Theoretical Economics: Recent Articles
http://econtheory.org
Articles recently published or accepted for publicationFri, 18 Apr 2014 21:05:00 EDTen-usSampling best response dynamics and deterministic equilibrium selection
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1405/10595/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1405/10595/1Wed, 09 Apr 2014 00:00:00 EDTby <b>Daisuke Oyama, William H. Sandholm, and Olivier Tercieux</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on April 9, 2014<p>Abstract: We consider a model of evolution in games in which a revising agent observes the actions of a random number of randomly sampled opponents and then chooses a best response to the distribution of actions in the sample. We provide a condition on the distribution of sample sizes under which an iterated $p$-dominant equilibrium is almost globally asymptotically stable under these dynamics. We show under an additional condition on the sample size distribution that in supermodular games, an almost globally asymptotically stable state must be an iterated $p$-dominant equilibrium. Since our selection results are for deterministic dynamics, any selected equilibrium is reached quickly; the long waiting times associated with equilibrium selection in stochastic stability models are absent.Three steps ahead
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1660/10538/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1660/10538/1Sun, 30 Mar 2014 00:00:00 EDTby <b>Yuval Heller</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on March 30, 2014<p>Abstract: We study a variant of the repeated Prisoner's Dilemma with uncertain horizon, in which each player chooses his foresight ability: that is, the timing in which he is informed about the realized length of the interaction. In addition, each player has an independent probability to observe the opponent's foresight ability. We show that if this probability is not too close to zero or one, then the game admits an evolutionarily stable strategy, in which agents who look one step ahead and agents who look three steps ahead co-exist. Moreover, this is the unique evolutionarily stable strategy in which players play efficiently at early stages of the interaction. We interpret our results as a novel evolutionary foundation for limited foresight, and as a new mechanism to induce cooperation in the repeated Prisoner's Dilemma..Breakdowns
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1670/10498/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1670/10498/1Mon, 24 Mar 2014 00:00:00 EDTby <b>Godfrey Keller and Sven Rady</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on March 24, 2014<p>Abstract: We study a continuous-time game of strategic experimentation in which the players try to assess the failure rate of some new equipment or technology. Breakdowns occur at the jump times of a Poisson process whose unknown intensity is either high or low. In marked contrast to existing models, we find that the cooperative value function does not exhibit smooth pasting at the efficient cut-off belief. This finding extends to the boundaries between continuation and stopping regions in Markov perfect equilibria. We characterize the unique symmetric equilibrium, construct a class of asymmetric equilibria, and elucidate the impact of bad versus good Poisson news on equilibrium outcomes.A folk theorem for stochastic games with infrequent state changes
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1512/10345/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1512/10345/1Wed, 26 Feb 2014 00:00:00 ESTby <b>Marcin Peski and Thomas Wiseman</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 26, 2014<p>Abstract: We characterize perfect public equilibrium payoffs in dynamic stochastic games, in the case where the length of the period shrinks, but players' rate of time discounting and the transition rate between states remain fixed. We present a meaningful definition of the feasible and individually rational payoff sets for this environment, and we prove a folk theorem under imperfect monitoring. Our setting differs significantly from the case considered in previous literature (Dutta (1995), Fudenberg and Yamamoto (2011), and Hörner, Sugaya, Takahashi, and Vieille (2011)) where players become very patient. In particular, the set of equilibrium payoffs typically depends on the initial state.Efficiency in repeated games with local interaction and uncertain local monitoring
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140279
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140279Wed, 05 Feb 2014 00:00:00 ESTby <b>Francesco Nava and Michele Piccione</b><p>Published in Theoretical Economics 9 (1), 279–312 (February 5, 2014)<p>Abstract: The paper discusses community enforcement in infinitely repeated, two-action games with local interaction and uncertain monitoring. Each player interacts with and observes only a fixed set of opponents, of whom he is privately informed. The main result shows that when beliefs about the monitoring structure have full support, efficiency can be sustained with sequential equilibria that are independent of the players' beliefs. Stronger results are obtained when only acyclic monitoring structures are allowed or players have unit discount rates. These equilibria satisfy numerous robustness properties.Two axiomatic approaches to the probabilistic serial mechanism
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140253
