
on Microeconomics 
By:  Florian Ederer (Cowles Foundation & SOM, Yale University); Richard Holden (Australian School of Business, University of New South Wales); Margaret Meyer (Dept. of Economics, Nuffield College) 
Abstract:  It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments in a twotask moral hazard model in which the agent is privately informed about which task is less costly for him to work on. We examine two simple classes of incentive scheme that are "opaque" in that they make the agent uncertain ex ante about the values of the incentive coefficients in the linear payment rule. We show that, relative to deterministic menus of linear contracts, these opaque schemes induce more balanced efforts, but they also impose more risk on the agent per unit of aggregate effort induced. We identify settings in which optimally designed opaque schemes not only strictly dominate the best deterministic menu but also completely eliminate the efficiency losses from the agent's better knowledge of the environment. Opaque schemes are more likely to be preferred to transparent ones when i) efforts on the tasks are highly complementary for the principal; ii) the agent's privately known preference between the tasks is weak; iii) the agent's risk aversion is significant; and iv) the errors in measuring performance on the tasks have large correlation or small variance. 
Keywords:  Incentives, Gaming, Contracts, Opacity 
JEL:  D86 D21 L22 
Date:  2014–01 
URL:  http://d.repec.org/n?u=RePEc:cwl:cwldpp:1935&r=mic 
By:  Kranz, Sebastian 
Abstract:  We propose a unified framework to study relational contracting and holdup problems in infinite horizon stochastic games. We first illustrate that with respect to long run decisions, the common formulation of relational contracts as Paretooptimal public perfect equilibria is in stark contrast to fundamental assumptions of holdup models. We develop a model in which relational contracts are repeatedly newly negotiated during relationships. Negotiations take place with positive probability and cause bygones to be bygones. Traditional relational contracting and holdup formulations are nested as opposite corner cases. Allowing for intermediate cases yields very intuitive results and sheds light on many plausible tradeoffs that do not arise in these corner cases. We establish a general existence result and a tractable characterization for stochastic games in which money can be transferred.  
JEL:  C73 C78 L14 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:80047&r=mic 
By:  Heidhues, Paul; Blume, Andreas; Franco, April 
Abstract:  We investigate dynamic coordination among members of a problemsolving team who receive private signals about which of their actions are required for a (static) coordinated solution and who have repeated opportunities to explore different action combinations. In this environment ordinal equilibria, in which agents condition only on how their signals rank their actions and not on signal strength, lead to simple patterns of behavior that have a natural interpretation as routines. These routines partially solve the team's coordination problem by synchronizing the team's search efforts and prove to be resilient to changes in the environment by being ex post equilibria, to agents having only a coarse understanding of other agents' strategies by being fully cursed, and to natural forms of agents' overconfidence. The price of this resilience is that optimal routines are frequently suboptimal equilibria.  
JEL:  B21 C72 L23 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:80027&r=mic 
By:  Eric Van den Steen (Harvard Business School, Strategy Unit) 
Abstract:  What makes a decision strategic? When is strategy most important? This paper studies the structure and value of strategy (in its everyday sense), starting from a (functional) definition of strategy as 'the smallest set of (core) choices to optimally guide the other choices.' This definition captures the idea of strategy as the core of a  potentially flexible and adaptive  intended course of action. It coincides with the equilibrium outcome of a 'strategy formulation game' where a person can  at a cost  look ahead, investigate, and announce a small set of choices to the rest of the organization. Starting from that definition, the paper studies what makes a decision 'strategic' and what makes strategy important, considering commitment, irreversibility, and persistence of a choice; the presence of uncertainty (and the type of uncertainty); the number and strength of interactions and the centrality of a choice; its level and importance; the need for specific capabilities; and competition and dynamics. It shows, for example, that irreversibility does not make a decision more strategic but makes strategy more valuable, that longrange strategies will be more concise, why a choice what not to do can be very strategic, and that a strategy 'bet' can be valuable. It shows how strategy creates endogenously a hierarchy among decisions. And it also shows how understanding the structure of strategy may enable a strategist to develop the optimal strategy in a very parsimonious way. 
