
on Microeconomics 
Issue of 2013‒07‒20
sixteen papers chosen by JingYuan Chiou IMT Lucca Institute for Advanced Studies 
By:  Yuichi Yamamoto (Department of Economics, University of Pennsylvania) 
Abstract:  We investigate whether two players in a longrun relationship can maintain cooperation when the details of the underlying game are unknown. Specifically, we consider a new class of repeated games with private monitoring, where an unobservable state of the world influences the payoff functions and/or the monitoring structure. Each player privately learns the state over time but cannot observe what the opponent learned. We show that there are robust equilibria in which players eventually obtain payoffs as if the true state were common knowledge and players played a “belieffree” equilibrium. We also provide explicit equilibrium constructions in various economic examples 
Keywords:  repeated game, private monitoring, incomplete information, belieffree equilibrium, expost equilibrium, individual learning 
JEL:  C72 C73 
Date:  2013–07–06 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:13038&r=mic 
By:  Enriqueta Aragones (Universitat Pompeu Fabra); Itzhak Gilboa (TelAviv University and Economics & Decision Sciences, HEC Paris); Andrew Postlewaite (Department of Economics, University of Pennsylvania); David Schmeidler (The Interdisciplinary Center Herzliya and Tel Aviv University) 
Abstract:  The art of rhetoric may be defined as changing other people’s minds (opinions, beliefs) without providing them new information. One technique heavily used by rhetoric employs analogies. Using analogies, one may draw the listener’s attention to similarities between cases and to reorganize existing information in a way that highlights certain regularities. In this paper we offer two models of analogies, discuss their theoretical equivalence, and show that finding good analogies is a computationally hard problem. 
Keywords:  Methodology, Casebased reasoning 
JEL:  B40 B41 
Date:  2013–07–09 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:13039&r=mic 
By:  Sonja Brangewitz (University of Paderborn); ClausJochen Haake (University of Paderborn) 
Abstract:  In this paper, we analyze a model in which two divisions negotiate over an intrafirm transfer price for an intermediate product. Formally, we consider bargaining problems under incomplete information, since the upstream division’s (seller's) costs and downstream division's (buyer's) revenues are supposed to be private information. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine transfer payments and transfer probabilities. Furthermore, we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the existing literature for negotiated transfer pricing under incomplete information. In particular, we focus on the models presented in Wagenhofer (1994). 
Keywords:  Transfer Pricing, Negotiation, Generalized Nash Bargaining Solution, Incomplete Information 
JEL:  C78 D82 M41 
Date:  2013–07 
URL:  http://d.repec.org/n?u=RePEc:pdn:wpaper:64&r=mic 
By:  Forges, Françoise; Serrano, Roberto 
Abstract:  This is a brief survey describing some of the recent progress and open problems in the area of cooperative games with incomplete information. We discuss exchange economies, cooperative Bayesian games with orthogonal coalitions, and issues of cooperation in noncooperative Bayesian games. 
Keywords:  Strategic Externalities; NonCooperative Bayesian Games; Cooperative Games with Orthogonal Coalitions; Exchange Economies; Informational Externalities; 
JEL:  D82 D51 C72 C71 
Date:  2013–06 
URL:  http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/8158&r=mic 
By:  Lombardi, Michele; Yoshihara, Naoki 
Abstract:  In this paper, we introduce the weak and the strong notions of partially honest agents (Dutta and Sen, 2012), and then study implementation by natural pricequantity mechanisms (Saijo et al., 1996, 1999) in pure exchange economies with three or more agents in which pureconsequentialistically rational agents and partially honest agents coexist. Firstly, assuming that there exists at least one partially honest agent in either the weak notion or the strong notion, the class of efficient social choice correspondences which are Nashimplementable by such mechanisms is characterized. Secondly, the (unconstrained) Walrasian correspondence is shown to be implementable by such a mechanism when there is at least one partially honest agent of the strong type, which may provide a behavioral foundation for decentralized implementation of the Walrasian equilibrium. Finally, in this setup, the effects of honesty on the implementation of more equitable Pareto optimal allocations can be viewed as negligible. 
Keywords:  Natural implementation, Nash equilibrium, exchange economies, intrinsic preferences for honesty. 
JEL:  C0 C02 C72 D03 D04 D71 
Date:  2013–07 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:48294&r=mic 
By:  Kohei Daido (School of Economics, Kwansei Gakuin University); Takeshi Murooka (Department of Economics, University of California, Berkeley) 
Abstract:  We investigate moralhazard problems with limited liability where agents have expectationbased referencedependent preferences. We show that stochastic compensation for low performance can be optimal. Because of loss aversion, the agents have firstorder risk aversion to wage uncertainty. This causes the agents to work harder when their low performance is stochastically compensated. We also examine team incentives for credibly employing such stochastic compensation. In an optimal contract, low and highperformance agents are equally rewarded if most agents achieve high performance. Team incentives can be optimal even when there are only two agents and the degree of loss aversion is not large. 
