nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒04‒13
forty-one papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Bonus Culture: Competitive Pay, Screening, and Multitasking By Bénabou, Roland; Tirole, Jean
  2. Gaming and Strategic Ambiguity in Incentive Provision By Ederer, Florian; Holden, Richard; Meyer, Margaret A
  3. Strategic Framing in Contracts By Katharina Hilken; Kris De Jaegher; Marc Jegers
  4. Rational parasites By Benoit, Jean-Pierre; Galbiati, Roberto; Henry, Emeric
  5. Rational Inattention and Organizational Focus By Dessein, Wouter; Galeotti, Andrea; Santos, Tano
  6. Common-Value All-Pay Auctions with Asymmetric Information By Einy, Ezra; Haimanko, Ori; Orzach, Ram; Sela, Aner
  7. The All-Pay Auction with Complete Information and Identity-Dependent Externalities By Bettina Klose; Dan Kovenock
  8. All-Pay Auctions: Implementation and Optimality By Jönsson, Stefan; Schmutzler, Armin
  9. Voting in collective stopping games By Herings P.J.J.; Predtetchinski A.
  10. Confirming Information Flows in Networks By Billand, Pascal; Bravard, Christophe; Kamphorst, Jurjen J.A.; Sarangi, Sudipta
  11. The effect of options on coordination By Araujo, Luis; Guimarães, Bernardo
  12. Multidimensional screening with complementary activities: regulating a monopolist with unknown cost and unknown preference for empire-building By Ana P. Borges; Didier Laussel; João Correia-da-Silva
  13. Pricing Strategies in Advance Selling: Should a Retailer Offer Pre-order Price Guarantee? By Oksana Loginova
  14. Responsibility effects in decision making under risk By Pahlke, Julius; Strasser, Sebastian; Vieider, Ferdinand M.
  15. Speculative Attacks with Multiple Targets By Junichi Fujimoto
  16. Crowd-sourcing with uncertain quality - an auction approach By Papakonstantinou, A.; Bogetoft, P.
  17. Discount Pricing By Armstrong, Mark; Chen, Yongmin
  18. Antitrust Fines in Times of Crisis By Fabra, Natalia; Motta, Massimo
  19. Bargaining position, bargaining power, and the property rights approach By Schmitz, Patrick W
  20. Irrelevance of private information in two-period economies with more goods than states of nature By Joao Correia-da-Silva; Carlos Hervés-Beloso
  21. Investments in physical capital, relationship-specificity, and the property rights approach By Schmitz, Patrick W
  22. Equilibrium selection through pu-dominance By Andrea Gallice
  23. Dynamic Network Formation in Two-Sided Economies By Pongou, Roland; Serrano, Roberto
  24. Hanging together or being hung separately: The strategic power of coalitions where bargaining occurs with incomplete information By Konrad, Kai A.; Cusack, Thomas R.
  25. Dynamic Markets for Lemons: Performance, Liquidity, and Policy Intervention By Diego Moreno; John Wooders
  26. Equilibria under Deferred Acceptance: Dropping Strategies, Filled Positions, and Welfare By Paula Jaramillo; Çagatay Kayi; Flip Klijn
  27. Existence and uniqueness of Arrow-Debreu equilibria with consumptions in $\mathbf{L}^0_+$ By Dmitry Kramkov
  28. Asymmetric Nash Solutions in the River Sharing Problem By Harold Houba; Gerard van der Laan; Yuyu Zeng
  29. Household Formation and Markets By Hans Gersbach; Hans Haller; Hideo Konishi
  30. Dynamic Competitive Economies with Complete Markets and Collateral Constraints By Felix Kubler; Piero Gottardi
  31. Saving Private Pareto By Harold Houba; Roland Iwan Luttens; Hans-Peter Weikard
  32. Keynesian Utilities: Bulls and Bears By Anat Bracha; Donald J. Brown
  33. Coordinating Static and Dynamic Supply Chains with Advertising through Two-Part Tariffs By L. Lambertini
  34. Antitrust as facilitating factor for collusion By Vermeulen A.J.; Bos A.M.; Letterie W.A.
  35. Screening-Based Competition By Gehrig, Thomas; Stenbacka, Rune
  36. Re-examining the Effects of Switching Costs By Rhodes, Andrew
  37. Search Costs, Demand-Side Economies and the Incentives to Merge under Bertrand Competition By Moraga-González, José-Luis; Petrikaite, Vaiva
  38. Lemons & Loons By Timothy Perri
  39. Monopolistic Competition and Optimum Product Selection: Why and how heterogeneity matters By Nocco, Antonella; Ottaviano, Gianmarco; Salto, Matteo
  40. Assortative Matching and Risk Sharing By Hailin Sun; Sanxi Li; Tong Wang
  41. Cooperative Investment, Uncertainty and Access By Bourreau, Marc; Cambini, Carlo; Hoernig, Steffen

  1. By: Bénabou, Roland; Tirole, Jean
    Abstract: This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions.
