nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒08‒02
eight papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Bayesian Networks and Boundedly Rational Expectations By Ran Spiegler
  2. Theory of civil war under asymmetric information By Jellal, Mohamed
  3. Optimal bid disclosure in license auctions with downstream interaction By Fan, Cuihong; Jun, Byoung Heon; Wolfstetter, Elmar G.
  4. Contests with a Prize Externality and Stochastic Entry By XiaoGang Che; Brad Humphreys
  5. The emergence of reciprocally beneficial cooperation By Sergio Beraldo; Robert Sugden
  6. Bequest choices under uncertainty By Rodrigo J. Raad; Gilvan R. Guedes
  7. Relative profit maximization in asymmetric oligopoly By Satoh, Atsuhiro; Tanaka, Yasuhito
  8. Mixed equilibrium in a pure location game: the case of n ≥ 4 firms By Christian Ewerhart

  1. By: Ran Spiegler (Tel Aviv University, Eitan Berglas School of Economics; Centre for Macroeconomics (CFM))
    Abstract: I present a framework for analyzing decision makers with an imperfect understanding of their environment’s correlation structure. The decision maker faces an objective multivariate probability distribution (his own action is one of the random variables). He is characterized by a directed acyclic graph over the set of variables. His subjective belief filters the objective distribution through his graph, via the factorization formula for Bayesian networks. This belief distortion implies that the decision maker’s long-run behavior may affect his perception of the consequences of his actions. Accordingly, I define a "personal equilibrium" notion of optimal choices. I show how recent models of boundedly rational expectations (as well as new ones, e.g. reverse causality) can be subsumed into this framework as special cases. Some general properties of the Bayesian-network representation of subjective beliefs are presented, as well as a "missing data" foundation.
    Date: 2014–07
  2. By: Jellal, Mohamed
    Abstract: In this paper, we consider a model that suggests that the theory of exchange with asymmetric information seems suitable to provide a possible explanation model of occurrence and duration of civil wars. We show that although civil conflicts are not Pareto optimal ex post they may be Pareto optimal ex ante, in the way that every alternative leaves either the government or the rebellion worse off in some contingency which cannot be ruled out on the basis of the information which is common to both sides. Therefore, the critical determinants of the occurrence of civil conflicts appear to be arising as consequences of asymmetries in the amount of information about some relevant variables available to bargaining parties. Indeed, the civil war commitment is used as device of division of rents accruing to rebellion and the ruling government elite.
    Keywords: Civil Wars, Transfers, Conflict Duration, Asymmetric Information, Rents, Mechanism Design
    JEL: C7 D74 D82 D86
    Date: 2014–07–26
  3. By: Fan, Cuihong; Jun, Byoung Heon; Wolfstetter, Elmar G.
    Abstract: The literature on license auctions for process innovations in oligopoly assumed that the auctioneer reveals the winning bid and stressed that this gives firms an incentive to signal strength through their bids, to the benefit of the innovator. In the present paper we examine whether revealing the winning bid is optimal. We consider three disclosure rules: full, partial, and no disclosure of bids, which correspond to standard auctions. We show that more information disclosure increases the total surplus divided between firms and the innovator as well as social surplus. More disclosure also increases bidders’ payoff. However, no disclosure maximizes the innovator’s expected revenue.
    Keywords: Auctions; innovation; licensing; information sharing.
    JEL: D21 D43 D44 D45
    Date: 2014–07
  4. By: XiaoGang Che (Durham University Business School); Brad Humphreys (West Virginia University, College of Business and Economics)
    Abstract: We analyze a contest with stochastic participation and a prize externality. A unique symmetric equilibrium exists in the contest. We demonstrate that the presence of a prize externality affects individual equilibrium spending but active participants always face the same expected payoff as in a contest without a prize externality. A positive prize externality gives a higher impact on individual equilibrium spending than a negative prize externality. Regardless of the existence and the sign of a prize externality, ex-post over-dissipation occurs if the actual number of participants is sufficiently large. Independent of the prize externality's sign, active participants spend less but face a higher payoff compared to a fixed-participation contest with the same expected number of players.
    Keywords: Tullock contest; Prize externality; stochastic entry
    JEL: C72 D72 D82
    Date: 2014–05
  5. By: Sergio Beraldo (Università di Napoli Federico II and CSEF); Robert Sugden (School of Economics and Centre for Behavioural and Experimental Social Science, University of East Anglia)
    Abstract: This paper offers a new and robust model of the emergence and persistence of cooperation when interactions are anonymous, the population is well-mixed, and the evolutionary process selects strategies according to material payoffs. The model has a Prisoner’s Dilemma structure, but with an outside option of non-participation. The payoff to mutual cooperation is stochastic; with positive probability, it exceeds that from cheating against a cooperator. Under mild conditions, mutually beneficial cooperation occurs in equilibrium. This is possible because the non-participation option holds down the equilibrium frequency of cheating. The dynamics of the model are investigated both theoretically and through simulations.
    Keywords: Cooperation; voluntary participation; random payoffs
    JEL: C73
    Date: 2014–07–18
  6. By: Rodrigo J. Raad (Cedeplar-UFMG); Gilvan R. Guedes (Cedeplar-UFMG)
    Abstract: This paper develops a theoretical model for parental behavior regarding land inheritance, explicitly accounting for consumption and human capital savings strategies. We distinguish two types of modeling: one with and another without strategic behavior. In the first model, we assume that children do not act strategically towards their parent; in this case, the parent chooses how much to bequeath contingent upon each child's return to human capital. We find that the child with the highest return to human capital is more likely to receive a larger share of the land if difference in offspring's returns is large enough. This result points to a non-altruistic behavior. In the second model, we allow for each child to influence parent's optimal choice of bequest by providing services to the latter. We show a numerical example in which the child's strategy for service provision is sufficient to assure that the one providing more service will receive a larger share of the bequest in a Nash equilibrium. This holds, regardless of differences in offspring returns to human capital.
    Keywords: Land inheritance, Altruism, Exchange motive, Nash equilibrium
    JEL: K11 P51
    Date: 2014–05
  7. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: We analyze Bertrand and Cournot equilibria in an asymmetric oligopoly in which the firms produce differentiated substitutable goods and seek to maximize their relative profits instead of their absolute profits. Assuming linear demand functions and constant marginal costs we show the following results. If the marginal cost of a firm is lower (higher) than the average marginal cost over the industry, its output at the Bertrand equilibrium is larger (smaller) than that at the Cournot equilibrium, and the price of its good at the Bertrand equilibrium is lower (higher) than that at the Cournot equilibrium.
    Keywords: relative profit maximization, asymmetric oligopoly, Cournot and Bertrand equilibria
    JEL: D43 L13
    Date: 2014–07–27
  8. By: Christian Ewerhart
    Abstract: The Hotelling game of pure location allows interpretations in spatial competition, political theory, and professional forecasting. In this paper, the doubly symmetric mixed-strategy equilibrium for n ≥ 4 firms is characterized as the solution of a well-behaved boundary value problem. The analysis suggests that, in contrast to the cases n = 3 and n → ∞ , the equilibrium for a finite number of n ≥ 4 firms tends to overrepresent locations at the periphery of its support interval. Moreover, in the class of examples considered, an increase in the number of firms universally leads to a wider range of location choices and to a more dispersed distribution of individual locations. The results are used to comment on the potential benefit of competition in forecasting markets.
    Keywords: Location, Hotelling game, mixed-strategy equilibrium, boundary value problem
    JEL: C72 D43 D72 L13
    Date: 2014–07

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