nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒03‒23
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Wither Game Theory? By Drew Fudenberg; David K Levine
  2. Bounded Memory, Reputation, and Impatience By Benjamin Sperisen
  3. Repeated games with public information revisited By Marie Laclau; Tristan Tomala
  4. A simple model of two-stage choice By HORAN, Sean
  5. The Subgame Perfect Core By Parkash Chander; Myrna Wooders
  6. A bargaining-Walras approach for finite economies By Hervés-Estévez, Javier; Moreno-García, Emma
  7. A More General Definition of Equilibrium in Markets with Adverse Selection By Anastasios Dosis
  8. Partially-honest Nash Implementation with Non-connected Honesty Standards By Lombardi, Michele; Yoshihara, Naoki
  9. Efficiency in Auctions with (Failed) Resale By Marco Pagnozzi; Krista J. Saral
  10. Constructing Social Division to Support Cooperation By Choy, James P.
  11. Cheap Talk with an Exit Option: A Model of Exit and Voice By Takashi Shimizu
  12. Task ordering in incentives under externalities By Murali Agastya; Kanti Parimal Bag; Nona Pepito
  13. Bertrand-Edgeworth games under triopoly: the equilibrium strategies when the payoffs of the two smallest firms are proportional to their capacities By De Francesco, Massimo A.; Salvadori, Neri
  14. Information Sharing and Rating Manipulation By Giannetti, Mariassunta; Liberti, Jose Maria; Sturgess, Jason
  15. Recursive Contracts and Endogenously Incomplete Markets By Mikhail Golosov; Aleh Tsyvinski; Nicolas Werquin
  16. Relational Knowledge Transfers By Luis Garicano; Luis Rayo
  17. A convergence result for a bargaining set By Hervés-Estévez, Javier; Moreno-García, Emma

  1. By: Drew Fudenberg; David K Levine
    Date: 2016–01–31
  2. By: Benjamin Sperisen (Department of Economics, Tulane University)
    Abstract: Reputation models typically assume players have full memory, yet in many applications this does not hold. This paper studies incomplete information games where players observe only finitely many recent periods, deriving a recursive characterization of the equilibrium payoff set that captures both stationary and previously unexplored non-stationary equilibria, as well as tools for studying purifiable (i.e. robust to payoff perturbations) equilibria. These tools are applied to a product choice game. For 1-period memory, I obtain the exact minimum and maximum purifiable equilibrium payoffs for almost all discount factors and prior beliefs on an "honest" firm type. For long memory, I characterize the minimum purifiable non-stationary equilibrium payoff and unique stationary payoff. In both cases, incomplete information and non-stationary behavior qualitatively change the equilibrium payoff set. These results hold for fixed discount factors independent of prior beliefs, and so do not require extreme patience.
    Keywords: Reputation, bounded memory, purifiability, product choice game
    JEL: C73 D82 D83 L14
    Date: 2016–02
  3. By: Marie Laclau (CNRS - Centre National de la Recherche Scientifique, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - Institut national de la recherche agronomique (INRA) - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Tristan Tomala (HEC Paris - Department of Economics and Decision Sciences)
    Abstract: We consider repeated games with compact actions sets and pure strategies in which players commonly observe a public signal which reveals imperfectly the action profile. We characterize the set of payoffs profiles that can be sustained by a perfect equilibrium, as players become increasingly patient. There are two conditions: admissibility and joint rationality. An admissibly feasible payoff can be achieved by an action profile that offers no unilateral deviation which is both undetectable and profitable. It is jointly rational if for all weights on players, the weighted payoff is greater than or equal to the minmax level of the weighted payoff function. This characterization is alternative to the one provided by the " score method " of Fuden-berg and Levine (1994). We provide a simple construction of equilibrium strategies based on cooperation, punishments and rewards. Punishments rely on Blackwell's approachability algorithm.
    Keywords: Repeated games, approachability, imperfect public monitoring.
