nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒08‒31
fifteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. On Apparent Irrational Behaviors : Interacting Structures and the Mind By Pierre Gosselin; Aïleen Lotz; Marc Wambst
  2. Aggregation of coherent experts opinion: a tractable extreme-outcomes consistent rule By Marcello Basili; Alain Chateauneuf
  3. Status, incentives and random favouritism By Dey, Oindrila; Banerjee, Swapnendu
  4. Bargaining order and delays in multilateral bargaining with asymmetric sellers By Amit Kumar Maurya; Shubhro Sarkar
  5. Strategic Generation Capacity Choice under Demand Uncertainty: Analysis of Nash Equilibria in Electricity Markets By Gürkan, G.; Ozdemir, O.; smeers, Y.
  6. Almost Stochastic Dominance and Moments By Guo, Xu; Wong, Wing-Keung; Zhu, Lixing
  7. Aggregation of not necessarily independent opinions By Marcello Basili; Luca Pratelli
  8. Limited higher order beliefs and the welfare effects of public information By Camille Cornand; Frank Heinemann
  9. Language, Meaning, and Games: Comment By Heller, Yuval
  10. Strategic Positioning of Goods in a Market with a Niche By Eleftherios Zacharias
  11. How status concerns can make us rich and happy By Strulik, Holger
  12. Optimal Pricing and Quality of Academic Journals and the Ambiguous Welfare Effects of Forced Open Access: A Two-sided Model By Mueller-Langer, Frank; Watt, Richard
  13. Default and Renegotiation in PPP Auctions By Matthew Ryan; Flávio Menezes
  14. Intermediating Adverse Selection By Vincent Glode; Christian Opp
  15. Booms and Busts with dispersed information By Kenza Benhima

  1. By: Pierre Gosselin (IF - Institut Fourier - CNRS : UMR5582 - Université Joseph Fourier - Grenoble I); Aïleen Lotz (Cerca Trova - Aucune); Marc Wambst (IRMA - Institut de Recherche Mathématique Avancée - CNRS : UMR7501 - Université de Strasbourg)
    Abstract: We develop a general method to solve models of interactions between multiple and possibly strategic agents. Our model explains apparently irrational or biased behaviors in a person. We argue that these actions could result from several rational structures having different goals. Our main example is a model of three agents, "conscious", "unconscious", and "body". Our main result states that, for an agent whose unconscious and conscious goals differ, the unconscious may influence the conscious, either directly or indirectly, via a third agent, the body. This three-agent model describes behaviors such as craving, exces- sive smoking, or sleepiness, to delay or dismiss a task. One of the main result shows that the unconscious' strategic action crucially depends on whether the conscious' actions are complementary in time. When complementary, and if the conscious is not sensitive to un- conscious' messages, the unconscious may drive the conscious towards its goals by blurring physical needs. When not complementary, the unconscious may more easily reach his goal by influencing the conscious, be it directly or indirectly.
    Keywords: dual agent; conscious and unconscious; rationality; multi-rationality; consis- tency; choices and preferences; multi-agent model
    Date: 2013–08–13
  2. By: Marcello Basili; Alain Chateauneuf
    Abstract: The paper defines a consensus distribution with respect to experts’ opinions by a multiple quantile utility model. The paper points out that the Steiner Point is the representative consensus probability. The new rule of experts’ opinions aggregation, that can be evaluated by the Shapley value in a simple way, is prudential and coherent.
    Keywords: Ambiguity, Aggregation, Steiner Point, Multiple Priors, Quantiles
    Date: 2013–06
  3. By: Dey, Oindrila; Banerjee, Swapnendu
    Abstract: The paper identifies a condition under which favouritism is beneficial to the principal even when the favoured agent is selected randomly. This paper also characterizes how the optimal incentive scheme changes in presence of random favouritism. Using a moral hazard framework with limited liability it is shown that in presence of favouritism principal can optimally decrease monetary incentive when the potentially favoured group size is small. Inspite of a fall in optimal effort the paper predicts that favouritism can emerge as an optimal outcome when return of the firm is low.
    Keywords: Favouritism, status-incentives, non-verifiability, moral hazard, optimal contract
    JEL: D86 L14 L20
    Date: 2013–06–01
  4. By: Amit Kumar Maurya (Indira Gandhi Institute of Development Research); Shubhro Sarkar (Indira Gandhi Institute of Development Research)
    Abstract: In a multilateral bargaining problem with one buyer and two heterogeneous sellers owning perfectly complementary units, we find that there exists an equilibrium which leads to inefficient delays when the buyer negotiates with the higher-valuation seller first and where players are extremely impatient. We also find that the buyer prefers to negotiate with the lower-valuation seller first, except in an equilibrium where both the buyer and the lower-valuation seller choose to play strategies that lead negotiations between them to hold out.
