nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒06‒30
fifteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Hidden Actions and Preferences for Timing of Resolution of Uncertainty By Haluk Ergin; Todd Sarver
  2. Mixed Extensions of Decision Problems under Uncertainty By Pierpaolo Battigalli; Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci
  3. Optimal Reference Points and Anticipation By Todd Sarver
  4. Single-Basined Choice By Walter Bossert; Hans Peters
  5. Long-Term Relationship Bargaining By Westermark, Andreas
  6. Dominance Solvable Approval Voting Games By Sébastien Courtin; Matias Nùnez
  7. Existence and Uniqueness of Equilibrium for a Spatial Model of Social Interactions By Adrien BLANCHET; Pascal MOSSAY; Filippo SANTAMBROGIO
  8. Non-Equivalent Beliefs and Subjective Equilibrium Bubbles By Martin Larsson
  9. (Un)stable vertical collusive agreements By Jean J. Gabszewicz; Skerdilajda Zanaj
  10. A positional game for an overlapping generation economy By Ahmad Naimzada; Marina Pireddu
  11. The Role of Incentives in Co-operation Failures By David Bartolini
  12. Spatial Segregation and Urban Structure By Pascal MOSSAY; Pierre PICARD
  13. Modularity and Monotonicity of Games By Takao Asano; Hiroyuki Kojima
  14. Investment complementarities, coordination failure, and the role and effects of public investment policy By Kasahara, Tetsuya
  15. Investment Timing and Vertical Relationships By Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno

  1. By: Haluk Ergin; Todd Sarver
    Abstract: We study preferences for timing of resolution of objective uncertainty in a menu-choice model with two stages of information arrival. We characterize a general class of utility representations called hidden action representations, which interpret an intrinsic preference for timing of resolution of uncertainty as if an unobservable action is taken between the resolution of the two periods of information arrival. These representations permit a richer class of preferences for timing than was possible in the model of Kreps and Porteus (1978) by incorporating a preference for flexibility. Our model contains several special cases where this hidden action can be given a novel economic interpretation, including a subjective-state-space model of ambiguity aversion and a model of costly contemplation.
    Keywords: temporal preferences, preference for flexibility, hidden action, subjective uncertainty
    Date: 2012–09–14
  2. By: Pierpaolo Battigalli; Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci
    Abstract: In a decision problem under uncertainty, a decision maker considers a set of alternative actions whose consequences depend on uncertain factors outside his control. Following Luce and Raiffa (1957), we adopt a natural representation of such situation that takes as primitives a set of conceivable actions A, a set of states S and a consequence function from actions and states to consequences in C. With this, each action induces a map from states to consequences, or Savage act, and each mixed action induces a map from states to probability distributions over consequences, or Anscombe-Aumann act. Under a consequentialist axiom, preferences over pure or mixed actions yield corresponding preferences over the induced acts. The most common approach to the theory of choice under uncertainty takes instead as primitive a preference relation over the set of all Anscombe-Aumann acts (functions from states to distributions over consequences). This allows to apply powerful convex analysis techniques, as in the seminal work of Schmeidler (1989) and the vast descending literature. This paper shows that we can maintain the mathematical convenience of the Anscombe-Aumann framework within a description of decision problems which is closer to applications and experiments. We argue that our framework is more expressive, it allows to be explicit and parsimonious about the assumed richness of the set of conceivable actions, and to directly capture preference for randomization as an expression of uncertainty aversion.
    Date: 2013
  3. By: Todd Sarver
    Abstract: This paper considers a model of reference-dependent utility in which the individual makes a conscious choice of her reference point for future consumption. The model incorporates the combination of loss aversion and anticipatory utility as competing forces in the determination of the optimal reference point: anticipating better outcomes boosts current utility but also raises the reference level for future consumption, making the individual more susceptible to losses. A central focus of the paper is on the implications of this model of Optimal Anticipation for attitudes toward risk in dynamic environments. The main representation is formulated in an infinite-horizon framework, and axiomatic foundations are provided. I also describe special cases and show in particular that recursive expected utility in the sense of Epstein and Zin (1989) and Kreps and Porteus (1978) can be reinterpreted in terms of optimal anticipation and loss aversion. Finally, I describe a homogeneous version of the model and apply it to a portfolio choice problem. I show that asset pricing for the Optimal Anticipation model is based on simple modifications of standard Euler equations. While maintaining tractability, this model is rich enough to permit first-order risk aversion and can overcome several deficits of standard expected utility, such as the equity premium puzzle and Rabin's paradox. JEL Classification: D03, D81, G12
    Keywords: reference dependence, loss aversion, anticipatory utility, equity premium puzzle, Rabin paradox
    Date: 2012–06–18
  4. By: Walter Bossert; Hans Peters
    Abstract: Single-basined preferences generalize single-dipped preferences by allowing for multiple worst elements. These preferences have played an important role in areas such as voting, strategy-proofness and matching problems. We examine the notion of singlebasinedness in a choice-theoretic setting. In conjunction with independence of irrelevant alternatives, single-basined choice implies a structure that conforms to the motivation underlying our definition. We also establish the consequences of requiring single-basined choice correspondences to be upper semicontinuous, and of the revealed preference relation to be Suzumura consistent.
