|
on Microeconomics |
| By: | Catherine Bobtcheff (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Raphaël Lévy (HEC Paris - Ecole des Hautes Etudes Commerciales); Thomas Mariotti (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Firms receiving independent signals on a common‐value risky project compete to be the first to invest. When firms are symmetric and competition is winner‐take‐all, rents are fully dissipated in equilibrium and the extent to which signals are publicly disclosed is irrelevant for welfare. When disclosure of signals is asymmetric, welfare is highest when firms are most asymmetric, and policies that uniformly promote disclosure may backfire, especially when competition is severe. When firms strategically select their disclosure policies, a moderate subsidy for disclosure induces a low correlation between firms' policies, and thus maximizes welfare. |
| Date: | 2025–02–18 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05475414 |
| By: | Biais, Bruno; Gersbach, Hans; Rochet, Jean-Charles; Villeneuve, Stéphane |
| Abstract: | This paper studies the efficient allocation of capital and consumption in a production economy with many agents, private information, and aggregate risk. It extends the influential work of Andrew Atkeson and Robert E. Lucas Jr. (1992), who analyzed a related problem in an exchange economy. In a dynamic production setting, the planner faces a fundamental trade-off between providing some insurance against privately observed idiosyncratic risk and sustaining productive investment and economic growth. Using mean-field control techniques, we derive the infinite dimensional Hamilton–Jacobi–Bellman equation that characterizes constrained-efficient allocations. Under constant relative risk aversion preferences, the solution admits a simple characterization. We show that constrained-efficient allocations can be decentralized through a competitive market in which goods trade against a single safe asset supplied by fiscal or monetary authorities. Dynamic efficiency requires setting the growth rate of the safe asset to balance the demand of agents for insurance with the investment needed to maintain optimal growth. |
| Keywords: | Economies with private information; Mean Field Control; Monetary Policy |
| Date: | 2026–03–12 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131529 |
| By: | Hyun Song Shin |
| Abstract: | Money is a coordination device underpinned by strong network effects: the more others accept a form of money, the more I wish to adopt it too. The decentralisation agenda of public permissionless blockchains undercuts these network effects and leads to fragmentation of the monetary landscape. Validators who maintain the blockchain need to be rewarded to play their role with the necessary reward increasing in the degree of dependence on other validators' actions to sustain consensus. Since these rewards must ultimately be borne by users through congestion rents, capacity constraints are a feature, not a bug, especially for blockchains with more stringent standards for consensus. New blockchains with less stringent thresholds for consensus enter the market to serve users priced out of incumbent chains. The resulting fragmentation undercuts the very network effects that give money its social value. Stablecoins inherit this fragmentation from the blockchains on which they reside. The analysis has broader implications for the future of the monetary system. |
| Keywords: | blockchain, tokenomics, network effects, stablecoins, decentralised consensus, global games, monetary system, fragmentation |
| JEL: | D82 E42 G23 L14 O33 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1335 |
| By: | Prummer, Anja; Nava, Francesco |
| Abstract: | We study a principal who allocates a good to agents with private, independently distributed values through an optimal mechanism. The principal can strategically shape these value distributions by modifying the good's features, which affect agents' valuations. Our analysis reveals that optimal designs are frequently divisive - creating goods that appeal strongly to specific agents or agent types while being less valued by others. These divisive designs reduce information rents and increase total surplus, even though they reduce competition. Even when total surplus is constrained, some divisiveness in designs remains optimal. |
| Keywords: | Value Design, Mechanism Design, Differentiation |
| JEL: | D82 D46 L15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fubsbe:338079 |
| By: | Johnen, Johannes (Université catholique de Louvain, LIDAM/CORE, Belgium); Shekhar, Shiva |
