nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒11‒16
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Implementation of Communication Equilibria by Correlated Cheap Talk : the Two-Player Case By Forges, Françoise; Vida, Péter
  2. The Power of Whispers: A Theory of Rumor, Communication and Revolution By Yang Lu; Wing Suen; Heng Chen
  3. Extremal Information Structures in the First Price Auction By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  4. Trust and Manipulation in Social Networks. By Manuel Förster; Ana Mauleon; Vincent Vannetelbosch
  5. Altruism in Networks By Renaud Bourlès; Yann Bramoullé
  6. Preferences With Grades of Indecisiveness By Stefania Minardi; Andrei Savochkin
  7. Verifiable and Nonverifiable Information in a Two-Period Agency Problem By Budde, Jörg
  8. Chance Theory: A Separation of Riskless and Risky Utility By Ulrich Schmidt; Zank Horst
  9. Good news and bad news in subjective performance evaluation By Budde, Jörg
  10. Two-sided reputation in certification markets By Bouvard, Matthieu; Levy, Raphael
  11. The Logical Consistency of Time Inconsistency: A Theory of Forward-Looking Behavior By Simone Galperti; Bruno Strulovici
  12. Over-caution of large committees of experts By Midjord, Rune; Rodríguez Barraquer, Tomás; Valasek, Justin
  13. A Traffic Jam Theory of Recessions By Jennifer La'O
  14. Auctions with imperfect commitment when the reserve may serve as a signal By Byoung Heon Jun; Elmar G. Wolfstetter
  15. An application of wage bargaining to price negotiation with discount factors varying in time. By Ahmet Ozkardas; Agnieszka Rusinowska
  16. Incentive Compatibility and Differentiability New Results and Classic Applications By Mailath, George J.; von Thadden, Ernst-Ludwig
  17. Collective risk aversion By Jouini, Elyès; Napp, Clotilde; Nocetti, Diego
  18. A simple equilibrium model for a commodity market with spot trades and futures contracts By Ekeland, Ivar; Lautier, Delphine; Villeneuve, Bertrand
  19. Network Neutrality, Access to Content and Online Advertising By Antonio Russo; Anna D’Annunzio
  20. Ideology and endogenous constitutions By Riboni, Alessandro
  21. Uniform Folk Theorems in Repeated Anonymous Random Matching Games By Joyee Deb; Julio González Díaz; Jérôme Renault

  1. By: Forges, Françoise; Vida, Péter
    Abstract: We show that essentially every communication equilibrium of any finite Bayesian game with two players can be implemented as a strategic form correlated equilibrium of an extended game, in which before choosing actions as in the Bayesian game, the players engage in a possibly fin nitely long (but in equilibrium almost surely fi nite), direct, cheap talk.
    Keywords: Bayesian game; pre-play communication; cheap talk; communication equilibrium; correlated equilibrium; Two Player;
    JEL: C72 D70 C73
    Date: 2013–01
  2. By: Yang Lu (Hong Kong University of Science and Technology); Wing Suen (The University of Hong Kong); Heng Chen (University of Hong Kong)
    Abstract: We study the role rumors play in revolutions using a global game model. Agents with diverse private information rationally evaluate the informativeness of rumors about the regime strength. Without communication among agents, wild rumors are discounted and agents are generally less responsive to rumors than to trustworthy news. When agents can exchange views on the informativeness of rumors, a rumor against the regime would coordinate a larger mass of attackers than that without communication. The effect of communication can be so large that rumors can have a greater impact on mobilization than does fully trustworthy information.
    Date: 2013
  3. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, Princeton University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We study how the outcomes of a private-value first price auction can vary with bidders' information, for a fixed distribution of private values. In a two bidder, two value, setting, we characterize all combinations of bidder surplus and revenue that can arise, and identify the information structure that minimizes revenue. The extremal information structure that minimizes revenue entails each bidder observing a noisy and correlated signal about the other bidder's value. In the general environment with many bidders and many values, we characterize the minimum bidder surplus of each bidder and maximum revenue across all information structures. The extremal information structure that simultaneously attains these bounds entails an efficient allocation, bidders knowing whether they will win or lose, losers bidding their true value and winners being induced to bid high by partial information about the highest losing bid. Our analysis uses a linear algebraic characterization of equilibria across all information structures, and we report simulations of properties of the set of all equilibria.