Keywords:  Moral Hazard, Loss Aversion, Stochastic Compensation, Team Incentives,ReferenceDependent Preferences 
JEL:  D03 D86 M12 M52 
Date:  2013–07 
URL:  http://d.repec.org/n?u=RePEc:kgu:wpaper:107&r=mic 
By:  Simone CerreiaVioglio (Department of Decision Sciences, Universit_a Bocconi); David Dillenberger (Department of Economics, University of Pennsylvania); Pietro Ortoleva (Department of Economics, Columbia University) 
Abstract:  Many violations of the Independence axiom of Expected Utility can be traced to subjects' attraction to riskfree prospects. Negative Certainty Independence, the key axiom in this paper, formalizes this tendency. Our main result is a utility representation of all preferences over monetary lotteries that satisfy Negative Certainty Independence together with basic rationality postulates. Such preferences can be represented as if the agent were unsure of how risk averse to be when evaluating a lottery p; instead, she has in mind a set of possible utility functions over outcomes and displays a cautious behavior: she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one. The set of utilities is unique in a welldefined sense. We show that our representation can also be derived from a `cautious' completion of an incomplete preference relation. 
Keywords:  Preferences under risk, Allais paradox, Negative Certainty Independence, Incomplete preferences, Cautious Completion, MultiUtility representation. 
JEL:  D80 D81 
Date:  2013–07–09 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:13037&r=mic 
By:  Michael Greinecker; Konrad Podczeck 
Abstract:  We show that concepts introduced by Aumann more than thirty years ago throw a new light on purification in games with extremely dispersed private information. We show that one can embed payoffirrelevant randomization devices in the private information of players and use these randomization devices to implement mixed strategies as deterministic functions of the private information. This approach gives rise to very short, elementary, and intuitive proofs for a number of purification results that previously required sophisticated methods from functional analysis or nonstandard analysis. We use our methods to prove a general purification theorem for games with private information in which a player's payoffs can depend in arbitrary ways on events in the private information of other players and in which we allow for shared information in a general way. 
Date:  2013–07 
URL:  http://d.repec.org/n?u=RePEc:inn:wpaper:201318&r=mic 
By:  Trishita Bhattacharjee (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development Research) 
Abstract:  This paper examines the implications of network externalities on equilibrium outcomes in a differentiated products duopoly under strategic managerial delegation through relative performance based incentive contracts. It shows that Miller and Pazgal (2001)'s equivalence result does not go through in the presence of network externalities. Instead, Singh and Vives (1984)'s rankings of equilibrium outcomes under Cournot and Bertrand hold true under relative performance based delegation contracts as well, if there are network externalities. However, when firms can choose whether to compete in price or in quantity, there are two pure strategy Nash equilibria and one mixed strategy Nash equilibrium. Interestingly, in pure strategy Nash equilibria asymmetric competition occurs, where a firm competes in price and its rival firm competes in quantity. Further, the mixed strategy Nash equilibrium probability of a firm to compete in terms of price increases with the strength of network effects and is always greater than the probability to compete in terms of price. 
Keywords:  Symmetric competition, Price competition, Network externalities, Quantity competition, Relative performance contract, Strategic delegation 
JEL:  D43 L22 L13 D21 
Date:  2013–05 
URL:  http://d.repec.org/n?u=RePEc:ind:igiwpp:2013010&r=mic 
By:  David Crainich (CNRSLEM and IESEG School of Management); Louis Eeckhoudt (IESEG School of Management (LEMCNRS) and and CORE (Université Catholique de Louvain)); Olivier Le Courtois (EM Lyon Business School) 
Abstract:  The concept of absolute risk aversion proposed by K. Arrow (1965) and J. Pratt (1964) and the assumption that it is decreasing in wealth has played a central role in the analysis of risky choices. Ten years later S. Richard (1975) defined correlation aversion in the framework of bivariate utility functions. Surprisingly however the measure of the intensity of correlation aversion has received so far almost no attention. In this paper we define an index of (absolute) correlation aversion and stress some of its properties. Besides we show how the assumption that it is decreasing in wealth generates new results for the analysis of risky choices under bivariate utility. Finally we indicate how these notions can be extended to higher orders of risk attitudes. 
Keywords:  Correlation aversion 
JEL:  D81 
Date:  2013–06 
URL:  http://d.repec.org/n?u=RePEc:ies:wpaper:e201312&r=mic 
By:  Trishita Bhattacharjee (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development ResearchInstitute of Economic Growth) 
Abstract:  This paper examines the possibility of emergence of incentive equilibrium in the case of monopoly, without relying on agency theory based arguments. It shows that, when there is network effect of consumption, it is optimal for a monopolist to offer salesoriented incentive scheme to her manager. The extent of salesorientation of the optimal incentive scheme is higher in the case of stronger network effect. It also shows that both the monopolist and consumers are better off under managerial delegation than in case of no delegation, unlike as in the case of usual oligopoly without network effect. 
