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on Microeconomics |
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Issue of 2013‒01‒26
fifteen papers chosen by Jing-Yuan Chiou IMT Lucca Institute for Advanced Studies |
| By: | Larry G. Epstein; Shaolin Ji |
| Abstract: | This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are presented. First, we derive arbitrage-free pricing rules based on hedging arguments. Ambiguous volatility implies market incompleteness that rules out perfect hedging. Consequently, hedging arguments determine prices only up to intervals. However, sharper predictions can be obtained by assuming preference maximization and equilibrium. Thus we apply the model of utility to a representative agent endowment economy to study equilibrium asset returns. A version of the C-CAPM is derived and the effects of ambiguous volatility are described. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.4614&r=mic |
| By: | Iossa, Elisabetta (DEF, University of Rome Tor Vergata, CEPR, CMPO and EIEF); Rey, Patrick (TSE,IDEI) |
| Abstract: | We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent’s productivity can evolve exogenously (random shocks) or improve endogenously through investment. We show that incentives are stronger and performance is higher when the contract approaches its expiry date. Contrary to common wisdom, long-term contracts may strengthen reputational effects whereas short-term contracting may be optimal when investment has persistent, long-term effects. |
| Keywords: | Career concerns, contract duration,contract renewal, reputation and dynamic incentives. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:26677&r=mic |
| By: | Gil S. Epstein (Bar-Ilan University); Yosef Mealem |
| Abstract: | This article considers an asymmetric contest with incomplete information. There are two types of players: informed and uninformed. Each player has a different ability to translate effort into performance in terms of the contest success function. While one player's type is known to both players, the other is private information and known only to the player himself. We compare the Bayesian Nash equilibrium outcome of a one-sided private information contest to the Nash equilibrium with no private information, in which both players know the type of the other player. We show conditions under which uncertainty increases the investment of the uninformed player and the rent dissipation of the contest, while decreasing the expected net payoff of the informed player. In addition, we consider conditions under which the informed player – before knowing his own type – prefers that the uninformed player knows his type. Moreover, we show conditions for the existence/non-existence of equilibrium in a two-stage contest in which the informed player declares his type (or does not declare) in the first stage and in the second stage the two players play according to the information available to them. |
| Keywords: | Asymmetric contests, rent seeking, incomplete information |
| JEL: | D72 C72 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2013-01&r=mic |
| By: | Garcia-Martinez, Jose A. |
| Abstract: | We show that the observation by a principal of the effectiveness of an expert‘s action could induce the expert to lie, damaging the principal. A career-minded expert receives a private-informative signal about the real state of the world, and then he takes an action that can match or not the real state. If a principal observes the consequences of this expert’s action, i.e., if the action matches or not the real state, this expert could disregard his valuable information damaging the principal: the expert plays the opposite action to that recommended by his signal and consequently decreases the probability of matching the real state. However, this expert could play the "recommended" action with positive probability if consequences are not observed. The previous literature has found that "transparency of consequence" can only improves the incentives of the expert to reveal his valuable information. The paradoxical behavior we have found can appear when the expert needs to signal with one action two different kinds of information, and there is a particular "trade-off" in the way of signaling; this "trade-off" can be affected in an unexpected way by the observation of the expert’s action consequences. In this paper, we present a simple model to capture this idea, and characterize the range of the parameters where that occurs. |
| Keywords: | Transparency; Principal-Agent; Reputation |
| JEL: | D82 C72 |
| Date: | 2013–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43825&r=mic |
| By: | Keller, Godfrey; Rady, Sven |
| Abstract: | We study a continuous-time game of strategic experimentation in which the players try to assess the failure rate of some new equipment or technology. Breakdowns occur at the jump times of a Poisson process whose unknown intensity is either high or low. In marked contrast to existing models, we find that the cooperative value function does not exhibit smooth pasting at the efficient cut-off belief. This finding extends to the boundaries between continuation and stopping regions in Markov perfect equilibria. We characterize the unique symmetric equilibrium, construct a class of asymmetric equilibria, and elucidate the impact of bad versus good Poisson news on equilibrium outcomes. |
| Keywords: | Strategic Experimentation; Two-Armed Bandit; Bayesian Learning; Poisson Process; Piecewise Deterministic Process; Markov Perfect Equilibrium; Differential-Difference Equation; Smooth Pasting; Continuous Pasting |
| JEL: | C73 D83 O32 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:396&r=mic |
| By: | Benjamin Lester; Ludo Visschers; Ronald Wolthoff |
| Abstract: | In many markets, sellers advertise their good with an asking price. This is a price at which the seller is willing to take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers' revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the positive implications of this pricing mechanism for transaction prices and allocations. |
