Theoretical Economics: Recent Articles
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Articles recently published or accepted for publicationMon, 27 Feb 2017 01:05:00 ESTen-usRobust contracting under common value uncertainty
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/2385/17156/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/2385/17156/1Thu, 16 Feb 2017 00:00:00 ESTby <b>Sarah Auster</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 16, 2017<p>Abstract: A buyer makes an offer to a privately informed seller for a good of uncertain quality. Quality determines both the seller's valuation and the buyer's valuation and the buyer evaluates each contract according to its worst-case performance over a set of probability distributions. The paper demonstrates that the contract that maximizes the minimum payoff over all possible probability distributions of quality is a screening menu that separates all types, whereas the optimal contract for any given probability distribution is a posted price, which induces bunching. Using the ϵ-contamination model, according to which the buyer's utility is a weighted average of his single prior expected utility and the worst-case scenario, the analysis further shows that for intermediate degrees of confidence the optimal mechanism combines features of both of these contracts.Temptation with uncertain normative preference
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1900/17147/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1900/17147/1Tue, 14 Feb 2017 00:00:00 ESTby <b>John E. Stovall</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 14, 2017<p>Abstract: We model a decision maker who anticipates being tempted but is also uncertain about what is normatively best. Our model is an extended version of Gul and Pesendorfer's (2001) with three time periods: in the ex ante period the agent chooses a set of menus, in the interim period she chooses a menu from this set, and in the final period she chooses from the menu. We posit axioms from the ex ante perspective. Our main axioms on preference state that the agent prefers flexibility in the ex ante period and the option to commit in the interim period. Our representation is a generalization of Dekel et al.'s (2009)and identifies the agent's multiple normative preferences and multiple temptations. We also characterize the uncertain normative preference analogue to the representation of Stovall (2010). Finally, we characterize the special case where normative preference is not uncertain. This special case allows us to uniquely identify all components of the representations of Dekel et al. (2009) and Stovall (2010).The limit of discounted utilitarianism
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1836/17146/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/1836/17146/1Tue, 14 Feb 2017 00:00:00 ESTby <b>Adam Jonsson and Mark Voorneveld</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 14, 2017<p>Abstract: This paper presents an infinite-horizon version of intergenerational utilitarianism. By studying discounted utilitarianism as the discount factor tends to one, we obtain a new welfare criterion: limit-discounted utilitarianism (LDU). We show that LDU meets standard assumptions of efficiency, equity, and interpersonal comparability, but allows us to compare more pairs of utility streams than commonly-used utilitarian criteria, including the overtaking criterion and the catching-up criterion. We also introduce a principle of compensation for postponements of utility streams and use it to characterize the LDU criterion on a restricted domain.Who goes first? Strategic delay under information asymmetry
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/2171/17119/1
http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/2171/17119/1Fri, 10 Feb 2017 00:00:00 ESTby <b>Peter A. Wagner</b><p>To be published in Theoretical Economics. First available as a "Paper to appear" on February 10, 2017<p>Abstract: This paper considers a timing game in which heterogeneously informed agents have the option to delay an investment strategically to learn about its uncertain return from the experience of others. I study the effects of information exchange through strategic delay on long-run beliefs and outcomes. Investment decisions are delayed when the information structure prohibits informational cascades. When there is only moderate inequality in the distribution of information, equilibrium beliefs converge in the long-run, and there is an insufficient aggregate investment relative to the efficient benchmark. When the distribution of information is more skewed, there can be a persistent wedge in posterior beliefs between well and poorly informed agents, because the poorly informed tend to ``drive out'' the well-informed.Career concerns with exponential learning
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170425
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170425Wed, 01 Feb 2017 00:00:00 ESTby <b>Alessandro Bonatti and Johannes Hörner</b><p>Published in Theoretical Economics 12 (1), 425–475 (February 1, 2017)<p>Abstract: This paper examines the interplay between career concerns and market structure. Ability and effort are complements: effort increases the probability that a skilled agent achieves a one-time breakthrough. Wages are based on assessed ability and on expected output. Effort levels at different times are strategic substitutes and, as a result, the unique equilibrium effort and wage paths are single-peaked with seniority. Moreover, for any wage profile, the agent works too little, too late. Commitment to wages by competing firms mitigates these inefficiencies. In that case, the optimal contract features piecewise constant wages and severance pay.Allais, Ellsberg, and preferences for hedging
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170377
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170377Wed, 01 Feb 2017 00:00:00 ESTby <b>Mark Dean and Pietro Ortoleva</b><p>Published in Theoretical Economics 12 (1), 377–424 (February 1, 2017)<p>Abstract: Two of the most well-known regularities observed in preferences under risk and uncertainty are ambiguity aversion and the Allais paradox. We study the behavior of an agent who can display both tendencies simultaneously. We introduce a novel notion of preference for hedging that applies to both objective lotteries and uncertain acts. We show that this axiom, together with other standard ones, is equivalent to a representation in which the agent 1) evaluates ambiguity using multiple priors, as in the model of Gilboa and Schmeidler [1989] and 2) evaluates objective lotteries by distorting probabilities, as in the Rank Dependent Utility model, but using the worst from a set of distortions. We show that a preference for hedging is not sufficient to guarantee Ellsberg-like behavior if the agent violates Expected Utility for objective lotteries; we provide a novel axiom that characterizes this case, linking the distortions for objective and subjective betsHow do you defend a network?
