nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒05‒22
23 papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Dynamic Screening with Limited Commitment By Rahul Deb; Maher Said
  2. Belief free equilibria By Olivier Compte; Andrew Postlewaite
  3. Relational Knowledge Transfers By Luis Garicano; Luis Rayo
  4. Decision–Making and Implementation in Teams By Jordi Blanes i Vidal; Marc Möller
  5. Project Screening with Tiered Evaluation By Andrei Barbos
  6. Nesting horizontal and vertical differentiation. By Jaskold Gabszewicz, Jean
  7. Stable Commitment in an Intertemporal Collusive Trade By Romeo Balanquit
  8. Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model By Hiroshi Osano; Keiichi Hori
  9. Symmetric Auctions By Rahul Deb; Mallesh Pai
  10. Coarse Correlated Equilibria in an Abatement Game By Herve Moulin; Indrajit Ray; Sonali Sen Gupta
  11. Top Guns May Not Fire: Best-Shot Group Contests with Group-Specific Public Good Prizes By Subhasish M. Chowdhury; Dongryul Lee; Roman M. Sheremeta
  12. Auctions Versus Negotiations: The Role of Price Discrimination By Chia-Hui Chen; Junichiro Ishida
  13. Equilibria under Deferred Acceptance: Dropping Strategies, Filled Positions, and Welfare By Paula Jaramillo; Çagatay Kayi; Flip Klijn
  14. Competitive Equilibrium from Equal Incomes for Tow-Sided Matching By Yinghua He; Antonio Miralles; Jianye Yan
  15. Monopolistic Competition and Optimum Product Selection: Why and How Heterogeneity Matters By Antonella Nocco; Gianmarco I. P. Ottaviano; Matteo Salto
  16. Cournot is more competitive than Bertrand! Upstream Monopoly with Two-part Tariffs By Maria Alipranti; Emmanuel Petrakis
  17. Efficient Risk Sharing with Limited Commitment and Hidden Saving By Sarolta Laczo; Arpad Abraham
  18. The Robust Nash Equilibrium and Equilibrium Selection in 2x2 Coordination Games By Raul V. Fabella; Vigile Marie B. Fabella
  19. Observable Implications of Nash and Subgame- Perfect Behavior in Extensive Games By Indrajit Ray; Susan Snyder
  20. A Unifying Impossibility Theorem for Compact Metricsocial Alternatives Space By Priscilla Man; Shino Takayama
  21. Prospect Theory and consumer behavior: Goals and Tradeoffs By Florent Buisson
  22. Multivariate Concave and Convex Stochastic Dominance. By Denuit, Michel
  23. Dominance Concepts for Fehr-Schmidt Preferences By Sanjit Dhami; Ali al-Nowaihi

  1. By: Rahul Deb; Maher Said
    Abstract: We examine a model of dynamic screening and price discrimination in which the seller has limited commitment power. Two cohorts of anonymous, patient, and risk-neutral buyers arrive over two periods. Buyers in the first cohort arrive in period one, are privately informed about the distribution of their values, and then privately learn the value realizations in period two. Buyers in the second cohort are ``last-minute shoppers'' that already know their values upon their arrival in period two. The seller can fully commit to a long-term contract with buyers in the first cohort, but cannot commit to the future contractual terms that will be offered to second-cohort buyers. The expected second-cohort contract serves as an endogenous type-dependent outside option for first-cohort buyers, reducing the seller's ability to extract rents via sequential contracts. We derive the seller-optimal equilibrium and show that the seller mitigates this effect by inducing some first-cohort buyers to strategically delay their time of contracting---the seller manipulates the timing of contracting in order to endogenously generate a commitment to maintaining high future prices. The seller's optimal contract pools low types, separates high types, and induces intermediate types to delay contracting.
    Keywords: Asymmetric information, Dynamic mechanism design, Limited commitment, Sequential screening, Type-dependent participation
    JEL: C73 D82 D86
    Date: 2013–05–09
  2. By: Olivier Compte (Paris School of Economics); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: The repeated game literature studies long run/repeated interactions, aiming to understand how repetition may foster cooperation. Conditioning future behavior on past play is crucial in this endeavor. For most situations of interest a given player does not directly observe the actions chosen by other players and must rely on noisy signals he receives about those actions. This is typically incorporated into models by defining a monitoring structure, that is, a collection of probability distributions over the signals each player receives (one distribution for each action profile players may play). Although this is simply meant to capture the fact that players don.t directly observe the actions chosen by others, constructed equilibria often depend on players precisely knowing the distributions, somewhat unrealistic in most problems of interest. This paper aims to show the fragility of belief free equilibrium constructions when one adds shocks to the monitoring structure in repeated games.
