nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒04‒06
sixteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Bayesian Repeated Games By Francoise Forges; Antoine Salomon
  2. Stochastic stability in finite extensive-form games of perfect information By Xu, Zibo
  3. Task Assignment under Agent Loss Aversion By Kohei Daido; Kimiyuki Morita; Takeshi Murooka; Hiromasa Ogawa
  4. Markov Perfect Equilibria in Differential Games with Regime Switching By Ngo Van Long; Fabien Prieur; Klarizze Puzon; Mabel Tidball
  5. The lifeboat problem By Konrad, Kai A.; Kovenock, Dan
  6. The core of games on ordered structures and graphs By Michel Grabisch
  7. Incomplete Information about Social Preferences Explains Equal Division and Delay in Bargaining. By KOHLER, Stefan
  8. Self-Image and Strategic Ignorance in Moral Dilemmas By Grossman, Zachary; van der Weele, Joël
  9. Characterizing Social Value of Information By Ui, Takashi; Yoshizawa, Yasunori
  10. On the Realizability of Social Preferences in Three-Party Parliamentary By Kazuya Kikuchi
  11. Who Should Pay for Credit Ratings and How? By Anil K Kashyap; Natalia Kovrijnykh
  12. Uncertainty and sentiment-driven equilibria By Jess Benhabib; Pengfei Wang; Yi Wen
  13. Creating Attachment through Advertising: Loss Aversion and Pre–Purchase Information By Heiko Karle
  14. Network Structure Matters: Applications to R&D collaboration, collusion, and online communication networks. By KORKMAZ, Gizem
  15. Endogenous Community Formation and Collective Provision - A Procedurally Fair Mechanism By Werner Güth
  16. The market for protection and the origin of the state By Konrad, Kai A.; Skaperdas, Stergios

  1. By: Francoise Forges (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine, LEDa - Laboratoire d'Economie de Dauphine - Université Paris IX - Paris Dauphine); Antoine Salomon (LEM - Laboratoire d'Économie Moderne - Université Paris II - Panthéon-Assas : EA4442)
    Abstract: We consider Bayesian games, with independent private values, in which uniform punishment strategies are available. We establish that the Nash equilibria of the Bayesian infinitely repeated game without discounting are payoff equivalent to tractable separating (i.e., completely revealing) equilibria and can be achieved as interim cooperative solutions of the initial Bayesian game. We also show, on a public good example, that the set of Nash equilibrium payoffs of the undiscounted game can be empty, while limit Nash equilibrium payoffs of the discounted game, as players become infinitely patient, do exist.
    Keywords: Bayesian game, incentive compatibility, independent private values, individual rationality, infinitely repeated game, public good
    Date: 2013–03–23
  2. By: Xu, Zibo (Dept. of Economic Statistics, Stockholm School of Economics)
    Abstract: We consider a basic stochastic evolutionary model with rare mutation and a best-reply (or better-reply) selection mechanism. Following Young's papers, we call a state stochastically stable if its long-term relative frequency of occurrence is bounded away from zero as the mutation rate decreases to zero. We prove that, for all finite extensive-form games of perfect information, the best-reply dynamic converges to a Nash equilibrium almost surely. Moreover, only Nash equilibria can be stochastically stable. We present a `centipede-trust game', where we prove that both the backward induction equilibrium component and the Pareto-dominant equilibrium component are stochastically stable, even when the populations increase to infinity. For finite extensive-form games of perfect information, we give a sufficient condition for stochastic stability of the set of non-backward-induction equilibria, and show how much extra payoff is needed to turn an equilibrium stochastically stable.
    Keywords: Evolutionary game theory; Markov chains; equilibrium selection; stochastic stability; games in extensive form; games of perfect information; backward induction equilibrium; Nash equilibrium components; best-reply dynamics.
    JEL: C61 C62 C73
    Date: 2013–03–21
  3. By: Kohei Daido (School of Economics, Kwansei Gakuin University); Kimiyuki Morita (Graduate School of Commerce and Management, Hitotsubashi University); Takeshi Murooka (Department of Economics, University of California-Berkeley); Hiromasa Ogawa (Graduate School of Economics, University of Tokyo)
    Abstract: We analyze a simple task-assignment model in which a principal assigns a task to one of two agents depending on the state. If the agents have standard concave utility, the principal assigns the task to an agent with the highest productivity in each state. In contrast, if the agents are loss averse, in order to alleviate their expected losses the principal may assign the task to a single agent in all states. Furthermore, the optimal contract may specify the same effort level across states. Our results imply that such simple contracts can be optimal even when employers can write contingent contracts at no cost.
