nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒06‒18
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. It's the thought that counts: The role of intentions in noisy repeated games By Rand, David Gertler; Fudenberg, Drew; Dreber, Anna
  2. Implementation in partial equilibrium By Takashi Hayashi; Michele Lombardi
  3. Rationalizable partition-confirmed equilibrium By Fudenberg, Drew; Kamada, Yuichiro
  4. Non-manipulability of Walrasian mechanisms in economies with a large number of objects By Tomoya Tajika; Tomoya Kazumura
  5. Search Frictions, Competing Mechanisms and Optimal Market Segmentation By Cai, Xiaoming; Gautier, Pieter A.; Wolthoff, Ronald
  6. Reputation with Opportunities for Coasting By Heski Bar-Isaac; Joyee Deb
  7. Honest Abe or Doc Holliday? Bluffing in Bargaining By Gregory DeAngelo; Bryan McCannon
  8. Entry in first-price auctions with signaling By Olivier Bos; Tom Truyts
  9. Reputational Concerns in Directed Search Markets with Adverse Selection By Elton Dusha
  10. The Design of Optimal Collateralized Contracts By Dan Cao; Roger Lagunoff
  11. Double round-robin tournaments By Francesco De Sinopoli; Claudia Meroni; Carlos Pimienta
  12. Nash on a rotary : two theorems with implications for electoral politics By Basu,Kaushik; Mitra,Tapan
  13. Preference Cloud Theory: Imprecise Preferences and Preference Reversals By Bayrak, Oben; Hey, John
  14. Optimal revelation of life-changing information By Schweizer, Nikolaus; Szech, Nora

  1. By: Rand, David Gertler; Fudenberg, Drew; Dreber, Anna
    Abstract: We examine cooperation in repeated interactions where intended actions are implemented with noise but intentions are perfectly observable. Observable intentions lead to more cooperation compared to control games where intentions are unobserved, allowing subjects to reach similar cooperation levels as in games without noise. Most subjects condition exclusively on intentions, and use simpler, lower-memory strategies compared to games where intentions are unobservable. When the returns to cooperation are high, some subjects are tolerant, using good outcomes to forgive attempted defections; when the returns to cooperation are low, some subjects are punitive, using bad outcomes to punish accidental defections.
    Date: 2015
  2. By: Takashi Hayashi; Michele Lombardi
    Abstract: Consider a society with a finite number of sectors (social issues or commodities). In a partial equilibrium (PE) mechanism a sector authority (SA) aims to elicit agents' preference rankings for outcomes at hand, presuming separability of preferences, while such presumption is false in general and such isolated rankings might be artifacts. Therefore, its participants are required to behave as if they had separable preferences. This paper studies what can be Nash implemented if we take such misspecification of PE analysis as a given institutional constraint. The objective is to uncover the kinds of complementarity across sectors that this institutional constraint is able to accommodate. Thus, in our implementation model there are several SAs, agents are constrained to submit their rankings to each SA separately and, moreover, SAs cannot communicate with each other. When a social choice rule (SCR) can be Nash implemented by a product set of PE mechanisms, we say that it can be Nash implemented in PE. We identify necessary conditions for SCRs to be Nash implemented in PE and show that they are also sufficient under a domain condition which identifes the kinds ofadmissible complementarities. Thus, the Nash implementation in PE of SCRs is examined in auction and matching environments.
    Date: 2016–05
  3. By: Fudenberg, Drew; Kamada, Yuichiro
    Abstract: Rationalizable partition-confirmed equilibrium (RPCE) describes the steady-state outcomes of rational learning in extensive-form games when rationality is common knowledge and players observe a partition of the terminal nodes. RPCE allows players to make inferences about unobserved play by others. We discuss the implications of this using numerous examples, and discuss the relationship of RPCE to other solution concepts in the literature.
    Date: 2015
  4. By: Tomoya Tajika; Tomoya Kazumura
    Abstract: We consider a problem of allocating multiple identical objects to a group of agents and collecting payments. Each agent may receive several objects and has quasi-linear preferences with a submodular valuation function. It is known that Walrasian mechanisms are manipulable. We investigate the incentive property of Walrasian mechanisms in economies with a large number of objects. Given a set of agents and a preference profile, an agent i asymptotically dominates an agent j if at sufficiently many objects, i's incremental valuation is higher than j's incremental valuation. We show that for each economy, if there is no agent asymptotically dominating the other agents, and if there are sufficiently many objects, any Walrasian mechanism is non-manipulable at the economy. We also consider replica economies, and show that for each economy, if it is replicated sufficiently many times, the minimum price Walrasian mechanisms are non-manipulable at the replica economy.
