nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒10‒22
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Overconfidence, Underconfidence, and Welfare By Takao Asano; Takuma Kunieda; Akihisa Shibata
  2. Patent Licensing Networks By Doh-Shin Jeon; Yassine Lefouili
  3. Optimal effort incentives in dynamic tournaments By Arnd Heinrich Klein; Armin Schmutzler
  4. Informational opacity and honest certification By Pollrich, Martin; Wagner, Lilo
  5. Subgame-Perfect Equilibria in Stochastic Timing Games By Frank Riedel; Jan-Henrik Steg
  6. Sequential Coordination, Higher-Order Belief Dynamics and E-Stability Principle. By G. Gaballo
  7. Citizen Candidates and Voting Over Incentive-Compatible Nonlinear Income Tax Schedules By Craig Brett; John A Weymark
  8. Should a Non-Rival Public Good Always Be Provided Centrally? By Nicolas Gravel; Michel Poitevin
  9. A Fixed-Point Theory of Price Level Determination in General Equilibrium By Gliksberg, Baruch
  10. Learning in a Perfectly Competitive Market By Leonard J. Mirman; Egas M. Salgueiro; Marc Santugini
  11. Simple Markovian Equilibria in Dynamic Spatial Legislative Bargaining By Jan Zapal
  12. On the precautionary motive for savings and prudence in the rank dependent utility framework By A.Chateauneuf; G.Lakhnati; E.Langlais
  13. Better Feared than Loved: Reputations and the Motives for Conflict By Long, Iain W.

  1. By: Takao Asano (Okayama University); Takuma Kunieda (City University of Hong Kong); Akihisa Shibata (Institute of Economic Research, Kyoto University)
    Abstract: Using a simple framework of Cooper and John (1988) and Cooper (1999), this paper derives the conditions under which overconfidence and underconfidence of agents lead to Pareto improvement. We show that an agent’s overconfidence in a game exhibiting strategic complementarity and positive spillovers and an agent’s underconfidence in a game exhibiting strategic complementarity and negative spillovers can lead to Pareto improvement.
    Keywords: overconfidence, underconfidence, strategic complementarity, strategic substitutability, positive spillover, negative spillover
    JEL: D62 C72
    Date: 2014–09
  2. By: Doh-Shin Jeon (Toulouse School of Economics and CEPR); Yassine Lefouili (Toulouse School of Economics)
    Abstract: This paper investigates the patent licensing networks formed by competing firms. Assuming that licensing agreements can involve the payment of fixed fees only and that firms compete à la Cournot, we show that the complete network is always bilaterally efficient and that the monopoly network is bilaterally efficient if the patents are complementary enough. In the case of independent patents, we fully characterize the bilaterally efficient networks and find that when the cost reduction resulting from getting access to a competitor's technology is large enough, the complete network is the only bilaterally efficient one. We also show that the bilaterally efficient networks can be sustained as subgame-perfect Nash equilibria with symmetric payoffs. This implies that the Pareto-dominance criterion selects the network that maximizes industry profits when more than one bilaterally efficient network exists.
    Keywords: Licensing; Networks; Antitrust and Intellectual Property
    JEL: L12 L13 L41
    Date: 2014–09
  3. By: Arnd Heinrich Klein; Armin Schmutzler
    Abstract: This paper analyzes two-stage rank-order tournaments. A principal decides (i) how to spread prize money across the two periods, (ii) how to weigh performance in the two periods when awarding the second-period prize, and (iii) whether to reveal performance after the … first period. The information revelation policy depends exclusively on properties of the effort cost function. The principal always puts a positive weight on first-period performance in the second period. The size of the weight and the optimal prizes depend on properties of the observation error distribution; they should be chosen so as to strike a balance between the competitiveness of fi…rst- and second-period tour- naments. In particular, the principal sets no …first-period prize unless the observations in period one are considerably more precise than in period two.