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140253Wed, 05 Feb 2014 00:00:00 ESTby <b>Tadashi Hashimoto, Daisuke Hirata, Onur Kesten, Morimitsu Kurino, and M. Utku Ünver</b><p>Published in Theoretical Economics 9 (1), 253–277 (February 5, 2014)<p>Abstract: This paper studies the problem of assigning a set of indivisible objects to a set of agents when monetary transfers are not allowed and agents reveal only ordinal preferences, but random assignments are possible. We offer two characterizations of the probabilistic serial mechanism, which assigns lotteries over objects. We show that it is the only mechanism satisfying non-wastefulness and ordinal fairness and the only mechanism satisfying sd-efficiency, sd-envy-freeness, and weak invariance or weak truncation robustness (where “sd” stands for first-order stochastic dominance).Regular prices and sales
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140217
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140217Wed, 05 Feb 2014 00:00:00 ESTby <b>Paul Heidhues and Botond Koszegi</b><p>Published in Theoretical Economics 9 (1), 217–251 (February 5, 2014)<p>Abstract: It is widely known that loss aversion leads individuals to dislike risk, and as has been argued by many researchers, in many instances this creates an incentive for firms to shield consumers and employees against economic risks. Complementing previous research, we show that consumer loss aversion can also have the opposite effect: it can lead a firm to optimally introduce risk into an otherwise deterministic environment. We consider a profit-maximizing monopolist selling to a loss-averse consumer, where (following \citeasnoun{koszegirabin}) we assume that the consumer's reference point is her recent rational expectations about the purchase. We establish that for any degree of consumer loss aversion, the monopolist's optimal price distribution consists of low and variable ``sale'' prices and a high and atomic ``regular'' price. Realizing that she will buy at the sale prices and hence that she will purchase with positive probability, the consumer chooses to avoid the painful uncertainty in whether she will get the product by buying also at the regular price. This pricing pattern is consistent with several recently documented facts regarding retailer pricing. We show that market power is crucial for this result: when firms compete ex ante for consumers, they choose deterministic prices.Endogenous agenda formation processes with the one-deviation property
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140187
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140187Wed, 05 Feb 2014 00:00:00 ESTby <b>Hannu Vartiainen</b><p>Published in Theoretical Economics 9 (1), 187–216 (February 5, 2014)<p>Abstract: We study collective choice via an endogenous agenda setting process. At each stage, a status quo is implemented unless it is replaced by a majority (winning coalition) with a new status quo outcome. The process continues until the prevailing status quo is no longer challenged. We impose a one-time deviation restriction on the feasible policy processes, reflecting farsightedness of voters. The key feature of the solution is history dependence. The existence of the solution is proven by iterating a version of the uncovered set. We show that the resulting fixed point is the largest set of outcomes that can be implemented via any policy process that meets the one-deviation restriction. Finally, we relate our solution to a concrete noncooperative model, and show that it can be interpreted as a refinement of the solution of Bernheim and Slavov (2009) in the context of repeated voting, and of the solution of Konishi and Ray (2003) and Vartiainen (2011) in the context of coalition formation.On the relationship between individual and group decisions
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140163
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140163Wed, 05 Feb 2014 00:00:00 ESTby <b>Joel Sobel</b><p>Published in Theoretical Economics 9 (1), 163–185 (February 5, 2014)<p>Abstract: Each member of a group receives a signal about the unknown state of the world and decides upon a utility-maximizing recommendation on the basis of that signal. The individuals have identical preferences. The group makes a decision that maximizes the common utility function assuming perfect pooling of the information in individual signals. An action profile is a group action and a recommendation from each individual. A collection of action profiles is rational if there exists an information structure under which all elements in the collection arise with positive probability. With no restrictions on the information structure, essentially all action profiles are rational. In fact, given any distribution over action profiles it is possible to find an information structure that approximates the distribution. In a monotone environment in which
individuals receive conditionally independent signals, essentially any single action profile is rational, although some collections of action profiles are not.On the consistency of data with bargaining theories
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140137
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140137Wed, 05 Feb 2014 00:00:00 ESTby <b>Christopher P. Chambers and Federico Echenique</b><p>Published in Theoretical Economics 9 (1), 137–162 (February 5, 2014)<p>Abstract: We develop observable restrictions of well-known theories of bargaining over money. We suppose that we observe a finite data set of bargaining outcomes, including data on allocations and disagreement points, but no information on utility functions. We ask when a given theory could generate the data. We show that if the disagreement point is fixed and symmetric, the Nash, utilitarian, and egalitarian max-min bargaining solutions are all observationally equivalent. Data compatible with these theories are in turn characterized by the property of comonotonicity of bargaining outcomes.
