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

  1. Folk Theorems, Second Version By Olivier Compte; Andrew Postlewaite
  2. Learning in a Black Box By H Peyton Young; H.H. Nax; M.N. Burton-Chellew; S.A. West
  3. Large elections with multiple alternatives: a Condorcet Jury Theorem and inefficient equilibria By GOERTZ, Johanna; MANIQUET, François
  4. Utilitarian Preferences and Potential Games By Hannu Salonen
  5. Competition for Attention By Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
  6. Ambiguous Networks By Marco Pelliccia
  7. Reducing the debt : is it optimal to outsource an investment? By Gilles Edouard Espinosa; Caroline Hillairet; Benjamin Jourdain; Monique Pontier
  8. Consumers' Complaints, the Nature of Corruption, and Social Welfare By Amegashie, J. Atsu
  9. When Borch’s Theorem does not apply: some key implications of market incompleteness, with policy relevance today By DREZE, Jacques
  10. Competitive Targeted Advertising with Price Discrimination By Rosa Branca Esteves; Joana Resende
  11. Semi-bounded Rationality: A model for decision making By Tshilidzi Marwala

  1. By: Olivier Compte (Paris School of Economics); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: Much of the repeated game literature is concerned with proving Folk Theorems. The logic of the exercise is to specify a particular game, and to explore for that game specification whether any given feasible (and individually rational) value vector can be an equilibrium outcome for some strategies when agents are sufficiently patient. A game specification includes a description of what agents observe at each stage. This is done by defining a monitoring structure, that is, a collection of probability distributions over the signals players receive (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 these distributions, somewhat unrealistic in most problems of interest. We revisit the classic Folk Theorem for games with imperfect public monitoring, asking that incentive conditions hold not only for a precisely defined monitoring structure, but also for a ball of monitoring structures containing it. We show that efficiency and incentives are no longer compatible.
    Keywords: Repeated games, folk theorem, robustness
    JEL: C72 C73
    Date: 2013–01–03
  2. By: H Peyton Young; H.H. Nax; M.N. Burton-Chellew; S.A. West
    Abstract: Many interactive environments can be represented as games, but they are so large and complex that individual players are in the dark about what others are doing and how their own payoffs are affected.  This paper analyzes learning behavior in such 'black box' environments, where players' only source of information is their own history of actions taken and payoffs received.  Specifically we study repeated public goods games, where players must decide how much to contribute at each stage, but they do not know how much others have contributed or how others' contributions affect their own payoffs.  We identify two key features of the players' learning dynamics.  First, if a player's realized payoff increases he is less inclined to change his strategy, whereas if his realized payoff decreases he is more inclined to change his strategy.  Second, if increasing his own contribution results in higher payoffs he will tend to increase his contribution still further, whereas the reverse holds if an increase in contribution leads to lower payoffs.  These two effects are clearly present when players have no information about the game; moreover they are still present even when players have full information.  Convergence to Nash equilibrium occurs at about the same rate in both situations.
    Keywords: Learning, information, public goods games
    JEL: C70 C73 C91 D83 H41
    Date: 2013–04–23
  3. By: GOERTZ, Johanna (University of Guelph, Canada & Université catholique de Louvain, CORE, Belgium); MANIQUET, François (Université catholique de Louvain, CORE, Belgium)
    Abstract: We investigate whether the plurality rule aggregates information efficiently in large elections with multiple alternatives, in which voters have common interests. Voters’ preferences depend on an unknown state of nature, and they receive imprecise private signals about the state of nature prior to the election. Similar to two-alternative elections (e.g., Myer- son (1998)), there always exists an informationally efficient equilibrium in which the correct alternative is elected. However, we identify new types of coordination failures in elections with more than two alternatives that lead to new types of inefficient equilibria. These can have interesting new properties: Voters may vote informatively, but the correct alternative is not elected.
    Keywords: efficient information aggregation, simple plurality rule, Poisson games, Condorcet Jury Theorem
    JEL: C72 D71 D72 D82
    Date: 2013–05–22
  4. By: Hannu Salonen (Department of Economics, University of Turku, Finland)
    Abstract: We study games with utilitarian preferences: the sum of individual utility functions is a generalized ordinal potential for the game. It turns out that generically, any finite game with a potential, ordinal potential, or generalized ordinal potential is better reply equivalent to a game with utilitarian preferences. It follows that generically, finite games with a generalized ordinal potential are better reply equivalent to potential games. For infinite games we show that a continuous game has a continuous ordinal potential, iff there is a better reply equivalent continuous game with utilitarian preferences. For such games we show that best reply improvement paths can be used to approximate equilibria arbitrarily closely.
    Keywords: potential games, best reply equivalence, utilitarian preferences
    JEL: C72 D43
    Date: 2013–05
  5. By: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a model of market competition and product differentiation in which consumers' attention is drawn to the products' most salient attributes. Firms compete for consumer attention via their choices of quality and price. With salience, strategic positioning of each product affects how all other products are perceived. With this attention externality, depending on the cost of producing quality some markets exhibit “commoditized” price salient equilibria, while others exhibit “de-commoditized” quality salient equilibria. When the cost of producing quality changes, innovation can lead to a radical change in markets. In the context of financial innovation, the model generates the well documented phenomenon of “reaching for yield”.
    JEL: D03 D43 L13 M31
    Date: 2013–05
  6. By: Marco Pelliccia (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We investigate the impact of network structures describing reciprocal influence-relationships between agents on their perceived ambiguity. We argue that, under specific assumptions, the potential complexity of the link-structures creates extra uncertainty or ambiguity over the "right" probability distribution to consider. This result affects the optimal equilibrium structures which arise in a dynamic game where the agents/nodes strategically rewire their links to minimize the perceived uncertainty. The model could explain specific network dynamics observed in markets with asymmetric or not perfect information on the partners' outcomes. For instance, we propose an interpretation of the dynamic of the European Interbank Market structure before and after the recent financial crisis.