JEL:  D70 L20 M10 
Date:  2013–12 
URL:  http://d.repec.org/n?u=RePEc:hbs:wpaper:14058&r=mic 
By:  Eric Van den Steen (Harvard Business School, Strategy Unit) 
Abstract:  This paper studies how strategy  formally defined as 'the smallest set of (core) choices to optimally guide the other choices'  relates to the strategist, for example, whether an optimal strategy should depend on who is CEO. The paper first studies why different people may systematically consider different decisions 'strategic'  with marketing people developing a marketingcentric strategy and favoring the marketing side of business  and derives two rational mechanisms for this outcome, one confidencebased and the other implementationbased. It then studies why it matters that it is the CEO and important decision makers (rather than an outsider) who formulate the strategy and shows that outsiderstrategists often face a tradeoff between the quality of a strategy and its likelihood of implementation, whereas the CEO's involvement helps implementation because it generates commitment, thus linking strategy formulation and implementation. In some sense, the paper thus explains why strategy is the quintessential responsibility of the CEO. Moreover, it shows that the optimal strategy should depend on who is CEO. It then turns that question around and studies strategy as a tool for exerting leadership, asking when the set of strategic decisions are exactly the decisions a CEO should control to give effective guidance. It finally shows how a CEO's vision, in the sense of a strong belief, about strategic decisions makes it more likely that the CEO will propose a strategy and that that strategy will be implemented. But strong vision about the wrong decisions, such as subordinate or others' decisions, may be detrimental to strategy and its implementation. 
Date:  2013–12 
URL:  http://d.repec.org/n?u=RePEc:hbs:wpaper:14057&r=mic 
By:  G. Carlier; R.A. Dana 
Abstract:  An exchange economy in which agents have convex incomplete preferences defined by families of concave utility functions is consid ered. Sufficient conditions for the set of efficient allocations and equi libria to coincide with the set of efficient allocations and equilibria that result when each agent has a utility in her family are provided. Welfare theorems in an incomplete preferences framework therefore hold under these conditions and efficient allocations and equilibria are characterized by first order conditions. 
Keywords:  incomplete preferences, efficient allocations and equilibria. 
Date:  2014–01–06 
URL:  http://d.repec.org/n?u=RePEc:ipg:wpaper:201419&r=mic 
By:  Wambach, Achim; Gretschko, Vitali 
Abstract:  We compare two commonly used mechanisms in procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer s preferences and may collude with one of the sellers. We provide a precise definition of both mechanisms and show contrary to conventional wisdom that an intransparent negotiation yields a higher buyer surplus than a transparent auction for a range of parameters. In particular, for small expected punishments there exists a lower and an upper bound on the number of sellers such that the negotiation yields a higher buyer surplus with a probability arbitrary close to 1 in the parameter space. Moreover, if the expected punishment is small, the negotiation is always more efficient and generates a higher surplus for the sellers.  
JEL:  D44 D73 H57 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79774&r=mic 
By:  Andrea Attar; Eloisa Campioni; GwenaÃ«l Piaser 
Abstract:  In the present note, we show that a weak restriction on out of equilibrium beliefs allows to extend the Revelation Principle to exclusive agency games, even if we consider mixed strategy equilibria. Next, we argue that this result does not extend to games with several agents, even if we restrict the analysis to pure strategy equilibria. 
Keywords:  Competing Mechanisms, Exclusive Contracts, Incomplete Information,Participation decision 
JEL:  D82 
Date:  2014–01–06 
URL:  http://d.repec.org/n?u=RePEc:ipg:wpaper:201407&r=mic 
By:  Vermeulen A.J.; Schr?der M.J.W.; Flesch J. (GSBE) 
Abstract:  We consider a bilateral trade model in which both players have a finite number of possible valuations. The sellers valuation and the buyers valuation for the object are private information, but the independent beliefs about these valuations are common knowledge. In this setting, we provide a characterization of the set of interim individually rationalimplementable trading rules, analogous to the result of Myerson and Satterthwaite 1983. Thereafter, we derive necessary conditions for incentive compatible and ex post individually rational direct mechanisms. For the special class of corner mechanisms with discrete uniform beliefs, we characterize the set of ex post individually rationalimplementable trading rules. In this context it is also shown that ex post efficiency can only be achieved if the number of different valuations is small. The maximal number of different valuations for which efficiency is still possible depends on the prior probability distribution of valuations. 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:unm:umagsb:2013025&r=mic 
By:  Rune Midjord; Tomas Rodriguez Barraquer; Justin Valasek 
Abstract:  In this paper, we demonstrate that payoffs linked to a committee member's individual vote may explain overcautious behavior in committees. A committee of experts must decide whether to approve or reject a proposed innovation on behalf of society. 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 illfated innovation. An example is FDA committees, where committee members can be exposed to a disesteem (negative) payoff if they vote to pass a drug that proves to be fatal for some users. We show that 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. We then show that this inefficiency can be mitigated by prevote information pooling, but only if the decision is take under unanimity: in the presence of disesteem payoffs, committee members will only vote efficiently if they are all responsible for the final decision. 