    Keywords: Dynamic tournaments, repeated contests, information revelation, effort incentives
    JEL: D02 D44
    Date: 2014–10
  4. By: Pollrich, Martin; Wagner, Lilo
    Abstract: This paper studies the interaction of information disclosure and reputational concerns in certification markets. We argue that by revealing less precise information a certifier reduces the threat of capture. Opaque disclosure rules may reduce profits but also constrain feasible bribes. For large discount factors a certifier is unconstrained in the choice of a disclosure rule and full disclosure maximizes profits. For intermediate discount factors, only less precise, such as noisy, disclosure rules are implementable. Our results suggest that contrary to the common view, coarse disclosure may be socially desirable. A ban may provoke market failure especially in industries where certifier reputational rents are low.
    Keywords: Certification; Bribery; Reputation
    JEL: L15 D82 L14 L11
    Date: 2014
  5. By: Frank Riedel (Center for Mathematical Economics, Bielefeld University); Jan-Henrik Steg (Center for Mathematical Economics, Bielefeld University)
    Abstract: We introduce a notion of subgames for stochastic timing games and the related notion of subgame-perfect equilibrium in possibly mixed strategies. While a good notion of subgame-perfect equilibrium for continuous-time games is not available in general, we argue that our model is the appropriate version for timing games. We show that the notion coincides with the usual one for discrete-time games. Many timing games in continuous time have only equilibria in mixed strategies - in particular preemption games, which often occur in the strategic real option literature. We provide a sound foundation for some workhorse equilibria of that literature, which has been lacking as we show. We obtain a general constructive existence result for subgame-perfect equilibria in preemption games and illustrate our findings by several explicit applications.
    Keywords: timing games, stochastic games, mixed strategies, subgame-perfect equilibrium in continuous time, optimal stopping
    JEL: C61 C73 D21 L12
    Date: 2014–09
  6. By: G. Gaballo
    Abstract: This paper explores convergence in higher-order beliefs - otherwise called eductive stability - when coordination is sequential, that is, when each agent of a given type fixes his own actions after observing the ones of earlier types in a given order. The presence of sequential types enhances expectational coordination in case of strategic substitutability, but not in case of strategic complementarity. In particular eductive stability can be obtained for any degree of substitutability, provided the number of sequential types is large enough. Therefore, sequential coordination opens up to the possibility that eductive convergence occurs at the same conditions of adaptive convergence, in accordance to the E-stability principle.
    Keywords: eductive learning, rational expectation equilibria, rationalizable set, learning in macroeconomics, coordination games.
    JEL: D41 E30 B41
    Date: 2014
  7. By: Craig Brett (Mount Allison University); John A Weymark (Vanderbilt University)
    Abstract: Majority voting over the nonlinear tax schedules proposed by a continuum of citizen candidates is considered. The analysis extends the finite-individual model of Röell (unpublished manuscript, 2012). Each candidate proposes the tax schedule that is utility maximal for him subject to budget and incentive constraints. Each of these schedules is a combination of the maxi-min and maxi-max schedules along with a region of bunching in a neighborhood of the proposer's type. Techniques introduced by Vincent and Mason (1967, NASA Contractor Report CR-744) are used to identify the bunching region. As in Röell's model, it is shown that individual preferences over these schedules are single-peaked, so the median voter theorem applies. In the majority rule equilibrium, marginal tax rates are negative for low-skilled individuals and positive for high-skilled individuals except at the endpoints of the skill distribution where they are typically zero.
    Keywords: bunching, citizen candidates, ironing, majority voting, nonlinear income taxation
    JEL: H2 D7
    Date: 2014–09–26
  8. By: Nicolas Gravel (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Michel Poitevin (Université de Montréal, CIREQ, and CIRANO)
    Abstract: This paper discusses the problem of optimal design of a jurisdiction structure from the view point of a welfarist social planner when households with identical utility functions for non-rival public good and private consumption have private information about their contributive capacities. It shows that the superiority of a centralized provision of a non-rival public good over a federal one does not always hold. Specifically, when differences in households contributive capacities are large, it is better to provide the public good in several distinct jurisdictions rather than to pool these jurisdictions into a single one. In the specific case where households have logarithmic utilities, the paper provides a complete characterization of the optimal jurisdiction structure in the two-type case. "C'est pour unir les avantages divers qui résultent de la grandeur et de la petitesse des nations que le fédératif a été créé." (Alexis de Toqueville)
    Keywords: federalism, jurisdictions, asymmetric information, equalization, city mergers
    Date: 2014–09–10
  9. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: This paper offers a fi�xed-point approach to the issue of price level determination in general equilibrium. It arrives at a solution method for rational expectations models with missing initial conditions for financial wealth. The paper emphasizes the calculation of an equilibrium initial valuation for government debt via a Krasnoselski-Mann-Bailey theorem. The analysis is performed from a global analysis perspective. Abstracting from policies that bring about zero eigen-values permits us to draw conclusions about global dynamics. This approach builds on the Hartman-Grobman Theorem and implies no loss of generality.
