Theoretical Economics: Recent Articles
http://econtheory.org
Articles recently published or accepted for publicationTue, 31 Mar 2015 12:05:00 EDTen-usA model of price discrimination under loss aversion and state-contingent reference points
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1737/12655/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1737/12655/1Sun, 15 Mar 2015 00:00:00 EDTby <b>Juan Carlos Carbajal and Jeffrey C. Ely</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on March 15, 2015<p>Abstract: We study optimal price discrimination when a monopolist faces a continuum of consumers with reference-dependent preferences. A consumer's valuation for product quality consists of an intrinsic valuation affected by a private state signal
(type), and a gain-loss valuation that depends on deviations of purchased quality from a reference point. Following Koszegi Rabin (2006), we consider loss-averse
buyers who evaluate gains and losses in terms of changes in the consumption valuation, but in our model each buyer evaluates consumption outcomes relative to his own state-contingent reference quality level. We capture the process by which reference qualities are formed via a reference consumption plan, and use a generalization of the Mirrlees representation of the indirect utility to fully characterize optimal contracts for loss-averse consumers. We find that, depending on the reference plan, optimal price discrimination may exhibit (i) downward distortions beyond the standard downward distortions due to screening; (ii) efficiency gains relative to second best contracts without
loss aversion; (iii) upward distortions above first best quality levels without loss aversion. We consider ex-ante and ex-post consistent contracts in which
quality offers by the firm coincide, in expectations or at every state realization, respectively, with the reference quality levels. We find the firm's unique preferred ex-ante and ex-post consistent contract menu and specify conditions under
which, for the second case, it also constitutes the consumers' preferred menu.The folk theorem with imperfect public information in continuous time
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1687/12628/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1687/12628/1Thu, 12 Mar 2015 00:00:00 EDTby <b>Benjamin Bernard and Christoph Frei</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on March 12, 2015<p>Abstract: We prove a folk theorem for multiplayer games in continuous time when players observe a public signal distorted by Brownian noise. The proof is based on a rigorous foundation for such continuous-time multiplayer games. We study in detail the relation between behaviour and mixed strategies, and the role of public randomization to move continuously across games within the same model.Fairness and externalities
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1651/12571/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1651/12571/1Mon, 02 Mar 2015 00:00:00 ESTby <b>Rodrigo A. Velez</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on March 2, 2015<p>Abstract: We study equitable allocation of indivisible goods and money among agents with other-regarding preferences. First, we argue that Foley's (1967) equity test, i.e., the requirement that no agent prefer the allocation obtained by swapping her consumption with another agent, is suitable for our environment. Then, we establish the existence of allocations passing this test for a general domain of preferences that accommodates prominent other-regarding preferences. Our results are relevant for equitable allocation among inequity-averse agents and in a domain with linear externalities that we introduce. Finally, we present conditions guaranteeing that these allocations are efficient.Efficient networks in games with local complementarities
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1742/12474/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1742/12474/1Tue, 17 Feb 2015 00:00:00 ESTby <b>Mohamed Belhaj, Sebatian Bervoets, and Frédéric Deroïan</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 17, 2015<p>Abstract: We address the problem of a planner looking for the efficient network when agents play a network game with local complementarities and links are costly. We show that for general network cost functions, efficient networks belong to the class of Nested-Split Graphs. Next, we refine our results and find that, depending on the specification of the network cost function, complete networks, core-periphery networks, dominant group architectures, quasi-star and quasi-complete networks can be efficient.Large deviations and stochastic stability in the small noise double limit
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1905/12476/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1905/12476/1Tue, 10 Feb 2015 00:00:00 ESTby <b>William H. Sandholm and Mathias Staudigl</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 10, 2015<p>Abstract: We consider a model of stochastic evolution under general noisy best response protocols, allowing the probabilities of suboptimal choices to depend on their payoff consequences. Our analysis focuses on behavior in the small noise double limit: we first take the noise level in agents' decisions to zero, and then take the population size to infinity. We show that in this double limit, escape from and transitions between equilibria can be described in terms of solutions to continuous optimal control problems. These are used in turn to characterize the asymptotics of the the stationary distribution, and so to determine the stochastically stable states.
