nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒11‒29
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Logic of Backward Induction By Itai Arieli; Robert J. Aumann
  2. Rationality and Dynamic Consistency under Risk and Uncertainty By Hammond, Peter J; Zank, Horst
  4. Managerial Economics of Cheap Talk By Saori Chiba; Kaiwen Leong
  5. Decentralised Bilateral Trading in a Market with Incomplete Information By Kalyan Chatterjee; Kaustav Das
  6. Competition and uncertainty in a paper's news desk By Ascensi—n Andina D’az
  7. A Model of Influence Based on Aggregation Function By Michel Grabisch; Agnieszka Rusinowska
  8. Level r Consensus By Muhammad Mahajne; Oscar Volij
  9. Unique equilibrium in contests with incomplete information By Christian Ewerhart; Federico Quartieri
  10. Bargaining and Buyout By Joosung Lee
  11. A contest success function for ranking By Vesperoni, Alberto
  12. Achieving Cooperation under Privacy Concerns By Wioletta Dziuda; Ronen Gradwohl
  13. Skewed Noise By David Dillenberger; Uzi Segal
  14. The Hidden Value of Lying: Evasion of Guilt in Expert Advice By Kiryl Khalmetski
  15. Institutions, shared guilt, and moral transgression By Rothenhäusler, Dominik; Schweizer, Nikolaus; Szech, Nora
  16. On the coincidence of the Mas-Colell bargaining set and the core By Giménez-Gómez, José-Manuel; Vilella Bach, Misericòrdia
  18. Coalitional Approaches to Collusive Agreements in Oligopoly Games By Sergio Currarini; Marco A. Marini
  19. Formal and Informal Markets: A Strategic and Dynamic Perspective By Nejat Anbarci; Pedro Gomis-Porqueras; Marcus Pivato
  20. Multidimensional welfare rankings By Athanassoglou, Stergios

  1. By: Itai Arieli; Robert J. Aumann
    Abstract: The logic of backward induction (BI) in perfect information (PI) games has been intensely scrutinized for the past quarter century. A major development came in 2002, when P. Battigalli and M. Sinischalchi (BS) showed that an outcome of a PI game is consistent with common strong belief of utility maximization if and only if it is the BI outcome. Both BS's formulation, and their proof, are complex and deep. We show that the result continues to hold when utility maximization is replaced by a rationality condition that is even more compelling; more important, the formulation and proof become far more transparent, accessible, and self-contained.
    Date: 2013–11
  2. By: Hammond, Peter J (Department of Economics, University of Warwick); Zank, Horst (University of Manchester)
    Abstract: For choice with deterministic consequences, the standard rationality hypothesis is ordinality — i.e., maximization of a weak preference ordering. For choice under risk (resp. uncertainty), preferences are assumed to be represented by the objectively (resp. subjectively) expected value of a von Neumann–Morgenstern utility function. For choice under risk, this implies a key independence axiom; under uncertainty, it implies some version of Savage's sure thing principle. This chapter investigates the extent to which ordinality, independence, and the sure thing principle can be derived from more fundamental axioms concerning behaviour in decision trees. Following Cubitt (1996), these principles include dynamic consistency, separability, and reduction of sequential choice, which can be derived in turn from one consequentialist hypothesis applied to continuation subtrees as well as entire decision trees. Examples of behaviour violating these principles are also reviewed, as are possible explanations of why such violations are often observed in experiments. JEL classification: expected utility ; consequentialism ; independence axiom ; consistent planning ; rationality ; dynamic consistency ; subjective probability ; sure thing principle JEL codes: D01 ; D03 ; D81 ; D91 ; C72
    Date: 2013
  3. By: Ezra Einy (BGU); Ori Haimanko (BGU); Ram Orzach (Oakland University, Rochester, MI 48309, USA); Aner Sela (BGU)
    Abstract: We study two-player common-value all-pay auctions in which the players have ex-ante asymmetric information represented by finite partitions of the set of possible values of winning. We consider two families of such auctions: in the first, one of the players has an information advantage (henceforth, IA) over his opponent, and in the second, no player has an IA over his opponent. We show that there exists a unique equilibrium in auctions with IA and explicitly characterize it; for auctions without IA we find a sufficient condition for the existence of equilibrium in monotonic strategies. We further show that, with or without IA, the ex-ante distribution of equilibrium effort is the same for every player (and hence the players' expected efforts are equal), although their expected payoffs are different. In auctions with IA, the players have the same ex-ante probability of winning, which is not the case in auctions without IA.