    Keywords: Multilateral bargaining, Bargaining order, Asymmetric sellers, Complete information, Subgame Perfection
    JEL: C72 C78
    Date: 2013–08
  5. By: Gürkan, G.; Ozdemir, O.; smeers, Y. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We analyze a two-stage game of strategic firms facing uncertain demand and exerting market power in decentralized electricity markets. These firms choose their generation capacities at the first stage while anticipating a perfectly competitive future electricity spot market outcome at the second stage; thus it is a closed loop game. In general, such games can be formulated as an equilibrium problem with equilibrium constraints (EPEC) and examples have been posed in the literature that have multiple or no equilibria. Therefore, it is of interest to define general sets of conditions under which solutions exist and are unique, which would enhance the value of such models for policy andmarket intelligence purposes. In this paper, we consider various types of such a closed loop model regarding the underlying price-demand relations (elastic and inelastic demand), the assumed demand uncertainty with a broad class of continuous distributions, and any finite number of players with symmetric or asymmetric costs. We establish sufficient conditions for the random demand’s probability distribution which guarantee existence and uniqueness of equilibria in most of the cases of this closed loop model. We identify a broad class of commonly used continuous probability distributions satisfying these conditions.
    Keywords: electricity markets;strategic generation investment modeling;demand uncertainty;existence and uniqueness of equilibrium.
    JEL: C62 C68 C72 D43 L94
    Date: 2013
  6. By: Guo, Xu; Wong, Wing-Keung; Zhu, Lixing
    Abstract: This paper first extends the theory of almost stochastic dominance (ASD) to the first four orders. We then establish some equivalent relationships for the first four orders of the ASD. Using these results, we prove formally that the ASD definition modified by Tzeng et al.\ (2012) does not possess any hierarchy property. Thereafter, we conclude that when the first four orders of ASD are used in the prospects comparison, risk-averse investors prefer the one with positive gain, smaller variance, positive skewness, and smaller kurtosis. This information, in turn, enables decision makers to determine the ASD relationship among prospects when they know the moments of the prospects. At last, we discuss the necessary and sufficient conditions for different orders the ASD and the moments of the prospects.
    Keywords: Stochastic dominance; almost stochastic dominance; risk aversion, mean, variance, skewness
    JEL: C0 D81 G11
    Date: 2013–08–21
  7. By: Marcello Basili; Luca Pratelli
    Abstract: We consider an aggregation scheme of opinions expressed through different probability distributions or multiple priors decision model. The decision-maker adopts entropy maximization as a measure of risk diversification and a rational form of prudence for valuing uncertain outcomes. We show a new aggregation rule formalization based on the idea that the decision-maker has a more reliable set of outcomes called ordinary and two fat tails that include more ambiguous and extreme events.
    Keywords: Ambiguity, Aggregation, Entropy, Multiple Priors, Quantiles
    JEL: D81
    Date: 2013–06
  8. By: Camille Cornand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Frank Heinemann (Fachgebiet Makroökonomik - Technische Universität Berlin)
    Abstract: In games with strategic complementarities, public information about the state of the world has a larger impact on equilibrium actions than private information of the same precision, because the former is more informative about the likely behavior of others. This may lead to welfare-reducing 'overreactions' to public signals as shown by Morris and Shin (2002). Recent experiments on games with strategic complementarities show that subjects attach a lower weight to public signals than theoretically predicted. Aggregate behavior can be better explained by a cognitive hierarchy model where subjects employ limited levels of reasoning. This paper analyzes the welfare effects of public information under such limited levels of reasoning and argues that for strategies according with experimental evidence, public information that is more precise than private information cannot reduce welfare, unless the policy maker has instruments that are perfect substitutes to private actions.
    Keywords: coordination games; strategic uncertainty; private information; public information; higherorder beliefs; levels of reasoning
    Date: 2013–08–28
  9. By: Heller, Yuval
    Abstract: Demichelis and Weibull (2008 AER) show that adding lexicographic lying costs to coordination games with cheap talk yields a sharp prediction: only the efficient outcome is evolutionarily stable. I demonstrate that this result is caused by the discontinuity of preferences, rather than by small lying costs per se.
    Keywords: Lexicographic preferences, evolutionary stability, cheap talk.