    Keywords: Repeated games, folk theorem, belief free, robustness
    JEL: C72 C73
    Date: 2013–05–10
  3. By: Luis Garicano; Luis Rayo
    Abstract: An expert must train a novice. The novice initially has no cash, so he can only pay the expert with the accumulated surplus from his production. At any time, the novice can leave the relationship with his acquired knowledge and produce on his own. The sole reason he does not is the prospect of learning in future periods. The profit-maximizing relationship is structured as an apprenticeship, in which all production generated during training is used to compensate the expert. Knowledge transfer takes a simple form. In the first period, the expert gifts the novice a positive level of knowledge, which is independent of the players' discount rate. After that, the novice's total value of knowledge grows at the players' discount rate until all knowledge has been transferred. The inefficiencies that arise from this contract are caused by the expert's artificially slowing down the rate of knowledge transfer rather than by her reducing the total amount of knowledge eventually transferred. We show that these inefficiencies are larger the more patient the players are. Finally, we study the impact of knowledge externalities across players.
    Date: 2013–04
  4. By: Jordi Blanes i Vidal; Marc Möller
    Abstract: We use a mechanism-design approach to study a team whose members choose a joint project and exert individual efforts to execute it. Members have private information about the qualities of alternative projects. Information sharing is obstructed by a trade-off between adaptation and motivation. We determine the conditions under which first-best project and effort choices are implementable and show that these conditions can become relaxed as the team grows in size. This contrasts with the common argument (based on free-riding) that efficiency is harder to achieve in larger teams. We also characterize the second-best mechanism and find that decision-making may be biased either in favor or against the team's initially preferred alternative.
    Keywords: teams, adaptation, motivation, decision–making, incentives
    JEL: D02 D23 L29
    Date: 2013–05
  5. By: Andrei Barbos (Department of Economics, University of South Florida)
    Abstract: We study a Bayesian game of two-sided incomplete information in which an agent, who owns a project of unknown quality, considers proposing it to an evaluator, who has the choice of whether or not to accept it. There exist two distinct tiers of evaluation that differ in the benefits they deliver to the agent upon acceptance of a project. The agent has to select the tier to which the project is submitted for review. Making a proposal incurs a cost on the agent in the form of a submission fee. We examine the effect of a change in the submission fees at the two tiers of evaluation on the expected quality of projects that are implemented by the evaluator.
    Keywords: Evaluation, Project Screening
    JEL: D01 D82
    Date: 2013–01
  6. By: Jaskold Gabszewicz, Jean
    Abstract: We explore a variant of the Hotelling model which allows to nest horizontal and vertical differentiation into a unified setup whose key parameter is the relative natural market size of the firms. In this setup, equilibrium prices increase whenever population's disparity decreases. We also explore the properties of the model in the case of entry by a vertically differentiated product into an otherwise horizontally differentiated industry.
    Date: 2012
  7. By: Romeo Balanquit (School of Economics, University of the Philippines Diliman)
    Abstract: This study presents a more general collusive mechanism that is sustainable in an oligopolistic repeated game. In this setup, firms can obtain average payoffs beyond the cooperative profits while at the same time improve consumer welfare through a lower market price offer. In particular, we introduce here the notion of intertemporal collusive trade where each oligopolist, apart from regularly producing the normal cooperative output, is also allowed in a systematic way to earn higher than the rest at some stages of the game. This admits subgame- perfection and is shown under some conditions to be Pareto-superior to the typical cooperative outcome.
