nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒07‒28
fifteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. A Bayesian Model of Knightian Uncertainty By Al-Najjar, Nabil I.; Weinstein, Jonathan
  2. Liberal Egalitarianism and the Harm Principle By Lombardi, Michele; Miyagishima, Kaname; Veneziani, Roberto
  3. Efficiency in strategic form games: A little trust can go a long way By Jianpei Li; Paul Schweinzer
  4. Bargaining and Power By Dominik Karos
  5. TULLOCK CONTESTS WITH ASYMMETRIC INFORMATION By Ezra Einy; Ori Haimanko; Diego Moreno; Aner Sela; Benyamin Shitovitz
  6. Group Lending Without Joint Liability By Thiemo Fetzer; Maitreesh Ghatak; Jonathan de Quidt
  7. On the Existence of Approximated Equilibria and Sharing-Rule Equilibria in Discontinuous Games By Philippe Bich; Rida Laraki
  8. Equilibrium, Auction, Multiple Substitutes and Complements By Akiyoshi Shioura; Zaifu Yang
  9. Seasrch Deterrence By Armstrong, Mark; Zhou, Jidong
  10. On the Equivalence of Continuity and Hemicontinuity for Preference Preorders By Georgios Gerasimou
  11. Conditional Beliefs and Higher-Order Preferences By Lee, Byung Soo
  12. Board directors' preferences: What are good aggregation rules? By Duran, Mihael
  13. Speculative Trade Equilibria with Incorrect Price Anticipations By Alexander Zimper
  14. Securing Basic Well-being for All By Gotoh, Reiko; Yoshihara, Naoki
  15. Cobb-Douglas preferences in bilateral oligopoly By Dickson Alex

  1. By: Al-Najjar, Nabil I. (Department of Managerial Economics and Decision Sciences, Kellog School of Management, Northwestern University Evanston, USA); Weinstein, Jonathan (Department of Managerial Economics and Decision Sciences, Kellog School of Management, Northwestern University Evanston, USA)
    Abstract: A long tradition suggests a fundamental distinction between situations of risk, where true objective probabilities are known, and unmeasurable uncertainties where no such probabilities are given. This distinction can be captured in a Bayesian model where uncertainty is represented by the agent's subjective belief over the parameter governing future income streams. Whether uncertainty reduces to ordinary risk depends on the agent's ability to smooth consumption. Uncertainty can have a major behavioral and economic impact, including precautionary behavior that may appear overly conservative to an outside observer. We argue that one of the main characteristics of uncertain beliefs is that they are not empirical, in the sense that they cannot be objectively tested to determine whether they are right or wrong. This can confound empirical methods that assume rational expectations.
    Keywords: Knightian uncertainty, consumption smoothing, uncertainty premium, rational expectations
    JEL: A10
    Date: 2013–07
  2. By: Lombardi, Michele; Miyagishima, Kaname; Veneziani, Roberto
    Abstract: This paper analyses the implications of classical liberal and libertarian approaches for distributive justice in the context of social welfare orderings. An axiom capturing a liberal non-interfering view of society, named the Weak Harm Principle, is studied, whose roots can be traced back to John Stuart Mill's essay On Liberty. It is shown that liberal views of individual autonomy and freedom can provide consistent foundations for social welfare judgements, in both the finite and the infinite context. In particular, a liberal non-interfering approach can help to adjudicate some fundamental distributive issues relative to intergenerational justice. However, a surprisingly strong and general relation is established between liberal views of individual autonomy and non-interference, and egalitarian principles in the Rawlsian tradition.
    Keywords: Liberal principles, maximin, intergenerational equity, infinite utility streams.
    JEL: D0 D01 D6 D60 D63 D7 D70 Q01
    Date: 2013–07
  3. By: Jianpei Li; Paul Schweinzer
    Abstract: We study the incentives of noncooperative players to play a cooperative game. That is, we look for individually rational, redistributive, pre-game agreements enacted in order to coordinate towards efficient equilibrium play. Contrasting with standard Nash equilibrium analysis, we assume that players can commit to the agreements they negotiate and that utility is verify and transferable. We show that agreeing on a proportional-exponential redistribution rule is individually rational and implements the socially efficient outcome as Nash equilibrium. Moreover, we show that this class of redistributional contracts may be naturally obtained as the outcome of Nash bargaining.
    Keywords: Redistribution, Efficiency, Social contract
    JEL: C72 D62 D71
    Date: 2013–07
  4. By: Dominik Karos (Department of Economics and Statistics, Saarland University)
    Abstract: Given a simple game, a power configuration specifies the power of each player in each winning coalition. We introduce a new power configuration which takes into account bargaining among players in coalitions. We show that under very weak conditions on a bargaining solution there is a power configuration which is stable with respect to renegotiations. We further show that given this power configuration there is a coalition which is both internally and Nash stable. We consider two different bargaining solutions on apex games and show under which conditions there are core stable coalitions. Finally, we investigate how infeasible coalition might affect the outcome and apply our model to the German parliament.
