nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒06‒28
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Signaling with Costly Acquisition of Signals By Ennio Bilancini; Leonardo Boncinelli
  2. Small Noise in Signaling Selects Pooling on Minimum Signal By Ennio Bilancini; Leonardo Boncinelli
  3. Coordination with independent private values: Why pedestrians sometimes bump into each other By Christoph Kuzmics
  4. Persuasion with Reference Cues and Elaboration Costs By Ennio Bilancini; Leonardo Boncinelli
  5. Public-Private Partnership: Information Externality in Sequential Investments By Marco Buso
  6. Loss Aversion in Sequential Auctions: Endogenous Interdependence, Informational Externalities and the "Afternoon Effect" By Rosato, Antonio
  7. Confidence Models of Incomplete Preferences By McClellon, M.
  8. Consumption of Durable Goods under Ambiguity By Othón M. Moreno
  9. Respect for experts or respect for unanimity? The liberal paradox in probabilistic opinion pooling By Frederik Herzberg
  10. Cautious Belief Formation By Joerg Bleile
  11. Asking Price Mechanism with Dynamic Arrivals By Peyman Khezr
  12. Moral Hazard in Dynamic Risk Management By Jak\v{s}a Cvitani\'c; Dylan Possama\"i; Nizar Touzi
  13. Behavioral Indifference Curves By John Komlos
  14. Equilibria and Centrality in Link Formation Games By Hannu Salonen
  15. Kuhn's Theorem for Extensive Form Ellsberg Games By Igor Mouraviev; Frank Riedel; Linda Sass
  16. Global Invertibility of Excess Demand Functions By Enrique Covarrubias
  17. Efficiency Based Measures of Inequality By Costel Andonie; Christoph Kuzmics; Brian W. Rogers
  18. Asymmetric punishment as an instrument of corruption control By Basu, Karna; Basu, Kaushik; Cordella, Tito

  1. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: In this paper we identify a novel reason why signaling may fail to separate types, which is specific to cases where the receiver has to incur a cost to acquire the signal sent by the sender. If the receiver chooses not to incur the acquisition cost, then all sender's types find it optimal to pool on the least costly signal; also, if all sender's types pool on the least costly signal, then the receiver finds it optimal not to incur the acquisition cost. This kind of coordination failure makes the resulting pooling equilibrium extremely robust, even when costs of signal acquisition are very small. Also, pooling is shown to be robust to all refinements based on out-of-equilibrium beliefs, even when the sender can engage in further signaling that can act as an "invitation" to acquire the main signal, and when acquisition costs are smooth and depend on the receiver's effort to acquire the signal. These results provide a new source of interest in pooling equilibria.
    Keywords: costly acquisition, pooling, equilibrium renements, forward induction
    JEL: D82 D83
    Date: 2014–06
  2. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: In this paper we study how the presence of a small amount of noise in signaling games impacts on the likelihood of separation and, hence, the likelihood of information transmission. We consider a variant of a standard signaling model where a source of exogenous noise affects the signals that agents observe. Noise, even if tiny, poses tight constraints on beliefs by making all signals possible along the equilibrium path. We show that separation cannot be obtained in equilibrium if the noise is small enough - but not nil. In particular, for any separating profile, if noise is suciently small then the sender has a profitable deviation consisting of a signal reduction. Instead, the pooling equilibrium where all sender's types pool on the minimum signal always exists, independently of the level of noise. These results provide a new source of interest in pooling equilibria.
    Keywords: noise; separation; pooling; information transmission.
    JEL: D82 D83
    Date: 2014–06
  3. By: Christoph Kuzmics (Center for Mathematical Economics, Bielefeld University)
    Abstract: Motivated by trying to better understand the norms that govern pedestrian traffic, I study symmetric two-player coordination games with independent private values. The strategies of "always pass on the left" and "always pass on the right" are always equilibria of this game. Some such games, however, also have other (pure strategy) equilibria with a positive likelihood of mis-coordination. Perhaps surprisingly, in some such games, these Pareto-inefficient equilibria, with a positive likelihood of mis-coordination, are the only evolutionarily stable equilibria of the game.
