nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒11‒07
twenty-six papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Bayes Correlated Equilibrium and the Comparison of Information Structures in Games By Dirk Bergemann; Stephen Morris
  2. Asymmetric Information and Rationalizability By Gabriel Desgranges; Stéphane Gauthier
  3. Do Actions Speak Louder Than Words? Auditing, Disclosure, and Verification in Organizations By Luca Anderlini; Dino Gerardi; Roger Lagunoff
  4. Dynamic Revenue Maximization: A Continuous Time Approach By Dirk Bergemann; Philipp Strack
  5. Leadership in the Prisoner's Dilemma with Inequity-Averse Preferences By Koji Abey; Hajime Kobayashi; Hideo Suehiro
  6. Shills and Shipes By Subir Bose; Arup Daripa
  7. Optimal Truncation in Matching Markets By Peter A. Coles; Ran I. Shorrer
  8. Dynamic Platform Design By Andre Veiga;
  9. Collusion, Randomization and Leadership in Groups By Rohan Dutta; David K Levine; Salvatore Modica
  10. Correlation in the Multiplayer Electronic Mail Game By Peter A. Coles; Ran I. Shorrer
  11. Optimal Crowdfunding Design By Matthew Ellman; Sjaak Hurkens
  12. Contractually stable networks By Jean-François Caulier; A. Mauleon; Vincent Vannetelbosch
  13. Temporal Resolution of Uncertainty and Recursive Models of Ambiguity Aversion By Strzalecki, Tomasz
  14. Exclusive Dealing and Vertical Integration in Interlocking Relationships By Nocke, Volker; Rey, Patrick
  15. Project Selection: Commitment and Competition By Vidya Atal; Talia Bar; Sidartha Gordon
  16. When Price Discrimination Fails - A Principal Agent Problem with Social Influence By Vlad Radoias
  17. Decision Errors, Legal Uncertainty and Welfare: a General Treatment By Yannis Katsoulacos; David Ulph
  18. Scoring Rules over Subsets of Alternatives: Consistency and Paradoxes By Eric Kamwa; Vincent Merlin
  19. To Adjust or not to Adjust after a Cost-Push Shock? A Simple Duopoly Model with (and without) Resilience By L. Lambertini; L. Marattin
  20. Stereotypes By Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
  21. Vertical Integration as a Source of Hold-up By Allain, Marie-Laure; Rey, Patrick; Chambolle, Claire
  22. Ex Ante and Ex Post Investments in Cybersecurity By Lam, Wing Man Wynne
  23. Pareto Improvements under Matching Mechanisms in a Public Good Economy By Weifeng Liu
  24. An approximate dual-self model and paradoxes of choice under risk By Fudenberg, Drew; Levine, David K.; Maniadis, Zacharias
  25. Over-Confidence, Shame and Investments By Dessi, Roberta; Zhao, Xiaojian
  26. Measuring Power and Satisfaction in Societies with Opinion Leaders By René Van Den Brink; Agnieszka Rusinowska; Frank Steffen

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: The set of outcomes that can arise in Bayes Nash equilibria of an incomplete information game where players may have access to additional signals beyond the given information structure is equivalent to the set of a version of incomplete information correlated equilibrium which we dub Bayes correlated equilibrium. A game of incomplete information can be decomposed into a basic game, given by actions sets and payoff functions, and an information structure. We identify a partial order on many player information structures (individual sufficiency) under which more information shrinks the set of Bayes correlated equilibria.
    Keywords: Correlated equilibrium, Incomplete information, Robust predictions, Information structure, Sufficiency, Blackwell ordering
    JEL: C72 D82 D83
    Date: 2013–09
  2. By: Gabriel Desgranges (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We study how asymmetric information affects the set of rationalizable solutions in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium is also the unique rationalizable solution when the sensitivity of the outcome to agents' forecasts is less than one, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, multiple rationalizable solutions arise when the proportion of agents who know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than one. Instability is equivalent to existence of some kind of sunspot equilibria.
