nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒08‒16
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information and Volatility By Dirk Bergemann; Tibor Heumann; Stephen Morris
  2. Mandatory Disclosure and Financial Contagion By Gadi Barlevy; Fernando Alvarez
  3. Implementation in Weakly Undominated Strategies, with Applications to Auctions and Bilateral Trade By Yamashita, Takuro
  4. Equilibrium delay and non-existence of equilibrium in unanimity bargaining games By Britz V.; Herings P.J.J.; Predtetchinski A.
  5. Common Value Allocation Mechanisms with Private Information: Lotteries or Auctions? By Alexander Matros; Alex Possajennikov
  6. A Cheap-talk Model with Multiple Free-riding Audiences: Reference to Global Environmental Protections By Yeung, Timothy
  7. Stochastic dominance, risk and disappointment: a synthesis By Thierry Chauveau
  8. On the risk in deviating from Nash equilibrium By Irit Nowik; Shmuel Zamir
  9. Private Agenda and Re-Election Incentives By Rivas, Javier
  10. Preventing bank runs By Andolfatto, David; Nosal, Ed; Sultanum, Bruno
  11. Search and Ripoff Externalities By Mark Armstrong
  12. Price revelation and existence of equilibrium in a private belief economy By Lionel De Boisdeffre
  13. Fixed Points of Parameterized Perturbations By Andrew McLennan
  14. Evolutionary Games with Group Selection By Martin Kaae Jensen; Alexandros Rigos
  15. Influence Vs. Utility in the Evaluation of Voting Rules: A New Look at the Penrose Formula By Le Breton, Michel; Van Der Straeten, Karine
  16. Net Neutrality and the Incentives (Not) to Exclude Competitors By Dewenter, Ralf; Rösch, Jürgen
  17. The Liberal Ethics of Non-Interference and the Pareto Principle By Marco Mariotti; Roberto Veneziani

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Tibor Heumann (Dept. of Economics, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: In an economy of interacting agents with both idiosyncratic and aggregate shocks, we examine how the information structure determines aggregate volatility. We show that the maximal aggregate volatility is attained in a noise free information structure in which the agents confound idiosyncratic and common components of the payoff state, and display excess response to the common component, as in Lucas (1972). The upper bound on aggregate volatility is linearly increasing in the variance of idiosyncratic shocks, for any given variance of aggregate shocks. Our results hold in a setting of symmetric agents with linear best responses and normal uncertainty. We show our results by providing a characterization of the set of all joint distributions over actions and states that can arise in equilibrium under any information structure. This tractable characterization, extending results in Bergemann and Morris (2013b), can be used to address a wide variety of questions.
    Keywords: Incomplete information, Bayes correlated equilibrium, Volatility, Moments restrictions, Linear best responses, Quadratic payoffs
    JEL: C72 C73 D43 D83
    Date: 2013–12
  2. By: Gadi Barlevy (Federal Reserve Bank of Chicago); Fernando Alvarez (University of Chicago)
    Abstract: The paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features "contagion," meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, banks in our model have protable investment projects that require outside funding, but which banks will only undertake if they have enough equity. Investors thus value information about which banks were hit by shocks. We find that when the extent of contagion is large, it is possible for no information to be disclosed in equilibrium but for mandatory disclosure to increase welfare by allowing investment that would not have occurred otherwise. Absent contagion, however, mandatory disclosure will not raise welfare, even if markets are otherwise frozen. Our findings provide insight on when contagion is likely to be a concern, e.g. when banks are highly leveraged against other banks, and thus on when mandatory disclosure is likely to be desirable.
    Date: 2014
  3. By: Yamashita, Takuro
    Abstract: We study the mechanism-design problem of guaranteeing desirable performances whenever agents are rational in the sense of not playing weakly dominated strategies. We first provide an upper bound for the best performance we can guarantee among all feasible mechanisms. We then prove the bound to be tight under certain conditions in auction and bilateral-trade applications. In particular, we find that a second-price auction is optimal in revenue with interdependent values, which is neither dominant-strategy nor ex post incentive compatible, but satisfies the novel incentive compatibility introduced in this analysis.
    Keywords: Robust mechanism design, Robust implementation
    JEL: D82 D86
    Date: 2014–07–20
  4. By: Britz V.; Herings P.J.J.; Predtetchinski A. (GSBE)
    Abstract: We consider a class of perfect information unanimity bargaining games, where the players have to choose a payoff vector from a fixed set of feasible payoffs. The proposer and the order of the responding players is determined by a state that evolves stochastically over time. The probability distribution of the state in the next period is determined jointly by the current state and the identity of the player who rejects the current proposal.This protocol encompasses a vast number of special cases studied in the literature. These special cases have in common that equilibria in pure stationary strategies exist, are efficient, are characterized by the absence of delay, and converge to a unique limit corresponding to an asymmetric Nash bargaining solution. For our more general protocol, we show that subgame perfect equilibria in pure stationary strategies need not exist. When such equilibria do exist, they may exhibit delay. Limit equilibria as the players become infinitely patient need not be unique.