We establish different tests for each of the theories under consideration in the case in which the disagreement point can be variable. Our results are readily applicable, outside of the bargaining framework, to testing the tax code for compliance with the principle of equal loss.Persuasion and dynamic communication
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140099
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140099Wed, 05 Feb 2014 00:00:00 ESTby <b>Itai Sher</b><p>Published in Theoretical Economics 9 (1), 99–136 (February 5, 2014)<p>Abstract: A speaker attempts to persuade a listener to accept a request by presenting evidence. A persuasion rule specifies what evidence is persuasive. This paper compares static and dynamic rules. We present a single linear program (i) whose solution corresponds to the listener's optimal dynamic rule and (ii) whose solution with additional integer constraints corresponds to the optimal static rule. We present a condition--foresight--under which the optimal persuasion problem reduces to the classical maximum flow problem. This has various qualitative consequences, including the coincidence of optimal dynamic and static persuasion rules, elimination of the need for randomization, and symmetry of optimal static rules.Dynamics of information exchange in endogenous social networks
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140041
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140041Wed, 05 Feb 2014 00:00:00 ESTby <b>Daron Acemoglu, Kostas Bimpikis, and Asuman Ozdaglar</b><p>Published in Theoretical Economics 9 (1), 41–97 (February 5, 2014)<p>Abstract: We develop a model of information exchange through communication and investigate its implications for information aggregation in large societies. An \textit{underlying state} determines payoffs from different actions. Agents decide which others to form a costly \textit{communication link} with, incurring the associated cost. After receiving a \textit{private signal} correlated with the underlying state, they exchange information over the induced \textit{communication network} until taking an (irreversible) action. We define \textit{asymptotic learning} as the fraction of agents taking the correct action converging to one as a society grows large. Under truthful communication, we show that asymptotic learning occurs if (and under some additional conditions, also only if) in the induced communication network most agents are a short distance away from ``information hubs'', which receive and distribute a large amount of information. Asymptotic learning therefore
requires information to be aggregated in the hands of a few agents. We also show that while truthful communication may not always be a best response, it is an equilibrium when the communication network induces asymptotic learning. Moreover, we contrast equilibrium behavior with a socially optimal strategy profile, i.e., a profile that maximizes aggregate welfare. We show that when the network induces asymptotic learning, equilibrium behavior leads to maximum aggregate welfare, but
this may not be the case when asymptotic learning does not occur. We then provide a
systematic investigation of what types of cost structures and associated social cliques (consisting of groups of individuals linked to each other at zero cost, such as friendship networks) ensure the emergence of communication networks that lead to asymptotic learning. Our result shows that societies with too many and sufficiently large social cliques do not induce asymptotic learning, because each social clique would have sufficient information by itself, making communication with others
relatively unattractive. Asymptotic learning results either if social cliques are
not too large, in which case communication across cliques is encouraged, or if there exist very large cliques that act as information hubs.Nonexclusive competition under adverse selection
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140001
http://econtheory.org/ojs/index.php/te/article/viewArticle/20140001Wed, 05 Feb 2014 00:00:00 ESTby <b>Andrea Attar, Thomas Mariotti, and François Salanié</b><p>Published in Theoretical Economics 9 (1), 1–40 (February 5, 2014)<p>Abstract: A seller of a divisible good faces several identical buyers. The
quality of the good may be low or high, and is the seller's
private information. The seller has strictly convex preferences
that satisfy a single-crossing property. Buyers compete by posting
menus of nonexclusive contracts, so that the seller can
simultaneously and privately trade with several buyers. We provide
a necessary and sufficient condition for the existence of a
pure-strategy equilibrium. Aggregate equilibrium trades are
unique. Any traded contract must yield zero profit. If a quality
is actually traded, then it is efficiently traded. Depending on
parameters, both qualities may be traded, or only one of them, or
the market may break down to a no-trade equilibrium.Strategic uncertainty and the ex-post Nash property in large games
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1492/10101/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1492/10101/1Tue, 14 Jan 2014 00:00:00 ESTby <b>M. Ali Khan, Kali P. Rath, Yeneng Sun, and Haomiao Yu</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on January 14, 2014<p>Abstract: This paper elucidates the conceptual role that independent randomization plays in non-cooperative game theory. In the context of large (atomless) games in normal form, we present precise formalizations of the notions of a mixed strategy equilibrium (MSE), and of a randomized strategy equilibrium in distributional form (RSED). We offer a resolution of two long-standing open problems and show: (i) any MSE {\it induces} a RSED, and any RSED can be {\it lifted} to a MSE, (ii) a mixed strategy profile is a MSE if and only if
it has the ex-post Nash property. Our substantive results are a direct consequence of an {\it exact} law of large numbers (ELLN) that can be formalized in the analytic framework of a Fubini extension. We discuss how the \lq measurability' problem associated with a MSE of a large game is automatically resolved in such a framework. We also illustrate our ideas by an approximate result pertaining to a sequence of large but finite games.Serial dictatorship: the unique optimal allocation rule when information is endogenous
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1335/10100/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1335/10100/1Tue, 14 Jan 2014 00:00:00 ESTby <b>Sophie Bade</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on January 14, 2014<p>Abstract: The study of matching problems typically assumes that agents precisely know their preferences over the goods to be assigned. Within applied contexts, this assumption stands out as particularly counterfactual. Parents typically do invest a large amount of time and resources to find the best school for their children; doctors run costly tests to establish the best kidney for a given patient. In this paper I introduce the assumption of endogenous information acquisition into otherwise standard house allocation problems. I find that there is a unique ex-ante Pareto-optimal, strategy-proof and non-bossy allocation mechanism: serial dictatorship. This stands in sharp contrast to the very large set of such mechanisms for
house allocation problems without endogenous information acquisition.