    Keywords: incomplete information, continuously stable strategy, CSS, evolutionary stability, best-response dynamics
    JEL: C72 C73 D82
    Date: 2014–02
  4. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: We develop a model of persuasion where, consistent with the psychological literature on dual process theory, the persuadee has to sustain a cognitive effort - the elaboration cost - in order to fully and precisely elaborate information. The persuader makes an offer to the persuadee and, aware that she is a dual process reasoner, also sends her a costly signal - the reference cue - which refers the oer to a category of offers whose average quality is known by the persuadee. Initially, the actual quality of the offer by the persuader is hidden to the persuadee, while the signal is visible. Then, the persuadee can either rely on cheap low elaboration and form expectations on the basis of the signal - thinking coarsely, i.e., by category - or engage in costly high elaboration to attain knowledge of the actual quality of the offer. This signaling setup allows us to keep the assumption that agents are both rational and Bayesian and, at the same time, to match many of the findings emphasized by well established psychological models of persuasion - such as the Elaboration Likelihood Model and the Heuristic-Systematic Model. In addition, the model provides novel theoretical results such as the possibility of separating equilibria that do not rely on the single-crossing property and, in particular, the emergence of a new phenomenon that we name reverse-signaling, where high types send low signals and low types send high signals.
    Keywords: persuasion, coarse reasoning, peripheral and central route, heuristic and systematic reasoning, reverse-signaling, counter-signaling.
    JEL: D01 D82 D83
    Date: 2014–06
  5. By: Marco Buso (University of Padova)
    Abstract: This paper studies the benet coming from bundling two sequential activities in a context of Public Private Partnerships (PPPs). Differently from previous literature, I introduce a source of asymmetric information in the form of an externality parameter linking the building stage with subsequent operational activity. Within this framework, PPPs allow the government to extract private information about the sign and magnitude of the externality parameter and to to minimize the informational rents needed to incentivize the builder's effort. Our results suggest how PPPs can become those commitment devices that force governments to define more coherent and informed plans that optimize the first period welfare, improving investment to reduce unexpected ex post costs (cost overruns).
    Keywords: agency theory; information externality; sequential investment; bundling.
    JEL: D86 L33 H11 H57 C61
    Date: 2014–02
  6. By: Rosato, Antonio
    Abstract: Empirical evidence from sequential auctions shows that prices of identical goods tend to decline between rounds. In this paper, I show how expectations-based reference-dependent preferences and loss aversion can rationalize this phenomenon. I analyze two-round sealed-bid auctions with symmetric bidders having independent private values and unit demand. Equilibrium bids in the second round are history-dependent and subject to a "discouragement effect": the higher the winning bid in the first auction is, the less aggressive the behavior of the remaining bidders in the second auction. When choosing his strategy in the first round, however, a bidder conditions his bid on being pivotal and hence expects not to be discouraged. Equilibrium behavior, therefore, leads the winner of the first round to overestimate the bid of his highest opponent and hence the next-round price so that equilibrium prices decline. Moreover, sequential and simultaneous auctions are not bidder-payoff equivalent nor revenue equivalent.
    Keywords: Reference-Dependent Preferences; Loss Aversion; Sequential Auctions; Afternoon Effect.
    JEL: D03 D44 D81 D82
    Date: 2014–06–21
  7. By: McClellon, M.
    Abstract: This paper introduces and axiomatizes a new class of representations for incomplete preferences called confidence models. Confidence models describe decision makers who behave as if they have probabilistic uncertainty over their true preferences, and are only willing to express a binary preference if it is sufficiently likely to hold. Confidence models are flexible enough to model behavior on a variety of domains, and they are general enough to nest the popular multi-utility models of incomplete preferences. Most importantly, they provide a natural way to connect incomplete preferences with stochastic choice. This connection is characterized by a simple condition that serves to identify the behavioral content of incomplete preferences.
    Date: 2014–01
  8. By: Othón M. Moreno
    Abstract: The focus of this paper is to analyze the effect that ambiguity will have on the buyer's reservation price and the value of the option to purchase the durable good with an embedded option to resell it. The agent is assumed to be risk neutral and ambiguity averse. The problem is formulated as an optimal stopping problem with multiple priors in continuous time with infinite horizon. Uncertainty comes from prices, which is summarized in a state variable that follows a Brownian motion. Preferences have a multiple-prior utility representation where the set of priors consist of a family of Brownian motions with unknown drift and common variance. We show that the direction of the change in the buyer's reservation price depends on the parametrization of the model and that the value of the embedded option is decreasing in the perceived level of ambiguity.