Keywords:  Committees; Information aggregation; Disesteem payoffs 
JEL:  D71 D72 
Date:  2013–12 
URL:  http://d.repec.org/n?u=RePEc:huj:dispap:dp654&r=mic 
By:  GwenaÃ«l Piaser 
Abstract:  It is argued that the revelation principle in multiprincipal multiagent games cannot be generalized. In other words, one cannot restrict attention to incentive compatible mechanisms, even if the concept of information is enlarged. 
Keywords:  Direct Mechanisms, Incentive compatible, Multiprincipals. 
JEL:  D82 
Date:  2014–01–06 
URL:  http://d.repec.org/n?u=RePEc:ipg:wpaper:201408&r=mic 
By:  Seel, Christian 
Abstract:  This paper analyzes a twoplayer allpay auction with incomplete information. More precisely, one bidder is uncertain about the size of the initial advantage of his rival modeled as a head start in the auction. I derive the unique Bayesian Nash equilibrium outcome for a large class of cumulative distribution functions over head starts. In equilibrium, the stronger player generates an informational rent if and only if his head start distribution is not stochastically dominated by a uniform distribution. This result introduces a new perspective on lobbying contests and procurement contests.  
JEL:  C72 C73 D72 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79930&r=mic 
By:  MarieCécile Fagart; Claude Fluet 
Abstract:  We consider decisionmakers facing a risky wealth prospect. The probability distribution depends on pecuniary effort, e.g., the amount invested in a venture or prevention expenditures to protect against accidental losses. We provide necessary local conditions and sufficient global conditions for greater risk aversion to induce more (or less) investment or to have no effect. We apply our results to incentives in the principalagent framework when differently risk averse agents face the same monetary incentives. 
Keywords:  Expected utility, risk aversion, comparative statics, mean utility preserving increase in risk, location independent risk 
JEL:  D81 
Date:  2014 
URL:  http://d.repec.org/n?u=RePEc:lvl:lacicr:1405&r=mic 
By:  Rodrigo Harrison; Pedro JaraMoroni 
Abstract:  Global games emerged as an approach to equilibrium selection. For a general setting with supermodular payoffs unique selection of equilibrium has been obtained through iterative elimination of strictly dominated strategies. For the case of global games with strategic substitutes, uniqueness of equilibrium has not been proved by iterative elimination of strictly dominated strategies, making the equilibrium less appealing. In this work we study a simple three player binary action global game with strategic substitutes for which we provide a condition for dominance solvability. This opens an unexplored research agenda on the study of global games with strategic substitutes. 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:ioe:doctra:440&r=mic 
By:  Sontuoso, Alessandro 
Abstract:  Human conduct is often guided by “conformist preferences”, which thrive on behavioral expectations within a society, with conformity being the act of changing one’s behavior to match the purported beliefs of others. Despite a growing research line considering preferences for a fair outcome allocation, economic theories do not explain the fundamental conditions for some social norm – whether of fairness or not – to be followed. Inspired by Bicchieri’s account of norms (C.Bicchieri, The Grammar of Society. CambridgeUP [2006]), I develop a behavioral theory of norm conformity building on the BattigalliDufwenberg “psychological” framework (P.Battigalli and M.Dufwenberg, Dynamic Psychological Games, J.Econ.Theory, 144:135 [2009]). 