| Keywords: | Asking Prices, Competing Mechanism Design, Auctions with Entry, Competitive Search |
| JEL: | C78 D21 D44 D82 D83 L11 R31 |
| Date: | 2013–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-471&r=mic |
| By: | Hu, Luke; Wolfstetter, Elmar G. |
| Abstract: | Inspired by some spectrum auctions, we consider a stylized license auction with incumbents and one entrant. Whereas the entrant values only the bundle of several units (synergy), incumbents are subject to non-increasing demand. The seller proactively encourages entry and restricts incumbent bidders. In this framework, an English clock auction gives rise to an exposure problem that distorts efficiency and impairs revenue. We consider three remedies: a (constrained) Vickrey package auction, an English clock auction with exit option that allows the entrant to annul his bid, and an English clock auction with exit and entry option that lifts the bidding restriction if entry failed. |
| Keywords: | Auctions; package auctions; combinatorial clock auctions; spectrum auction; bundling; synergies |
| JEL: | D21 D43 D44 D45 G34 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:394&r=mic |
| By: | Maarten Janssen (University of Vienna); Vladimir Karamychev (Erasmus University Rotterdam) |
| Abstract: | We analyze the effects of mergers in first-price sealed-bid auctions on bidders' equilibrium bidding functions and on revenue. We also study the incentives of bidders to merge given the private information they have. We develop two models, depending on how after-merger valuations are created. In the first, single-aspect model, the valuation of the merged firm is the maximum of the valuations of the two firms engaged in the merger. In the multi-aspect model, a bidder's valuation is the sum of two components and a merged firm chooses the maximum of each component of the two merging firms. In the first model, a merger creates incentives for bidders to shade their bids leading to lower revenue. In the second model, the non-merging firms do not shade their bids and revenue is actually higher. In both models, we show that all bidders have an incentive to merge. |
| Keywords: | Mergers; first-price sealed-bid auctions |
| JEL: | D44 D82 |
| Date: | 2013–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130012&r=mic |
| By: | Emilio Espino; Julian Kozlowski; Juan M. Sánchez |
| Abstract: | This paper studies the efficient arrangement among several agents that are subject to idiosyncratic, privately observed taste shocks affecting their marginal utility of current consumption. Agents accumulate capital and have access to a technology to produce goods. The framework deviates from previous literature, which assumed that (i) there is a continuum of agents and (ii) agents are exogenously endowed with output every period with no investment opportunities. A new method is proposed to solve for the optimal allocation that takes advantage of the fact that the utility possibility set is convex. Pareto weights play the role of promised utility in Abreu, Pearce, and Stac- chetti (1990). The method is applied to study efficiency in a partnership between the founder, who faces the taste shock, and the partner, who provides funds but do not face shocks. New insights are derived. Under private information the ownership structure determines to what extent private information matters. If the founder’s share of the partnership is too big his incentives to cheat vanish. Additionally, efficiency implies that, while incentive constraints bind, equity shares must fluctuate to alleviate infor- mation problems. In the long run, there are two possible extreme structures: (1) the founder’s equity share becomes sufficiently large to make the incentive problem irrele- vant and (2) the founder’s equity share converges to zero. Two alternative economies are studied to understand the role of key assumptions: (i) an endowment economy and (ii) an economy in which both partners face taste shocks. It turned out that to obtain the main results allowing for a production economy is crucial but having only one agent with shock is not.> |
| Keywords: | Disclosure of information ; Risk ; Capital |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-001&r=mic |
| By: | Larbi Alaoui; Fabrizio Germano |
| Abstract: | We develop a general theory of news media. News consumers are time constrained and perform a (possibly subconscious) optimal search, given the amount of time they possess. Their utility functions are general and allow for complementarities over the amount of information they acquire on any given topic. Media outlets are aware of consumers' preferences and constraints, and aim to maximize readership. These outlets observe the news items of the day and decide on a ranking to provide to readers. They cannot falsify or misreport news. In the baseline model readers and outlets are unbiased and fully rational. <br><br> We then derive basic properties of equilibria on these markets for news. In particular, equilibrium rankings need not be reader-efficient. Even in competitive markets, readers may read more than they would like to; they may read stories distinct from the ones they prefer and on topics that are different from the ones they consider to be important. Next, we derive implications on diverse aspects of new and traditional media. These include a rationale for tabloid news based on complementarities in preferences, a rationale for why readers switch to certain online media platforms as a way to circumvent inefficient rankings found in traditional media, and the derivation of a positive role for public media in restoring reader-efficient standards. Finally, we relate some of our findings to recent stylized facts, and brie y discuss political economy implications of the model. |