    Keywords: First price auction, Mechanism design, Robust predictions, Private information, Bayes correlated equilibrium
    JEL: C72 D44 D82 D83
    Date: 2013–11
  4. By: Manuel Förster (CORE - Université Catholique de Louvain et Centre d'Economie de la Sorbonne); Ana Mauleon (CORE - Université Catholique de Louvain et CEREC - Université Saint-Louis - Bruxelles); Vincent Vannetelbosch (Università di Trento and LEM Scuola Superiore Sant'Anna)
    Abstract: We investigate the role of manipulation in a model of opinion formation where agents have opinions about some common question of interest. Agents repeatedly communicate with their neighbors in the social network, can exert some effort to manipulate the trust of others, and update their opinions taking weighted averages of neighbors' opinions. The incentives to manipulate are given by the agents' preferences. We show that manipulation can modify the trust structure and lead to a connected society, and thus, make the society reaching a consensus. Manipulation fosters opinion leadership, but the manipulated agent may even gain influence on the long-run opinions. In sufficiently homophilic societies, manipulation accelerates (slows down) convergence if it decreases (increases) homophily. Finally, we investigate the tension between information aggregation and spread of misinformation. We find that if the ability of the manipulating agent is weak and the agents underselling (overselling) their information gain (lose) overall influence, then manipulation reduces misinformation and agents converge jointly to more accurate opinions about some underlying true state.
    Keywords: Social networks, trust, manipulation, opinion leadership, consensus, Wisdom of crowds.
    JEL: D83 D85 Z13
    Date: 2013–09
  5. By: Renaud Bourlès (Ecole Centrale Marseille (Aix-Marseille School of Economics), CNRS & EHESS); Yann Bramoullé (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: We provide the first theoretical analysis of altruism in networks. Agents are embedded in a fixed, weighted network and care about their direct friends. Given some initial distribution of incomes, they may decide to support their poorer friends. We study the resulting non-cooperative transfer game. Our analysis highlights the importance of indirect gifts, where an agent gives to a friend because his friend himself has a friend in need. We uncover four main features of this interdependence. First, we show that there is a unique profile of incomes after transfers, for any network and any utility functions. Uniqueness in transfers holds on trees, but not on arbitrary networks. Second, there is no waste in transfers in equilibrium. In particular, transfers flow through indirect paths of highest altruistic strength. Third, a negative shock on one agent cannot benefit others and tends to affect socially closer agents first. In addition, an income redistribution that decreases inequality ex-ante can increase inequality ex-post. Fourth, altruistic networks decrease income inequality. In contrast, more altruistic or more homophilous networks can increase inequality.
    Keywords: Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS
    Date: 2013–11
  6. By: Stefania Minardi; Andrei Savochkin
    Abstract: Departing from the traditional approach to modeling an agent who finds it difficult to make clear-cut comparisons between alternatives, we introduce the notion of graded preferences: Given two alternatives, the agent reports a number between 0 and 1, which reflects her inclination to prefer the first option over the second or, put differently, how confident she is about the superiority of the first one. In the classical framework of uncertainty, we derive a representation of a graded preference by a measure of the set of beliefs that rank one option better than the other. Our model is a refinement of Bewley’s (1986) model of Knightian uncertainty: It is based on the same object of representation — the set of beliefs — but provides more information about how the agent compares alternatives. We also define and characterize, in terms of the representation, the notion of one agent being “more decisive” than another.
    Keywords: incomplete preferences, Knightian uncertainty, graded preferences, confidence, decisiveness
    JEL: D81
    Date: 2013
  7. By: Budde, Jörg
    Abstract: I examine how a firm’s opportunity to verify information influences the joint use of verifiable and unverifiable information for incentive contracting. I employ a simple two-period agency model, in which contract frictions arise from limited liability and the potential unverifiability of the principal’s information about the agent’s action. With short-term contract, the principal benefits from both a more informative and a more conservative verification of his private information. With long-term contracts, he may prefer a less informative verification, but his preference for a conservative verification persists.