    Keywords: adverse selection; bonuses; competition; contracts; executive compensation; Hotelling; incentives; inequality; moral hazard; performance pay; screening; work ethic
    JEL: D31 D82 D86 J31 J33 L13 M12
    Date: 2013–04
  2. By: Ederer, Florian; Holden, Richard; Meyer, Margaret A
    Abstract: It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments. Ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent. If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment.
    Keywords: ambiguity; contracts; gaming; incentives; randomization
    JEL: L13 L22
    Date: 2013–01
  3. By: Katharina Hilken; Kris De Jaegher; Marc Jegers
    Abstract: We provide a hidden-action principal-agent model where the agent has reference- dependent preferences. The loss-averse agent considers the base wage as reference point, and bonuses and/or penalties as gains and losses, respectively. When choosing optimal payments, the principal strategically sets the base wage, knowing that this determines the agent's reference point. We consider two variants of the model. In a first variant, the agent's reservation utility is not reference-dependent. We show that it is always optimal in this case for the principal to employ bonuses. In a second variant, the reservation utility is reference-dependent and the principal may use penalties.
    Keywords: Strategic Framing; Reference-Dependent Preferences; Principal-Agent Theory; Optimal Payment Schemes; Employment Contracts
    JEL: D86 D03 J33 M52
    Date: 2013–03
  4. By: Benoit, Jean-Pierre; Galbiati, Roberto; Henry, Emeric
    Abstract: Understanding the impact of legal protection on investment is of major importance. This paper provides a framework for addressing this issue, and shows that investment may actually be higher in the absence of legal protection. Focusing on the application to innovation, in an environment where an innovator (the host) repeatedly faces the same imitators (parasites), we show that investment can take place even without patent protection, as parasites limit their imitation to preserve the innovator's incentives to invest. We show further that an innovator might be more active without legal protection: it is forced to increase its investment to keep the parasites satisfied and, thus, cooperative. We provide experimental evidence consistent with the theoretical results: in the experiment, investment levels with and without legal protection are comparable, and sometimes greater without patents. Our framework is general enough to apply to other situations such as investment in developing countries, commons' management and long-distance trade.
    Keywords: experiment; investment; patent; repeated games
    JEL: C91 K0 O3
    Date: 2013–02
  5. By: Dessein, Wouter; Galeotti, Andrea; Santos, Tano
    Abstract: We examine the allocation of scarce attention in team production. Each team member is in charge of a specialized task, which must be adapted to a privately observed shock and coordinated with other tasks. Coordination requires that agents pay attention to each other, but attention is in limited supply. We show that when attention is scarce, organizational focus and leadership naturally arise as a response to organizational trade-offs between coordination and adaptation. At the optimum, all attention is evenly allocated to a select number of "leaders." The organization then excels in a small number of focal tasks at the expense of all others. Our results shed light on the importance of leadership, strategy and “core competences,” as well as new trends in organization design. We also derive implications for the optimal size or “scope” of organizations. Surprisingly, improvements in communication technology may result in smaller but more adaptive organizations.
    Keywords: Attention; Coordination; Core competencies; Leadership; Organization Size; Organizational Design; Organizational Strategy
    JEL: D2 D83 D85 L2
    Date: 2013–03
  6. By: Einy, Ezra; Haimanko, Ori; Orzach, Ram; Sela, Aner
    Abstract: We study two-player common-value all-pay auctions (contests) with asymmetric information under the assumption that one of the players has an information advantage over his opponent. We characterize the unique equilibrium in these contests, and examine the role of information in determining the players' expected efforts, probabilities of winning, and expected payoffs. In particular, we show that the players always have the same probability of winning the contest, and that their expected efforts are the same, but their expected payoffs are different. It is also shown that budget constraints may have an unanticipated effect on the players' expected payoffs, i.e., a player's information advantage may turn into a payoff disadvantage.
    Keywords: all-pay auctions; asymmetric information; information advantage
    JEL: C72 D44 D82
    Date: 2013–01
  7. By: Bettina Klose (Department of Economics, University of Zurich); Dan Kovenock (Economic Science Institute, Chapman University)
    Abstract: We derive a necessary and sufficient condition for the existence of equilibria with only two active players in the all-pay auction with complete information and identity-dependent externalities. This condition shows that the generic equilibrium of the standard all-pay auction is robust to the introduction of "small" identity-dependent externalities. In general, however, the presence of identity-dependent externalities invalidates well-established qualitative results concerning the set of equilibria of the first-price all-pay auction with complete information. With identity-dependent externalities equilibria are generally not payoff equivalent, and identical players may earn different payoffs in equilibrium. These observations show that Siegel’s (2009) results characterizing the set of equilibrium payoffs in all-pay contests, including the all-pay auction as a special case, do not extend to environments with identity-dependent externalities. We further compare the all-pay auction with identity-dependent externalities to the first-price winner-pay auction with identity-dependent externalities. We demonstrate that the equilibrium payoffs of the all-pay auction and winner-pay auction cannot be ranked unambiguously in the presence of identity-dependent externalities by providing examples of environments where equilibrium payoffs in the all-pay auction dominate those in the winner-pay auction and vice versa.