Keywords:  Conformist Preferences; Social Norms; Social Dilemmas; Psychological Game Theory; Behavioral Economics 
JEL:  A13 C72 C92 D63 H41 
Date:  2013–12–27 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:53234&r=mic 
By:  Tomas Rodriguez Barraquer 
Abstract:  Consider a setting in which agents can each take one of two ordered actions and in which the incentive of any given agent to take the high action is positively reinforced by the number of other agents that take it. Furthermore, assume that we don't know any other details about the game being played. What can we say about the details of the structure of the interaction between actions and incentives when we observe a set or a subset of all possible equilibria? In this paper we study 3 nested classes of games: (a) binary games of strategic complements; (b) games in (a) that admit a network representation: and (c) games in (b) in which the network is complete. Our main results are the following: It has long been established in the literature that the set of pure strategy Nash equilibria of any binary game of strategic complements among a set N of agents can be seen as a lattice on the set of all subsets of N under the partial order defined by the set inclusion relation. If the game happens to be strict in the sense that agents are never indifferent among outcomes (games in (a)), then the resulting lattice of equilibria satisfies a straightforward sparseness condition. (1) We show that, in fact, the games in (a) express all such lattices. (2) We characterize the collection of subsets of N that can be weakly expressed as the set of equilibria of some game of thresholds (games in (b)). (3) We characterize the collection of subsets of N that can be weakly expressed as the set of equilibria of some game of thresholds on the complete graph (games in (c)). 
Date:  2013–12 
URL:  http://d.repec.org/n?u=RePEc:huj:dispap:dp655&r=mic 
By:  Herweg, Fabian; Schmidt, Klaus 
Abstract:  We propose a theory of ex post inefficient renegotiation that is based on loss aversion. When two parties write a longterm contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversion makes the renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of longterm contracts. First, it explains why parties often abstain from writing a beneficial longterm contract or why some contracts specify transactions that are never ex post efficient. Second, it shows under what conditions parties should rely on the allocation of ownership rights to protect relationshipspecific investments rather than writing a specific performance contract. Third, it shows that employment contracts can be strictly optimal even if parties are free to renegotiate.  
JEL:  C78 D03 D86 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79772&r=mic 
By:  von Weizsäcker, Christian 
Abstract:  Is welfare economics still possible, when preferences are endogenously determined? The answer is yes, if and only if the hypothesis of adaptive preferences is correct. If preferences satisfy the conditions of continuity, nonsatiation and regularity, then adaptive preferences imply that improvement sequences are noncircular (acyclic): Theorem 1. And noncircularity of improvement sequences implies that there exists an exogenous quasiutility function V(x), such that V(y)>V(x) indicates that y can be reached from x via an improvement sequence: Theorem 2. As a corollary preferences then are adaptive. I define pragmatic compossibility of rights as a condition for a free society. Their specific form can only be obtained by experience, i.e. piecemeal engineering la Karl Popper. For this concept of the Open Society to be feasible preferences have to be adaptive. Partial equilibrium costbenefit analysis remains valid if and only if preferences are adaptive: Theorem 3. This is a requirement for a society which can escape stagnation by means of the money form of decentralised decision making. The success of western society through the last several centuries is proof that preferences are adaptive.  
JEL:  D01 D61 K10 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79782&r=mic 
By:  Schnedler, Wendelin 
Abstract:  Incentives often distort behavior: they induce agents to exert effort but this effort is not employed optimally. This paper proposes a theory of incentive design allowing for such distorted behavior. At the heart of the theory is a tradeoff between getting the agent to exert effort and ensuring that this effort is used well. The theory covers various moralhazard models, ranging from traditional singletask to multitask models. It also provides for the first time a formalization and proofs for various widelyspread perceived wisdoms about incentive design and distorted behavior.  
JEL:  M52 D86 J33 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79775&r=mic 
By:  Eric Danan (THEMA  Université CergyPontoise); Thibault Gajdos (GREQAM  Aix Marseille University); JeanMarc Tallon (Centre d'Economie de la Sorbonne  Paris School of Economics) 
Abstract:  We provide a generalization of Harsanyi (1955)'s aggregation theorem to the case of incomplete preferences at the individual and social level. Individuals and society have possibly incomplete expected utility preferences that are represented by sets of expected utility functions. Under Pareto indifference, social preferences are represented through a set of aggregation rules that are utilitarian in a generalized sense. Strengthening Pareto indifference to Pareto preference provides a refinement of the representation. 
