nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒03‒13
twelve papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Short-term, Long-term, and Continuing Contracts By Maija Halonen-Akatwijuka; Oliver Hart
  2. Memory, Attention and Choice By Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
  3. Social Learning and Selective Attention By Andrew Caplin; John Leahy; Filip Matějka
  4. Bounded rationality adn correlated equilibria By Fabrizio Germano; Peio Zuazo-Garin
  5. Uncertain rationality and robustness in games with incomplete information By Fabrizio Germano; Peio Zuazo-Garin
  6. Informational opacity and honest certication By Martin Pollrich; Lilo Wagner
  7. Learning to Disagree in a Game of Experimentation By Alessandro Bonatti; Johannes Horner
  8. Deliberating Collective Decisions By Chan, Jimmy; Lizzeri, Alessandro; Suen, Wing; Yariv, Leeat
  9. Dynamic Games under Bounded Rationality By Zhao, Guo
  10. Cournot Games with Uncertainty: Coalitions, Competition, and Efficiency By Baosen Zhang; Ramesh Johari; Ram Rajagopal
  11. Fairness and Efficiency in a Random Assignment: Three Impossibility Results By Alexander Nesterov
  12. Mediation and Peace By Johannes Horner; Massimo Morelli; Francesco Squintani

  1. By: Maija Halonen-Akatwijuka; Oliver Hart
    Abstract: Parties often regulate their relationships through “continuing” contracts that are neither long-term nor short-term but usually roll over. We study the trade-off between long-term, short-term, and continuing contracts in a two period model where gains from trade exist in the first period, and may or may not exist in the second period. A long-term contract that mandates trade in both periods is disadvantageous since renegotiation is required if there are no gains from trade in the second period. A short-term contract is disadvantageous since a new contract must be negotiated if gains from trade exist in the second period. A continuing contract can be better. In a continuing contract there is no obligation to trade in the second period but if there are gains from trade the parties will bargain “in good faith” using the first period contract as a reference point. This can reduce the cost of negotiating the next contract. Continuing contracts are not a panacea, however, since good faith bargaining may preclude the use of outside options in the bargaining process and as a result parties will sometimes fail to trade when this is efficient.
    JEL: D23 D86 K12
    Date: 2015–03
  2. By: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a theory of consumer choice that combines elements of limited recall and of allocationof attention distorted by salience. The theory helps clarify and organize a variety of evidence dealingwith consumer reaction to information, including surprises in quality and prices, unshrouding ofhidden attributes such as taxes or maintenance costs, and reminders. Our model explains howconsumers under or overreact to information, depending on what draws their attention. It also yieldsa normative analysis of reaction to reminders which adjusts the \sucient statistic" methodology.
    Date: 2015–03
  3. By: Andrew Caplin; John Leahy; Filip Matějka
    Abstract: Popularity is self reinforcing. The attention garnered by popular options propels further interest in them. Yet rather than blindly follow the crowd, most pay attention to how well these items match their tastes. We model this role of social learning in guiding selective attention and market dynamics. We confirm that attention focuses on options that quickly achieve popularity. Information externalities render the chosen set smaller than socially optimal. This rationalizes antitrust policies that encourage early experimentation. When attention costs are based on Shannon entropy, optimal policies are computable. With rich data, optimal choices can be identified for all consumer types.
    JEL: D83
    Date: 2015–03
  4. By: Fabrizio Germano; Peio Zuazo-Garin
    Abstract: We study an interactive framework that explicitly allows for non-rational behavior. We do not place any restrictions on how players can deviate from rational behavior. Instead we assume that there exists a lower bound p E [0,1] such that all players play and are believed to play rationally with a probability p or more. This, together with the assumption of a common prior, leads to what we call the set of p-rational outcomes, which we define and characterize for arbitrary p E [0,1]. We then show that this set varies continuously in p and converges to the set of correlated equilibria as p approaches 1, thus establishing robustness of the correlated equilibrium concept to relaxing rationality and common knowledge of rationality. The p-rational outcomes are easy to compute, also for games of incomplete information, and they can be applied to observed frequencies of play to compute a measure p that bounds from below the probability with which any given player is choosing actions consistent with payoff maximization and common knowledge of payoff maximization.