    Keywords: All-pay auction, Identity-dependent externalities, Payoff nonequivalence, political conflict
    JEL: D44 D62 D72 C72
    Date: 2013
  8. By: Jönsson, Stefan; Schmutzler, Armin
    Abstract: This paper analyzes how all-pay auctions with endogenous prizes can be used to provide effort incentives. We show that wide classes of effort distributions can be implemented as equilibrium outcomes of such games. We also ask how all-pay auctions have to be structured so as to induce high expected highest efforts without generating excessive wasteful efforts of losers. All-pay auctions with endogenous prizes can do better than all-pay auctions with fixed prizes in this respect, in particular, when the prize function is approximately linear. We use the results to compare patents and prizes as innovation incentives, and to explore promotion incentives in organizations.
    Keywords: all-pay auctions; contests; endogenous prizes; implementation
    JEL: D02 D43 D44
    Date: 2013–01
  9. By: Herings P.J.J.; Predtetchinski A. (GSBE)
    Abstract: At each moment in time, some alternative from a finite set is selected by a dynamic process. Players observe the alternative selected and sequentially cast a yes or a no vote. If the set of players casting a yes–vote is decisive for the alternative in question,the alternative is accepted and the game ends. Otherwise the next period begins.We refer to this class of problems as collective stopping problems. Collective choicegames, quitting games, and coalition formation games are particular examples that fit nicely into this more general framework.When the core of this game is non–empty, a stationary equilibrium in pure strategies is shown to exist. But in general, even mixed stationary equilibria may not exist in collective stopping games. We consider strategies that are pure and action–independent, and allow for a limited degree of history dependence. Under such individual behavior, aggregate behavior can be conveniently summarized by a collective strategy. We consider collective strategies that are simple and induced by two–step game–plans and provide a constructive proof that this collection always contains a subgame perfect equilibrium. The existence of such an equilibrium is shown to imply the existence of a sequential equilibrium in an extended model with incomplete information. Collective equilibria are shown to be robust to perturbations in the dynamic process and in utilities. We apply our approach to the case with three alternatives exhibiting a Condorcet cycle and to the Baron-Ferejohn model of redistributive politics.
    Keywords: Existence and Stability Conditions of Equilibrium;
    Date: 2013
  10. By: Billand, Pascal; Bravard, Christophe; Kamphorst, Jurjen J.A.; Sarangi, Sudipta
    Abstract: Social networks, be it on the internet or in real life, facilitate information flows. We model this by giving agents incentives to link with others and receive information through those links. We consider networks where agents have an incentive to confirm the information they receive from others. Our paper analyzes the social networks that are formed. We first study the existence of Nash equilibria and then characterize the set of strict Nash networks. Next, we characterize the set of strictly efficient networks and discuss the relationship between strictly efficient networks and strict Nash networks. Finally, we check the robustness of our results by allowing for heterogeneity among agents, possibility of bilateral deviations of agents, and decay in the network.
    Keywords: connections model, confirmation, two-way flow models.
    JEL: C72 D85
    Date: 2013–04
  11. By: Araujo, Luis; Guimarães, Bernardo
    Abstract: This paper studies how constraints on the timing of actions affect equilibrium in intertemporal coordination problems. We show that while the possibility of waiting longer for others'’ actions helps agents to coordinate in the good equilibrium, the option of delaying one’s' actions harms coordination and can induce severe coordination failures: if agents are very patient, they might get arbitrarily low expected payoffs even in cases where coordination would yield arbitrarily large returns. The risk-dominant equilibrium of the corresponding one-shot game is selected when the option to delay effort is commensurate with the option to wait longer for others’' actions. In an application to innovation processes, we show that protection of the domestic industry might hinder industrialization. We also argue that increased competition might have spurred the emergence of shadow banking in the last few decades.
