nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒02‒28
35 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Dynamic Moral Hazard without Commitment By Johannes Horner ; Larry Samuelson
  2. Attention, Coordination, and Bounded Recall By Alessandro Pavan
  3. From Rationality to Irrationality : Dynamic Interacting Structures By Gosselin, Pierre ; Lotz, Aïleen ; Wambst, Marc
  4. Information, Risk Sharing and Incentives in Agency Problems By Jia xie
  5. Disputes, Debt and Equity By Alfred Duncan ; Charles Nolan
  6. The Dynamics of Social Influence By Bary S.R. Pradelski
  7. Poverty and Self Control By Sevin Yeltekin ; Debraj Ray ; B. Douglas Bernheim
  8. Dynamic Managerial Compensation: On the Optimality of Seniority-based Schemes By Daniel Garrett ; Alessandro Pavan
  9. Frustration and Anger in Games By Pierpaolo Battigalli ; Martin Dufwenberg ; Alec Smith
  10. Anxiety, overconfidence, and excessive risk taking By Eisenbach, Thomas M. ; Schmalz, Martin C.
  11. A Framework for Modeling Bounded Rationality: Mis-specified Bayesian-Markov Decision Processes By Ignacio Esponda ; Demian Pouzo
  12. Optimism and Pessimism with Expected Utility, Fifth Version By David Dillenberger ; Andrew Postlewaite ; Kareen Rozen
  13. A note on the welfare of a sophisticated time-inconsistent decision-maker By Kodritsch, Sebastian
  14. Information Aversion By Valentin Haddad ; Marianne Andries
  15. Citizen-Editors' Endogenous Information Acquisition and News Accuracy By Francesco Sobbrio
  16. Noisy Learning in a Competitive Market with Risk Aversion By Leonard J. Mirman ; Egas M. Salgueiro ; Marc Santugini
  17. Price Discrimination in Asymmetric Industries: Implications for Competition and Welfare By Hinnerk Gnutzmann
  18. Information and Trading Targets in a Dynamic Market Equilibrium By Jin Hyuk Choi ; Kasper Larsen ; Duane J. Seppi
  19. Stability in price competition revisited By Faias, Marta ; Hervés-Estévez, Javier ; Moreno-García, Emma
  20. Dynamic Mechanisms without Money By Yingni Guo ; Johannes Horner
  21. Assortative matching through signals By Friedrich Poeschel ; ; ;
  22. Knowing me, imagining you: Projection and overbidding in auctions By Breitmoser, Yves
  23. Contracting on Networks By Mohamed Belhaj ; Frédéric Deroian
  24. Transparency and Distressed Sales under Asymmetric Information By William Fuchs ; Aniko Ory ; Andrzej Skrzypacz
  25. Get Rid of Unanimity: The Superiority of Majority Rule with Veto Power By Bouton, Laurent ; Llorente-Saguer, Aniol ; Malherbe, Frédéric
  26. One-Shot Bargaining Mechanisms By Yakov Babichenko ; Leonard J. Schulman
  27. On bargaining sets for finite economies By Hervés-Estévez, Javier ; Moreno-García, Emma
  28. Strategic Location Choice under Dynamic Oligopolistic Competition and Spillovers By Luca Colombo ; Herbert Dawid
  29. English Auctions with Ensuing Risks and Heterogeneous Bidders By Audrey Hu ; Steven A. Matthews ; Liang Zou
  30. Equilibrium Bank Runs Revisied By Ed Nosal ; Bruno Sultanum ; David Andolfatto
  31. When and How the Punishment Must Fit the Crime By Mailath, George J. ; Nocke, Volker ; White, Lucy
  32. A Mechanism for Optimal Enforcement of Coordination: Sidestepping Theory of Mind By Alexander Funcke ; Daniel Cownden
  33. Costless delay in negotiations By Herings P.J.J. ; Houba H
  34. Rent-seeking contests with private valuations By Andrea Gallice
  35. Stochastic Games with Hidden States By Yuichi Yamamoto

  1. By: Johannes Horner (Cowles Foundation, Yale University ); Larry Samuelson (Cowles Foundation, Yale University )
    Abstract: We study a discrete-time model of repeated moral hazard without commitment. In every period, a principal finances a project, choosing the scale of the project and a contingent payment plan for an agent, who has the opportunity to appropriate the returns of a successful project unbeknownst the principal. The absence of commitment is reflected both in the solution concept (perfect Bayesian equilibrium) and in the ability of the principal to freely revise the project's scale from one period to the next. We show that removing commitment from the equilibrium concept is relatively innocuous -- if the players are sufficiently patient, there are equilibria with payoffs low enough to effectively endow the players with the requisite commitment, within the confines of perfect Bayesian equilibrium. In contrast, the frictionless choice of scale has a significant effect on the project's dynamics. Starting from the principal's favorite equilibrium, the optimal contract eventually converges to the repetition of the stage-game Nash equilibrium, operating the project at maximum scale and compensating the agent (only) via immediate payments.