    Keywords: Common-value all-pay auctions, asymmetric information, information advantage
    JEL: C72 D44 D82
    Date: 2013
  4. By: Saori Chiba (Dept. of Management, Università Ca' Foscari Venice); Kaiwen Leong (Nanyang Technological University)
    Abstract: Consider an uninformed decision maker (DM) who communicates with a partially informed speaker (S) through cheap talk. DM can choose a project to implement or the outside option of no project. We show that if the agentsÕ ex-ante rankings over projects do not coincide, then this conflict of interest can reduce SÕs incentive to pander and hence facilitate information transmission. Intuitively, SÕs ex-ante bias and the incentive to pander affect SÕs information revelation in opposite directions and hence offset each other. We also explore the relationship between information transmission and managerial issues such as delegation, disclosure, and interpersonal authority.
    Keywords: Cheap Talk, Delegation, Disclosure, Interpersonal Authority, Pandering
    JEL: D82 D83 M10
    Date: 2013–11
  5. By: Kalyan Chatterjee (Department of Economics, Pennsylvania State University.); Kaustav Das (Department of Economics, University of Exeter)
    Abstract: We study a model of decentralised bilateral interactions in a small market where one of the sellers has private information about her value. There are two identical buyers and another seller, whose valuation is commonly known to be in between the two possible valuations of the informed seller. We consider two in?nite horizon games, with public and private simultaneous one-sided o¤ers respectively and simultaneous responses. We show that there is a stationary perfect Bayes?equilibrium for both models such that prices in all transactions converge to the same value as the discount factor goes to 1.
    Keywords: Bilateral Bargaining, Incomplete information, Outside options, Coase conjecture.
    JEL: C78 D82
    Date: 2013
  6. By: Ascensi—n Andina D’az (Department of Economic Theory, Universidad de M‡laga)
    Abstract: We propose a model in which different types of journalists have superior information to a newspaper's editor. Journalists compete for having their report published, but when writing their reports, they are uncertain about the preferences of the editor. We analyze the effects of competition and uncertainty on the incentives of the journalists to write informative reports. We obtain that there is not a unique prediction as to the effects of competition, but the correct answer depends on how much uncertainty there is. Thus, if the editor is perceived to be honest, we show there is an equilibrium in which all the journalists write informative reports, provided that a certain level of competition is met. In contrast, if the editor is perceived to be biased, partial revelation of information exists, even in the absence of competition. Last, high levels of uncertainty inevitably results in uninformative reporting.
    Keywords: Information transmission, media bias, competing journalists, uncertainty
    JEL: D72 D82
    Date: 2013–11
  7. By: Michel Grabisch (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: The paper concerns a dynamic model of influence in which agents make a yes-no decision. Each agent has an initial opinion which he may change during different phases of interaction, due to mutual influence among agents. We investigate a model of influence based on aggregation functions. Each agent modifies his opinion independently of the others, by aggregating the current opinion of all agents. Our framework covers numerous existing models of opinion formation, since we allow for arbitrary aggregation functions. We provide a general analysis of convergence in the aggregation model and find all terminal classes and states. We show that possible terminal classes to which the process of influence may converge are terminal states (the consensus states and non trivial states), cyclic terminal classes, and unions of Boolean lattices (called regular terminal classes). An agent is influential for another agent if the opinion of the first one matters for the latter. A generalization of influential agent to an irreducible coalition whose opinion matters for an agent is called influential coalition. The graph (hypergraph) of influence is a graphical representation of influential agents (coalitions). Based on properties of the hypergraphs of influence we obtain conditions for the existence of the different kinds of terminal classes. An important family of aggregation functions -- the family of symmetric decomposable models -- is discussed. Finally, based on the results of the paper, we analyze the manager network of Krackhardt.
