nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒08‒10
eleven papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Finite Depth of Reasoning and Equilibrium Play in Games with Incomplete Information By Willemien Kets
  2. Natural Implementation with Partially Honest Agents in Economic Environments By Lombardi, Michele; Yoshihara, Naoki
  3. Partially Honest Nash Implementation: A Full Characterization By Lombardi, Michele; Yoshihara, Naoki
  4. Optimal Voting Rules By Alex Gershkov; Benny Moldovanu; Xianwen Shi
  5. The effect of options on coordination By GUIMARAES, Bernardo; ARAUJO, Luis
  6. Securing Basic Well-being for All By Gotoh, Reiko; Yoshihara, Naoki
  7. Moral Hazard and Cooperation in Competing Teams By Raul V. Fabella
  8. Limits to Reputations By Mehmet Ekmekci; Nuh Dalkiran
  9. Expert Information and Majority Decisions. By Kohei Kawamura (University of Edinburgh) and Vasileios Vlaseros (University of Edinburgh)
  10. Relative Injustice Aversion By Moreno-Garrido, Luis José Blas
  11. Financial Innovation, Collateral and Investment By Ana Fostel; John Geanakoplos

  1. By: Willemien Kets
    Abstract: The standard framework for analyzing games with incomplete information models players as if they have an infinite depth of reasoning, which is not always consistent with experimental evidence. This paper generalizes the type spaces of Harsanyi (1967- 1968) so that players can have a nite depth of reasoning. We do this restricting the set of events that a player of a finite depth can reason about. This approach allows us to extend the Bayesian-Nash equilibrium concept to environments with players with a nite depth of reasoning. We demonstrate that the standard approach of modeling beliefs with Harsanyi type spaces fails to capture the equilibrium behavior of players with a nite depth, at least in some games. Consequently, the standard approach cannot be used to describe the equilibrium behavior of players with a finite depth in general.
    Keywords: Bounded rationality, higher-order beliefs, finite depth of reasoning, games with incomplete information, Bayesian equilibrium JEL Classification: C700, C720, D800, D830
    Date: 2013–07–22
  2. 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 price-quantity mechanisms (Saijo et al., 1996, 1999) in pure exchange economies with three or more agents in which pure-consequentialistically 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 Nash-implementable 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 set-up, 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: C72 D71
    Date: 2013–07
  3. By: Lombardi, Michele; Yoshihara, Naoki
    Abstract: Given the framework introduced by Dutta and Sen (2012), this paper offers a comprehensive analysis of (Nash) implementation with partially honest agents when there are three or more participants. First, it establishes a condition which is necessary and sufficient for implementation. Second, it provides simple tests for checking whether or not a social choice correspondence can be implemented. Their usefulness is shown by examining implementation in a wide variety of environments.
    Keywords: Implementation, Nash equilibrium, social choice correspondences, partial honesty, Condition μ
    JEL: C72 D71
    Date: 2013–07
  4. By: Alex Gershkov; Benny Moldovanu; Xianwen Shi
    Abstract: We study dominant strategy incentive compatible (DIC) and deterministic mechanisms in a social choice setting with several alternatives. The agents are privately informed about their preferences, and have single-crossing utility functions. Monetary transfers are not feasible. We use an equivalence between deterministic, DIC mechanisms and generalized median voter schemes to construct the constrained-efficient, optimal mechanism for an utilitarian planner. Optimal schemes for other welfare criteria such as, say, a Rawlsian maximin can be analogously obtained.
    Keywords: Mechanism Design, Voting, Dominant Strategy, Utilitarian
    JEL: D82 D72 D71
    Date: 2013–08–07
  5. By: GUIMARAES, Bernardo; ARAUJO, Luis
    Abstract: This paper studies how constraints on the timing of actions affect equilibrium in intertemporalcoordination problems. The model exhibits a unique symmetric equilibrium in cut-o¤ strategies.The risk-dominant action of the underlying one-shot game is selected when the option to delayeffort is commensurate with the option to wait longer for others' actions. The possibility of waitinglonger for the actions of others enhances coordination, but the option of delaying one s actionscan induce severe coordination failures: if agents are very patient, they might get arbitrarily lowexpected payoffs even in cases where coordination would yield arbitrarily large returns.