    Keywords: Moral hazard, Dynamic moral hazard, Commitment, Principal-agent, Cash flow diversion
    JEL: C72 D82 D86
    Date: 2015–02
  2. By: Alessandro Pavan
    Abstract: I consider a exible framework of strategic interactions under incomplete information in which, prior to committing their actions (consumption, production, or investment decisions), agents choose the attention to allocate to an arbitrarily large number of information sources about the primitive events that are responsible for the incompleteness of information (the exogenous fundamentals). The analysis sheds light on what type of payoff¤ interdependencies contribute to inefficiency in the allocation of attention. The results for the case of perfect recall (in which the agents remember the inuence of each source on their posterior beliefs) are compared to those for the case of bounded recall (in which posterior beliefs about the underlying fundamentals are consistent with Bayesian updating, but in which the agents are unable to keep track of the influence of individual sources on their posterior beliefs).
    Keywords: attention, endogenous information, strategic complementarity/substitutability, externalities, efficiency, welfare, bounded recall JEL Classification: C72, D62, D83, E50
    Date: 2014–01–14
  3. By: Gosselin, Pierre ; Lotz, Aïleen ; Wambst, Marc
    Abstract: This article develops a general method to solve dynamic models of interactions between multiple strategic agents that extends the static model studied previously by the authors. It describes a general model of several interacting agents, their domination relations as well as a graph encoding their information pattern. It provides a general resolution algorithm and discusses the dynamics around the equilibrium. Our model explains apparent irrational or biased individual behaviors as the result of the actions of several goal-specific rational agents. Our main example is a three-agent model describing "the conscious", "the unconscious", and "the body". We show that, when the unconscious strategically dominates, the equilibrium is unconscious-optimal, but body and conscious-suboptimal. In particular, the unconscious may drive the conscious towards its goals by blurring physical needs. Our results allow for a precise account of agents' time rate preference. Myopic behavior among agents leads to oscillatory dynamics : each agent, reacting sequentially, adjusts its action to undo other agents' previous actions. This describes cyclical and apparently inconsistent or irrational behaviors in the dual agent. This cyclicality is present when agents are forward-looking, but can be dampened depending on the conscious sensitivity to other agents' actions.
    Keywords: dual agent; conscious and unconscious, rationality; multi-rationality; emotions; choices and preferences; multi-agent model; consistency; game theory; strategical advantage.
    JEL: B41 D01 D81 D82
    Date: 2015–02–14
  4. By: Jia xie
    Abstract: This paper studies the use of information for incentives and risk sharing in agency problems. When the principal is risk neutral or the outcome is contractible, risk sharing is unnecessary or completely taken care of by a contract on the outcome. In this case, information systems are ranked according to their informativeness of the agent’s action. When the outcome is noncontractible, however, the principal has to rely on imperfect information for both incentives and risk sharing. Under the first-order approach, we characterize a problem-independent ranking of information systems, which is relaxed from Gjesdal’s (1982) criterion. We also find sufficient conditions justifying the firstorder approach.
    Keywords: Economic models
    JEL: D8
    Date: 2015
  5. By: Alfred Duncan ; Charles Nolan
    Abstract: We show how the prospect of disputes over firms’ revenue reports promotes debt financing over equity. These findings are presented within a costly state verification model with a risk averse entrepreneur. The prospect of disputes encourages incentive regimes which limit penalties and avoid stochastic monitoring, even when the lender can commit to stochastic enforcement strategies. Consequently, optimal contracts shift away from equity and toward standard debt. For a useful special case of the model, closed form solutions are presented for leverage and consumption allocations under efficient debt contracts.