    Keywords: influence; aggregation function; convergence; terminal class; influential coalition; hypergraph; social network
    Date: 2013
  8. By: Muhammad Mahajne (BGU); Oscar Volij (BGU)
    Abstract: We propose a weakening of the unanimity concept, which we refer to as consensus of level r, and apply it to rationalize social aggregation rules.
    Keywords: Social choice, unanimity, consensus, preference aggregation rules
    JEL: D71
    Date: 2013
  9. By: Christian Ewerhart; Federico Quartieri
    Abstract: Szidarovszky and Okuguchi (Games and Economic Behavior, 1997) have provided useful conditions for the existence of a unique purestrategy Nash equilibrium in rent-seeking games of complete information. In this paper, we generalize their results to contests with incomplete information. Two assumptions are imposed on the information structure. First, the players?' valuations of winning are assumed to be multiplicatively separable (which includes the polar cases of private values and pure common value). Second, it is assumed that a player is never certain to be the only one with a positive budget. It is also shown that, unless the budgets of all players are zero in all states, at least two players realize a positive expected net rent.
    Keywords: Contests, equilibrium existence and uniqueness, incomplete information, rent dissipation
    JEL: D72 C72
    Date: 2013–11
  10. By: Joosung Lee
    Abstract: I introduce a noncooperative coalitional bargaining model for characteristic function form games. A player not only buys out other players' resources and rights with upfront transfers as in Gul (Econometrica, 1989), but also strategically chooses partners instead of bargaining with a randomly selected opponent. Such transactions among players are interpreted as coalition formation. The main theorem provides a general inefficiency result. If a characteristic function form game has a strict subcoalition with a strictly positive worth and a player with a strictly positive marginal contribution to the grand-coalition, then an efficient stationary subgame perfect equilibrium does not exist, as long as the discount factor is sufficiently high but strictly less than 1. Two special results are established. A grand-coalition equilibrium is impossible when players are sufficiently patient, unless the characteristic function form game is a unanimity game. For a simple game with a veto player and multiple winning coalitions, a non-minimal winning coalition is formed with positive probability. In two applications, I study players' strategic alliance behavior and the effect of the strategic behavior on inequality. First, for three-player simple games, the equilibrium payoff vector Lorenz-dominates both the Shapley-Shubik power index and the core-constrained Nash bargaining solution. Second, for wage bargaining games, workers endogenously form a union and their equilibrium payoffs can be greater than marginal products.
    JEL: C72 C78 D72 D74
    Date: 2013–11–20
  11. By: Vesperoni, Alberto (University of Siegen)
    Abstract: A contest is a game where several players compete for winning prizes by expending costly efforts. We assume that the outcome of a contest is an ordered partition of the set of players (a ranking) and a contest success function assigns a probability to each possible outcome as a function of players’ efforts. We define a contest success function for contests whose outcome is a ranking of any type, i.e., with any number of players at each rank. This approach is new in contest theory since the axiomatic work has exclusively been on contests with single-winner, whose outcome is a ranking with one player in the first rank and all other players in the second rank. The contest success function is characterized by pair-swap consistency, which is an axiom of independence of irrelevant alternatives and generalizes the main axiom in Skaperdas (1996).
    Keywords: conflict; contest; ranking; success function; axiom; probabilistic choice
    JEL: C25 C70 D72 D74 D81
    Date: 2013–11–25
  12. By: Wioletta Dziuda; Ronen Gradwohl
    Abstract: Two players choose whether to cooperate on a project. Each of them is endowed with some evidence, and if both possess a sufficient amount then cooperation is profitable. In order to facilitate cooperation the players reveal evidence to one another. However, some players are concerned about privacy, and so revelation of evidence that does not result in cooperation is costly. We show that in equilibrium evidence can be exchanged both incrementally and all at once, and identify conditions under which the different rates of evidence exchange are optimal.