| Abstract: | This paper proposes a simple yet useful framework for evaluating vertical mergers in digital markets by distinguishing between product-specific and ecosystem-specific network effects. Vis-a-vis no network effects, product-specific network effects amplify foreclosure and steering incentives, as a rival’s growth directly undermines the platform’s product value. Conversely, ecosystem-specific effects dampen foreclosure incentives, since rivals contribute to the overall value of the platform ecosystem. We develop a formal model illustrating how this distinction shapes platform behavior and competitive outcomes. We apply this distinction to real-world examples to illustrate its potential usefulness. Our distinction implies that regulators may want to adopt a stricter standard with no presumption of efficiencies where product-specific effects dominate. In contrast, when ecosystem-specific effects prevail, merger evaluation should mirror traditional vertical merger analysis. Thus, offering a more nuanced approach to merger evaluation by presenting a practical screening tool to identify problematic vertical mergers in markets featuring network effects. |
| Keywords: | Network Externalities ; Platforms ; Vertical Integration |
| JEL: | L22 L41 L51 |
| Date: | 2025–07–30 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025015 |
| By: | Wei Liang (China Economics and Management Academy, Central University of Finance and Economics, Beijing, 100081, China); Heng-fu Zou (The World Bank, Washington, D. C., 20433, USA) |
| Abstract: | We develop a continuous-time principal-agent model with mean-field interactions to study optimal incentive design in large economies. We extend Sannikov's recursive contracting framework to a setting where a single principal manages a continuum of heterogeneous agents whose behaviors are interdependent through aggregate effort externalities. Each agent's hidden efort affects their stochastic output, while the principal designs state-contingent contracts that must account for both individual moral hazard and collective behavior effects. The model generates a coupled system of forward-backward stochastic differential equations: a backward Hamilton-Jacobi-Bellman equation characterizing the principal's value function and optimal contracts, and a forward Fokker-Planck equation governing the evolution of the agent distribution. We establish conditions for mean-field equilibrium where the aggregate effort assumed by the principal when designing contracts coincides with the aggregate effort induced by agents following these contracts. Our numerical implementation reveals that despite complex state-dependent individual con tracts, the aggregate effort remains approximately stable over the contract horizon, while the distribution of continuation values exhibits increasing dis persion. Applications include compensation design in large frms, platform economies, and public incentive programs where individual actions generate aggregate externalities. |
| Keywords: | Mean field games, Principal-agent problem, Continuous-time contracting, Moral hazard, Fokker-Planck equation, Dynamic incentives |
| JEL: | C63 C73 D86 G32 J33 |
| Date: | 2026–03–15 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:806 |
| By: | Luca Di Corato (Department of Economics, Ca’ Foscari University of Venice); Michele Moretto (Department of Economics and Management, University of Padova) |
| Abstract: | This paper studies a continuous-time regulatory problem in which a firm holds persistent private information about demand and is subject to a flow limited-liability constraint. The regulator regulates prices through a dynamic mechanism that ensures truthful reporting of the evolving type. Limited liability imposes a state-dependent lower bound on the firm’s instantaneous utility, inducing a reflecting boundary in continuation utility and giving rise to a tractable singular-control representation. We derive closed-form expressions for the optimal pricing rule and the associated continuation-utility function, and we characterize the optimal up-front transfer required to induce truthful revelation of the firm’s initial type. The resulting contract is fully explicit and highlights how limited liability shapes information rents and regulatory distortions over time. |
| Keywords: | Dynamic regulation, Limited liability, Adverse selection, Continuous-time contracting, Reflecting boundary, Singular control |
| JEL: | D82 D86 L51 H54 C61 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:fem:femwpa:2026.09 |
| By: | Holmberg, Pär; Ruddell, Keith; Willems, Bert (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | We characterize Nash equilibria in multi-product markets in which producers commit to vectors of supply functions contingent on all prices. The framework accommodates (dis)economies of scope in production, and goods may be substitutes or complements in demand. We show that equilibrium allocations of underlying goods and payoffs are invariant under bundling. With quadratic costs and linear demand, this invariance reduces the multi-product problem to an equivalent set of single-product markets that can be analyzed independently. We introduce Lerner and pass-through matrices to capture markups and welfare losses; their eigenvalues summarize fundamental market properties, remain invariant under bundling, and lend themselves to comparative statics analysis. |
| Keywords: | Supply function equilibrium ; multi-product pricing ; divisible-good auction ; bundling ; pass-through ; welfare |
| JEL: | C62 C72 D43 D44 L94 |
| Date: | 2025–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025018 |
