Volume 18, Issue 1 -

In the canonical model of frictionless markets, arbitrage is usually taken to force all trades of homogeneous goods to occur at essentially the same price. In the real world, however, arbitrage possibilities are often severely restricted and this may lead to substantial price heterogeneity. Here we focus on frictions that can be modeled as the bargaining constraints induced by an incomplete trading network. In this context, the interplay among the architecture of the trading network, the buyers’ valuations, and the sellers’ costs shapes the effective arbitrage possibilities of the economy. We characterize the configurations that, at an intertemporal bargaining equilibrium, lead to a uniform price. Conceptually, this characterization involves studying how the network positions and valuations/costs of any given set of buyers and sellers affect their collective bargaining power relative to a notional or benchmark situation in which the connectivity is complete. Mathematically, the characterizing conditions can be understood as price-based counterparts of those identified by the celebrated Marriage Theorem in matching theory.

Abstract: We consider a frictional market where an element of the terms of trade (price or quantity) is posted ex-ante (before the matching process) while the other is determined ex-post. By doing so, sellers can exploit their local monopoly power by adjusting prices or quantities once the local demand is realized. We find that when sellers can adjust quantities ex-post, there exists a unique symmetric equilibrium where an increase in the buyer-seller ratio leads to higher quantities and prices. When buyers instead can choose quantities ex-post, a higher buyer-seller ratio leads to higher prices but lower traded quantities. These equilibrium allocations are generically constrained inefficient in both intensive and extensive margins. When sellers post ex-ante quantities and adjust prices ex-post, a symmetric equilibrium exists where buyers obtain no surplus from trade. This equilibrium allocation is not constrained efficient either. If buyers choose prices ex-post, there is no trade in equilibrium when entry is costly.

The previous literature on general equilibrium has assumed that all traders belong to a single market. However, traders often participate in more than one exchange to diversify their portfolios. Moreover, there is evidence that the security listings of exchanges overlap. Our model captures these facts: there are multiple exchanges, the same security is listed in different exchanges, and traders can belong to more than one exchange. We show that, in the presence of convex transaction costs, there exists an equilibrium, and that individual demand is a continuously differentiable function in prices.

In this paper, we introduce production into the standard general equilibrium model with asymmetric information, which was proposed by Dubey et al. (Cowles Foundation Discussion Paper 2000; Econometrica 2005). In such an economy, there is no rational explanation for producers’ delivery upper bounds while the endowments naturally limit consumers’ deliveries. However, we show that the typical equilibrium allocation of the asymmetric information economy necessarily and substantially depends on such exogenous upper bounds (Example 1 and Theorem 1). In other words, an equilibrium existence theorem without such upper bounds, even if such exists, will typically fail to treat the asymmetric information problem, e.g., the adverse selection problem. Hence, to treat the equilibrium existence problem under the informational asymmetry appropriately, we have to extend the standard model so that the delivery upper bounds need not to be specified explicitly. For this purpose, we propose a quite natural and realistic assumption with respect to the technological condition related to the market delivery, i.e., the existence of some small standardization, commoditization, and/or transaction costs of market deliveries is shown to be sufficient (Theorem 3).

In a stochastic economy, the rebalancing of short and long term government debt positions can have real effects when markets are incomplete. This paper analyzes both stationary and dynamic policy rules for the term structure of interest rates. After proving the existence of a recursive representation of equilibrium, necessary conditions for Pareto efficiency are characterized. The necessary conditions are equivalent for both stationary and dynamic policy rules.