    Keywords: coordination failures; delay; option; strategic complementarities
    JEL: C72 C73 D84
    Date: 2013–01
  12. By: Ana P. Borges (NIDISAG - Núcleo de Investigação do Instituto Superior de Administração e Gestão); Didier Laussel (Aix-Marseille Université (AMSE)); João Correia-da-Silva (CEF.UP e Faculdade de Economia, Universidade do Porto)
    Abstract: We study optimal regulation of a monopolist when intrinsic efficiency (intrinsic cost) and empire-building tendency (marginal utility of output) are private information but actual cost (difference between intrinsic cost and effort level) is observable. This is a problem of multidimensional screening with complementary activities. Results are mainly driven by two elements: the correlations between types; and the relative magnitude of the uncertainty along the two dimensions of private information. If the marginal utility of output varies much more (resp. less) across managers than the intrinsic marginal cost, then we have empire-building (resp. efficiency) dominance. In that case, an inefficient empire-builder produces more (resp. less) and at lower (resp. higher) marginal cost than an efficient money-seeker. It is only when variabilities are similar that we obtain the natural ranking of activities (empire-builders produce more while efficient managers produce at a lower cost).
    Keywords: Multidimensional screening, regulation, procurement, empire-building, adverse selection.
    JEL: D82 H42 L51
    Date: 2013–02
  13. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia)
    Abstract: Advance selling is a marketing strategy by a firm that allows consumers to submit pre-orders for a new to-be-released product. It helps the firm to reduce uncertainty about future demand and consumers to avoid stock-out risks. At the same time, consumers might be reluctant to place advance orders if they are uncertain about their valuations for the product or when they expect future price cuts. To induce early purchases, the firm may offer pre-order price guarantee. This paper examines the firm's profit-maximizing strategy in a two-period setting characterized by market size uncertainty, consumer valuation uncertainty, and consumer experience/inexperience with the product. I show that when consumers are less heterogeneous in their valuations, the firm should implement advance selling and offer pre-order price guarantee. For some parameter configurations pre-order price guarantee acts as a commitment device not to decrease the price in the regular selling season. In other situations, it enables the firm to react to the information obtained from pre-orders by increasing or decreasing the price. When consumers are more heterogeneous in their valuations and the market size uncertainty is small, or the fraction of experienced consumers in the population is high, the firm should not implement advance selling.
    Keywords: advance selling, price guarantee, price commitment, the Newsvendor Problem, demand uncertainty, experienced consumers, inexperienced consumers
    JEL: C72 D42 L12 M31
    Date: 2013–03–15
  14. By: Pahlke, Julius; Strasser, Sebastian; Vieider, Ferdinand M.
    Abstract: We explore situations in which a decision-maker bears responsibility for somebody else's outcomes as well as for her own. For gains we confirm the intuition that being responsible for somebody else's payoffs increases risk aversion, while in the loss domain we find increased risk seeking. In a second experiment we replicate the finding of increased risk aversion for large probabilities of a gain, while for small probability gains we find an increase of risk seeking under conditions of responsibility. This discredits hypotheses of a cautious shift under responsibility, and indicates an accentuation of the fourfold pattern of risk attitudes usually found for individual choices. --
    Keywords: risk attitude,prospect theory,social norms,responsibility,other-regarding preferences
    JEL: D03 D81
    Date: 2012
  15. By: Junichi Fujimoto (University of Tokyo)
    Abstract: This paper examines a global games model of speculative attacks in which speculators can choose to attack any one of a number of targets. In the canonical global games model with a single target, it is well known that there exists a unique equilibrium that survives the iterative deletion of dominated strategies, characterized by the threshold values of the private signal and the fundamentals. This paper shows that with two targets, iterative deletion of dominated strategies yields a unique combination of threshold signal functions that are nondecreasing in the private signals of the other targetâÂÂs fundamentals, and threshold fundamentals functions that are increasing in the other targetâÂÂs fundamentals. The result is shown to extend to environments with any N symmetric targets. The key argument is to combine the iterative deletion procedure with the contraction mapping theorem. The paper then goes through a number of numerical examples and shows, among other results, that more accurate private signals have a decoupling effect on the outcomes of attack on different countries. Finally, this paper introduces public information and shows that the sufficient condition for unique equilibrium threshold functions is very similar to that for a unique equilibrium in the single-target model.
    Date: 2012
  16. By: Papakonstantinou, A.; Bogetoft, P.
    Abstract: This article addresses two important issues in crowd-sourcing: ex ante uncertainty about the quality and cost of different workers and strategic behaviour. We present a novel multi-dimensional auction that incentivises the workers to make partial enquiry into the task and to honestly report quality-cost estimates based on which the crowd-sourcer can choose the worker that offers the best value for money. The mechanism extends second score auction design to settings where the quality is uncertain and it provides incentives to both collect information and deliver desired qualities.