| By: | Huan Cai; Ziqing Lu; Catherine Xu; Weiyu Xu; Jie Zheng |
| Abstract: | With recent development of artificial intelligence, it is more common to adopt AI agents in economic activities. This paper explores the economic actions of agents, including human agents and AI agents, in an economic game of trading products/services, and the equilibria in this economy involving multiple agents. We derive a range of equilibrium results and their corresponding conditions using a Markov chain stationary distribution based model. One distinct feature of our model is that we consider the long-term utility generated by economic activities instead of their short-term benefits. For the model consisting of two agents, we fully characterize all the possible economic equilibria and conditions. Interestingly, we show that unless each agent can at least double (not merely increase) its marginal utility by purchasing the other agent's products/services, purchasing the other agent's products/services will not happen in any economic equilibrium. We further extend our results to three and more agents, where we characterize more economic equilibria. We find that in some equilibria, the ``more powerful'' AI agents contribute zero utility to ``less capable'' agents. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.00858 |
| By: | Ivo Welch |
| Abstract: | With four political candidates competing first in two primaries and then in a general election, even a modestly polarized electorate can sustain (in equilibrium) much more extremist candidates. However, a party can sustain extremism only if the other side is extreme, too. A small moderation of one side’s voting electorate can trigger a discontinuous collapse of candidate extremism on both sides — a “moderation export” effect. The converse is also true: minute increases in voter polarization on the more moderate side can trigger radical candidate extremism on both sides. Principled candidates can destroy party electability. Distance-related voter abstention favors extremism. |
| JEL: | D71 D72 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34967 |
| By: | Mauleon, Ana (Université catholique de Louvain, LIDAM/CORE, Belgium); Vannetelbosch, Vincent (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | We consider priority-based school choice problems where students can form two types of matches: public matches observed by everyone and private matches generally not observed by others. We introduce the notion of rationalizable conjectural stable (RCS) matching, which generalizes Gale and Shapley (1962)’s stability notion to accommodate private matches. We partially characterize RCS matchings and we show that the Efficiency-Adjusted Deferred Acceptance (EADA) matching is RCS when private and public matches are perfect substitutes. Finally, we extend the definition of RCS matching to school choice problems when private and public matches are imperfect substitutes. |
| Keywords: | School choice ; Private information ; Private matchings ; Stability ; Rationalizability |
| JEL: | C70 C78 D82 |
| Date: | 2025–03–20 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025007 |
| By: | Barbara Antonioli; Federico Trombetta |
| Abstract: | Executives may implement legally contestable policies aggressively before courts reach a final legality determination, creating reliance and other sunk effects that make reversal costly. We study a complete-information sequential game in which an executive chooses policy aggressiveness and a court then decides whether to uphold the policy or strike it. If reversal costs increase sufficiently convexly in aggressiveness, the court strikes mild policies but upholds sufficiently aggressive ones to avoid disruption. Anticipating this, the executive overreaches—choosing a policy more extreme than its ideal point—to deter full reversal, yielding inefficient excess implementation relative to a commitment benchmark. Institutions that limit pre-review sunk effects (stays, phased implementation, expedited review) mitigate this distortion. |
| JEL: | D72 D74 K23 K40 P16 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:dis:wpaper:dis2602 |
| By: | Masahiro Kato |
| Abstract: | This study proposes the General Bayes framework for policy learning. We consider decision problems in which a decision-maker chooses an action from an action set to maximize its expected welfare. Typical examples include treatment choice and portfolio selection. In such problems, the statistical target is a decision rule, and the prediction of each outcome $Y(a)$ is not necessarily of primary interest. We formulate this policy learning problem by loss-based Bayesian updating. Our main technical device is a squared-loss surrogate for welfare maximization. We show that maximizing empirical welfare over a policy class is equivalent to minimizing a scaled squared error in the outcome difference, up to a quadratic regularization controlled by a tuning parameter $\zeta>0$. This rewriting yields a General Bayes posterior over decision rules that admits a Gaussian pseudo-likelihood interpretation. We clarify two Bayesian interpretations of the resulting generalized posterior, a working Gaussian view and a decision-theoretic loss-based view. As one implementation example, we introduce neural networks with tanh-squashed outputs. Finally, we provide theoretical guarantees in a PAC-Bayes style. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.23672 |
