nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒06‒09
twelve papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Incomplete Information Models of Guilt Aversion in the Trust Game By Giuseppe Attanasi; Pierpaolo Battigalli; Elena Manzoni
  2. Asking Prices and Inspection Goods By Ronald Wolthoff; Lodewijk Visschers; Benjamin Lester
  3. The Menu-Size Complexity of Auctions By Sergiu Hart; Noam Nisan
  4. Market-based incentives By Borys Grochulski; Yuzhe Zhang
  5. A theory of search with recall and uncertain deadlines By Brennan Platt; Nuray Akin
  6. Reputation-Driven Industry Dynamics By Bernardita Vial; Felipe Zurita
  7. Learning Through Referrals By Manolis Galenianos
  8. The Supermodular Stochastic Ordering By Margaret Meyer; Bruno Strulovici
  10. Checking bivariate first order dominance By Range, Troels Martin; Østerdal, Lars Peter
  11. The value of information disclosure under local learning. The case of fixed types. By Ottorino Chillemi; Benedetto Gui; Lorenzo Rocco
  12. Global invertibility of excess demand functions By Covarrubias, Enrique

  1. By: Giuseppe Attanasi; Pierpaolo Battigalli; Elena Manzoni
    Abstract: In the theory of psychological games it is assumed that players' preferences on material consequences depend on endogenous beliefs. Most of the applications of this theoretical framework assume that the psychological utility functions representing such preferences are common knowledge. But this is often unrealistic. In particular, it cannot be true in experimental games where players are subjects drawn at random from a population. Therefore an incomplete-information methodology is called for. We take a first step in this direction, focusing on models of guilt aversion in the Trust Game. We consider two alternative modeling assumptions: (i) guilt aversion depends on the role played in the game, because only the trustee can feel guilt for letting the co-player down, (ii) guilt aversion is independent of the role played in the game. We show how the set of Bayesian equilibria changes as the upper bound on guilt sensitivity varies, and we compare this with the complete-information case. Our analysis illustrates the incomplete-information approach to psychological games and can help organize experimental results in the Trust Game.
    Keywords: Psychological games, Trust Game, guilt, incomplete information
    JEL: C72 C91 D03
    Date: 2013–06
  2. By: Ronald Wolthoff (University of Toronto); Lodewijk Visschers (Universidad Carlos III); Benjamin Lester (Federal Reserve Bank of Philadelphia)
    Abstract: When a seller with a single, indivisible good meets with potential buyers sequentially, the process of price determination often involves an asking price: the seller quotes a price at which he is willing to sell immediately, but he also allows bids below this price and can recall such bids after meeting with other buyers. In most models of trade, this pricing mechanism is either infeasible or sub-optimal. In this paper, we consider an environment where asking prices are a simple, yet natural trading mechanism that allows buyers and sellers to cope with certain trading frictions. We characterize equilibrium asking prices and allocations, establish that this allocation is constrained efficient, and then derive a rich set of testable implications that emerge from our theory.
    Date: 2012
  3. By: Sergiu Hart; Noam Nisan
    Abstract: We consider the menu size of auctions as a measure of auction complexity and study how it affects revenue. Our setting has a single revenue-maximizing seller selling two or more heterogenous items to a single buyer whose private values for the items are drawn from a (possibly correlated) known distribution, and whose valuation is additive over the items. We show that the revenue may increase arbitrarily with menu size and that a bounded menu size can not ensure any positive fraction of the optimal revenue. The menu size turns out to "nail down" the revenue properties of deterministic auctions: their menu size may be at most exponential in the number of items and indeed their revenue may be larger than that achievable by the simplest types of auctions by a factor that is exponential in the number of items but no larger. Our model is related to a previously studied "unit-demand" model and our results also answer an open problem in that model.
    Date: 2013–04
  4. By: Borys Grochulski; Yuzhe Zhang
    Abstract: We study optimal incentives in a principal-agent problem in which the agent's outside option is determined endogenously in a competitive labor market. In equilibrium, strong performance increases the agent's market value. When this value becomes sufficiently high, the threat of the agent's quitting forces the principal to give the agent a raise. The prospect of obtaining this raise gives the agent an incentive to exert effort, which reduces the need for standard incentives, like bonuses. In fact, whenever the agent's option to quit is close to being "in the money," the market-induced incentive completely eliminates the need for standard incentives.
    Keywords: Labor market
    Date: 2013
  5. By: Brennan Platt (Brigham Young University); Nuray Akin (University of Miami)
    Abstract: We analyze an equilibrium search model where buyers seek to purchase a good before a deadline and face uncertainty regarding the availability of past price quotes in the future. Sellers cannot observe a potential buyer's remaining time until deadline nor his quote history, and hence post prices that weigh the probability of sale versus the profit once sold. The model's equilibrium can take one of three forms. In a late equilibrium, buyers initially forgo purchases, preferring to wait until the deadline. In an early equilibrium, any equilibrium offer is accepted as soon as it is received. In a full equilibrium, higher prices are turned down until near the deadline, while lower prices are immediately accepted. Equilibrium price and sales dynamics are determined by the time remaining until the deadline and the quote history of the consumer.
