nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒01‒19
nine papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Informational Robustness and Solution Concepts By Dirk Bergemann; Stephen Morris
  2. Observing Each Other's Observations in the Electronic Mail Game By Dominik Grafenhofer; Wolgang Kuhle
  3. Explicit Renegotiation in Repeated Games By Mikhail Safronov; Bruno Strulovici
  4. Limit pricing and secret barriers to entry By Luigi Brighi; Marcello D'Amato
  5. The Multiple Hierarchical Legislatures in a Representative Democracy: Districting for Policy Implementation By Kobayashi, Katsuya; Tasnádi, Attila
  6. Which club should I attend, Dad?: Targeted socialization and production By Facundo Albornoz; Antonio Cabrales; Esther Hauk
  7. A Duality Approach to Continuous-Time Contracting Problems with Limited Commitment By Yuzhe Zhang; Jianjun Miao
  8. Media silence, feedback power and reputation By Ascensión Andina-Díaz; José A. García-Martínez
  9. Diffusion of Multiple Information By Nicole Tabasso

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We discuss four solution concepts for games with incomplete information. We show how each solution concept can be viewed as encoding informational robustness. For a given type space, we consider expansions of the type space that provide players with additional signals. We distinguish between expansions along two dimensions. First, the signals can either convey payoff relevant information or only payoff irrelevant information. Second, the signals can be generated from a common (prior) distribution or not. We establish the equivalence between Bayes Nash equilibrium behavior under the resulting expansion of the type space and a corresponding more permissive solution concept under the original type space. This approach unifies some existing literature and, in the case of an expansion without a common prior and allowing for payoff relevant signals, leads us to a new solution concept that we dub belief-free rationalizability.
    Keywords: Incomplete information, Informational robustness, Bayes correlated equilibrium, Interim corrrelated rationalizability, Belief free rationalizability
    JEL: C79 D82
    Date: 2014–12
  2. By: Dominik Grafenhofer; Wolgang Kuhle
    Abstract: We study a Bayesian coordination game where agents receive private information on the game's payoff structure. In addition, agents receive private signals on each other's private information. We show that once agents possess these different types of information, there exists a coordination game in the evaluation of this information. And even though the precisions of both signal types is exogenous, the precision with which agents predict each other's actions at equilibrium turns out to be endogenous. As a consequence, we find that there exist multiple equilibria if the private signals' precision is high. These equilibria differ with regard to the way that agents weight their private information to reason about each other's actions.
    Date: 2014–12
  3. By: Mikhail Safronov; Bruno Strulovici
    Abstract: Cooperative concepts of renegotiation in repeated games have typically assumed that Pareto-ranked equilibria could not coexist within the same renegotiation-proof set. With explicit renegotiation, however, a proposal to move to a Pareto-superior equilibrium can be deterred by a different continuation equilibrium which harms the proposer and rewards the refuser. This paper introduces a simple protocol of renegotiation for repeated games and defines the stability of social norms and renegotiation-proof outcomes in terms of a simple equilibrium refinement. We provide distinct necessary and sufficient conditions for renegotiation-proofness, which converge to each other as renegotiation frictions become negligible. Renegotiation-proof outcomes always exist and can be all included within a single, most permissive social norm that is straightforward to characterize graphically. JEL Classification: C71, C72, C73, C78
    Date: 2014–11–14
  4. By: Luigi Brighi; Marcello D'Amato
    Abstract: We study a two periods entry game where the incumbent .rm, who has private information about his own production costs, makes a non observable long run investment choice, along with a pricing decision observed by the entrant. The investment choice affects both post-entry competition and first period cost of production, so that the cost of signaling becomes endogenous. The game is solved following Bayes-Nash requirements, the intuitive criterion is used to constrain off-equilibrium beliefs. When investment is publicly observable, it is shown that the unique intuitive equilibrium is the separating equilibrium with limit pricing and no entry deterrence. When investment is not observable, quite remarkably, there exists a unique intuitive pooling equilibrium which is Pareto superior, from the incumbent's point of view, to the unique intuitive separating equilibrium. In the pooling equilibrium no entry takes place and the price is below the low cost monopoly price. Thus, when investment is secret, a limit pricing policy supports entry deterrence. Our model provides an example of secret barriers to entry and their relationship with limit pricing. We also contribute to the analysis of a relatively under-researched class of games where the cost of signaling unobservable characteristics is endogenously determined by unobserved actions.