    Keywords: Asymmetric information; common knowledge; eductive learning; rational expectations; rationalizability
    Date: 2013
  3. By: Luca Anderlini (Department of Economics, Georgetown University); Dino Gerardi (Collegio Carlo Alberto, Universit' degli Studi di Torino); Roger Lagunoff (Department of Economics, Georgetown University)
    Abstract: We study the relative performance of disclosure and auditing in organizations. We consider the information transmission problem between two decision makers who take actions at dates 1 and 2 respectively. The first decision maker has private information about a state of nature that is relevant for both decisions, and sends a cheap-talk message to the second. The second decision maker can commit to only observe the message (disclosure), or can retain the option to observe the action of the first decision maker (auditing) or, at some cost, to verify the state. In equilibrium, state verification will never occur and the second decision maker effectively chooses between auditing and disclosure. When the misalignment is preferences reflects a bias in a decision maker's own action relative to that of the other - we call this an agency bias - then, in equilibrium, the second decision maker chooses to audit. Actions speak louder than words in this case. When one decision maker prefers all actions to be biased relative to the other decision maker - we call this an ideological bias - then, if the misalignment is large enough, in equilibrium the second decision maker chooses disclosure. In this case words speak louder than actions. While firms are usually characterized by agency bias, ideological bias is more common in political systems. Our results indicate that the ability to commit not to audit has value in the latter case. However such commitment is rarely feasible in the political sphere.
    Keywords: Auditing, Disclosure, Agency Bias, Ideological Bias
    JEL: C73 D63 D72 D74 H11
    Date: 2014–06–01
  4. By: Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Microsoft Research New England & UC Berkeley)
    Abstract: We characterize the profit-maximizing mechanism for repeatedly selling a non-durable good in continuous time. The valuation of each agent is private information and changes over time. At the time of contracting every agent privately observes his initial type which influences the evolution of his valuation process. In the profit-maximizing mechanism the allocation is distorted in favor of agents with high initial types. We derive the optimal mechanism in closed form, which enables us to compare the distortion in various examples. The case where the valuation of the agents follows an arithmetic/geometric Brownian motion, Ornstein-Uhlenbeck process, or is derived from a Bayesian learning model are discussed. We show that depending on the nature of the private information and the valuation process the distortion might increase or decrease over time.
    Keywords: Mechanism design, Dynamic auctions, Repeated sales
    JEL: D44 D82 D83
    Date: 2014–07
  5. By: Koji Abey (Faculty of International Social Sciences, Yokohama National University); Hajime Kobayashi (Faculty of Economics, Kansai University); Hideo Suehiro (Graduate School of Business Administration, Kobe University)
    Abstract: We consider the economic consequences of fairness concerns under the freedom to choose the timing of moves by developing a new economic theory of leadership. We study the prisoner' s dilemma in which players are endowed with Fehr and Schmidt preferences with inequity aversion as their private information and then choose cooperation or defection once at one of two timings that they prefer. In this model, we consider an equilibrium in which a leader-follower relationship endogenously emerges as a consequence of players' heterogeneous inequity aversions. We present three results. First, we provide a sufficient condition for the existence of a leadership equilibrium. Then, we present a comparative statics analysis of the equilibrium. Finally, we investigate who takes the leadership, depending on the game parameters. We provide a characterization of the equilibrium leadership patterns. These results also hold when agents can choose the timing of moves from more than two timings.
    Keywords: Leadership, Endogenous Timing, Prisoner' s Dilemma, Inequity Aversion
    JEL: C72 D03 D82
    Date: 2014–05
  6. By: Subir Bose; Arup Daripa
    Abstract: Online auctions with a fixed end-time often experience a sharp increase in bidding towards the end despite using a proxy-bidding format. We provide a novel explanation of this phenomenon under private values. We study a correlated private values environment in which the seller bids in her own auction (shill bidding). Bidders selected randomly from some large set arrive randomly in an auction, then decide when to bid (possibly multiple times) over a continuous time interval. A submitted bid arrives over a continuous time interval according to some stochastic distribution. The auction is a continuous-time game where the set of players is not commonly known, a natural setting for online auctions. Our results are robust with respect to the seller’s and the bidders’ priors regarding the set of bidders arriving at the auction. We show that there is a late-bidding equilibrium in which bids are delayed to the latest instance involving no sacrifice of probability of bid arrival, but shill bids fail to arrive with positive probability, and in this sense optimal late bidding serves to snipe the shill bids. We show conditions under which the equilibrium outcome is unique. Further, if these conditions do not hold, and there are any equilibria with a different outcome, they are necessarily characterized by early bidding. Any such equilibria are Pareto dominated for the bidders compared to the late-bidding equilibrium. Finally, our results suggest that under private values, the case against shill-bidding might be weak.
