nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒10‒03
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Imperfect Attention and Menu Evaluation By Manzini, Paola; Mariotti, Marco
  2. Intermediation in Networks By Siedlarek, Jan-Peter
  3. The Continuous Logit Dynamic and Price Dispersion By Ratul Lahkar; Frank Riedel
  4. Ranking Multidimensional Alternatives and Uncertain Prospects By Marcus Pivato; Philippe Mongin
  5. Perceiving Prospects Properly By Jakub Steiner (CERGE-EI and University of Edinburgh) and Colin Stewart (University of Toronto)
  6. A Unified Approach to Revealed Preference Theory: The Case of Rational Choice By Hiroki Nishimura; Efe A. Ok; John K.-H. Quah
  7. Information Aggregation and Optimal Market Size By Kei Kawakami
  8. Microeconomic Foundations of Representative Agent Models by Means of Ultraproducts By Frederik Herzberg; Geghard Bedrosian
  9. Zero-determinant strategies in iterated multi-strategy games By Jin-Li Guo
  10. A Characterization of Rationalizable Consumer Behavior By Philip J. Reny
  11. Strategic choice of sharing rules in collective contests By Pau Balart; Sabine Flamand; Orestis Troumpounis
  12. Optimal sorting in group contests with complementarities By Philip Brookins; John Lightle; Dmitry Ryvkin
  13. On Doping and Recovery By Sebastian Bervoets; Bruno Decreuse; Mathieu Faure
  14. Choosing a Good Toolkit: An Essay in Behavioral Economics By Alejandro Francetich; David M. Kreps

  1. By: Manzini, Paola; Mariotti, Marco
    Abstract: We model the choice behaviour of an agent who suffers from imperfect attention. We define inattention axiomatically through preference over menus and endowed alternatives: an agent is inattentive if it is better to be endowed with an alternative a than to be allowed to pick a from a menu in which a is is the best alternative. This property and vNM rationality on the domain of menus and alternatives imply that the agent notices each alternative with a given menu-dependent probability (attention parameter) and maximises a menu independent utility function over the alternatives he notices. Preference for flexibility restricts the model to menu independent attention parameters as in Manzini and Mariotti [19]. Our theory explains anomalies (e.g. the attraction and compromise effect) that the Random Utility Model cannot accommodate.
    Keywords: bounded rationality, stochastic choice,
    Date: 2013
  2. By: Siedlarek, Jan-Peter
    Abstract: I study intermediation in networked markets using a stochastic model of multilateral bargaining in which traders compete on different routes through the network. I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the impact of network structure on payoffs. There is never too little trade but there may be an inefficiency through too much trade in states where delay would be efficient. With homogenous trade surplus the payoffs for players that are not essential to a trade opportunity go to zero as trade frictions vanish.
    Keywords: bargaining; financial networks;intermediation; matching; middlemen; networks; over-the-counter markets; stochastic games
    JEL: C73 C78 L14
    Date: 2014–07–20
  3. By: Ratul Lahkar (Department of Economics, Ashoka University); Frank Riedel (Center for Mathematical Economics, Bielefeld University)
    Abstract: We define the logit dynamic for games with continuous strategy spaces and establish its fundamental properties, i.e. the existence, uniqueness and continuity of solutions. We apply the dynamic to the analysis of the Burdett and Judd (1983) model of price dispersion. Our objective is to assess the stability of the logit equilibrium corresponding to the unique Nash equilibrium of this model. Although a direct analysis of local stability is difficult due to technical difficulties, an appeal to finite approximation techniques suggest that the logit equilibrium is unstable. Price dispersion, instead of being an equilibrium phenomenon, is a cyclical phenomenon. We also establish a result on the Lyapunov stability of logit equilibria in negative definite games.
