nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒06‒07
twelve papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Dynamic Adverse Selection and the Supply Size By Ennio Bilancini; Leonardo Boncinelli
  2. What is Ambiguity? By Massimiliano AMARANTE
  3. A test for weakly separable preferences By John Quah
  4. Comparing Preference Orders:Asymptotic Independence By Kikuchi, Kazuya
  5. Strategy-Proofness and Essentially Single-Valued Cores Revisited By Lars EHLERS
  6. Experimentation With Menus By Alejandro Francetich
  7. Network E¤ects, Aftermarkets and the Coase Conjecture : A Dynamic Markovian Approach By Didier LAUSSEL; Ngo Van LONG; Joana RESENDE
  8. Efficiency and Stability in a Process of Teams Formation By Boncinelli, Leonardo; Pin, Paolo
  9. Categorization and Coordination By Vessela Daskalova; Nicolaas J. Vriend
  10. Expected Utility without Full Transitivity By Walter BOSSERT; Kotaro SUZUMURA
  11. WHY MY PARTICIPATION MATTERS: Rent-seeking with endogenous prize determination By Klarizze Anne Puzon; Marc Willinger
  12. Constructive and Computable Hahn-Banach Theorems for the (Second) Fundamental Theorem of Welfare Economics By K.Vela Velupillai

  1. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information while the realized distribution of qualities is public information. We show that in equilibrium all goods can be traded if the size of the supply is publicly available to market participants. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. We also identify circumstances under which only full trade equilibria exist. Further, we give conditions for full trade to obtain when the realized distribution of qualities is not public information and when new goods enter the market at later stages.
    Keywords: dynamic adverse selection; supply size; frequency of exchanges; asymmetric information
    JEL: D82 L15
    Date: 2014–04
  2. By: Massimiliano AMARANTE
    Abstract: The concept of Ambiguity designates those situations where the information available to the decision maker is insufficient to form a probabilistic view of the world. Thus, it has provided the motivation for departing from the Subjective Expected Utility (SEU) paradigm. Yet, the formalization of the concept is missing. This is a grave omission as it leaves non-expected utility models hanging on a shaky ground. In particular, it leaves unanswered basic questions such as: (1) Does Ambiguity exist?; (2) If so, which situations should be labeled as "ambiguous"?; (3) Why should one depart from Subjective Expected Utility (SEU) in the presence of Ambiguity?; and (4) If so, what kind of behavior should emerge in the presence of Ambiguity? The present paper fi…lls these gaps. Speci…fically, it identifi…es those information structures that are incompatible with SEU theory, and shows that their mathematical properties are the formal counterpart of the intuitive idea of insufficient information. These are used to give a formal de…finition of Ambiguity and, consequently, to distinguish between ambiguous and unambiguous situations. Finally, the paper shows that behavior not conforming to SEU theory must emerge in correspondence of insufficient information and identifi…es the class of non-EU models that emerge in the face of Ambiguity. The paper also proposes a new comparative defi…nition of Ambiguity, and discusses its relation with some of the existing literature.
    Keywords: non-expected utility, information, ambiguity
    JEL: D81
    Date: 2014
  3. By: John Quah
    Abstract: We identify necessary and sufficient conditions under which a finite data set of price vectors and consumption bundles can be rationalized by a weakly separable utility function.� Our result could be understood as a generalization of Afriat's Theorem.
    Keywords: Afriat's Theorem, utility function, revealed preference, generalized axiom
    JEL: C14 C60 C61 D11 D12
    Date: 2014–05–21
  4. By: Kikuchi, Kazuya
    Abstract: A decision maker is presented with two preference orders over n objects and chooses the one which is “closer” to his own preference order. We consider several plausible comparison rules that the decision maker might employ. We show that when n is large and the pair of orders to be compared randomly realizes, different comparison rules lead to statistically almost independent choices. Thus, two people with a common preference relation may nonetheless exhibit almost uncorrelated choice patterns.
    Keywords: preference relation, rank correlation
    JEL: D01
    Date: 2014–05
  5. By: Lars EHLERS
    Abstract: We consider general allocation problems with indivisibilities where agents' preferences possibly exhibit externalities. In such contexts many different core notions were proposed. One is the -core whereby blocking is only allowed via allocations where the non-blocking agents receive their endowment. We show that if there exists an allocation rule satisfying individual rationality, efficiency, and strategy-proofness, then for any problem for which the -core is non-empty, the allocation rule must choose a -core allocation and all agents are indifferent between all allocations in the -core. We apply our result to housing markets, coalition formation and networks.
    Keywords: General allocation problems, externalities, strategy-proofness, -core.