    Keywords: Single-basinedness, choice correspondences, independence of irrelevant alternatives, upper semicontinuity, Suzumura consistency
    JEL: D11 D71
    Date: 2013
  5. By: Westermark, Andreas (Research Department, Central Bank of Sweden)
    Abstract: We analyze a bargaining model where there is a long-term relationship between a seller and a buyer and there is bargaining over a sequence of surpluses that arrives at fixed points in time. Markov Perfect Equilibria are analyzed and equilibrium payoffs characterized. The transfers between the players can be described as a first-order system of difference equations. Payoffs depend on both current and future surpluses. Future surpluses are important partly because the risk of separation leads to the loss of surplus today and in the future and partly because delay without separation can last into future periods. We also find conditions for existence and uniqueness of equilibria with immediate agreement.
    Keywords: Bargaining; long term relationship
    JEL: C72 C78
    Date: 2013–04–01
  6. By: Sébastien Courtin; Matias Nùnez (Universit´e de Cergy-Pontoise, THEMA, UMR CNRS 8184; Universit´e de Cergy-Pontoise, THEMA, UMR CNRS 8184)
    Abstract: This work provides necessary and sufficient conditions for the dominance solvability of approval voting games. Our conditions are very simple since they are based on the approval relation, a binary relation between the alternatives. We distinguish between two sorts of dominance solvability and prove that the most stringent one leads to the election of the set of CondorcetWinners whereas this need not be the case for the weak version.
    Keywords: Approval voting, Strategic voting, Dominance-solvability, Condorcet Winner
    JEL: C72 D71 D72
    Date: 2013
  7. By: Adrien BLANCHET; Pascal MOSSAY; Filippo SANTAMBROGIO
    Abstract: We extend Beckmann's spatial model of social interactions to the case of a two-dimensional spatial economy involving a large class of utility functions, accessing costs, and space-dependent amenities. We show that spatial equilibria derive from a potential functional. By proving the existence of a minimiser of the functional, we obtain that of spatial equilibrium. Under mild conditions on the primitives of the economy, the functional is shown to satisfy displacement convexity, a concept used in the theory of optimal transportation. This provides a variational characterisation of spatial equilibria. Moreover, the strict displacement convexity of the functional ensures the uniqueness of spatial equilibrium. Also, the spatial symmetry of equilibrium is derived from that of the spatial primitives of the economy. Several examples illustrate the scope of our results. In particular, the emergence of multiplicity of equilibria in the circular economy is interpreted as a lack of convexity of the problem.
    Date: 2013–06
  8. By: Martin Larsson
    Abstract: This paper develops a dynamic equilibrium model where agents exhibit a strong form of belief heterogeneity: they disagree about zero probability events. It is shown that, somewhat surprisingly, equilibrium exists in this setting, and that the disagreement about nullsets naturally leads to equilibrium asset pricing bubbles. The bubbles are subjective in the sense that they are perceived by some but not necessarily all agents. In contrast to existing models, bubbles arise with no restrictions on trade beyond a standard solvency constraint.
    Date: 2013–06
  9. By: Jean J. Gabszewicz (CORE, Université Catholique de Louvain, Belgique); Skerdilajda Zanaj (CREA, Université de Luxembourg)
    Abstract: In this paper, we extend the concept of stability to vertical collusive agreements, involving downstream and upstream firms, using a setup of successive Cournot oligopolies. We show that a stable vertical agreement always exists: the unanimous vertical agreement involving all downstream and upstream firms. Thus, stable vertical collusive agreements exist even for market structures in which horizontal cartels would be unstable. We also show that there are economies for which the unanimous agreement is not the only stable one.
    Keywords: collusion, stability, vertical agreement.
    JEL: D43 L13
    Date: 2013
  10. By: Ahmad Naimzada; Marina Pireddu
    Abstract: We develop a model with intra-generational consumption externalities, based on the overlapping generation version of Diamond (1965) model. More specifically, we consider a two-period lived overlapping generation economy, assuming that the utility of each consumer depends also on the average level of consumption by other consumers in the same generation. In this way we obtain a positional game embedded in an overlapping generation economy. We characterize the consumption and saving choices for the two periods in the Nash equilibrium path and we determine a dynamic equation for capital accumulation coherent with the agents' choices in the Nash equilibrium. Hence, also the behavior, both static and dynamic, described by the equation for the capital accumulation is coherent with the Nash equilibrium. For the associated dynamical system we find a unique positive steady state for capital, which is globally stable. Its position is decreasing with respect to positive variations in the degree of interaction in the first period, while the opposite relation holds in the second period. We then compare the steady states for capital with and without social interaction. In this respect we show that the steady state with social interaction is larger than the steady state in the absence of social interaction if and only if the degree of interaction in the second period exceeds the degree of interaction in the first period. In particular, if the degrees of interaction in the two periods coincide, the dynamical system is equivalent to the one without social interaction.