| Keywords: | media economics, media competition, information search, time preference, news ranking, digital media, internet, new and traditional media, public media, tabloid news, media bias |
| JEL: | D03 L13 L82 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:675&r=mic |
| By: | Gürtler, Marc; Gürtler, Oliver |
| Abstract: | We investigate the effect of employee heterogeneity on the incentive to put forth effort in a market-based tournament. Employers use the tournament's outcome to estimate employees' abilities and accordingly condition their wage offers. Employees put forth effort, because by doing so they increase the probability of outperforming the rival, thereby increasing their ability assessment and thus the wage offer. We demonstrate that the tournament outcome provides more information about employees' abilities in case they are heterogeneous. Thus, employees get a higher incentive to affect the tournament outcome, and employers find it optimal to hire heterogeneous contestants. -- |
| Keywords: | tournament,competitive labor market,heterogeneity,learning |
| JEL: | D83 J24 J31 M51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tbsifw:if42v1&r=mic |
| By: | Selcuk, O.; Talman, A.J.J. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper introduces a new solution concept for cooperative games with general coalitional structure in which only certain sets of players, including the set of all players, are able to form feasible coalitions. The solution concept takes into account the marginal contribution of players. This marginal contribution can be a joint contribution of several players and is equally divided among those players. Any set system representing a coalitional structure induces a collection of coalitional trees, whose nodes may consist of subsets of players. As solution we take the average of the marginal contribution vectors that correspond to all coalitional trees. The solution is ecient and several other properties are studied and some special cases are considered. |
| Keywords: | TU game;cooperation structure;marginal contribution;set system;Shapley value |
| JEL: | C71 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013002&r=mic |
| By: | Brink, R. van den; Herings, P.J.J.; Laan, G. van der; Talman, A.J.J. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: In the literature various models of games with restricted cooperation can be found. In those models, instead of allowing for all subsets of the set of players to form, it is assumed that the set of feasible coalitions is a proper subset of the power set of the set of players. In this paper we consider such sets of feasible coalitions that follow from a permission structure on the set of players, in which players need permission to cooperate with other players. We assume the permission structure to be an oriented tree. This means that there is one player at the top of the permission structure and for every other player there is a unique directed path from the top player to this player. We introduce a new solution for these games based on the idea of the Average Tree value for cycle-free communication graph games. We provide two axiomatizations for this new value and compare it with the conjunctive permission value. |
| Keywords: | TU game;restricted cooperation;permission structure;Shapley value;Average Tree value;axiomatization. |
| JEL: | C71 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013001&r=mic |
| By: | Vidal-Puga, Juan |
| Abstract: | In bargaining problems, a rule satisfies ordinal invariance if it does not depend on order-preserving transformations of the agents' utilities. In this paper, a simple non-cooperative game for three agents, based on bilateral offers, is presented. The ordinal Shapley rule arises in subgame perfect equilibrium as the agents have more time to reach an agreement. |
| Keywords: | ordinal bargaining; ordinal Shapley rule |
| JEL: | C78 C72 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43790&r=mic |
| By: | García-Bermejo, Juan Carlos (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.) |
| Abstract: | Majority voting is commonly used in aggregating judgments. The literature to date on judgment aggregation (JA) has focused primarily on proposition-wise majority voting (PMV). Given a set of issues on which a group is trying to make collective judgments, PMV aggregates individual judgments issue by issue, and satisfies a salient property of JA rules—independence. This paper introduces a variant of majority voting called holistic majority voting (HMV). This new variant also meets the condition of independence. However, instead of aggregating judgments issue by issue, it aggregates individual judgments en bloc. A salient and straightforward feature of HMV is that it guarantees the logical consistency of the propositions expressing collective judgments, provided that the individual points of view are consistent. This feature contrasts with the known inability of PMV to guarantee the consistency of the collective outcome. Analogously, while PMV may present a set of judgments that have been rejected by everyone in the group as collectively accepted, the collective judgments returned by HMV have been accepted by a majority of individuals in the group and, therefore, rejected by a minority of them at most. In addition, HMV satisfies a large set of appealing properties, as PMV also does. However, HMV may not return any complete proposition expressing the judgments of the group on all the issues at stake, even in cases where PMV does. Moreover, demanding completeness from HMV leads to impossibility results similar to the known impossibilities on PMV and on proposition-wise JA rules in general. |
| Keywords: | judgment aggregation; judgment aggregation correspondences; proposition-wise majority voting; holistic majority voting |
| JEL: | D70 D71 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:uam:wpaper:201302&r=mic |