    Keywords: Coalition Formation, Power, Bargaining
    JEL: C71 D71
    Date: 2013–06
  5. By: Ezra Einy (Department of Economics, Ben-Gurion University of the Negev, Israel); Ori Haimanko (Department of Economics, Ben-Gurion University of the Negev, Israel); Diego Moreno (Departamento de Economia, Universidad Carlos III de Madrid.); Aner Sela (Department of Economics, Ben-Gurion University of the Negev. Israel); Benyamin Shitovitz (Department of Economics, University of Haifa)
    Abstract: Under standard assumptions about players'cost functions, we show that a Tullock contest with asymmetric information has a pure strategy equilibrium. Next we study Tullock contests in which players have a common value and a common state-independent linear cost function. A two-player contest in which one player has an information advantage has a unique equilibrium. In equilib- rium both players exert the same expected effort, and although the player with an information advantage wins the prize with probability less than one-half, his payoff is greater or equal to that of his opponent. When there are more than two players in the contest, having information advantage leads to higher payoffs, but the other properties of equilibrium no longer hold.
    JEL: C72 D44 D82
    Date: 2013
  6. By: Thiemo Fetzer; Maitreesh Ghatak; Jonathan de Quidt
    Abstract: This paper contrasts individual liability lending with and without groups to joint liability lending. By doing so, we shed light on an apparent shift away from joint liability lending towards individual liability lending by some microfinance institutions First we show that individual lending with or without groups may constitute a welfare improvement so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how a purely mechanical argument in favor of the use of groups - namely lower transaction costs - may actually be used explicitly by lenders to encourage the creation of social capital. We also carry out some simulations to evaluate quantitatively the welfare impact of alternative forms of lending, and how they relate to social capital.
    Keywords: microfinance, group lending, joint liability, mutual insurance
    JEL: G11 G21 O12 O16
    Date: 2013–07
  7. By: Philippe Bich (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Rida Laraki (Ecole Polytechnique - Ecole Polytechnique, IMJ - Institut de Mathématiques de Jussieu - CNRS : UMR7586 - Université Pierre et Marie Curie (UPMC) - Paris VI - Université Paris VII - Paris Diderot)
    Abstract: New relaxations of the Nash equilibrium concept are shown to exist in any strategic game with discontinuous payoff functions. The new concepts are used (1) to show the equivalence between Reny's better-reply security condition [28] and Simon-Zame's endogenous tie-breaking rule equilibrium concept [32], (2) to obtain conditions for the existence of approximated equilibria in a class of discontinuous games that naturally extends Reny's better-reply secure games, and (3) to show the existence of approximated equilibria in a large family of two-player games that contains all standard models of auctions.
    Keywords: Discontinuous games, better-reply security, sharing-rule equilibrium, approximated equilibrium, strategic approximation, auctions, diagonal games.
    Date: 2013–07–18
  8. By: Akiyoshi Shioura; Zaifu Yang
    Abstract: We study a market model where there are n different types of indivisible goods for sale. The goods can be substitutable or complementary. There are multiple units of each good. Each agent may consume several goods and has quasi-linear utilities in money. We introduce a general condition which will be shown to guarantee the existence of a Walrasian equilibrium and generalize several existing conditions such as gross substitutes, strong substitutes, and gross substitutes and complements. We also identify several characterizations of this condition. Furthermore, we propose a price adjustment process which converges globally to a Walrasian equilibrium.
    Keywords: Indivisibility, equilibrium, existence, substitutes and complements, auction
    JEL: C61 C62 D44 D51
    Date: 2013–07
  9. By: Armstrong, Mark; Zhou, Jidong
    Abstract: A seller wishes to prevent the discovery of rival offers by its prospective customers. We study sales techniques which serve this purpose by making it harder for a customer to return to buy later after a search for alternatives. These include making an exploding offer, offering a "buy-now" discount, or requiring payment of a deposit in order to buy later. It is unilaterally profitable for a seller to deter search under mild conditions, but sellers can suffer when all do so. In a monopoly setting where the buyer has an uncertain outside option, the optimal selling mechanism features both buy-now discounts and deposit contracts. When a seller cannot commit to its policy, it exploits the inference that those consumers who try to buy later have no good alternative. In many cases the outcome then involves exploding offers, so that no consumers return to buy after search.
    Keywords: Consumer search; sales techniques; price discrimination; sequential screening
    JEL: D18 D83 L13 L80
    Date: 2013–06
  10. By: Georgios Gerasimou (University of St. Andrews)
    Abstract: Sufficient conditions are provided for a possibly incomplete preference preorder on a topological space to be closed in the product space if and only if it has closed upper and lower contour sets. Notably, it is shown that the two properties are equivalent if the domain of the preorder is a Hausdorff (T2) topological space. The two concepts are therefore identical in the overwhelming majority of cases that are of interest to economists, even when completeness is not assumed.
    Keywords: Incomplete preorders, continuity, hemicontinuity, equivalence.