    Keywords: Microeconomics, costly state verification; external finance
    JEL: D52 D53 D82 D86
    Date: 2014–12
  6. By: Bary S.R. Pradelski
    Abstract: Individual behaviors such as smoking, fashion, and the adoption of new products is influenced by taking account of others' actions in one's decisions.  We study social influence in a heterogeneous population and analyze the long-run behavior of the dynamics.  We distinguish between cases in which social influence arises from responding to the number of current adopters, and cases in which social influence arises from responding to the cumulative usage.  We identify the equilibria of the dynamics and show which equilibrium is observed in the long-run.  We find that the models exhibit different behaviour and hence this differentiation is of importance.  We also provide an intuition for the different outcomes.
    Keywords: social influence, imitation, equilibrium selection
    JEL: C62 C70 D70 G00
    Date: 2015–02–24
  7. By: Sevin Yeltekin (Carnegie Mellon University ); Debraj Ray (New York University ); B. Douglas Bernheim (Stanford University )
    Abstract: The absence of self-control is often viewed as an important correlate of persistent poverty. Using a standard intertemporal allocation problem with credit constraints faced by an individual with quasi-hyperbolic preferences, we argue that poverty damages the ability to exercise self-control. Our theory invokes George Ainslie’s notion of “personal rules,†interpreted as subgame-perfect equilibria of an intrapersonal game played by a time-inconsistent decision maker. Our main result pertains to situations in which the individual is neither so patient that accumulation is possible from every asset level, nor so impatient that decumulation is unavoidable from every asset level. Such cases always possess a threshold level of assets above which personal rules support unbounded accumulation, and a second threshold level of assets below which there is a “poverty trapâ€: no personal rule permits the individual to avoid depleting all liquid wealth. In short, poverty perpetuates itself by undermining the ability to exercise self-control. Thus policies designed to help the poor accumulate assets may be highly effective, even if they are temporary. We also explore the implications for saving with easier access to credit, the demand for commitment devices, the design of accounts to promote saving, and the variation of the marginal propensity to consume across classes of resource claims.
    Date: 2014
  8. By: Daniel Garrett ; Alessandro Pavan
    Abstract: We study the optimal dynamics of incentives for a manager whose ability to generate cash ows changes stochastically with time and is his private information. We show that, in general, the power of incentives (or "pay for performance") may either increase or decrease with tenure. However, risk aversion and high persistence of ability call for a reduction in the power of incentives later in the relationship. Our results follow from a new variational approach that permits us to tackle directly the "full program," thus bypassing some of the di¢ culties of working with the "relaxed program" encountered in the dynamic mechanism design literature.
    Keywords: managerial compensation, power of incentives, pay for performance, dynamic mechanism design, adverse selection, moral hazard, persistent productivity shocks, risk aversion. JEL Classification: D82
    Date: 2014–11–01
  9. By: Pierpaolo Battigalli ; Martin Dufwenberg ; Alec Smith
    Abstract: Frustration, anger, and aggression have important consequences for economic and social behavior, concerning for example monopoly pricing, contracting, bargaining, tra¢ c safety, violence, and politics. Drawing on insights from psychology, we develop a formal approach to exploring how frustration and anger, via blame and aggression, shape interaction and outcomes in economic settings. KEYWORDS: frustration, anger, blame, belief-dependent preferences, psychological games JEL codes: C72, D03
    Date: 2015
  10. By: Eisenbach, Thomas M. (Federal Reserve Bank of New York ); Schmalz, Martin C. (Federal Reserve Bank of New York )
    Abstract: We provide a preference-based rationale for endogenous overconfidence. Horizon-dependent risk aversion, combined with a possibility to forget, can generate overconfidence and excessive risk taking in equilibrium. An “anxiety prone” agent, who is more risk-averse to imminent than to distant risks, has an incentive to distort her future self’s beliefs toward underestimating risk. Such self-deception can be achieved even if the future self is aware of the attempted distortion. We relate our results to the literature on empirically observed overconfidence and excessive risk taking in several domains of financial and other types of decision making.”
