nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒08‒16
seven papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Trust in Cohesive Communities By Felipe Balmaceda; Juan Esconar
  2. Afriat from MaxMin By John Geanakoplos
  3. Minimum Coverage Regulation in Insurance Markets By Daniel McFadden; Carlos Noton; Pau Olivella
  4. Waiting For Signalling Quality By Hikmet Gunay
  5. The Informational Benefit of Being Discriminated By Catherine Gendron-Saulnier; Marc Santugini
  6. Multilayered Tournaments By Junichiro Ishida
  7. The perception of distributive fairness and optimal taxation under uncertainty By Weinreich, Daniel

  1. By: Felipe Balmaceda; Juan Esconar
    Abstract: This paper studies which social networks maximize trust and cooperation when agreements are implicitly enforced. We study a repeated trust game in which trading opportunities arise exogenously and the social network determines the information transmission technology. We show that cohesive communities, modeled as social networks of complete components, emerge as the optimal community design. Cohesive communities generate some degree of common knowledge of transpired play that allows players to coordinate their punishments and, as a result, yield relatively high equilibrium payoffs. Our results provide an economic rationale for the commonly argued optimality of cohesive social networks.
    Date: 2013
  2. By: John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: Afriat's original method of proof is restored by using the minmax theorem.
    Keywords: Afriat's Theorem, Revealed preference, GARP
    JEL: D11 C60
    Date: 2013–08
  3. By: Daniel McFadden; Carlos Noton; Pau Olivella
    Abstract: We study the consequences of imposing a minimum coverage in an insurance market where enrollment is mandatory and agents have private information on their true risk type. If the regulation is not too stringent, the equilibrium is separating in which a single firm monopolizes the high risks while the rest attract the low risks, all at positive profits. Hence individuals, regardless of their type, "subsidize" insurers. If the legislation is sufficiently stringent the equilibrium is pooling, all firms just break even and low risks subsidize high risks. None of these results require resorting to non-Nash equilibrium notions.
    Date: 2013
  4. By: Hikmet Gunay
    Abstract: When a durable good of uncertain quality is introduced to the market, some consumers strategically delay their buying to the next period with the hope of learning the unknown quality. We analyze the monopolist's pricing and "waiting" strategies when consumers have strategic delay incentives. We show when the monopolist offers introductory low prices in pooling equilibria. We also find two types of separating equilibria: one where high type signals its quality by choosing a different price than the low type in the first period, and another where the high-type monopolist announces the product in the first period and waits to sell only in the second period. Waiting creates a credible cost for signalling; hence, the monopolist uses it as a signalling device.
    Date: 2013–07
  5. By: Catherine Gendron-Saulnier; Marc Santugini (IEA, HEC Montréal)
    Abstract: We consider a monopoly supplying a homogeneous good to two separate markets with different demands. In one of the markets, some buyers do not know the quality of the good, but learn about it from observing prices. Under noisy demand, third-degree price discrimination is shown to alter the informational content of the price-signals received by the uninformed buyers. Specifically, discriminatory pricing have informational benefits over uniform pricing, i.e., the posterior beliefs of the uninformed buyers have a smaller bias and a lower variance.
    Keywords: Market segmentation, Monopoly, Quality of information, Signaling, Third-degree price discrimination
    JEL: D82 D83 L12 L15
    Date: 2013–07
  6. By: Junichiro Ishida
    Abstract: In many facets of life, we often face competition with a multilayered structure in which different levels of competition take place simultaneously. In this paper, we propose a new class of tournament models, called multilayered tournaments, to capture this type of competitive environment. Among other things, we find that: (i) an increase in individual incentives, holding the level of team incentives fixed, can lower total effort as it induces inefficient allocation of effort; (ii) the optimal level of individual incentives depends on and is complementary to the level of team incentives. The analysis illuminates the essential role of economic subgroups, such as firms, in achieving some degree of cooperation in an inherently competitive environment, and provides an explanation for why high-powered incentives are more common in market arrangements than within firms.
    Date: 2013–08
  7. By: Weinreich, Daniel
    Abstract: This paper incorporates a preference for distributive fairness (inequity aversion) into the analysis on optimal redistributive taxation under uncertainty. We can show that introducing or strengthening the taste for distributive fairness does not affect the socially optimal tax rate (social insurance) directly. This merely works through a reduction in individual risk taking (increase in self-insurance) induced by inequity aversion. If the efficacy of self-insurance is sufficiently small, this renders taxation more desirable and therefore enhances the socially optimal tax rate. In other words, self-insurance should be complemented by social insurance in order to impair the psychic disutility stemming from income inequality. Turning to the case of moral hazard it can be shown that optimal self-insurance efforts are again increasing with the strength of inequity aversion while the effect on the optimal tax rate remains unclear.
    Keywords: distributive fairness; inequity aversion; optimal taxation; redistribution; uncertainty
    JEL: D63 H21 H53
    Date: 2013–08

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