Showing papers in "B E Journal of Theoretical Economics in 2016"

On the Impossibility of Fair Risk Allocation

Abstract: Measuring and allocating risk properly are crucial for performance evaluation and internal capital allocation of portfolios held by banks, insurance companies, investment funds and other entities subject to financial risk. We show that by using a coherent measure of risk it is impossible to allocate risk satisfying the natural requirements of (Solution) Core Compatibility, Equal Treatment Property and Strong Monotonicity. To obtain the result we characterize the Shapley value on the class of totally balanced games and also on the class of exact games.

Welfare-Improving Effect of a Small Number of Followers in a Stackelberg Model

Abstract: We investigate a Stackelberg oligopoly model in which m leaders and N−m$N - m$ followers compete. We find an important welfare effect that relates to anti-monopoly policies when we move from the Cournot model (m=N$m = N$) to the Stackelberg model: Exchanging a small number of Cournot firms for Stackelberg followers always improves welfare under moderate conditions. This contrasts with the welfare effect that can reduce welfare when a small number of Cournot firms are exchanged for Stackelberg leaders. The key result behind this asymmetry is the contrasting limit results in the cases where m converges to N and m converges to 0. We also discuss the optimal number of leaders and the integer constraint for the number of firms.

The predominant role of signal precision in experimental beauty contests

Abstract: The weight assigned to public information in Keynesian beauty contest depends on the signal precision and on the degree of strategic complementarities. This experimental study shows that the response of subjects to changes in the signal precision and in the degree of strategic complementarities is qualitatively consistent with theoretical predictions, though quantitatively weaker. The weaker subjects’ response to changes in the signal precision, however, mainly drives the weight observed in the experiment, making strategic complementarities and overreaction an issue of second order.

On the Rejectability of the Subjective Expected Utility Theory

Abstract: State space is an element of the Subjective Expected Utility (SEU) theory that is constructed in the agent’s mind but is not directly observable. The researcher who veries whether or not the agent violates the SEU theory could presume a state space but he risks reaching conclusions based on false assumptions. As an alternative approach, I propose SEU-rationalization: From the agent’s observable choices, the researcher constructs the state space and belief over that state space such that the agent appears to satisfy the SEU theory. I derive conditions under which it is possible to SEU-rationalize the agent’s behavior.

Optimal Penalties for Repeat Offenders – The Role of Offence History

Abstract: Within an infinite and a corresponding finite game framework we analyse intertemporal punishment for repeat offenders. The legal authority is assumed to maximize social welfare by minimizing the sum of harm from crimes and cost of punishment. We show that the time horizon considerably affects the structure of the optimal penalty scheme. In the finite game framework decreasing as well as escalating penalty schemes may be optimal. For the more appropriate infinite game framework we show three main results: First, any penalty scheme can be replaced by a (weakly) escalating penalty scheme that leads to the same criminal activity and the same social penalization cost. Second, the optimal penalty scheme is of the escalating type. Third, the socially optimal level of crime under escalating penalties may be higher than the level which would be optimal under uniform penalties.

The Rationality of Expectations Formation

Abstract: Rational expectations do not require beliefs to be consistent with history and with what agents can conclude from it. Actually, at a rational expectations equilibrium agents may hold beliefs that explain poorly the history they observe, even when restricted to only those rationalizing their choices. This paper shows that if agents hold rationally formed expectations instead —in the sense of following from beliefs that explain history better than any other beliefs justifying their choices— then additional allocations unsupported by rational expectations can be shown to be equilibrium outcomes. By means of this result, it is established too that adding common knowledge of the rationality of the formation of expectations —on top of that of rationality of choices and market clearing— does not suffice either to guarantee rational expectations. Interestingly, the rationally formed expectations equilibria produced in this paper exhibit a sunspot-like volatility that do not rely on an explicit sunspot mechanism.