    Keywords: game theory
    Date: 2013–02
  8. By: Hiroshi Osano (Institute of Economic Research, Kyoto University); Keiichi Hori (Faculty of Economics, Ritsumeikan University)
    Abstract: This paper explores a continuous-time agency model with double moral hazard. Using a venture capitalist—entrepreneur relationship where a manager provides unobservable effort while a venture capitalist (VC) both supplies unobservable effort and chooses the optimal timing of the initial public offering (IPO) with an irreversible investment, we show that optimal IPO timing is earlier under double moral hazard than under single moral hazard. Our results also indicate that the manager's compensation tends to be paid earlier under double moral hazard. We also derive several comparative static results for the IPO timing and managerial compensation profile, all of which provide new empirically testable implications. Usefully, even where the VC does not completely exit with the IPO, such that there is a requirement for a multiagent analysis after the IPO, most of our results remain unchanged. In addition, our model applies to not only the VC exit through the M&A (Mergers and Acquisitions) process but also the dissolution of joint ventures and corporate spin-offs.
    Keywords: two-sided moral hazard, IPO timing, managerial compensation, dynamic incentives, spin-offs
    JEL: D82 D86 G24 G34 M12 M51
    Date: 2013–02
  9. By: Rahul Deb; Mallesh Pai
    Abstract: Practical or legal constraints often restrict auctions to being symmetric (anonymous and nondiscriminatory). We examine when this restriction prevents a seller from achieving his objectives. In an independent private value setting with heterogenous buyers, we characterize the set of incentive compatible and individually rational outcomes that can be implemented via a symmetric auction. We show that symmetric auctions can yield many discriminatory outcomes such as revenue maximization and affirmative action. We also characterize the set of implementable outcomes when individual rationality holds ex-post rather than in expectation. This additional requirement may prevent the seller from maximizing revenue.
    Keywords: symmetric auctions, implementation, indirect mechanisms, optimal auctions
    JEL: D44
    Date: 2013–05–13
  10. By: Herve Moulin; Indrajit Ray; Sonali Sen Gupta
    Abstract: We consider coarse correlated equilibria - CCE - (Moulin and Vial 1978) for the well-analyzed abatement game (Barrett 1994) and prove that CCE can strictly improve upon the Nash equilibrium payoffs, while correlated equilibrium - CE - (Aumann 1974, 1987) cannot, because these games are potential games. We compute the largest feasible total utility in any CCE in those games: it is achieved by a CCE involving only two pure strategy profiles, and the efficiency gain is small.
    Keywords: Coarse correlated equilibrium, Abatement game
    JEL: C72 Q52
    Date: 2013–04
  11. By: Subhasish M. Chowdhury (University of East Anglia, Norwich); Dongryul Lee (Department of Economics, Sungshin University, Seoul); Roman M. Sheremeta (Chapman University)
    Abstract: We analyze a group contest in which n groups compete to win a group-specific public good prize. Group sizes can be different and any player may value the prize differently within and across groups. Players exert costly efforts simultaneously and independently. Only the highest effort (the best-shot) within each group represents the group effort that determines the winning group. We fully characterize the set of equilibria and show that in any equilibrium at most one player in each group exerts strictly positive effort. There always exists an equilibrium in which only the highest value player in each active group exerts strictly positive effort. However, perverse equilibria may exist in which the highest value players completely free-ride on others by exerting no effort. We provide conditions under which the set of equilibria can be restricted and discuss contest design implications.
    Keywords: best-shot technology; group contest; group-specific public goods; free-riding
    JEL: C72 D70 D72 H41
    Date: 2013
  12. By: Chia-Hui Chen; Junichiro Ishida
    Abstract: Auctions are a popular and prevalent form of trading mechanism, despite the restriction that the seller cannot price-discriminate among potential buyers. To understand why this is the case, we consider an auction-like environment in which a seller with an indivisible object negotiates with two asymmetric buyers to determine who obtains the object and at what price. The trading process resembles the Dutch auction, except that the seller is allowed to offer different prices to different buyers. We show that when the seller can commit to a price path in advance, the optimal outcome can generally be implemented. When the seller lacks such commitment power, however, there instead exists an equilibrium in which the seller's expected payoff is driven down to the second-price auction level. Our analysis suggests that having the discretion to price discriminate is not necessarily beneficial for the seller, and even harmful under plausible conditions, which could explain the pervasive use of auctions in practice.
    Date: 2013–05
  13. 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).
