nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒02‒11
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Memory Utility By Itzhak Gilboa; Andrew Postlewaite; Larry Samuelson
  2. Truthful Equilibria in Dynamic Bayesian Games By Johannes Horner; Satoru Takahashi; Nicolas Vieille
  3. Aggregating Tastes, Beliefs, and Attitudes Under Uncertainty By Hill , Brian; Danan , Eric
  4. Bayesian signaling By Hedlund, Jonas
  5. Dynamic Revenue Maximization: A Continuous Time Approach By Dirk Bergemann; Philipp Strack
  6. Strategic influence in social networks. By Michel Grabisch; Antoine Mandel; Agnieszka Rusinowska; Emily Tanimura
  7. Nonlinear Pricing with Finite Information By Dirk Bergemann; Ji Shen; Yun Xu; Edmund M. Yeh
  8. Pricing a Package of Services By Ketelaar, Felix; Szalay, Dezso
  9. Uncertain discount and hyperbolic preferences By Daniele Pennesi
  10. The Transfer Paradox in Welfare Space By Thomas Demuynck; Bram De Rock; Victor Ginsburgh
  11. Organizing to adapt and compete By Ricardo Alonso; Wouter Dessein; Niko Matouschek
  12. Confidence as a Source of Deferral By Hill, Brian
  13. On the value of persuasion by experts By Ricardo Alonso; Odilon Câmara
  14. Peer effects in endogenous networks By Timo Hiller
  15. Network geometry and the scope of the median voter theorem By Stefano Vannucci
  16. Pass/Fail, A-F, or 0-100? - Optimal Grading of Eager Students By Lilo Wagner
  17. An Extended Theory of Rational Addiction By Federico Perali; Luca Piccoli; Knut R. Wangen
  18. Moral hazard and debt maturity By Gur Huberman; Rafael Repullo

  1. By: Itzhak Gilboa (University of Tel Aviv); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Yale University and HEC Paris)
    Abstract: People often consume non-durable goods in a way that seems inconsistent with preferences for smoothing consumption over time. We suggest that such patterns of consumption can be better explained if one takes into account the memories that consumption generates. A memorable good, such as a honeymoon or a vacation, is a good whose mental consumption outlives its physical consumption. We consider a model in which a consumer enjoys physical consumption as well as memories. Memories are generated only by some goods, and only when their consumption exceeds customary levels by a sufficient margin. We offer axiomatic foundations for the structure of the utility function and study optimal consumption in a dynamic model. The model shows how rational consumers, taking into account their future memories, would make optimal choices that rationalize lumpy patterns of consumption.
    Keywords: Memorable goods, memory utility, consumption smoothing
    JEL: D91
    Date: 2015–01–21
  2. By: Johannes Horner (Cowles Foundation, Yale University); Satoru Takahashi (National University of Singapore); Nicolas Vieille (HEC Paris)
    Abstract: This paper characterizes an equilibrium payoff subset for dynamic Bayesian games as discounting vanishes. Monitoring is imperfect, transitions may depend on actions, types may be correlated and values may be interdependent. The focus is on equilibria in which players report truthfully. The characterization generalizes that for repeated games, reducing the analysis to static Bayesian games with transfers. With independent private values, the restriction to truthful equilibria is without loss, except for the punishment level; if players withhold their information during punishment-like phases, a folk theorem obtains.
    Keywords: Bayesian games, Repeated games, Folk theorem
    JEL: C72 C73
    Date: 2013–12
  3. By: Hill , Brian; Danan , Eric
    Abstract: The authors 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). The authors 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. They 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. The authors then apply these general results to the Maxmin Expected Utility model, the Choquet Expected Utility model and the Smooth Ambiguity model. They end with a characterization of the aggregation of ambiguity attitudes.