    Keywords: Bargaining Theory; Matching Theory;
    JEL: C78
    Date: 2014
  5. By: Alexander Matros (Darla Moore School of Business, University of South Carolina); Alex Possajennikov (Department of Economics, University of Nottingham)
    Abstract: We consider mechanisms for allocating a common-value prize between two players in an incomplete information setting. In this setting, each player receives an independent private signal about the prize value. The signals are from a discrete distribution and the value is increasing in both signals. First, we characterize symmetric equilibria in four mechanisms: a lottery; and Â…rst-price, second-price, and all-pay auctions. Second, we establish revenue equivalence of these auction mechanisms in this setting. Third, we describe conditions under which the expected revenue is higher in the lottery than in any of the auctions. Finally, we identify an optimal mechanism and its implementation by means of reserve prices in lottery and auction mechanisms.
    Keywords: common value; contests; auctions
  6. By: Yeung, Timothy
    Abstract: This paper presents a cheap-talk one-sender-multiple-receiver model in which audiences freeride on each other in the context of global environmental protections. The sender observes the magnitude of damage of emission, and sends the same message simultaneously to all audiences, who then play a game to determine individual emission level. The sender may find it impossible to credibly send the truth when externality is large enough because of the incentive to correct free-riding behavior. If a private club is established for sharing information, the sender’s information with more countries may not be optimal because the sender is less truthful when the club is larger.
    Keywords: Cheap Talk, Externality, Environmental Protections
    JEL: D82 H41
    Date: 2014–06
  7. By: Thierry Chauveau (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: Although it is endowed with many interesting properties, the theory of decision-making under risk by Loomes and Sugden [1986] has never been given an axiomatics. In this paper, we make up for this omission because their lottery-dependent functional is endowed with many interesting properties to which little attention has been paid up to now. In particular, investors whose preferences are represented by the functional are rational in that (a) they actually behave differently if they are risk averse or risk prone, (b) risk is defined in a consistent way with risk aversion, (c) the functional is but the opposite to a convex measure of risk (Föllmer ans Schied [2002]) when constant marginal utility is assumed and (d) violations of the second-order stochastic dominance property are allowed for when "utils" are substituted for monetary values. Moreover, the partial weak order induced by stochastic dominance over utils is as "close" to the weak order of preferences as possible and utility functions may be elicited through experimental testing.
    Keywords: Disappointment; risk-aversion; expected utility; risk premium; stochastic dominance; subjective risk
    Date: 2014–06
  8. By: Irit Nowik; Shmuel Zamir
    Abstract: The purpose of this work is to offer for any zero-sum game with a unique strictly mixed Nash equilibrium, a measure for the risk when deviating from the Nash equilibrium. We present two approaches regarding the nature of deviations; strategic and erroneous. Accordingly, we define two models. In each model we define risk measures for the row-player (PI) and the column player (PII), and prove that the risks of PI and PII coincide. This result holds for any norm we use for the size of deviations. We develop explicit expressions for the risk measures in the L1 and L2 norms, and compute it for several games. Although the results hold for all norms, we show that only the L1 norm is suitable in our context, as it is the only norm which is consistent in the sense that it gives the same size to potentially equivalent deviations. The risk measures defined here enables testing and evaluating predictions on the behavior of players. For example: Do players deviate more in a game with lower risks than in a game with higher risk?
    Date: 2014–04
  9. By: Rivas, Javier
    Date: 2013
  10. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Nosal, Ed (Federal Reserve Bank of Chicago); Sultanum, Bruno (The Pennsylvania State University)
    Abstract: Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria. It has never been clear, however, whether bank-run equilibria in this framework are a natural byproduct of the economic environment or an artifact of suboptimal contractual arrangements. In the class of direct mechanisms, Peck and Shell (2003) demonstrate that bank-run equilibria can exist under an optimal contractual arrangement. The difficulty of preventing runs within this class of mechanism is that banks cannot identify whether withdrawals are being driven by psychology or by fundamentals. Our solution to this problem is an indirect mechanism with the following two properties. First, it provides depositors an incentive to communicate whether they believe a run is on or not. Second, the mechanism threatens a suspension of convertibility conditional on what is revealed in these communications. Together, these two properties can eliminate the prospect of bank-run equilibria in the Diamond-Dybvig environment.
    Keywords: bank runs; optimal deposit contract; financial fragility
    JEL: D82 E58 G21
    Date: 2014–08–04
  11. By: Mark Armstrong
    Abstract: This paper surveys models of markets in which some consumers are "savvy" while others are not.� We discuss when the presence of savvy consumers improves the deals available to non-savvy consumers in the market (the case of search externalities), and when the non-savvy fund generous deals for savvy consumers (ripoff externalities).� We also discuss when the two groups of consumers have aligned or divergent views about market interventions.� The analysis covers two overlapping families of models: those which examine markets with price/quality dispersion, and those which exhibit forms of consumer hold-up.