    Keywords: Online auctions, correlated private values, last-minute bidding, sniping, shill bidding, random bidder arrival, continuous bid time, continuous bid arrival process.
    JEL: D44
    Date: 2014–09
  7. By: Peter A. Coles; Ran I. Shorrer
    Abstract: Although no stable matching mechanism can induce truth-telling as a dominant strategy for all participants (Roth, 1982), recent studies have presented conditions under which truthful reporting by all agents is close to optimal (Immorlica and Mahdian, 2005,�Kojima and Pathak, 2009�and�Lee, 2011). Our results demonstrate that in large, uniform markets using the Men-Proposing Deferred Acceptance Algorithm, each woman's best response to truthful behavior by all other agents is to truncate her list substantially. In fact, the optimal degree of truncation for such a woman goes to 100% of her list as the market size grows large. In general one-to-one markets we provide comparative statics for optimal truncation strategies: reduction in risk aversion and reduced correlation across preferences each lead agents to truncate more. So while several recent papers focused on the limits of strategic manipulation, our results serve as a reminder that without pre-conditions ensuring truthful reporting, there exists a potential for significant manipulation even in settings where agents have little information.
  8. By: Andre Veiga (Nuffield College, Oxford University, 1 New Road, Oxford OX1 1NF, United Kingdom);
    Abstract: Abstract I model dynamic product design along price and non-price dimensions by a firm in a market with positive network externalities between consumers. In the case of a usage fee, I provide conditions under which the steady state (SS) is unique and show that the introductory price is negative and therefore below the positive SS price. Moreover, SS price increases with the size of demand frictions and is therefore higher than in a static model. A welfare maximizer's SS price is lower than a profit-maximizer's, and it is negative if demand frictions are low enough. If a platform chooses product scope (in the sense of Johnson and Myatt (2006)), it is optimal to begin as a niche platform and to broaden scope as market share increases. When the platform can target different groups of consumers with different prices, it caters to those consumers whose price-elasticity of demand is large relative to their valuation for network externalities. Finally, we show how the model can be extended to the case where consumers have multidimensional types and make heterogeneous contributions to the network's value.
    Keywords: Production, Pricing, and Market Structure; Networks; Network Formation and Analysis; Existence and Stability Conditions of Equilibrium; Dynamic Analysis; Firm Behavior: Theory; Monopoly
    JEL: L11 L14 D85 C62 C61 D21 D42
    Date: 2014
  9. By: Rohan Dutta; David K Levine; Salvatore Modica
    Date: 2014–10–17
  10. By: Peter A. Coles; Ran I. Shorrer
    Abstract: In variants of the Electronic Mail Game (Rubinstein, 1989) where two or more players communicate via multiple channels, the multiple channels can facilitate collective action via redundancy, the sending of the same message along multiple paths or else repeatedly along the same path (Chwe, 1995 and De Jaegher, 2011). This paper offers another explanation for how multiple channels may permit collective action: parties may be able to coordinate their actions when messages' arrivals at their destinations are sufficiently correlated events. Correlation serves to fill in information gaps that arise when players are uncertain of the source of message failure, effectively strengthening messages from one player. This asymmetry in message strength in turn permits cutoff equilibria, where players take action after receiving a minimum number of confirmations.