    Keywords: Preference Aggregation; Social Choice; Uncertainty
    JEL: D71 D81
    Date: 2014–07–20
  4. By: Hedlund, Jonas
    Abstract: This paper introduces private sender information into a sender-receiver game of Bayesian persuasion with monotonic sender preferences. I derive properties of increasing differences related to the precision of signals and use these to fully characterize the set of equilibria robust to the intuitive criterion. In particular, all such equilibria are either separating, i.e., the sender's choice of signal reveals his private information to the receiver, or fully disclosing, i.e., the outcome of the sender's chosen signal fully reveals the payoff-relevant state to the receiver. Incentive compatibility requires the high sender type to use sub-optimal signals and therefore generates a cost for the high sender type in comparison to a full information benchmark in which the receiver knows the sender's type. The receiver prefers the equilibrium outcome over this benchmark for large classes of monotonic sender preferences.
    Keywords: Bayesian Persuasion; Signaling.
    Date: 2014–12–11
  5. By: Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Microsoft Research New England & UC Berkeley)
    Abstract: We characterize the revenue-maximizing mechanism for time separable allocation problems 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. The leading example is the repeated sales of a good or a service. We derive the optimal dynamic mechanism, analyze its qualitative structure and frequently derive its closed form solution. This enables us to compare the distortion in various settings. In particular, we discuss the cases where the type of each agent follows an arithmetic or geometric Brownian motion or a mean reverting process. We show that depending on the nature of the private information the distortion might increase or decrease over time.
    Keywords: Mechanism design, Dynamic auctions, Repeated sales, Impulse response function, Stochastic flow
    JEL: D44 D82 D83
    Date: 2014–07
  6. By: Michel Grabisch (Paris School of Economics - Centre d'Economie de la Sorbonne); Antoine Mandel (Paris School of Economics - Centre d'Economie de la Sorbonne); Agnieszka Rusinowska (Paris School of Economics - Centre d'Economie de la Sorbonne); Emily Tanimura (Centre d'Economie de la Sorbonne)
    Abstract: We consider a model of influence with a set of non-strategic agents and two strategic agents. The non-strategic agents have initial opinions and are linked through a simply connected network. They update their opinions as in the DeGroot model. The two strategic agents have fixed opinions, 1 and 0 respectively, and are characterized by the magnitude of the impact they can exert on non-strategic agents. Each strategic agent forms a link with one non-strategic agent in order to alter the average opinion that eventually emerges in the network. This procedure defines a zero-sum game whose players are the two strategic agents and whose strategy set is the set of non-strategic agents. We focus on the existence and the characterization of equilibria in pure strategy in this setting. Simple examples show that the existence of a pure strategy equilibrium does depend on the structure of the network. The characterization of equilibrium we obtain emphasizes on the one hand the influenceability of target agents and on the other hand their centrality whose natural measure in our context defines a new concept, related to betweenness centrality, that we call intermediacy. We also show that in the case where the two strategic agents have the same impact, symmetric equilibria emerge as natural solutions whereas in the case where the impacts are uneven, the strategic players generally have differentiated equilibrium targets, the high-impacts agent focusing on centrality and the low-impact agent on influenceability.
    Keywords: Influence networks, beliefs, DeGroot model, strategic player, convergence, consensus, equilibrium.
    JEL: C71 D85
    Date: 2015–01
  7. By: Dirk Bergemann (Cowles Foundation, Yale University); Ji Shen (Dept. of Finance, London School of Economics); Yun Xu (Dept. of Electrical Engineering, Yale University); Edmund M. Yeh (Dept. of Computer Science and Electrical Engineering, Northeastern University)
    Abstract: We analyze nonlinear pricing with finite information. A seller offers a menu to a continuum of buyers with a continuum of possible valuations. The menu is limited to offering a finite number of choices representing a finite communication capacity between buyer and seller. We identify necessary conditions that the optimal finite menu must satisfy, either for the socially efficient or for the revenue-maximizing mechanism. These conditions require that information be bundled, or "quantized" optimally. We show that the loss resulting from using the n-item menu converges to zero at a rate proportional to 1 = n^2. We extend our model to a multi-product environment where each buyer has preferences over a d dimensional variety of goods. The seller is limited to offering a finite number n of d-dimensional choices. By using repeated scalar quantization, we show that the losses resulting from using the d-dimensional n-class menu converge to zero at a rate proportional to d = n^{2/d}. We introduce vector quantization and establish that the losses due to finite menus are significantly reduced by offering optimally chosen bundles.