| By: | Jin Yeub Kim (Yonsei University); Wooyoung Lim (The Hong Kong University of Science and Technology) |
| Abstract: | Mediation is a key strategic instrument for managing conflicts in bargaining scenarios with incomplete information. This paper reports the first systematic laboratory investigation into the informed principal problem concerning mediator selection. The theory of neutral optimum predicts that, in our environment, the informed principal's most reasonable choice is not the mediator that maximizes the ex-ante probability of peace; rather, the one preferred by the stronger type alone constitutes a credibly justifiable compromise between the conflicting interests of different types. We find that subjects do not choose the neutral mediator more often than the peace-maximizing one. Different principal types recognize the need for inscrutable selection and form intertype compromises, and they systematically view the peace-maximizing mediator as the more compelling compromise. The strategic reasoning underlying the neutral optimum fails to materialize in the lab. |
| Keywords: | Informed Principal Problems, Mechanism Selection, Mediation, Inscrutability, Neutral Optimum, Laboratory Experiments |
| JEL: | C72 C91 D82 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-283 |
| By: | Aaron Bodoh-Creed; Brent Hickman; John List; Ian Muir; Gregory Sun |
| Abstract: | Nonlinear pricing theory predicts that firms can extract surplus by inducing heterogeneous consumers to self-sort across price contract offers that are ex-post optimal for them. We study subscription pricing when the frictionless sorting assumption fails. Using large-scale subscription experiments conducted by Lyft, we document systematic deviations from optimal self-selection: many high-demand consumers decline subscriptions that would have saved them money, while some subscribers fail to break even. We develop a structural model of intensive-margin demand in which consumers may exhibit salience failures, forecast errors about future demand, or impulsivity. We show that subscription uptake can be recast as one-sided noncompliance in a binary-instrument framework, allowing us to leverage LATE methods to identify counterfactual outcome distributions and a novel "uptake function" linking baseline outcomes to compliance behavior. Combining experimental price variation with this identification strategy, we recover utility primitives, demand heterogeneity, and behavioral parameters. Salience failures and forecast errors play quantitatively important roles. Counterfactual analyses show that optimal subscription pricing generates substantial gains relative to linear pricing, but these gains are highly sensitive to consumer deviations from ex-post optimal choice. Implementing nonlinear pricing therefore requires not only optimal contract design for consumer screening, but also coordinated efforts to mitigate behavioral frictions. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:feb:natura:00834 |
| By: | Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium); Racionero, Maria |
| Abstract: | We consider a society where social mobility is influenced by parental wealth transfers and education investments. Specifically, the educational investments capture the time parents devote to the education of their children. We show that, in the absence of government intervention, the market equilibrium results in a level of upward social mobility lower than that in an ideal first-best scenario. Given the challenge of observing individual characteristics, we characterize the second-best solution achievable through the implementation of non-linear taxation. We consider two alternative government objectives: a weighted utilitarian criterion and a Rawlsian criterion. Additionally, we explore the implications of two alternative informational assumptions: whether educational investments are observable or non-observable. |
| Keywords: | Social mobility ; non-linear taxation ; inheritance taxation |
| JEL: | H21 H31 H52 |
| Date: | 2025–06–01 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025013 |
| By: | Gokan, Toshitaka; Thisse, Jacques-François (Université catholique de Louvain, LIDAM/CORE, Belgium); Zhu, Xiwei |