    Keywords: crowd-sourcing; Multi-dimensional auctions; Yardstick competition; Score functions; Strictly proper scoring rules;
    JEL: D86 D84 D81 D82
    Date: 2013–02–06
  17. By: Armstrong, Mark; Chen, Yongmin
    Abstract: We investigate the marketing practice of framing a price as a discount from an earlier price. We discuss two reasons why a discounted price---rather than a merely low price---can make a consumer more willing to purchase. First, a high initial price can indicate the product is high quality. Second, a high initial price can signal a bargain relative to other options, and there is less incentive to search. We also discuss a behavioral model where the propensity to buy increases when others pay more. A seller has an incentive to offer false discounts, where the initial price is exaggerated.
    Keywords: consumer protection; consumer search; false advertising; price discrimination; Reference dependence
    JEL: D03 D18 D83 M3
    Date: 2013–02
  18. By: Fabra, Natalia; Motta, Massimo
    Abstract: In a model in which firms can go bankrupt because of adverse market shocks or antitrust fines, we find that even large corporate fines may not be able to induce deterrence. Managerial penalties are thus needed. If the policy may be changed according to the state of the business cycle, then the optimal outcome can always be achieved through antitrust fines that are more severe in good times and more lenient in bad times. A time-independent policy may result in either too many bankruptcies or under-deterrence as compared to the optimal policy.
    Keywords: antitrust fines; business cycles; managing incentives
    JEL: K14 K42 L13
    Date: 2013–01
  19. By: Schmitz, Patrick W
    Abstract: In the property rights approach to the theory of the firm (Hart, 1995), parties bargain about whether or not to collaborate after non-contractible investments have been made. Most contributions apply the regular Nash bargaining solution. We explore the implications of using the generalized Nash bargaining solution. A prominent finding regarding the suboptimality of joint ownership turns out to be robust. However, in contrast to the standard property rights model, it may well be optimal to give ownership to a party whose investments are less productive, provided that this party's ex-post bargaining power is relatively small.
    Keywords: bargaining; incomplete contracts; investment incentives; ownership
    JEL: C78 D23 D86 L23
    Date: 2013–01
  20. By: Joao Correia-da-Silva (CEFUP e Faculdade de Economia, Universidade do Porto); Carlos Hervés-Beloso (RGEA, Facultad de Económicas, Universidad de Vigo)
    Abstract: We introduce a two-period economy with asymmetric information about the state of nature that occurs in the second period. Each agent is endowed with an information structure that describes her (incomplete) ability to prove whether or not a state has occurred. We show that if the number of states of nature is not greater than the number of goods, then, generically, the equilibria of the associated full information economy are also equilibria of the asymmetric information economy. The information structures of the agents are, in that sense, irrelevant.
    Keywords: General equilibrium, Asymmetric information, Private state-verification,Two-period economies, Generic existence of equilibrium, Generic efficiency
    JEL: C62 C72 D51 D82
    Date: 2012–12
  21. By: Schmitz, Patrick W
    Abstract: We reconsider the property rights approach to the theory of the firm based on incomplete contracts. We explore the implications of different degrees of relationship-specificity when there are two parties, A and B, who can make investments in physical capital (instead of human capital). If relationship-specificity is exogenously given, it turns out that joint asset ownership can be optimal only if the degree of relationship-specificity is sufficiently small. If relationship-specificity can be freely chosen and if party A's investments are more productive, then the parties deliberately choose a strictly positive level of relationship-specificity and they always agree on sole ownership by party A.
    Keywords: incomplete contracts; investment incentives; ownership; relationship-specificity; theory of the firm
    JEL: C78 D23 D86 L22 L24
    Date: 2013–03
  22. By: Andrea Gallice (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: This paper introduces and discusses the concept of pu-dominance in the context of finite games in normal form. It then presents the pu-dominance criterion for equilibrium selection, a generalization of the risk-dominance criterion to games with more than two players.
    Keywords: equilibrium selection, normal form games, pu-dominance
    JEL: C72 C73
    Date: 2013–03
  23. By: Pongou, Roland; Serrano, Roberto
    Abstract: We study the dynamic stability of networks in a two-sided economy of agents labelled men and women. Each agent desires relationships with the other type, but having multiple partners is costly. This cost-benefit trade-off results in each agent having a single-peaked utility function, the peak being greater for men than for women. We propose two stochastic Markov processes in which self-interested agents form and sever links over time, but may also take actions that do not increase their utility with small probability. In the first process, an agent who invests more time in a relationship signals commitment to his/her partner, whereas in the second, such an agent is perceived as having a weaker position. We prove that only egalitarian pairwise stable networks (in which all agents have the same number of partners) form in the long run under the first process, while under the second, only anti-egalitarian pairwise stable networks (in which all women are matched to a small number of men) arise. This latter outcome is also consistent with the presence of "herd externality" or "informational cascade", leading to a pattern of a one-sided thin market. Applying these results to communication shows that the diffusion of a given piece of information can widely vary across identical economies, and that information concentrates more in women than in men. The model sheds light on patterns of network formation in several two-sided markets, including employer-employee, dating, buyer-seller, and faculty-student relationships.
