nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒06‒04
eleven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Explaining rank-dependent utility with regret and rejoicing By Gollier, Christian
  2. Destroying Surplus and Buying Time in Unanimity Bargaining By Volker Britz
  3. Eliciting Ambiguous Beliefs Under alpha-Maxmin Preference By Subir Bose; Arup Daripa
  4. Self-fulfilling mistakes : Characterization and welfare By Dalton, Patricio; Ghosal, Sayantan
  5. The Efficiency of (strict) Liability Rules revised in Risk and Ambiguity. By Nicolas Lampach; Sandrine Spaeter
  6. Percautionary saving with changing income ambiguity By Atsushi Kajii; Jingyi Xue
  7. A universal construction generating potential games By Kukushkin, Nikolai S.
  8. Democracy and redistribution By Santanu Gupta; Raghbendra Jha
  9. Sleeping Beauty on Monty Hall By Michel Janssen; Sergio Pernice
  10. Choice of strategic variables by relative profit maximizing firms in oligopoly By Satoh, Atsuhiro; Tanaka, Yasuhito
  11. Organized Crime and the Bright Side of Subversion of Law By Astrid, Gamba; Giovanni, Immordino; Salvatore, Piccolo;

  1. By: Gollier, Christian
    Abstract: We fill a gap in the literature by formally defining the notion of aversion to risk of regret. An agent is sensitive to regret when her ex-post utility depends upon the forgone best payoff. An increase in the risk of regret occurs when the actual payoff and this best alternative become statistically less concordant. Accordingly, regret-risk aversion is characterized by the supermodularity of the bivariate utility function. We define a measure of regret-risk aversion in the small and in the large. We show that more regretrisk- averse agents are more willing to choose the risky act in a one-risky-one-safe menu, and that this bias is increasing in the skewness of the risky choice. This can explain the "possibility effect" that is well documented in decision theory. Symmetrically, we define the aversion to elation-risk that can prevail when the ex-post utility is alternatively sensitive to the forgone worst payoff. We show that elation-risk-seeking can explain the "certainty effect". We also show that a regret-risk-averse and elation-risk-seeking people behave as if they would have rank-dependent utility preferences with an inverse-S shaped probability weighting function that reproduces estimations existing in the literature.
    Keywords: Longshot bias, certainty effect, possibility effect, probability weighting, riskseeking,prospect theory, behavioral finance.
    JEL: D81
    Date: 2016–05
  2. By: Volker Britz (ETH Zurich, Switzerland)
    Abstract: In non-cooperative bargaining games in the tradition of Rubinstein, the proposer derives bargaining power from the prospect of a costly delay which would follow the rejection of a proposal. We consider a unanimity bargaining game in which the proposer can strategically choose to prolong this delay. Prolonging the delay increases the proposer's bargaining power, but is assumed to come at a cost and thus cause an inefficiency. We use an appropriate refinement of stationary subgame-perfect equilibrium as the solution concept. We characterize equilibrium strategies and payoffs. We establish conditions on model parameters under which equilibrium is or is not efficient. For inefficient equilibria, we quantify the extent of the inefficiency. Moreover, we study the relation between the number of players and the degree of inefficiency. We find that inefficient equilibria become more inefficient the more players there are. Moreover, the parameter region in which an efficient equilibrium is possible shrinks when the number of players increases.
    Keywords: Bargaining, Surplus Destruction, Discount Factor, Timing
    JEL: C72 C78
    Date: 2016–05
  3. By: Subir Bose (University of Leicester); Arup Daripa (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We study the problem of elicitation of subjective beliefs of an agent when the beliefs are ambiguous (the set of beliefs is a non-singleton set) and the agent’s preference exhibits ambiguity aversion; in particular, as represented by alpha-maxmin preferences. We construct a direct revelation mechanism such that truthful reporting of beliefs is the agent’s unique best response. The mechanism uses knowledge of the preference parameter alpha and we construct a mechanism that truthfully elicits alpha. Finally, using the two as ingredients, we construct a grand mechanism that elicits ambiguous beliefs and alpha concurrently.
    Keywords: Ambiguity, alpha-maxmin preferences, maxmin preferences, elicitation of beliefs and alpha.
    JEL: D81 D82
    Date: 2016–03
  4. By: Dalton, Patricio (Tilburg University, School of Economics and Management); Ghosal, Sayantan
    Abstract: This paper incorporates self-fullling mistakes into an otherwise classical decision-making framework. A behavioural agent makes a mistake when he fails to internalize all the consequences of his actions on himself. We show that Sen's axioms and fully characterize choice data consistent with behavioral agents. These two axioms are weaker than Sen's axioms and that fully characterize rational agents. We oer a welfare benchmark that can be applied to existing behavioural economics models and show the conditions under which our welfare ranking can be used to infer welfare dominated (i.e. mistaken) choices using choice data alone.
    Date: 2016
  5. By: Nicolas Lampach; Sandrine Spaeter
    Abstract: In this paper we revise the results about the efficiency of (strict) unlimited, then limited liability in inducing optimal investment in prevention by injurers. Risk and ambiguity are considered. We assume that the potential injurer whose activities cause a risk of environmental accident can reduce the probability of accident by investing in prevention. In the risky model, we recover that limited liability does not always induce low prevention. Contrary to the arguments enhanced by Beard (1990) and Lipowski-Posey (1993), outside lending, absent from our model, does not explain this result. In the ambiguous context, we implement the Non-Extreme Outcome (NEO) expected utility model (Chateauneuf et al., 2007) to represent the injurer’s beliefs and decisions. When ambiguity matters and prevention also affects the injurer’s subjective beliefs, none of the results with risk hold. In particular, the injurer can overinvest in prevention under both unlimited and limited liability.