  11. By: Matthew Ellman (Institute for Economic Analysis (CSIC) and BGSE, Campus UAB, 08193 Bellaterra, Spain); Sjaak Hurkens (Institute for Economic Analysis (CSIC) and BGSE, Campus UAB, 08193 Bellaterra, Spain)
    Abstract: This paper investigates the optimal design of crowdfunding where crowdfunders are potential consumers with standard motivations and entrepreneurs are profit-maximizing agents. We characterize the typical crowdfunding mechanism where the entrepreneur commits to produce only if aggregate funding exceeds a defined threshold. We study how the entrepreneur uses this threshold, in conjunction with a minimal price, for rent extraction. Compared to a standard posted-price mechanism, total welfare may rise because the entrepreneur can adapt the production decision to demand conditions, but may fall because rent-seeking can worsen. Crowdfunding platforms can raise threshold credibility. So we also compare outcomes when the entrepreneur commits to a threshold against those where the entrepreneur simply decides on production after observing crowdfunder bids. Finally, we contrast crowdfunding with the optimal mechanism where production is contingent on a general function of all bids, rather than the simple sum of bids obliged by the aggregate threshold rule. Crowdfunding is very different, for instance, never committing to produce the good when aggregate bids fall short of the fixed cost (even absent credit constraints).
    Keywords: Crowdfunding; mechanism design
    JEL: C72 D42 L12
    Date: 2014–10
  12. By: Jean-François Caulier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); A. Mauleon (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique); Vincent Vannetelbosch (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique)
    Abstract: We develop a theoretical framework that allows us to study which bilateral links and coalition structures are going to emerge at equilibrium. We define the notion of coalitional network to represent a network and a coalition structure, where the network speciÖes the nature of the relationship each individual has with his coalition members and with individuals outside his coalition. To predict the coalitional networks that are going to emerge at equilibrium we propose the concept of contractual stability which requires that any change made to the coalitional network needs the consent of both the deviating players and their original coalition partners. We show that there always exists a contractually stable coalitional network under the simple majority decision rule and the component-wise egalitarian or majoritarian allocation rules. Moreover, requiring the consent of group members may help to reconcile stability and e¢ ciency.
    Keywords: Networks ; Coalition Structures ; Contractual Stability ; Allocation Rules Networks ; Strong efficiency
    Date: 2013
  13. By: Strzalecki, Tomasz
    Abstract: Dynamic models of ambiguity aversion are increasingly popular in applied work. This paper shows that there is a strong interdependence in such models between the ambiguity attitude and the preference for the timing of the resolution of uncertainty, as defined by the classic work of Kreps and Porteus (1978). The modeling choices made in the domain of ambiguity aversion influence the set of modeling choices available in the domain of timing attitudes. The main result is that the only model of ambiguity aversion that exhibits indifference to timing is the maxmin expected utility of Gilboa and Schmeidler (1989). This paper examines the structure of the timing nonindifference implied by the other commonly used models of ambiguity aversion. This paper also characterizes the indifference to long-run risk, a notion introduced by Duffie and Epstein (1992). The interdependence of ambiguity and timing that this paper identifies is of interest both conceptually and practically—especially for economists using these models in applications.
    Date: 2013
  14. By: Nocke, Volker; Rey, Patrick
    Abstract: We develop a model of interlocking bilateral relationships between upstream manufacturers that produce differentiated goods and downstream retailers that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, at the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically.
    Keywords: vertical relations, exclusive dealing, vertical merger, foreclosure, bilateral contracting
    JEL: D43 L13 L42
    Date: 2014–07
  15. By: Vidya Atal (Monclair State University); Talia Bar (University of Connecticut); Sidartha Gordon (Sciences Po)
    Abstract: We examine project selection decisions of …rms constrained in the number of projects they can handle at once. Taking on a project requires a commitment of uncertain duration, restricting the …rm from selecting another project in subsequent periods. Due to the capacity constraints and need for commitment, some positive return projects are rejected. In a sequential move dynamic game, we fi…nd that the …first mover strategically rejects some projects that are then selected by the second mover, even when both fi…rms are symmetric and equally informed. We study the effects of competition on project selection, and compare the jointly optimal selection decision to the behavior of strategic non-cooperative …firms.
    Keywords: project selection, search, commitment, Markov perfect equilibrium
    JEL: L10 L13 D21
    Date: 2014–07
  16. By: Vlad Radoias (Department of Economics, Towson University)
    Abstract: I develop a theoretical model of price discrimination under social influence. I find that social influence gives sellers the incentive to artificially create and maintain excess demand on the market. The rationing occurs mainly at the low end of the market, and sometimes results in full rationing of the low end. Furthermore, the incidence of price discrimination under social influence is much lower than in the absence of it. Social influence lowers the profitability of price discrimination and incentivizes sellers to reduce product variety and to only target the high end of the market, a fact that is consistent with many empirical observations.