    Keywords: overconfidence; dynamic consistency; biases; deception; risk taking
    JEL: A12 D81 D83 D84
    Date: 2015–02–01
  11. By: Ignacio Esponda ; Demian Pouzo
    Abstract: We provide a framework to study dynamic optimization problems where the agent is uncertain about her environment but has (possibly) an incorrectly specified model, in the sense that the support of her prior does not include the true model. The agent's actions affect both her payoff and also what she observes about the environment; she then uses these observations to update her prior according to Bayes' rule. We show that if optimal behavior stabilizes in this environment, then it is characterized by what we call an equilibrium. An equilibrium strategy $\sigma$ is a mapping from payoff relevant states to actions such that: (i) given the strategy $\sigma$, the agent's model that is closest (according to the Kullback-Leibler divergence) to the true model is $\theta(\sigma)$, and (ii) $\sigma$ is a solution to the dynamic optimization problem where the agent is certain that the correct model is $\theta(\sigma)$. The framework is applicable to several aspects of bounded rationality, where the reason why a decision maker has incorrect beliefs can be traced to her use of an incorrectly-specified model.
    Date: 2015–02
  12. By: David Dillenberger (Department of Economics, University of Pennsylvania ); Andrew Postlewaite (Department of Economics, University of Pennsylvania ); Kareen Rozen (Department of Economics, Yale University )
    Abstract: Maximizing subjective expected utility is the classic model of decision making under uncertainty. Savage (1954) provides axioms on preference over acts that are equivalent to the existence of a subjective expected utility representation, and further establishes that such a representation is essentially unique. We show that there is a continuum of other \expected utility" representations in which the probability distributions over states used to evaluate acts depend on the set of possible outcomes of the act and suggest that these alternate representations can capture pessimism or optimism. We then extend the DM's preferences to be defined over both subjective acts and objective lotteries, allowing for source-dependent preferences. Our result permits modeling ambiguity aversion in Ellsberg's two-urn experiment using a single utility function and pessimistic probability assessments over prizes for lotteries and acts, while maintaining the axioms of Savage and von Neumann-Morganstern on the appropriate domains.
    Keywords: Subjective expected utility, optimism, pessimism, stake-dependent probability
    JEL: D80 D81
    Date: 2013–11–01
  13. By: Kodritsch, Sebastian
    Abstract: I examine the circumstances under which a sophisticated time-inconsistent decisionmaker (i) will not or (ii) need not severely miscoordinate her behavior across time, in the sense of following a course of action which fails to be Pareto-optimal for the sequence of temporal selves of the individual (Laibson [1994] and O'Donoghue and Rabin [1999] provide prominent instances of such miscoordination). Studying the standard solution concept for this case - Strotz-Pollak equilibrium - in general decision problems with perfect information, I establish two results: first, for finite-horizon problems without indifference, essential consistency (Hammond [1976]) is sufficient for choice to be Pareto-optimal. Second, if the decision problem satisfies a certain history-independence property, whenever an equilibrium outcome fails to be Pareto-optimal, it is Pareto-dominated by another equilibrium outcome, leading to an existence result for a Pareto-optimal solution.
    Keywords: time-inconsistency,multi-selves approach,Strotz-Pollak equilibrium,welfare,Pareto-optimality
    JEL: C72 D11 D60 D74 D90
    Date: 2015
  14. By: Valentin Haddad (Princeton University ); Marianne Andries (Toulouse School of Economics )
    Abstract: We propose a theory of inattention solely based on preferences, absent any cognitive limitations, or external costs of acquiring information. Under disappointment aversion, information decisions and risk attitude are intertwined, and agents are intrinsically information averse. We illustrate this link between attitude towards risk and information in a standard portfolio problem. We show agents never choose to receive information continuously in a diffusive environment: they optimally acquire information at infrequent intervals only. In contrast to existing theories, we show the optimal frequency of information acquisition can decrease when risk increases, consistent with empirical evidence. We show information aversion tends to lower significantly the benefits of diversification, leads to a joint evaluation of project gains and their information process, as well as creates scope for the creation of information providers. These results suggest our approach can explain many observed features of decision under uncertainty.
