nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒12‒08
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Foundation for Dominant Strategy Voting Mechanisms By Debasis Mishra
  2. Optimism, pessimism and financial bubbles By Bertrand Wigniolle
  3. Beatable Imitation in Symmetric Games with Perturbed Payoffs By Tsakas, Nikolas
  4. Satisficing Behavior with a Secondary Criterion By Christopher J. Tyson
  5. Public Information in Populations with Heterogeneous Interests By Kristoffer Nimark
  6. A Behavioral Definition of States of the World By Vassili Vergopoulos
  7. Utilitarianism with Prior Heterogeneity By Antoine Billot; Vassili Vergopoulos
  8. Permission to Exist By Martin C. Byford; Joshua S. Gans
  9. Bargaining in Bilateral Oligopoly: An Alternating Offers Representation of the "Nash-in-Nash" Solution By Allan Collard-Wexler; Gautam Gowrisankaran; Robin S. Lee
  10. Believing when Credible: Talking about Future Plans By Karl H. Schlag; Péter Vida
  11. Reverse First-mover and Second-mover Advantage in a Vertical Structure By Lee, DongJoon; Choi, Kangsik; Hwang, Kyu-Chan
  12. Homogeneous platform competition with endogenous homing By Jeitschko, Thomas D.; Tremblay, Mark J.
  13. Beauty Contests and Fat Tails in Financial Markets By Makoto Nirei; Tsutomu Watanabe
  14. Policy experimentation, political competition, and heterogeneous beliefs By Antony Millner; Hélène Ollivier; Leo Simon
  15. A life-cycle model with ambiguous survival beliefs By Groneck, Max; Ludwig, Alexander; Zimper, Alexander
  16. An Axiomatic Approach to Measuring Degree of Stochastic Dominance By Takashi Kamihigashi; John Stachurski

  1. By: Debasis Mishra
    Abstract: We study deterministic voting mechanisms by considering an ordinal notion of Bayesian incentive compatibility (OBIC). If the beliefs of agents are independent and generic, we show that any OBIC mechanism is dominant strategy incentive compatible under an additional mild requirement. Our result works in a large class of preference domains (that include the unrestricted domain, the single peaked domain, a specific class of single crossing domains) and under a weaker notion of OBIC that we call locally OBIC. We also discuss the implications of assuming unanimity on our results.
    Date: 2014–11
  2. By: Bertrand Wigniolle (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: This paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank-dependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Paretooptimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles.
    Keywords: Rational bubbles; RDU preferences
    Date: 2014–04
  3. By: Tsakas, Nikolas
    Abstract: In a recent paper, Duersch (2012) showed that in a rather broad class of repeated symmetric two-player games, a player who uses the simple "imitate-if-better" heuristic cannot be subject to a money pump. In this paper, we extend the analysis to games with randomly perturbed payoffs and we show that this result is not robust to, even arbitrarily small, payoff perturbations. In particular, we provide a necessary and sufficient condition that characterizes the class of perturbed games in which the imitator can be subject to a money pump.
    Keywords: Imitate-if-better, Repeated Games, Symmetric Games, Relative Payoffs, Robustness, Perturbations.
    JEL: C72 C73
    Date: 2014–06–12
  4. By: Christopher J. Tyson (Queen Mary University of London)
    Abstract: Using the techniques of revealed preference analysis, we study a two-stage model of choice behavior. In the first stage, the decision maker maximizes a menu-dependent binary relation encoding preferences that are imperfectly perceived. In the second, a menu-independent binary relation is maximized over the subset of alternatives that survive the first stage. This structure can support various interpretations, including those of salience effects, positive action, and surface characteristics. We characterize the model behaviorally both in ordinal form and in terms of the corresponding numerical representations.
    Keywords: Bounded rationality, Choice function, Revealed preference, Salience
    JEL: D01 D03
    Date: 2014–09
  5. By: Kristoffer Nimark (CREI)
    Abstract: Public signals are well-known to be particularly influential when privately informed agents interact strategically (e.g. Morris and Shin AER 2002). However, that a signal is ``public" in the common knowledge sense is a much stronger assumption than what is implied by the everyday meaning of the word. In this paper we will argue that it is useful to make a distinction between information that is public in the strong common knowledge sense of the word and information that is merely publicly available. Agents with partially heterogeneous interests have a choice between different information providers, where an information provider is defined by a news selection function. The news selection function of a particular information provider determines which events the provider will report conditional on the entire set of realized events which is a larger set than what is feasible to report on. Information providers thus perform an editorial service for their customers by selecting which events to report. An individual agent will choose to get information from the provider that he expects to report the most interesting events. The optimal choice will depend on the preferences of the agent, the news selection functions available and the distribution of events. The degree of "publicness" of an event is endogenous and the paper thus provides a theory of what type of information becomes common knowledge among populations with heterogeneous interests. The theory can be used to characterize the implications of the editorial function of information providers for agents' posterior beliefs and equilibrium actions.