    Keywords: Mechanism design, Nonlinear pricing, Multi-Dimension, Multi-product, Private information, Limited information, Quantization, Information theory
    JEL: C72 C73 D43 D83
    Date: 2015–01
  8. By: Ketelaar, Felix; Szalay, Dezso
    Abstract: We study a tractable two-dimensional model of price discrimination. Consumers combine a rigid with a more flexible choice, such as choosing the location of a house and its quality or size. We show that the optimal pricing scheme involves no bundling if consumer types are affiliated. Conversely, if consumer types are negatively affiliated over some portion of types then some bundling occurs.
    Keywords: Bundling; Monopoly; Multidimensional screening; Price discrimination
    JEL: D42 D82 D86
    Date: 2014–12
  9. By: Daniele Pennesi (Université de Cergy-Pontoise, THEMA)
    Abstract: When the discount rate is uncertain, individuals whose preferences are consistent with discounted expected utility, exhibit diminishing impatience. This paper introduces and characterizes a variation of discounted expected utility in which the discount rate depends on the state of the nature that will occur. Quasi-hyperbolic discounting and the model of Dasgupta and Maskin (2005) are particular cases. The present bias disappears when the immediate payoff becomes uncertain. Commitment may be detrimental unless the discount rate is constant.
    Keywords: Diminishing Impatience, Uncertainty, Hyperbolic Discounting, Time Inconsistency
    JEL: D03 D90 D81
    Date: 2015
  10. By: Thomas Demuynck; Bram De Rock; Victor Ginsburgh
    Abstract: The transfer paradox describes a situation in which a transfer ofendowments between two agents results in a welfare decrease for therecipient and a welfare increase for the donor. It is known that ina two-agent regular exchange economy with an arbitrary number ofgoods, the transfer paradox occurs only if the price equilibrium isunstable. In this paper, we show that in the space of welfare weights,the set of stable equilibria and the set of no-transfer paradox equilibriacoincide. As a corollary we also obtain that for two agents and anarbitrary number of goods, the index of an equilibrium in price spacecoincides with its index in welfare space.
    Keywords: welfare equilibrium; exchange economy; transfer paradox
    JEL: D51 D60
    Date: 2015–01
  11. By: Ricardo Alonso; Wouter Dessein; Niko Matouschek
    Abstract: We examine the relationship between the organization of a multi-divisional firm and its ability to adapt production decisions to changes in the environment. We show that even if lower-level managers have superior information about local conditions, and incentive conflicts are negligible, a centralized organization can be better at adapting to local information than a decentralized one. As a result, and in contrast to what is commonly argued, an increase in product market competition that makes adaptation more important can favor centralization rather than decentralization.
    Keywords: adaptation; information; organization
    JEL: D23 D83 L23
    Date: 2014
  12. By: Hill, Brian
    Abstract: One apparent reason for deferring a decision – abstaining from choosing, leaving the decision open to be taken by someone else, one’s later self, or nature – is for lack of sufficient confidence in the relevant beliefs. This paper develops an axiomatic theory of decision in situations where a costly deferral option is available that captures this source of deferral. Drawing on it, a preliminary behavioural comparison with other accounts of deferral, such as those based on information asymmetry, is undertaken, and a simple multi-factor model of deferral – involving both confidence and information considerations – is formulated. The model suggests that incorporating confidence can account for cases of deferral that traditional accounts have trouble explaining.
    Keywords: Confidence; multiple priors; deferral; delegation; information acquisition; value of information; incomplete preferences
    JEL: D80 D81 D83
    Date: 2014–10–10
  13. By: Ricardo Alonso; Odilon Câmara
    Abstract: A sender can influence the behavior of a receiver by controlling the informativeness of a public signal. We show that the sender cannot benefit from becoming an expert, that is, from privately learning some information about the state. We then show that in some instances an uninformed sender is ex-ante strictly better off than an expert sender.