    Date: 2012
  6. By: Bernardita Vial; Felipe Zurita
    Abstract: This paper studies the entry-exit dynamics of an experience good industry. Consumers observe noisy signals of past ï¬rm behavior and hold common beliefs regarding their types, or reputations. There is a small chance that ï¬rms may independently and unobservably be exogenously replaced. The market is perfectly competitive: entry is free, and all participants are price-takers. Entrants have an endogenous reputation uE. In the steady-state equilibrium, uE is the lowest reputation among active ï¬rms: ï¬rms that have done poorly leave the market, and some re-enter under a new name. This endogenous replacement of names drives the industry dynamics. In particular, exit probabilities are higher for younger ï¬rms, for inept ï¬rms, and for ï¬rms with worse reputations. Competent ï¬rms have stochastically larger reputations than inept ï¬rms both in the population as a whole and within each cohort, and thus are able to live longer and charge higher prices.
    Keywords: reputation, industry dynamics, free entry, exit and entry rates
    JEL: C7 D8 L1
    Date: 2013
  7. By: Manolis Galenianos (Pennsylvania State University)
    Abstract: This paper theoretically examines the firm's choice to use different search channels in order to hire new workers. An equilibrium model is developed where the quality of a match is uncertain and firms search for workers through the market and through referrals. The intensity of use of each search channel is endogenized through the choice of channel-specific search effort. When referrals generate more accurate signals regarding match quality, the model predicts that referred workers have higher starting wages, higher productivity and lower separation rates than non-referred candidates and that these differentials decrease over time due to selection, which is consistent with the data. The model is extended by introducing productivity heterogeneity in firms and allowing the endogenous determination of signal quality. It is shown that high productivity firms choose greater accuracy of signals which diminishes the referral-market differential and leads to lower referral intensity, consistent with the data. This type of selection on the firm side explains why regressions that do not include firm fixed effects find a negative effect of referrals on wages in contrast to firm-level and other evidence.
    Date: 2012
  8. By: Margaret Meyer; Bruno Strulovici
    Abstract: In many economic applications involving comparisons of multivariate distributions, supermodularity of an objective function is a natural property for capturing a preference for greater interdependence.  One multivariate distribution dominates another according to the supermodular stochastic ordering if it yields a higher expectation than the other for all supermodular objective functions.  We prove that this ordering is equivalent to one distribution being derivable from another by a sequence of elementary, bivariate, interdependence-increasing transformations, and develop methods for determining whether such a sequence exists.  For random vectors resulting from common and idiosyncratic shocks, we provide non-parametric sufficient conditions for supermodular dominance.  Moreover, we characterize the orderings corresponding to supermodular objective functions that are also increasing or symmetric.  We use the symmetric supermodular ordering to compare distributions generated by heterogeneous lotteries.  Applications to welfare economics, committee decision-making, insurance, finance, and parameter estimation are discussed.
    Keywords: Interdependence, supermodular, correlation, copula, concordance, mixture, majorization, tournament
    JEL: D63 D81 G11 G22
    Date: 2013–05–22
  9. By: Anne-Christine Barthel (Department of Economics, The University of Kansas)
    Abstract: Generally we can distinguish between two types of comparative statics problems that have been approached with lattice programming methods. The first type of problem considers the change of the optimal solution to a maximization problem as the objective function changes, the other type the change due to a change in the constraint set. Comparative statics theorems have been developed for both cases under cardinal and ordinal assumptions in the literature; Quah (2007) expanded existing work by making it applicable to optimization problems with a new, weaker order on the constraint sets. The idea of this paper is to extend the existing comparative statics results to an even broader class of constrained optimization problems. We combine the two previously mentioned types of maximization problems and apply the existing comparative statics theorems to cases with changes in both the objective function and non-lattice constraint sets. Examples and applications from a variety of areas in economics, such as consumer theory, producer theory and environmental economics, are provided as well.
    Keywords: Lattices, comparative statics, supermodularity, Single Crossing Property, consumer problem, LeChatelier principle
    JEL: C61 D11 D21 Q58
    Date: 2013–05
  10. By: Range, Troels Martin (Department of Business and Economics); Østerdal, Lars Peter (Department of Business and Economics)
    Abstract: We consider the problem of checking first order dominance for finite bivariate distributions. We observe that this can be formulated as a special bipartite network problem related to the classical transportation problem. We exploit this observation to develop a new characterization of first order dominance and fast dominance-checking algorithms.
    Keywords: Multidimensional first order dominance; usual stochastic order; characterization; network problem; checking algorithm
    JEL: C61 D63 I31
    Date: 2013–05–27
  11. By: Ottorino Chillemi (University of Padova); Benedetto Gui (University of Padova); Lorenzo Rocco (University of Padova)
    Abstract: A large population plays a two-period sequential common agency game. Agents are long lived, while principals are short lived. Preferences and technology are additively separable in time and time independent. At the onset, agents are matched in pairs under private information of individual types. At the end of the first period, in each pair the principal can disclose membersÕ reports, in which case members remain together in the second period, or conceal information, in which case members are randomly rematched and in the second period their type remains private information. We show that an equilibrium exists in which information disclosure is efficiency enhancing. Remarkably, information disclosure would have zero value if reassembling agent pairs was not an option, as in the standard one agency literature.
    Date: 2013–05
  12. By: Covarrubias, Enrique
    Abstract: In this paper we provide necessary and sufficient conditions for the excess demand function of a pure exchange economy to be globally invertible so that there is a unique equilibrium. Indeed, we show that an excess demand function is globally invertible if and only if its Jacobian never vanishes and it is a proper map. Our result includes as special cases many partial results found in the literature that imply global uniqueness including Gale-Nikaido conditions and properties related to stability of equilibria. Furthermore, by showing that the condition is necessary, we are implicitly finding the weakest possible condition.
    Keywords: Uniqueness Equilibrium
    JEL: D5 D50 D51
    Date: 2013–05–30

This nep-mic issue is ©2013 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.