nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒02‒15
nine papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Speculative Attacks with Multiple Targets By Junichi Fujimoto
  2. Matching with Couples: Stability and Incentives in Large Markets By Fuhito Kojima; Parag Pathak; Alvin Roth
  3. The Strategic Use of Download Limits by a Monopoly Platform By Nicholas Economides; Benjamin Hermalin
  4. Risk Aversion and the Desirability of Attenuated Legal Change By Steven Shavell
  5. A theory of targeted search By Cheremukhin, Anton A.; Tutino, Antonella; Restrepo-Echavarria, Paulina
  6. Allocating value among farsighted players in network formation By Nicolas CARAYOL; Remi DELILLE; Vincent VANNETELBOSCH
  7. The value of public information in common value Tullock contests By Ezra Einy; Diego Moreno; Benyamin Shitovitz
  8. AGM-consistency and perfect Bayesian equilibrium. Part II: from PBE to sequential equilibrium. By Giacomo Bonanno
  9. Destructive Agents, Finance Firms, and Systemic Risk By Natasa Bilkic; Thomas Gries

  1. By: Junichi Fujimoto (The University of Tokyo)
    Abstract: This paper examines a global games model of speculative attacks in which speculators can choose to attack any one of a number of targets. In the canonical global games model of speculative attacks with a single target, it is well known that there exists a unique equilibrium that survives iterative deletion of dominated strategies, characterized by the threshold values of the private signal and the fundamentals. This paper shows that with two targets, there is again a unique, dominance-solvable equilibrium. In this equilibrium, the threshold value of signal for attacking a given currency is a function of the signal for the other target, and the threshold value of fundamentals that determines the outcome of attack on one currency is a function of the other target’s fundamentals. Under certain condition on the noise distribution, the result is shown to extend to environments with any N symmetric targets. This paper then presents a number of numerical examples and shows, among other results, that more accurate private signals have a decoupling effect on the outcomes of attack on different currencies.
    Date: 2014–01
  2. By: Fuhito Kojima (Stanford University); Parag Pathak (Massachusetts Institute of Technology); Alvin Roth (Stanford University)
    Abstract: Accommodating couples has been a longstanding issue in the design of centralized labor market clearinghouses for doctors and psychologists, because couples view pairs of jobs as complements. A stable matching may not exist when couples are present. This paper's main result is that a stable matching exists when there are relatively few couples and preference lists are sufficiently short relative to market size. We also discuss incentives in markets with couples. We relate these theoretical results to the job market for psychologists, in which stable matchings exist for all years of the data, despite the presence of couples.
    Date: 2013–04
  3. By: Nicholas Economides; Benjamin Hermalin
    Date: 2014
  4. By: Steven Shavell
    Abstract: This article develops two points. First, insurance against the risk of legal change is largely unavailable, primarily because of the correlated nature of the losses that legal change generates. Second, given the absence of insurance against legal change, it is generally desirable for legal change to be attenuated. Specifically, in a model of uncertainty about two different types of legal change—in regulatory standards, and in payments for harm caused—it is demonstrated that the optimal new regulatory standard is less than the conventionally efficient standard, and that the optimal new payment for harm is less than the harm.
    JEL: H8 K10 K20
    Date: 2014–02
  5. By: Cheremukhin, Anton A. (Federal Reserve Bank of Dallas); Tutino, Antonella (Federal Reserve Bank of Dallas); Restrepo-Echavarria, Paulina (Federal Reserve Bank of Dallas)
    Abstract: We present a theory of targeted search, where people with a finite information processing capacity search for a match. Our theory explicitly accounts for both the quantity and the quality of matches. It delivers a unique equilibrium that resides in between the random matching and the directed search outcomes. The equilibrium that emerges from this middle ground is inefficient relative to the constrained Pareto allocation. Our theory encompasses the outcomes of the random matching and the directed search literature as limiting cases.
    Keywords: matching; assignment; search; efficiency; information
    JEL: C78 D83 E24 J64
    Date: 2014–02–13
    Abstract: We propose a concept to study the stability of social and economic networks when players are farsighted and allocations are determined endogenously. A set of networks is a von Neumann-Morgenstern farsightedly stable set with bargaining if there exists an allocation rule and a bargaining threat such that (i) there is no farsighted improving path from one network inside the set to another network inside the set, (ii) from any network outside the set there is a farsighted improving path to some network inside the set, (iii) the value of each network is allocated among players so that players suffer or benefit equally from being linked to each other compared to the allocation they would obtain at their respective credible bargaining threat. We show that the set of strongly efficient networks is the unique von Neumann-Morgenstern farsightedly stable set with bargaining if the allocation rule is anonymous and component efficient and the value function is top convex. Moreover, the componentwise egalitarian allocation rule emerges endogenously.
    Keywords: Farsighted players, Stability, Equal bargaining power
    JEL: A14 C70 D20
    Date: 2014
  7. By: Ezra Einy; Diego Moreno; Benyamin Shitovitz
    Abstract: We study how changes in the information available to the players of a symmetric common-value Tullock contest with incomplete information affect their payoffs and their incentives to exert effort. For the class of contests where players' state dependent cost of effort is multiplicative, we show that if the players' Arrow-Pratt measure of relative risk aversion is increasing (decreasing), then the better informed they are, the smaller (greater) is the effort they exert, and the greater (smaller) is their payoff.
    Keywords: Tullock contests , Common values , Value of public information
    Date: 2014–01
  8. By: Giacomo Bonanno (Department of Economics, University of California Davis)
    Abstract: In Bonanno (Int. J. Game Theory, 42:567-592, 2013) a general notion of perfect Bayesian equilibrium (PBE) was introduced for extensive-form games and shown to be intermediate between subgame-perfect equilibrium and sequential equilibrium. The essential ingredient of the proposed notion is the existence of a plausibility order on the set of histories that rationalizes a given assessment. In this paper we study restrictions on the belief revision policy encoded in a plausibility order and provide necessary and sufficient conditions for a PBE to be a sequential equilibrium.
    Keywords: Plausibility order, belief revision, Bayesian updating, independence, sequential equilibrium, consistency
    JEL: C7
    Date: 2014–02–04
  9. By: Natasa Bilkic (University of Paderborn); Thomas Gries (University of Paderborn)
    Abstract: Popular opinion suggests that malfunctioning, poorly designed incentive schemes in financial firms that encouraged greed and involved excessive salaries were responsible for the excessive risk taking that eventually led to the 2008 financial crash. In this paper we discuss this claim in a theoretical model. We use a modified version of delegated portfolio choice approach with performance contracts. If, in this modified model, we allow for the existence of destructive agents - when maximizing their private utility - each financial firm will take excessive risks. As a result the finance sector develops systemic risk. We define systemic risk as inefficient and excessive risk that is chosen in an endogenous and stable manner by the aggregate market.
    Keywords: delegated portfolio choice, systemic risk, destructive agent, adverse selection
    JEL: D82 D86 G14
    Date: 2014–02

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