    Keywords: Cooperation, Privacy, Communication JEL Classification: D80
    Date: 2013–11–05
  13. By: David Dillenberger (Department of Economics, Univerity of Pennsylvania); Uzi Segal (Department of Economics, Boston College and Warwick Business School)
    Abstract: Experimental evidence suggests that individuals who face an asymmetric distribution over the likelihood of a specific event might actually prefer not to know the exact value of this probability. We address these findings by studying a decision maker who has recursive, non-expected utility preferences over two-stage lotteries. For a binary lottery that yields the better outcome with probability p, we identify noise around p with a compound lottery that induces a probability distribution over the exact value of the probability and has an average value p. We first propose and characterize a new notion of skewed distributions. We then use this result to provide conditions under which a decision maker who always rejects symmetric noise around p will always reject skewed to the left noise, but might accept skewed to the right noise. The model can be applied to the areas of investment under risk, medical decision making, and criminal law procedures, and can also be used to address the phenomenon of ambiguity seeking in the context of decision making under uncertainty.
    Keywords: Asymmetric noise, skewed distributions, recursive non-expected utility, ambiguity seeking, compound lotteries.
    JEL: D81
    Date: 2013–11–25
  14. By: Kiryl Khalmetski
    Abstract: I develop a model of strategic communication between an uninformed receiver and a partially informed sender who is averse to lying. The sender's cost of lying is endogenous, depending on the receiver's beliefs induced by the sender's message, rather than on its exogenous formulation. One of my main findings is that this leads to the endogenous emergence of evasive communication, i.e., pretending to be uninformed, even when communication is completely unrestricted. Furthermore, the belief-dependent cost of lying gives rise to specific predictions regarding the welfare implications of several conventional policies. In particular, prohibition of lying (i.e., of explicit falsification) may lead to a decrease in the receiver's welfare. In addition, dealing with an ex-ante less informed sender can be beneficial to the receiver. The results are attributed exclusively to belief-dependent preferences and cannot be explained by an outcome-based model.
    JEL: D82 D83 D84 C72
    Date: 2013–11–20
  15. By: Rothenhäusler, Dominik; Schweizer, Nikolaus; Szech, Nora
    Abstract: We study how institutional design in influences moral transgression. People are heterogeneous in their feelings of guilt and can share guilt with others. Institutions determine the number of supporters necessary for immoral outcomes to occur. With more supporters required, every supporter can share guilt more easily. This facilitates becoming a supporter. Conversely, an institution requiring more supporters must rely on people who have higher individual moral standards. We analyze individual thresholds for agreeing to a transgression, depending on the available options for sharing guilt by institutional design. On the aggregate level, we study how institutions affect the likelihood of immoral outcomes. --
    Keywords: Moral Decision Making,Shared Guilt,Group Absolution,Diffused Responsibility,Institutional Design,Committee Decisions,Moral Transgression
    JEL: D01 D03 D23 D63 D82
    Date: 2013
  16. By: Giménez-Gómez, José-Manuel; Vilella Bach, Misericòrdia
    Abstract: In this paper we prove that the Mas-Colell bargaining set coincides with the core for three-player balanced and superadditive cooperative games. This is no longer true without the superadditivity condition or for games with more than three-players. Furthermore, under the same assumptions, the coincidence between the Mas-Collel and the individual rational bargaining set (Vohra (1991)) is revealed. Keywords: Cooperative game, Mas-Colell bargaining set, balancedness, individual rational bargaining set. JEL classi fication: C71, D63, D71.
    Keywords: Jocs cooperatius, Economia del benestar, Elecció social, 33 - Economia,
    Date: 2013
  17. By: Mridu Prabal Goswami (BGU)
    Abstract: This paper defines the single-crossing property for two-agent, two-good exchange economies for classical (i.e., continuous, strictly monotonic, and strictly convex) individual preferences. Within this framework and on a rich single-crossing domain, the paper characterizes the family of continuous, strategy-proof and individually rational social choice functions whose range belongs to the interior of the set of feasible allocations. This family is shown to be the class of generalized trading rules. This result highlights the importance of the concavification argument in the characterization of fixed-price trading rules provided by Barber? and Jackson (1995), an argument that does not hold under single-crossing. The paper also shows how several features of abstract single-crossing domains, such as the existence of an ordering over the set of preference relations, can be derived endogenously in economic environments by exploiting the additional structure of classical preferences.