    Keywords: Ambiguity, optimal stopping, embedded option, durable goods
    JEL: C61 D81 D91
    Date: 2014–01
  9. By: Frederik Herzberg (Center for Mathematical Economics, Bielefeld University)
    Abstract: Amartya Sen (1970) has shown that three natural desiderata for social choice rules are inconsistent: universal domain, respect for unanimity, and respect for some minimal rights — which can be interpreted as either expert rights or liberal rights. Dietrich and List (2008) have generalised this result to the setting of binary judgement aggregation. This paper proves that the liberal paradox holds even in the framework of probabilistic opinion pooling and discusses options to circumvent this impossibility result: restricting the aggregator domain to profiles with no potential for conflicting rights, or considering agendas whose issues are not all mutually interdependent.
    Keywords: probabilistic opinion pooling, Sen's liberal paradox, expert rights, liberal rights, unanimity, general aggregation theory JEL Classification: D71, D82, C11
    JEL: D71 D82 C11
    Date: 2014–06
  10. By: Joerg Bleile (Center for Mathematical Economics, Bielefeld University)
    Abstract: We provide an axiomatic approach to a belief formation process in an informational environment characterized by limited, heterogenous and differently precise information. For a list of previously observed cases an agent needs to express her belief by assigning probabilities to possible outcomes. Different numbers of observations of a particular case give rise to varying precision levels associated to the pieces of information. Different precise information affects the cautiousness and confidence with which agents form estimations. We modify the Concatenation axiom introduced in Billot, Gilboa, Samet and Schmeidler (BGSS) (Econometrica, 2005) in a way to capture the impact of precision and its related perceptional effects, while still keeping its normative appealing spirit. We obtain a representation of a belief as a weighted sum of estimates induced by past cases. The estimates are affected by cautiousness and confidence considerations depending on the precision of the underlying observed information, which generalizes BGSS. The weights are determined by frequencies of the observed cases and their similarities with the problem under consideration.
    Keywords: Belief formation, prior, relative frequencies, case-based reasoning, similarity precision, ambiguity, learning, imagination, confidence, cautiousness
    JEL: D01 D81 D83
    Date: 2014–04
  11. By: Peyman Khezr (School of Economics, The University of Queensland)
    Abstract: This paper studies a popular selling mechanism relevant to the Australian housing market in which the seller of the object posts an asking price to attract potential buyers for further negotiations. The game is studied in a dynamic setting with the possibility of more than one potential buyer arriving at each period. The game is designed such that in the event when only one buyer arrives, the seller engages in negotiation with that buyer and when two or more buyers arrive, the seller runs an auction with a reserve price. We show the conditions under which this mechanism can extract more expected payoffs to the seller comparing to a uniform price selling or an standard auction. The selling mechanism we study is applicable to many real world markets, specially the housing market of Australia and adds to the theoretical literature by explaining why sometimes sale prices are higher than the asking prices. We also explain the role of the asking price in the relevant markets. Other small variations of this mechanism are also studied for the purposes of comparison.
    Date: 2014–06–18
  12. By: Jak\v{s}a Cvitani\'c; Dylan Possama\"i; Nizar Touzi
    Abstract: We consider a contracting problem in which a principal hires an agent to manage a risky project. When the agent chooses volatility components of the output process and the principal observes the output continuously, the principal can compute the quadratic variation of the output, but not the individual components. This leads to moral hazard with respect to the risk choices of the agent. Using a recent theory of singular changes of measures for Ito processes, we formulate a principal-agent problem in this context, and solve it in the case of CARA preferences. In that case, the optimal contract is linear in these factors: the contractible sources of risk, including the output, the quadratic variation of the output and the cross-variations between the output and the contractible risk sources. Thus, like sample Sharpe ratios used in practice, path-dependent contracts naturally arise when there is moral hazard with respect to risk management. We also provide comparative statistics via numerical examples, showing that the optimal contract is sensitive to the values of risk premia and the initial values of the risk exposures.
    Date: 2014–06
  13. By: John Komlos
    Abstract: According to the endowment effect there is some discomfort associated with giving up a good, that is to say, we are willing to give up something only if the price is greater than the price we are willing to pay for it. This implies that the indifference curves should designate a reference point at the current level of consumption. Such indifference maps are kinked at the current level of consumption. The kinks in the curves imply that the utility function is not differentiable everywhere and the budget constraint does not always have a unique tangent with an indifference curve. Thus, price changes may not bring about changes in consumption which may be the reason for the frequent stickiness of prices, wages and interest rates. We also discuss a multiple period example in which the indifference map shifts as the reference point shifts implying that the curves cross over time even though tastes do not change.