Debt, as one of basic human relations, has profound effects on economic growth. Debt accumulation in the global economy was modeled by the stochastic logistic equation reflecting causality between leverage and its rate of change. The model, identifying interactions and feedbacks in aggregate behaviour of creditors and borrowers, addressed various issues of macrofinancial stability. Qualitatively diverse patterns, including the Wicksellian (normal) market, the Minsky financial bubbles and the Fisherian debt-deflation, were discerned by appropriate combinations of rates of return, spreads and leverage. The Kolmogorov-Fokker-Plank equation was used to find out the stationary gamma distribution of leverage that was instrumental for the evaluation of appropriate failure and survival functions. Two patterns corresponding to different forms of a stationary gamma distribution were recognized in the long run leverage dynamics and were simulated as scenarios of a possible system evolution. In particular, empirically parameterized asymptotical distribution indicated excessive leverage and unsustainable global debt accumulation. It underlined the necessity of comprehensive reforms aiming to decrease uncertainty, debt and leverage. Assuming these reforms were successfully implemented, global leverage distributions would have converged in the long run to a peaked gamma distribution with the mode identical to the anchor leverage. The latter corresponded to a balanced long run debt demand and supply, hence to fairly evaluated financial assets fully collateralized by real resources. A particular case of macrofinancial Tobin’s q -coefficients following the Ornstein-Ulenbeck process was studied to evaluate a reasonable range of squeezing the bloated world finance. The model was verified on data published by the IMF in Global Financial Stability Reports for the period 2003–2013.

This paper addresses conflicts between two groups when trying to win a group-specific public good prize. We analyze how these contests are affected when groups are led by an organizer with the capacity to impose transfers to share the costs of individual efforts within the group. The technology of conflict that we use is the Tullock Contest Success Function with a perfect substitute impact function. We first describe centralized levels of group effort - those that organizers wish to attain - and compare with efforts when individuals act non-cooperatively. In the model a group underperforms when effort exerted by individuals in the non-cooperative setting is smaller than the centralized group effort. Otherwise, the group outperforms. We show that the larger group always underperforms, while the smaller one only does so if its size is sufficiently close to the larger group. Second, we characterize cost sharing schemes that implement group centralized levels of effort. These schemes consist of sharing costs in an egalitarian way. And third, we examine the game in which organizers compete strategically in setting the cost-sharing scheme of their group. We show that while the cost-sharing scheme is the same for the larger group as in the implementation case, it is different for the smaller group.

To demonstrate resolution and psychological strength, players often engage in pre-contest communication by publicly stating their desire to win an upcoming contest. Existing explanations for this phenomenon revolve around incomplete information and signaling. In this paper, I offer a complementary explanation that does not rely on signaling. Within a complete information setup, I show that players may have an incentive for pre-contest communication if, in addition to an audience (reputational) cost when the statement does not materialize, the players also incur an audience reward (credibility gain) when the statement materializes.

Our study concerns a collective decision-making model for the collection of information from two voters. Both voters, who tend to make the same voting choices because of their conformity preferences, collect information about the consequences of a project and then vote on the project. We focus on an informative equilibrium in which voters vote informatively using pure strategies. This is a symmetric Nash equilibrium. Our result is interesting as it shows that nonconformist voters exert less effort from a social perspective because of a positive externality that results in the free-rider problem, while conformity preferences can help to improve the sum of the voters’ expected payoffs from the social perspective. This is because conformity preferences may alleviate the free-rider problem associated with coordination (making the same vote). Specifically, conformity preferences give special importance to the correlation between voters’ signals, even if this correlation is unrelated to the accuracy of the signals. Furthermore, we present the exact conformity preference level which helps voters to exert an optimal effort level that maximizes the sum of the voters’ expected payoffs compared to the nonconformist case. In addition, we graphically illustrate comparative statics on effort levels in informative equilibria.

The consumption functions in Becker and Murphy's (1988) rational addiction theory are subjected to an extensive comparative dynamics analysis. They are shown to be intrinsically characterized by a symmetric and positive semidefinite matrix of generalized Slutsky-like terms. In contrast, the typical comparative dynamics expressions, comprised of the individual partial derivatives of the consumption functions with respect to the parameters and state variables, do not possess refutable implications under the basic assumptions of the theory. Only with additional sufficiently strong assumptions, of which some are identified here, can they be signed.

As the tax authority releases or withholds relevant information, it decrease or increases the extent of uncertainty about the audit probability taxpayers perceive, affecting their reporting behavior and expected tax revenues. The effects of an increase in enforcement uncertainty on the expected tax revenues depend on taxpayer pessimism or optimism and on additional information about the audit probability taxpayers receive. The expected tax revenues tend to increase in response to an increase in audit uncertainty, and the tax authority would have little incentive to release more information to the extent that it cares about tax revenues.