    Date: 2014
  6. By: Vassili Vergopoulos (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: This paper elaborates an axiomatic treatment of the Subjective Expected Utility (SEU) model that dispenses with the assumption of an exogenous state space. Within a state-free description of uncertainty and alternatives, axioms for preferences are formulated and shown to characterize the existence of a subjective state space, a subjective probability and a utility function. In the representation, the individual appears to behave as if he used the state space to describe uncertainty and maximized SEU to make decisions. Moreover, the state space, probability and utility are unique in some appropriate sense.
    Keywords: Expected utility; subjective state space; causality; consequentialism
    Date: 2014–02
  7. By: Antoine Billot (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - Université Paris II - Panthéon-Assas : EA4442 - Sorbonne Universités); Vassili Vergopoulos (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: Harsanyi's axiomatic justification of utilitarianism is extended to a framework with subjective and heterogenous priors. Contrary to the existing literature on aggregation of preferences under uncertainty, society is here allowed to formulate probability judgements, not on the actual state of the world as individuals do, but rather on the opinion they each have on the actual state. An extended Pareto condition is then proposed that characterizes the social utility function as a convex combination of individual ones and the social prior as the independent product of individual ones.
    Keywords: Utilitarianism; prior heterogeneity; Pareto condition
    Date: 2014–06
  8. By: Martin C. Byford; Joshua S. Gans
    Abstract: We provide a new model that generates persistent performance differences amongst seemingly similar enterprises. Our model provides a mechanism whereby efficient incumbent rivals can give permission for an inefficient firm to exist in the presence of efficient entrants. We demonstrate that, in a repeated game, an efficient incumbent has a unilateral incentive to establish a relational contract that softens price competition to either strengthen the inefficient firm in a war of attrition that emerges post-entry or reduce the value to the inefficient firm of selling its position to entrants. The paper provides conditions under which that equilibrium exists and derives a number of empirical predictions as implications of the model. It is demonstrated that performance differences are likely to be associated with stability in the identity of firms in the market.
    JEL: L11 L22
    Date: 2014–09
  9. By: Allan Collard-Wexler; Gautam Gowrisankaran; Robin S. Lee
    Abstract: The concept of a Nash equilibrium in Nash bargains, proposed in Horn and Wolinsky (1988), has become the workhorse bargaining model for predicting and estimating the division of surplus in applied analysis of bilateral oligopoly. This paper proposes a non-cooperative foundation for this concept—in which agreements between each pair of firms maximizes their bilateral Nash product conditional on all other negotiated agreements—by extending the Rubinstein (1982) alternating offers model to a setting with multiple upstream and downstream firms. In our model, downstream firms make simultaneous offers to upstream firms in odd periods, and upstream firms make simultaneous offers to downstream firms in even periods. Given restrictions on underlying payoffs, we prove that there exists a perfect Bayesian equilibrium with passive beliefs that generates the "Nash-in-Nash" solution, and that this equilibrium outcome is unique.
    JEL: C78 D43 L13
    Date: 2014–10
  10. By: Karl H. Schlag; Péter Vida
    Abstract: We explore in an equilibrium framework whether games with multiple Nash equilibria are easier to play when players can communicate. We consider two variants, modelling talk about future plans and talk about past actions. The language from which messages are chosen is endogenous, messages are allowed to be vague. We focus on equilibria where messages are believed whenever possible, thereby develop a theory of credible communication. Predictions confirm the longstanding intuition for Aumann’s (1990) Stag Hunt game which applies directly to an investment game with positive spillovers. Our results shed new light on the multiplicity of equilibria in economic applications.