    Date: 2013–10–23
  8. By: Ulrich Schmidt; Zank Horst
    Abstract: We present a preference foundation for Chance Theory (CT), a model of decision making under uncertainty where the evaluation of an act depends distinctively on its lowest outcome. This outcome is evaluated with the riskless value function u and the potential increments over it are evaluated by subjective expected utility with a risky utility function u. In contrast to earlier approaches with models that aimed at separating riskless and risky utility, CT does not violate basic rationality principles like first-order stochastic dominance or transitivity. Decision makers with CT-preferences always prefer the expected value of a lottery to the latter, so they are weakly risk averse. Besides explaining behavioral irregularities like the expected utility paradoxes of Allais and Rabin, CT also separates risk attitude in the strong sense from attitude towards wealth. Risk attitude is completely determined by the curvature of vuand is independent of the value function v. Conversely, attitude towards wealth is reflected solely through the curvature of v without imposing constraints on u
    Keywords: decision theory, expected utility, riskless utility for wealth, risky utility for money, preference, foundation, prudence
    JEL: D81
    Date: 2013–10
  9. By: Budde, Jörg
    Abstract: Earlier studies show that contracts under subjective performance evaluation are dichotomous and punish only worst performance. I show that with limited liability payments need not be binary. More importantly, if the agent earns a rent from limited liability, the optimal contract distinguishes only signals of good news and bad news of the agent’s action.
    Keywords: bonus; monotone likelihood ratio; wage compression
    JEL: D82 M52 M54
    Date: 2013–09
  10. By: Bouvard, Matthieu; Levy, Raphael
    Abstract: We consider a market where privately informed sellers resort to certification to overcome adverse selection. There is uncertainty about the certifier's ability to generate accurate information. The profit of a monopolistic certifier is an inverted U-shaped function of his reputation for accuracy: being perceived as more precise allows to attract more good sellers but a high expected precision also deters bad sellers. Since the certifier tries to reach a balanced reputation to attract both types, reputation has a disciplining effect when the certifier is perceived as insufficiently accurate, but gives incentives to decrease precision when he is perceived as “too" accurate. The impact of competition depends on whether sellers “multihome" or “singlehome". Under singlehoming, certifiers compete to attract good sellers, which makes higher reputation more valuable. Multihoming makes higher reputations less desirable because the competitor exerts a negative externality by providing extra information. Therefore, singlehoming attenuates bad reputation effects, while multihoming exacerbates inefficiencies.
    Date: 2013–10
  11. By: Simone Galperti; Bruno Strulovici
    Abstract: This paper argues that, to be forward-looking in a logically consistent sense, a decision maker must take account of his overall well-being, not just his instantaneous utility, in all future periods. However, such a decision-maker is necessarily time inconsistent. The paper explores the relationship between how a decision-maker discounts well-being and how he discounts instantaneous utility. It also provides simple axiomatizations of preferences that exhibit forward-looking behavior, including quasi-hyperbolic discounting (Phelps and Pollack (1968) [18]; Laibson (1997) [12]). Finally, the paper provides a rigorous way to think about welfare criteria in models with time inconsistent agents.
    Keywords: time inconsistency, forward-looking behavior, hyperbolic discounting, beta-delta discounting, anticipations, welfare criterion. JEL Classification: D01, D60, D90
    Date: 2013–10–29
  12. By: Midjord, Rune; Rodríguez Barraquer, Tomás; Valasek, Justin
    Abstract: We provide an explanation for why committees may behave over-cautiously. A committee of experts makes a decision on a proposed innovation on behalf of 'society'. Each expert's signal about the innovation's quality is generated by the available evidence and the best practices of the experts' common discipline, which is only indirectly related to the true state of the world. In addition to a payoff linked to the adequateness of the committee's decision, each expert receives a disesteem payoff if he/she voted in favor of an ill-fated innovation. No matter how small the disesteem payoffs are, information aggregation fails in large committees: under any majority rule, the committee rejects the innovation almost surely. -- Wir bieten eine Erklärung für die Frage an, warum Gremien unter bestimmten Umständen übervorsichtig agieren. Ein Expertengremium entscheidet stellvertretend für 'die Gesellschaft' über eine ihm vorgeschlagene Innovation. Die Bewertung der Qualität dieser Innovation durch jeden Experten erfolgt auf der Grundlage dessen, was in der gemeinsamen Disziplin als allgemein evident und als 'best practice' angesehen wird. Beides korreliert jedoch nur indirekt mit der tatsächlichen Qualität der Innovation. Neben der Entlohnung, die von der Qualität der Entscheidung des Komitees abhängt, enthält der Nutzen eines jeden Experten eine negative Komponente, z. B. in Form von Geringschätzung, falls er / sie für eine erfolglose Innovation votiert hat. Dabei zeigt sich, dass in großen Gremien das Aggregieren von Informationen scheitert, egal wie klein die negative Nutzenkomponente sein mag: unter jeder beliebigen Mehrheitsregel lehnt das Gremium die Innovation mit an Sicherheit grenzender Wahrscheinlichkeit ab.
