nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒10‒17
nine papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Hierarchical Experimentation By Chia-Hui Chen; Junichiro Ishida
  2. From fixed to state-dependent duration in public-private partnerships By Daniel Danau; Annalisa Vinella
  3. Equilibria for Multi–leader Multi–follower Games with Vertical Information: Existence Results By Maria Carmela Ceparano; Jacqueline Morgan
  4. Harsanyi's theorem without the sure-thing principle: On the consistent aggregation of Monotonic Bernoullian and Archimedean preferences By Stéphane Zuber
  5. Optimal Risk Sharing with Optimistic and Pessimistic Decision Makers By Aloisio Araujo; Laurence Jean-Marc Bonnisseau; Alain Chateauneuf; Rodrigo Novinski
  6. Optimal Relevance in Imperfect Information Games By Jorge M. Streb
  7. Premuneration Values and Investments in Matching Markets By George J. Mailath; Andrew Posltewaite; Larry Samuelson
  8. Electoral Accountability and Responsive Democracy By John Duggan; Cesar Martinelli
  9. Regularity properties in a state-constrained expected utility maximization problem By Mourad Lazgham

  1. By: Chia-Hui Chen; Junichiro Ishida
    Abstract: We consider a bandit problem faced by a team of two heterogeneous players. The team is hierarchical in that one (the principal) retains the exclusive right to terminate the project while the other (the agent) focuses strictly on implementing the project assigned to him. As a key departure, we assume that the principal may be privately informed about the project quality. In contrast to the existing literature, the belief in our model is generally non-monotonic: while each failure makes the agent less confident in the project, the uninformed principal drops out gradually over time, which partially restores his confidence. We derive explicit solutions for the agent's effort and the principal's exit decisions, which allow us to obtain a full characterization of the equilibrium. We also discuss the role of effort monitoring in this context and suggest a new rationale for delegation.
    Date: 2015–10
  2. By: Daniel Danau (Universitè de Caen Basse-Normandie - Centre de Recherche en Economie et Management); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro" - Dipartimento di Scienze economiche e metodi matematici)
    Abstract: A government delegates a build-operate-transfer project to a private Örm. In the contracting stage, the operating cost is unknown. The Örm can increase the likelihood of facing a low cost, rather than a high cost, by exerting costly e§ort when building the infrastructure. Once this is in place, the Örm learns the true cost and begins to operate. We show that, under limited commitment, if the break-up of the partnership is su¢ciently costly to the government and/or information problems are su¢ciently severe, the contract is not robust to renegotiation unless it has a longer duration when the realized cost is low. This result is at odds with the prescription of the literature on aÌexible-term contracts, which recommends a longer duration when operating conditions are unfavourable.
    Keywords: Public-private partnerships; state-dependent duration; aÌexible-term con- tract; limited commitment; renegotiation; break-up
    JEL: D82 H57 H81
    Date: 2015–01
  3. By: Maria Carmela Ceparano (Università di Napoli Federico II); Jacqueline Morgan (Università di Napoli Federico II and CSEF)
    Abstract: We consider a two–stage multi–leader multi–follower game where the action chosen by any leader is observed by only one “exclusive” follower. Many real–world situations can be modeled as such a game, for example in Pagnozzi and Piccolo, Vertical Separation with Private Contracts, The Economic Journal (2012), where competing manufacturers (the leaders) delegate retail decisions to exclusive retailers (the followers) offering a private contract. This game, called with vertical information, may have an infinity of Nash equilibria but it is not possible to refine using the concept of subgame perfect Nash equilibrium since the associate extensive form has no proper subgames. This motivates the introduction of selections of Nash equilibria based on the beliefs that each follower has about the actions observed by the other followers. In this paper, focusing on the concept of equilibrium under passive beliefs for a general model, we show the effectiveness of the concept and we investigate the existence of such a selection for significative classes of problems satisfying conditions of minimal character on possibly discontinuous data.