    Keywords: task assignment, loss aversion, reference-dependent preferences
    JEL: D03 D86 M12 M52
    Date: 2013–03
  4. By: Ngo Van Long; Fabien Prieur; Klarizze Puzon; Mabel Tidball
    Abstract: We propose a new methodology exploring Markov perfect equilibrium strategies in differential games with regime switching. Speciffically, we develop a general game with two players having two kinds of strategies. Players choose an action that in fluences the evolution of a state variable, and decide on the switching time between alternative and consecutive regimes. Compared to the optimal control problem with regime switching, necessary optimality conditions are modiffied for the first-mover. When choosing her optimal switching strategy, this player considers her impact on the other player's actions and welfare, vice versa. In order to deter- mine the optimal timing between regime changes, the notion of erroneous timing is introduced and necessary conditions for a particular timing to be erroneous are derived.
    Date: 2013–03
  5. By: Konrad, Kai A.; Kovenock, Dan
    Abstract: We study an all-pay contest with multiple identical prizes ("lifeboat seats"). Prizes are partitioned into subsets of prizes ("lifeboats"). Players play a twostage game. First, each player chooses an element of the partition ("a lifeboat"). Then each player competes for a prize in the subset chosen ("a seat"). We characterize and compare the subgame perfect equilibria in which all players employ pure strategies or all players play identical mixed strategies in the first stage. We find that the partitioning of prizes allows for coordination failure among players when they play nondegenerate mixed strategies and this can shelter rents and reduce rent dissipation compared to some of the less efficient pure strategy equilibria.
    Keywords: all-pay contest; multiple prizes; rent dissipation; lifeboat
    Date: 2012
  6. By: Michel Grabisch (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: In cooperative games, the core is the most popular solution concept, and its properties are well known. In the classical setting of cooperative games, it is generally assumed that all coalitions can form, i.e., they are all feasible. In many situations, this assumption is too strong and one has to deal with some unfeasible coalitions. Defining a game on a subcollection of the power set of the set of players has many implications on the mathematical structure of the core, depending on the precise structure of the subcollection of feasible coalitions. Many authors have contributed to this topic, and we give a unified view of these different results.
    Keywords: TU-game; Solution concept; Core; Feasible coalition; Communication graph; Partially ordered set
    Date: 2013
  7. By: KOHLER, Stefan
    Abstract: Two deviations of alternating-offer bargaining behavior from economic theory are observed together, yet have been studied separately. Players who could secure themselves a large surplus share if bargainers were purely self-interested incompletely exploit their advantage. Delay in agreement occurs even if all experimentally controlled information is common knowledge. This paper rationalizes both regularities coherently by modeling heterogeneous social preferences, either self-interest or envy, of one bargaining party as private information in a three period game of bargaining and preference screening and signaling.
    Date: 2012
  8. By: Grossman, Zachary; van der Weele, Joël
    Abstract: Avoiding information about adverse welfare consequences of self-interested decisions, orstrategic ignorance, is an important source of corruption, anti-social behavior and even atrocities. We model an agent who cares about self-image and has the opportunity to learn the social benefits of a personally costly action.  The trade-off between self-image concerns and material payoffs can lead the agent to use ignorance as an excuse, even if it is deliberately chosen. Two experiments, modeled after Dana, Weber, and Kuang (2007), show that a) many people will reveal relevant information about others' payoffs after making an ethical decision, but not before, and b)  some people are willing to pay for ignorance. These results corroborate the idea that Bayesian self-signaling drives people to avoid inconvenient facts in moral decisions.
    Keywords: Economics, Economics, General, prosocial behavior, dictator games, strategic ignorance, self-signaling
    Date: 2013–03–15
  9. By: Ui, Takashi; Yoshizawa, Yasunori
    Abstract: This paper examines the social value of information in symmetric Bayesian games with quadratic payoff functions and normally distributed public and private signals. The main results identify necessary and sufficient conditions for welfare to increase with public or private information. Using the conditions, we classify games into eight types by welfare effects of information. In the first type, welfare necessarily increases with both public and private information. In the second type, welfare can decrease, but only with public information. In the third type, welfare can decrease as well as increase with both public and private information. In the fourth type, welfare can decrease with both, but can increase only with private information. The remaining four types are the counterparts of the above four types with the opposite welfare effects of information. For each type, we characterize a socially optimal information structure and a socially optimal Bayesian correlated equilibrium.
    Keywords: Bayesian game, incomplete information, optimal information structure, potential game, private signal, public signal, team, value of information
    JEL: C72 D82
    Date: 2013–03
  10. By: Kazuya Kikuchi
    Abstract: It is widely held that compared with a legislature with a single majority party, a multi-party legislature achieves more precise representation of society. But the scope of such an advantage that a multi-party system has is rarely discussed. We study the range of social preferences that a three-party system can realize through majority voting. We present a procedure to construct a three-party system that will induce the policy choice specified by a given social preference relation. We provide a sufficient condition for a social preference relation to be compatible with some three-party system. The condition describes a certain restriction on the structure of cycles of social preferences.