Keywords:  Incomplete preferences, aggregation, expected multiutility, utilitarianism. 
JEL:  D71 D81 
Date:  2014–01 
URL:  http://d.repec.org/n?u=RePEc:mse:cesdoc:14002&r=mic 
By:  Riedel, Frank; Sass, Linda 
Abstract:  In classic game theory, agents use mixed strategies in the form of objective and probabilistically precise devices to conceal their actions. We introduce the larger set of probabilistically imprecise devices as strategies and study the consequences for the basic results of normal form games. While Nash equilibria remain equilibria in the extended game, there arise new Ellsberg equilibria with distinct outcomes, as we illustrate by negotiation games with three players. We characterize Ellsberg equilibria in twoperson conflict and coordination games. These equilibria turn out to be consistent with experimental deviations from Nash equilibrium play.  
JEL:  C72 D81 C70 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:80012&r=mic 
By:  Herings P.J.J.; Predtetchinski A. (GSBE) 
Abstract:  At each moment in time, some alternative from a finite set is selected by a dynamic process. Players observe the alternative selected and sequentially cast a yes or a no vote. If the set of players casting a yesâ€“vote is decisive for the alternative in question,the alternative is accepted and the game ends. Otherwise the next period begins.We refer to this class of problems as collective stopping problems. Collective choicegames, quitting games, and coalition formation games are particular examples that fit nicely into this more general framework.When the core of this game is nonâ€“empty, a stationary equilibrium in pure strategies is shown to exist. But in general, even mixed stationary equilibria may not exist in collective stopping games. We consider strategies that are pure and actionâ€“independent, and allow for a limited degree of history dependence. Under such individual behavior, aggregate behavior can be conveniently summarized by a collective strategy. We consider collective strategies that are simple and induced by twoâ€“step gameâ€“plans and provide a constructive proof that this collection always contains a subgame perfect equilibrium. The existence of such an equilibrium is shown to imply the existence of a sequential equilibrium in an extended model with incomplete information. Collective equilibria are shown to be robust to perturbations in the dynamic process and in utilities. We apply our approach to the case with three alternatives exhibiting a Condorcet cycle and to the BaronFerejohn model of redistributive politics. 
Keywords:  Existence and Stability Conditions of Equilibrium; Noncooperative Games; Stochastic and Dynamic Games; Evolutionary Games; Repeated Games; Bargaining Theory; Matching Theory; 
JEL:  C62 C72 C73 C78 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:unm:umagsb:2013014&r=mic 
By:  R.A Dana; C. Le Van 
Abstract:  This article reconsiders the theory of existence of efficient allocations and equilibria when consumption sets are unbounded below under the assumption that agents have incomplete preferences. It is motivated by an example in the theory of assets with shortselling where there is risk and ambiguity. Agents have Bewleyâ€™s incomplete preferences. As an inertia principle is assumed in markets, equilibria are individually rational. It is shown that a necessary and sufficient for existence of an individually rational efficient allocation or of an equilibrium is that the relative interiors of the risk adjusted sets of probabilities intersect. The more risk averse, the more ambiguity averse the agents, the more likely is an equilibrium to exist. The paper then turns to incomplete preferences with concave multiutility representations. Several definitions of efficiency and of equilibrium with inertia are considered. Sufficient conditions and necessary and sufficient conditions are given for existence of efficient allocations and equilibria with inertia. 
Keywords:  Uncertainty, risk, risk adjusted prior, no arbitrage, equilibrium with shortselling, incomplete preferences, equilibrium with inertia. 
JEL:  C62 D50 D81 D84 G1 
Date:  2014–01–06 
URL:  http://d.repec.org/n?u=RePEc:ipg:wpaper:201420&r=mic 
By:  Drexl, Moritz; Kleiner, Andreas 
Abstract:  We study decision rules for committees that repeatedly take a binary decision. Committee members are privately informed about their payoffs and monetary transfers are not feasible. In static environments, the only strategyproof mechanisms are voting rules which are criticized for being inefficient as they do not condition on preference intensities. The dynamic structure of repeated decisionmaking allows for richer decision rules that overcome this inefficiency by making use of information on preference intensities. Nonetheless, we show that often simple voting is optimal for twoperson committees. This holds for many prior type distributions and irrespective of the agents' patience.  