    JEL: A2 D03 D11
    Date: 2014–06
  14. By: Hannu Salonen (Department of Economics, University of Turku)
    Abstract: We study non-cooperative link formation games in which players have to decide how much to invest in relationships with other players. The relationship between equilibrium strategies and network centrality measures are investigated in games where there is a common valuation of players as friends. If the utility from relationships with other players is bilinear, then indegree, eigenvector centrality, and the Katz-Bonacich centrality measure put the players in opposite order than the common valuation. If the utility from relationships is strictly concave, then these measures order the players in the same way as the common valuation.
    Keywords: link formation games, centrality measures, complete network
    JEL: C72 D43
    Date: 2014–06
  15. By: Igor Mouraviev (Center for Mathematical Economics, Bielefeld University); Frank Riedel (Center for Mathematical Economics, Bielefeld University); Linda Sass (Center for Mathematical Economics, Bielefeld University)
    Abstract: The paper generalizes Kuhn's Theorem to extensive form games in which players condition their play on the realization of ambiguous randomization devices and use a maxmin decision rule to evaluate the consequences of their decisions. It proves that ambiguous behavioral and ambiguous mixed strategies are payoff- and outcome equivalent only if the latter strategies satisfy a rectangularity condition. The paper also discusses dynamic consistency. In particular, it shows that not only the profile of ambiguous strategies must be appropriately chosen but also the extensive form must satisfy further restrictions beyond those implied by perfect recall in order to ensure that each player respects her ex ante contingent choice with the evolution of play.
    Keywords: Kuhn's Theorem, Strategic Ambiguity, Maxmin Utility, Ellsberg Games
    JEL: C72 D81
    Date: 2014–06
  16. By: Enrique Covarrubias
    Abstract: In this paper we provide necessary and sufficient conditions for the excess demand function of a pure exchange economy to be globally invertible so that there is a unique equilibrium. Indeed, we show that an excess demand function is globally invertible if and only if its Jacobian never vanishes and it is a proper map. Our result includes as special cases many partial results found in the literature that imply global uniqueness including Gale-Nikaido conditions and properties related to stability of equilibria. Furthermore, by showing that the condition is necessary, we are implicitly finding the weakest possible condition
    Keywords: Excess demand function, invertibility, uniqueness, Jacobian, proper map
    JEL: C62 C65 D51 D52 D58
    Date: 2013–11
  17. By: Costel Andonie (City University of Hong Kong); Christoph Kuzmics (Center for Mathematical Economics, Bielefeld University); Brian W. Rogers (Washington University in St. Louis)
    Abstract: How should we make value judgments about wealth inequality? Harsanyi (1953) proposes to take an individual who evaluates her well-being by expected utility and ask her to evaluate the wealth possibilities ex-ante (i.e. before she finds her place in society, i.e., under the "veil of ignorance" of Rawls (1971)) assuming that she will be allocated any one of the possible wealth levels with equal probability. We propose a different notion of how wealth levels are allocated, based on a competition or contest. We find that inequality can be captured through the equilibrium properties of such a game. We connect the inequality measures so derived to existing measures of inequality, and demonstrate the conditions under which they satisfy the received key axioms of inequality measures (anonymity, homogeneity and the Pigou-Dalton transfer principle). Our approach also provides a natural way to discuss the tradeoff between greater total wealth and greater inequality.
    Keywords: utilitarianism, inequality, contests
    JEL: C72 C73 D63 D72
    Date: 2014–06
  18. By: Basu, Karna; Basu, Kaushik; Cordella, Tito
    Abstract: The control of bribery is a policy objective in many developing countries. It has been argued that asymmetric punishments could reduce bribery by incentivizing whistle-blowing. This paper investigates the role played by asymmetric punishment in a setting where bribe size is determined by Nash bargaining, detection is costly, and detection rates are set endogenously. First, when detection rates are fixed, the symmetry properties of punishment are irrelevant to bribery. Bribery disappears if expected penalties are sufficiently high; otherwise, bribe sizes rise as expected penalties rise. Second, when detection rates are determined by the bribe-giver, a switch from symmetric to asymmetric punishment either eliminates bribery or allows it to persist with larger bribe sizes. Furthermore, when bribery persists, multiple bribe sizes could survive in equilibrium. The paper derives parameter values under which each of these outcomes occurs and discusses how these could be interpreted in the context of existing institutions.
    Keywords: Public Sector Corruption&Anticorruption Measures,Crime and Society,Corruption&Anticorruption Law,Social Accountability,Business Ethics, Leadership and Values
    Date: 2014–06–01

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