    Keywords: Boundary Value Problems; Distorting Taxes; General Equilibrium; Global Determinacy; Krasnoselski-Mann-Bailey theorem;
    JEL: C62 C68 E60 H30 H60
  10. By: Leonard J. Mirman; Egas M. Salgueiro; Marc Santugini
    Abstract: We study the informativeness of the price in a perfectly competitive market. A price-taking firm sells a good whose quality is unknown to some buyers. The uninformed buyers use the price to infer information about quality. The shape of the supply curve influences the amount of information contained in the equilibrium price.
    Keywords: Asymmetric information, Learning, Perfect competition, Rational expectations
    JEL: D2 D41 D8 L1
    Date: 2014
  11. By: Jan Zapal
    Abstract: The paper proves, by construction, the existence of Markovian equilibria in a model of dynamic spatial legislative bargaining. Players bargain over policies in an infinite horizon. In each period, a majority vote takes place between the proposal of a randomly selected player and the status-quo, the policy last enacted. This determines the policy outcome that carries over as the status-quo in the following period; the status-quo is endogenous. Proposer recognition probabilities are constant and discount factors are homogeneous. The construction relies on simple strategies determined by strategic bliss points computed by the algorithm we provide. A strategic bliss point is the policy maximizing the dynamic utility of a player with ample bargaining power. Relative to a bliss point, the static utility ideal, a strategic bliss point is a moderate policy. Moderation is strategic and germane to the dynamic environment; players moderate in order to constrain the future proposals of opponents. Moderation is a strategic substitute; when a player's opponents do moderate, she does not, and when they do not moderate, she does. We prove that the simple strategies induced by the strategic bliss points computed by the algorithm deliver a Stationary Markov Perfect equilibrium. Thus we prove its existence in a large class of symmetric games with more than three players and (possibly with slight adjustment) in any three-player game. Because the algorithm constructs all equilibria in simple strategies, we provide their general characterization, and we show their generic uniqueness. Finally, we analyse how the degree of moderation changes with changes in the model parameters, and we discuss the dynamics of the equilibrium policies.
    Keywords: dynamic decision-making; endogenous status-quo; spatial bargaining; legislative bargaining;
    JEL: C73 C78 D74 D78
    Date: 2014–08
  12. By: A.Chateauneuf; G.Lakhnati; E.Langlais
    Abstract: In this paper we deal with the basic two-period consumption saving problem where the first and second period consumption utility, v and u is assumed to be concave re- spectively as usually. We prove that for the rank dependent utility model, prudence is fully characterized by the convexity of u/ and strong pessimism. The paper ends by showing that for a strong risk averse RDU decision maker, strict pessimism allows local weak prudence, whatever the sign of u/// .
    Keywords: RDU Model, Strong Risk Aversion, Pessimism, Prudence and LocalWeak Prudence.
    JEL: D80 D81
    Date: 2014–09–29
  13. By: Long, Iain W. (Cardiff Business School)
    Abstract: Throughout history, victory in conflict has created fearsome reputations. With it, the victor ensures greater allegiance of the wider population, increasing their rents at the expense of their enemy. Such reputational concerns generate two motives for conflict. When only victory or defeat is informative, the less scary party may attack to show that they are tougher than expected. If the occurrence of conflict also conveys information, the scarier party is more likely to attack. By failing to do so, the population would perceive them as weak and switch loyalties anyway. In this case, conflict arises to save face.
    Keywords: Conflict; Reputations
    JEL: D74 C73 D83 F51 H56
    Date: 2014–10

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