nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒10‒22
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Incomplete Information Games with Ambiguity Averse Players By Eran Hanany; Peter Klibanoff; Sujoy Mukerji
  2. Information Aggregation and Countervailing Biases in Organizations By Saori CHIBA; Kaiwen LEONG
  3. Strategic investment and learning with private information By KLEIN, Nicolas; WAGNER, Peter
  4. Policy Experimentation, Redistribution and Voting Rules By Renee Bowen; Vincent Anesi
  5. Insurance and Inequality with Persistent Private Information By Bloedel, Alex; Krishna, R. Vijay; Leukhina, Oksana
  6. Equity Criteria Based on the Dominance Principle and Individual Preferences: Refinements of the Consensus Approach By Sakamoto, Norihito
  7. Evolutionary Models of Preference Formation By Alger, Ingela; Weibull, Jörgen W.
  8. When Choosing is Painful: A Psychological Opportunity Cost Model By Emmanuelle Gabillon
  9. Beliefs, Plans, and Perceived Intentions in Dynamic Games By Pierpaolo Battigalli; Nicodemo De Vito
  10. Topological Connectedness and Behavioral Assumptions on Preferences: A Two-Way Relationship By M. Ali Khan; Metin Uyan{\i}k

  1. By: Eran Hanany (Faculty of Engineering, Tel Aviv University); Peter Klibanoff (Department of Managerial Economics and Decision Sciences, Kellogg School of Management, North-western University); Sujoy Mukerji (Queen Mary University of London)
    Abstract: We study incomplete information games with ambiguity averse players. Our focus is on equilibrium concepts satisfying sequential optimality each player's strategy is optimal at each information set given opponents' strategies. We show sequential optimality, which does not make any explicit assumption on updating, is equivalent to sequential optimality with respect to beliefs updated using a particular generalization of Bayesian updating. Ambiguity aversion expands the set of equilibria compatible with players sharing common ambiguous beliefs. We connect ambiguity aversion with belief robustness. Examples illustrate new strategic behavior, including strategic use of ambiguity, under ambiguity aversion.
    Keywords: Ambiguity aversion, dynamic games, incomplete information, multi-stage games, sequential optimality, sequential equilibrium with ambiguity, ambiguous strategies, smooth ambiguity model
    JEL: C72 D82 D81
    Date: 2018–09–13
  2. By: Saori CHIBA; Kaiwen LEONG
    Abstract: A decision maker relies on an agent for decision-relevant information. We consider two dimensions of biases—one over projects (project bias) often assumed in cheap talk models à la Crawford and Sobel (1982) and the other over the outside option (pandering bias) scrutinized in Che, Dessein and Kartik (2013). The two biases counteract each other. This effect is more significant as payoffs to different projects are more highly negatively correlated. As a result, a larger project bias can facilitate cheap talk communications and benefit the players. Due to this correlation-driven countervailing biases, the comparison between vetobased delegation and non-delegation is not trivial.
    Keywords: Bias, Cheap Talk, Correlation, Outside Option.
    JEL: D82 D83
    Date: 2018–10
  3. By: KLEIN, Nicolas; WAGNER, Peter
    Abstract: We study a two-player game of strategic experimentation in which agents choose the timing of investments which yield uncertain returns over time. Agents learn about future returns through privately observed signals, others’ investment decisions and from public experimentation outcomes when returns are realized. We characterize symmetric equilibria, and we relate the extent of strategic delay of investments in equilibrium to the primitives of the information structure. Agents invest without delay when the most optimistic intermediate belief exceeds a threshold. Otherwise, delay in investments induces a negative learning feed-back which may either escalate or dampen beliefs and investment choices. We highlight how private information in strategic experimentation can increase ex ante welfare because of strategic uncertainty and due to an «encouragement effect of private information»
    Date: 2018
  4. By: Renee Bowen; Vincent Anesi
    Abstract: We study optimal policy experimentation by a committee. We consider a dynamic bargaining game in which committee members choose either a risky reform or a safe alternative each period. When no redistribution is allowed the unique equilibrium outcome is generically inefficient. When redistribution is allowed (even small amounts), there always exists an equilibrium that supports optimal experimentation for any voting rule without veto players. With veto players, however, optimal policy experimentation is possible only with a sufficient amount of redistribution. We conclude that veto rights are more of an obstacle to optimal policy experimentation than constraints on redistribution.
    JEL: C73 C78 D61 D78 H61
    Date: 2018–09
  5. By: Bloedel, Alex (Stanford University); Krishna, R. Vijay (Florida State University); Leukhina, Oksana (Federal Reserve Bank of St. Louis)
    Abstract: We study optimal insurance contracts for an agent with Markovian private information. Our main results characterize the implications of constrained efficiency for long-run welfare and inequality. Under minimal technical conditions, there is Absolute Immiseration: in the long run, the agent’s consumption and utility converge to their lower bounds. When types are persistent and utility is unbounded below, there is Relative Immiseration: low-type agents are immiserated at a faster rate than high-type agents, and “pathwise welfare inequality” grows without bound. These results extend and substantially generalize the hallmark findings from the classic literature with iid types, suggesting that the underlying forces are robust to a broad class of private information processes. The proofs rely on novel recursive techniques and martingale arguments. When the agent has CARA utility, we also analytically and numerically characterize the short-run properties of the optimal contract. Persistence gives rise to qualitatively novel short-run dynamics and allocative distortions (or “wedges”) and, quantitatively, induces less efficient risk-sharing. We compare properties of the wedges to their counterparts in the dynamic taxation literature.