| Abstract: | We develop a model in which offline and online transportation costs, online shopping disutility cost and consumer taste heterogeneity, and online and offline retailers' pricing policies interact to determine the equilibrium retail format that emerges from firms' and consumers' choices. This is done by combining spatial pricing and discrete choice theory within a unified game-theoretic framework. We study the industry equilibrium, as well as the corresponding consumer surplus and total welfare. Our results show that firms' choices of a retail format and consumers' decision to buy from an offline or online firm often depend on consumers' locations relative to firms'. Comparing aggregate consumer surpluses shows that consumers prefer online to alternative channels when they are sufficiently heterogeneous, but this need not be so when heterogeneity is weak. When consumers' tastes are heterogenous enough, the retail format maximizing total welfare depends on the value of the distaste costs of online purchase. Thus, the nature of products supplied by retailers is likely to affect the socially desirable retailing system through the degree of product differentiation. |
| Keywords: | Offline retailing ; online retailing ; spatial price policies |
| JEL: | L13 L81 R10 |
| Date: | 2025–03–13 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025008 |
| By: | Patrick Beissner; Tim Boonen; Mario Ghossoub |
| Abstract: | This paper examines the impact of introducing a Rank-Dependent Utility (RDU) agent into a von Neumann-Morgenstern (vNM) pure-exchange economy with no aggregate uncertainty. In the absence of the RDU agent, the classical theory predicts that Pareto-optimal allocations are full-insurance, or no-betting, allocations. We show how the probability weighting function of the RDU agent, seen as a proxy for probabilistic risk aversion that is not captured by marginal utility of wealth, can lead to Pareto optima characterized by endogenous betting, despite common baseline beliefs. Such endogenous betting at an optimum leads to uncertainty-generating trade arising purely from heterogeneity in the perception of risk, rather than in beliefs. Our results formalize the intuitive understanding that probability weighting can act as an endogenous source of belief heterogeneity, and provide a new behavioral foundation for the coexistence of common beliefs and speculative behavior, in an environment with no initial aggregate uncertainty. Interpreting the RDU agent's nonlinear weighting function as an ``internality'' prompts the question of whether a social planner should intervene. We show how a benevolent social planner can nudge the RDU agent to behave closer to a vNM agent, through costly statistical or financial education, thereby (partially) restoring the optimality of full-insurance allocations. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.24194 |
| By: | Conte, Anna; D'Ippoliti, Carlo; Temperini, Jacopo |
| Abstract: | Consensus mechanisms are institutional governance structures that coordinate decentralized agents by aligning incentives to sustain agreement on shared outcomes. Many contemporary designs embed efficiency-reducing contingencies, such as reduced rewards or penalties, intended to discipline behaviour after coordination failure. The implicit assumption is that efficiency loss strengthens incentives to restore agreement. We test this assumption in a controlled agreement environment derived from a consensus-like structure. In a two-stage mechanism where coordination failure reduces available surplus but agreement remains individually rational, laboratory data from 716 participants reveal persistent disagreement in reduced-surplus states. Conflict rates range from approximately 20% to over 60%, contradicting standard equilibrium predictions of universal agreement. These results show that efficiency loss does not necessarily discipline behaviour. Instead, reduced-surplus environments are associated with sustained disagreement and amplified inefficiency, highlighting the importance of incorporating behavioural considerations into the design of consensus-based governance systems. |
| Date: | 2026–03–03 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:8b6kf_v1 |
| By: | Jason Delaney (Georgia Gwinnett College); Sarah Jacobson (Williams College); Thorsten Moenig (Temple University); |
| Abstract: | "Is the assumption that people automatically know their own preferences innocuous? We present a theory that explores the implications of having to discover one's preferences. We show that if tastes must be learned through experience, preferences for some goods will be learned over time, but preferences for other goods will never be learned. This is because sampling a new item has an opportunity cost. Learning is less likely for people who are impatient, risk averse, low income, or short-lived, and for consumption items that are rare, are expensive, must be bought in large quantities, or are initially judged negatively relative to other items. Choices will eventually stabilize, but they need not stabilize at true preferences. A pessimistic bias about untried goods should increase with time. Agents will make choice reversals during the learning process. Welfare loss from suboptimal choices will decline over time but need not approach zero. Overall, our results imply that undiscovered preferences could confound interpretation of choice data of all kinds and could have significant welfare and policy implications." |
| Keywords: | discovered preferences, preference stability, learning |
| JEL: | D83 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:wil:wileco:2025_113 |
| By: | Alexander Erlei; Lukas Meub |
