
on Microeconomics 
Issue of 2013‒01‒12
fifteen papers chosen by JingYuan Chiou IMT Lucca Institute for Advanced Studies 
By:  Papakonstantinou, A.; Bogetoft, P. 
Abstract:  This paper discusses the design of a novel multidimensional mechanism which allows a principal to procure a single project or an item from multiple suppliers through a twostep payment. The suppliers are capable of producing different qualities at costs which cannot exceed a certain value and the mechanism balances between the costs faced by the suppliers and the benefit the principal achieves from higher qualities. Iniatially, the principal implements a standard second score auction and allocates the project to a single supplier based its reported cost and quality, while then it elicits truthful reporting of the quality by issuing a symmetric secondary payment after observing the winner’s production. We then provide an alternate mechanism in which the principal issues an asymmetric secondary payment which rewards agents for producing higher qualities, while it penalises them for producing lower qualities than they reported. We prove that for both mechanisms truthful revelation of costs and qualities is a dominant strategy (weakly for costs) and that they are immune to combined misreporting of both qualities and costs. We also show that the mechanisms are individually rational, and that the optimal payments received by the winners of the auctions are equal to the payment issued by the standard second score auction. 
Keywords:  multidimensional auctions; procurement; contract theory; auction theory 
JEL:  D86 D82 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:43563&r=mic 
By:  Chen, Yongmin; Schwartz, Marius 
Abstract:  We extend the analysis of monopoly thirddegree price discrimination to the empirically important case where marginal costs also differ between markets. Differential pricing then reallocates output to the lowercost markets, hence welfare can increase even if total output does not, unlike under pure price discrimination. To induce output reallocation the firm varies its prices butagain, unlike under pure price discriminationwith no upward bias in the average price. Due to this price dispersion, differential pricing motivated solely by cost differences will increase consumer surplus (and total welfare) for a broad class of demand functions. We also provide sufficient conditions for beneficial differential pricing in the hybrid case where both demand elasticities and marginal costs differ. 
Keywords:  price discrimination; differential pricing; price dispersion; addon pricing 
JEL:  D4 L1 
Date:  2012–12–23 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:43393&r=mic 
By:  Poeschel, Friedrich 
Abstract:  In a model of sequential search with transferable utility, we allow heterogeneous agents to strategically choose a costless signal of their type. Search frictions are included as discounting and explicit search costs. Through signals, if only they are truthful, agents can avoid the inefficiencies of random search. Then the situation effectively approaches a setting without search frictions. We identify the condition under which signals are truthful and a unique separating equilibrium with perfect sorting arises despite frictions. We find that supermodularity of the match production function is a necessary and sufficient condition. This is a weaker condition than is needed for sorting in models without signals, which may explain why sorting is much more widespread in reality than existing models would suggest. Supermodularity functions here as both a sorting condition and a singlecrossing property. The unique separating equilibrium in our model achieves nearly unconstrained efficiency despite frictions: agents successfully conclude their search after a single meeting, a stable matching results, and overall match output is maximised.  
JEL:  J64 D83 C78 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc12:62061&r=mic 
By:  Bilkic, Natasa; Gries, Thomas 
Abstract:  Initiating a conflict is an investment in social, political or economic change. The decision to attack is sequential in time, irreversible and, more important, includes highly uncertain and erratic threats and opportunities yet completely disregarded in confict theory. In this dynamic model of decision making we focus on the time dimension of an escalating conflict. In order to cover the effects of high uncertainties we extend methods in real option theory by introducing a discontinuous ItoL vy Jump Diffusion processes. We analytically derive a threshold that triggers the attack and determine the expected time of action. With this new discontinuous processs we are able to show that an increasing number and intensity of oppressive government actions may lead to an earlier outbreak of conflict. However, even if latent conflicts are not immediately solved policies can prolong the peace period to find a long term solution to the conflict.  