    Date: 2016–03–09
  4. By: HORAN, Sean
    Abstract: I provide choice-theoretic foundations for a simple two-stage model, called transitive shortlist methods, where choices are made by sequentially by applying a pair of transitive preferences (or rationales) to eliminate inferior alternatives. Despite its simplicity, the model accommodates a wide range of choice phenomena including the status quo bias, framing, homophily, compromise, and limited willpower. I establish that the model can be succinctly characterized in terms of some well-documented context effects in choice. I also show that the underlying rationales are straightforward to determine from readily observable reversals in choice. Finally, I highlight the usefulness of these results in a variety of applications.
    Keywords: Shortlisting; axiomatization; revealed preference; identification
    JEL: D01
    Date: 2016
  5. By: Parkash Chander (Jindal School of Government and Public Policy); Myrna Wooders (Vanderbilt University)
    Abstract: We propose a cooperative solution concept for games in extensive form that incorporates both cooperation and subgame perfection. This new concept, which we label the subgame-perfect core, is a refinement of the core of an extensive game in the same sense as the set of subgame-perfect Nash equilibria is a refinement of the set of Nash equilibria. Moreover, each subgame perfect core payoff vector can be obtained as a subgame-perfect Nash equilibrium payoff vector of a modified extensive game. We establish several additional properties of the subgame-perfect core and demonstrate its applicability by studying three applications: the centipede game, the two-player infinite bargaining game of alternating offers, and a dynamic game of climate change. In addition, we motivate and introduce a concept of subgame-perfect strong Nash equilibrium of an extensive game and show that it is coalition proof.
    Keywords: Extensive game, subgame perfection, characteristic function game, core, centipede game, coalition-proof Nash equilibrium
    JEL: C7 D0
    Date: 2016–03–13
  6. By: Hervés-Estévez, Javier; Moreno-García, Emma
    Abstract: We give a notion of bargaining set for finite economies and show its coincidence with the set of Walrasian allocations. Moreover, we also show that justified objections equate with Walrasian objections. Our bargaining-Walras equivalence provides a discrete approach to the characterization of competitive equilibria obtained by Mas-Colell (1989) for continuum economies. Some further results highlight whether it is possible to restrict the formation of coalitions and still get the bargaining set. Finally, recasting some known characterizations of Walrasian allocations, we state additional interpretations of the bargaining set.
    Keywords: Bargaining sets, coalitions, core, veto mechanism.
    JEL: D00 D11 D51
    Date: 2015–07–16
  7. By: Anastasios Dosis (ESSEC - ESSEC Business School - Essec Business School - Economics Department - Essec Business School, THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)
    Abstract: I provide a general definition of equilibrium in markets with adverse selection. An equilibrium is defined as a menu of contracts that makes non-negative aggregate profits such that there exists no other menu that includes it as a subset and makes strictly positive aggregate profits. I show that every efficient menu of contracts is also an equilibrium menu of contracts. Furthermore, I characterise a general sufficient condition under which every equilibrium menu of contracts is efficient, restoring that way the First Fundamental Theorem of Welfare Economics. I provide two possible interpretations for this new definition.
    Keywords: existence,efficiency,Adverse selection,equilibrium
    Date: 2016–02–19
  8. By: Lombardi, Michele; Yoshihara, Naoki
    Abstract: An individual may display an honesty standard which allows her to lie a little without that being harmful to her self view as an honest person. On this basis, the paper considers a society with a finite number of individuals involving partially-honest individuals and in which every individual has her own honesty standard. An individual honesty standard is modeled as a subgroup of the society, including the individual herself. A partially-honest individual is an individual who strictly prefers to tell the truth prescribed by her honesty standard whenever lying has no effect on her material well-being. The paper studies the impact of placing honesty standard restrictions on the mechanism designer for Nash implementation problems of that society. It offers a necessary condition for Nash implementation, called partial-honesty monotonicity, and shows that in an independent domain of preferences that condition is equivalent to Maskin monotonicity, provided that honesty standards of society are non-connected. They are non-connected if every individual is excluded from the honesty standard of another individual. Finally, it shows that the limitations imposed by Maskin monotonicity can be circumvented by a q-mechanism (Lombardi and Yoshihara, 2013) provided that there are at least n - q + 1 partially-honest individuals in a society and that no participant has a veto-power.