    Date: 2014
  15. By: Francesco Sobbrio (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore )
    Abstract: This paper provides a model of the market for news where profit-maximizing media outlets choose their editors from a population of rational citizens. The analysis identifies a novel mechanism of media bias: the bias in a media outlet's news reports is the result of the slanted endogenous information acquisition strategy of its editor. In particular, the results show that the expected accuracy of news reports is lower the more ideological an editor is. Nevertheless, citizens find it optimal to acquire information from a media outlet whose editor has similar ideological preferences. Depending on the distribution of citizens' ideological preferences, a media outlet may choose an ideological editor even in a monopolistic market. Moreover, ideological editors are more likely to be present in the market for news: i) the higher the number of media outlets competing in the market for news; ii) the lower the opportunity cost that citizens have to incur to acquire information
    Keywords: Media Bias, Slant, Information Acquisition, Valence, Competition
    JEL: D81 D82 L82
    Date: 2013–11
  16. By: Leonard J. Mirman ; Egas M. Salgueiro ; Marc Santugini
    Abstract: We address the issue of risk aversion in a competitive equilibrium when some buyers engage in learning and information is conveyed through the price system. Specifically, since the learning process yields uncertainty, we study the effect of risk aversion on the equilibrium outcomes of the model, including the amount of information released by the market. We show that risk aversion has an effect on the market outcomes but not on the flow of information. In particular, an increase in risk aversion lowers the competitive price and quantity. However, an increase in risk aversion does not change the amount of information embedded in the equilibrium price.
    Keywords: Learning, Risk aversion, Uncertainty
    JEL: D21 D42 D82 D83 D84 L12 L15
    Date: 2015
  17. By: Hinnerk Gnutzmann (Università Cattolica del Sacro Cuore ; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore )
    Abstract: Price discrimination by consumer's purchase history is widely used in regulated industries, such as communication or utilities, both by incumbents and entrants. I show that such discrimination can have surprisingly negative welfare eects { even though prices and industry prots fall, so does consumer surplus. Earlier studies that did not allow entrants to discriminate or assumed symmetric rms yielded sharply dierent results, the pro{competitive eect of price discrimination are stronger in these settings. Imposing a pricing constraint on incumbent's discrimination leads the entrant to discriminate more heavily, but still improves both consumer and producer welfare.
    Keywords: History{based price discrimination, asymmetric price discrimination, switching cost
    JEL: L13 L41
    Date: 2014–11
  18. By: Jin Hyuk Choi ; Kasper Larsen ; Duane J. Seppi
    Abstract: This paper investigates the equilibrium interactions between trading targets and private information in a multi-period Kyle (1985) market. There are two investors who each follow dynamic trading strategies: A strategic portfolio rebalancer who engages in order splitting to reach a cumulative trading target and an unconstrained strategic insider who trades on long-lived information. We consider cases in which the constrained rebalancer is partially informed as well as the special case in which the rebalancer is ex ante uninformed. We derive a linear Bayesian Nash equilibrium, describe an algorithm for computing such equilibria, and present numerical results on properties of these equilibria.
    Date: 2015–02
  19. By: Faias, Marta ; Hervés-Estévez, Javier ; Moreno-García, Emma
    Abstract: We consider consumers with the same reservation price, who desire to buy at most one unit of a good. Firms compete only in prices but there are other features firms cannot control that would eventually lead an agent to buy in one firm or another. We introduce such uncertainty in a model of a price competition game with incomplete information. This competition takes place under stability and we provide equilibrium existence results. We analyze different specifications of residual demands which yield further interpretations that deepen the phenomenon of price dispersion, Bertrand’s paradox and market power.
    Keywords: Price competition, incomplete information, Nash equilibrium, ap- proximate equilibrium, price dispersion.
    JEL: C70 D4 L00 L1 L13
    Date: 2014–08–31
  20. By: Yingni Guo (Dept. of Economics, Northwestern University ); Johannes Horner (Cowles Foundation, Yale University )
    Abstract: We analyze the optimal design of dynamic mechanisms in the absence of transfers. The designer uses future allocation decisions as a way of eliciting private information. Values evolve according to a two-state Markov chain. We solve for the optimal allocation rule, which admits a simple implementation. Unlike with transfers, efficiency decreases over time, and both immiseration and its polar opposite are possible long-run outcomes. Considering the limiting environment in which time is continuous, we show that persistence hurts.
