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on Microeconomics |
| By: | Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko |
| Abstract: | This paper investigates the existence and nature of equilibrium in a competitive insurance market under adverse selection with endogenously determined information structures. Rothschild-Stiglitz (RS) characterized the self-selection equilibrium under the assumption of exclusivity, enforcement of which required full information about contracts purchased. By contrast, the Akerlof price equilibrium described a situation where the insurance firm has no information about sales to a particular individual. We show that with more plausible information assumptions - no insurance firm has full information but at least knows how much he has sold to any particular individual - neither the RS quantity constrained equilibrium nor the Akerlof price equilibrium are sustainable. But when the information structure itself is endogenous - firms and consumers decide what information about insurance purchases to reveal to whom - there always exists a Nash equilibrium. Strategies for firms consist of insurance contracts to offer and information-revelation strategies; for customers - buying as well as information revelation strategies. The equilibrium set of insurance contracts is unique: the low risk individual obtains insurance corresponding to the pooling contract most preferred by him; the high risk individual, that plus (undisclosed) supplemental insurance at his own actuarial odds resulting in his being fully insured. Equilibrium information revelation strategies of firms entail some but not complete information sharing. However, in equilibrium all individuals are induced to tell the truth. The paper shows how the analysis extends to cases where there are more than two groups of individuals and where firms can offer multiple insurance contracts. |
| JEL: | D82 D86 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23556&r=mic |
| By: | Vladimir Asriyan; William Fuchs; Brett Green |
| Abstract: | How effectively does a decentralized marketplace aggregate information that is dispersed throughout the economy? We study this question in a dynamic setting, in which sellers have private information that is correlated with an unobservable aggregate state. We first characterize equilibria with an arbitrary finite number of informed traders. A common feature is that each seller’s trading behavior provides an informative and conditionally independent signal about the aggregate state. We then ask whether the state is revealed as the number of informed traders goes to infinity. Perhaps surprisingly, the answer is no. We provide generic conditions under which the amount of information revealed is necessarily bounded and does not reveal the aggregate state. When these conditions are violated, there may be coexistence of equilibria that lead to aggregation with those that do not. We discuss the implications for policies meant to enhance information dissemination in markets. Reporting lags combined with segmented trading platforms can be an effective way to ensure information aggregation without sacrificing welfare. In general, a partially revealing information policy can increase trading surplus. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:979&r=mic |
| By: | Fudenberg, Drew; Rayo, Luis |
| Abstract: | We study the design of careers by a principal who trains a cash-constrained agent, or apprentice, who is free to walk away at any time. The principal specifies time paths of knowledge transfer, effort provision, and task allocation, subject to the apprentice's continued participation. In the optimal contract, the apprentice pays for training by working for low or no wages and working inefficiently hard. The apprentice can work on both "skilled" (knowledge-complementary) and "unskilled" (knowledge-independent) tasks. If the principal specifies inefficiently much skilled effort at any time, she shortens the apprenticeship compared to its length when skilled effort is efficient. Otherwise, she specifies inefficiently much unskilled effort throughout and leaves the apprenticeship length unchanged. We then consider the effect of regulations that limit how hard the apprentice can work and how long the apprenticeship can last. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12126&r=mic |
| By: | Salvador Barberà; Anke Gerber |
| Abstract: | We study collective decision-making procedures involving the formation of an agenda of issues and the subsequent vote on the position for each issue on the agenda. Issues that are not on the agenda remain unsettled. We use a protocol-free equilibrium concept introduced by Dutta et al. (2004) and show that in equilibrium, and under general conditions, any subset of issues may be excluded from the agenda in equilibrium whenever the voting rule belongs to one of two prominent families. What is voted upon and what is not depends on the voters preferences in a subtle manner, suggesting a high degree of instability. We also discuss further conditions under which this “anything goes” result may be qualified. In particular, we study those cases where all issues will be put in the agenda. |
| Keywords: | agenda formation, issues, voting, anything goes, equilibrium continuation agendas, voting by quota, amendment procedures, manipulation |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:973&r=mic |
| By: | Elchanan Ben-Porath (Department of Economics and Center for Rationality, Hebrew University); Eddie Dekel (Economics Department, Northwestern University, and School of Economics, Tel Aviv University); Barton L. Lipman (Department of Economics, Boston University) |
| Abstract: | We show that in a class of I-agent mechanism design problems with evidence, commitment is unnecessary, randomization has no value, and robust incentive compatibility has no cost. In particular, for each agent i, we construct a simple disclosure game between the principal and agent i where the equilibrium strategies of the agents in these disclosure games give their equilibrium strategies in the game corresponding to the mechanism but where the principal is not committed to his response. In this equilibrium, the principal obtains the same payo as in the optimal mechanism with commitment. As an application, we show that certain costly veri cation models can be characterized using equilibrium analysis of an associated model of evidence. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2017-001&r=mic |
| By: | Sylvain Gibaud; Jorgen W. Weibull |