    Keywords: Two-sided networks, pairwise stability, stochastic stability, herd externality, informational cascade, contagion asymmetry, thin economy.
    JEL: A14 C7 I12 J00
    Date: 2013–04–09
  24. By: Konrad, Kai A.; Cusack, Thomas R.
    Abstract: What is the strategic role of membership in an intergovernmental group with unanimity requirements if the group negotiates with an external player in a setting with incomplete information? Being in such a group has a strategic effect compared to negotiating as a stand-alone player and reduces the demands of the outside player: being in a group lends additional bargaining power. Negotiating as a group may also cause more inefficiencies due to bargaining failure, and this might harm the intergovernmental group. We uncover the role of preference alignment and preference independence between members of the coalition group for equilibrium payoffs and welfare effects. In this analysis we also distinguish between coalition groups with and without side payments. Overall, coalition groups tend to perform well for the members of the coalition group in comparison to fully decentralized negotiations, particularly if the objectives of the members of the coalition group are not always perfectly aligned. --
    Keywords: bargaining,incomplete information,coalitions,groups,strategic bargaining power
    JEL: F51 F53 F59
    Date: 2013
  25. By: Diego Moreno (Departamento de Econom?a, Universidad Carlos III de Madrid); John Wooders (Economics Discipline Group, University of Technology, Sydney)
    Abstract: Even though adverse selection pervades markets for real goods and financial assets, equilibrium in such markets is not well understood. What are the properties of equilibrium in dynamic markets for lemons? What determines the liquidity of a good? Which market structures perform better, decentralized ones, in which trade is bilateral and prices are negotiated, or centralized ones, in which trade is multilateral and agents are price-takers? Is there a role for government intervention? We show that when the horizon is finite and frictions are small, decentralized markets are more liquid and perform better than centralized markets. Moreover, the surplus realized is above the static competitive surplus, and decreases as the horizon grows larger, approaching the static competitive surplus as the horizon becomes infinite even if frictions are non-negligible. Subsidies on low quality or taxes on high quality raise surplus.
    Keywords: adverse selection; lemons markets; decentralised markets; equilibrium dynamics
    JEL: C72 C73 C78 D82
    Date: 2013–03–01
  26. By: Paula Jaramillo; Çagatay Kayi; Flip Klijn
    Abstract: This paper studies many-to-one matching markets where each student is assigned to a hospital. Each hospital has possibly multiple positions and responsive preferences. We study the game induced by the student-optimal stable matching mechanism. We assume that students play their weakly dominant strategy of truth-telling. Roth and Sotomayor (1990) showed that there can be unstable equilibrium outcomes. We prove that any stable matching can be obtained in some equilibrium. We also show that the exhaustive class of dropping strategies does not necessarily generate the full set of equilibrium outcomes. Finally, we find that the so-called "rural hospital theorem" cannot be extended to the set of equilibrium outcomes and that welfare levels are in general unrelated to the set of stable matchings. Two important consequences are that, contrary to one-to-one matching markets, (a) filled positions depend on the particular equilibrium that is reached and (b) welfare levels are not bounded by the student and hospital-optimal stable matchings (with respect to the true preferences).
    Keywords: many-to-one matching, deferred acceptance, Nash equilibrium, dropping strategies, filled positions, welfare
    JEL: C78 D60
    Date: 2013–04
  27. By: Dmitry Kramkov
    Abstract: We consider an economy where agents' consumption sets are given by the cone $\mathbf{L}^0_+$ of non-negative measurable functions and whose preferences are defined by additive utilities satisfying the Inada conditions. We extend to this setting the results in \citet{Dana:93} on the existence and uniqueness of Arrow-Debreu equilibria. In the case of existence, our conditions are necessary and sufficient.
    Date: 2013–04
  28. By: Harold Houba (VU University Amsterdam); Gerard van der Laan (VU University Amsterdam); Yuyu Zeng (VU University Amsterdam)
    Abstract: We study multiple agents along a general river structure that is expressed by a geography matrix and who have access to limited local resources, quasi-linear preferences over water and money and cost functions dependent upon river inflow and own extraction. Unanimity bargaining determines the water allocation and monetary transfers. We translate International Water Law into either disagreement outcomes or individual aspiration levels. In the former case, we apply the asymmetric Nash bargaining solution, in the latter case the agents have to compromise in order to agree and we apply the asymmetric Nash rationing solution. In both cases the optimization problem is separable into two subproblems: the efficient water allocation that maximizes utilitarian welfare given the geography matrix; and the determination of the monetary transfers associated with the weights. We show that the Nash rationing solution may result in nonparticipation, therefore we generalize to the case with participation constraints.