    Keywords: Mechanism design, Principal-Agent, Token mechanisms
    JEL: C73 D82
    Date: 2015–02
  21. By: Friedrich Poeschel ; ; ;
    Abstract: When agents do not know where to find a match, they search. However, agents could direct their search to agents who strategically choose a certain signal. Introducing cheap talk to a model of sequential search with bargaining, we find that signals will be truthful if there are mild complementarities in match production: supermodularity of the match production function is a necessary and sufficient condition. It simultaneously ensures perfect positive assortative matching, so that single-crossing property and sorting condition coincide. As the information from signals allows agents to avoid all unnecessary search, this search model exhibits nearly unconstrained efficiency.
    Keywords: Assortative matching, sorting, search, signals, information
    JEL: J64 D83 C78
    Date: 2013–08
  22. By: Breitmoser, Yves
    Abstract: People overestimate the probability that others share their values or preferences. I introduce type projection equilibrium (TPE) to capture such projection in Bayesian games. TPE allows each player to believe his opponents share his type with intermediate probability \rho. After establishing existence, I address my main question: How does projection affect behavior in games? I analyze auctions and distribution games. In auctions, projection implies an increased sense of competition, which induces overbidding in all (first-price) auctions. In addition, it biases the perceived value distribution, which induces cursed bidding in common value auctions. Thus, projection induces a hitherto neglected bias in bidding. It is novel in that it explains behavior across conditions and it is independently founded in psychology. I test projection equilibrium in multiple ways on existing data and find that it substantially improves on alternative concepts, both in isolation and in addition to them. The findings are cross-validated by testing projection of social preferences in distribution games.
    Keywords: auctions, overbidding, winner's curse, projection, risk aversion, cursed equilibrium, level-k, social preferences
    JEL: C72 C91 D44
    Date: 2015–02–10
  23. By: Mohamed Belhaj (Centrale Marseille (Aix-Marseille School of Economics), CNRS and EHESS ); Frédéric Deroian (Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS )
    Abstract: A principal offers bilateral contracts to a set of agents organized in a network conveying synergies, in a context where agents' efforts are observable and where the principal's objective increases with the sum of efforts. We characterize optimal contracts as a function of agents' positions on the network. The analysis shows that contract enforceability is key to understand optimality. We also examine linear contracting and we analyze the situation where the principal is constrained to contract with a single agent on the network. Last, we extend this setting to network entry.
    Keywords: optimal contracting, multi-agency, Network, Strategic Complementarity, enforceability
    JEL: C72 D85
    Date: 2015–01–12
  24. By: William Fuchs (Haas School of Business, UC Berkeley ); Aniko Ory (Cowles Foundation, Yale University ); Andrzej Skrzypacz (Graduate School of Business, Stanford University )
    Abstract: We analyze price transparency in a dynamic market with private information and correlated values. Uninformed buyers compete inter- and intra-temporarily for a good sold by an informed seller suffering a liquidity shock. We contrast public versus private price offers. In a two-period case all equilibria with private offers have more trade than any equilibrium with public offers; under some additional conditions we show Pareto-dominance of the private-offers equilibria. If a failure to trade by the deadline results in an efficiency loss, public offers can induce a market breakdown before the deadline, while trade never stops with private offers.
    Keywords: Adverse selection, Transparency, Distress, Market design, Volume
    JEL: D82 G14 G18
    Date: 2015–02
  25. By: Bouton, Laurent ; Llorente-Saguer, Aniol ; Malherbe, Frédéric
    Abstract: Consider a group of agents whose goal is to reform the status quo if and only if this is Pareto improving. Agents have private information and may have common or private objectives, which creates a tension between information aggregation and minority protection. We propose a simple voting system -majority rule with veto power- that essentially resolves this tension, for it combines the advantageous properties of both majority and unanimity rules. We argue that our results shed new light on the evolution of voting rules in EU institutions and could guide policy reforms in cases such as juries in the US.
