Volume 16, Issue 2 -

State space, a key element of the Subjective Expected Utility (SEU) theory, is not observable. This implies that, in order to test the SEU theory, it is necessary to assume some state space. Consequently, if the SEU theory is rejected, then it is appropriate to conduct a robustness check; that is, to search for a different state space and a probability over that state space which together do not lead to the rejection of the SEU theory. To find such state space and probability means to SEU-rationalize the agent’s behavior. I show how to conduct the process of SEU-rationalization and determine when an SEU-rationalization is possible.

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.

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$$n$$, 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 finishes. In contrast, multiple entries can occur and profitability is enhanced when agents are uncertain about n$$n$$. Under some conditions, a PRA may even yield higher expected revenues than standard auction formats.

Rational expectations are not required to follow from beliefs that explain well history, but just to correctly foresee the future. As a consequence, at a rational expectations equilibrium, the agents’ expectations may follow from beliefs that explain poorly the observed history, even among those rationalizing their choices. This paper shows, firstly, 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 allocations unsupported by rational expectations can be shown to be equilibrium outcomes. By means of this result, it is established, secondly, that adding the common knowledge of the rationality of the formation of expectations to that of the rationality of choices and of market clearing, still does not suffice to guarantee rational expectations. Finally, the rationally formed expectations equilibria produced in this paper exhibit a sunspot-like volatility that, interestingly enough, do not rely on an explicit sunspot mechanism.

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.

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.

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.

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.

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.

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.

This paper studies a competing-mechanism game for directed search markets in which multiple sellers simultaneously offer selling mechanisms to multiple buyers in order 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 mechanism that induces buyers’ ex-post truth telling on market information. It provides the characterization of all symmetric ex-post truth telling 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.

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.

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.

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.

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.