    Keywords: strategic interaction, correlated equilibrium, robustness to bounded rationality, approximate knowledge, incomplete information, measure of rationality, experiments.
    JEL: C72 D82 D83
    Date: 2015–02
  5. By: Fabrizio Germano; Peio Zuazo-Garin
    Abstract: Economic predictions are highly sensitive to model and informational specifications. Weinstein and Yildiz (2007) show that, in static games with incomplete information, only very weak predictions, namely, the interim correlated rationalizable (ICR) actions, are robust to higher-order belief misspecifications. This paper extends their robustness analysis to allow for higher-order uncertainty about rationality. We introduce interim correlated p-rationalizability (ICRp) as a solution concept for games with incomplete information. We first confirm the robustness of the ICR predictions to small departures from common belief in rationality by showing the continuity of ICRp actions at p = 1, where they coincide with ICR. At the same time, we show that Weinstein and Yildiz's (2007) deeper results on the structure of rationalizability, most notably, their discontinuity and generic local uniqueness properties, fail as soon as any arbitrarily small amount of higher-order uncertainty about rationality is introduced. Thus, we find that common belief in rationality is a necessary condition for Weinstein and Yildiz's (2007) discontinuity property to hold. Among other things, this reveals the diminishing strategic impact of higher-order belief constraints.
    Keywords: Robustness, rationalizability, uncertain rationality, incomplete information, belief hierarchies.
    JEL: C72 D82 D83
    Date: 2015–02
  6. By: Martin Pollrich (Humboldt-Universitaet zu Berlin); Lilo Wagner (Deutsches Institut für Wirtschaftsforschung)
    Abstract: This paper studies the interaction of information disclosure and reputational concerns in certication markets. We argue that by revealing less precise information a certifier reduces the threat of capture. Opaque disclosure rules may reduce profits but also constrain feasible bribes. For large discount factors a certifier is unconstrained in the choice of a disclosure rule and full disclosure maximizes profits. For intermediate discount factors, only less precise, such as noisy, disclosure rules are implementable. Our results suggest that contrary to the common view, coarse disclosure may be socially desirable. A ban may provoke market failure especially in industries where certifier reputational rents are low. Creation Date: 2015-04
    Keywords: Certification, Bribery, Reputation
    JEL: L15 D82 L14 L11
  7. By: Alessandro Bonatti; Johannes Horner (Cowles Foundation, Yale University)
    Abstract: We analyse strategic experimentation in which information arrives through fully revealing, publicly observable “breakdowns.” With hidden actions, there exists a unique equilibrium that involves randomization over stopping times. This randomization induces belief disagreement on the equilibrium path. When actions are observable, the equilibrium is pure, and welfare improves. We analyse the role of policy interventions such as subsidies for experimentation and risk-sharing agreements. We show that the optimal risk-sharing agreement restores the first-best outcome, independent of the monitoring structure.
    Keywords: Experimentation, Free-riding, Mixed strategies, Monitoring, Delay
    JEL: C73 D83 O33
    Date: 2015–03
  8. By: Chan, Jimmy; Lizzeri, Alessandro; Suen, Wing; Yariv, Leeat
    Abstract: We present a dynamic model of sequential information acquisition by a heterogeneous committee. At each date agents decide whether to vote to adopt one of two alternatives or continue to collect more information. The process stops when a qualified majority vote for an alternative. Three main insights emerge from our analysis and match an array of stylized facts on committee decision making. First, majority rule is more fragile than super-majority rules to impatient committee members. Second, more diverse preferences, more consensual deliberation rules, or more unanimous de- cision voting rules lead to lengthier deliberation and more accurate decisions. Last, balanced committees unanimously prefer to delegate deliberation power to a moderate chairman rather than be governed by a deliberation rule such as unanimity.