    Date: 2013–03
  11. By: Anil K Kashyap; Natalia Kovrijnykh
    Abstract: This paper analyzes a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on the unobservable effort exerted by a credit rating agency (CRA). We analyze optimal compensation schemes for the CRA that differ depending on whether a social planner, the firm, or investors order the rating. We find that rating errors are larger when the firm orders it than when investors do. However, investors ask for ratings inefficiently often. Which arrangement leads to a higher social surplus depends on the agents' prior beliefs about the project quality. We also show that competition among CRAs causes them to reduce their fees, put in less effort, and thus leads to less accurate ratings. Rating quality also tends to be lower for new securities. Finally, we find that optimal contracts that provide incentives for both initial ratings and their subsequent revisions can lead the CRA to be slow to acknowledge mistakes.
    JEL: D82 D83 D86 G24
    Date: 2013–03
  12. By: Jess Benhabib; Pengfei Wang; Yi Wen
    Abstract: We construct a model to capture the Keynesian idea that production and employment decisions are based on expectations of aggregate demand driven by sentiments and that realized demand follows from the production and employment decisions of firms. We cast the Keynesian idea into a simple model with imperfect information about aggregate demand and we characterize the rational expectations equilibria of this model. We find that the equilibrium is not unique despite the absence of any non-convexities or strategic complementarity in the model. In addition to multiple fundamental equilibria, there can be serially correlated stochastic equilibria driven by self-fulfilling consumer sentiments. Furthermore, these sentiment-driven equilibria are not based on randomizations of the fundamental equilibria.
    Keywords: Uncertainty ; Equilibrium (Economics)
    Date: 2013
  13. By: Heiko Karle (ETH Zurich, Switzerland)
    Abstract: Complementing the existing literature on anchoring effects and loss aversion, we analyze how firms can influence loss–averse consumers’ willingness to pay by product information in the form of informative advertising rather than by prices. We find that consumers’ willingness to pay is greatest when only partial information about the product—i.e. only a fraction of product attributes—is disclosed, and that partial information disclosure is the optimal mode of advertising for a monopolistic firm. This causes the consumers’ realized product valuation to diverge from their intrinsic product valuation, which leads to a reduction of consumer surplus. Consequently, transparency policies can help to protect consumers.
    Keywords: Advertising; Loss Aversion; Information Disclosure.
    JEL: D83 L41 M37
    Date: 2013–03
  14. By: KORKMAZ, Gizem
    Abstract: This thesis studies the interplay between network structure and strategic decision making given the backdrop of economic and social networks. The first two chapters study how firms’ incentives to invest in costly R&D are affected by the pattern of R&D collaborations in a certain industry. These two chapters propose formal models that build upon and enrich the previous literature, which abstracted from two crucial dimensions of the problem. The first chapter introduces the possibility that inter-firm links aiming at R&D collaboration could facilitate market collusion. The second chapter incorporates network-based externalities resulting from informational flows and congestion that are associated with R&D collaborations. These chapters suggest that the benefits of possible inter-firm collaboration must be reevaluated from the point of their welfare consequences. The last chapter aims to improve our understanding of how collective action spreads in large and complex networks in which agents use online social networks as communication tools. To this end, we develop a dynamic game-theoretic model of the “on-set of revolutions” that focuses on the local spread of information in order to study how network structure, knowledge and information-sharing interact in facilitating coordination through online communication networks.
    Date: 2012
  15. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group)
    Abstract: A group of actors, individuals or firms, can engage in collectively providing projects which may be costly or generating revenues and which may benefit some and harm others. Based on requirements of procedural fairness (Güth and Kliemt, 2013), we derive a bidding mechanism determining endogenously who participates in collective provision, which projects are implemented, and the positive or negative payments due to the participating members. We justify and discuss this procedural fairness approach and compare it with that of optimal, e.g. welfaristic game theoretic mechanism design (e.g. Myerson, 1979).
    Keywords: Procedural fairness, Mechanism design, Equality axiom, Public provision, Collective action
    JEL: D44 D46 D61 D62 D63 D71 D72 D73 D74
    Date: 2013–03–21
  16. By: Konrad, Kai A.; Skaperdas, Stergios
    Abstract: We examine a stark setting in which security or protection can be provided by self-governing groups or by for-profit entrepreneurs (kings, kleptocrats, or mafia dons). Though selfgovernance is best for the population, it faces problems of long-term viability. Typically, in providing security the equilibrium market structure involves competing lords, a condition that leads to a tragedy of coercion: all the savings from the provision of collective protection are dissipated and welfare can be as low as, or even lower than, in the absence of the state.
    Keywords: property rights; anarchy; government
    Date: 2012

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