JEL:  D72 D82 C61 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79832&r=mic 
By:  Herings P.J.J.; Meshalkin A.V.; Predtetchinski A. (GSBE) 
Abstract:  We study the division of a surplus under majoritarian bargaining in the threeperson case. In a stationary equilibrium as derived by Baron and Ferejohn 1989, the proposer offers one third times the discount factor of the surplus to a second player and allocates no payoff to the third player, a proposal which is accepted without delay. Laboratory experiments show various deviations from this equilibrium, where different offers are typically made and delay may occur before acceptance. We address the issue to what extent these findings are compatible with subgame perfect equilibrium and characterize the set of subgame perfect equilibrium payoffs for any value of the discount factor. We show that for any proposal in the interior of the space of possible agreements there exists a discount factor such that the proposal is made and accepted. We characterize the values of the discount factor for which equilibria with oneperiod delay exist. We show that any amount of equilibrium delay is possible and we construct subgame perfect equilibria such that arbitrary long delay occurs with probability one. 
Keywords:  Noncooperative Games; Bargaining Theory; Matching Theory; 
JEL:  C72 C78 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:unm:umagsb:2013072&r=mic 
By:  Franke, Jörg; Kanzow, Christian; Leininger, Wolfgang; Schwartz, Alexandra 
Abstract:  We allow a contest organizer to bias a contest in a discriminatory way; i.e., she can favor specific contestants by designing the contest rule in order to maximize total equilibrium effort (resp. revenue). The two predominant contest regimes are considered, allpay auctions and lottery contests. For allpay auctions the optimal bias is derived in closed form: It implies extreme competitive pressure among active contestants and low endogenous entry. Moreover, the exclusion principle advanced by Baye et al. (1993) becomes obsolete in this case. In contrast, the optimally biased lottery induces larger entry of contestants due to softer competition. Our main result regarding total revenue comparison under the optimal biases reveals that the allpay auction revenue dominates the lottery contest for all levels of heterogeneity among contestants. The incentive effect due to a strongly discriminating contest rule (allpay auction) dominates the participation effect due to a weakly discriminating contest rule (lottery).  
JEL:  C72 D72 C62 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79998&r=mic 
By:  Khan A. (GSBE) 
Abstract:  We study stochastically stable behaviour in 2 x 2 coordination games where the riskdominant equilibrium differs from the Paretoefficient equilibrium. Individuals are randomly matched to another individual in the population (with full support) and they choose strategies by imitating the most successful individual they observe. So, while individuals interact globally, their observation, as determined by their social network, may be local. In the benchmark model, all individuals observe each other, and hence, an individual imitates the strategy of the most successful individual in the entire population; here, the stochastically stable outcome corresponds to the situation where everyone coordinates on the Paretoefficient equilibrium. While this outcome is always stochastically stable even when observability is incomplete, the state where everyone plays the action of the riskdominant equilibrium may be stochastically stable as well. Reasonably tight sufficient conditions for unique stochastic stability of the state where all individuals play the Paretoefficient equilibrium strategy include each individual observing at least four other individuals or when each individual observes the same number of other individuals. 
JEL:  C73 D03 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:unm:umagsb:2013004&r=mic 
By:  Konrad, Kai A.; Cusack, Thomas R. 
Abstract:  What is the strategic role of membership in an intergovernmental group with unanimity requirements if the group negotiates with an external player in a setting with incomplete information? Being in such a group has a strategic effect compared to negotiating as a standalone player and reduces the demands of the outside player: being in a group lends additional bargaining power. Negotiating as a group may also cause more inefficiencies due to bargaining failure, and this may harm also the intergovernmental group. We uncover the role of preference alignment and preference independence between members of the coalition group for equilibrium payoffs and welfare effects. In this analysis we also distinguishing between coalition groups with and without side payments. Overall, coalition groups tend to perform well for the members of the coalition group in comparison to fully decentralized negotiations, particularly if the objectives of the members of the coalition group are not always perfectly aligned.  