    Date: 2013–08–02
  6. 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
  7. By: Raul V. Fabella (School of Economics, University of the Philippines Diliman)
    Abstract: We give the conditions for the attainment of self-enforcing Pareto efficiency under complete effort non-observability, strict agent rationality and global budget balance among teams involved in a winner-takes-all contest for a prize. Employing Nash conjectures and fixed fee financing of the prize, we characterize the competitive environment that allows teams to overcome the moral hazard problem and induce self-enforcing egalitarian outcomes. If the number of identical teams is finite, the production technology is restricted to factor symmetric ones. When the number of identical teams becomes unbounded, the restriction on the production technology vanishes and there always exists a fee level that supports a self-enforcing Pareto efficient solution as long as member utilities over own share are identical and obey the Inada conditions. Some form of membership symmetry cannot be ruled out for Pareto efficiency.
    Date: 2013–07
  8. By: Mehmet Ekmekci (Northwestern University); Nuh Dalkiran (Bilkent University)
    Abstract: Much of the interest in the adverse selection approach to reputations in repeated games arises from the fact that quite small departures from the complete information model seems to have large effects on the set of equilibrium payoffs. We show that this is not the case in reputation games where a long-run player plays a fixed stage-game against an infinite sequence of short-run players under imperfect public-monitoring. We conclude that in such games, introducing arbitrarily small incomplete information cannot open the possibility of new equilibrium payoffs that are far away from the complete information equilibrium payoff set, even when the long-run player's discount factor is very high but fixed. Our main result implies that the standard reputation results hold true due to a specific order of limits.
    Date: 2013
  9. By: Kohei Kawamura (University of Edinburgh) and Vasileios Vlaseros (University of Edinburgh)
    Abstract: This paper studies dichotomous majority voting in common interest committees where each member receives not only a private signal but also a public signal observed by all of them. The public signal represents, e.g. expert information presented to an entire committee and its quality is higher than that of each individual private signal. We identify two informative symmetric strategy equilibria, namely i) the mixed strategy equilibrium where each member randomizes between following the private and public signals should they disagree; and ii) the pure strategy equilibrium where they follow the public signal for certain. The former outperforms the latter. The presence of the public signal precludes the equilibrium where every member follows their own signal, which is an equilibrium in the absence of the public signal. The mixed strategy equilibrium in the presence of the public signal outperforms the sincere voting equilibrium without the public signal, but the latter may be more efficient than the pure strategy equilibrium in the presence of the public signal. We suggest that whether expert information improves committee decision making depends on equilibrium selection.
    Keywords: information aggregation, strategic voting, expert information
    JEL: D72 D82 D83
    Date: 2013–08–02
  10. By: Moreno-Garrido, Luis José Blas (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica)
    Abstract: I propose a new utility function based on the relative aversion to injustice to explain why, in classical bargaining games, classical equilibria do not hold when money is not windfall, but it is result of the effort.
    Keywords: Distribution; Equity; Justice; Altruism; Property Rights
    JEL: D30 D63 D64 P14
    Date: 2013–08–02
  11. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We show that financial innovations that change the collateral capacity of assets in the economy can affect investment even in the absence of any shift in utilities, productivity, or asset payoffs. First we show that the ability to leverage an asset by selling non-contingent promises can generate over-investment compared to the Arrow-Debreu level. Second, we show that the introduction of naked CDS can generate under-investment with respect to the Arrow-Debreu level. Finally, we show that the introduction of naked CDS can robustly destroy competitive equilibrium.
    JEL: D52 D53 E44 G01 G11 G12
    Date: 2013–07

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