    Keywords: Price Discrimination, Social Influence, Excess Demand.
    JEL: D4 L15 M31
    Date: 2014–10
  17. By: Yannis Katsoulacos (Athens University of Economics and Business); David Ulph (University of St Andrews)
    Abstract: This paper provides a general treatment of the implications for welfare of legal uncertainty. We distinguish legal uncertainty from decision errors: though the former can be influenced by the latter, the latter are neither necessary nor sufficient for the existence of legal uncertainty. We show that an increase in decision errors will always reduce welfare. However, for any given level of decision errors, information structures involving more legal uncertainty can improve welfare. This holds always, even when there is complete legal uncertainty, when sanctions on socially harmful actions are set at their optimal level. This transforms radically one’s perception about the “costs” of legal uncertainty. We also provide general proofs for two results, previously established under restrictive assumptions. The first is that Effects-Based enforcement procedures may welfare dominate Per Se (or object-based) procedures and will always do so when sanctions are optimally set. The second is that optimal sanctions may well be higher under enforcement procedures involving more legal uncertainty.
    Keywords: optimal law enforcement, optimal penalties, legal uncertainty, decision errors
    JEL: K4 L4 K21 K23
    Date: 2014–02–01
  18. By: Eric Kamwa (CREM UMR CNRS 6211, University of Caen Basse Normandie, France); Vincent Merlin (CREM UMR CNRS 6211, University of Caen Basse Normandie, France)
    Abstract: We know since the works of Gehrlein and Fishburn (1980, 1981), Fishburn (1981) and Saari (1987, 1988, 1990) that, the collective rankings of scoring rules are not stable when some alternatives are dropped from the set of alternatives. However, in the literature, attention has been mainly devoted to the relationship between pairwise majority vote and scoring rules rankings. In this paper, we focus on the relationships between four-candidate and three-candidate rankings. More precisely, given a collective ranking over a set of four candidates, we determine under the impartial culture condition, the probability of each of the six possible rankings to occur when one candidate is dropped. As a consequence, we derive from our computations, the likelihood of two paradoxes of committee elections, the Leaving Member paradox (Staring, 1986) and of the Prior Successor Paradox which occur when an elected candidate steps down from a two-member committee.
    Keywords: Scoring rule, Consistency, Collective Ranking, Committee, Paradox, Impartial Culture
    JEL: D70 D71
    Date: 2014–09
  19. By: L. Lambertini; L. Marattin
    Abstract: We characterize the equilibrium in a homogeneous good Cournot duopoly in which firms have the choice to react to a cost-push shock by paying a lump-sum adjustment cost in order to offset the initial rise in marginal cost. Our results show that the size of the shock and the size of the adjustment cost jointly determine the nature and the number of the equilibria generated in the game. In particular, if the adjustment cost is high enough, at least one firm decides not to adjust at the pure strategy equilibrium, and such a partial adjustment by the industry can be socially efficient as well. Some implications of this partial equilibrium analysis about an industry' resilience are outlined.
    JEL: D43 E30 L13
    Date: 2014–10
  20. By: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a model of stereotypes in which a decision maker assessing a�group recalls only that group's most representative or distinctive types. Stereotypes highlight differences between groups, and are especially inaccurate (consisting of unlikely, extreme types) when groups are similar. �Stereotypical thinking exhibits base rate neglect, but also confirmation bias: beliefs overreact to information that confirms the stereotype and ignore information that contradicts it. �Stereotypes can change if new information changes the group's most distinctive trait. Applied to gender stereotypes, the model provides a unified account of disparate evidence regarding the gender gap in education and in labor markets.
    Date: 2014–09
  21. By: Allain, Marie-Laure; Rey, Patrick; Chambolle, Claire
    Abstract: While vertical integration is traditionally seen as a solution to the hold-up problem, this paper highlights instead that it can generate hold-up problems — for rivals. We first consider a successive duopoly where competition among suppliers eliminates any risk of hold-up; downstreamfirms thus obtain the full return from their investments. We then show that vertical integration creates hold-up concerns for the downstream rival, by affecting the integrated supplier’s incentives from both ex ante and ex post standpoints. We also provide illustrations in terms of standard industrial organization models and of antitrust cases, and discuss the robustness of the insights.