    JEL: C73
    Date: 2013–08–29
  10. By: Eleftherios Zacharias (Department of Economics, Athens University of Economics and Bussiness, Greece; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We use the Hotelling's model allowing for a "gap" in the consumers' preferences. As a result, the characteristics space is divided in two separate intervals. The largest one represents the main market, and the smallest represents a niche. We find that in this set up the principle of maximum differentiation may not hold. We also, examine the incentives of a firm to adopt a niche marketing strategy. That is, to relocate and price its product so that to maximize its profits from the niche market only. We show that, as the reservation value of the consumers for the product increases, it is more profitable for a firm to adopt a nich marketing strategy.
    Keywords: Hotelling model, niche marketing, market segmentation
    JEL: M31 M21 L13
    Date: 2013–07
  11. By: Strulik, Holger
    Abstract: This paper considers an overlapping generations model of economic growth populated by two types of individuals. Competitive types compare future consumption (i.e. wealth) with the mean. Self-sufficient types derive utility simply from their own consumption and do not compare themselves with others. I derive a condition under which the utility (happiness) of both types increases when the economy is populated by a larger share of competitive types. In the long-run the condition is always fulfilled when the economy is capable of economic growth. The reason for this phenomenon is that competitive types generate higher savings and thus higher aggregate capital stock and income per capita, which raises utility of both types. I show that the result is robust to the consideration of endogenous work effort and that a sufficiently high share of competitive types in a society can be inevitable for long-run economic growth to exist. --
    Keywords: status preferences,happiness,economic growth
    JEL: D90 E21 O40
    Date: 2013
  12. By: Mueller-Langer, Frank; Watt, Richard
    Abstract: We analyse optimal pricing and quality of a monopolistic journal and the optimality of open access in a two-sided model. The predominant aspect of the model that determines the quality levels at which open access is optimal is the nature of the (non-linear) externalities between readers and authors in a journal. We show that there exist scenarios in which open access is a feature of high-quality journals. Besides, we find that the removal of copyright (and thus forced open access) will likely increase both readership and authorship, will decrease journal profits, and may increase social welfare.
    Keywords: Two-sided markets; academic journals; open access; removal of copyright; welfare effects
    JEL: L11 L82 O34
    Date: 2013–08–21
  13. By: Matthew Ryan (The University of Auckland); Flávio Menezes (School of Economics, The University of Queensland)
    Abstract: The winners of auctions for PPP contracts, especially for major infrastructure projects such as highways, often enter financial distress, requiring the concession to either be re-allocated or re-negotiated. We build a simple model to identify the causes and consequences of such problems. In the model, firms bid toll charges for a fixed-term high- way concession, with the lowest bid winning the auction. The winner builds and operates the highway for the fixed concession period. Each bidder has a privately known construction cost and there is common uncertainty regarding the level of demand that will result for the com- pleted highway. Because it is costly for the Government to re-assign the concession, it is exposed to a hold-up problem, which bidders can exploit through the strategic use of debt. Each firm chooses its finan- cial structure to provide optimal insurance against downside demand risk: the credible threat of default is used to extort an additional transfer payment from the Government. We derive the optimal finan- cial structure and equilibrium bidding behaviour and show that (i) the auction remains efficient, but (ii) bids are lower than they would be if all bidders were cash financed, and (iii) the more efficient the winning firm, the more likely it is to require a Government bail-out.
    Date: 2013–08–20
  14. By: Vincent Glode (Wharton School); Christian Opp (University of Pennsylvania)
    Abstract: We propose a parsimonious model of over-the-counter trading under asymmetric information to study the presence of intermediary chains that stand between well informed parties and uninformed market participants. Multiple moderately informed intermediaries can fulfill an important economic role of "smoothing" adverse selection. Informed market participants may prefer to trade through these intermediary chains as they improve trade efficiency but also reduce the surplus accruing to uninformed traders. Our model makes novel predictions about optimal network formation when adverse selection problems impede the efficiency of trade.
    Date: 2013
  15. By: Kenza Benhima
    Abstract: This paper lays down a model where dispersed information generates booms and busts in economic activity. Boom-and-bust dynamics start when firms are initially over-optimistic about demand due to an aggregate noise shock in their signals. Consequently, they over-produce, which generates a boom. This however also depresses their mark-ups, which, to firms, signals low demand and overturns their expectations, generating a bust. This emphasizes a novel role for imperfect common knowledge: dispersed information makes firms ignorant about their competitors' actions, which makes them confuse high noise-driven supply with low fundamental demand. Boom-and-bust episodes are more dramatic when the aggregate noise shocks are more unlikely and when congestion effects are stronger.
    Keywords: Imperfect Common Knowledge; Expectations; Recessions
    JEL: E32 D83 D52
    Date: 2013–08

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