    Keywords: multi–leader multi–follower games; selection of equilibria; passive beliefs; existence; discontinuous data; information; fixed points; set–valued map
    Date: 2015–10–13
  4. By: Stéphane Zuber (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper studies the extension of Harsanyi's theorem (Harsanyi, 1995) in a framework involving uncertainty. It seeks to extend the aggregation result to a wide class of Monotonic Bernoullian and Archimedean preferences (Cerreia-Vioglio et al., 2011) that subsumes many models of choice under uncertainty proposed in the literature. An impossibility result is obtained, unless we are in the specific framework where all individuals and the decision-maker are subjective expected utility maximizers sharing the same beliefs. This implies that non-expected utility preferences cannot be aggregated consistently
    Keywords: Harsanyi's theorem; Pareto principle; Monotonic Bernoullian and Archimedean preferences; Subjective Expected Utility
    JEL: D71 D81
    Date: 2015–09
  5. By: Aloisio Araujo (IMPA and EPGE/FGV - Rio de Janeiro); Laurence Jean-Marc Bonnisseau (Centre d'Economie de la Sorbonne - Paris School of Economics); Alain Chateauneuf (IPAG - Centre d'Economie de la Sorbonne - Paris School of Economics); Rodrigo Novinski (Faculdades Ibmec - Rio de Janeiro)
    Abstract: We prove that under mild conditions individually rational Pareto optima will exist even in presence of non-convex preferences. We consider decision makers dealing with a countable flow of payoffs or choosing among financial assets whose outcomes depend on the realization of a countable set of states of the world. Our conditions for the existence of Pareto optima can be interpreted as a requirement of impatience in the first context and of some pessimism or not unrealistic optimism in the second context. A non-existence example is provided when, in the second context, some decision maker is too optimistic. We furthermore show that at an individually rational Pareto optimum at most one strictly optimistic decision maker will avoid ruin at each state or date. Considering a risky context this entails that even is risk averters will share risk in a comonotonic way as usual, at most one classical strong risk lover will avoid ruin at each state or date. Finally some examples illustrate circumstances when a risk averter could take advantage of sharing risk with a risk lover rather than with a risk averter
    Keywords: Risk sharing; Pareto optimum; impatience; optimistic
    JEL: D80 D81
    Date: 2015–09
  6. By: Jorge M. Streb
    Abstract: To help incorporate natural language into economic theory, this paper does two things. First, the paper extends to imperfect information games an equilibrium concept developed for incomplete information games, so natural language can be formalized as a vehicle to convey information about actions as well as types. This equilibrium concept is specific to language games, because information is conveyed by the sender through the message’s literal meaning. Second, the paper proposes an equilibrium refinement which selects the sender’s most preferred equilibrium. The refinement captures the notion that the speaker seeks to improve its status quo, aiming at optimal relevance. Explicit coordination through verbal communication parallels the idea of implicit coordination through focal points.
    Keywords: cheap talk, signs, semantics, pragmatics, relevance, equilibrium selection
    JEL: D83 C72
    Date: 2015–10
  7. By: George J. Mailath (Dept. of Economics, University of Pennsylvania); Andrew Posltewaite (Dept. of Economics, University of Pennsylvania); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: We analyze a model in which agents make investments and then match into pairs to create a surplus. The agents can make transfers to reallocate their pretransfer ownership claims on the surplus. Mailath, Postlewaite and Samuelson (2013) showed that when investments are unobservable, equilibrium investments are generally inefficient. In this paper we work with a more structured model that is sufficiently tractable to analyze the nature of the investment inefficiencies. We provide conditions under which investment is inefficiently high or low and conditions under which changes in the pretransfer ownership claims on the surplus will be Pareto improving, as well as examine how the degree of heterogeneity on either side of the market affects investment efficiency.
    Keywords: Matching, Investments, Premuneration values, Underinvestment, Transfers
    JEL: C7 D4
    Date: 2015–10
  8. By: John Duggan (Department of Political Science, University of Rochester); Cesar Martinelli (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: We consider a canonical two-period model of elections with adverse selection (hidden preferences) and moral hazard (hidden actions), in which neither voters nor politicians can commit to future choices. We prove existence of electoral equilibria, and we show that office holders mix between “taking it easy†and “going for broke†in the first period. Even in the presence of a finite horizon, we establish that increasing office motivation leads to arbitrarily high expected policy outcomes. We conclude that the mechanism of electoral accountability has the potential to achieve responsiveness of democratic politics when electoral incentives are sufficiently large.
    Date: 2015–10
  9. By: Mourad Lazgham
    Abstract: We consider a stochastic optimal control problem in a market model with temporary and permanent price impact, which is related to an expected utility maximization problem under finite fuel constraint. We establish the initial condition fulfilled by the corresponding value function and show its first regularity property. Moreover, we can prove the existence and uniqueness of optimal strategies under rather mild model assumptions. On the one hand, this result is of independent interest. On the other hand, it will then allow us to derive further regularity properties of the corresponding value function, in particular its continuity and partial differentiability. As a consequence of the continuity of the value function, we will prove the dynamic programming principle without appealing to the classical measurable selection arguments.
    Date: 2015–10

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