nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒08‒23
five papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Attack, Defense and Contagion in Networks By S. Goyal; A. Vigier
  2. On the equivalence between Bayesian and dominant strategy implementation: the case of correlated types By Alexey Kushnir
  3. Informational Fragility of Dynamic Rational Expectations Equilibria By Giacomo Rondina
  4. Customer Relationship and Sales By Shouyong Shi
  5. Consumers' Imperfect Information and Price Rigidities By Jean-Paul L'Huillier

  1. By: S. Goyal; A. Vigier
    Abstract: Connections between individuals facilitate the exchange of goods, resources and information and create benefits. These connections may be exploited by adversaries to spread their attacks as well. What is the optimal way to design and defend networks in the face of attacks? We develop a model with a Designer and an Adversary. The Designer moves first and chooses a network and an allocation of defense resources across nodes. The Adversary then allocates attack resources on nodes and determines how successful attacks should navigate the network. Our main result is that, in a wide variety of circumstances, a star network with all defense resources allocated to the central hub node is optimal for the Designer. The Adversary targets undefended peripheral nodes; upon capture of these nodes the resources mount a concerted attack on the center.
    Keywords: Networks, computer security, Tullock contests, connectivity
    Date: 2013–08–15
  2. By: Alexey Kushnir
    Abstract: We consider general social choice environments with private values and correlated types. Each agent's matrix of conditional probabilities satisfies the full rank condition. We show that for any Bayesian incentive compatible mechanism there exists a dominant strategy incentive compatible mechanism that delivers the same interim expected utilities to all agents and generates at least the same social surplus. In addition, if there is a social alternative that is inferior to the other alternatives for all agents the dominant strategy incentive compatible mechanism matches exactly the social surplus. These results extend to environments with interdependent values satisfying the single crossing condition.
    Keywords: Mechanism design, Bayesian implementation, dominant strategy implementation, full surplus extraction, correlation
    JEL: D82
    Date: 2013–08
  3. By: Giacomo Rondina (University of California, San Diego)
    Abstract: We study the stability properties of Rational Expectations equilibria in dynamic models with incomplete information when the information set of agents is slightly perturbed. We show that equilibria where the endogenous variables resolve the information incompleteness can be informationally fragile, in the sense that a slight perturbation in the endogenous information set of the agents along the equilibrium path can lead to a break-down of the equilibrium dynamics. We then construct a class of dynamic rational expectations equilibria that are informationally stable for the same parameter space where other equilibria are informationally fragile. We show that an equilibrium that is informationally fragile is not least-squares learnable, while an equilibrium that is informationally stable always is. We finally present an application to a macroeconomic equilibrium model with productivity shocks and nominal rigidities under incomplete information that shows that both informationally fragile and stable equilibria can be obtained, with quite different shocks propagation properties.
    Date: 2013
  4. By: Shouyong Shi (University of Toronto)
    Abstract: I analyze a search equilibrium of a large market where customer relationship arises endogenously together with service priority and sales. A buyer is related to a seller if he just purchased from the seller, and the relationship is broken if the buyer fails to buy from the seller. I prove that there exists a unique equilibrium where it is optimal for a buyer to make repeat purchases from the related seller and optimal for a seller to give service priority to the related buyer. Moreover, a related seller posts a (high) regular price, and an unrelated seller posts a (low) sale price with the intention to revert to the regular price once he gains a relationship. The fraction of related sellers is endogenous. I examine how market conditions affect the stock of relationships, markups, the size and the duration of a sale.
    Date: 2013
  5. By: Jean-Paul L'Huillier (Einaudi Institute for Economics and Fina)
    Abstract: This paper develops a model of price rigidities and information diffusion in decentralized markets with private information. First, I provide a strategic microfoundation for price rigidities, by showing that firms are better off delaying the adjustment of prices when they face a high number of uninformed consumers. Second, in an environment where consumers learn from firms' prices, the diffusion of information follows a Bernoulli differential equation. Therefore, learning follows nonlinear dynamics. Third, the price rigidity produces an informational externality that affects welfare. Fourth, the dynamics of output and inflation are hump-shaped due to consumer learning.
    Date: 2013

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