    Keywords: Consumer protection, consumer search, price dispersion, hold-up, add-on pricing
    JEL: D03 D18 D43 D83
    Date: 2014–07–29
  12. By: Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, CATT - Centre d'Analyse Théorique et de Traitement des données économiques)
    Abstract: We consider a pure exchange financial economy, where rational agents, possibly asymmetrically informed, forecast prices privately and, therefore, face "exogenous uncertainty", on the future state of nature, and "endogenous uncertainty" on future prices. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets ex post. We introduce no-arbitrage prices and display their revealing properties. Under mild conditions, we show that a sequential equilibrium exists, whatever the financial structure and agents' private information or beliefs. This result suggests that existence problems of standard sequential equilibrium models, following Hart (1975) or Radner (1979), stem from the rational expectation and perfect foresight assumptions, which are both dropped in our model.
    Keywords: Sequential equilibrium; temporary equilibrium; perfect foresight; existence; rational expectations; financial markets; information; inferences; asymmetric information; arbitrage
    Date: 2013–09
  13. By: Andrew McLennan (School of Economics, The University of Queensland)
    Abstract: The effect of perturbing a parameter—comparative statics—is, of course, a familiar and important issue in economic analysis. Perfection of a single Nash equilibrium (Selten (1975)) is defined by requiring that at least some perturbations in a given class give rise to perturbed games that have nearby equilibria. Roughly, Kohlberg and Mertens (1986) define strategic stability of a set of equilibria by requiring that for all sufficiently small perturbations, the perturbed games have equilibria near the set. This note presents a topological result concerning the behavior of such nearby equilibria when there is a function from a neighborhood of the relevant set of equilibria to the space of perturbations.
    Date: 2014–07–21
  14. By: Martin Kaae Jensen; Alexandros Rigos
    Abstract: This paper introduces two new concepts in evolutionary game theory: Nash equilibrium with Group Selection (NEGS) and Evolutionarily Stable Strategy with Group Selection (ESSGS). These concepts generalize Maynard Smith and Price (1973) to settings with arbitrary matching rules, inparticular they reduce, respectively, to Nash equilibrium and ESS when matching is random. NEGS and ESSGS are to the canonical group selection model of evolutionary theory what Nash Equilibrium and ESS are to the standard replicator dynamics: any NEGS is a steady state, any stable steady state is a NEGS, and any ESSGS is asymptotically stable. We exploit this to prove what may be called “the second welfare theorem of evolution”: Any evolutionary optimum will be a NEGS under some matching rule. Our results are illustrated in Hawk-Dove, Prisoners’ dilemma, and Stag Hunt games.
    Keywords: Evolutionary Game Theory, Evolutionarily Stable Strategy, ESS, Group Selection, Non-random Matching, Trait-group Model, Haystack Model.
    JEL: C72 C73
    Date: 2014–07
  15. By: Le Breton, Michel; Van Der Straeten, Karine
    Abstract: In this paper, we clarify the relationship between influence/power measurement and utility measurement, the most popular two social objective criteria used when evaluating voting mechanisms. For one particular probabilistic model describing the preferences of the electorate, the so-called Impartial Culture (IC) model used by Banzhaf, the Penrose formula show that the two objectives coincide. The IC probabilistic model assumes that voter preferences are independent. In this article, we prove a general version of the Penrose formula, allowing for correlations in the electorate. We show that in that case, the two social objectives no longer coincide, and qualitative conclusions can be very different.
    Keywords: Power measurement, Voting, Random electorates
    JEL: D71 D72
    Date: 2014–07
  16. By: Dewenter, Ralf (Helmut Schmidt University, Hamburg); Rösch, Jürgen (Helmut Schmidt University, Hamburg)
    Abstract: This paper analyses the incentives of a vertical integrated Internet service provider (ISP) to block competitors from content markets. Using a simple model we find that the ISP does not block competing content providers as long as the contents are differentiated sufficiently. Exclusion only takes place when the competitor offers perfect homogeneous content and the ISP has a local monopoly over its Internet access customers or if network effects are strong. In this case, however, the abuse of market power can at least in Europe be prohibited by competition authorities. That is, according to our model there is no need for a regulation of net neutrality.
    Keywords: net neutrality; competition; Internet service providers
    JEL: D40 K20 L12 L82 L86
    Date: 2014–07–28
  17. By: Marco Mariotti (University of St Andrews); Roberto Veneziani (Queen Mary University of London)
    Abstract: We analyse the liberal ethics of noninterference applied to social choice. A liberal principle capturing noninterfering views of society and inspired by John Stuart Mill's conception of liberty, is examined. The principle captures the idea that society should not penalise agents after changes in their situation that do not affect others. An impossibility for liberal approaches is highlighted: every social decision rule that satisfies unanimity and a general principle of noninterference must be dictatorial. This raises some important issues for liberal approaches in social choice and political philosophy.
    Keywords: Liberalism, Harm Principle, Non-Interference, Impossibility
    Date: 2014–03–01

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