nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒03‒15
twelve papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Theory of Contracts With Limited Enforcement By Martimort, David; Semenov, Aggey; Stole, Lars
  2. Careerist Experts and Political Incorrectness By Chia-Hui Chen; Junichiro Ishida
  3. Delegation to potentially uninformed agent By Semenov, Aggey
  4. Strategic Experimentation in Queues By Caroline D. Thomas; Martin W. Cripps
  5. Reason-Based Rationalization By Franz Dietrich; Christian List
  6. Discovered Preferences for Risky and Non-Risky Goods By Sarah Jacobson; Jason Delaney; Thorsten Moenig
  7. Choice-theoretic Solutions for Strategic Form Games By John Duggan; Michel Le Breton
  8. Why do I keep going in circles? On the impossibility of constructing rational preferences By Brendan Markey-Towler
  9. Information Transmission in Nested Sender-Receiver Games By Sidartha Gordon; Ying Chen
  10. Mixed equilibria in Tullock contests By Christian Ewerhart
  11. Arbitrage and asset market equilibrium in infinite dimensional economies with short-selling and risk-averse expected utilities By Thai Ha-Huy; Cuong Le Van; Manh-Hung Nguyen
  12. On existence and bubbles of Ramsey equilibrium with borrowing constraints By Robert Becker; Stefano Bosi; Cuong Le Van; Thomas Seegmuller

  1. By: Martimort, David; Semenov, Aggey; Stole, Lars
    Abstract: We present a Theory of Contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset. Public enforcement relies on remedies for breach. Private enforcement comes from severing relationships. We first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly. Whether a long-term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller. While under complete information, the optimal contract would remain stationary, non-stationarity might arise under asymmetric information. Enforcement constraints are time-dependent and easier to satisfy as time passes. Indeed, a high-cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on. Yet, such take-the-money-and-run strategy becomes less attractive as time passes and can be prevented with backloaded payments. The optimal contract thus goes through two different phases. First, quantities and prices increase at the inception of the relationship. Later on, the contract looks more stationary. The public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting. Long-run screening distortions encapsulate the quality of enforcement, offering de facto a link between the quality of the legal system and contractual performances.
    Keywords: Asymmetric information, enforcement, breach of contracts, dynamic contracts
    JEL: D82 D86
    Date: 2014–02–07
  2. By: Chia-Hui Chen; Junichiro Ishida
    Abstract: While political correctness is a dominant norm in many public situations, we also observe behaviors that are apparently ''politically incorrect,'' often from professionals and experts. This paper examines the flip side of political correctness as analyzed in Morris (2001) to shed some light on the elusive notion of political incorrectness and elucidate its equilibrium and welfare properties. We show that there are circumstances in which unbiased experts deliberately take a politically incorrect stance out of reputational concerns and identify key elements which give rise to this perverse reputational incentive. The results suggest that political incorrectness cannot necessarily be viewed as a sign of blunt honesty when informed experts have long-term reputational concerns. We also examine the welfare consequences of political incorrectness and argue that this form of information manipulation can be beneficial under some conditions.
    Date: 2014–03
  3. By: Semenov, Aggey
    Abstract: We consider a delegation problem with a potentially uninformed agent when the principal cannot use monetary payments. If the bias between the principal and the agent is large, then the optimal delegation set is an interval. When the bias is small or medium however, the optimal delegation set is no longer connected. It can be one of two types: with an interval and low option, the other with two intervals. In all cases the agent has less discretion. However, in the case of medium biases the principal delegates in a wider range than in the case of informed agent. In all cases the agent will be given more freedom if he is more informed.
    Keywords: Delegation, non-informed agent, delegation set
    JEL: D86 D82
    Date: 2012–10–19
  4. By: Caroline D. Thomas (Department of Economics, The University of Texas at Austin); Martin W. Cripps (Department of Economics, University College London)
    Abstract: We analyze the social and private learning at the symmetric equilibria of a queueing game with strategic experimentation. An infinite sequence of agents arrive at a server which processes them at an unknown rate. The number of agents served at each date is either: a geometric random variable in the good state, or zero in the bad state. The queue lengthens with each new arrival and shortens if the agents are served or choose to quit the queue. Agents can only observe the evolution of the queue after they arrive, thus each agent solves the experimentation problem of how long to wait to learn about the probability of service. The agents, in addition, benefit from an informational externality by observing the length of the queue and the actions of other agents. There is also a negative payoff externality as those at the front of the queue delay the service of those at the back.
    Date: 2014
  5. By: Franz Dietrich; Christian List
    Abstract: "Reason-based rationalizations" explain an agent's choices by specifying which properties of the options or choice context he/she cares about (the "motivationally salient properties") and how he/she cares about these properties the "fundamental preference relation"). We characterize the choice-behavioural implications of reason-based rationalizability and identify two kinds of context-dependent motivation in a reason-based agent: he/she may (i) care about different properties in different contexts and (ii) care not only about properties of the options, but also about properties relating to the context. Reason-based rationalizations can explain non-classical choice behaviour, including boundedly rational and sophisticated rational behaviour, and predict choices in unobserved contexts, an issue neglected in standard choice theory.
