
on Microeconomics 
Issue of 2013‒03‒30
eleven papers chosen by JingYuan Chiou IMT Lucca Institute for Advanced Studies 
By:  Arnold Polanski (University of East Anglia); Fernando VegaRedondo (European University Institute) 
Abstract:  The paper proposes an intertemporal model of bargaining among heterogeneous buyers and sellers placed on a bipartite network. First, it characterizes conditions on the network under which its trading restrictions are inessential and the outcome is arbitragefree. Instead, when the system is segmented in different trading components, we show how these come about and how prices are determined in each of them. Second, we turn to the issue of network endogeneity, focusing on those networks that are Pairwise Stable. Such networks are shown to always exist and be arbitragefree. In the latter respect, therefore, they satisfy one of the key properties displayed by frictionless markets. We identify, however, a sharp contrast regarding another key feature: PairwiseStable networks are generically inefficient if the matching process is genuinely decentralized. This uncovers a fundamental incompatibility between individual incentives and social welfare in endogenous trading networks. We explain that such incompatibility is not only due to buyer/seller heterogeneity but is also caused by the incentives underlying network formation in a trading context. 
Date:  2013–03 
URL:  http://d.repec.org/n?u=RePEc:uea:aepppr:2012_38&r=mic 
By:  Arnold Polanski (University of East Anglia); Emiliya A. Lazarova (University of Birmingham) 
Abstract:  We study dynamic multilateral markets, in which players' payoffs result from coalitional bargaining. We establish payoff uniqueness of stationary equilibria and the emergence of endogenous cooperation structures when traders experience some degree of (heterogeneous) bargaining frictions. When we focus on market games with different player types, we derive, under mild conditions, an explicit formula for each type's equilibrium payoff as market frictions vanish. We further apply this methodology to the analysis of labor markets. From our general results, we can determine the endogenous composition of the equilibrium firm and the remuneration scheme. 
Date:  2013–03 
URL:  http://d.repec.org/n?u=RePEc:uea:aepppr:2012_39&r=mic 
By:  Jacob Glazer; Ariel Rubinstein 
Date:  2013–03–21 
URL:  http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000644&r=mic 
By:  Grochulski, Borys; Zhang, Yuzhe 
Abstract:  We study optimal incentives in a principalagent problem in which the agent's outside option is determined endogenously in a competitive labor market. In equilibrium, strong performance increases the agent's market value. When this value becomes sufficiently high, the threat of the agent's quitting forces the principal to give the agent a raise. The prospect of obtaining this raise gives the agent an incentive to exert effort, which reduces the need for standard incentives, like bonuses. In fact, whenever the agent's option to quit is close to being ``in the money,'' the marketinduced incentive completely eliminates the need for standard incentives. 
Keywords:  Marketbased incentive, Career Concerns, Endogenous outside option, Limited commitment, Private information, Wage contract 
JEL:  D82 D86 J31 J33 M12 M52 
Date:  2013–03–25 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:45576&r=mic 
By:  Eric Danan; Thibault Gajdos; JeanMarc Tallon (THEMA, Universite de CergyPontoise and THEMA; GREQAM, CNRS, AixMarseille University; Universite Paris I PantheonSorbonne, CNRS) 
Abstract:  We provide a generalization of Harsanyi (1955)'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 multiutility, utilitarianism. 
JEL:  D71 D81 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:ema:worpap:201305&r=mic 
By:  Dai Zusai (Department of Economics, Temple University) 
Abstract:  We propose a new deterministic evolutionary dynamicâ€”the tempered best response dynamic (tBRD)to capture two features of economic decision making: optimization and continuous sensitivity to incentives. That is, in the tBRD, an agent is more likely to revise his action when his current payoff is further from the optimal payoff, and he always switches to an optimal action when revising. The tBRD is a payoff monotone selection like the replicator dynamic, which makes medium and longrun outcomes more consistent with predictions from equilibrium refinement than the BRD in some situations. The technical contribution of the tBRD is continuous sensitivity, which allows us to apply results of a system of piecewise differential equations in order to obtain conditions for uniqueness and stability of solutions. 