JEL:  F51 F53 F59 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79967&r=mic 
By:  Storcken A.J.A.; Peters H.J.M.; Roy S.; Sen A. (GSBE) 
Abstract:  It is proved that every strategyproof, peaksonly or unanimous, probabilistic rule defined over a minimally rich domain of singlepeaked preferences is a probability mixture of strategyproof, peaksonly or unanimous, deterministic rules over the same domain. The proof employs Farkas Lemma and the maxflow mincut theorem for capacitated networks. 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:unm:umagsb:2013040&r=mic 
By:  Kragl, Jenny; Gogova, Martina 
Abstract:  We analyze optimal labor contracts when the worker is inequity averse towards the employer. Welfare is maximized for an equal sharing rule of surplus between the worker and the firm. That is, profit sharing is optimal even if effort is contractible. If the firm can make a takeitor leaveit offer, the optimal contract is also statedependent but always suboptimal with respect to welfare. The reason is that the firm will always pay the worker less than half of the surplus, thereby leading to agency costs due inequity aversion. If the parties bargain over the optimal contract, the optimal division of surplus is more equitable compared to the case with a purely selfish worker. Moreover, the optimal contract with bargaining approaches the welfareoptimal contract as the parties' bargaining power converges. Our results help explain why workers are willing to accept lower wages in times of crisis but demand higher wages in times of economic rise. Moreover, our findings imply that raising the bargaining power of the less powerful party may increase welfare  
JEL:  M52 D03 D86 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79790&r=mic 
By:  Alexander Zimper 
Abstract:  Existing no trade results are based on the common prior assumption (CPA). This paper identifies a strictly weaker condition than the CPA under which speculative trade is impossible in a rational expectations equilibrium (REE). As our main finding, we demonstrate the impossibility of speculative asset trade in an REE whenever an insider is involved who knows the asset's true value. To model insider trade as an equilibrium phenomenon an alternative equilibrium concept than the REE is thus required. 
Keywords:  LevinCoburn Report, Goldman Sach, Insider Trade; Rational Expectations 
JEL:  D51 D53 G02 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:rza:wpaper:399&r=mic 
By:  Wagner, Lilo; Baumann, Julian 
Abstract:  We rationalize a special type of sharing information which can typically be found in markets for occupational disability insurances. There, firms share information about acceptances and rejections of an applicant. We set up a multiplestep signalling model with uninformed agents and endogenize competing principals' decisions to acquire information on risk types. We formalize the idea that information exchange also serves as a tool to signal an applicant's switching type. This may lessen competition and increase industry profits or result in a higher share of uninsured applicants as compared to a market without information sharing. In any case, consumer welfare is reduced. Our model also helps to understand why access to the system is not made dependent on the provision of own data. In addition, we rationalize the existence of anonymous prequalification tests that allow consumers to gain information about their risk type without risking to enter a system entry.  
JEL:  D82 D83 G22 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:80015&r=mic 
By:  Schumacher, Heiner; Kesternich, Iris; Kosfeld, Michael; Winter, Joachim 
Abstract:  We analyze distributional preferences in games in which a decider chooses the provision of a good that benefits a receiver and creates costs for a group of payers. The average decider takes into account the welfare of all parties and has concerns for efficiency. However, she attaches similar weights to small and large groups so that she neglects large provision costs that are dispersed among many payers. This holds regardless of whether the decider benefits from the provision or not. A CES utility function which rationalizes average behavior implies altruism in bilateral situations and welfaredamaging actions when costs are dispersed. 
Keywords:  Social Preferences; Distribution Games; Concentrated Benefits and Dispersed Costs 
JEL:  C91 D63 H00 
Date:  2014–01–17 
URL:  http://d.repec.org/n?u=RePEc:trf:wpaper:453&r=mic 
By:  Kleiner, Andreas; Drexl, Moritz 
Abstract:  Which decision rule should we use to make a binary collective choice? While voting procedures are applied ubiquitously, they are criticized for being inefficient. Using monetary transfers, efficient choices can be made at the cost of a budget imbalance. Is it optimal to do so? And why are monetary transfers used only rarely in public decision making? We solve for the welfare maximizing social choice function taking monetary transfers explicitly into account. Under a mild regularity assumption on the distribution of types, we show that the optimal anonymous social choice function is implementable through qualified majority voting. Our result shows that using a VCG mechanism is not superior to voting in general and justifies the use of voting mechanisms. It thereby could explain why many decision rules employed in practice do not rely on monetary transfers.  