    Keywords: collec- tive learning; optimal stopping; sequential likelihood ratio test; swing voters
    JEL: D71 D72 D83
    Date: 2015–03
  9. By: Zhao, Guo
    Abstract: I propose a dynamic game model that is consistent with the paradigm of bounded rationality. Its main advantages over the traditional approach based on perfect rationality are that: (1) the strategy space is a chain-complete partially ordered set; (2) the response function is certain order-preserving map on strategy space; (3) the evolution of economic system can be described by the Dynamical System defined by the response function under iteration; (4) the existence of pure-strategy Nash equilibria can be guaranteed by fixed point theorems for ordered structures, rather than topological structures. This preference-response framework liberates economics from the utility concept, and constitutes a marriage of normal-form and extensive-form games.
    Keywords: Dynamic Games,Bounded Rationality,Dynamical System, fixed point theorems,chain-complete partially ordered set,Coase theorem,impossibility theorem, Keynesian beauty contest,Bertrand Paradox, backward induction paradox
    JEL: C7 D5 D7
    Date: 2015–03–08
  10. By: Baosen Zhang; Ramesh Johari; Ram Rajagopal
    Abstract: We investigate the impact of group formations on the efficiency of Cournot games where producers face uncertainties. In particular, we study a market model where producers must determine their output before an uncertainty production capacity is realized. In contrast to standard Cournot models, we show that the game is not efficient when there are many small producers. Instead, producers tend to act conservatively to hedge against their risks. We show that in the presence of uncertainty, the game becomes efficient when producers are allowed to take advantage of diversity to form groups of certain sizes. We characterize the trade-off between market power and uncertainty reduction as a function of group size. Namely, we show that when there are N producers present, competition between groups of size square root of N results in equilibria that are socially optimal.
    Date: 2015–03
  11. By: Alexander Nesterov (Wissenschaftszentrum für Sozialforschung Berlin)
    Abstract: This paper considers the problem of allocating N indivisible objects among N agents according to their preferences when transfers are not allowed, and studies the tradeoff between fairness and efficiency in the class of strategy-proof mechanisms. The main finding is that for strategy-proof mechanisms the following efficiency and fairness criteria are mutually incompatible: (1) Ex-post efficiency and envy-freeness, (2) ordinal efficiency and weak envy-freeness and (3) ordinal efficiency and equal division lower bound. Result (1) is the first impossibility result for this setting that uses ex-post efficiency; results (2) and (3) are more relevant for practical implementation than similar results in the literature. In addition, for N = 3 the paper strengthens the characterization result by Bogomolnaia and Moulin (2001): the random serial dictatorship mechanism is the unique strategy-proof, ex-post efficient mechanism that eliminates strict envy between agents with the same preferences. Creation Date: 2014-11
    Keywords: random assignment, random serial dictatorship, strategy-proofness, ex-post efficiency, weak envy-freeness, equal division lower bound
    JEL: C78 D71 D78
  12. By: Johannes Horner; Massimo Morelli; Francesco Squintani
    Abstract: This paper applies mechanism design to the study of international con flict resolution. Standard mechanisms in which an arbitrator can enforce her decisions are usually not feasible because disputants are sovereign entities. Nevertheless, we find that this limitation is inconsequential. Despite only being capable of making unenforceable recommendations, mediators can be equally effective as arbitrators. By using recommendation strategies that do not reveal that one player is weak to a strong opponent, a mediator can effectively circumvent the unenforceability constraint. This is because these strategies make the strong player agree to recommendations that yield the same payoff as arbitration in expectation. This result relies on the capability of mediators to collect confidential information from the disputants, before making their recommendations. Simple protocols of unmediated communication cannot achieve the same level of ex ante welfare, as they preclude confidentiality.
    Date: 2015

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