    Keywords: River Basin Management; International Water Law; Negotiations; Externalities; Political Economy of Property Rights
    JEL: C70 D60 Q53
    Date: 2013–04–02
  29. By: Hans Gersbach (ETH Zurich); Hans Haller (Virginia Tech University); Hideo Konishi (Boston College)
    Abstract: We consider competitive markets for multiple commodities with endogenous formation of one- or two-person households. Within each two-person household, externalities from the partner's commodity consumption and unpriced actions are allowed. Each individual has two types of traits: observable characteristics and unobservable taste characteristics. Each individual gets utility from his/her own private consumption, from discrete actions such as job-choice, from the partner's observable characteristics such as appearance and hobbies, from some of the partner's consumption vectors, and from the partner's action choices. We investigate competitive market outcomes with an endogenous household structure in which no individual and no man/woman-pair can deviate profitably. We find a set of sufficient conditions under which a stable matching equilibrium exists. We further establish the first welfare theorem for this economy.
    Keywords: endogenous household formation of households, consumption externalities, stable matching equilibrium, efficiency
    JEL: D51 D61 D71
    Date: 2013–03–31
  30. By: Felix Kubler (University of Zurich and SFI); Piero Gottardi (European University Institute)
    Abstract: In this paper we examine the competitive equilibria of a dynamic stochastic economy with complete markets. We show that the completeness of the market requires both the set of asset payoffs and collateral levels to be sufficiently rich, so as to allow to decentralize the equilibrium allocations obtained in Arrow-Debreu markets subject to a series of appropriate limited pledgeability constraints. We provide then sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and show that they often have finite support. The model is then tractable and its equilibria can be computed with arbitrary accuracy. We carry out on this basis a quantitative assessment of the risk sharing and efficiency properties of equilibria.
    Date: 2012
  31. By: Harold Houba (VU University Amsterdam); Roland Iwan Luttens (Amsterdam University College); Hans-Peter Weikard (Wageningen University)
    Abstract: We include initial holdings in the jungle economy of Piccione and Rubinstein (Economic Journal, 2007) and relax the assumptions on consumption sets and preferences. We show that initial holdings are irrelevant for lexicographic welfare maximization. Equilibria other than such maximizers can be jungle equilibria due to myopia. We show that farsightedness restores the equivalence between jungle equilibria and lexicographic welfare maximization. However, we also derive farsighted equilibria in which stronger agents withhold goods from weaker agents. Then, gift giving by stronger agents is needed to restore Pareto efficiency. Our results add to understanding coercion and the crucial assumptions underlying jungle economies.
    Keywords: jungle economy; withholding; coercion; power
    JEL: D51 D61 P52
    Date: 2013–04–04
  32. By: Anat Bracha (Federal Reserve Bank of Boston); Donald J. Brown (Dept. of Economics, Yale University)
    Abstract: We propose Keynesian utilities as a new class of non-expected utility functions representing the preferences of investors for optimism, defined as the composition of the investor's preferences for risk and her preferences for ambiguity. The optimism or pessimism of Keynesian utilities is determined by empirical proxies for risk and ambiguity. Bulls and bears are defined respectively as optimistic and pessimistic investors. The resulting family of Afriat inequalities are necessary and sufficient for rationalizing the asset demands of bulls and bears with Keynesian utilities.
    Keywords: Uncertainty, Optimism, Afriat inequalities
    JEL: D81 G11
    Date: 2013–04
  33. By: L. Lambertini
    Abstract: Zaccour (2008) investigates the behaviour of a marketing channel where firms invest in advertising to increase brand equity, showing that an exogenous twopart tariff cannot be used to replicate the vertically integrated monopolist’s performance. I revisit the same model proving the existence of a multiplicity of franchising contracts taht can do the job. In particular, I set out by illustrating an optimal two-part tariff specified as a linear function of the upstream firm’s advertising effort, performing this task both in the static and in the dynamic game. then, I show that an analogous result emerges (i) in the static game by writing the fixed component of the two-part tariff as a non-linear function of the manufacturer’s advertising effort; and (ii) by using a contract which is linear in the brand equity, in the dynamic case.
    JEL: L21 M31 M37
    Date: 2013–03
  34. By: Vermeulen A.J.; Bos A.M.; Letterie W.A. (GSBE)
    Abstract: We study collusion in an infinitely repeated prisoners' dilemma when firms' discount factor is private information. If tacit collusion is not feasible, firms that are capable of sustaining high prices may still be willing and able to collude explicitly. Firms eager to collude may signal their intentions when forming the agreement is costly, but not too costly. As antitrust makes explicit collusion costly in expected terms, it may in fact function as a signaling device. We show that there always exists a cost level for which explicit collusion is viable. Moreover, our analysis suggests that antitrust enforcement is unable to fully deter collusion.