    Keywords: Positional game, overlapping generations, consumption externalities
    JEL: C72 D91 E21 O41
    Date: 2013–06
  11. By: David Bartolini
    Abstract: There are many situations where the best outcome is reached through co-operation and co-ordination of agents’ actions. Although this is the best collective outcome, economic agents may fail to implement such co-operative strategy. The reason for this failure may be lack of information about the gains from co-operation, or lack of capacity to implement the co-operative strategy. The present work focuses on two obstacles to co-operation that are linked with the incentives of the economic agents, and that are present even when the problems of information and capacity are taken care off. The two obstacles are the incentive to free ride and the strategic risk. The former stems from the possibility of obtaining gains without paying the associated costs (which are incurred by the agents that decide to co-operate); the latter is the risk of being the only one (or among the few) that acts co-operatively, so that the agent pays the costs but obtains less than what it would be feasible had other agents decided to co-operate. In this setting, using a game theoretical approach, we distinguish several cases of co-operation failures according to the relevance of those two obstacles. The analysis is then applied to contractual design and financial incentives. The overall message is the importance of identifying the source of co-operation failure in order to devise an effective policy to induce co-operation. It may not be enough to tell people (and institutions) that they should co-operate because it is in their interest, it is necessary to identify the incentives that shape agents’ decisions and are responsible for co-operation failures.
    Keywords: game theory, co-operation and co-ordination failure, economic incentives
    JEL: C70 C72 D86
    Date: 2013–05–27
  12. By: Pascal MOSSAY; Pierre PICARD
    Abstract: In this paper, we study the social interactions between two populations of individuals living in a city. Agents consume land and benefit from intra and intergroup social interactions. We show that segregation arises in equilibrium: populations become separated in distinct spatial neighborhoods. Two- and three-district urban structures are characterized. For high population ratios or strong intergroup interactions, only three-district cities exist. In other cases, multiplicity of equilibria arises. Moreover, for sufficiently low population ratios or very weak intergroup interactions, all individuals agree on the optimal spatial equilibrium.
    Date: 2013–06
  13. By: Takao Asano (Faculty of Economics, Okayama University); Hiroyuki Kojima (Department of Economics, Teikyo University)
    Abstract: The purpose of this paper is twofold. First, we generalize Kajii et al. (2007), and provide a condition under which for a game v, its Mobius inversion is equal to zero within the framework of the k-modularity of v for k >= 2. This condition is more general than that in Kajii et al. (2007). Second, we provide a condition under which for a game v for k >= 2, its Mobius inversion takes non-negative values, and not just zero. This paper relates the study of totally monotone games to that of kmonotone games. Furthermore, the modularity of a game can be related to k-additive capacities proposed by Grabisch (1997). As applications of our results to economics, this paper shows that a Gini index representation of Ben-Porath and Gilboa (1994) can be characterized by using our results directly. Our results can also be applied to potential functions proposed by Hart and Mas-Colell (1989) and further analyzed by Ui et al. (2011). *>= is greater than or equal to.
    Keywords: Belief Functions; Mobius Inversion; Totally Monotone Games; k-additive capacities; Gini Index; Potential Functions
    JEL: C71 D81 D90
    Date: 2013–06
  14. By: Kasahara, Tetsuya
    Abstract: This paper analyzes the role and effects of public investment policy when coordination problems among agents can result in individually rational but socially inefficient investment decisions. Developing a coordination investment model in which individuals simultaneously and independently determine whether to undertake a risky but potentially more profitable investment project or an alternative with safe but lower returns, we first show that the risk of coordination failure can in equilibrium result in socially inefficient investment and small consumption. We then investigate the role and effects of a public investment policy designed to help mitigate inefficiency. In our model, the size of a feasible public investment policy is determined endogenously. Our numerical results show that the divisibility of investment projects, the presence of financial constraints, the productivity of public investments, and the relative precision of public and private information, as well as the relative tax rates imposed on risky investments and safe investments, have complex effects on the effectiveness of public investment policy and welfare. In particular, we demonstrate that a public investment policy of a larger size and the availability of more precise information do not necessarily increase welfare.
    Keywords: Strategic complementarities, coordination games, information precision, public investment policy, financial constraints
    JEL: C72 D81 H21 H53
    Date: 2013–06
  15. By: Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
    Abstract: We show that the standard analysis of vertical relationships transposes directly to investment dynamics. Thus, when a firm undertaking a project requires an outside supplier (e.g., an equipment manufacturer) to provide it with a discrete input to serve a growing but uncertain demand, and if the supplier has market power, investment occurs too late from an industry standpoint. The distortion in firm decisions is characterized by a Lerner-type index. Despite the underlying investment option, greater volatility can result in a lower value for both firms. We examine several contractual alternatives to induce efficient timing, a novel vertical restraint being for the upstream to sell a call option on the input. We also extend the model to allow for downstream duopoly. When downstream firms are engaged in a preemption race, the upstream firm sells the input to the first investor at a discount such that the race to preempt exactly offsets the vertical distortion, and this leader invests at the optimal time. These results are illustrated with a case study drawn from the pharmaceutical industry.
    Keywords: Irreversible investment; Preemption; Real options; Vertical relations
    JEL: C73 D43 D92 L13
    Date: 2013–06–19

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