    Date: 2016–05
  5. By: Cai, Xiaoming; Gautier, Pieter A.; Wolthoff, Ronald
    Abstract: In a market in which sellers compete for heterogeneous buyers by posting mechanisms, we analyze how the properties of the meeting technology affect the allocation of buyers to sellers. We show that a separate submarket for each type of buyer is the efficient outcome if and only if meetings are bilateral. In contrast, a single market with all agents is optimal if and only if the meeting technology satisfies a novel condition, which we call "joint concavity". Both outcomes can be decentralized by sellers posting auctions combined with a fee that is paid by (or to) all buyers with whom the seller meets. Finally, we compare joint concavity to two other properties of meeting technologies, invariance and non rivalry, and explain the differences.
    Keywords: competing mechanisms; matching function; meeting technology; search frictions
    JEL: C78 D44 D83
    Date: 2016–06
  6. By: Heski Bar-Isaac (Rotman School of Management, University of Toronto); Joyee Deb (School of Management, Yale University)
    Abstract: Reputation concerns can discipline agents to take costly effort and generate good outcomes. But what if outcomes are not always observed? We consider a model of reputation with shifting observability, and ask how this affects agents’ incentives. We identify a novel and intuitive mechanism by which infrequent observation or inattention can actually strengthen reputation incentives and encourage effort. If an agent anticipates that outcomes may not be observed in the future, the benefits from effort today are enhanced due to a “coasting” effect. By investing effort when outcomes are more likely observed, the agent can improve her reputation, and when the audience is inattentive in the future, she can coast on this reputation without additional effort. We show that future opportunities to rest on one’s laurels can lead to greater overall effort and higher efficiency than constant observation. This has implications for the design of review systems or performance feedback systems in organizations. We provide a characterization of the optimal observability structure to maximize efficient effort in our setting.
    JEL: C73 D82 L14 L14
    Date: 2016–05
  7. By: Gregory DeAngelo (West Virginia University, Department of Economics); Bryan McCannon (West Virginia University, Department of Economics)
    Abstract: We consider a bargaining environment where there is asymmetric information regarding whether the two players have common preferences or conflicting preferences. If the cost of strategic communication is independent of the state, then signaling is not expected to be effective. If the uninformed agent believes, though, a (cheap†talk) signal has been sent, then the informed agents are incentivized to engage in deceptive bluffing. Alternatively, if bluffing is not too prevalent, honest communication can be worthwhile. We explore this theoretically and experimentally. We present a bargaining model where state†dependent mixed strategies arise as equilibria. Thus, bluffing occurs in equilibrium. In the model, players who experience a disutility to engaging in deceptive behavior are then introduced. The set of equilibria are refined and we show, ironically, that the introduction of honest players increases the overall level of deception. We then design an experimental game to assess the validity of the predictions from the theoretical model. We show that agents attempt to strategically transmit information even when (costly) signaling is not possible. Across rounds of the game honest, but cheap talk, signaling and bluffing co†move in that as the former becomes more prevalent so too does the latter. Furthermore, we document a contagion effect in the laboratory. Bluffing not only creates deadweight loss in a particular dyad, but leads the agent who was bluffed to engage in more bargaining conflict in future rounds against a new, randomly†selected opponent. Aggregate wealth is higher prior to the introduction of deception in the group.
    Keywords: bargaining, bluff, cheap†talk signaling, contagion, deception, experiment, signal, strategic information transmission
    Date: 2016–06
  8. By: Olivier Bos; Tom Truyts
    Abstract: We study the optimal entry fee in a symmetric private value first-price auction with signaling, in which the participation decisions and the auction outcome are used by an outside observer to infer the bidders’ types. We show that this auction has a unique fully separating equilibrium bidding function. The expected revenue maximizing entry fee is the maximal fee that guarantees full participation.
    Date: 2016–04
  9. By: Elton Dusha
    Abstract: This paper introduces reputation building in directed search with adverse selection. Seller types randomly determine the quality of the asset they hold, where both a seller's type and asset quality are private information. When an exchange occurs, the quality of the asset that a seller holds is revealed and the market updates its belief about a seller's type, which I refer to as reputation. Markets where sellers have a higher reputation have lower liquidity and higher prices. With reputational concerns, the downward liquidity distortions caused by adverse selection are exacerbated. Equilibrium selection is affected by the incentives sellers have to earn a higher reputation. Shocks to entry costs have larger effects when sellers can build a reputation through multiple matches with buyers. JEL classiffications: D82,G1. Key words: Keywords: directed search, adverse selection, reputation, liquidity.