Keywords:  Incentive equilibrium, Managerial delegation, Monopoly, Network effects 
JEL:  D42 L20 L12 
Date:  2013–05 
URL:  http://d.repec.org/n?u=RePEc:ind:igiwpp:2013009&r=mic 
By:  Alcalde, Jose (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica); SilvaReus, José Ángel (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica) 
Abstract:  We design a mechanism to allocate indivisible objects that combines procedural and distributive fairness. It associates each allocation problem a family of priorities to be used when determining how agents and objects should be matched. The selection of specific priorities, correlated with agents' preferences, guarantees the (exante) equity of the outcome. The analysis of our mechanism, both from the efficiency and the strategic perspectives, enables us to connect the recent literature on random assignment (Bogomolnaia and Moulin, 2001) and the traditional analysis of matching mechanisms (Gale and Shapley, 1962). 
Keywords:  Correlated Priorities; Random Assignment; Serial Rule; Matching Markets 
JEL:  C78 D61 D63 
Date:  2013–07–11 
URL:  http://d.repec.org/n?u=RePEc:ris:qmetal:2013_003&r=mic 
By:  Alexander Zimper (Department of Economics, University of Pretoria) 
Abstract:  The financial sector of emerging economies in Africa is characterized by a noncompetitive banking sector which dominates any direct participation of agents in asset markets. Based on a variant of Diamond and Dybvig's (1983) model of financial intermediation, we formally explain both stylized facts through market inexperience of agents in emerging economies. While experienced agents correctly predict future market clearing equilibrium prices, inexperienced agents are ignorant about future market equilibria. As a consequence, a monopolistic banking sector can exploit these agents because their only outside option is an autarkic investment project. 
Keywords:  Emerging Economies, Demand Deposit Contract, Asset Market, Asymmetric Information 
JEL:  O16 G14 G21 
Date:  2013–07 
URL:  http://d.repec.org/n?u=RePEc:pre:wpaper:201334&r=mic 
By:  David Crainich (CNRSLEM and IESEG School of Management); Louis Eeckhoudt (IESEG School of Management (LEMCNRS) and and CORE (Université Catholique de Louvain)); James K. Hammitt (Harvard University (Center for Risk Analysis), Cambridge  Toulouse School of Economics (LERNAINRA)) 
Abstract:  The relationship between willingness to pay (WTP) to reduce the probability of an adverse event and the degree of risk aversion is ambiguous. The ambiguity arises because paying for protection worsens the outcome in the event the adverse event occurs, which influences the expected marginal utility of wealth. Using concepts of prudence (equivalently, downside risk aversion), we characterize the marginal WTP to reduce the probability of the adverse event as the product of WTP in the case of risk neutrality and an adjustment factor. For the univariate case (e.g., risk of financial loss), the adjustment factor depends on risk aversion and prudence with respect to wealth. For the bivariate case (e.g., risk of death or illness), the adjustment factor depends on risk aversion and crossprudence in wealth. 
Keywords:  value per statistical life, mortality risk, risk aversion, prudence 
JEL:  D8 I1 
Date:  2013–06 
URL:  http://d.repec.org/n?u=RePEc:ies:wpaper:e201313&r=mic 
By:  Pietri , Antoine; Tazdaït , Tarik; Vahabi , Mehrdad 
Abstract:  This paper is among the first to theoretically examine the relevance of price competition in the protection market by focusing on the competition between empires. By distinguishing absolute and differential protection rents, we first define coercive rivalry and price competition among empires and then establish three types of empires: early empires of domination (like Akkadian empire), territorial empires (like Russian empire), and merchant empires (like Venetian empire). Empires are structured on the basis of two types of hierarchies that determine their protection costs: ‘topdown’ and ‘bottomup.’ We systematically study the impact of asymmetrical protection costs on price competition in the light of Bertrand equilibria. We provide an economic rationale for the use of violence throughout history in conformity with the findings of economic historians. 
Keywords:  Absolute and differential protection rents; Bertrand equilibrium; Empires of domination; Merchant empires; Territorial Empires 
JEL:  D74 H11 H56 L13 P16 
Date:  2013–03 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:48225&r=mic 
By:  Jensen, Sissel (Dept. of Economics, Norwegian School of Economics); Kvaløy, Ola (UiS Business School, University of Stavanger); Olsen, Trond E. (Dept. of Business and Management Science, Norwegian School of Economics); Sørgard, Lars (Dept. of Economics, Norwegian School of Economics) 
Abstract:  The economics of crime and punishment postulates that higher punishment leads to lower crime levels, or less severe crime. It is however hard to get empirical support for this rather intuitive relationship. This paper offers a model that can contribute to explain why this is the case. We show that if criminals can spend resources to reduce the probability of being detected, then a higher general punishment level can increase the crime level. In the context of antitrust enforcement, the model shows that competition authorities who attempt to fight cartels by means of tougher sanctions for all offenders may actually lead cartels to increase their overcharge when leniency programs are in place. 
Keywords:  Antitrust enforcement; leniency programs; economics of crime 
JEL:  K20 K21 L40 
Date:  2013–05–27 
URL:  http://d.repec.org/n?u=RePEc:hhs:nhhfms:2013_005&r=mic 