    Keywords: Committees,Information aggregation,Disesteem payoffs
    JEL: D71 D72
    Date: 2013
  13. By: Jennifer La'O (University of Chicago)
    Abstract: I construct a dynamic economy in which agents are interconnected: the output produced by one agent is the consumption good of another. I show that this economy can generate recessions which resemble traffic jams. At the micro level, each individual agent waits for his own income to increase before he increases his spending. However, his spending behavior affects the income of another agent. Thus, the spending behavior of agents during recessions resembles the stop-and-go behavior of vehicles during traffic jams. Furthermore, these traffic jam recessions are not caused by large aggregate shocks. Instead, in certain parts of the parameter space, a small pertubation or individual shock is amplified as its impact cascades from one agent to another. These dynamics eventually result in a stable recessionary equilibrium in which aggregate output, consumption, and employment remain low for many periods. Thus, much like in traffic james, agents cannot identify any large exogenous shock that caused the recession. Finally, I provide conditions under which these traffic jam recessions are most likely to occur.
    Date: 2013
  14. By: Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea); Elmar G. Wolfstetter (Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str. 1, 10178 Berlin, Germany)
    Abstract: If bidders are uncertain whether the auctioneer sticks to the announced reserve, some bidders respond by strategic non-participation, speculating that the auctioneer may revoke the reserve. However, the reserve inadvertently signals the auctioneer¡¯s type, which drives a unique separating and a multitude of pooling equilibria. If one eliminates belief systems that violate the¡°intuitive criterion¡±, one obtains a unique equilibrium reserve price equal to the seller¡¯s own valuation. Paradoxically, even if bidders initially believe that the auctioneer is bound by his reserve almost with certainty, commitment has no value.
    Keywords: Auctions, mechanism design
    JEL: D21 D43 D44 D45
    Date: 2013
  15. By: Ahmet Ozkardas (Turgut Özal Üniversitesi et Centre d'Economie de la Sorbonne); Agnieszka Rusinowska (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We consider a non-cooperative price bargaining model between a monopolistic producer and a monopsonic consumer. The innovative element that our model brings to the existing literature on price negotiation concerns the parties' preferences which are not expressed by constant discount rates, but by sequences of discount factors varying in time. We assume that the sequence of discount rates of a party can be arbitrary, with the only restriction that the infinite series that determines the utility for the given party must be convergent. Under certain parameters, the price negociation model coincides with wage bargaining with the exogenous always strike decision. We determine the unique subgame perfect equilibrium in this model for no-delay strategies independent of the former history of the game. Then we relax the no-delay assumption and determine the highest equilibrium payoff of the seller and the lowest equilibrium payoff of the buyer for the general case. We show that the no-delay equilibrium strategy profiles support these extreme payoffs.
    Keywords: Price bargaining, alternating offers, varying discount rates, subgame perfect equilibrium.
    JEL: C78 J52 E31
    Date: 2013–10
  16. By: Mailath, George J.; von Thadden, Ernst-Ludwig
    Abstract: We provide several generalizations of Mailath's (1987) result that in games of asymmetric information with a continuum of types incentive compatibility plus separation implies differentiability of the informed agent's strategy. The new results extend the theory to classic models in finance such as Leland and Pyle (1977), Glosten (1989), and DeMarzo and Duffie (1999), that were not previously covered.