We use these results to perform a complete analysis of evolution in three-strategy coordination games that satisfy the marginal bandwagon property and that have an interior equilibrium, with agents following the logit choice rule.Optimal delegated search with adverse selection and moral hazard
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1801/12375/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1801/12375/1Wed, 04 Feb 2015 00:00:00 ESTby <b>Robert Ulbricht</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 4, 2015<p>Abstract: The paper studies a model of delegated search. The distribution of search revenues is unknown to the principal and has to be elicited from the agent in order to design the optimal search policy. At the same time, the search process is unobservable, requiring search to be self-enforcing. The two information asymmetries are mutually enforcing each other; if one is relaxed, delegated search is efficient. With both asymmetries prevailing simultaneously, search is almost surely inefficient (it is stopped too early). Second-best remuneration is shown to optimally utilize a menu of simple bonus contracts. In contrast to standard adverse selection problems, indirect nonlinear tariffs are strictly dominated.Matching to share risk
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1914/12371/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1914/12371/1Wed, 04 Feb 2015 00:00:00 ESTby <b>Pierre-André Chiappori and Philip J. Reny</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 4, 2015<p>Abstract: We consider a matching model in which individuals belonging to two
populations (\textquotedblleft males\textquotedblright\ and
\textquotedblleft females\textquotedblright ) can match to share their
exogenous income risk. Within each population, individuals can be ranked by
risk aversion in the Arrow-Pratt sense. The model permits non transferable
utility, a context in which few general results have previously been
derived. We show that in this framework a stable matching always exists, it
is generically unique, and it is negatively assortative: for any two matched
couples, the more risk averse male is matched with the less risk averse
female.Sampling best response dynamics and deterministic equilibrium selection
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150243
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150243Fri, 30 Jan 2015 00:00:00 ESTby <b>Daisuke Oyama, William H. Sandholm, and Olivier Tercieux</b><p>Published in Theoretical Economics 10 (1), 243–281 (January 30, 2015)<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/viewArticle/20150203
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150203Fri, 30 Jan 2015 00:00:00 ESTby <b>Yuval Heller</b><p>Published in Theoretical Economics 10 (1), 203–241 (January 30, 2015)<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/viewArticle/20150175
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150175Fri, 30 Jan 2015 00:00:00 ESTby <b>Godfrey Keller and Sven Rady</b><p>Published in Theoretical Economics 10 (1), 175–202 (January 30, 2015)<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/viewArticle/20150131
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150131Fri, 30 Jan 2015 00:00:00 ESTby <b>Marcin Peski and Thomas Wiseman</b><p>Published in Theoretical Economics 10 (1), 131–173 (January 30, 2015)<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.Strategic uncertainty and the ex-post Nash property in large games
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150103
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150103Fri, 30 Jan 2015 00:00:00 ESTby <b>M. Ali Khan, Kali P. Rath, Yeneng Sun, and Haomiao Yu</b><p>Published in Theoretical Economics 10 (1), 103–129 (January 30, 2015)<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.Communication with tokens in repeated games on networks
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150067
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150067Fri, 30 Jan 2015 00:00:00 ESTby <b>Alexander Wolitzky</b><p>Published in Theoretical Economics 10 (1), 67–101 (January 30, 2015)<p>Abstract: A key obstacle to coordination and cooperation in many networked environments is that behavior in each bilateral relationship is not observable to individuals outside that relationship: that is, information is local. This paper investigates when players can use communication to replicate any outcome that would have been sustainable were this information public. A benchmark result is that if only cheap talk communication is possible then public information can only be replicated if the network is 2-connected: that is, if no player can prevent the flow of information to another. In contrast, the main result is that public information can always be replicated if in addition to cheap talk the players have access to undifferentiated tokens that can be freely transferred among neighbors (which bear some resemblance to certain models of fiat money). Sufficient conditions are provided for such tokens to expand the equilibrium payoff set, relative to what would be achievable without explicit communication or with cheap talk communication only.Is utility transferable? a revealed preference analysis
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150051
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150051Fri, 30 Jan 2015 00:00:00 ESTby <b>Laurens Cherchye, Thomas Demuynck, and Bram De Rock</b><p>Published in Theoretical Economics 10 (1), 51–65 (January 30, 2015)<p>Abstract: The transferable utility hypothesis underlies important theoretical results in household economics. We provide a revealed preference framework for bringing this (theoretically appealing) hypothesis to observational data. We establish revealed preference conditions that must be satisfied for observed household consumption behavior to be consistent with transferable utility. We also show that these conditions are testable by means of integer programming methods.Unraveling in a repeated moral hazard model with multiple agents
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150011
http://econtheory.org/ojs/index.php/te/article/viewArticle/20150011Fri, 30 Jan 2015 00:00:00 ESTby <b>Madhav Chandrasekher</b><p>Published in Theoretical Economics 10 (1), 11–49 (January 30, 2015)<p>Abstract: This paper studies an infinite horizon repeated moral hazard problem where a single principal employs several agents. We assume that the principal cannot observe the agents' effort choices; however, agents can observe each other and can be contractually required to make observation reports to the principal. Observation reports, if truthful, can serve as a monitoring instrument to discipline the agents. However, reports are cheap talk so that it is also possible for agents to collude, i.e. where they shirk, earn rents, and report otherwise to the principal. The main result of the paper constructs a class of collusion-proof contracts with two properties. First, equilibrium payoffs to both the principal and the agents approach their first-best benchmarks as the discount factor tends to unity. These payoff bounds apply to all subgame perfect equilibria in the game induced by the contract. Second, while equilibria themselves depend on the discount factor, the contract which induces these equilibria is independent of the discount factor.