    Keywords: Vertical Integration, Hold-up, Incomplete contracts, Vertical foreclosure.
    JEL: L13 L41 L42
    Date: 2014–09
  22. By: Lam, Wing Man Wynne
    Abstract: This paper develops a theory of sequential investments in cybersecurity in which the software vendor can invest ex ante and ex post. The regulator can use safety standards and liability rules as means of increasing security. A standard is a minimum level of safety, and a liability rule states the amount of damage each party is liable for. I show that the joint use of an optimal standard and a full liability rule leads to underinvestment ex ante and overinvestment ex post because the software vendor does not suffer the full costs of the society in case of security failure. Instead, switching to a partial liability rule can correct the inefficiencies. This suggests that to improve security, the regulator should encourage not only the firms, but also the enterprises to invest in security. I also discuss the effect of network externality and explain why firms engage in "vaporware".
    Keywords: cybersecurity, sequential investment, standards, liability
    JEL: L1 L8
    Date: 2014–08
  23. By: Weifeng Liu
    Abstract: Matching mechanisms have been proposed to mitigate underprovision of public goods in voluntary contribution models. This paper investigates Pareto-improving equilibria under various matching schemes with two heterogeneous players. First, this matching mechanism avoids free riding and each player has incentives to provide matching contributions at interior equilibria because providing matching contributions is better off while accepting matching contributions is worse off. Second, given any income distribution within the interiority zone players can always implement small matching schemes to make them both better off. This finding is useful for cooperation, particularly in the context without complete information of global preferences or at the international level without a central government. Third, on the contrary, at corner equilibria providing matching contributions is worse off while accepting matching contributions is better off. Thus, if income distribution is beyond the interiority zone, there are no Pareto-improving matching equilibria.
    Keywords: Public goods, Matching mechanisms, Pareto improvements, Aggregative games, Interiority
    JEL: C78 H41 H77 Q54
    Date: 2014–10
  24. By: Fudenberg, Drew; Levine, David K.; Maniadis, Zacharias
    Abstract: We derive a simplified version of the model of Fudenberg and Levine, 2006 and Fudenberg and Levine, 2011 and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out†in the Marschak–Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.
    Date: 2014
  25. By: Dessi, Roberta; Zhao, Xiaojian
    Abstract: The available evidence from numerous studies suggests that overconfidence is a more important phenomenon in North America than in Japan. The pattern is reversed for shame, which appears to play a more important role among Japanese than North Americans. We develop a model that endogenizes these differences and examines their economic consequences. In addition, it yields novel implications for differences in overconfidence and behavior within countries. A crucial tradeoff arises in the model between the benefits of encouraging improvement on existing activities and the benefits of promoting initiative and investment in new activities. Overconfidence and high sensitivity to shame emerge as substitute mechanisms to induce efficient investment decisions, generating a "North American" equilibrium with overconfidence and low sensitivity to shame, and a "Japanese" equilibrium with high sensitivity to shame and no overconfidence. The analysis identifies the costs as well as bene fits of reliance on each mechanism, and welfare implications.
    Keywords: Overconfidence, shame, investment, cultural differences, cross-sectional differences, memory, cultural transmission
    JEL: D03 D83 Z1
    Date: 2014–08
  26. By: René Van Den Brink (Department of Econometrics and Tinbergen Institute - VU University); Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Frank Steffen (University of Liverpool Management School (ULMS) - University of Liverpool Management School)
    Abstract: Opinion leaders are actors who have some power over their followers as they are able to influence their followers' choice of action in certain instances. In van den Brink et al. (2011) we proposed a two-action model for societies with opinion leaders. We introduced a power and a satisfaction score and studied some common properties. In this paper we strengthen two of these properties and present two further properties, which allows us to axiomatize both scores for the case that followers require unanimous action inclinations of their opinion leaders to follow them independently from their own action inclinations.
    Keywords: Collective choice ; follower ; opinion leader ; power ; satisfaction ; axiomatization
    Date: 2013

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