Sellers’ Implicit Collusion in Directed Search Markets

Abstract: This paper studies a competing-mechanism game for directed search markets in which multiple sellers simultaneously offer selling mechanisms to multiple buyers to compete for trading opportunities and profits. Buyers approach any particular seller via directed search but there can be mis-coordination among buyers in the sense that they choose all the sellers offering the same mechanism with equal probability. A seller's mechanism can be sufficiently general to make his trading price contingent on participating buyers' messages, which may reflect changes in trading prices somewhere else. This allows sellers to sustain implicit collusion. This paper focuses on symmetric equilibria in which sellers offer the same ex-post incentive compatible mechanism. It provides the characterization of all symmetric ex-post equilibrium allocations and comparative statics regarding the range of equilibrium prices and profits. In a large market, the probability that sellers can sell their products at collusive prices depends on the ratio of buyers to sellers.

Price Reveal Auctions

Abstract: A price reveal auction (PRA) is a descending price auction in which the current price of the item on sale is hidden. Buyers can privately observe the price only by paying a fee, and every time an agent does so, the price falls by a predetermined amount. We show that if the number of participants, n, is common knowledge, then in equilibrium a PRA replicates the outcome of a posted price mechanism. In particular, at most one buyer observes the price and the auction immediately ?nishes. In contrast, multiple entries can occur and pro?tability is enhanced when agents are uncertain about n. Under some conditions, a PRA may even yield higher expected revenues than standard auction formats.

Loss Aversion and Consumption Plans with Stochastic Reference Points

Abstract: This paper studies the making of risky choices following loss aversion with endogenous reference expectations under the two schemes of state-independent and state-dependent stochastic reference points. Using a tractable, intertemporal choice model, this paper derives analytic solutions to show that, when loss aversion is high, the reference-dependent decision maker saves a markedly larger amount than is predicted by the standard model. When the loss aversion is low (i.e. the individual is loss-tolerant), the overall result is ambiguous, although the decision maker may deviate into consuming more; if he faces a small level of uncertainty relative to the intensity of his loss aversion, he may even do this by borrowing. Given the same loss aversion level, this study determines that, in the presence of positive state-dependence, the state-independent model generates greater deviation than the state-dependent one. Finally, this paper derives a two-period general equilibrium result with two agents who have different attitudes toward loss.

The Core of Aggregative Cooperative Games with Externalities

Abstract: This paper analyzes cooperative games with externalities generated by aggregative normal form games. We construct the characteristic function of a coalition S for various coalition formation rules and we examine the corresponding cores. We first show that the γ$$\gamma $$-core is non-empty provided each player’s payoff decreases in the sum of all players’ strategies. We generalize this result by showing that if S believes that the outside players form at least l(s)=n−s−(s−1)$$l(s) = n - s - (s - 1)$$ coalitions, then S has no incentive to deviate from the grand coalition and the corresponding core is non-empty (where n is the number of players in the game and s the number of members of S). We finally consider the class of linear aggregative games (Martimort and Stole 2010). In this case, if S believes that the outsiders form at least lˆ(s)=ns−1$$\widehat l(s) = {n \over s} - 1$$ coalitions [where lˆ(s)≤l(s)$$\widehat l(s) \le l(s)$$] a core non-emptiness result holds again.

Predicting Empirical Patterns in Viewing Japanese TV Dramas Using Case-Based Decision Theory

Abstract: This article empirically analyzes consumer behavior of viewing TV dramas using case-based decision theory. The theory addresses an economic situation with structural ignorance, where states of the world are not naturally given nor simply formulated for a decision-maker. Under this theory, consumers make decisions based on subjective evaluations of previous purchases for similar goods. Our empirical analysis is concerned with viewing decisions on getsuku, the Japanese TV dramas broadcast at 9 pm Monday by the Fuji Television Network. The regularity of the schedule and the long-sustaining popularity of the program enable us to easily collect consumer data. Then, we conduct a web survey of individual audiences on subjective evaluations of previously watched dramas. For our empirical analysis, we utilize a simple linear model of the case-based model that allows the incorporation of flexible inference techniques. Our results demonstrate better performance of the case-based models than models based on traditional expected utility theory regarding both statistical model selection and one-step-ahead prediction. We also reveal that the successful performance of the case-based model in our analysis depends on the availability of individual subjective evaluations and that it is difficult to replace the individual-specific information using demographic information and aggregate data.

