nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒04‒11
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Cooperation Dynamic in Repeated Games of Adverse Selection By Juan F. Escobar; Gastón Llanes
  2. Relational Contracts with Subjective Peer Evaluations By Joyee Deb; Jin Li; Arijit Mukherjee
  3. Bundled procurement By Chen, Yongmin; Li, Jianpei
  4. On Games and Equilibria with Coherent Lower Expectations By Giuseppe De Marco; Maria Romaniello
  5. The rationality of expectations formation By DAVILA, Julio
  6. Social ordering functions By MANIQUET, François
  7. Dynamic Games with Almost Perfect Information By He, Wei; Sun, Yeneng
  8. Sequential English Auctions: A Theory of Opening-bid …Fishing By Joseph Uri Podwol
  9. Toward a theory of monopolistic competition By PARENTI, Mathieu; USHCHEV, Philip; THISSE, Jacques-François
  10. On the impossibility of protecting risk-lovers By Toomas Hinnosaar

  1. By: Juan F. Escobar; Gastón Llanes
    Abstract: We study a class of repeated games with Markovian private information and characterize optimal equilibria as players become arbitrarily patient.  We show that seemingly non-cooperative action may occur in equilibrium and serve as signals of changes in private information. Players forgive such actions, and use the information they convey to adjust their continuation play. However, to forgive is not to forget: players keep track of the number of aggressions and enter into a punishment phase if that number becomes suspiciously high. Our model explains features of long-run relationships that are only barely understood, such as equilibrium defaults, unilateral price cuts, collusive price leadership, graduated sanctions, and restitutions. We also explore a model in which interactions are frequent and show how increasing the persistence of the process of types reduces informational fictions. Key words: Keywords: Repeated games, adverse selection, signaling, tacit collusion, price leadership, price cuts, equilibrium defaults, graduated sanctions.
    Date: 2015
  2. By: Joyee Deb (School of Management, Yale University); Jin Li (Kellogg School of Management, Northwestern University); Arijit Mukherjee (Dept. of Economics, Michigan State University)
    Abstract: We study optimal contracting in a setting where a firm repeatedly interacts with multiple workers, and can compensate them based on publicly available performance signals as well as privately reported peer evaluations. If the evaluation and the effort provision are done by different workers (as in a supervisor/agent hierarchy), we show that, using both the private and public signals, the first best can be achieved even in a static setting. However, if each worker is required to both exert effort and report on his co-worker’s performance (as in a team setting), the worker’s effort incentives cannot be decoupled from his truth-telling incentives. This makes the optimal static contract inefficient and relational contracts based on the public signals increase efficiency. In the optimal contract, it may be optimal to ignore signals that are informative of the worker’s effort.
    Keywords: Relational contracts, Subjective evaluation
    JEL: D82 D86
    Date: 2015–03
  3. By: Chen, Yongmin; Li, Jianpei
    Abstract: When procuring multiple products from competing firms, a buyer may choose separate purchase, pure bundling, or mixed bundling. We show that pure bundling will generate higher buyer surplus than both separate purchase and mixed bundling, provided that trade for each good is likely to be efficient. Pure bundling is superior because it intensifies the competition between firms by reducing their cost asymmetry. Mixed bundling is inferior because it allows firms to coordinate to the high prices associated with separate purchase. (Pure) bundling is more likely to be selected as a procurement strategy when: (i) the products' values are higher relative to their possible costs, (ii) costs for different goods are more negatively or less positively dependent, or (iii) the cost distribution of each product is more dispersed.
    Keywords: procurement, bundled procurement, separate purchase, bundling, mixed bundling
    JEL: D21 D44 L24
    Date: 2015–04–02
  4. By: Giuseppe De Marco (Università di Napoli Parthenope and CSEF); Maria Romaniello (Seconda Università di Napoli)
    Abstract: Different solution concepts for strategic form games have been introduced in order to weaken the consistency assumption that players' beliefs - about their opponents strategic choices - are correct in equilibrium. The literature has shown that ambiguous beliefs are an appropriate device to deal with this task. In this note, we introduce an equilibrium concept in which players do not know the opponents' strategies in their entirety but only the coherent lower expectations of some random variables that depend on the actual strategies taken by the others. This equilibrium concept generalizes the already existing concept of equilibrium with partially specified probabilities by extending the set of feasible beliefs and allowing for comparative probability judgements. We study the issue of the existence of the equilibrium points in our framework and find that equilibria exist under rather classical assumptions.