    Keywords: Adverse selection; separation; differentiable strategies; incentive compatibility
    JEL: C60 C73 D82 D83 G14
    Date: 2013–01–21
  17. By: Jouini, Elyès; Napp, Clotilde; Nocetti, Diego
    Abstract: In this paper we analyse the risk attitude of a group of heterogenous agents and we develop a theory of comparative collective risk tolerance. In particular, we characterize how shifts in the distribution of individual levels of risk tolerance affect the representative agent's degree of risk tolerance. In the model with efficient risk – sharing and two agents (e.g. a household) with isoelastic preferences we show that an increase of the level of risk tolerance of one of the agents might have an ambiguous impact on the aggregate level of risk tolerance; the latter increases for some levels of aggregate wealth while it decreases for other levels of aggregate wealth. Specifically, there are two possible shapes for aggregate risk tolerance as a function of the risk tolerance level of one of the agents: increasing curve or increasing then decreasing curve. For more general populations we characterize the effect of first order like shifts (individual levels of risk tolerance more concentrated on high values) and second order like shifts (more dispersion on individual levels of risk tolerance) on the collective level of risk tolerance. We also evaluate how shifts in the distribution of individual levels of risk tolerance impact the collective level of risk tolerance in a framework with exogenous egalitarian sharing rules. Our results permit to better characterize differences in risk taking behavior between groups and individuals and among groups with different distribution of risk preferences.
    Keywords: collective risk; heterogenous agents; risk tolerance; isoelastic preferences; aggregate wealth; risk preferences;
    JEL: D1 D81
    Date: 2013
  18. By: Ekeland, Ivar; Lautier, Delphine; Villeneuve, Bertrand
    Abstract: We propose a simple equilibrium model, where the physical and the derivative markets of the commodity interact. There are three types of agents: industrial pro- cessors, inventory holders and speculators. Only the two first of them operate in the physical market. All of them, however, may initiate a position in the paper market, for hedging and/or speculation purposes. We give the necessary and sufficient con- ditions on the fundamentals of this economy for a rational expectations equilibrium to exist and we show that it is unique. This is the first contribution of the paper. Our model exhibits a surprising variety of behaviours at equilibrium, and our second contribution is that the paper offers a unique generalized framework for the analysis of price relationships. The model indeed allows for the generalization of hedging pressure theory, and it shows how this theory is connected to the storage theory. Meanwhile, it allows to study simultaneously the two main economic functions of derivative markets: hedging and price discovery. In its third contribution, through the distinction between the utility of speculation and that of hedging, the model illustrates the interest of a derivatives market in terms of the welfare of the agents.
    Keywords: Derivative markets; equilibrium; Industrial processors; inventory holders; speculator;
    JEL: D40 D81 D84 G13 Q00
    Date: 2013–05
  19. By: Antonio Russo (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Anna D’Annunzio (Sapienza University of Rome, Italy)
    Abstract: We investigate the implications of Network Neutrality regulation for Internet fragmentation. We model a two-sided market, where Content Providers (CPs) and consumers interact through Internet Service Providers (ISPs) and CPs sell consumers’ attention to advertisers. Under Network Neutrality, CPs can have their traffic delivered to consumers by ISPs for free, while in the Unregulated Regime they have to pay a (non-discriminatory) termination fee. In our model multiple impressions of an ad on a consumer are partially wasteful. Thus, equilibrium ad rates decrease when the audiences of CPs overlap. We show that universal distribution of content is always an equilibrium when Network Neutrality regulation is in place. In contrast, when competition among CPs strongly reduces their profits, in the Unregulated Regime ISPs can use termination fees to induce fragmentation and extract CPs’ extra profits. This occurs when repeated impressions of an ad rapidly lose value and consumers care for content availability to a relatively small extent. Our results suggest that the Unregulated Regime is never superior to Network Neutrality from a consumer surplus and social welfare point of view.
    Keywords: Network Neutrality, two-sided markets, Internet, advertising, fragmentation
    JEL: L1 D43 L13 L51
    Date: 2013–11
  20. By: Riboni, Alessandro
    Abstract: We study a legislature where decisions are made by playing an agenda-setting game. Legislators are concerned about their electoral prospects but they are also genuinely concerned for the legislature to make the correct decision. We show that when ideological polarization is positive but not too large (and the status quo is extremely inefficient), institutions in which the executive has either no constraints (autocracy) or many constraints (unanimity) are preferable to democracies that operate under an intermediate number of constraints (simple majority rule). When instead ideological polarization is large (and the status quo is only moderately inefficient), simple majority turns out to be preferable.
    Keywords: Majority rule; Position-taking preferences; Ideological polarization; Strategic interactions; Agenda-setting game;
    JEL: D7 D02
    Date: 2013
  21. By: Joyee Deb; Julio González Díaz; Jérôme Renault
    Date: 2013

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