    JEL: C65 D01 D11
    Date: 2013–07–01
  11. By: Lee, Byung Soo
    Abstract: In this paper, we establish the Bayesian foundations of type structures in which beliefs are lexicographic probability systems (LPS’s)—such as those used in Brandenburger et al. (2008)—rather than standard probability measures as in Mertens and Zamir (1985). This is a setting which the distinction between preferences hierarchies (Epstein and Wang, 1996) and beliefs hierarchies is meaningful and the former has conceptual advantages. Type structures in which beliefs are conditional probability systems (CPS’s) are found to describe fewer hierarchies than LPS type structures can if a nonredundancy requirement is imposed. The two families of type structures are found to be capable of describing the same set of hierarchies in the absence of such a requirement. The existence of “largest”—a notion closely related to universality—LPS/CPS type structures is also shown. Finally, we find that some coherent hierarchies cannot be types but those hierarchies may be needed to express epistemic conditions for iterated elimination of weakly dominated strategies.
    Keywords: Preferences hierarchies, type structure, weakly dominated strategies, epistemic game theory, lexicographic probability system, conditional probability system
    JEL: C72 D8 D80
    Date: 2013–07–17
  12. By: Duran, Mihael
    Abstract: I analyze how boards of directors with heterogeneous preferences can affect the information shared with the CEO with the help of a cheap-talk model that allows for large groups of receivers. This paper provides new insights on how heterogeneity of boards can change the way of communication between the board and the CEO, related to different ways of decision making. My model gives some insights how heterogeneous preferences can have an impact on how communication between CEO and the board of directors takes place. I also indicate how coalition forming in the boardroom can be influenced by director's and CEO's perferences. Finnaly this model gives a possible answer why board of directors hetreogeneity differs even for shareholder representatives if there are any empoyees on the board. --
    Keywords: Board of directors,Cheap talk,Director's preferences,Heterogeneity,Multiple audiences
    JEL: C71 C72 D72 D82 G34
    Date: 2013
  13. By: Alexander Zimper (Department of Economics, University of Pretoria)
    Abstract: This paper introduces an equilibrium concept for boundedly rational agents who base their demand-supply decisions on incorrect price anticipations. Formally, we differentiate between equilibrium and out-of-equilibrium states. If the agents attach zero prior probability to all out-of-equilibrium states, our equilibrium concept coincides with Radner's (1979) concept of rational expectations equilibria (=REE). In contrast to REE, however, there may exist strict incentives for speculative asset trade whenever boundedly rational agents regard out-of-equilibrium states as possible.
    Keywords: Bounded Rationality, Speculative Trade, Rational Expectations, Incorrect Prices
    JEL: D51 D53
    Date: 2013–07
  14. By: Gotoh, Reiko; Yoshihara, Naoki
    Abstract: The purpose of this paper is to examine the possibility of a social choice rule to implement a social policy for “securing basic well-being for all.” For this purpose, the paper introduces a new scheme of social choice, called a social relation function (SRF), which associates to each profile of individual well-being appraisals and each profile of group-evaluations a reflexive and transitive binary relation over the set of social policies. As a part of the domains of SRFs, the available class of group evaluations is constrained by the following three conditions: Basic Well-being Condition, Restricted Monotonicity, and Refrain Condition. Furthermore, two axioms, the non-negative response (NR) and the weak Pareto condition (WP), are introduced as the two basic condititions of SRFs. NR demands giving priority to the evaluations of disadvantage groups, while treating them as formally equal relative to each other. WP requires treating impartially the well-being appraisals of all individuals. In conclusion, this paper shows that, under some reasonable assumptions, there exists a SRF which satisfies NR and WP.
    Keywords: basic well-being, individual well-being appraisals, social relation functions
    JEL: D63
    Date: 2013–07
  15. By: Dickson Alex (Department of Economics, University of Strathclyde)
    Abstract: Bilateral oligopoly is a simple model of exchange in which a finite set of sellers seek to exchange the goods they are endowed with for money with a finite set of buyers, and no price-taking assumptions are imposed. If trade takes place via a strategic market game bilateral oligopoly can be thought of as two linked proportional-sharing contests: in one the sellers share the aggregate bid from the buyers in proportion to their supply and in the other the buyers share the aggregate supply in proportion to their bids. The analysis can be separated into two ‘partial games’. First, fix the aggregate bid at B; in the first partial game the sellers contest this fixed prize in proportion to their supply and the aggregate supply in the equilibrium of this game is X˜ (B). Next, fix the aggregate supply at X; in the second partial game the buyers contest this fixed prize in proportion to their bids and the aggregate bid in the equilibrium of this game is ˜B (X). The analysis of these two partial games takes into account competition within each side of the market. Equilibrium in bilateral oligopoly must take into account competition between sellers and buyers and requires, for example, ˜B (X˜ (B)) = B. When all traders have Cobb-Douglas preferences ˜ X(B) does not depend on B and ˜B (X) does not depend on X: whilst there is competition within each side of the market there is no strategic interdependence between the sides of the market. The Cobb-Douglas assumption provides a tractable framework in which to explore the features of fully strategic trade but it misses perhaps the most interesting feature of bilateral oligopoly, the implications of which are investigated.
    Keywords: strategic market game, bilateral oligopoly, Cobb-Douglas preferences
    JEL: C72 D43 D50
    Date: 2013–06

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