    JEL: D01
    Date: 2014–01
  6. By: Sarah Jacobson (Williams College); Jason Delaney (School of Business Administration, Georgia Gwinnett College); Thorsten Moenig (Department of Mathematics, University of St. Thomas)
    Abstract: We develop an axiomatic theory that integrates the discovered preference hypothesis into neoclassical microeconomic choice theory. A theory in which preferences must be discovered through experience can explain patterns observed in choice data, including preference reversals, evolution of or instability in risky choice, and errors that decline with repetition as seen in contingent valuation data. With reasonable assumptions, we show that preferences for common, high-ranked, and non-stochastic choice items are learned quickly and thus should appear stable. However, initially low-ranked choice items may remain persistently mis-ranked. Preferences for choice items with stochastic outcomes are difficult to learn, so choice under uncertainty is subject to error. At finite time, a choice item is more likely to be mis-ranked if it has stochastic outcomes, if it is initially low-ranked, or if it appears rarely in choice sets. The existence of a default option may or may not render correct ranking more difficult. Undiscovered preferences can lead to real welfare loss as agents make choices not congruent with their true preferences. This theory is amenable to tests using laboratory experiments. Preference discovery has implications for policy, and the process of discovery may contaminate choice data in a variety of contexts.
    Keywords: discovered preferences, preference stability, learning, risk preferences
    JEL: D81 D83 D01 D03
    Date: 2014–03
  7. By: John Duggan (University of Rochester); Michel Le Breton (Toulouse School of Economics)
    Date: 2014–03
  8. By: Brendan Markey-Towler (School of Economics, The University of Queensland)
    Abstract: In standard models of rational choice it is typically taken for granted that preferences are given and defined over the alternatives alone, and the possibility of making a rational choice is simply a matter of assumption. In this paper I generalise this aspect of the economic model so that preferences over alternatives are constructed from given preferences defined over various characteristics of the alternatives under consideration. I characterise the decision problem before investigating what conditions a procedure for aggregating preferences over attributes into preferences over alternatives must satisfy in order for the latter to be rational. I then consider what the implications of these conditions for the procedural rationality of the aggregation process.
    Date: 2014–03–03
  9. By: Sidartha Gordon (Département d'économie); Ying Chen
    Abstract: We introduce a “nestedness” relation for a general class of sender-receiver games and compare equilibrium properties, in particular the amount of information transmitted, across games that are nested. Roughly, game is nested in game if the players’s optimal actions are closer in game. We show that under some conditions, more information is transmitted in the nested game in the sense that the receiver’s expected equilibrium payoff is higher. The results generalize the comparative statics and welfare comparisons with respect to preferences in the seminal paper of Crawford and Sobel (1982). We also derive new results with respect to changes in priors in addition to changes in preferences. We illustrate the usefulness of the results in three applications: (i) delegation to an intermediary with a different prior, the choice between centralization and delegation, and two-way communication with an informed principal.
    Keywords: sender-receiver games, information transmission, nestedness, inter- mediary, delegation, informed principal.
    Date: 2014–04
  10. By: Christian Ewerhart
    Abstract: Any symmetric mixed-strategy equilibrium in a Tullock contest with intermediate values of the decisiveness parameter ("2
    Keywords: Tullock contest, mixed-strategy Nash equilibrium, analytical functions
    JEL: C72 D72 C16
    Date: 2014–03
  11. By: Thai Ha-Huy; Cuong Le Van; Manh-Hung Nguyen
    Abstract: We consider a model with an inffnite number of states of nature, von Neumann - Morgenstern utilities, where agents have different probabil- ity beliefs and where short sells are allowed. We show that no-arbitrage conditions, deffned for ffnite dimensional asset markets models, are not sufficient to ensure existence of equilibrium in presence of an inffnite num- ber of states of nature. However, if the individually rational utility set U is compact, we obtain an equilibrium. We give conditions which imply the compactness of U. We give examples of non-existence of equilibrium when these conditions do not hold.
    Keywords: asset market equilibrium, individually rational attainable al- locations, individually rational utility set, no-arbitrage prices, no-arbitrage condition.
    JEL: C62 D50 D81 D84 G1
    Date: 2014–02–25
  12. By: Robert Becker; Stefano Bosi; Cuong Le Van; Thomas Seegmuller
    Abstract: We address the issues of existence of Ramsey equilibrium under bor- rowing constraints and occurrence of rational bubbles. First, we consider a time-truncated economy. Since the feasible allo- cations sets of our economy are uniformly bounded, we prove that there exists an equilibrium in a time-truncated bounded economy by Gale and Mas-Colell's (1975) theorem. Actually, this equilibrium turns out to be an equilibrium for the time-truncated economy as the uniform bounds are relaxed, as is commonly shown in general equilibrium proofs of existence for ffnite-dimensional commodity spaces. Second, we take the limit of a sequence of truncated, unbounded economies, and prove the existence of an intertemporal equilibrium in the limit economy. Third, rational bubbles never occur in our productive economy.
    Keywords: Ramsey model, heterogeneous agents, labor supply, borrowing constraint, bubbles.
    JEL: C62 D31 D91 G10
    Date: 2014–02–25

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