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170331
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170331Wed, 01 Feb 2017 00:00:00 ESTby <b>Marcin Konrad Dziubiński and Sanjeev Goyal</b><p>Published in Theoretical Economics 12 (1), 331–376 (February 1, 2017)<p>Abstract: Modern economies rely heavily on their infrastructure networks. These
networks face threats ranging from natural disasters to human attacks. As
networks are pervasive, the investments needed to protect them are very large;
this motivates the study of targeted defence. What are the ‘key’ nodes to
defend to maximize functionality of the network? What are the incentives of
individual nodes to protect themselves in a networked environment and how do
these incentives correspond to collective welfare?
We provide a characterization of equilibrium attack and defence in terms of
two classical concepts in graph theory – separators and transversals. We use
this characterization to study the intensity of conflict (the resources spent on
attack and defence) and the prospects of active conflict (when both adversary
and defender target nodes for action) in networks. Finally, we show that welfare
costs of decentralized defence can be very largeIncentive compatible allocation and exchange of discrete resources
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170287
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170287Wed, 01 Feb 2017 00:00:00 ESTby <b>Marek Pycia and M. Utku Ünver</b><p>Published in Theoretical Economics 12 (1), 287–329 (February 1, 2017)<p>Abstract: The allocation and exchange of discrete resources, such as transplant
organs, public housing, dormitory rooms, and many other resources
for which agents have single-unit demand, is often conducted via direct
mechanisms without monetary transfers. Incentive compatibility and
efficiency are primary concerns when designing such mechanisms. We
construct the full class of group strategy-proof and Pareto efficient
mechanisms and show that each of them can be implemented by endowing
agents with control rights over resources. This new class, which we
call trading cycles, contains new mechanisms as well as known mechanisms
such as top trading cycles, serial dictatorships, and hierarchical
exchange. We illustrate how one can use our construction to show what
can and what cannot be achieved in a variety of allocation and exchange
problems, and we provide an example in which the new trading-cycles
mechanisms are more Lorenz equitable than all previously known mechanisms.Repeated Nash implementation
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170249
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170249Wed, 01 Feb 2017 00:00:00 ESTby <b>Claudio Mezzetti and Ludovic Renou</b><p>Published in Theoretical Economics 12 (1), 249–285 (February 1, 2017)<p>Abstract: We study the repeated implementation of social choice functions in environments with complete information and changing preferences. We define dynamic monotonicity, a natural but non-trivial dynamic extension of Maskin monotonicity, and show that it is necessary and almost sufficient for repeated Nash implementation, regardless of whether the horizon is finite or infinite and whether the discount factor is “large” or “small.”Sequential voting and agenda manipulation
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170211
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170211Wed, 01 Feb 2017 00:00:00 ESTby <b>Salvador Barberà and Anke Gerber</b><p>Published in Theoretical Economics 12 (1), 211–247 (February 1, 2017)<p>Abstract: We study the possibilities for agenda manipulation under strategic voting for two prominent sequential voting procedures, the amendment and the successive procedure. We show that a well-known result for tournaments, namely that the successive procedure is (weakly) more manipulable than the amendment procedure at any given preference profile, extends to arbitrary majority quotas. Moreover, our characterizations of the attainable outcomes for arbitrary quotas allow us to compare the possibilities for manipulation across different quotas. It turns out that the simple majority quota maximizes the domain of preference profiles for which neither procedure is manipulable, but at the same time neither the simple majority quota nor any other quota uniformly minimize the scope of manipulation, once this becomes possible. Hence, quite surprisingly, simple majority voting is not necessarily the optimal choice of a society that is concerned about agenda manipulation.Directives, expressives, and motivation
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170175
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170175Wed, 01 Feb 2017 00:00:00 ESTby <b>Toru Suzuki</b><p>Published in Theoretical Economics 12 (1), 175–210 (February 1, 2017)<p>Abstract: When an agent's motivation is sensitive to how his supervisor thinks about the agent's competence, the supervisor has to take into account both informational and expressive contents of her message to the agent. This paper shows that the supervisor can credibly express her trust in the agent's ability only by being unclear about what to do. Suggesting what to do, i.e., "directives," could reveal the supervisor's "distrust" and reduce the agent's equilibrium effort level even though it provides useful information about the decision environment. There is also an equilibrium in which directives are neutral in expressive content. However, it is shown that neologism proofness favors equilibria in which directives are double-edged swords.Monopolistic nonlinear pricing with consumer entry
