nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒11‒22
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Aggregating Tastes, Beliefs, and Attitudes under Uncertainty. By Eric Danan; Thibault Gajdos; Brian Hill; Jean-Marc Tallon
  2. Do Actions Speak Louder than Words? By Luca Anderlini; Dino Gerardi; Roger Lagunoff
  3. Learning under Ambiguity - A Note on the Belief Dynamics of Epstein and Schneider (2007) By Heyen, Daniel
  4. Multiproduct trading with a common agent under complete information: Existence and characterization of Nash equilibrium By Iván Arribas; Amparo Urbano Salvador
  5. Sequential Voting and Agenda Manipulation By Salvador Barberà; Anke Geber
  6. From degrees of belief to beliefs: Lessons from judgment-aggregation theory By Dietrich, Franz; List, Christian
  7. Biased Supervision By Josse Delfgaauw; Michiel Souverijn
  8. Determinacy of Equilibrium in Outcome Game Forms By Litan, Cristian; Marhuenda, Francisco; Sudhölter, Peter
  9. War with Crazy Types By Avidit Acharya; Edoardo Grillo
  10. Multiple Contracting in Insurance Markets: Cross-Subsidies and Quantity Discounts By Attar, Andrea; Mariotti, Thomas; Salanié, François
  11. A new dynamic mechanism to the marriage problem with a variant By B. Evci
  12. A Theory of Price Adjustment under Loss Aversion By Steffen Ahrens; Inske Pirschel; Dennis J. Snower;
  13. Again on the Farkas Theorem and the Tucker Key Theorem Proved Easily By Giorgio Giorgi
  14. Fear of Rejection? Tiered Certification and Transparency By Emmanuel Farhi; Josh Lerner; Jean Tirole

  1. By: Eric Danan (THEMA - Université Cergy-Pontoise); Thibault Gajdos (GREQAM - Université d'Aix Marseille); Brian Hill (GREGHEC - HEC Paris); Jean-Marc Tallon (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We provide possibility results on the aggregation of beliefs and tastes for Monotone, Bernoullian and Archimedian preferences of Cerreia-Vioglio, Ghirardato, Maccheroni, Marinacci and Siniscalchi (2011). We propose a new axiom, Unambiguous Pareto Dominance, which requires that if the unambiguous part of individuals' preferences over a pair of acts agree, then society should follow them. We characterize the resulting social preferences and show that it is enough that individuals share a prior to allow non dictatorial aggregation. A further weakening of this axiom on common-taste acts, where cardinal preferences are identical, is also characterized. It gives rise to a set of relevant priors at the social level that can be any subset of the convex hull of the individuals' sets of relevant priors. We then apply these general results to the Maxmin Expected Utility model, the Choquet Expected Utility model and the Smooth Ambiguity model. We end with a characterization of the aggregation of ambiguity attitudes.
    Keywords: Preferences aggregation, social choice, uncertainty.
    JEL: D71 D81
    Date: 2014–07
  2. By: Luca Anderlini; Dino Gerardi; Roger Lagunoff
    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
  3. By: Heyen, Daniel
    Abstract: Epstein and Schneider (2007) develop a framework of learning under ambiguity, generalizing maxmin preferences of Gilboa and Schmeidler (1989) to intertemporal settings. The specific belief dynamics in Epstein and Schneider (2007) rely on the rejection of initial priors that have become implausible over the learning process. I demonstrate that this feature of ex-post rejection of theories gives rise to choices that are in sharp contradiction with ambiguity aversion. Concrete, the intertemporal maxmin decision-maker equipped with such belief dynamics prefers, under prevalent conditions, a bet in an ambiguous urn over the same bet in a risky urn. I offer two modifications of their framework, each of which is capable of avoiding this anomaly.
