
on Microeconomics 
Issue of 2013‒03‒02
twelve papers chosen by JingYuan Chiou IMT Lucca Institute for Advanced Studies 
By:  Baron, David P. (Stanford University); Bowen, T. Renee (Stanford University) 
Abstract:  Policymaking is a dynamic process in which policies can be changed in each period but continue in the absence of new legislation. We study a dynamic legislative bargaining game with an endogenous status quo where in each period a dollar is allocated with a proposal voted against the allocation in the previous period. We characterize for any initial status quo a class of simple Markov perfect equilibria (MPE) with dynamic coalitions, where a dynamic coalition is a decisive set of legislators whose members support the same policy, or set of policies, in at least two consecutive periods. In the basic model a dynamic coalition persists throughout the game, and coalition members share the dollar equally in every period. If uncertainty is associated with the implementation of a policy, there is a continuum of allocations supported by coalition MPE in which the originator of the coalition receives a share larger than the coalition partner receives but smaller than in sequential legislative bargaining theory. These coalition equilibria have the same allocation in every period when the coalition persists, but with positive probability the coalition dissolves due to the uncertainty. Coalition MPE also exists in which members tolerate a degree of implementation uncertainty resulting in coalition allocations that can change from one period to the next. The dynamic coalitions are minimal winning, form in the first period, and, if a coalition dissolves, a new coalition is formed in the next period. The predictions of the theory are compared to experiment results. 
JEL:  C73 D72 
Date:  2013–01 
URL:  http://d.repec.org/n?u=RePEc:ecl:stabus:2128&r=mic 
By:  Daniel Cardona (Universitat de les Illes Balears); Antoni RubíBarceló (Universitat de les Illes Balears) 
Abstract:  This note analyzes the efficiency properties of the equilibrium in a multilateral bargaining game in which a legislature divides a budget among collective and particularistic goods. We extend the model of Volden and Wiseman (2007) by considering smooth utility functions and consensus requirements ranging from simplemajority to unanimity. We show that when the private valuation of the private good is relatively high, only unanimity induces an (exante) Pareto efficient outcome. Moreover, optimality can be easily attained by using sequential negotiations, independently of the majority requirement. 
Keywords:  Noncooperative bargaining, sequential negotiantion, voting, quota rules 
JEL:  C72 C78 D72 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:ubi:deawps:53&r=mic 
By:  Andreas M. Hefti 
Abstract:  This paper investigates the relationship between uniqueness of Nash equilibria and local stability with respect to the bestresponse dynamics in the cases of sumaggregative and symmetric games. If strategies are equilibrium complements, local stability and uniqueness are the same formal properties of the game. With equilibrium substitutes, local stability is stronger than uniqueness. If players adjust sequentially rather than simultaneously, this tends towards making a symmetric equilibria of symmetric games more stable. Finally, the relationship between the stability of the Nash bestresponse dynamics is compared to the stability of the responsedynamics induced by aggregatetaking behavior. 
Keywords:  Contraction mapping, stability, uniqueness, aggregatetaking behavior, dominance solvability, symmetric games 
JEL:  C72 D43 L13 
Date:  2013–02 
URL:  http://d.repec.org/n?u=RePEc:zur:econwp:112&r=mic 
By:  Andersson , Tommy (Department of Economics, Lund University); Gudmundsson , Jens (Department of Economics, Lund University); Talman , Adolphus (CentER, Tilburg University); Yang , Zaifu (Department of Economics and Related Studies, University of York) 
Abstract:  A group of heterogeneous agents may form partnerships in pairs. All single agents as well as all partnerships generate values. If two agents choose to cooperate, they need to specify how to split their joint value among one another. In equilibrium, which may or may not exist, no agents have incentives to break up or form new partnerships. This paper proposes a dynamic competitive adjustment process that always either finds an equilibrium or exclusively disproves the existence of any equilibrium in finitely many steps. When an equilibrium exists, partnership and revenue distribution will be automatically and endogenously determined by the process. Moreover, several fundamental properties of the equilibrium solution and the model are derived. 
