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 Economic TheoryJournal Prestige (SJR): 2.302 Citation Impact (citeScore): 1Number of Followers: 18      Hybrid journal (It can contain Open Access articles) ISSN (Print) 1432-0479 - ISSN (Online) 0938-2259 Published by Springer-Verlag  [2469 journals]
• Dynamically consistent objective and subjective rationality

Abstract: Abstract A group of experts, for instance climate scientists, is to advise a decision maker about the choice between two policies f and g. Consider the following decision rule. If all experts agree that the expected utility of f is higher than the expected utility of g, the unanimity rule applies, and f is chosen. Otherwise, the precautionary principle is implemented and the policy yielding the highest minimal expected utility is chosen. This decision rule may lead to time inconsistencies when adding an intermediate period of partial resolution of uncertainty. We show how to coherently reassess the initial set of experts’ beliefs so that precautionary choices become dynamically consistent: new beliefs should be added until one obtains the smallest “rectangular set” that contains the original one. Our analysis offers a novel behavioral characterization of rectangularity and a prescriptive way to aggregate opinions in order to avoid sure regret.
PubDate: 2022-06-02

• Minimal rationalizations

Abstract: Abstract I refine the multi-utility model and identify the minimal number W of total orders that is sufficient to rationalize a path independent choice function. This identification invokes the well-known pigeonhole principle: any dataset of size $$W+1$$ that is rationalized by W rankings must contain at least two distinct observations where the same ranking is maximized. In general, the index W can be huge even for reasonable choice functions, such as top-ten rules. If W is constrained, then minimal rationalizations can be found in polynomial time via an explicit focal algorithm. The axiom of Expansion (Sen’s $$\gamma$$ ) describes a special case where the index W must equal the capacity—the largest number of elements that may be selected together in a menu.
PubDate: 2022-06-01

• Equilibrium efficiency with secured and unsecured assets

Abstract: Abstract Economies with lack of commitment have been extensively studied using instruments like collateral and market exclusion. In collateral models agents cannot transfer wealth from the future and an efficient allocation may not be implementable even if markets are complete. We study an economy with secured and unsecured assets, the last ones are important in allowing transfers from the future. Bankruptcy punishment is the seizure of a fraction of agent’s income, this results in a non-convex budget set. We provide some conditions to implement the Arrow Debreu allocation (AD) with a large enough seizure rate, indirectly proving equilibrium existence. Further, we perform a numerical exercise with US data to prove that if agents in the lower income quartile have a positive probability of coming up to a larger one (more social mobility) then we can implement AD and the minimum seizure rate depends inversely on this probability.
PubDate: 2022-06-01

• The median rule in judgement aggregation

Abstract: Abstract A judgement aggregation rule takes the views of a collection of voters over a set of interconnected issues and yields a logically consistent collective view. The median rule is a judgement aggregation rule that selects the logically consistent view which minimizes the average distance to the views of the voters (where the “distance” between two views is the number of issues on which they disagree). In the special case of preference aggregation, this is called the Kemeny rule. We show that, under appropriate regularity conditions, the median rule is the unique judgement aggregation rule which satisfies three axioms: Ensemble Supermajority Efficiency, Reinforcement, and Continuity. Our analysis covers aggregation problems in which the consistency restrictions on input and output judgements may differ. We also allow for issues to be weighted, and provide numerous examples in which issue weights arise naturally.
PubDate: 2022-06-01

• Order-k rationality

Abstract: Abstract A decision maker (DM) may not perfectly maximize her preference over the feasible set. She may feel it is good enough to maximize her preference over a sufficiently large consideration set; or just require that her choice is sufficiently well-ranked (e.g., in the top quintile of options); or even endogenously determine a threshold for what is good enough, based on an initial sampling of the options. Heuristics such as these are all encompassed by a common theory of order-k rationality, which relaxes perfect optimization by only requiring choices from a set S to fall within the set’s top k(S) elements according to the DM’s preference ordering. Heuristics aside, this departure from rationality offers a natural way, in the classic ‘as if’ tradition, to gradually accommodate more choice patterns as k increases. We characterize the empirical content of order-k rationality (and related theories), and provide a tractable testing method which is comparable to the method of checking SARP.
PubDate: 2022-06-01

• An epistemic characterization of MACA

Abstract: Abstract Greenberg et al. (Econ Theory 40:91–112, 2009. https://doi.org/10.1007/s00199-008-0349-5) offered a solution concept of a “mutually acceptable course of action” (MACA) for situations in which rational individuals with different beliefs and views of the world agree to a shared course of action. In this paper we investigate epistemic conditions for MACA, in terms of information, beliefs, and rationality. Within a semantic framework, we formulate and show, using the notion of “lexicographic probability system” (LPS) introduced by Blume et al. (Econometrica 59:61–79, 1991a), that MACA is the logical consequence of “perfect” rationality, common belief in “perfect” rationality, and correct mutual belief in agreement on the shared course of action. We also demonstrate how epistemic characterizations for “perfect” versions of solution concepts can be derived from our epistemic characterization for MACA, by varying the degree of completeness of the shared course of action.
PubDate: 2022-06-01