    Keywords: Strict liability; Ambiguity; Optimal Care; Optimism; Subjective Beliefs.
    JEL: K0 K32 D81 D29
    Date: 2016
  6. By: Atsushi Kajii (Institute of Economic Research, Kyoto University); Jingyi Xue (Singapore Management University)
    Abstract: We study a two-period saving model where the agent's future income might be ambiguous. Our agent has a version of the smooth ambiguity decision criterion (Klibanoff, Marinacci and Mukerji (2005)), where the agent's perception about ambiguity is described by a second-order belief over first-order risks. We model increasing ambiguity as a spreading-out of the second-order belief. We show that under a "Risk Comonotonicity" condition, our agent saves more when ambiguity in future income increases. We argue that the condition is indispensable for our result.
    JEL: D80 D81 D91 E21
    Date: 2016–05
  7. By: Kukushkin, Nikolai S.
    Abstract: Strategic games are considered where each player's total utility is the sum of local utilities obtained from the use of certain "facilities." All players using a facility obtain the same utility therefrom, which may depend on the identities of users and on their behavior. If a regularity condition is satisfied by every facility, then the game admits an exact potential; both congestion games and games with structured utilities are included in the class and satisfy that condition. Under additional assumptions the potential attains its maximum, which is a Nash equilibrium of the game.
    Keywords: Potential game; Congestion game; Game with structured utilities; Game of social interactions; Additive aggregation
    JEL: C72
    Date: 2016–05–31
  8. By: Santanu Gupta; Raghbendra Jha
    Abstract: In a probabilistic voting model with three jurisdictions with residents with different income levels, we demonstrate that it is always optimal to distribute tax revenues as public good to only the residents of richest and median income jurisdictions. In this context, we compare the overall welfare of all citizens in a one bracket Tax Structure where the poor contribute to tax and does not receive public goods, to that in a progressive Two bracket or a Three bracket Tax Structure where the poor face no taxes but neither do they receive any public goods. In a situation where the government extracts a part of the tax revenues as political rents and maximizes expected payoff rather than the probability of re-election, there is a possibility of complete extraction which implies taxing away all private income with no allocation of public good, if electoral uncertainty be high.
    Keywords: median voter, local public good, reservation utility
    JEL: H41 H72
    Date: 2016
  9. By: Michel Janssen; Sergio Pernice
    Abstract: We present a game show that we claim can serve as a proxy for the notorious Sleeping Beauty Problem. This problem has divided commentators into two camps, `halfers' and `thirders'. In our game show, the potential awakenings of Sleeping Beauty, during which she will be asked about the outcome of the coin toss that determined earlier how many times she is awakened and asked, are replaced by potential contestants, deciding whether to choose heads or tails in a bet they will get to place if chosen as contestants on the outcome of the coin toss that determined earlier how many of them are chosen as contestants. This game show bears out the basic intuition of the thirders. Our goal in this paper, however, is not to settle the dispute between halfers and thirders but to draw attention to our game-show proxy itself, which realizes a version of the Sleeping Beauty Problem without the ambiguities plaguing the original. In this spirit, we design similar game-show proxies for variations on the Sleeping Beauty Problem with stochastic experiments other than a coin toss. We do the same for a variation in which Sleeping Beauty must decide upon being awakened whether or not to switch doors in the famous Monty Hall Problem and have the number of awakenings during which she gets to make that decision depend on the door she picked before she was put to sleep.
    Date: 2016–05
  10. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: This paper studies the choice of strategic variables by firms in a symmetric oligopoly in which each firm produces differentiated goods and maximizes its relative profit that is the difference between its profit and the average profit of the other firms. We consider a two stage game such that in the first stage the firms choose their strategic variables, quantity or price, and in the second stage they determine the values of their strategic variables. We show that the choice of strategic variables is irrelevant in the sense that the equilibrium quantities and prices are the same in all firms whichever each firm chooses in the first stage, so any combination of strategy choice by the firms constitutes a sub-game perfect equilibrium in the two stage game.
    Keywords: relative profit maximization, oligopoly
    JEL: D43
    Date: 2016–01–01
  11. By: Astrid, Gamba; Giovanni, Immordino; Salvatore, Piccolo;
    Abstract: When Legislators award amnesties to `low-rank' criminals cooperating with the justice, top criminals may capture public officials to avoid being sanctioned. Optimal policies should anticipate this danger and fight it back by granting amnesties not only to low-rank criminals, but also to officials who plea guilty and report bribe givers. Even if the threat of being betrayed by their fellows may induce top-criminals to bribe prosecutors, these policies increase the conviction risk not only for top-criminals but also for low-rank ones, whereby increasing the risk premium that the latter require to participate the crime: the bright side of subversion of law.
    Keywords: Criminal Organizations, Corruption, Leniency
    JEL: K14 K42 D73 D78
    Date: 2016–05–17

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