    Keywords: constructive abstention; information aggregation; Pareto criterion; unanimity rule; veto power
    JEL: D70
    Date: 2015–02
  26. By: Yakov Babichenko ; Leonard J. Schulman
    Abstract: We consider the situation that two players have cardinal preferences over a finite set of alternatives. These preferences are common knowledge to the players, and they engage in bargaining to choose an alternative. In this they are assisted by an arbitrator (a mechanism) who does not know the preferences. Our main positive result suggests a satisfactory-alternatives mechanism wherein each player reports a set of alternatives. If the sets intersect, then the mechanism chooses an alternative from the intersection uniformly at random. If the sets are disjoint, then the mechanism chooses an alternative from the union uniformly at random. We show that a close variant of this mechanism succeeds in selecting Pareto efficient alternatives only, as pure Nash equilibria outcomes. Then we characterize the possible and the impossible with respect to the classical bargaining axioms. Namely, we characterize the subsets of axioms can be satisfied simultaneously by the set of pure Nash equilibria outcomes of a mechanism. We provide a complete answer to this question for all subsets of axioms. In all cases that the answer is positive, we present a simple and intuitive mechanism which achieves this goal. The satisfactory-alternatives mechanism constitutes a positive answer to one of these possibility cases (arguably the most interesting case). Our negative results exclude the possibility of an efficient mechanism with unique equilibrium outcome, and exclude the possibility of an efficient symmetric mechanism which is invariant with respect to repetition of alternatives.
    Date: 2015–02
  27. By: Hervés-Estévez, Javier ; Moreno-García, Emma
    Abstract: We define a bargaining set for finite economies using Aubin’s veto mechanism and show its coincidence with the set of Walrasian allocations. Then, we rewrite our notion in terms of replicated economies showing that, in contrast with Anderson, Trockel and Zhou’s (1997) non-convergence result, this Edgeworth bargaining set shrinks to the set of Walrasian allocations.
    Keywords: Bargaining sets, coalitions, core, veto mechanism.
    JEL: D00 D11 D51
    Date: 2014–07–18
  28. By: Luca Colombo (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore ); Herbert Dawid (Universität Bielefeld )
    Abstract: This paper investigates firms' optimal location choices explicitly accounting for the role of inwards and outwards knowledge spillovers in a dynamic Cournot oligopoly with firms that are heterogeneous in their ability to carry out cost-reducing R\&D. Firms can either locate in an industrial cluster or in isolation. Technological spillovers are exchanged between the firms in the cluster. It is shown that a technological leader has an incentive to locate in isolation only if her advantage exceeds a certain threshold, which is increasing in firms' discount rate, in industry dispersion, and in the intensity of knowledge spillovers. Scenarios are identified where although it is optimal for the technological leader to locate in isolation, from a welfare perspective it would be desirable that she locates in the cluster.
    Keywords: Location Choice, Knowledge Spillovers, Technological Leadership, Markov-perfect Equilibrium
    JEL: L13 C73 O31 R12
    Date: 2013–11
  29. By: Audrey Hu (University of Amsterdam,Tinbergen Institute ); Steven A. Matthews (Department of Economics, University of Pennsylvania ); Liang Zou (University of Amsterdam )
    Abstract: We establish conditions under which an English auction for an indivisible risky asset has an efficient ex post equilibrium when the bidders are heterogeneous in both their exposures to, and their attitudes toward, the ensuing risk the asset will generate for the winning bidder. Each bidder's privately known type is unidimensional, but may affect both his risk attitude and the expected value of the asset's return to the winner. An ex post equilibrium in which the winning bidder has the largest willingness to pay for the asset exists if two conditions hold: each bidder's marginal utility of income is log-supermodular, and the vector-valued function mapping the type vector into the bidders' expected values for the asset satisfies a weighted average crossing condition. However, this equilibrium need not be efficient. We show that it is efficient if each bidder's expected value for the asset is nonincreasing in the types of the other bidders, or if the bidders exhibit nonincreasing absolute risk aversion or if the asset is riskless.
    Keywords: English auction, ensuing risk, heterogeneous risk preferences, interdependent values, ex post equilibrium, ex post efficiency
    JEL: D44 D82
    Date: 2015–02–25
  30. By: Ed Nosal (Federal Reserve Bank of Chicago ); Bruno Sultanum (The Pennsylvania State University ); David Andolfatto (Federal Reserve Bank of St. Louis )
    Abstract: Peck and Shell (2003) show that equilibrium bank runs are possible in the Diamond and Dybvig (1983)environment. We show that their result is an artifact of their restriction to direct mechanisms. That is, their bank contract is not an optimal one. We show that an indirect mechanism eliminates the possibility of bank-run equilibria and implements the socially efficient outcome. The optimal mechanism can be interpreted as a form of deposit insurance.