JEL:  D74 D81 C61 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc12:62031&r=mic 
By:  Souza, Filipe; Rêgo, Leandro 
Abstract:  We discuss the rationality of burning money behavior from a new perspective: the mixed Nash equilibrium. We support our argument analyzing the firstorder derivatives of the mixed equilibrium expected utility of the players with respect to their own utility payoffs in a 2x2 normal form game. We establish necessary and sufficient conditions that guarantee the existence of negative derivatives. In particular, games with negative derivatives are the ones that create incentives for burning money behavior since such behavior in these games improves the player’s mixed equilibrium expected utility. We show that a negative derivative for the mixed equilibrium expected utility of a given player i occurs if, and only if, he has a strict preference for one of the strategies of the other player. Moreover, negative derivatives always occur when they are taken with respect to player i’s highest and lowest game utility payoffs. 
Keywords:  Mixed Nash Equilibrium; Burning Money; Collaborative Dominance; Security Dilemma 
JEL:  C7 
Date:  2012–02–10 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:43410&r=mic 
By:  Souza, Filipe; Rêgo, Leandro 
Abstract:  In this article, we analyze how reasonable it is to play according to some Nash equilibria if players have a preference for one of their opponents’ strategies. For this, we propose the concepts of collaborative dominance and collaborative equilibrium. First we prove that, when the collaborative equilibrium exists it is always efficient, what can be seen as a focal property. Further we argue that a reason for players choosing not to collaborate is if they are focusing in security instead of efficiency, in which case they would prefer to play maximin strategies. This argument allows us to reduce the hall of reasonable equilibria for games where a collaborative equilibrium exists. Finally, we point out that twoplayer zerosum games do not have collaborative equilibrium and, moreover, if there exists a strategy profile formed only by collaboratively dominated actions it is a Nash equilibrium in such kind of game. 
Keywords:  Nash Equilibrium; Collaborative Dominance; TwoPlayers ZeroSum Games 
JEL:  C7 
Date:  2012–11–20 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:43408&r=mic 
By:  Han Feng; David Hobson 
Abstract:  This paper discusses the gambling contest introduced in Seel & Strack (Gambling in contests, Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 375, Mar 2012.) and considers the impact of adding a penalty associated with failure to follow a winning strategy. The Seel & Strack model consists of $n$agents each of whom privately observes a transient diffusion process and chooses when to stop it. The player with the highest stopped value wins the contest, and each player's objective is to maximise their probability of winning the contest. We give a new derivation of the results of Seel & Strack based on a Lagrangian approach. Moreover, we consider an extension of the problem in which in the case when an agent is penalised when their strategy is suboptimal, in the sense that they do not win the contest, but there existed an alternative strategy which would have resulted in victory. 
Date:  2013–01 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1301.0719&r=mic 
By:  Erhan Bayraktar; Song Yao 
Abstract:  We analyze a robust optimal stopping problem when there is volatility uncertainty. This is a zerosum controllerstopper game in which the stopper is trying to maximize its payoff against an adverse player which tries to minimize this payoff by choosing the probability measure by from a set of measures which are not necessarily equivalent. In particular, we analyze the upper Snell envelope $\ol{Z}$ of the reward process $Y$ and by comparing it with the Snell envelope of $Y$ under each individual probability $\hP$, we show that $\ol{Z}$ is an $\ul{\sE}_t \dfnn \underset{\hP \in \cQ_t}{\inf} \hE_\hP [\cd]$supermartingale, and a nonlinear martingale up to the first time $\t^*$ when $\ol{Z}$ meets $Y$. Consequently, $\t^*$ is the optimal stopping time for the robust optimal stopping problem. 
Date:  2013–01 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1301.0091&r=mic 
By:  Shurojit Chatterji (Singapore Management University, School of Economics); Sayantan Ghosal (Warwick University) 
Abstract:  We define a solution concept, perfectly contracted equilibrium, for an intertempo ral exchange economy where agents are simultaneously price takers in spot commod ity markets while engaging in ecient, nonWalrasian contracting over future prices. Without requiring that agents have perfect foresight, we show that perfectly contracted equilibrium outcomes are a subset of Pareto optimal allocations. It is a robust possi bility for perfectly contracted equilibrium outcomes to differ from ArrowDebreu equi librium outcomes. We show that both centralized banking and retrading with bilateral contracting can lead to perfectly contracted equilibria. 