• Discontinuous stochastic games

Abstract: Abstract We prove for a large class of stochastic games with discontinuous payoffs, a stationary Markov perfect equilibrium exists under the condition of “continuation payoff security.” This condition is easy to verify and holds in many economic games. Roughly, a game belongs to this class if for any action/state profiles and continuation payoff, a player can identify another action at the current stage with the payoff not much worse than her current one, even if other players perturb actions slightly. As an illustrative application of the equilibrium existence result, we provide a stochastic dynamic oligopoly model of firm entry, exit, and price competitions.
PubDate: 2022-06-01

• Equality and responsibility: ex ante and ex post redistribution mechanisms

Abstract: Abstract We study redistribution in a setting where individual responsibility and circumstance characteristics determine pre-tax income. We distinguish between ex ante and ex post versions of the key principles of compensation and reward. Furthermore, we distinguish between absolute and relative versions of reward. On the basis of these axioms, we provide characterizations of five familiar and two new redistribution mechanisms.
PubDate: 2022-06-01

• Shareholder heterogeneity, asymmetric information, and the equilibrium
manager

Abstract: Abstract Consider a firm owned by shareholders with heterogeneous beliefs and discount rates who delegate to a manager the choice of a production plan. The shareholders and the manager can trade contingent claims in a complete asset market. Shareholders cannot observe the chosen production plan and design a compensation scheme so that at equilibrium the manager chooses the plan they prefer and reveals it truthfully. We show that at equilibrium (i) profit is maximized, (ii) the manager gets a constant share of production, (iii) she has no incentive to trade. We then show that such equilibrium exists if and only if the manager has the same belief and discount rate as the representative shareholder. This allows us to characterize the required characteristics of the manager as a function of shareholders’ characteristics.
PubDate: 2022-06-01

• Auctioning risk: the all-pay auction under mean-variance preferences

Abstract: Abstract We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the unique symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniformly distributed valuations, we show that a variance-averse player always bids higher than her risk-neutral opponent with the same valuation. Utilising our analytically derived bidding functions we discuss all-pay auctions with variance-averse bidders from an auction designer’s perspective. We briefly consider possible extensions of our model, including noisy signals, type-dependent attitudes towards risk, and variance-seeking preferences.
PubDate: 2022-06-01

• Generic determinacy among stationary overlapping generations

Abstract: Abstract For simplicity or realism, determinacy analysis for overlapping-generations models typically aggregates all conceivable commodities into a fixed, finite number of types. Analysis finds robust examples with indeterminate equilibria, which suggests indeterminacy may be significant among overlapping generations. But does robust indeterminacy exist despite that simplifying aggregation' or because of aggregation' We suggest the latter with a generic determinacy theorem for overlapping-generations models with idealized competitive markets for a continuum of commodities in discrete or continuous time. And aggregating the continuum of commodities into a finite number of types transforms some of those generic, determinate models into ostensibly-robust indeterminacy examples.
PubDate: 2022-06-01

• Robust contracting in general contract spaces

Abstract: We consider a general framework of optimal mechanism design under adverse selection and ambiguity about the type distribution of agents. We prove the existence of optimal mechanisms under minimal assumptions on the contract space and prove that centralized contracting implemented via mechanisms is equivalent to delegated contracting implemented via a contract menu under these assumptions. Our abstract existence results are applied to a series of applications that include models of optimal risk sharing and of optimal portfolio delegation.
PubDate: 2022-06-01

• General equilibrium methodology applied to the design, implementation and
performance evaluation of large, multi-market and multi-unit policy
constrained auctions

Abstract: Abstract The paper reports on the methodology, experiments, design and outcome of a large auction with multiple, interdependent markets constructed from principles of general equilibrium as opposed to game theoretic auction theory. The auction distributed 18,788 entitlements to operate electronic gaming machines in 176 interconnected markets to 363 potential buyers representing gaming establishments subject to multiple policy constraints on the allocation. The multi-round auction, conducted in one day, produced over \$600M in revenue. All policy constraints were satisfied. Revealed dynamics of interim allocations and new statistical tests provide evidence of multiple market convergence hypothesized by classical principles and theories of general equilibrium. Results support the use of computer supported, “tâtonnement–like” market adjustments as a reliable empirical processes and not as purely theoretical constructs.
PubDate: 2022-05-31

• Equilibrium existence and expected payoffs in all-pay auctions with
constraints

Abstract: Abstract This paper introduces constraints on player choices in a broad class of all-pay auctions by allowing for upper bounds on players’ strategy sets. It proves the existence of equilibrium and derives simple closed-form formulae for players’ expected payoffs in any equilibrium. These formulae are straightforward to calculate in applications and do not require the derivation of the equilibrium or equilibria. This may be useful because: (i) In some applications players’ expected payoffs are the main item of interest. For example, one may be concerned about the effect of a policy on the market participants. In these cases the results can be used directly, bypassing the need for the full derivation of the equilibrium. (ii) In all-pay auctions, equilibrium is typically in mixed strategies. So in applications where the full characterization of the equilibrium is of interest, finding the players’ expected payoffs is a crucial first step in the derivation of the equilibrium.
PubDate: 2022-05-30