    Date: 2015–04–01
  5. By: DAVILA, Julio (Université catholique de Louvain, CORE, Belgium)
    Abstract: Rational expectations do not require beliefs to be consistent with history and with what agents can conclude from it. Actually, at a rational expectations equilibrium agents may hold beliefs that explain poorly the history they observe, even when restricted to only those rationalizing their choices. This paper shows that if agents hold rationally formed expectations instead —in the sense of following from beliefs that explain history better than any other beliefs justifying their choices— then additional allocations unsupported by rational expectations can be shown to be equilibrium outcomes. By means of this result, it is established too that adding common knowledge of the rationality of the formation of expectations —on top of that of rationality of choices and market clearing— does not suffice either to guarantee rational expectations. Interestingly, the rationally formed expectations equilibria produced in this paper exhibit a sunspot-like volatility that do not rely on an explicit sunspot mechanism.
    Keywords: rationality, expectations, overlapping generations
    JEL: D84 D5 E3
    Date: 2014–11–05
  6. By: MANIQUET, François (Université catholique de Louvain, CORE, Belgium)
    Abstract: We present the Fair Social Ordering approach to policy assessment. In an economic model, a Social Ordering Function (SOF) associates each economy in the domain with a complete ranking of the allocations. We describe the main achievements of the SOF theory. We present two applications, which show how SOF's can be used to evaluate policies. The first application concerns labor income taxation. The second application concerns the measurement of poverty. Finally, we discuss the relationship between the SOF approach and some other approaches to the construction of criteria to evaluate policies.
    Date: 2014–09–30
  7. By: He, Wei; Sun, Yeneng
    Abstract: This paper aims to solve two fundamental problems on finite or infinite horizon dynamic games with perfect or almost perfect information. Under some mild conditions, we prove (1) the existence of subgame-perfect equilibria in general dynamic games with almost perfect information, and (2) the existence of pure-strategy subgame-perfect equilibria in perfect-information dynamic games with uncertainty. Our results go beyond previous works on continuous dynamic games in the sense that public randomization and the continuity requirement on the state variables are not needed. As an illustrative application, a dynamic stochastic oligopoly market with intertemporally dependent payoffs is considered.
    Keywords: Dynamic games; almost perfect information; perfect information; subgame-perfect equilibirum
    JEL: C62 C73 D0
    Date: 2015
  8. By: Joseph Uri Podwol (Economic Analysis Group, U.S. Department of Justice)
    Abstract: Cassady (1967) describes an auction in which the auctioneer “fishes” for an opening bid, calling out lower and lower amounts until an opening bid is eventually placed. Once a bid is placed, it is not uncommon for the bidding to escalate above the initial starting price. The current study explains this puzzle in a model in which an auctioneer sells an indivisible good via English ascending-price auction and cannot commit to keeping the item off the market should the initial starting price fail to elicit any bids. A key insight of the paper is that the well-known strategy equivalence between the English auction and the second-price auction fails to extend to the sequential setting. This difference has important implications for the equilibrium starting-price path, giving rise to a Coase conjecture in the English auction but not in the second-price auction.
    Date: 2015–03
  9. By: PARENTI, Mathieu (Université catholique de Louvain, CORE, Belgium; NRU-Higher School of Economics, Russia); USHCHEV, Philip (NRU-Higher School of Economics, Russia); THISSE, Jacques-François (Université catholique de Louvain, CORE, Belgium; NRU-Higher School of Economics, Russia; CEPR)
    Abstract: We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which depends on both the per capita consumption and the total mass of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shock are characterized through necessary and sufficient conditions. Finally, we show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous firms and consumers.
    Keywords: monopolistic competition, general equilibrium, additive preferences, homothetic preferences
    JEL: D43 L11 L11 L13
    Date: 2014–11–18
  10. By: Toomas Hinnosaar
    Abstract: Risk-neutral sellers can extract high profits from risk-loving buyers by selling them lotteries. To limit this problem, gambling is heavily regulated in most countries. I show that protecting risk-loving buyers against profit-maximizing sellers is essentially impossible. Even if buyers are risk-loving in the weakest sense, the seller can construct a nonrandom winner-pays auction that ensures unbounded profits. The result holds even if the seller cannot use any mechanism that resembles a lottery and only requires that buyers are asymptotically risk loving. This condition is satisfied, for example, when preferences satisfy Savage’s axioms or with prospect theory preferences.
    Keywords: risk-loving agents, auctions, gambling, prospect theory
    JEL: D82 D44 C72 D81
    Date: 2015

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