University Competition and Transnational Education: The Choice of Branch Campus

Abstract: We present a theoretical framework in which an elitist and a non-elitist university in a developed country compete by choosing admission standards and deciding whether or not to open a branch campus in a developing country. Students from a developing country attend university if either a branch campus is opened or, they can afford to move to the developed country. We find that the elitist university is more likely to open a branch campus. This result is reversed if the gain, in terms of prestige, to attend the home campus of the elitist university more than offsets a student’s mobility costs. A rise in the graduate wage increases the incentive for opening a branch campus, although this incentive is stronger for the elitist university.

Strategic Delay in Global Games

Abstract: We study strategic uncertainty in an investment coordination game when players have the option to delay acting. Absent the option to delay, the global games literature shows that efficient equilibrium outcomes are possible only when they are also risk dominant. In contrast, we show that when delay is not too costly, strategic uncertainty can encourage delay in such a way that efficient investment occurs whenever it is “worth waiting for.”

Workplace Deviance and Recession

Abstract: We examine the relationship between the incidence of workplace deviance (on-the-job crime) and the state of the economy. A worker’s probability of future employment depends on whether she has been deviant as well as on the availability of jobs. Using a two period model we show that the net impact on deviant behavior to changes in unemployment can go either way depending upon the nature of the equilibrium. Two kinds of equilibria are possible. In one, a non-deviant’s probability of being employed increases as expected market conditions improve which lowers the incentive to be a deviant. In contrast, in the other kind of equilibrium, the deviant’s probability of being employed increases when market conditions improve which increases the incentive to be a deviant. In either case, there is a setup cost to deviant behavior and the attractiveness of incurring that increases with an increase in expected probability of future employment which unambiguously increases the incentive to be deviant. In the first kind of equilibrium, the two effects counteract each other, while in the second they reinforce each other. Finally, we characterize conditions under which an increase in optimism, i.e. a reduction in the probability of facing a recession unambiguously increases deviant behavior.

Relative Concerns on Visible Consumption: A Source of Economic Distortions

Abstract: Do relative concerns on visible consumption give rise to economic distortions? We re-examine the question posited by Arrow and Dasgupta (2009) building upon their general framework but recognizing that relative concerns can only apply to visible goods (e.g., cars, clothing, jewelry) and that households consume both visible and non-visible goods. Contrary to Arrow and Dasgupta (2009), the answer to this question turns to be always affirmative: the competitive equilibrium will always be different than the socially optimal one, since individuals do not take into account the negative externality they exert on others through the consumption of the visible good, while the social planner does. If one invokes separability assumptions, then the steady state competitive equilibrium consumption of non-visible goods will be strictly lower than the socially optimal one.

Informal Insurance Networks

Abstract: This paper develops a model of risk sharing in which each individual’s income shock is locally shared ex-post given an ex-ante strategically formed network. Emphasizing the informational constraint of the network such that transfers can only be contingent on local information, the model provides characterizations of the ex-ante efficient network and the pairwise stable networks. While it is no surprise that the unique efficient network is the complete graph, it is interesting that any pairwise stable network features low average degree and almost 2-regular structures, even under individual risk heterogeneity, and it tends to exhibit positive assortativity in terms of risk variances. If expected incomes are also locally shared in addition to income shocks, the pairwise stable network may become more densely connected, achieving efficiency under certain parameter values.

Profit Tax Evasion under Wage Bargaining Structure

Abstract: This paper deals with the neutrality of profit taxes levied on firms as well as the implications of tax evasion in economies with right-to-manage wage formation and efficient bargaining, respectively. Contrary to the outcome under competitive labor markets, we show that profit taxes are not neutral and the firm’s tax evasion decision is not separable from its production decision under right-to-manage wage formation, where a trade union and firm bargain over the wage rate (except in the special case of a monopoly union). A similar conclusion follows from an efficient bargaining model, where a trade union and firm bargain over both the wage rate and employment. In addition, wage bargaining plays an important role in determining the optimal profit tax and the enforcement policy.

Price and Inventory Dynamics in an Oligopoly Industry: A Framework for Commodity Markets

Abstract: This paper analyzes the interaction between price and inventory decisions in an oligopoly industry and its implications for the dynamics of prices. The work extends existing literature and especially the work of Hall and Rust (2007) to endogenous prices and strategic oligopoly competition. We show that the optimal decision rule is an (S,s) order policy and prices and inventory are strategic substitutes. Fixed ordering costs generate infrequent orders. Consequently, with strategic competition in prices, (S,s) inventory behavior together with demand uncertainty generates endogenous cyclical patterns in prices without any exogenous shocks. Hence, the developed model provides a promising framework for explaining dynamics of commodity markets and especially observed autocorrelation in price fluctuations.