Keywords:  best response dynamic, payoff monotonicity, statusquo bias, switching costs, proper equilibrium, piecewise differential equations 
JEL:  C62 C73 D03 
Date:  2013–01 
URL:  http://d.repec.org/n?u=RePEc:tem:wpaper:1301&r=mic 
By:  Arin Aguirre, Francisco Javier; Katsev, Ilya 
Abstract:  We prove that the SDprenucleolus satisfies monotonicity in the class of convex games. The SDprenucleolus is thus the only known continuous core concept that satisfies monotonicity for convex games. We also prove that for convex games the SDprenucleolus and the SDprekernel coincide. 
Keywords:  prenucleolus, monotonicity, TU games 
JEL:  C71 C72 
Date:  2013–02–26 
URL:  http://d.repec.org/n?u=RePEc:ehu:ikerla:9828&r=mic 
By:  Igal Milchtaich (BarIlan University) 
Abstract:  In a number of large, important families of finite games, not only do purestrategy Nash equilibria always exist but they are also reachable from any initial strategy profile by some sequence of myopic singleplayer moves to a better or bestresponse strategy. This weak acyclicity property is shared, for example, by all perfectinformation extensiveform games, which are generally not acyclic since even sequences of bestimprovement steps may cycle. Weak acyclicity is equivalent to the existence of weak potential, which unlike a potential increases along some rather than every sequence as above, as well as to the existence of an acyclic scheduler, which guarantees convergence to equilibrium by disallowing certain (improvement) moves. A number of sufficient conditions for acyclicity and weak acyclicity are known. 
Date:  2013–03 
URL:  http://d.repec.org/n?u=RePEc:biu:wpaper:201303&r=mic 
By:  Giacomo Bonanno (Department of Economics, University of California Davis) 
Abstract:  We investigate the extension of backwardinduction to von Neumann extensive games (where information sets have a synchronous structure) and provide an epistemic characterization of it. Extensions of the idea of backwardinduction were proposed by Penta (2009) and later by Perea (2013), who also provided an epistemic characterization in terms of the notion of common belief in future rationality. The epistemic characterization we propose, although differently formulated, is conceptually the same as Perea's and so is the generalization of backward induction. The novelty of this contribution lies in the epistemic models that we use, which are dynamic, behavioral models where strategies play no role and the only beliefs that are specified are the actual beliefs of the players at the time of choice. Thus our analysis is free of (objective or subjective) counterfactuals. 
Keywords:  Dynamic game, imperfect information, backward induction, belief, rationality, behavioral model 
JEL:  C7 
Date:  2013–03–11 
URL:  http://d.repec.org/n?u=RePEc:cda:wpaper:132&r=mic 
By:  Facundo Piguillem (EIEF); Anderson Schneider (TRC) 
Abstract:  Would citizens coordinate to punish a government when they observe suspicious behavior? This paper shows that under some circumstances such coordination is impossible. This fact has important implications for policy discretion. We study an environment with the following characteristics: 1) the aggregate productivity (fundamental) is stochastic, 2) only the government observes it and, 3) every agent privately receives a noisy signal about the fundamental. Item 1) implies that the best policy (tax on investment) with commitment is state contingent, while 2) and 3) make information incomplete. The main consequence of incomplete information is to make coordination among small anonymous agents harder. Since coordination is key to punishing the government when it deviates, independently of the accuracy of the signal, the set of sustainable payoffs is drastically reduced. Regardless of the size of the noise, state contingent policies cannot be an equilibrium. Moreover, the best equilibrium policy is independent of the fundamental, i.e., the optimal policy calls for strong rules rather than discretion. Finally, we show that the payoff of the best equilibrium without commitment is uniformly bounded away from the payoff of the equilibrium with commitment. 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:eie:wpaper:1306&r=mic 
By:  Szalay, Dezsö 
Abstract:  I study the optimal regulation of a firm producing two goods. The firm has private information about its cost of producing either of the goods. I explore the ways in which the optimal allocation differs from its one dimensional counterpart. With binding constraints in both dimensions, the allocation involves distortions for the most efficient producers and features overproduction for some less efficient types. 
JEL:  D82 L21 
Date:  2013–03–15 
URL:  http://d.repec.org/n?u=RePEc:trf:wpaper:397&r=mic 