Keywords:  equilibrium, future prices, uncertainty, contracts 
JEL:  D5 D70 D72 D84 
Date:  2012–12 
URL:  http://d.repec.org/n?u=RePEc:siu:wpaper:362012&r=mic 
By:  Göller, Daniel 
Abstract:  We examine the efficiency of the standard breach remedy expectation damages in a setting of bilateral cooperative investment by a buyer and a seller. Contracts may specify a required quality level and an upper bound to the cost of production. We find that it is optimal to write an augmented Cadillac contract that sets one threshold such that it cannot be met with positive probability together with an extreme price. Then, one of the parties becomes a residual claimant of the trade relationship. The other threshold can be used to balance the incentives of the other party.  
JEL:  K12 C70 D86 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc12:62047&r=mic 
By:  Simone Moriconi (ITEMQ, Università Cattolica di Milano and CREA, University of Luxembourg) 
Abstract:  This paper analyzes the impact of taxation on economic effciency when contracts are incomplete. We assume firms operate in a perfect competitive market and can choose between integrated or nonintegrated governance to cope with contract incompleteness. Taxation reduces incentives to pursue intrafirm coordination, thus the effciency of firm's production process under nonintegration. This is not the case under integration, since production decisions are transferred to the Headquarters, at a fixed integration cost. Taxation may then induce firms to change their organization at the industry equilibrium. We show that a tax that induces firms to choose integration rather than nonintegration may serve a corrective function if integration costs and market prices are not too high. 
Keywords:  taxation, incomplete contracts and economic effciency 
JEL:  H21 L22 H32 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:luc:wpaper:1208&r=mic 
By:  Salvatore Federico; Paul Gassiat; Fausto Gozzi 
Abstract:  We consider a utility maximization problem for an investmentconsumption portfolio when the current utility depends also on the wealth process. Such kind of problems arise, e.g., in portfolio optimization with random horizon or with random trading times. To overcome the difficulties of the problem we use the dual approach. We define a dual problem and treat it by means of dynamic programming, showing that the viscosity solutions of the associated HamiltonJacobiBellman equation belong to a suitable class of smooth functions. This allows to define a smooth solution of the primal HamiltonJacobiBellman equation, proving that this solution is indeed unique in a suitable class and coincides with the value function of the primal problem. Some financial applications of the results are provided. 
Date:  2013–01 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1301.0280&r=mic 
By:  Ragnar Torvik (Department of Economics, Norwegian University of Science and Technology); Daron Acemoglu; James A. Robinson 
Abstract:  In this online appendix we extend the basic model in the paper in several directions, discuss the robustness of the results, and moreover what new mechanisms our extensions implies as compared to the ones in the basic model. 
Date:  2013–01–04 
URL:  http://d.repec.org/n?u=RePEc:nst:samfok:14013&r=mic 
By:  Schmitz, Patrick W. 
Abstract:  An inventor can invest research effort to come up with an innovation. Once an innovation is made, a contract is negotiated and unobservable effort must be exerted to develop a product. In the absence of liability constraints, the inventor's investment incentives are increasing in his bargaining power. Yet, given limited liability, overinvestments may occur and the inventor's investment incentives may be decreasing in his bargaining power. 
Keywords:  holdup problem; incomplete contracts; research and development; limited liability 
JEL:  D86 L23 O31 
Date:  2012–12 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:43407&r=mic 
By:  Boris Gershman 
Abstract:  The two sides of envy, destructive and constructive, give rise to qualitatively dierent equilibria, depending on the economic, institutional, and cultural environment. If investment opportunities are scarce, inequality is high, property rights are poorly protected, and social comparisons are strong, society is likely to be in the fear equilibrium," in which better endowed agents restrain their eorts to prevent destructive envy of the relatively poor. Otherwise, the standard \keeping up with the Joneses" competition arises, and envy is satised through suboptimally high eorts. Economic growth expands the production possibilities frontier and triggers an endogenous transition from one equilibrium to the other causing a qualitative shift in the relationship between envy and economic performance: envyavoidance behavior with its adverse eect on investment paves the way to creative emulation. From a welfare perspective, better institutions and wealth redistribution that move the society away from the lowoutput fear equilibrium need not be Pareto improving in the short run, as they unleash the negative consumption externality, but in the long run such policies are likely to increase social welfare due to enhanced productivity growth. 
Keywords:  Economic growth, Envy, Inequality, Property rights, Redistribution 
JEL:  D31 D62 D74 O10 O43 Z13 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:amu:wpaper:201219&r=mic 