We investigate open-bid protocols termed price-demand procedures in combinatorial auction problems. Instead of requiring buyers to reveal their entire valuation functions directly, the auctioneer gradually gathers information by offering price vectors and requiring demand responses to each buyer. The auctioneer continues to calculate the ‘provisional’ profile of valuation functions in a history-dependent manner and check whether the efficient allocations with and without any single buyer for this profile are revealed in the resultant history. Once these are revealed, the auctioneer ends the procedure and determines the VCG outcome associated with the provisional profile at the ending time. With the assumptions of revealed preference activity rule and connectedness, this paper shows that the VCG outcome associated with the provisional profile at the ending time is always the same as that associated with the true profile, even though the provisional profile is generally different from the true one. Only our procedures can achieve the correct VCG outcome. We further discuss the auctioneer’s discretion and buyers’ privacy concern.

We study asymmetric first price auctions in which bidders place their bids sequentially, one after the other and only once. We show that, when bidders’ values are drawn from uniform distributions and are asymmetric, i.e., there is a strong bidder and a weak bidder (the strong bidder’s distribution first order stochastically dominates that of the weak bidder’s), the expected revenue in the sequential bidding first price auction (when the strong bidder bids first) may be higher than in the simultaneous bidding first price auction as well as the simultaneous bidding second price auction. The expected payoff of the weak bidder is also higher in the sequential first price auction. Therefore a seller interested in increasing revenue facing asymmetric bidders may find it beneficial to order them and let them bid sequentially instead of simultaneously.

This study addresses the problem of Arrovian preference aggregation. Social rationality plays a crucial role in the standard Arrovian framework. However, no assumptions on social rationality are imposed here. Social preferences are allowed to be any binary relation (possibly incomplete and intransitive). We introduce the axiom of hybrid invariance, which requires that if social preferences under two preference profiles make the same judgment, then a social preference under a “hybrid” of the two profiles must extend the original judgment in a certain way. Then, we characterize the structure of decisive coalitions under hybrid invariance.

This paper explores a multi-player game of optimal stopping over a finite time horizon. A player wins by retaining a higher value than her competitors do, from a series of independent draws. In our game, a cutoff strategy is optimal, we derive its form, and we show that there is a unique Bayesian Nash Equilibrium in symmetric cutoff strategies. We establish results concerning the cutoff value in its limit and expose techniques, in particular, use of the Budan-Fourier Theorem, that may be useful in other similar problems.

In this paper, we study a Cournot competition where there are a group of firms producing a homogeneous product and another group producing a differentiated product. We find that, fixing the total number of firms in the market, each firm’s profit is U-shaped and convex in the number of firms producing the same product when the degree of substitution is large, and each firm’s profit is U-shaped in the cross-price effect parameter when the number of firms producing the same product is large.

Reductions in search costs are generally found to increase efficiency and welfare. Using a simple search model we show that when an upstream firm incurs a search cost to identify a potential trading partner and the two parties then negotiate the wholesale price, a reduction in search cost can actually reduce welfare. Furthermore, in a market driven by seller search, a search cost of zero is never socially optimal.

This article studies and characterizes a family of reference-dependent choice procedures. The decision maker is assumed to compare alternatives with a reference alternative by a single criterion or multiple criteria. The choice set contains all alternatives passing the threshold (set by the reference alternative) in terms of all criteria. Characterizations are provided for variants of such choice procedures.

We consider the rationale for imposing uniform pricing (UP) on a monopolist in a two-market model with endogenous quality. In contrast to the literature, we find that UP may yield higher quality than third-degree price discrimination (PD). This occurs when the demand dispersion between markets is sufficiently decreasing with quality. A simple test for a higher quality under UP is to check whether an increase in quality reduces the price differential between markets under PD. In this case, a higher quality under UP is an effective substitute for PD to extract consumer surplus. When the demand dispersion is small enough, a higher quality under UP increases social welfare relative to PD.

This paper provides an analysis of a cost-averting war of attrition with minimum necessary conceders. All symmetric stationary Nash equilibria are characterized. The multiplicity of equilibria has called for further refinements. We show that there exists a unique symmetric stationary trembling hand perfect equilibrium. Comparative statics results of the trembling hand perfect equilibrium are provided. This paper’s model is motivated by the problem of delayed public goods provisions in collective action settings. Augmenting the number of minimum necessary conceders can curtail delays.