The Dynamics of Incentives, Productivity, and Operational Risk

Abstract: This paper develops a dynamic principal-agent model and applies it to understand changes in labor productivity and operational risk. Our analysis demonstrates the importance of matching the terms of the job contract to the technology. Such issues would be especially important in service industries and in the knowledge-based economy where discretionary effort tends to play a greater role. We show that the production technology needs to be characterized by at least two parameters: one parameter which measures output independent of the worker’s effort and a second parameter which measures the effect of the effort. We solve for the Renegotiation-Proof Nash Equilibrium. We show that there can be a tension between increasing expected productivity and controlling costs per worker. Our analysis also adds to the growing interest in “operational risk”, which is associated with human actions. The closed form solutions provided by our model provide a natural way to consider the impact and possibility of this type of risk. Our analysis demonstrates why the effect of a negative event should be considered relative to a concept of normal which is based on an equilibrium, that uncertainty in the external environment enables (but does not cause) operational risk events and that both the equilibrium and the effects vary with the production technology.

A Model of Access in the Absence of Markets

Abstract: Economists have long known that properly designed markets allocate resources efficiently. However, in many circumstances markets are unfeasible. In this paper, we construct a general model of access which allows us to value different assignments when resources are allocated in the absence of markets. We demonstrate that marginal value schedules are far less useful in allocating access when property rights are unattainable. The criteria for optimal allocation combine information on both the marginal value schedules and the assignments determining the probabilities of access to the resource. Our approach allows us to rank rationing policies in a wide range of real-world, second-best settings.

On Nash Implementability in Allotment Economies under Domain Restrictions with Indifference

Abstract: In this paper we give a full characterization of Nash implementability of social choice correspondences (SCCs) in allotment economies on preference domains with private values and different types of indifference. We focus on single-peaked/single-plateaued preferences with worst indifferent allocations, single-troughed preferences and single-troughed preferences with best indifferent allocations. We begin by introducing a weak variant of no-veto power, called I∗${I^*}$-weak no-veto power, which form together with unanimity and a stronger version of Maskin monotonicity a sufficient condition for Nash implementation in general environment. We apply this result to the above preference domains and we prove that any SCC that has full range is Nash implementable if and only if it satisfies Maskin monotonicity. We examine the implementability of some well-known correspondences. We give examples of SCCs that are monotonic in the unrestricted domains and also monotonic in our setup, and we provide exemples of SCCs that are not monotonic in the unrestricted domains, but monotonic and therefore Nash implementable in our context. Finally, we give examples of SCCs that are not monotonic in the restricted domains and also not monotonic in our area, and therefore not Nash implementable.

Building Reputation in a War of Attrition Game: Hawkish or Dovish Stance?

Abstract: This paper examines a two-player war of attrition game in continuous-time, where (1) fighting (i. e., escalating the conflict) is costless for a player unless he quits, (2) at any point in time, each player can attack to his opponent and finalize the game with a costly war, (3) there is two-sided uncertainty regarding the players’ resolve, and (4) each player can choose his tone/stance (either hawkish or dovish) at the beginning of the game, which affects his quitting cost. The results imply that choosing hawkish (dovish) regime is optimal if and only if the benefit-cost ratio of the dispute is sufficiently high (low). If hawkish tone is going to give a player upper hand in a dispute, then choosing a more aggressive tone does not increase his payoff. However, choosing a more dovish tone increases a player’s payoff whenever dovish regime is optimal.

Dynamic Contests With Bankruptcy: The Despair Effect

Abstract: The first author acknowledges financial support from ECO2008-04756 (Grupo Consolidado-C), SGR2014-515 and PROMETEO/2013/037. The second author acknowledges financial support from ECO2014-57442-P.

Competition and Personality in a Restaurant Entry Game

Abstract: We explore the question of whether personality traits as measured by standard psychological tests are significant explanators of behavior in an entry game. The experimental data and psychological test results come from classroom experiments designed to teach the concepts of short and long run equilibrium in a competitive market. These experiments were conducted in 42 classroom sessions, each with about 35 students.