    Keywords: Ambiguity, Network, Interbank Market
    JEL: D85 D81 D82 G21
    Date: 2013–02
  7. By: Gilles Edouard Espinosa (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - Ecole des Ponts ParisTech); Caroline Hillairet (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - Polytechnique - X - CNRS : UMR7641); Benjamin Jourdain (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - Ecole des Ponts ParisTech); Monique Pontier (IMT - Institut de Mathématiques de Toulouse - Université Paul Sabatier [UPS] - Toulouse III - Université Toulouse le Mirail - Toulouse II - Université des Sciences Sociales - Toulouse I - Institut National des Sciences Appliquées (INSA) - Toulouse - CNRS : UMR5219)
    Abstract: We deal with the problem of outsourcing the debt for a big investment, according two situations: either the firm outsources both the investment (and the associated debt) and the exploitation to a private consortium, or the firm supports the debt and the investment but outsources the exploitation. We prove the existence of Stackelberg and Nash equilibria between the firm and the private consortium, in both situations. We compare the benefits of these contracts. We conclude with a study of what happens in case of incomplete information, in the sense that the risk aversion coefficient of each partner may be unknown by the other partner.
    Keywords: Outsourcing; Public Debt; Public-Private-Partnership; Nash equilibrium; Stackelberg equilibrium; Optimization; Stochastic control; Partial information
    Date: 2013–05–21
  8. By: Amegashie, J. Atsu
    Abstract: A primary means of bureaucratic oversight is consumer complaints. Yet, this important control mechanism has received very little attention in the literature on corruption. I study a model of corruption with incomplete information in which consumers require a government service from officials who may be corrupt. A victim of corruption can report corrupt officials to higher-ranking officials (supervisors) who may be corrupt or honest. I find that social welfare may be non-monotonic in the proportion of honest supervisors. In some cases, an increase in the proportion of honest supervisors increases social welfare only if there is a critical mass of honest supervisors. Under certain conditions, there is, surprisingly, an equilibrium in which no one reports corruption regardless of the proportion of honest supervisors although all lower-ranking officials are corrupt. The analysis shows that using an increase in consumer complaints as a measure of the success of an anti-corruption campaign may be wrong because the consumers may benefit in other ways (e.g., a fall in the equilibrium bribe). I also fill a gap in the literature by endogenizing an official's decision to engage in "corruption with theft" or "corruption without theft" as defined by Shleifer and Vishny (1993) and use the model to shed light on recent anti-corruption initiatives such as the Punjab Citizen Feedback Model in Pakistan and a recent proposal by Kaushik Basu (2012).
    Keywords: bribes; consumer complaints; corruption with theft; corruption without theft; Bayesian equilibrium.
    JEL: H0 O1 O12
    Date: 2013–05–01
  9. By: DREZE, Jacques (Université catholique de Louvain, CORE, Belgium)
    Abstract: Markets are incomplete when the assets available to the agents do not span the space of future contingencies. Efficiency is then assessed by the weak criterion of "constrained efficiency" (efficiency relative to the set of allocations compatible with the asset structure). That criterion requires firms to optimise relative to shadow-prices reflecting shareholders’ preferences. Yet, even when firms do so, competitive equilibria on the markets for assets and commodities fail (generically) to be constrained efficient (section 3). Pareto-superior allocations can be implemented through price/wage rigidities and quantity constraints (section 4). But nominal rigidities are conducive to multiple equilibria, implying endogenous macroeconomic uncertainties that compound the primitive (exogenous) uncertainties (section 5). Various policy implications can be drawn, which are of some relevance to the current crisis.
    Keywords: general equilibrium, incomplete markets, temporary equilibrium, constrained efficiency, price rigidities, multiple equilibria, coordination failures, Phillips curve
    JEL: D50 D52 D82
    Date: 2013–04–26
  10. By: Rosa Branca Esteves (Universidade do Minho - NIPE); Joana Resende (Universidade do Porto - FEP)
    Abstract: This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market in which advertising plays two major roles. It transmits relevant information to otherwise uninformed consumers and it acts as a price discrimination device. We look at the …firms' optimal advertising and pricing decisions in two settings, namely mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. In the case of targeted advertising, we show that …firms advertise more in its weak market than in its strong market. The analysis highlights that targeted advertising might constitute a tool to dampen price competition. We show that average prices with mass advertising/non-discrimination can be below those with targeted advertising/price discrimination (regardless of the market segment). We also fi…nd that, when advertising costs are not too high, price discrimination by means of targeted advertising can boost industry pro…fits at the expense of consumer and overall welfare. Finally, we show that overall welfare and consumer surplus falls when …firms use targeted advertising instead of mass advertising.
    Date: 2013
  11. By: Tshilidzi Marwala
    Abstract: In this paper the theory of semi-bounded rationality is proposed as an extension of the theory of bounded rationality. In particular, it is proposed that a decision making process involves two components and these are the correlation machine, which estimates missing values, and the causal machine, which relates the cause to the effect. Rational decision making involves using information which is almost always imperfect and incomplete as well as some intelligent machine which if it is a human being is inconsistent to make decisions. In the theory of bounded rationality this decision is made irrespective of the fact that the information to be used is incomplete and imperfect and the human brain is inconsistent and thus this decision that is to be made is taken within the bounds of these limitations. In the theory of semi-bounded rationality, signal processing is used to filter noise and outliers in the information and the correlation machine is applied to complete the missing information and artificial intelligence is used to make more consistent decisions.
    Date: 2013–05

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