    Keywords: Nash implementation, partial-honesty, non-connected honesty standards, independent domain, q-mechanisms
    JEL: C72 D71 D82
    Date: 2016–02
  9. By: Marco Pagnozzi (Università di Napoli Federico II and CSEF); Krista J. Saral (Webster University Geneva)
    Abstract: We analyze how the possibility of resale affects efficiency in multi-object uniform-price auctions with asymmetric bidders using a combination of theory and experiments. Our experimental design consists of four treatments that vary the (exogenous) probability that bidders participate in a post-auction resale market, which is implemented as an unstructured bargaining game between bidders. In all treatments, the possibility of resale increases efficiency after the auction, but it also induces demand reduction by high-value bidders during the auction, which reduces auction efficiency. In contrast to what is usually argued, resale does not necessarily increase final efficiency. When there is a low probability of a resale market, final efficiency is actually lower than in an auction without resale. We also analyze the quantitative and qualitative bargaining chat data to provide additional behavioral insights into the functioning of resale markets.
    Keywords: Efficiency, multi-object auctions, resale, asymmetric bidders, bargaining, economic experiments
    JEL: D44 C90
    Date: 2016–03–08
  10. By: Choy, James P. (University of Warwick)
    Abstract: Many societies are divided into multiple smaller groups. Certain kinds of interaction are more likely to take place within a group than across groups. I model a reputation effect that enforces these divisions. Agents who interact with members of different groups can support lower levels of cooperation with members of their own groups. A hierarchical relationship between groups appears endogenously in equilibrium. Group divisions appear without any external cause, and improvements in formal contracting institutions may cause group divisions to disappear. Qualitative evidence from the anthropological literature is consistent with several predictions of the model.
    Keywords: Cooperation, Caste, Social Institution JEL Classification: C73, O12, O17
    Date: 2016
  11. By: Takashi Shimizu (Graduate School of Economics, Kobe University)
    Abstract: The paper presents a formal model of the exit and voice framework proposed by Hirschman. More speci cally, we modify Crawford and Sobel's cheap talk model such that the sender of a cheap talk message has an exit option. We demonstrate that the presence of the exit option may increase the informativeness of cheap talk and improve welfare if the exit option is relatively attractive to the sender and relatively unattractive to the receiver. Moreover, it is veri ed that perfect information transmission can be approximated in the limit. The results suggest that the exit reinforces the voice in that the credibility of exit increases the informativeness of the voice.
    Keywords: Exit, Voice, Cheap Talk, Informativeness, Credibility
    JEL: D23 D82 J5 L22
    Date: 2016–02
  12. By: Murali Agastya (University of Sydney, School of economics - University of Sydney); Kanti Parimal Bag (Department of Economics - NUS - National University of Singapore); Nona Pepito (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique, Department of Economics - Essec Business School)
    Abstract: In a two-task team project with observable task outcomes, optimal incentives prioritize tasks differently depending on task externalities. When the tasks are independent, Principal follows a decreasing order by placing more essential task first. A task is more essential if its failure compromises the overall project's chance of success from a task-specific cutoff level by a greater percentage. This definition has no systematic relations to the variance of task outcomes. In particular, a more risky task can be less essential or more essential. Under externalities, essentiality and impact jointly determine the optimal ordering. A task with much higher impact can be performed early even if it is less essential. Optimal task ordering thus raises subtle new issues and forms an integral part in team incentives. Our analysis provides some contrast with recent team incentives results.
