nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒10‒03
seven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Prolonged Learning and Hasty Stopping: The Wald Problem With Ambiguity By Sarah Auster; Yeon-Koo Che; Konrad Mierendorff
  2. Simultaneous Search and Adverse Selection By Sarah Auster; Piero Gottardi; Ronald Wolthoff
  3. A Rationalization of the Weak Axiom of Revealed Preference By Victor H. Aguiar; Per Hjertstrand; Roberto Serrano
  4. A Dynamic Theory of Random Price Discounts By Francesc Dilmé; Daniel Garrett
  5. Precautionary Saving Behaviour under Ambiguity By Suen, Richard M. H.
  6. Relational Contracts: Public versus Private Savings By Francesc Dilmé; Daniel Garrett
  7. The Department of Economics at the University of Chicago, 1947–1982 By Harberger, Arnold C.; Edwards, Sebastian

  1. By: Sarah Auster; Yeon-Koo Che; Konrad Mierendorff
    Abstract: This paper studies sequential information acquisition by an ambiguity-averse decision maker (DM), who decides how long to collect information before taking an irreversible action. The agent optimizes against the worst-case belief and updates prior by prior. We show that the consideration of ambiguity gives rise to rich dynamics: compared to the Bayesian DM, the DM here tends to experiment excessively when facing modest uncertainty and, to counteract it, may stop experimenting prematurely when facing high uncertainty. In the latter case, the DM’s stopping rule is non-monotonic in beliefs and features randomized stopping.
    Keywords: Wald Problem, Ambiguity Aversion
    JEL: C61 D81 D83 D91
    Date: 2022–09
  2. By: Sarah Auster; Piero Gottardi; Ronald Wolthoff
    Abstract: We study the effect of diminishing search frictions in markets with adverse selection by presenting a model in which agents with private information can simultaneously contact multiple trading partners. We highlight a new trade-off: facilitating contacts reduces coordination frictions but also the ability to screen agents' types. We find that, when agents can contact sufficiently many trading partners, fully separating equilibria obtain only if adverse selection is sufficiently severe. When this condition fails, equilibria feature partial pooling and multiple equilibria co-exist. In the limit, as the number of contacts becomes large, some of the equilibria converge to the competitive outcomes of Akerlof (1970), including Pareto dominated ones; other pooling equilibria continue to feature frictional trade in the limit, where entry is inefficiently high. Our findings provide a basis to assess the effects of recent technological innovations which have made meetings easier.
    Keywords: search; adverse selection; screening; labor market; coordination frictions; search frictions
    JEL: D82 D83 E24
    Date: 2022–09–04
  3. By: Victor H. Aguiar (University of Western Ontario); Per Hjertstrand (Research Institute of Industrial Economics, Sweden); Roberto Serrano (Brown University)
    Abstract: Samuelson’s (1938) weak (generalized) axiom of revealed preference– WGARP–is a minimal and appealing consistency condition of choice. We offer a rationalization of WGARP in general settings. Our main result is an exact analog of the celebrated Afriat’s theorem, but for WGARP. Its ordinal rationalization is in terms of an asymmetric and locally nonsatiated preference function. Its cardinal rationalization uses a coalitional multi-utility (CMU) maxmin representation with a coherency restriction on the coalition structure. Effectively, the CMU representation aggregates piecemeal preferences within the decision maker (multiple rationales without preference reversals that allow for transitivity violations). Basic consumer theory and welfare analysis are also developed. Extensions to the weak axiom of revealed preference–WARP–and choices obeying the law of demand are included.
    Keywords: abstract consumer choice; weak axiom of revealed preference; Afriat’s theorem; asymmetric preference function; coalitional multi-utility rationalization; welfare analysis
    JEL: C60 D10
    Date: 2022
  4. By: Francesc Dilmé (University of Bonn); Daniel Garrett (Toulouse School of Economics)
    Abstract: A seller with commitment power sets prices over time. Risk-averse buyers arrive to the market and decide when to purchase. We obtain that the optimal price path is a “regular” price, with occasional episodes of sequential discounts that occur at random times. The optimal price path has the property that the price a buyer ends up paying is independent of his arrival and purchase times, and only depends on his valuation. Our theory accommodates empirical findings on the timing of discounts.
    Keywords: dynamic pricing, sales, random mechanisms
    JEL: D82
  5. By: Suen, Richard M. H.
    Abstract: This paper analyses a two-period model in which a consumer faces a future income risk but is uncertain about its probability distribution. We derive three sets of sufficient conditions under which a consumer with generalised recursive smooth ambiguity (GRSA) preferences will save more under ambiguity than in a deterministic environment. Our results show how precautionary saving is jointly determined by attitudes toward atemporal risk, ambiguity and intertemporal substitution. We also find a close connection between risk prudence under non-expected utility and precautionary saving under GRSA preferences.
    Keywords: Precautionary Saving; Risk Aversion; Intertemporal Substitution; Smooth Ambiguity Preferences.
    JEL: D81 E21
    Date: 2022–08–02
  6. By: Francesc Dilmé (University of Bonn); Daniel Garrett (University of Essex)
    Abstract: Work on relational employment agreements often predicts low payments or termination for poor performance. The possibility of saving can, however, limit the e˙ectiveness of mone-tary incentives in motivating an employee with diminishing marginal utility for consump-tion. We study the role of savings and their observability in optimal relational contracts. We focus on the case where players are not too patient, and hence the constant first-best e˙ort cannot be implemented. If savings are hidden, the relationship eventually deterio-rates over time. In particular, both payments and e˙ort decline. On the other hand, if savings are public, consumption is initially high, so the agent’s savings fall over time, and e˙ort and payments to the agent increase. The findings thus suggest how tacit agreements on consumption can forestall the deterioration of dynamic relationships in which the agent can save.
    Keywords: relational contracts, consumption smoothing preferences, private savings
    JEL: C73 J30
    Date: 2022–08
  7. By: Harberger, Arnold C.; Edwards, Sebastian
    Abstract: This paper is about the Department of Economics at the University of Chicago, between 1947 and 1982. The paper has the form of a conversation between the two authors and covers issues such as the existence of a "Chicago School," the Department's governance, the personalities of some well-known members such as Frank Knight, Milton Friedman, and Robert Mundell, teaching, and the "Chicago boys." It also deals with the relation between members of the Department and those of other leading Schools.
    Keywords: Chicago School,Milton Friedman,monetarism,Frederik Hayek
    Date: 2021

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