    Keywords: Absolute immiseration; relative immiseration; dynamic contracting; recursive contracts; principal-agent problem; persistent private information.
    JEL: C73 D30 D31 D80 D82 E61
    Date: 2018–09–07
  6. By: Sakamoto, Norihito
    Abstract: This paper examines the problem of the indexing dilemma in the context of an ordinal interpersonal comparison of individual situations and proposes a new class of equity criteria based on the dominance principle and individual preferences. First, we show that an interpersonal comparison ordering that satisfies the dominance principle and the monotonicity condition must be a consensus ranking, which requires that individual i's situation with consumption bundle x should be better than j's situation with y whenever all individuals strictly prefer x to y. Second, we propose a new class of equity criteria based on the worst evaluation of each person's situation, which is a class of ordering extensions of interpersonal rankings that respect the consensus condition. In addition, we show its representation theorem and characterize maximin orderings based on our criteria. Third, possibility and impossibility results between the Pareto principle and dominance methods are obtained. Then, we propose a class of median rules as another equity criterion that satisfies the weak Pareto and dominance principles.
    Keywords: Indexing dilemma, Consensus approach, Ordinal interpersonal comparison, Universal social ordering
    JEL: D60 D63 I30 I31 I32
    Date: 2018–08
  7. By: Alger, Ingela; Weibull, Jörgen W.
    Abstract: The literature on the evolution of preferences of individuals in strategic interactions is vast and diverse. We organize the discussion around the following question: Supposing that material outcomes drive evolutionary success, under what circumstances does evolution promote Homo oeconomicus, defined as material self-interest, and when does it instead lead to other preferences? The literature suggests that Homo oeconomicus is favored by evolution only when individuals' preferences are their private information and the population is large and well-mixed so that individuals with rare mutant preferences almost never get to interact with each other. If rare mutants instead interact more often (say, due to local dispersion), evolution instead favors a certain generalization of Homo oeconomicus including a Kantian concern. If individuals interact under complete information about preferences, evolution destabilizes Homo oeconomicus in virtually all games.
    JEL: C73 D01 D03
    Date: 2018–09
  8. By: Emmanuelle Gabillon
    Abstract: This paper is a contribution to regret theory, which we generalize in two ways. Since the intensity of regret depends on the information the decision-maker has about the results of the foregone strategies, we build a model of choice which accommodates any feedback structure. We also show that the reference point, which characterizes the regret utility function introduced by Quiggin (1994), does not always represent a feeling of regret. It corresponds to a broader concept, which we call psychological opportunity cost (POC), of which regret is no more than a specific expression. We find behavioral deviations from the predictions of the Expected Utility Theory. We obtain correlation loving, greater reluctance to take on risk and we highlight some harmful effects of information. Our model equally offers a theoretical framework for experimental studies about inaction inertia.
    Keywords: choice, correlation loving, emotion, inaction inertia, information, regret.
    JEL: D03 D81 D82
    Date: 2018
  9. By: Pierpaolo Battigalli; Nicodemo De Vito
    Abstract: We adopt the epistemic framework of Battigalli and Siniscalchi (J. Econ. Theory 88:188-230, 1999) to model the distinction between a players contingent behavior, which is part of the external state, and his plan, which is described by his beliefs about his own behavior. This allows us to distinguish between intentional and unintentional behavior, and to explicitly model how playersrevise their beliefs about the intentions of others upon observing their actions. We illustrate our approach with detailed examples and with a new derivation of backward induction from epistemic conditions. Speci cally, we prove that common full belief in optimal planning and in belief in continuation consistency imply the backward induction strategies and beliefs. We also present within our framework other relevant epistemic assumptions about backward and forward-induction reasoning, and relate them to similar ones studied in the previous literature. KEYWORDS: Epistemic game theory, plans, perceived intentions, back- ward induction, forward induction.
    Date: 2018
  10. By: M. Ali Khan; Metin Uyan{\i}k
    Abstract: This paper offers a comprehensive treatment of the question as to whether a binary relation can be consistent (transitive) without being decisive (complete), or decisive without being consistent, or simultaneously inconsistent or indecisive, in the presence of a continuity hypothesis that is, in principle, non-testable. It identifies topological connectedness of the (choice) set over which the continuous binary relation is defined as being crucial to this question. Referring to the two-way relationship as the Eilenberg-Sonnenschein (ES) research program, it presents four synthetic, and complete, characterizations of connectedness, and its natural extensions; and two consequences that only stem from it. The six theorems are novel to both the economic and the mathematical literature: they generalize pioneering results of Eilenberg (1941), Sonnenschein (1965), Schmeidler (1971) and Sen (1969), and are relevant to several applied contexts, as well as to ongoing theoretical work.
    Date: 2018–10

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