    Keywords: externalities in teams,sequencing, essential tasks, joint projects, team incentives
    Date: 2016–01–25
  13. By: De Francesco, Massimo A.; Salvadori, Neri
    Abstract: The paper is the second part of a trilogy in which we extend the analysis of price competition among capacity-constrained sellers beyond duopoly to triopoly. In the first part of the trilogy we provided some general results, highlighting features of a duopolistic mixed strategy equilibrium that generalize to triopoly and provided a first partition concerning the pure strategy equilibrium regions and the mixed strategies equilibrium region and then the partition of this region in a part in which the payoffs of the two smallest firm are proportional to their capacities and another in which the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. In this paper we provide a complete characterization of the set of mixed strategy equilibria in the part in which the payoffs of the two smallest firms are proportional to their capacities. This part is partitioned according to equilibrium features and in each part it is determined whether equilibria are uniquely determined or not and in the latter case it is proved that the equilibria constitute a continuum. Further we determine the circustances in which supports of an equilibrium strategy may be disconnected and show how gaps are then determined. We also prove that the union of supports is indeed connected, a property which cannot be extended to the case in which the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. The third part of the trilogy will be devoted to a complete characterization of the mixed strategy equilibria when the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. This will allow also to determine the payoff of the smallest firm.
    Keywords: Bertrand-Edgeworth; Price game; Oligopoly; Triopoly; Mixed strategy equilibrium
    JEL: C72 D43 L13
    Date: 2016–03–07
  14. By: Giannetti, Mariassunta; Liberti, Jose Maria; Sturgess, Jason
    Abstract: We show that banks manipulate the credit ratings of their borrowers before being compelled to share them with competing banks. Using a unique feature on the timing of information disclosure of the Argentinean public credit registry, we disentangle the effect of manipulation from learning of credit ratings. We show that banks downgrade high quality borrowers on which they have positive private information to protect their informational rents. Banks also upgrade low quality borrowers to avoid creditor runs. Our results can explain the limited effectiveness of public credit registries and cast doubt on the use of credit ratings in reducing information asymmetry
    Date: 2016–03
  15. By: Mikhail Golosov; Aleh Tsyvinski; Nicolas Werquin
    Abstract: In this chapter we study dynamic incentive models in which risk sharing is endogenously limited by the presence of informational or enforcement frictions. We comprehensively overview one of the most important tools for the analysis such problems — the theory of recursive contracts. Recursive formulations allow to reduce often complex models to a sequence of essentially static problems that are easier to analyze both analytically and computationally. We first provide a self-contained treatment of the basic theory: the Revelation Principle, formulating and simplifying the incentive constraints, using promised utilities as state variables, and analyzing models with persistent shocks using the first-order approach. We then discuss more advanced topics: duality theory and Lagrange multiplier techniques, models with lack of commitment, and martingale methods in continuous time. Finally, we show how a variety of applications in public economics, corporate finance, development and international economics featuring incomplete risk-sharing can be analyzed using the tools of the theory of recursive contracts.
    JEL: C61 E2 E61
    Date: 2016–02
  16. By: Luis Garicano; Luis Rayo
    Abstract: An expert with general knowledge trains a cash-constrained novice. Faster training increases the novice's productivity and his ability to compensate the expert; it also shrinks the stock of knowledge yet to be transferred, reducing the expert's ability to retain the novice. The profit-maximizing agreement is a multi-period apprenticeship in which knowledge is transferred gradually over time. The expert adopts a " 1/e rule" whereby, at the beginning of the relationship, the novice is trained just enough to produce a fraction 1/e of the efficient output. This rule causes inefficiently lengthy relationships that grow longer the more patient the players. We discuss policy interventions.
    Keywords: general human capital, international joint ventures, relational contracts
    Date: 2016–03
  17. By: Hervés-Estévez, Javier; Moreno-García, Emma
    Abstract: We introduce a new notion of bargaining set for finite economies and show a convergence result.
    Keywords: Bargaining set, coalitions, core, veto mechanism, justified objections.
    JEL: D00 D11 D51
    Date: 2015

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