    Keywords: Market Structure, Firm Strategy, and Market Performance: General;
    Date: 2013
  35. By: Gehrig, Thomas; Stenbacka, Rune
    Abstract: We apply a reduced form representation of product market competition, facilitating an explicit characterization of the equilibrium investments in consumer-specific screening. The effects of market structure on screening incentives depend on the microstructure of the imperfect screening technology and on the characteristics of the pool of consumers. We conduct a welfare analysis, which reveals that the microstructure of the screening technology and the characteristics of the pool of consumers determine whether there are private incentives for overinvestment or underinvestment in screening. Furthermore, we show that the introduction of screening competition amplifies market failures associated with screening investments.
    Keywords: imperfect competition; imperfect screening
    JEL: D43 L15
    Date: 2013–03
  36. By: Rhodes, Andrew
    Abstract: Consumers often incur costs when switching from one product to another. Recently there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs. We provide a simple condition which determines whether switching costs raise or lower long-run prices. We also show that switching costs are more likely to increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.
    Keywords: Switching costs, Dynamic competition, Markov perfect equilibrium
    JEL: D21 D4 L0 L11 L13
    Date: 2013–04–08
  37. By: Moraga-González, José-Luis; Petrikaite, Vaiva
    Abstract: We study the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search sequentially for satisfactory deals. In the pre-merger symmetric equilibrium, consumers visit firmsrandomly. However, after a merger, because insiders raise their prices more than the outsiders, consumers start searching for good deals at the non-merging stores, and only when they do not find a satisfactory product there they visit the merging firms. As search costs go up, consumer traffic from the non-merging firms to the merged ones decreases and eventually mergers become unprofitable. This new merger paradox can be overcome if the merged entity chooses to stock each of its stores with all the products of the constituent firms, which generates sizable search economies. We show that such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the non-merging firms. In that situation, consumers start searching for a satisfactory good at the merged entity and the firms outside the merger lose out. When search economies are sufficiently large, a merger is beneficial for consumers too, and overall welfare increases.
    Keywords: consumer search; demand-side economies; economies of search; insiders; long-run; mergers; orders of search; outsiders; prominence; sequential search; short-run
    JEL: D40 D83 L13
    Date: 2013–03
  38. By: Timothy Perri
    Abstract: Akerlof (2012, 2013) has argued individuals often do not behave according to rational expectations. He shows how buyers in a complete lemon’s market are worse off if they behave irrationally---like loons. We examine several different lemon’s market situations (including when workers may signal or be screened to reveal their quality) to determine the effects on welfare for loons and for society as a whole. Sometimes there are opposite effects for welfare for society and loons. Also, in some cases, both society and loons are better off due to loony behavior. Key Words: Lemons, asymmetric information, and signaling
    JEL: D82
    Date: 2013
  39. By: Nocco, Antonella; Ottaviano, Gianmarco; Salto, Matteo
    Abstract: After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium seems to be largest when selection among heterogenous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.
    Keywords: heterogeneity; monopolistic competition; product diversity; selection; welfare
    JEL: D4 D6 F1 L0 L1
    Date: 2013–04
  40. By: Hailin Sun (University of Toulouse); Sanxi Li (Renmin University); Tong Wang (University of East Anglia)
    Abstract: This paper analyzes sorting pattern of risk-sharing partnerships where agents are heterogenous in their income riskiness. When preference belongs to the class of HARA, household production in terms of monetary equivalence is perfectly transferable between spouses. Hence the characterization of stable match which minimizes social risk premium crucially depends on the interaction between risks in the household portfolio. In the multiplicative model where individuals are ranked by their holdings of a common risky stock, the convexity of household risk premium in joint risk size lead to negative assortative matching. In the additive model where individuals are ranked by their idiosyncratic risks in the Rothschild-Stiglitz sense, negative sorting is stable if any Rothschild-Stiglitz deterioration raises local risk aversion a la Ross.
    Date: 2013–04
  41. By: Bourreau, Marc; Cambini, Carlo; Hoernig, Steffen
    Abstract: We investigate cooperative investment for the deployment of a new infrastructure, and how it interacts with access obligations and demand uncertainty. Co-investment increases total coverage only if service differentiation and/or cost savings from joint investment, in particular due to high uncertainty, are high. Mandated access reduces incentives for co-investment not only through lower returns but also by the existence of the access option itself. Voluntary access provision increases infrastructure coverage but reduces social welfare by softening competition.
    Keywords: Access Obligations; Co-investment; Networks; Uncertainty
    JEL: D21 D43 G31 L5 L96
    Date: 2013–03

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