    Keywords: learning under ambiguity; multiple prior; maxmin; ambiguity aversion
    Date: 2014–10–21
  4. By: Iván Arribas (ERI-CES, University of Valencia, Ivie); Amparo Urbano Salvador (ERI-CES, University of Valencia)
    Abstract: This paper focuses on oligopolistic markets in which indivisible goods are sold by multiproduct firms to a continuum of homogeneous buyers, with measure normalized to one, who have preferences over bundles of products. Our analysis contributes to the literature on private, delegated agency games with complete information, extending the insights by Chiesa and Denicolò (2009) to multiproduct markets with indivisibilities and where the agent's preferences need not be monotone. By analyzing a kind of extended contract schedules -mixed bundling prices- that discriminate on exclusivity, the paper shows that efficient equilibria always exist in such settings. There may also exist inefficient equilibria in which the agent chooses a suboptimal bundle and no principal has a profitable deviation inducing the agent to buy the surplus-maximizing bundle because of a coordination problem among the principals. Inefficient equilibria can be ruled out by either assuming that all firms are pricing unsold bundles at the same profit margin as the bundle sold at equilibrium, or imposing the solution concept of subgame perfect strong equilibrium, which requires the absence of profitable deviations by any subset of principals and the agent. We also provide a characterization of the equilibrium strategies. More specific results about the structure of equilibrium prices and payoffs for common agency outcomes are ofered when the social surplus function is monotone and either submodular or supermodular.
    Keywords: Multiproduct Price Competition, Delegated Agency Games, Mixed Bundling Prices, Subgame Perfect Nash Equilibrium, Strong Equilibrium
    JEL: C72 D21 D41 D43 L13
    Date: 2014–09
  5. By: Salvador Barberà; Anke Geber
    Abstract: We provide characterizations of the set of outcomes that can be achieved by agenda manipulation for two prominent sequential voting procedures, the amendment and the successive procedure. Tournaments and super-majority voting with arbitrary quota q are special cases of the general sequential voting games we consider. We show that when using the same quota, both procedures are non-manipulable on the same set of preference profiles, and that the size of this set is maximized under simple majority. However, if the set of attainable outcomes is not single-valued, then the successive procedure is more vulnerable towards manipulation than the amendment procedure. We also show that there exists no quota which uniformly minimizes the scope of manipulation, once this becomes possible.
    Keywords: sequential voting, agendas, manipulation
    JEL: C72 D02 D71 D72
    Date: 2014–08
  6. By: Dietrich, Franz; List, Christian
    Abstract: What is the relationship between degrees of belief and (all-or-nothing) beliefs? Can the latter be expressed as a function of the former, without running into paradoxes? We reassess this “belief-binarization†problem from the perspective of judgmentaggregation theory. Although some similarities between belief binarization and judgment aggregation have been noted before, the literature contains no general study of the implications of aggregation-theoretic impossibility and possibility results for belief binarization. We seek to fill this gap. At the centre of this paper is an impossibility theorem showing that, except in simple cases, there exists no belief-binarization rule satisfying four baseline desiderata (“universal domainâ€, “belief consistency and completenessâ€, “propositionwise independenceâ€, “certainty preservationâ€). We show that this result is a corollary of the judgment-aggregation variant of Arrow’s impossibility theorem and explore several escape routes from it.
    Keywords: subjective probability, yes/no belif, impossibility theorem on binarization, analytic philosophy, judgment aggregation
    JEL: C0 C02 D0 D01 D7 D70 D8 D80 D81 D89
    Date: 2014–08
  7. By: Josse Delfgaauw (Erasmus University Rotterdam); Michiel Souverijn (Erasmus University Rotterdam, the Netherlands)
    Abstract: When verifiable performance measures are imperfect, organizations often resort to subjective performance pay. This may give supervisors the power to direct employees towards tasks that mainly benefit the supervisor rather than the organization. We cast a principal-supervisor-agent model in a multitask setting, where the supervisor has an intrinsic preference towards specific tasks. We show that subjective performance pay based on evaluation by a biased supervisor has the same distorting effect on the agent's effort allocation as incentive pay based on an incongruent performance measure. If the principal can combine incongruent performance measures with biased supervision, the distortion in the agent's efforts is mitigated, but cannot always be eliminated. We apply our results to the choice between specialist and generalist middle managers, where a trade-off between expertise and bias may arise.