    JEL: C78 D61 D78
    Date: 2014
  6. By: Alejandro Francetich
    Abstract: A decision maker can choose up to two alternatives, or “tools,” over time. One and only one of these tools is profitable, but there is uncertainty as to which one is the profitable one. Opportunities to “employ” the favored tool obey a Poisson process with known arrival rate. The decision maker only observes the realized rewards of the tools chosen, and choosing each tool entails a cost. If the tools are expensive, and if she is sufficiently impatient, the decision maker never chooses the complete menu. Otherwise, she experiments with the complete menu when she is sufficiently uncertain about the state, even more so if tools ignored or discarded “disappear.” If she starts with a singleton that produces no successes, she becomes gradually pessimistic and eventually hires both tools. As soon as the first arrival occurs, the decision maker keeps the winner. If successes from the complete menu cannot be attributed to any individual tool, experimenting entails sticking to singletons, and only an impatient decision maker would rent both tools simultaneously when these are cheap. Keywords: Two-armed bandits, experimentation, exploitation, correlated arms JEL Classification Numbers: D83, D90
    Date: 2014
  7. By: Didier LAUSSEL; Ngo Van LONG; Joana RESENDE
    Abstract: This paper analyses the dynamic problem faced by a monopolist …rm that produces a durable good (in the primary market) and also participates in the market for complementary goods and services (the aftermarket). Considering the possibility of network effects in both markets, we investigate the Markov Perfect Equilibrium of the dynamic game played by the monopolist and the forward-looking consumers. We characterize the evolution of the monopolists equilibrium network and the equilibrium price trajectories. We show that the Coase Conjecture remains valid if there are only primary network effects, while it fails when aftermarket network effects are present. We also fi…nd that the properties of the Markov Perfect Equilibrium vary drastically with the intensity of aftermarket network effects.
    Keywords: durable good, network externalities, aftermarkets, Coase Conjecture
    JEL: L12 L14
    Date: 2014
  8. By: Boncinelli, Leonardo; Pin, Paolo
    Abstract: We analyze a team formation process that generalizes matching models and network formation models, allowing for overlapping teams of heterogeneous size. We apply different notions of stability: myopic team-wise stability, which extends to our setup the concept of pair-wise stability, coalitional stability, where agents are perfectly rational and able to coordinate, and stochastic stability, where agents are myopic and errors occur with vanishing probability. We find that, in many cases, coalitional stability in no way refines myopic team-wise stability, while stochastically stable states are feasible states that maximize the overall number of activities performed by teams.
    Keywords: team formation; stochastic stability; coalitional stability; networks; marriage theorem.
    JEL: C72 C73 D85 H41
    Date: 2014–04–01
  9. By: Vessela Daskalova (University of Cambridge); Nicolaas J. Vriend (Queen Mary University of London)
    Abstract: The use of coarse categories is prevalent in various situations and has been linked to biased economic outcomes, ranging from discrimination against minorities to empirical anomalies in financial markets. In this paper we study economic rationales for categorizing coarsely. We think of the way one categorizes one's past experiences as a model of the world that is used to make predictions about unobservable attributes in new situations. We first show that coarse categorization may be optimal for making predictions in stochastic environments in which an individual has a limited number of past experiences. Building on this result, and this is a key new insight from our paper, we show formally that cases in which people have a motive to coordinate their predictions with others may provide an economic rationale for categorizing coarsely. Our analysis explains the intuition behind this rationale.
    Keywords: Categorization, Prediction, Decision-making, Coordination, Learning
    JEL: D83 C72
    Date: 2014–05
  10. By: Walter BOSSERT; Kotaro SUZUMURA
    Abstract: We generalize the classical expected-utility criterion by weakening transitivity to Suzumura consistency. In the absence of full transitivity, reflexivity and completeness no longer follow as a consequence of the system of axioms employed and a richer class of rankings of probability distributions results. This class is characterized by means of standard expected-utility axioms in addition to Suzumura consistency. An important feature of some members of our new class is that they allow us to soften the negative impact of wellknown paradoxes without abandoning the expected-utility framework altogether.
    JEL: D81
    Date: 2014
  11. By: Klarizze Anne Puzon; Marc Willinger
    Abstract: We analyze an institutionalized rent-seeking game in which groups can endogenously choose the prize at stake, e.g. a common-pool resource. In the first stage, groups determine how much of the resource to protect and equally share. In the second stage, the unprotected fraction is competed for in a rent-seeking game. We consider two institutions varying in the extent by which subjects participate: majority voting (i.e. "unrestrained participation" where all group members participate in the protection stage) and dictatorial rule (i.e. "limited participation" where only one member decides in the protection stage) [...]
    Date: 2014–06
  12. By: K.Vela Velupillai
    Abstract: The Hahn-Banach Theorem plays a crucial role in the second fundamental theorem of welfare economics. To date, all mathematical economics and advanced general equilibrium textbooks concentrate on using nonconstructive or incomputable versions of this celebrated theorem. In this paper we argue for the introduction of constructive or computable Hahn-Banach theorems in mathematical economics and advanced general equilibrium theory. The suggested modification would make applied and policy-oriented economics intrinsically computational.
    Keywords: Fundamental Theorems of Welfare Economics, Hahn-Banach Theorem, Constructive Analysis, Computable Analysis
    JEL: C60 C63 C68 D58 D61
    Date: 2014

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