Keywords:  Partnership formation; adjustment process; equilibrium; assignment market 
JEL:  C62 C72 D02 
Date:  2013–02–04 
URL:  http://d.repec.org/n?u=RePEc:hhs:lunewp:2013_002&r=mic 
By:  Sebastian Kranz (Dept. of Mathematics and Economics, University of Ulm) 
Abstract:  We propose a unified framework to study relational contracting and holdup problems in infinite horizon stochastic games. We first illustrate that with respect to long run decisions, the common formulation of relational contracts as Paretooptimal public perfect equilibria is in stark contrast to fundamental assumptions of holdup models. We develop a model in which relational contracts are repeatedly newly negotiated during relationships. Negotiations take place with positive probability and cause bygones to be bygones. Traditional relational contracting and holdup formulations are nested as opposite corner cases. Allowing for intermediate cases yields very intuitive results and sheds light on many plausible tradeoffs that do not arise in these corner cases. We establish a general existence result and a tractable characterization for stochastic games in which money can be transferred. This paper formulates a theory of relational contracting in dynamic games. A crucial feature is that existing relational contracts can depreciate and ensuing negotiations then treat previous informal agreements as bygones. The model nests the traditional formulation of relational contracts as Paretooptimal equilibria as a special case. In repeated games both formulations are always mathematically equivalent. We provide ample illustrations that in dynamic games the traditional formulation is restrictive in so far that it rules out by assumption many plausible holdup problems  even for small discount factors. Our model provides a framework that naturally unifies the analysis of relational contracting and holdup problems. 
Keywords:  Relational contracting, Holdup, Negotiations, Stochastic games 
JEL:  C73 C78 D23 L14 
Date:  2013–02 
URL:  http://d.repec.org/n?u=RePEc:cwl:cwldpp:1888&r=mic 
By:  Eric Danan (THEMA  THéorie Economique, Modélisation et Applications  université de CergyPontoise); Thibault Gajdos (GREQAM  Groupement de Recherche en Économie Quantitative d'AixMarseille  Université de la Méditerranée  AixMarseille II  Université Paul Cézanne  AixMarseille III  Ecole des Hautes Etudes en Sciences Sociales (EHESS)  CNRS : UMR7316); JeanMarc Tallon (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université Paris I  PanthéonSorbonne, EEPPSE  Ecole d'Économie de Paris  Paris School of Economics  Ecole d'Économie de Paris) 
Abstract:  We analyze the aggregation problem without the assumption that individuals and society have fully determined and observable preferences. More precisely, we endow individuals ans society with sets of possible von NeumannMorgenstern utility functions over lotteries. We generalize the classical neutrality assumption to this setting and characterize the class of neutral social welfare function. This class turns out to be considerably broader for indeterminate than for determinate utilities, where it basically reduces to utilitarianism. In particular, aggregation rules may differ by the relationship between individual and social indeterminacy. We characterize several subclasses of neutral aggregation rules and show that utilitarian rules are those that yield the least indeterminate social utilities, although they still fail to systematically yield a determinate social utility. 
Keywords:  Aggregation  vNM utility  indeterminacy  neutrality  utilitarianism 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:halshs00788647&r=mic 
By:  Daniel Cardona (Universitat de les Illes Balears); Antoni RubíBarceló (Universitat de les Illes Balears) 
Abstract:  This paper analyzes the incentives of the members of a committee to acquire skills, when they will share a fixed budget among them in expost negotiations. Skills are interpreted as the ability to manage a collective budget, in the sense that shares assigned to skilled agents generate positive externalities to all members. In this setting, the equilibrium generally displays an overqualified population. 
Keywords:  Investments, Holdup, Multilateral bargaining, Skills, Externalities 
JEL:  C78 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:ubi:deawps:54&r=mic 
By:  Mohamed Belhaj (Centrale Marseille, (AixMarseille School of Economics), CNRS and EHESS); Sebastian Bervoets (AixMarseille University (AixMarseille School of Economics), CNRS and EHESS); Frédéric Deroïan (AixMarseille University (AixMarseille School of Economics), CNRS and EHESS) 
Abstract:  We consider agents playing a linear network game with strategic complementarities. We analyse the problem of a policy maker who can change the structure of the network in order to increase the aggregate efforts of the individuals and/or the sum of their utilities, given that the number of links of the network has to remain fixed. We identify some link reallocations that guarantee an improvement of aggregate efforts and/or aggregate utilities. With this comparative statics exercise, we then prove that the networks maximising both aggregate outcomes (efforts and utilities) belong to the class of NestedSplit Graphs. 
