nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒06‒18
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Hard evidence and welfare in adverse selection environments By PRAM, Kym
  2. Aggregation of Bayesian preferences: Unanimity vs Monotonicity By Federica Ceron; Vassili Vergopoulos
  3. Common agency dilemma with information asymmetry in continuous time By Thibaut Mastrolia; Zhenjie Ren
  4. Rationalizable Information Equilibria By Alexander Zimper
  5. Risk Sharing in an Adverse Selection Model By Raymond Deneckere; André De Palma; Luc Leruth
  6. Robust Pooling for Contracting Models with Asymmetric Information By Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
  7. Portfolio optimization for a large investor controlling market sentiment under partial information By S\"uhan Altay; Katia Colaneri; Zehra Eksi
  8. Personal Bankruptcy Law and Entrepreneurship By Geraldo Cerqueiro; María Fabiana Penas; Robert Seamans
  9. How multiplicative uncertainty affects the tradeoff between information disclosure and stabilisation policy? By Meixing Dai; Moïse Sidiropoulos
  10. Second price all-pay auctions, how much money do players get or lose? By Gisèle Umbhauer

  1. By: PRAM, Kym
    Abstract: I consider environments in which an agent with private information can acquire arbitrary hard evidence about his type before interacting with a principal. In a broad class of screening models, I show that there is always an evidence structure that interim Pareto improves over the no-evidence benchmark whenever some types of the agent take an outside option in the benchmark case, and additional weak conditions, including either a single-crossing condition or state-independence of the principal's payoffs, are satisfied. I show that the sufficient conditions are tight and broadly applicable. Addressing concerns about multiple equilibria, I show how a planner can restrict the available evidence to ensure that an equilibrium which interim Pareto-improves over the benchmark case is obtained. Furthermore, I show that Pareto-improving evidence can arise endogenously when agents choose what evidence to acquire (and disclose).
    Keywords: Information Economics, Hard Evidence, Mechanism Design, Microeconomic Theory, Insurance.
    Date: 2017
  2. By: Federica Ceron (Centre d'Economie de la Sorbonne - Paris School of Economics); Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This article reconsiders the issue of Bayesian aggregation by pointing at a conflict that may arise between two logically independent dominance criteria, Pareto dominance and statewise dominance, that are commonly imposed on social preferences. We propose a weaker dominance axiom that restricts statewise dominance to Pareto dominant alternatives and Pareto dominance to statewise dominant alternatives. The associated aggregation rule is a convex combination of two components., the first being a weighted sum of the individuals' subjective expected utility (SEU) functional, the second being a social SEU functional, with associated social utility function and social belief. Such representation establishes the existence of a trade off between adherence to the Pareto principle and compliance with statewise dominance. We then investigate what are the consequences of adding to our assumptions either of the two dominance criteria in their full force and obtain that each of them is equivalent to discarding the other, unless there is essentially a common prior probability
    Keywords: Pareto dominance; Monotonicity; Preference aggregation; Social choice, Subjective expected utility
    JEL: D71 D81
    Date: 2017–05
  3. By: Thibaut Mastrolia (CMAP); Zhenjie Ren (CEREMADE)
    Abstract: In this paper, we consider a problem of contract theory in which several Principals hire a common Agent and we study the model in the continuous time setting. We show that optimal contracts should satisfy some equilibrium conditions and we reduce the optimisation problem of the Principals to a system of coupled Hamilton-Jacobi-Bellman (HJB) equations. Further, in a more specific linear-quadratic model where two interacting Principals hire one common Agent, we are able to calculate the optimal effort by the Agent for both Principals. In this continuous time model, we extend the result of Bernheim and Whinston (1986) in which the authors compare the optimal effort of the Agent in a non-cooperative Principals model and that in the aggregate model, and give the condition under which these two optimisations coincide.
    Date: 2017–06
  4. By: Alexander Zimper (Department of Economics, University of Pretoria, Pretoria, South Africa and Kiel Institute for the World Economy)
    Abstract: Rational expectations equilibria (REE) assume that the ex post equilibrium price function is able to reveal ex ante information. This paper drops the assumption of information revealing prices and instead constructs an internal reasoning process through which highly rational price-takers can infer information from other market participants under the assumption that their utility maximization problems are common knowledge. Based on this reasoning process, we introduce the novel competitive equilibrium concept of rationalizable information equilibria (RIE). Our formal analysis establishes that (i) the RIE concept amounts to a refinement of the (generalized) REE concept whereby (ii) REE with interior net-trades are generically RIE.
    Keywords: General Equilibrium, Asset Exchange Economies, Asymmetric Information, Rational Expectations, Generalized Rational Expectations, Rationalizability
    JEL: D53 D83
    Date: 2017–06
  5. By: Raymond Deneckere (University of Wisconsin-Madison [Madison]); André De Palma (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Luc Leruth (University of Liege, IMF Office in Europe - EUO)
    Abstract: We introduce risk aversion in a mixed moral hazard/adverse selection model. Under plausible assumptions, the effort level of the firm is distorted downward from the first best level of effort for both agent types. Thus, the traditional result of no distortion on the top does not hold with risk aversion. We also show that the effort level of the low-cost type may be distorted more than that of the high cost type. With an observable cost shock, an increase in exogenous risk may increase the effort level of the efficient firm and lower the expected cost of the project.