    Date: 2013–04–10
  14. By: Yinghua He; Antonio Miralles; Jianye Yan
    Abstract: Using the assignment of students to schools as our leading example, we study many-to-one two-sided matching markets without transfers. Students are endowed with cardinal preferences and schools with ordinal ones, while preferences of both sides need not be strict. Using the idea of a competitive equilibrium from equal incomes (CEEI, Hylland and Zeckhauser (1979)), we propose a new mechanism, the Generalized CEEI, in which students face different prices depending on how schools rank them. It always produces fair (justified-envy-free) and ex ante efficient random assignments and stable deterministic ones with respect to stated preferences. Moreover, if a group of students are top ranked by all schools, the G-CEEI random assignment is ex ante weakly efficient with respect to students’ welfare. We show that each student’s incentive to misreport vanishes when the market becomes large, given all others are truthful. The mechanism is particularly relevant to school choice since schools’ priority orderings can be considered as their ordinal preferences. More importantly, in settings where agents have similar ordinal preferences, the mechanism’s explicit use of cardinal preferences may significantly improve efficiency. We also discuss its application in school choice with affirmative action such as group-specific quotas and in one-sided matching.
    Keywords: two-sided matching, weak preferences, school choice, efficiency, fairness, stability, incentive compatibility, competitive equilibrium from equal incomes
    JEL: C78 D82 I29
    Date: 2012–12
  15. By: Antonella Nocco; Gianmarco I. P. Ottaviano; Matteo Salto
    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 heterogeneous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.
    Keywords: monopolistic competition, product diversity, heterogeneity, selection, welfare
    JEL: D4 D6 F1 L0 L1
    Date: 2013–04
  16. By: Maria Alipranti (University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The present paper compares the Cournot and Bertrand equilibrium outcomes and social welfare in vertically related markets with upstream monopolistic market structure, where the trade between the upstream monopolist and the downstream firms is conducted via two-part tariffs contracts. We show that the equilibrium quantities, the profits of the downstream firms, the consumers' surplus and the social welfare are always higher under Cournot final market competition than under Bertrand final market competition. On the contrary the equilibrium profits of the upstream monopolist under Bertrand market competition always exceed those obtained under Cournot market competition.
    Keywords: Vertical relations, Betrand, Cournot, Two-part tariffs
    JEL: L13 L22 D43
    Date: 2012–08–29
  17. By: Sarolta Laczo (University of California, Los Angeles); Arpad Abraham (European University Institute)
    Abstract: In the typical model of risk sharing with limited commitment (e.g. Kocherlakota, 1996) agents do not have access to any technology transferring resources intertemporally. In our model, agents have a private (non-contractible and/or non-observable) saving technology. We first show that, under general conditions, agents would like to use their private saving technology, i.e. their Euler constraints are violated at the constrained-optimal allocation of the basic model. We then study a problem where both the default and saving incentives of the agents are taken into account. We show that when the planner and the agents have access to the same intertemporal technology, agents no longer want to save at the constrained-optimal allocation. The reason is that endogenously incomplete markets provide at least as much incentive for the planner to save, because she internalizes the effect of aggregate assets on future risk sharing. This implies that aggregate savings are positive in equilibrium even when there is no aggregate uncertainty and the return to saving is below the discount rate. Further, we show that assets remain stochastic whenever only moderate risk sharing is implementable in the long run, but become constant if high but still imperfect risk sharing is the long-run outcome. In contrast, if the return on saving is as high as the discount rate, perfect risk sharing is always self-enforcing in the long run. We also show that higher consumption inequality implies higher public asset accumulation. In terms of consumption dynamics, two counterfactual properties of limited commitment models, amnesia and persistence, do not hold in our model when assets are stochastic in the long run. We also provide an algorithm to solve the model, and illustrate the effects of changing the discount factor and the return to saving by computed examples.
    Date: 2012
  18. By: Raul V. Fabella (University of the Philippines School of Economics); Vigile Marie B. Fabella (Universitët Konstanz, Germany)
    Abstract: We propose an equilibrium concept, the Robust Nash equilibrium (RNE), that combines the best-reply rationality and the "first mover invariance" condition. The single-stage 2x2 symmetric information game G is transformed into sequential two-stage games with two sub-trees: STA has the row player starting and STB has the column player starting. A profile in G is robust if it is the strict SPNE of the two branches; it is ephemeral if it is not the SPNE of any branch. We show that every strict dominant strategy equilibrium of G is robust but not every strict Nash equilibrium of G is. We show further that every robust profile of G is always a strict Nash equilibrium of G. A Robust Nash equilibrium (RNE) of G is any robust profile of G. The RNE of G is unique. We show in particular that the payoff dominant strict Nash equilibrium of a coordination game G is RNE while the strictly payoff-dominated Nash equilibrium of G is ephemeral. The original Harsanyi-Selten preference for payoff dominance over risk dominance is supported by robustness without invoking collective rationality.