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170141
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170141Wed, 01 Feb 2017 00:00:00 ESTby <b>Lixin Ye and Chenglin Zhang</b><p>Published in Theoretical Economics 12 (1), 141–173 (February 1, 2017)<p>Abstract: We consider consumer entry in the canonical monopolistic nonlinear pricing
model (Mussa and Rosen, 1978) wherein consumers learn their preference
"types" after incurring privately known entry costs. We show that by taking into account consumer entry, the nature of optimal nonlinear pricing contracts changes significantly: compared to the benchmark without costly entry, in our model both quality distortion and market exclusion are reduced, sorting is more likely, and whenever bunching occurs, the bunching interval is necessarily smaller. Additionally, under certain conditions the monopoly solution may even achieve the first best (i.e., production efficiency). We also demonstrate that the optimal monopoly solutions can be ranked according to inverse hazard rate functions of the entry cost, which suggests an interesting dynamic for monopolistic nonlinear pricing with consumer entry.Dynamic contracting: an irrelevance theorem
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170109
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170109Wed, 01 Feb 2017 00:00:00 ESTby <b>Péter Eső and Balázs Szentes</b><p>Published in Theoretical Economics 12 (1), 109–139 (February 1, 2017)<p>Abstract: This paper generalizes a conceptual insight in dynamic contracting with quasilinear payoffs: the principal does not need to pay any information rents for extracting the agent's `new' private information obtained after signing the contract. This is shown in a general model in which the agent's type stochastically evolves over time, and her payoff (which is linear in transfers) depends on the entire history of private and any contractible information, contractible decisions and her hidden actions. The contract is offered by the principal in the presence of initial informational asymmetry. The model can be transformed into an equivalent one where the agent's subsequent information is independent in each period (type orthogonalization). We show that for any fixed decision-action rule implemented by a mechanism, the agent's rents (as well as the principal's maximal revenue) are the same as if the principal could observe and contract on the agent's orthogonalised types after the initial period. We also show that any monotonic decision-action rule can be implemented in a Markovian environment satisfying certain regularity conditions, and provide a simple `recipe' for solving such
dynamic contracting problems.On the existence of approximate equilibria and sharing rule solutions in discontinuous games
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170079
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170079Wed, 01 Feb 2017 00:00:00 ESTby <b>Philippe Bich and Rida Laraki</b><p>Published in Theoretical Economics 12 (1), 79–108 (February 1, 2017)<p>Abstract: This paper studies the existence of some known equilibrium solution concepts in a large class of economic models with discontinuous payoff functions. The issue is well understood for Nash equilibria, thanks to Reny's better-reply security condition, and its recent improvements. We propose new approaches, related to Reny's work, and obtain tight conditions for the existence of an approximate equilibrium and of a sharing rule solution in pure and mixed strategies (Simon and Zame). As byproducts, we prove that many auction games with correlated types admit an approximate equilibrium, and that many competition models with discontinuous preferences have a sharing rule solution.Auction design without quasilinear preferences
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170053
http://econtheory.org/ojs/index.php/te/article/viewArticle/20170053Wed, 01 Feb 2017 00:00:00 ESTby <b>Brian Baisa</b><p>Published in Theoretical Economics 12 (1), 53–78 (February 1, 2017)<p>Abstract: I study the canonical private value auction model for a single good without the quasilinearity restriction. I assume only that bidders are risk averse and the indivisible good for sale is a normal good. I show removing quasilinearity leads to qualitatively different solutions to the auction design problem. Expected revenue is no longer maximized using standard auctions that allocate the good to the highest bidder. Instead, the auctioneer better exploits bidder preferences by using a mechanism that allocates the good to one of many different bidders, each with strictly positive probability. I introduce a probability demand mechanism that treats probabilities of winning the indivisible good like a divisible good in net supply one. With enough bidders, it has greater expected revenues than any standard auction; and under complete information, it implements a Pareto efficient allocation.