    Keywords: information control; persuasion; experts
    JEL: D83
    Date: 2014–06–03
  14. By: Timo Hiller
    Abstract: This paper presents a simple model of strategic network formation with local complementarities in effort levels and positive local externalities for a general class of payoff functions. Results are obtained for one-sided and two-sided link creation. In both cases (pairwise) Nash equilibrium networks are nested split graphs, which are a strict subset of core-periphery networks. The relevance of the convexity of the value function (gross payoffs as a function of neighbours' effort levels when best responding) in obtaining nested split graphs is highlighted. Under additional assumptions on payoffs, we show that the only efficient networks are the complete and the empty network. Furthermore, there exists a range of linking cost such that any (pairwise) Nash equilibrium is inefficient and for a strict subset of this range any (pairwise) Nash equilibrium network structure is different from the efficient network. These findings are relevant for a wide range of social and economic phenomena, such as educational attainment, criminal activity, labor market participation, and R&D expenditures of firms.
    Keywords: strategic network formation; peer effects; strategic complements; positive externalities
    JEL: J1
    Date: 2013–09
  15. By: Stefano Vannucci
    Abstract: It is shown that the median voter theorem for committee-decisions holds over a full unimodal preference domain whenever (i) the underlying median interval space satisfi?es interval antiexchange and (ii) unimodality is defi?ned with respect to the incidence-geometry of the relevant outcome space or network. Thus, in particular, the interval spaces canonically induced by trees do support the median voter theorem on their own full unimodal preference domains. Conversely, validity of the median voter theorem on the full unimodal preference domain of a certain median interval space on a discrete outcome space requires that the graph canonically induced by that interval space be precisely a tree.
    JEL: D71
    Date: 2015–01
  16. By: Lilo Wagner
    Abstract: This paper analyzes optimal grading in a world that focuses on top grades. Students choose an effort level, their performance is graded, and their grade correlates with their future income. Ex-ante, the policy maker chooses the optimal coarseness of the grading scale to maximize student welfare. When choosing their effort, students overweight outstanding { or salient { grades. I show that this behavior leads to excessive effort levels when grading is fully informative, and that coarse grading can be used to counterbalance incentives. Thus, salience can help explain why grading ranges from Pass/Fail scales (tenure decisions) via A-F-scales (school) to fully disclosing scores (e.g. SAT).
    Keywords: Optimal grading, effort incentives, salience theory, education
    JEL: D83 D81 I21
    Date: 2015
  17. By: Federico Perali (University of Verona); Luca Piccoli (Universitat de les Illes Balears); Knut R. Wangen (University of Oslo)
    Abstract: This study extends the Rational Addiction theory by introducing an endogenous discounting of future utilities. The discount rate depends on habits accumulation over time which occur because of the repeated consumption of an addictive good. The endogeneity of the discount rate affects consumption decisions via a habits dependent rate of time preference and discloses a patience-dependence trade off. The existence of a steady state in which habits do not grow and its optimality are proven. Local stability properties of the steady state reveal that the equilibrium can be a saddle node, implying smooth convergence to the steady state, but also a stable or unstable focus, potentially predicting real world behaviors as binge drinking or extreme addiction states that may drive to death. The stability of the steady state mostly depend on the habit formation process, suggesting that heterogeneity in habit formation may be a key component to explain heterogeneity in time preferences.
    Keywords: habit formation, addiction, endogenous discounting, time inconsistency
    JEL: D11 I12
    Date: 2015
  18. By: Gur Huberman; Rafael Repullo
    Abstract: We present a model of the maturity of a bank’s uninsured debt. The bank borrows funds and chooses afterwards the riskiness of its assets. This moral hazard problem leads to an excessive level of risk. Short-term debt may have a disciplining effect on the bank’s risk-shifting incentives, but it may lead to inefficient liquidation. We characterize the conditions under which short-term and long-term debt are feasible, and show circumstances under which only short-term debt is feasible and under which short-term debt dominates long-term debt when both are feasible. Thus, short-term debt may have the salutary effect of mitigating the moral hazard problem and inducing lower risk-taking. The results are consistent with key features of the common narrative of the period preceding the 2007-2009 financial crisis.
    Keywords: Short-term debt; long-term debt; optimal financial contracts; risk-shifting; rollover risk; inefficient liquidation.
    JEL: F3 G3
    Date: 2014–06–13

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