    Keywords: Nash Equilibrium
    JEL: C02 C72
    Date: 2012–10
  19. By: Indrajit Ray; Susan Snyder
    Abstract: We provide necessary and sufficient conditions for observed outcomes in extensive game forms, in which preferences are unobserved, to be rationalized first, weakly, as a Nash equilibrium and then, fully, as the unique subgame-perfect equilibrium. Thus, one could use these conditions to find that play is (a) consistent with subgame-perfect equilibrium, or (b) not consistent with subgame-perfect behavior but is consistent with Nash equilibrium, or (c) consistent with neither.
    Keywords: Revealed Preference, Consistency, Subgame- Perfect Equilibrium
    JEL: C72 C92
    Date: 2013–04
  20. By: Priscilla Man (School of Economics, The University of Queensland); Shino Takayama (School of Economics, The University of Queensland)
    Abstract: In Man and Takayama (2013) (henceforth MT) we show that many classical impossibility theorems follow from three simple and intuitive axioms on the social choice correspondence when the set of social alternatives is finite. This note extends the main theorem (Theorem 1) in MT to the case where the set of social alternatives is a compact metric space. We also qualify how versions of Arrow's Impossibility Theorem and the Muller-Satterthwaite Theorem (Muller and Satterthwaite, 1977) can be obtained as corollaries of the extended main theorem. A generalized statement of the Muller-Satterthwaite Theorem for social choice correspondences with weak preferences on a compact metric social alternatives domain under a modified definition of Monotonicity is given. To the best of our knowledge, this is the first paper to document this version of the Muller-Satterthwaite Theorem. This note is mainly technical. Readers interested in the motivations and discussions of our axioms and main theorem should consult MT.
    JEL: D71
    Date: 2013–05–01
  21. By: Florent Buisson (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: I show that a loss averse consumer who must share her budget between two goods prefer allocations for which consumption equals reference point for at least one good. The phenomenon intensity depends on the curvature of the utility curve. These results are consistent with several stylized facts which cannot be explained by the standard consumer theory.
    Keywords: Loss aversion; prospect theory
    Date: 2013–03
  22. By: Denuit, Michel
    Abstract: Stochastic dominance permits a partial ordering of alternatives (probability distributions on consequences) based only on partial information about a decision maker’s utility function. Univariate stochastic dominance has been widely studied and applied, with general agreement on classes of utility functions for dominance of different degrees. Extensions to the multivariate case have received less attention and have used different classes of utility functions, some of which require strong assumptions about utility. The multivariate concave stochastic dominance we investigate is a natural extension of the stochastic order typically used in the univariate case and is consistent with a basic preference assumption. The corresponding utility functions are multivariate risk averse, and reversing the preference assumption allows us to investigate stochastic dominance for utility functions that are multivariate risk seeking. We provide insight into these two contrasting forms of stochastic dominance, develop some criteria to compare probability distributions (hence alternatives) via multivariate stochastic dominance, and illustrate how this dominance could be used in practice to identify inferior alternatives. Connections between our approach and dominance using different stochastic orders are discussed.
    Date: 2013
  23. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: Many diverse problems in economics can only be reasonably explained by assuming that people have social preferences, i.e., in addition to their own payoffs they are altruistic towards those who are poorer and envious towards those who are richer. How do people with social preferences choose among alternative income distributions? The aim of our paper is to answer this question in the context of the Fehr-Schmidt (1999) preferences. The classical notions of first and second order stochastic dominance are not useful in this case. However, a fairly natural set of conditions that are a modification of the concepts of first and second order stochastic dominance and generalized Lorenz dominance turn out to successfully answer the question posed. We also introduce weak FS dominance, which is particularly suited to the linear form of Fehr-Schmidt preferences.
    Keywords: Fehr-Schmidt Preferences; ?First Order Fehr-Schmidt Dominance; Second Order Fehr-Schmidt Dominance; Weak Fehr-Schmidt Dominance; Strong Fehr-Schmidt Dominance; Fehr-Schmidt-Lorenz Dominance.
    JEL: D03 D63 D64
    Date: 2013–05

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