    Keywords: Incentives,Contract Theory,Risk-Sharing., Regulation
    Date: 2016–11–07
  6. By: Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
    Abstract: We consider principal-agent contracting models between a seller and a buyer with single- dimensional private information. The buyer's type follows a continuous distribution on a bounded interval. We present a new modelling approach where the seller oers a menu of nitely many contracts to the buyer. The approach distinguishes itself from existing methods by pooling the buyer types using a partition. That is, the seller rst chooses the number of contracts oered and then partitions the set of buyer types into subintervals. All types in a subinterval are pooled and oered the same contract by the design of our menu. We call this approach robust pooling and apply it to utility maximisation and cost min- imisation problems. In particular, we analyse two concrete problems from the literature. For both problems we are able to express structural results as a function of a single new parameter, which remarkably does not depend on all instance parameters. We determine the optimal par- tition and the corresponding optimal menu of contracts. This results in new insights into the (sub)optimality of the equidistant partition. For example, the equidistant partition is optimal for a family of instances for one of the problems. Finally, we derive performance guarantees for the equidistant and optimal partitions for a given number of contracts. For the considered problems the robust pooling approach has good performances with only a few contracts.
    Keywords: mechanism design, asymmetric information, robust pooling, optimal partitioning, performance guarantees
    Date: 2017–03–14
  7. By: S\"uhan Altay; Katia Colaneri; Zehra Eksi
    Abstract: We consider an investor faced with the utility maximization problem in which the risky asset price process has pure-jump dynamics affected by an unobservable continuous-time finite-state Markov chain, the intensity of which can also be controlled by actions of the investor. Using the classical filtering theory, we reduce this problem with partial information to one with full information and solve it for logarithmic and power utility functions. In particular, we apply control theory for piecewise deterministic Markov processes (PDMP) to our problem and derive the optimality equation for the value function and characterize the value function as the unique viscosity solution of the associated dynamic programming equation. Finally, we provide a toy example, where the unobservable state process is driven by a two-state Markov chain, and discuss how investor's ability to control the intensity of the state process affects the optimal portfolio strategies as well as the optimal wealth under both partial and full information cases.
    Date: 2017–06
  8. By: Geraldo Cerqueiro; María Fabiana Penas; Robert Seamans
    Abstract: We study the effect of debtor protection on firm entry and exit dynamics. We find that more lenient personal bankruptcy laws lead to higher firm entry, especially in sectors with low entry barriers. We also find that debtor protection increases firm exit rates and that this effect is independent of firm age. Our results overall indicate that the wealth insurance provided by personal bankruptcy exemptions induce individuals to embrace entrepreneurship and that this in turn fosters competition in a Schumpeterian sense.
    Keywords: Debtor Protection, Personal Bankruptcy, Entrepreneurship.
    Date: 2017–01
  9. By: Meixing Dai; Moïse Sidiropoulos
    Abstract: In an economy characterised by Keynes’ “beauty contest”, policymakers can either disseminate their own information and abstain from stabilisation policy, or use an informational advantage to undertake active policy intervention. The contribution of this paper is to analyse how such a trade-off is affected by Brainard’s conservatism principle. We show that multiplicative uncertainty reduces the incentive for policy activism and weakens the argument for imperfect disclosure of the policymaker’s private information. Notably, a sufficient high degree of multiplicative uncertainty in the transmission of policy intervention would call for full disclosure of public information in the presence of stabilisation policy.
    Keywords: Multiplicative uncertainty; heterogeneous private information; optimal information disclosure; policy intervention; strategic complementarities.
    JEL: C72 D62 D82 E58
    Date: 2017
  10. By: Gisèle Umbhauer
    Abstract: The paper studies second price all-pay auctions - wars of attrition - in a new way, based on class room experiments and Kosfeld, Droste and Voorneveld’s (2002) best reply matching equilibrium. Two players fight over a prize of value V, have a budget M, submit bids lower or equal to M; both pay the lowest bid and the prize goes to the highest bidder. The behaviour probability distributions in the class room experiments are strikingly different from the mixed Nash equilibrium. They fit with best reply matching or generalized best reply matching, an ordinal logic according to which, if bid A is the best response to bid B, and if B is played with probability p, then A is also played with probability p. In the mixed Nash equilibrium, the expected payoff is never negative and close to 0. In the best reply and generalized best reply matching equilibria, players may lose money, up to 1/12th of the budget when M is large in comparison to V, but they can also get a lot of money, especially if V is large. The study leads to examine possible bifurcations in the bidding behaviour and gives some insights into how to regulate games to avoid pathological gambling with a huge waste of money.
    Keywords: second price all-pay auction, war of attrition, best reply matching, Nash equilibrium, classroom experiment.
    JEL: C72 D44
    Date: 2017

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