    Keywords: Entry deterrence, limit pricing, signaling, pooling equilibrium
    JEL: D58 L51
    Date: 2014–12
  5. By: Kobayashi, Katsuya; Tasnádi, Attila
    Abstract: We build a multiple hierarchical model of a representative democracy in which, for instance, voters elect county representatives, county representatives elect district representatives, district representatives elect state representatives, and state representatives elect a prime minister. We use our model to show that the policy determined by the final representative can become more extreme as the number of hierarchical levels increases because of increased opportunities for gerrymandering. Thus, a sufficiently large number of voters gives a district maker an advantage, enabling her to implement her favorite policy. We also show that the range of implementable policies increases with the depth of the hierarchical system. Consequently, districting by a candidate in a hierarchical legislative system can be viewed as a type of policy implementation device.
    Keywords: electoral systems, median voter, gerrymandering, council democracies.
    JEL: D72
    Date: 2014–12–17
  6. By: Facundo Albornoz; Antonio Cabrales; Esther Hauk
    Abstract: We study a model that integrates productive and socialization efforts with network choice and parental investments. We characterize the unique symmetric equilibrium of this game. We first show that individuals underinvest in productive and social effort, but that solving only the investment problem can exacerbate the misallocations due to network choice, to the point that it may generate an even lower social welfare if one of the networks is sufficiently disadvantaged. We also study the interaction of parental investment with network choice. We relate these equilibrium results with characteristics that we find in the data on economic co-authorship and field transmission between advisors and advisees.
    Date: 2014–12
  7. By: Yuzhe Zhang (Texas A&M University); Jianjun Miao (Boston University)
    Abstract: We propose a duality approach to solving contracting models with either one-sided or two-sided limited commitment in continuous time. We establish weak and strong duality theorems and provide a dynamic programming characterization of the dual problem. The dual problem gives a linear Hamilton-Jacobi-Bellman equation with a known state space subject to free-boundary conditions, making analysis much more tractable than the primal problem. We provide two explicitly solved examples of a consumption insurance problem. We characterize the optimal consumption allocation in terms of the marginal utility ratio. We find that neither autarky nor full risk sharing can be an optimal contract with two-sided limited commitment, unlike in discrete-time models. We also derive an explicit solution for the unique long-run stationary distribution of consumption relative to income.
    Date: 2014
  8. By: Ascensión Andina-Díaz (Department of Economic Theory, Universidad de Málaga); José A. García-Martínez (Department of Economic Theory, Universidad Miguel Hernández)
    Abstract: This paper proposes a theory of media silence. The argument is that news organizations have the power to raise public concern and so affect the probability that there is ex-post verification of the true state of the world. Built on the literature of career concerns, we consider a newspaper that seeks to maximize its reputation for high quality. Our results predict more media silence, the higher the prior expectations on the quality of the firm, the greater the probability of ex-post verification, and the higher the power of the newspaper to activate the verification.
    Keywords: Feedback power; reputation; quality; competition; media silence
    JEL: C72 D82
    Date: 2014–12
  9. By: Nicole Tabasso (University of Surrey)
    Abstract: We model the diffusion of two types of information through a population under the assumption that communication time is limited. When a meeting between individuals occurs, at most one information can be communicated. Preferences over information types divide the population into two groups, and if a choice has to be made about which information to communicate, members of either group will choose their preferred information. We find that crowding out of information does occur, but information is rarely eradicated entirely. Somewhat surprisingly, the parameter values under which a unique information would survive in the population are sufficient for both information to survive. Only if in- formation preferences in the entire population are aligned, i.e., every individual prefers to communicate the same information, does the second information die out. We apply our framework to answer questions on the impact that segregation has on information diffusion and polarization. We find that segregation unambiguously increases polarization and decreases the proportions of informed individuals, and derive the conditions under which agents endogenously choose to segregate.
    JEL: D83 D85
    Date: 2014–12

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