    Keywords: social choice, classical preference, single-crossing, concavification.
    JEL: D00 D51 D71
    Date: 2013
  18. By: Sergio Currarini (University of Leicester, Universita' di Venezia and Euro-Mediterranean Center on Climate Change); Marco A. Marini (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza")
    Abstract: In this paper we review a number of coalitional solution concepts for the analysis of cartel and merger stability in oligopoly. We show that, although so far the industrial organization and the cooperative game-theoretic literature have proceeded somehow independently on this topic, the two approaches are highly inter-connected. We first consider the basic problem of the stability of the whole industry association of firms under oligopoly and, for this purpose, we introduce the concept of core in oligopoly games. We show that different assumptions on the behaviour as well as on the timing of the coalitions of firms yield very different results on the set of allocations which are core-stable. We then consider the stability of associations of firms organized in coalition structures different from the grand coalition. To this end, various coalition formation games recently introduced by the so called endogenous coalition formation literature are critically reviewed. Again, different assumptions concerning the timing and the behaviour of firms are shown to yield a wide range of different results. We conclude by reviewing some recent extensions of the coalitional analysis to oligopolistic markets with heterogeneous firms and incomplete information.
    Keywords: Cooperative Games, Coalitions, Mergers, Cartels, Core, Games with Ex- ternalities, Endogenous Coalition Formation
    Date: 2013
  19. By: Nejat Anbarci; Pedro Gomis-Porqueras; Marcus Pivato
    Abstract: In formal markets, to attract buyers, sellers must publicly advertise their prices and locations. But in informal markets, sellers must remain anonymous from government authorities. Since agents' payoffs depend on the ratio of buyers and sellers in each of these markets, all agents try to position themselves in the market which can yield them the highest possible payoff. This strategic interaction in turn critically affects the time evolution of these two markets. In our benchmark model, in which only sellers can switch between these markets, there exists a unique stable dynamic equilibrium where formal and informal markets co-exist. Sellers switch from the formal to the informal market whenever costs of trading in the informal market decrease, and vice versa. In a richer environment, where both sellers and buyers can switch between markets, and the sellers' and buyers' costs of trading in the formal market net of those in the informal market have opposite signs, there exists a unique stable dynamic equilibrium where formal and informal markets co-exist.
    Keywords: Price posting, bargaining, matching, formal sector, informal sector
    JEL: C7 D49
    Date: 2013–11–20
  20. By: Athanassoglou, Stergios
    Abstract: Social well-being is intrinsically multidimensional. Welfare indices attempting to reduce this complexity to a unique measure abound in many areas of economics and public policy. Ranking alternatives based on such measures depends, sometimes critically, on how the different dimensions of welfare are weighted. In this paper, a theoretical framework is presented that yields a set of consensus rankings in the presence of such weight imprecision. The main idea is to consider a vector of weights as an imaginary voter submitting preferences over alternatives in the form of an ordered list. With this voting construct in mind, a rule for aggregating the preferences of many plausible choices of weights, suitably weighted by the importance attached to them, is proposed. An axiomatic characterization of the rule is provided, and its computational implementation is developed. An analytic solution is derived for an interesting special case of the model corresponding to generalized weighted means and the $\epsilon$-contamination framework of Bayesian statistics. The model is applied to the Academic Ranking of World Universities index of Shanghai University, a popular composite index measuring academic excellence.
    Keywords: multidimensional welfare, social choice, voting, Kemeny's rule, graph theory, $\epsilon$-contamination
    JEL: C61 D71 D72 I31
    Date: 2013–11–21

This nep-mic issue is ©2013 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.