    Keywords: subjective performance evaluation, middle managers, incentives, multitasking
    JEL: J24 M12 M52
    Date: 2014–08–25
  8. By: Litan, Cristian (Department of Statistics, Forecasting, Mathematics); Marhuenda, Francisco (Department of Economics); Sudhölter, Peter (Department of Business and Economics)
    Abstract: We show the generic finiteness of the number of probability distributions on outcomes induced by Nash equilibria for two-person game forms such that either (i) one of the players has no more than two strategies or (ii) both of the players have three strategies, and (iii) for outcome game forms with three players, each with at most two strategies. Finally, we exhibit an example of a game form with three outcomes and three players for which the Nash equilibria of the associated game induce a continuum of payoffs for an open non-empty set of utility profiles.
    Keywords: Outcome game form; Completely mixed Nash equilibrium; Generic finiteness
    JEL: C72
    Date: 2014–11–05
  9. By: Avidit Acharya; Edoardo Grillo
    Abstract: We model a situation in which two countries are involved in a dispute. The dispute can end in a peaceful settlement, or it can escalate to war. If it is common knowledge that the countries are strategically rational, then the only equilibrium outcome of the model is peace. If, on the other hand, each country believes that there is some chance that its adversary is a crazy type that always behaves aggressively, then even a strategically rational country may have an incentive to pretend to be crazy. This leads to war with positive probability. In addition to being qualitatively different from the existing literature, our model (i) enables a more tractable analysis of two-sided incomplete informa- tion, (ii) has a generically unique equilibrium prediction, and (iii) yields several new comparative statics results. For example, we analyze the effect of increas- ing the prior probability that the countries are crazy types, as well as the effect of changing the relative military strengths of the countries, on equilib- rium behavior. In studying these comparative statics, our model identifies two countervailing forces that arise when the prior probability that a country is crazy decreases: a reputation motive that promotes less aggressive behavior by that country, and a defense motive that promotes more aggressive behavior by the other country.
    Keywords: war, conflict, bargaining, reputation
    JEL: C7 F5 N4
    Date: 2014
  10. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We study a nonexclusive insurance market with adverse selection in which insurers compete through simple contract offers. Multiple contracting endogenously emerges in equilibrium. Different layers of coverage are priced fairly according to the types of insurees who purchase them, giving rise to cross-subsidies between types. Riskier insurees demand greater total coverage at an increasing unit price, but the contracts offered by insurers feature quantity discounts in equilibrium. Our policy implications emphasize the need to regulate the supply side of nonexclusive insurance markets, leaving insurees free to choose their optimal level of coverage.
    Keywords: Insurance Markets, Multiple Contracting, Adverse Selection.
    JEL: D43 D82 D86
    Date: 2014–10–07
  11. By: B. Evci
    Abstract: We know from Gale and Shapley (1962) that every Two-Sided Matching Game has a stable solution. It is also well-known that the number of stable matchings increases with the number of agents on both sides. In this paper, we propose two mechanisms, one of which is a variant of the other, to the marriage problem. Our original mechanism implements the full set of stable matchings for any preference profile. On the other hand, the variant mechanism parititons the domain of preference profiles into two; for one set, it implements the full set of stable matchings like the original mechanism and for the other, it ends up with a proper subset of the set of stable matchings. Besides, for some profiles with multi stability, it gives one of the optimal stable matchings. Namely, the second mechanism coincides either with the original mechanism or it is an improvement for one side; and in some profiles, the algortihm induces Gale and Shapley's algorithm for some profiles. Thus, it is a "middle" mechanism.
    JEL: C78 D78
    Date: 2014–10
  12. By: Steffen Ahrens; Inske Pirschel; Dennis J. Snower;
    Abstract: We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers’ perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers’ rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers’ reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks.
    Keywords: price sluggishness, loss aversion, state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014–11
  13. By: Giorgio Giorgi (Department of Economics and Management, University of Pavia)
    Abstract: The purpose of this paper is twofold; first, to present a simple proof of the Farkas theorem (or Farkas lemma or Farkas-Minkowski lemma), proof performed through a nonlinear theorem of the alternative; second, to present various new proofs of the so-called "Tucker key theorem", and to show that these two results are essentially equivalent.
    Keywords: Farkas lemma, Farkas theorem of the alternative, Tucker key theorem, Gordan theoren, Stiemke theorem, Motzkin theorem
    Date: 2014–10
  14. By: Emmanuel Farhi; Josh Lerner; Jean Tirole

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