Keywords:  Network, Linear Interaction, Bonacich Centralities, Strategic Complementarity, Nested Split Graphs. 
JEL:  C72 D85 
Date:  2013–02–12 
URL:  http://d.repec.org/n?u=RePEc:aim:wpaimx:1309&r=mic 
By:  Michele Gori (Dipartimento di Scienze per l'Economia e l'Impresa, Universita' degli Studi di Firenze); Daniela Bubboloni (Dipartimento di Scienze per l'Economia e l'Impresa, Universita' degli Studi di Firenze) 
Abstract:  Under the assumptions that individual preferences and social outcomes are linear orders over the set of alternatives, we provide necessary and sufficient conditions for the existence of anonymous and neutral rules and for the existence of anonymous and neutral majority rules. We determine also general formulas for counting these rules and we explicitly determine their number in some special cases. 
Keywords:  Social welfare function; anonymity; neutrality; super majority; > absolute qualified majority; linear order; group theory. 
JEL:  D71 
Date:  2013–02 
URL:  http://d.repec.org/n?u=RePEc:flo:wpaper:201302&r=mic 
By:  Ronald Stauber 
Abstract:  This paper defines simple procedures to construct ambiguous perturbations of belief structures associated to standard type spaces with precise beliefs, based on ambiguous type spaces whose induced belief hierarchies approximate the belief hierarchies corresponding to the initial type space. Two alternative procedures to construct such perturbations are introduced, and are shown to yield a simple and intuitive characterization of convergence of the resulting approximations to the initial unperturbed environment. The perturbations arising from one of these procedures include the set of all finite perturbations as a special case. The introduced perturbations and their convergence properties provide a foundation for the analysis of robustness to ambiguity of various solutions concepts, and for various decision rules under ambiguity. 
JEL:  C72 D83 
Date:  2013–02 
URL:  http://d.repec.org/n?u=RePEc:acb:cbeeco:2013602&r=mic 
By:  Kleppe, J.; Reijnierse, J.H.; SudhÃ¶lter, P. (Tilburg University, Center for Economic Research) 
Abstract:  If the excesses of the coalitions in a transferable utility game are weighted, then we show that the arising weighted modifications of the wellknown (pre)nucleolus and (pre)kernel satisfy the equal treatment property if and only if the weight system is symmetric in the sense that the weight of a subcoalition of a grand coalition may only depend on the grand coalition and the size of the subcoalition. Hence, the symmetrically weighted versions of the (pre)nucleolus and the (pre)kernel are symmetric, i.e., invariant under symmetries of a game. They may, however, violate anonymity, i.e., they may depend on the names of the players. E.g., a symmetrically weighted nucleolus may assign the classical nucleolus to one game and the per capita nucleolus to another game. We generalize Sobolevâ€™s axiomatization of the prenucleolus and its modification for the nucleolus as well as Pelegâ€™s axiomatization of the prekernel to the symmetrically weighted versions. Only the reduced games have to be replaced by suitably modified reduced games whose definitions may depend on the weight system. Moreover, it is shown that a solution may only satisfy the mentioned sets of modified axioms if the weight system is symmetric. 
Keywords:  TU game Â· Nucleolus Â· Kernel 
JEL:  C71 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:dgr:kubcen:2013007&r=mic 
By:  Nina Boyarchenko; Mario Cerrato; John Crosby; Stewart Hodges 
Abstract:  Faced with the problem of pricing complex contingent claims, an investor seeks to make his valuations robust to model uncertainty. We construct a notion of a model uncertaintyinduced utility function and show that model uncertainty increases the investor's effective risk aversion. Using the modeluncertaintyinduced utility function, we extend the "No Good Deals" methodology of Cochrane and SaaRequejo [2000] to compute lower and upper good deal bounds in the presence of model uncertainty. We illustrate the methodology using some numerical examples. 
Keywords:  Asset pricing theory; Good deal bounds; Knightian uncertainty; Model uncertainty; Contingent claim pricing. modeluncertaintyinduced utility function 
JEL:  G12 G13 
Date:  2013–01 
URL:  http://d.repec.org/n?u=RePEc:gla:glaewp:2013_04&r=mic 