JEL:  D70 D82 H41 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79886&r=mic 
By:  Klein, Arnd Heinrich; Schmutzler, Armin 
Abstract:  This paper analyzes intertemporal effort provision in twostage tournaments. A principal with a fixed budget for prizes faces two riskneutral agents. He observes noisy signals of effort in both periods. His goal is to maximize either total efforts (perfect substitutes) or the product of first and secondperiod efforts (imperfect substitutes). He decides (i) how to weigh performance in the two periods when awarding the second period prize, (ii) how to spread prize money across the two periods, and (iii) whether to reveal performance after the first period. Under very general conditions, the principal puts positive weight on both periods in period two. Furthermore, he sets no firstperiod prize provided the observations in period one are too noisy. The information revelation policy depends on the third derivative of the effort cost function.  
JEL:  D02 D44 D00 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79973&r=mic 
By:  Staudigl, Mathias; Weidenholzer, Simon 
Abstract:  We consider a coevolutionary model of social coordination and network formation where agents may decide on an action in a 2x2  coordination game and on whom to establish costly links to. We fi nd that a payo ff dominant convention is selected for a wider parameter range when agents may only support a limited number of links as compared to a scenario where agents are not constrained in their linking choice. The main reason behind this result is that under constrained interactions agents face a tradeoff between the links they have and those they would rather have.  
JEL:  C73 C72 D85 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79822&r=mic 
By:  Müller, Daniel; Herweg, Fabian 
Abstract:  We consider a monopolistic supplier's optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on price discrimination with nonlinear wholesale tariffs, we find that banning discriminatory wholesale contracts often improves welfare. This also holds if the manufacturer is not an unconstrained monopolist. Moreover, uniform pricing increases downstream investments in cost reduction in the long run.  
JEL:  D43 L11 L42 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:zbw:vfsc13:79978&r=mic 
By:  Güth, Werner; Pull, Kerstin; Stadler, Manfred 
Abstract:  We study interfirm competition on a product market where effort decisions are delegated to the firms' workers. Intrafirm organization is captured by a principalmultiagent framework where firm owners implement alternative compensation schemes for the workers. We show that the value of delegation as well as the optimal design of the compensation scheme crucially depend on the intensity of competition. In particular, our model explains why piece rates and performancebased revenue sharing may be observed in different markets at the same time.  
Keywords:  delegation,agency theory,compensation schemes 
JEL:  C72 L22 M52 
Date:  2014 
URL:  http://d.repec.org/n?u=RePEc:zbw:tuewef:67&r=mic 
By:  Marco Pagnozzi (Università di Napoli Federico II and CSEF); Antonio Rosato (University of Technology Sydney) 
Abstract:  We compare two mechanisms through which a potential entrant can take over an incumbent in a market with asymmetric firms: auctions (where other incumbents can bid for the target) and bilateral negotiations between the entrant and the target. The entrant’s choice of target depends on the mechanism, and it may not maximize expost profit or consumer welfare. In an auction, the entrant pays a higher price to take over a target with higher synergies, because they impose stronger negative externalities on incumbents and increase their willingness to pay for preventing entry. This provides a new rationale for takeover premia. Auctions increase the price obtained by the target, but reduce welfare compared to negotiation because they may discourage the entrant from acquiring a target with higher synergies. 
Keywords:  Takeover; Mergers; Auctions with Externalities 
JEL:  D44 G34 L13 
Date:  2014–01–27 
URL:  http://d.repec.org/n?u=RePEc:sef:csefwp:353&r=mic 
By:  Bernardita Vial; Felipe Zurita 
Abstract:  This article studies the effect of the possibility that firms change their names over their incentives for choosing high quality. A firm may want to start over under a new name in order to avoid market punishment, if the reputation carried by its former name is too low. We find that that the effect of the namechanging option on incentives is ambiguous. Although the ability of avoiding punishment generally hurts incentives, it may sometimes improve them. Moreover, doing so may be the only way out a loweffort trap. The conditions under which each case obtains are explored. 
Keywords:  Reputation, forgiveness, incentives 
JEL:  D8 D9 L1 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:ioe:doctra:447&r=mic 