  8. By: Christos Bilanakos
    Abstract: This article studies the relationship between the level of consumers’ inequality (or heterogeneity) and the size of government for the case of an impure public good. It is shown that the size of redistribution (represented by the level of subsidy provided to the firm) increases with the publicness of the good but may decrease with the level of consumers’ inequality. Under the assumption of Nash bargaining between consumers and producers with respect to the level of subsidy, it is also shown that the actual size of government will be inefficiently small if the level of inequality is relatively low but can be inefficiently large (implying that the good will be overproduced in equilibrium) if the level of inequality is relatively low and the publicness of the good is high enough.
    Keywords: Impure public good, perfect competition and monopoly, subsidy, inequality, Nash Bargaining
    Date: 2012–12
  9. By: Paula Jaramillo; Cagatay Kay; Flip Klijn
    Abstract: We consider two-sided many-to-many matching markets in which each worker may work for multiple firms and each firm may hire multiple workers. We study individual and group manipulations in centralized markets that employ (pairwise) stable mechanisms and that require participants to submit rank order lists of agents on the other side of the market. We are interested in simple preference manipulations that have been reported and studied in empirical and theoretical work: truncation strategies, which are the lists obtained by removing a tail of least preferred partners from a preference list, and the more general dropping strategies, which are the lists obtained by only removing partners from a preference list (i.e., no reshuffling). We study when truncation / dropping strategies are exhaustive for a group of agents on the same side of the market, i.e., when each match resulting from preference manipulations can be replicated or improved upon by some truncation / dropping strategies. We prove that for each stable mechanism, truncation strategies are exhaustive for each agent with quota (Theorem 1). We show that this result cannot be extended neither to group manipulations (even when all quotas equal 1 { Example 1), nor to individual manipulations when the agent's quota is larger than 1 (even when all other agents' quotas equal 1 { Example 2). Finally, we prove that for each stable mechanism, dropping strategies are exhaustive for each group of agents on the same side of the market (Theorem 2), i.e., independently of the quotas.
    Date: 2012–10–22
  10. By: Marco Mariotti (University of St Andrews); Roberto Veneziani (Queen Mary University of London)
    Abstract: Opportunities in society are commonly interpreted as ?chances of success?. Within this interpretation, should opportunities be equalised? We show that a liberal principle of justice and a limited principle of social rationality imply that opportunity pro?les should be evaluated by means of a ?Nash?criterion. The interpretation is new: the social objective should be to maximise the chance that everybody in society succeeds. In particular, the failure of even only one individual must be considered maximally detrimental. We also study a re?nement of this criterion and its extension to problems of intergenerational justice. JEL Categories: D63, D70
    Keywords: opportunities, chances in life, Non-Interference, Nash ordering.
    Date: 2012–10
  11. By: Kouroche Vafaï (Université Paris Descartes - Sorbonne Cité et Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: To control, evaluate, and motivate their agents, firms employ supervisors. As shown by empirical investigations, biased evaluation by supervisors linked to collusion is a persistent feature of firms. This paper studies how deceptive supervision affects agency relationships. We consider a three-level firm where a supervisor is in charge of producing a verifiable report on an agent's output. Depending on the output he has observed, the supervisor may either collude with the agent or with the principal, and make an uniformative report. We show that the proliferation of collusive activities in firms : modifies the configuration of the optimal preventive policy, may increase the expected cost of preventing each type collusion, is beneficial to the supervisor and detrimental to the agent, and is not always harmful.
    Keywords: Firm, group decision, control, biased supervision.
    JEL: D20 D73 L20 M50
    Date: 2012–12
  12. By: Gabriel de Abreu Madeira
    Abstract: Abstract: This paper employs mechanism design to study how imperfect legal enforcement impacts simultaneously on the availability (or scale) of credit for investment purposes and interest rates. The analysis combines two standard ingredients of the development and contract literatures: limited commitment, which encapsulates the idea that contract enforcement is imperfect, and asymmetric information about cash flows, which justify debt contracts and default under some circumstances. Costly use of courts may be optimal, which contrasts with results from most limited commitment models, where punishments are just threats, never applied in optimal arrangements. Numerical solutions for several parametric specifications, allowing for heterogeneity on initial wealth are provided. In all such solutions, wealthier individuals borrow with lower interest rates and run higher scale enterprises, which is consistent with stylized facts. The reliability of courts has a consistently positive effect on the scale of projects. However its effect on interest rates is subtler and depends essentially on the degree of curvature of the production function.
    Keywords: Limited Commitment, Credit Constraints, Legal Enforcement, Mechanism Design.
    JEL: D02 D82 L26 O12 O16
    Date: 2012–12–07
  13. By: Nicholas C. Barberis
    Abstract: Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis.
    JEL: D03 D81
    Date: 2012–12
  14. By: Roth, Alvin E. (Harvard University)
    Abstract: Interview conducted on 6 December 2012.
    Keywords: Market Design;
    JEL: C71 D02
    Date: 2012–12–15

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