| Abstract: | Individual and national wealth accumulation is here modelled as a recurrently played game between randomly matched pairs of individuals from a large population. The simple game here studied represents exogenously and spontaneously arising productive opportunities, and the drawn individuals may seek cooperation or conflict over each opportunity. How does national wealth and the evolutionarily stable cooperation rate depend on natural resources and institutions? We show that the steady-state level of national wealth is not monotonically increasing with natural resources. We also study the evolution of the full wealth distribution. When the population is large, the distribution of individual wealth converges over time to a skewed distribution. We also analyze the effect of institutions and the possibility that wealthier individuals are more likely to win conflicts, including effects on national wealth and inequality. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1707.00996&r=mic |
| By: | Kasper, Laura (saarland university); Peters, Hans (QE / Mathematical economics and game the); Vermeulen, Dries (QE / Operations research) |
| Abstract: | We consider voting correspondences that are, besides Condorcet Consistent, immune against the two strong no show paradoxes. That is, it cannot happen that if an additional voter ranks a winning alternative on top then that alternative becomes loosing, and that if an additional voter ranks a loosing alternative at bottom then that alternative becomes winning. This immunity is called the Top Property in the first case and the Bottom Property in the second case. We establish the voting correspondence satisfying Condorcet Consistency and the Top Property, which is maximal in the following strong sense: it is the union of all smaller voting correspondences with these two properties. The result remains true if we add the Bottom Property but not if we replace the Top Property by the Bottom Property. This voting correspondence contains the Minimax Rule but it is strictly larger. In particular, voting functions (single-valued voting correspondences) that are Condorcet Consistent and immune against the two paradoxes must select from this maximal correspondence, and we demonstrate several ways in which this can or cannot be done. |
| Keywords: | Condorcet Consistency, strong no show paradoxes, Minimax Rule |
| JEL: | D71 D72 |
| Date: | 2017–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2017017&r=mic |
| By: | Nakao, Keisuke |
| Abstract: | This study proposes a dynamic model of rebellion, where three players individually decide to challenge their common adversary. It is formally demonstrated that the pattern of rebellion is determined endogenously, depending on the challengers' resolve and strength. In other words, a stronger challenger with more resolve tends to fight earlier than others do. |
| Keywords: | bandwagoning, strategic coordination, rebellion |
| JEL: | D74 F51 |
| Date: | 2017–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80034&r=mic |
| By: | Ariel Neufeld |
| Abstract: | We show that when the price process $S$ represents a fully incomplete market, the optimal super-replication of any Markovian claim $g(S_T)$ with $g(\cdot)$ being nonnegative and lower semicontinuous is of buy-and-hold type. As both (unbounded) stochastic volatility models and rough volatility models are examples of fully incomplete markets, one can interpret the buy-and-hold property when super-replicating Markovian claims as a natural phenomenon in incomplete markets. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1707.01178&r=mic |
| By: | David Puelz; P. Richard Hahn; Carlos Carvalho |
| Abstract: | This paper considers portfolio construction in a dynamic setting. We specify a loss function comprised of utility and complexity components with an unknown tradeoff parameter. We develop a novel regret-based criterion for selecting the tradeoff parameter to construct optimal sparse portfolios over time. |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1706.10180&r=mic |
| By: | Biais, Bruno; Heider, Florian; Hoerova, Marie |
| Abstract: | We study the interaction between contracting and equilibrium pricing when risk- averse hedgers purchase insurance from risk-neutral investors subject to moral hazard. Moral hazard limits risk-sharing. In the individually optimal contract, margins are called (after bad news) to improve risk-sharing. But margin calls depress the price of investors' assets, affecting other investors negatively. Because of this fire-sale externality, there is too much use of margins in the market equilibrium compared to the utilitarian optimum. Moreover, equilibrium multiplicity can arise: In a pessimistic equilibrium, hedgers who fear low prices request high margins to obtain more insurance. Large margin calls trigger large price drops, confirming initial pessimistic expectations. Finally, moral hazard generates endogenous market incompleteness, raises risk premia, and induces contagion between asset classes. |
| Keywords: | Insurance; Derivatives; Moral hazard; Risk-management; Margin requirements; Contagion; Fire-sales |
| JEL: | D82 G21 G22 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:31764&r=mic |
| By: | Jean-Philippe Platteau; Guilia Camilotti; Emmanuelle Auriol |
| Abstract: | Social engineering refers to deliberate attempts, often under the form of legislative moves, to promote changes in customs and norms that hurt the interests of marginalized population groups. This paper explores the analytical conditions under which social engineering is more or less likely to succeed than more indirect approaches when it comes to suppress genderbiased customs. This implies discussing the main possible interaction frameworks leading to antiwomen equilibria, and deriving policy implications from the corresponding games. The theoretical arguments are illustrated by examples drawn from available empirical works, thus providing a reasoned survey of the literature. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2017-145&r=mic |
| By: | Biais, Bruno; Bisière, Christophe; Bouvard, Matthieu; Casamatta, Catherine |
| Abstract: | Blockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective, way to record transactions and asset ownership, but are they? We model the blockchain as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. We show that mining the longest chain is a Markov perfect equilibrium, without forking on the equilibrium path, in line with the seminal vision of Nakamoto (2008). We also clarify, however, that the blockchain game is a coordination game, which opens the scope for multiple equilibria. We show there exist equilibria with forks, leading to orphaned blocks and also possibly to persistent divergence between different chains. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:31763&r=mic |
| By: | Larry G. Epstein (Boston University); Yoram Halevy (University of British Columbia) |
| Abstract: | Many decisions are made in environments where outcomes are determined by the realization of multiple random events. A decision maker may be uncertain how these events are related. We identify and experimentally substantiate behavior that intuitively reflects a lack of confidence in their joint distribution. Our findings suggest a dimension of ambiguity which is different from that in the classical distinction between risk and "Knightian uncertainty." |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2017-006&r=mic |