nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒04‒18
eight papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Bayesian Inference Does Not Lead You Astray... On Average By Alejandro Francetich; David Kreps
  2. De Finetti Meets Ellsberg By Larry G. Epstein; Kyoungwon Seo
  3. Equilibrium Selection in Sequential Games with Imperfect Information By Jon X. Eguia; Aniol Llorente-Saguer; Rebecca Morton; Antonio Nicolò
  4. Optimism, pessimism and financial bubbles By Bertrand Wigniolle
  5. On equilibrium payoffs in wage bargaining with discount rates varying in time By Ahmet Ozkardas; Agnieszka Rusinowska
  6. Insensitivity to Prices in a Dictator Game By Jim Engle-Warnick; Natalia Mishagina
  7. Do Consumers' Preferences Really Matter? - A Note on Spatial Competition with Restricted Strategies By Buechel, Berno; Klein, Jan
  8. Minimally Complex Exchange Mechanisms: Emergence of Prices, Markets, and Money By Pradeep Dubey; Siddhartha Sahi; Martin Shubik

  1. By: Alejandro Francetich; David Kreps
    Abstract: A decision maker faces an unobserved state of nature. She updates her prior on the state based on the realizations of a signal. In this note, we show that the expected posterior on any given state, taking expectation under the conditional distribution of the signal on this same state, is never lower than the prior on said state. In other words, the expected posterior probability on the true state is never lower than the prior on this state, regardless of what the true state is.
    Date: 2014
  2. By: Larry G. Epstein; Kyoungwon Seo
    Abstract: The paper outlines an exchangeable non-Bayesian model of preference generalizing the Savage/de Finetti classic model of subjective expected utility preference with an exchangeable prior. The treatment is informal, and the emphasis is on motivation and potential applications rather than on axiomatic foundations and technical details. The objective is to provide a widely accessible introduction to research that is reported in detail elsewhere.
    Keywords: Savage/de Finetti classic model, Ellsberg Paradox,
    Date: 2013–09–01
  3. By: Jon X. Eguia (University of Bristol); Aniol Llorente-Saguer (Queen Mary University of London); Rebecca Morton (New York University); Antonio Nicolò (University of Manchester)
    Abstract: Games with imperfect information often feature multiple equilibria, which depend on beliefs off the equilibrium path. Standard selection criteria such as passive beliefs, symmetric beliefs or wary beliefs rest on ad hoc restrictions on beliefs. We propose a new selection criterion that imposes no restrictions on beliefs: we select the action profile that is supported in equilibrium by the largest set of beliefs. We conduct experiments to test the predictive power of the existing and our novel selection criteria in two applications: a game of vertical multi-lateral contracting, and a game of electoral competition. We find that our selection criterion outperforms the other selection criteria.
    Keywords: Equilibrium selection, Passive beliefs, Symmetric beliefs, Vertical contracting, Multiple equilibria, Imperfect information
    JEL: C72 D86 H41 D72
    Date: 2014–04
  4. By: Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank-dependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Paretooptimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles.
    Keywords: Rational bubbles; RDU preferences
    Date: 2014–04
  5. By: Ahmet Ozkardas (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne)
    Abstract: We provide an equilibrium analysis of a wage bargaining model between a union and a firm in which the union must choose between strike and holdout in case of a disagreement. While in the literature it is assumed that the parties of wage bargaining have constant discount factors, in our model preferences of the union and the firm are expressed by sequences of discount rates varying in time. First, we describe necessary conditions under arbitrary sequences of discount rates for the supremum of the union's payoffs and the infimum of the firm's payoffs under subgame perfect equilibrium in all periods when the given party makes an offer. Then, we determine the equilibrium payoffs for particular cases of sequences of discount rates varying in time. Besides deriving the exact bounds of equilibrium payoffs, we also characterize the equilibrium strategy profiles that support these extreme payoffs.
    Keywords: Union; firm bargaining; varying discount rates; subgame perfect equilibrium; equilibrium payoffs
    Date: 2014–02
  6. By: Jim Engle-Warnick; Natalia Mishagina
    Abstract: We show that violations of demand theory are more numerous than previously reported in experimental two-player dictator games. We then apply a new procedure consisting of income-compensated price adjustments that makes the choice sets rationalizable. We introduce a “weighted price” function that shows that violations of revealed preference can be interpreted as the dictator's insensitivity to the price of the dictator's allocation relative to the responder's allocation. Our paper is the first to rationalize violations of demand theory in dictator games by examining the relationship between violations of GARP and prices. We suggest that weighted prices, and not only preferences, may be a component of decision making in dictator games
    Keywords: Dictator Game, WARP, Revealed Preference,
    Date: 2014–02–01
  7. By: Buechel, Berno; Klein, Jan
    Abstract: In the framework Hotelling-Downs competition two players can freely choose a position along a one-dimensional market. We introduce restrictions of feasible strategies and analyze the consequences for players and consumers. In equilibrium players may minimally differentiate away from the center of the market and even locate completely independently of consumers' preferences. We provide conditions for these novel cases as well as for the standard result that players locate on the median of the distribution of consumers. In addition to the short run, where restrictions are fixed, we elaborate on the long run by studying the players' choice of restrictions under (potential) market entry. In both settings, we find an inefficient outcome, in which a firm is capable of offering a product at the center of the market, but instead chooses a position that is worse for most of the consumers.
    Keywords: duopoly; product differentiation; Hotelling-Downs; median voter; market entry
    JEL: D43 D49 L13 P16
    Date: 2014–04–12
  8. By: Pradeep Dubey (Center for Game Theory, Stony Brook University and Cowles Foundation, Yale University); Siddhartha Sahi (Dept. of Mathematics, Rutgers University); Martin Shubik (Cowles Foundation and School of Management, Yale University)
    Abstract: We consider abstract exchange mechanisms wherein individuals submit "diversified" offers in m commodities, which are then redistributed to them. Our first result is that if the mechanism satisfies certain natural conditions embodying "fairness" and "convenience" then it admits unique prices, in the sense of consistent exchange-rates across commodity pairs ij that equalize the valuation of offers and returns for each individual. We next define certain integers tau_{ij}, pi_{ij}, and k_{i} which represent the "time" required to exchange i for j, the "difficulty" in determining the exchange ratio, and the "dimension" of the offer space in i; we refer to these as time-, price- and message-complexity of the mechanism. Our second result is that there are only a finite number of minimally complex mechanisms, which moreover correspond to certain directed graphs G in a precise sense. The edges of G can be regarded as markets for commodity pairs, and prices play a stronger role in that the return to a trader depends only on his own offer and the prices. Finally we consider "strongly" minimal mechanisms, with smallest "worst case" complexities tau = max tau_{ij} and pi = max pi_{ij}. Our third main result is that for m > 3 commodities that there are precisely three such mechanisms, which correspond to the star, cycle, and complete graphs, and have complexities (pi,tau) = (4,2), (2,m - 1), (m^{2} - m, 1) respectively. Unlike the other two mechanisms, the star mechanism has a distinguished commodity -- the money -- that serves as the sole medium of exchange. As m approaches infinity it is the only mechanism with bounded (pi,tau).
    Keywords: Exchange mechanism, Minimal complexity, Prices, Markets, Money
    JEL: C70 C72 C79 D44 D63 D82
    Date: 2014–04

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