    JEL: C72 D83
    Date: 2014–11
  11. By: Lee, DongJoon; Choi, Kangsik; Hwang, Kyu-Chan
    Abstract: This paper examines the issue of the first-mover and second-mover advantage in a vertical structure in which each manufacturer trades with a separated retailer via two-part tariffs. Compared to the canonical result in one-tier market, we find that the manufacturers' preference orderings over sequential versus simultaneous play are reversed in a vertical structure. We show that the Stackelberg leader (Stackelberg follower) had the first (second)-mover advantage in the downstream Cournot (Bertrand) competition. The first (second)-mover advantage compels its manufacturer to set the wholesale price higher than that of rival. Finally, we show that the manufacturer in which its retailer moves second (first) in a downstream Stackelberg Cournot (Bertrand) competition earns higher profits than the other in which its retailer moves first (second) in a downstream Stackelberg Cournot (Bertrand) competition.
    Keywords: First- and Second-mover Advantage, Two-part Tariffs, Vertical Structure.
    JEL: D43 L13 L14
    Date: 2014–09–25
  12. By: Jeitschko, Thomas D.; Tremblay, Mark J.
    Abstract: We develop a model for two-sided markets with consumers and producers, who interact through a platform. Typical settings for the model are the market for smartphones with phone users, app producers, and smartphone operating systems; or the video game market with game players, video game producers, and video game consoles. Only consumers who purchase the platform can access content from the producers. Consumers are heterogeneous in their gains from the producer side; and producers are heterogeneous in their costs of bringing apps to the platform. We consider competition between two homogeneous platforms that allows consumers and firms to optimize with respect to how they home, i.e. we allow both individual consumers and individual producers to multi-home or single-home depending on whether it is optimal based on their type. This leads to multiple equilibrium allocations of consumers and firms - all of which are seen in existing markets. We then find conditions under which a monopoly platform generates higher surplus than two competing homogeneous platforms.
    Keywords: two-sided markets,platforms,platform competition,multi-homing,single-homing,endogenous homing decisions,network effects
    JEL: L14 L22 D40 L13
    Date: 2014
  13. By: Makoto Nirei (Hitotsubashi University); Tsutomu Watanabe (The University of Tokyo)
    Abstract: Using a simultaneous-move herding model of rational traders who infer other traders' private information on the value of an asset by observing their aggre- gate actions, this study seeks to explain the emergence of fat-tailed distributions of transaction volumes and asset returns in financial markets. Without mak- ing any parametric assumptions on private information, we analytically show that traders' aggregate actions follow a power law distribution. We also provide simulation results to show that our model successfully reproduces the empirical distributions of asset returns. We argue that our model is similar to Keynes's beauty contest in the sense that traders, who are assumed to be homogeneous, have an incentive to mimic the average trader, leading to a situation similar to the indeterminacy of equilibrium. In this situation, a trader's buying action causes a stochastic chain-reaction, resulting in power laws for financial fluctuations.
    Date: 2014–06
  14. By: Antony Millner (London School of Economics and Political Science - LSE); Hélène Ollivier (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Leo Simon (University of California - Berkeley - Department of Agricultural and Resource Economics)
    Abstract: We consider a two period model in which an incumbent political party chooses the level of a current policy variable unilaterally, but faces competition from a political opponent in the future. Both parties care about voters' payoffs, but they have different beliefs about how policy choices will map into future economic outcomes. We show that when the incumbent party can endogenously influence whether learning occurs through its policy choices (policy experimentation), future political competition gives it a new incentive to distort its policies - it manipulates them so as to reduce uncertainty and disagreement in the future, thus avoiding the costs of competitive elections with an opponent very different from itself. The model thus demonstrates that all incumbents can find it optimal to 'over experiment', relative to a counterfactual in which they are sure to be in power in both periods. We thus identify an incentive for strategic policy manipulation that does not depend on self-serving behavior by political parties, but rather stems from their differing beliefs about the consequences of their actions.
    Keywords: Beliefs; Learning; Political Economy
    Date: 2014–05
  15. By: Groneck, Max; Ludwig, Alexander; Zimper, Alexander
    Abstract: On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.
    Keywords: Cumulative prospect theory,Choquet expected utility,Dynamic inconsistency,Life-cycle hypothesis,Saving puzzles
    JEL: D91 D83 E21
    Date: 2014
  16. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); John Stachurski (Research School of Economics, Australian National University, Australia)
    Abstract: In recent years, a range of measures of "partial" or "degree of" stochastic dominance have been introduced. These measures attempt to determine the extent to which one distribution is dominated by another. In order to systematically assess these proposed measures and their relationship to partial stochastic dominance, we adopt an axiomatic approach. We propose axioms for measuring degree of stochastic dominance and study the relationship between them. Among other findings, we show that one and only one measure satisfies all the axioms.
    Date: 2014–11

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