• Source and rank-dependent utility

Abstract: Abstract Foundations are provided for rank-dependent preferences within the popular two-stage framework of Anscombe–Aumann, in which risk and ambiguity feature as distinct sources of uncertainty. We advance the study of attitudes towards ambiguity without imposing expected utility for risk. As a result, in our general model, ambiguity attitude can be captured by non-additive subjective probabilities as under Choquet expected utility or by a specific utility for ambiguity as in recursive expected utility or, if required, by both. The key property for preferences builds on (discrete) rates of substitution which are standardly applied in economics. By demanding consistency for these rates of substitution across events and within or across sources of uncertainty, we obtain a model that nests popular theories for risk and ambiguity. This way, new possibilities for theoretical and empirical analyses of these theories emerge.
PubDate: 2022-05-26

• Randomizing without randomness

Abstract: Abstract We provide a methodology for eliciting utility midpoints from preferences, assuming that payoffs are consumption plans and that preferences satisfy a minimal form of additive separability. The methodology does not require any subjective or objective uncertainty. Thus, this construction of utility midpoints allows us to define mixtures of acts in a purely subjective fashion, without making any assumptions as to the decision maker’s reaction to the uncertainty that may be present. This approach makes it possible to provide a simple and fully subjective characterization of the second-order subjective expected utility model, allowing a clear distinction of such model from subjective expected utility.
PubDate: 2022-05-19

• Greater search cost reduces prices

Abstract: Abstract Consumers learn their valuation for most goods and services sooner than the price or the availability. In such markets, the optimal price of each firm falls in the search cost of the consumers, despite the exit of lower-value consumers when search becomes costlier. The reason is that a greater search cost causes inframarginal consumers to exit instead of switching firms. The marginal consumers respond less and may become more numerous. The more elastic demand raises prices. At a high enough search cost, no consumer switches. Each firm is a monopolist but sets a lower price than under competition over the switchers because demand changes shape when some consumers exit. Total surplus, demand and profits fall in the search cost. Consumer surplus and total surplus are higher when consumers do not know their valuations. The results are robust to various changes of the assumptions, for example some consumers having zero search cost or firms running out of stock.
PubDate: 2022-05-17

• Complete markets with bankruptcy risk and pecuniary default punishments

Abstract: Abstract For an infinite horizon economy with complete contingent markets, bankruptcy risk and default penalties (given by linear loss in utils), Araujo and Sandroni (Econometrica 67(3): 663–672, 1999) and Araujo et al. (J Econ Theory 165:242–256, 2016) show that if agents’ posteriors of their average probabilistic beliefs do not converge in the long run, then a competitive equilibrium without bankruptcy does not exist. The first contribution of this paper is to show that even if all agents have homogenous beliefs, existence of an equilibrium is guaranteed only under stringent conditions on default penalty rates. In order to discourage agents from making promises that they know in advance they will not be able to honor, default penalty rates must be large enough. Are the “real-life” default penalties sufficiently harsh' Since utility penalties are difficult to measure in practise, we propose to address this question by replacing the “reduced-form” linear loss in utils by pecuniary punishments in the line of Kehoe and Levine (Rev Econ Stud 60:865–888, 1993). We show that, independently of the severity of the pecuniary punishment, an equilibrium without bankruptcy never exists.
PubDate: 2022-04-30

• All probabilities are equal, but some probabilities are more equal than
others

Abstract: Abstract There are several procedures for selecting people at random. Modern and ancient stories as well as some experiments suggest that individuals may not view all such lotteries as “fair.” In this paper, we compare alternative procedures and show conditions under which some procedures are preferred to others. These procedures give all individuals an equal chance of being selected, but have different structures. We analyze these procedures as multi-stage lotteries. In line with previous literature, our analysis is based on the observation that multi-stage lotteries are not considered indifferent to their probabilistic one-stage representations.
PubDate: 2022-04-22

• The interaction of emotions and cost-shifting rules in civil litigation

Abstract: Abstract We model civil litigation as a simultaneous contest between a plaintiff and a defendant who have monetary and emotional preferences. The litigants’ emotional variables capture a non-monetary joy of winning and relational emotions toward each other. A contest success function (CSF) describes the litigants’ respective probabilities of success based on their endogenous litigation expenses and exogenous relative advantages. The model does not specify a functional form for the CSF. Instead, it accommodates any CSF that satisfies general and intuitive assumptions, which capture frequently-used functional forms. A cost-shifting rule allows the winner to recover an exogenous proportion of her litigation expenses from the loser. There exists a unique Nash equilibrium with positive expenses. In equilibrium, negative relational emotions (but not a positive joy of winning) amplify the effects of cost shifting, and vice versa. Thus negative relational emotions and positive cost shifting have a similar strategic role, and one can be a substitute for the other. If the litigants’ relative advantages are sufficiently balanced, then more cost shifting (or more negative relational emotions) increases total expenses in equilibrium.
PubDate: 2022-04-12
DOI: 10.1007/s00199-022-01426-4

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