    Date: 2015
  10. By: Dan Cao (Department of Economics, Georgetown University); Roger Lagunoff (Department of Economics, Georgetown University)
    Abstract: This paper presents a two-period optimal contracting model of collateral. A borrower values a capital good and a composite non-capital good. He privately observes an income shock in the composite good in the second period. Collateralization of both goods occurs in the optimal contract, whereas it does not under full information. Relative to full information, the capital good in the optimal contract is over-consumed in the initial loan period and under-consumed in the repayment period. The relation between forfeiture of assets and contractual distortion is summarized by a formula showing higher distortions associated with larger increases in forfeited collateral. Forfeiture is decreasing in income at the tails of the income distribution, and low income types forfeit more than high income types. We obtain a closed form solution in a parameterized model. Forfeited collateral is globally decreasing in income with pooling at the bottom when the borrower's initial assets are low.
    Keywords: Optimal contract, asymmetric information, collateral, forfeiture, collateralized contract.
    JEL: D82 D86 D53 D14 G21 G22
    Date: 2016–04–01
  11. By: Francesco De Sinopoli (Department of Economics, University of Verona); Claudia Meroni (Department of Economics, University of Verona); Carlos Pimienta (School of Economics, UNSW Business School, UNSW)
    Abstract: A tournament is a simultaneous n-player game that is built on a two-player game g. We generalize Arad and Rubinstein’s model assuming that every player meets each of his opponents twice to play a (possibly) asymmetric game g in alternating roles (using sports terminology, once "at home" and once "away"). The winner of the tournament is the player who attains the highest total score, which is given by the sum of the payoffs that he gets in all the matches he plays. We explore the relationship between the equilibria of the tournament and the equilibria of the game g. We prove that limit points of equilibria of tournaments as the number of players goes to infinity are equilibria of g. Such a refinement criterion is satisfied by strict equilibria. Being able to analyze arbitrary two-player games allows us to study meaningful economic applications that are not symmetric, such as the ultimatum game.
    Keywords: tournaments, asymmetric games, ultimatum game, double round-robin
    JEL: C72 C73 D70
    Date: 2016–05
  12. By: Basu,Kaushik; Mitra,Tapan
    Abstract: The paper provides a complete characterization of Nash equilibria for games in which n candidates choose a strategy in the form of a platform, each from a circle of feasible platforms, with the aim of maximizing the stretch of the circle from where the candidate?s platform will receive support from the voters. Using this characterization, it is shown that if the sum of all players? payoffs is 1, the Nash equilibrium payoff of each player in an arbitrary Nash equilibrium must be restricted to the interval [1/2(n ? 1), 2/(n + 1)]. This implies that in an election with four candidates, a candidate who is attracting less than one-sixth of the voters can do better by changing his or her strategy.
    Keywords: ICT Economics,Economic Theory&Research,Common Property Resource Development,Coastal and Marine Environment,Disease Control&Prevention
    Date: 2016–06–08
  13. By: Bayrak, Oben; Hey, John
    Abstract: This paper presents a new theory, called Preference Cloud Theory, of decision-making under uncertainty. This new theory provides an explanation for empirically-observed Preference reversals. Central to the theory is the incorporation of preference imprecision which arises because of individuals’ vague understanding of numerical probabilities. We combine this concept with the use of the Alpha model (which builds on Hurwicz’s criterion) and construct a simple model which helps us to understand various anomalies discovered in the experimental economics literature that standard models cannot explain.
    Keywords: Imprecise Preferences; Preference Reversals; Decision under Uncertainty; Anomalies in Expected Utility Theory
    JEL: D0 D00 D01 D02 D03 D04 D8 D80 D81
    Date: 2015
  14. By: Schweizer, Nikolaus; Szech, Nora
    Abstract: Information about the future may be instrumentally useful, yet scary. For example, many patients shy away from precise genetic tests about their dispositions for severe diseases. They are afraid that a bad test result could render them desperate due to anticipatory feelings. We show that partially revealing tests are typically optimal when anticipatory utility interacts with an instrumental need for information. The same result emerges when patients rely on probability weighting. Optimal tests provide only two signals, which renders them easily implementable. While the good signal is typically precise, the bad one remains coarse. This way, patients have a substantial chance to learn that they are free of the genetic risk in question. Yet even if the test outcome is bad, they do not end in a situation of no hope.
    Keywords: Test Design,Revelation of Information,Design of Beliefs,Medical Tests,Anticipatory Utility,Huntington's Disease
    JEL: D81 D82
    Date: 2016

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