    Keywords: Price dispersion, Evolutionary game theory, Logit dynamic
    JEL: C72 C73 L11
    Date: 2014–08
  4. By: Marcus Pivato; Philippe Mongin (Université de Cergy-Pontoise, THEMA; Centre National de la Recherche Scientique and HEC Paris)
    Abstract: We introduce a ranking of multidimensional alternatives, including un- certain prospects as a particular case, when these objects can be given a matrix form. This ranking is separable in terms of rows and columns, and continuous and monotonic in the basic quantities. Owing to the theory of additive separability developed here, we derive very precise numerical representations over a large class of domains (i.e., typically not of the Cartesian product form). We apply these representation to (1) streams of commodity baskets through time, (2) uncertain social prospects, (3) un- certain individual prospects. Concerning (1), we propose a finite horizon variant of Koopmans's (1960) axiomatization of infinite discounted util- ity sums. The main results concern (2). We push the classic comparison between the ex ante and ex post social welfare criteria one step further by avoiding any expected utility assumptions, and as a consequence ob- tain what appears to be the strongest existing form of Harsanyi's (1955) Aggregation Theorem. Concerning (3), we derive a subjective probability for Anscombe and Aumann's (1963) finite case by merely assuming that there are two epistemically independent sources of uncertainty. characteristics.
    Keywords: Multiattribute utility, Separability, Subjective Probability, Harsanyi, Koopmans, Ex ante versus ex post welfare.
    Date: 2014
  5. By: Jakub Steiner (CERGE-EI and University of Edinburgh) and Colin Stewart (University of Toronto)
    Abstract: When an agent chooses between prospects, noise in information processing generates an effect akin to the winner’s curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception patterns share key features with prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events), status quo bias, and reference-dependent S-shaped valuations. These biases arise to correct for the winner’s curse effect.
    Date: 2014–09–02
  6. By: Hiroki Nishimura (Department of Economics, University of California Riverside); Efe A. Ok (New York University); John K.-H. Quah (Oxford University)
    Date: 2014–09
  7. By: Kei Kawakami
    Abstract: This paper studies a rational expectations model of trading where strategic traders face information asymmetries and endowment shocks. We show that negative partici- pation externalities arise due to an endogenous interaction between information aggre-gation and multiple trading motives. Moreover, the negative externalities are strong enough to make optimal market size ?nite. In a decentralized process of market for- mation, multiple markets can survive due to the negative externalities among traders. The model also predicts: (i) that only in a su¢ ciently large market the equilibrium multiplicity due to self-ful?lling trading motives can arise, (ii) that a high correlation in endowment shocks can make markets extremely illiquid.
    Keywords: Asymmetric information, Aggregate shock, Imperfect competition, Market fragmentation, Multiple equilibria, Network externality puzzle, Price impact.
    Date: 2014
  8. By: Frederik Herzberg (Center for Mathematical Economics, Bielefeld University); Geghard Bedrosian (Center for Mathematical Economics, Bielefeld University)
    Abstract: This paper builds on a recent proposal for microeconomic foundations for "representative agents". Herzberg [Journal of Mathematical Economics, vol. 46, no. 6, 1115-1124 (2010)] constructed a representative utility function for infinite-dimensional social decision problems and since the decision problems of macroeconomic theory are typically infinite-dimensional, Herzberg's original result is insufficient for many applications. We therefore generalise his result by allowing the social alternatives to belong to a general reflexive Banach space and provide sufficient conditions for our new results to be satisfied in economic applications.
    Keywords: microfoundation, representative agent, social choice, reflexive Banach space, convex optimisation, ultrafilter, bounded ultrapower, nonstandard analysis
    JEL: D71
    Date: 2014–07
  9. By: Jin-Li Guo
    Abstract: Self-serving, rational agents sometimes cooperate to their mutual benefit. The two-player iterated prisoner's dilemma game is a model for including the emergence of cooperation. It is generally believed that there is no simple ultimatum strategy which a player can control the return of the other participants. The recent discovery of the powerful class of zero-determinant strategies in the iterated prisoner's dilemma dramatically expands our understanding of the classic game by uncovering strategies that provide a unilateral advantage to sentient players pitted against unwitting opponents. However, strategies in the prisoner's dilemma game are only two strategies. Are there these results for general multi-strategy games? To address this question, the paper develops a theory for zero-determinant strategies for multi-strategy games, with any number of strategies. The analytical results exhibit that a similar scenario to the case of two-strategy games. Zero-determinant strategies in iterated prisoner's dilemma can be seen as degenerate case of our results. The results are also applied to the snowdrift game, the hawk-dove game and the chicken game.