    Date: 2014
  31. By: Mailath, George J. ; Nocke, Volker ; White, Lucy
    Abstract: In repeated normal-form (simultaneous-move) games, simple penal codes (Abreu,1986, 1988) permit an elegant characterization of the set of subgame-perfect outcomes. We show that the logic of simple penal codes fails in repeated extensive-form games. By means of examples, we identify two types of settings in which a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator, but also to the nature of the deviation.
    Keywords: Simple Penal Code , Subgame Perfect Equilibrium , Repeated Extensive Game , Optimal Punishment
    JEL: C70 C72 C73
    Date: 2015
  32. By: Alexander Funcke (Philosophy, Politics and Economics, University of Pennsylvania ); Daniel Cownden
    Abstract: Mechanisms employing fines and rewards may be introduced in multi-equilibrium situations to enforce a certain equilibrium. The mechanism does two things. First, it produces a signal disrupting the normal dynamics of repeated play; potentially encouraging agents to reconsider their expectations. Secondly, it changes the payoffs. In deciding what behavior to engage in after introduction of a new mechanism a rational agent needs to consider to what degree the signal has been received and convinced others, which in turn depends on what those others believe about the reception of the signal, and so on. The epistemic mess is a challenge for both the agents and for a policy maker interested in facilitating a re-coordination. The latter begs the question: How large must fines and rewards be to ensure re-coordination? We show that the result we get from classic game theory is more "heavy handed" than necessary; far less intervention is actually required. Specifically we will outline a mechanism that ensures re-coordination, regardless of the idiosyncratic belief formation processes of the population, while at the same time making minimal interventions.
    Keywords: coordination, fines and rewards, mechanism design
    JEL: C79 D80 Z13
    Date: 2015–02
  33. By: Herings P.J.J. ; Houba H (GSBE )
    Abstract: We study strategic negotiation models featuring costless delay, general recognition procedures, endogenous voting orders, and finite sets of alternatives. Two examples show 1. non-existence of stationary subgame-perfect equilibrium SSPE. 2. the recursive equations and optimality conditions are necessary for SSPE but insufficient because these equations can be singular. Strategy profiles excluding perpetual disagreement guarantee non-singularity. The necessary and sufficient conditions for existence of stationary best responses additionally require either an equalizing condition or a minimality condition. Quasi SSPE only satisfy the recursive equations and optimality conditions. These always exist and are SSPE if either all equalizing conditions or all minimality conditions hold.
    Keywords: Noncooperative Games; Stochastic and Dynamic Games; Evolutionary Games; Repeated Games; Bargaining Theory; Matching Theory;
    JEL: C72 C73 C78
    Date: 2015
  34. By: Andrea Gallice
    Abstract: We study a rent-seeking contest in which players have heterogeneous and private valuations. In addition to their own type, agents only know that all valuations are drawn from an unspeciÂ…ed distribution, of which they only know the mean. We obtain a closed-form solution for agentsÂ’ optimal level of investment and subject it to comparative statics analy- sis. We also investigate the issue of entry in the game and the amount of rent dissipation that results in equilibrium. Finally, we compare our results with those that would emerge in a context of perfect information.
    Keywords: rent-seeking; contests; private information; imperfect information.
    JEL: D72 D82
    Date: 2014
  35. By: Yuichi Yamamoto (Department of Economics, University of Pennsylvania )
    Abstract: This paper studies infinite-horizon stochastic games in which players observe noisy public information about a hidden state each period. We find that if the game is connected, the limit feasible payoff set exists and is invariant to the initial prior about the state. Building on this invariance result, we provide a recursive characterization of the equilibrium payoff set and establish the folk theorem. We also show that connectedness can be replaced with an even weaker condition, called asymptotic connectedness. Asymptotic connectedness is satisfied for generic signal distributions, if the state evolution is irreducible.
    Keywords: stochastic game, hidden state, connectedness, stochastic selfgeneration, folk theorem
    JEL: C72 C73
    Date: 2015–01–14

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