Teamwork Efficiency and Company Size

Abstract: We study how ownership structure and management objectives interact in determining the company size without assuming information constraints or any explicit costs of management. In symmetric agent economies, the optimal company size balances the returns to scale of the production function and the returns to collaboration efficiency. For a general class of payoff functions, we characterize the optimal company size, and we compare the optimal company size across different managerial objectives. We demonstrate the restrictiveness of common assumptions on effort aggregation (e.g., constant elasticity of effort substitution), and we show that common intuition (e.g., that corporate companies are more efficient and therefore will be larger than equal-share partnerships) might not hold in general.

Competition in a Posted-Salary Matching Market under Private Information

Abstract: We study a posted-salary labor market in which firms engage in salary competition. Firms’ preferences over workers are private information, creating uncertainty about competitive pressure for different workers. We consider a baseline 2-firm, 2-worker model, then extend the analysis to larger markets by replicating the baseline. We characterize the unique Bayesian- Nash equilibrium, in which each firm type chooses a distributional strategy with interval support in the salary space. The main result shows that competition is localized, in the sense that firm types with a common most preferred worker choose non-overlapping, adjacent supports. We also provide numerical results to show that the equilibrium strategies in finite replicated markets converge to the corresponding equilibrium strategies in a market with a continuum of firms and workers.

Tenacious selection of Nash equilibrium

Abstract: We propose a complexity measure and an associated refinement based on the observation that best responses with more variations call for more precise anticipation. The variations around strategy profiles are measured by considering the cardinalities of players' pure strategy best responses when others' behavior is perturbed. After showing that the resulting selection method displays desirable properties, it is employed to deliver a refinement: the tenacious selection of Nash equilibrium. We prove that it exists; does not have containment relations with perfection, properness, persistence and other refinements; and possesses some desirable features.

Political Support and Civil Disobedience: A Social Interaction Approach

Abstract: People may express their opposition to government policies by adopting different measures of civil disobedience. Tax compliance is an example of an economic decision that may be affected by anti-government sentiment. Embedding the interdependence between social policies, political opposition and tax compliance in a dynamic social interaction process, we characterize a unique stable steady state of such a process. We find that social interaction may be a very important factor shaping government policies, at times reverting conventional relations between social spending and government support.

On the Price of Commitment Assets in a General Equilibrium Model with Credit Constraints and Tempted Consumers

Abstract: We analyze a three period production economy, where households exhibit problems of self-control and face credit constraints. Apart from liquid assets, a single commitment (illiquid) asset is available that allows to commit to a planned consumption path. We compare general equilibrium allocations of the two models: one, where households choices are determined using Gul and Pesendorfer (2001, “Temptation and Self-Control.” Econometrica 69:1403–35; GP, henceforth) model and the other, where households choices come from a (β–δ) quasi-hyperbolic discounting model. Contrary to the results of Kocherlakota (2001, “Looking for Evidence of Time-Inconsistent Preferences in Asset Market Data.” Quarterly Review 13–24) or Gabrieli and Ghosal (2013, “Non-Existence of Competitive Equilibria with Dynamically Inconsistent Preferences.” Economic Theory 52:299–313), we show that, when a production sector is incorporated into the economy with commitment asset and credit constraints, we can restore the equilibrium existence (without recalling measure space of consumers (see Luttmer and Mariotti 2006, “Competitive Equilibrium When Preferences Change Over Time.” Economic Theory 27:679–90)) and unlike Gul and Pesendorfer (2004b, “Self Control, Revealed Preferences and Consumption Choice.” Review of Economic Studies 7:243–64), we show that the equilibrium allocations of both models (GP and β–δ) imply positive consumption of the commitment asset and corner consumption of one of the liquid assets. We also provide an example showing, when equilibrium allocations of both models are different.

Assortative Outsourcing with Exit

Abstract: A general framework is presented that incorporates dynamics and heterogeneity among both upstream suppliers and downstream producers to mimic the exit strategy of Hirschman (1970) in building vertical relations. An assortative matching develops between producers and suppliers based on their level of efficiency, which leads to an increase in the aggregate industrial productivity but also makes the distribution of firms more dispersed. Further experiments suggest that the nature of outsourcing relations is impacted in certain ways by business cycles and technological advancements.