| Abstract: | As AI agents increasingly act on behalf of human stakeholders in economic settings, understanding their behavior in complex market environments becomes critical. This article examines how Large Language Models coordinate on markets that are characterized by information asymmetries and in which providers of services have incentives to exploit that asymmetry for their own economic gain. To that end, we conduct simulations with GPT-5.1 agents in credence goods markets, manipulating the institutional framework (free market, verifiability, liability), LLM agent's social preferences (default, self-interested, inequity-averse, efficiency-loving), and reputation mechanisms across one-shot and repeated 16-round interactions. In one-shot settings, LLM agents largely fail to establish cooperation, with markets breaking down except under liability rules or when experts have efficiency-loving preferences. Repeated interactions solve consumer participation through competitive price reduction, but expert fraud remains entrenched absent explicit other-regarding preferences. LLM consumers focus narrowly on price levels rather than understanding strategic incentives embedded in markups, making them vulnerable to exploitation. Compared to human experiments, LLM markets exhibit substantially higher consumer participation but much greater market concentration, lower prices, and more polarized fraud patterns. The effect of institutions like verifiability and reputation is also much more ambiguous. Surplus shifts dramatically toward consumers under social-preference objectives. These findings suggest that institutional design for AI agent markets requires fundamentally different approaches than those effective for human actors, with social preference alignment emerging as the primary determinant of market efficiency. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.08853 |
| By: | Stark, Oded; Kosiorowski, Grzegorz |
| Abstract: | We establish a new approach to the modeling of cooperation, and we formulate a new solution concept for cooperative games. We do this by constructing a game of cooperation between individuals who exhibit distaste for relative deprivation, RD, in the sense that they experience stress when their income is lower than that of their comparators. In such a game, the sharing out of the jointly earned income between these individuals when they cooperate, as prescribed by standard solutions of cooperative games, might not be acceptable to the individuals. The stress from RD may have the upper hand. Measuring stress by RD, we thus model a setting in which two individuals who are concerned with being relatively deprived need to decide whether or not to cooperate. We term this setting an RD cooperative game, and we design a rule, the RD solution, for the distribution of the income yielded in this game. The RD solution prescribes cooperation in spite of cooperation-induced stress and preserves the spirit of standardness (an equal sharing of the gain that accrues from cooperation) for two-player games (a property shared by the main solution concepts for cooperative games). |
| Keywords: | Institutional and Behavioral Economics |
| Date: | 2026–03–17 |
| URL: | https://d.repec.org/n?u=RePEc:ags:ubzefd:396310 |
| By: | Chengqi Zang; Zhenghui Wang; Weitong Zhang |
| Abstract: | Automated Market Makers (AMMs) are a central component of decentralized exchanges, yet their equilibrium foundations and microeconomic mechanisms remain incompletely understood. This paper develops a dynamic equilibrium framework for Constant Function Market Makers (CFMMs) that formalizes the strategic interaction between arbitrageurs and liquidity providers (LPs) over time. We make three main contributions. First, we derive and empirically validate an intrinsic buy-sell asymmetry in CFMM price impact. Even in the absence of directional price movements, the geometric structure of constant product AMMs implies systematically different execution costs for buying and selling, a prediction that we confirm using on-chain transaction data. Second, we characterize the optimization problems of arbitrageurs and LPs in closed form, incorporating slippage and fees. In a baseline environment with only informed arbitrageurs, we show that providing liquidity is strictly dominated for LPs: arbitrage-driven price corrections generate negative jump returns that cannot be offset by fees, yielding a degenerate equilibrium with minimal liquidity provision. Third, motivated by empirical evidence, we extend the model to include agent heterogeneity, endogenous gas fees, and time varying volatility. In this extended environment, noise trading, arbitrage races, and execution costs jointly determine LP returns, giving rise to an interior equilibrium in which optimal liquidity provision is non-monotonic in volatility and exhibits a hump-shaped relationship. Overall, this paper builds a dynamic equilibrium model calibrated on extensive data that characterize the complex interaction between informed arbitrageurs, noise traders, and liquidity providers. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.08603 |