    Date: 2014–09
  10. By: Philip J. Reny (University of Chicago)
    Abstract: For an arbitrary finite or infinite dataset D of prices and corresponding chosen bundles, it is shown that the following three conditions are equivalent. (i) D satisfies GARP; (ii) D can be rationalized by a utility function; (iii) D can be rationalized by a strictly increasing, quasiconcave utility function. Examples of infinite datasets satisfying GARP are provided for which every utility rationalization fails to be lower semicontinuous, upper semicontinuous, or concave. Thus condition (iii) cannot be substantively improved upon.
    Date: 2014
  11. By: Pau Balart; Sabine Flamand; Orestis Troumpounis
    Abstract: Competition between groups often involves prizes that have both a public and a private component. The exact nature of the prize not only affects the strategic choice of the sharing rules determining its allocation but also gives rise to an interesting phenomenon not observed when the prize is either purely public or purely private. Indeed, we show that in the two-groups contest, for most degrees of privateness of the prize, the large group uses its sharing rule as a mean to exclude the small group from the competition, a situation called monopolization. Conversely, there is a degree of relative privateness above which the small group, besides being active, even outperforms the large group in terms of winning probabilities, giving rise to the celebrated group size paradox.
    Date: 2014
  12. By: Philip Brookins (Department of Economics, Florida State University); John Lightle (Department of Economics, Florida State University); Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: Contests between groups of workers are often used to create incentives in organizations. Managers can sort workers into groups in various ways in order to maximize total output. We explore how the optimal sorting of workers by ability in such environments depends on the degree of effort complementarity within groups. For moderately steep costs of effort, we find that the optimal sorting is balanced (i.e., minimizing the variance in ability between groups) when complementarity is weak, and unbalanced (i.e., maximizing the variance in ability) when complementarity is strong. However, when the cost of effort is sufficiently steep, the optimal sorting can be unbalanced for all levels of complementarity or even alternate between unbalanced and balanced as the level of complementarity increases.
    Keywords: group contest, complementarity, sorting, heterogeneity
    JEL: D72 C72 C02
    Date: 2014–09
  13. By: Sebastian Bervoets (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Bruno Decreuse (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Mathieu Faure (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))
    Abstract: This paper provides a game-theoretical analysis of the use by athletes of performance-enhancing drugs. We focus on a two-player game where players are heterogeneous and performances are subject to uncertainty. While the standard setup assumes these drugs increase maximum performances, we assume that they also increase the probability that a given athlete competes at his best possible level. This second effect drives the doping strategies alone, suggesting that focusing on the first effect leads to incorrect conclusions. Doping strategies are strategic complements for the top dog, whereas they are strategic substitutes for the underdog. We show that the top dog always dopes more than the underdog, and that the top dog will often prefer a world with doping than without it. We also argue that anti-doping tests may increase doping for the underdog, and that targeting such tests to the top dog provides incentive to dope for the underdog.
    Keywords: game theory; PED; anti-doping legislation
    Date: 2014–08
  14. By: Alejandro Francetich; David M. Kreps
    Abstract: The problemof choosing an optimal toolkit day after day,when there is uncertainty concerning the value of different tools that can only be resolved by carrying the tools, is a multi-armed bandit problem with nonindependent arms. Accordingly, except for very simple specifications, this optimization problem cannot (practically) be solved. Decision takers facing this problem presumably resort to decision heuristics, “sensible” rules fordeciding which tools to carry, based on past experience. In this paper, we examine and compare the performance of a variety of heuristics, some very simple and others inspired by the computer-science literature on these problems. Some asymptotic results are obtained, especially concerning the long-run outcomes of using the heuristics, hence these results indicate which heuristics do well when the discount factor is close to one. But our focus is on the relative performance of these heuristics for discount factors bounded away from one, which we study through simulation of the heuristics on a collection of test problems.
    Date: 2014

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