Theoretical Economics January 2019 is now online

Theoretical Economics
Volume 14, Number 1 (January 2019)
Table of contents


Title: Dynamic objective and subjective rationality

Pages: 1-14

Authors: José Heleno Faro, Jean-Philippe Lefort

Abstract: We characterize prior-by-prior Bayesian updating using a model proposed by Gilboa, Maccheroni, Marinacci and Schmeidler (2010) that jointly considers objective and subjective rationality. These rationality concepts are subject to the Bewley unanimity rule and maxmin expected utility, respectively, with a common set of priors and the same utility over consequences. We use this setup with two preference relations to develop a novel rationale for full Bayesian updating of maxmin expected utility preferences

Keywords: Dynamic consistency, full Bayesian updating, incomplete preferences, objective rationality, subjective rationality, maxmin expected utility, multiple priors

JEL classification: D81


Title: On the manipulability of efficient exchange rules

Pages: 15-38

Authors: Ryan Tierney

Abstract: We identify a large subdomain, D, of quasilinear economies on which any efficient exchange rule will be generically (in the Baire
sense) manipulable. For generic economies outside of D, we find rules that are locally non-manipulable. The interior of the set D consists of all economies in which competitive equilibrium would prescribe that all agents consume a positive quantity of money. Since we study quasilinear preferences, this is the domain of primary interest. Our locally non-manipulable rules rely on the existence of traders who are willing to sell all of their cash and absorb the imbalances in the trading of the commodity.

Keywords: Exchange, incentive compatibility, budget balance

JEL classification: D44, D47


Title: Full surplus extraction and within-period ex post implementation in dynamic environments

Pages: 39-69

Authors: Shunya Noda

Abstract: We study full surplus extraction and implementation in dynamic environments.
We exploit intertemporal correlations of agents' types to construct within-period ex post incentive compatible mechanisms. First, we formulate one-shot environments, in which a single agent has a hidden type and the planner observes a public signal about the agent's type after a type-contingent allocation is chosen. We propose necessary and sufficient conditions for full surplus extraction (strong detectability) and for implementability of the targeted allocation rule (weak
detectability) in this one-shot problem. We decompose the general dynamic problem into one-shot problems, and obtain sufficient conditions for surplus extraction and implementation.

Keywords: Dynamic mechanism design, perfect Bayesian equilibrium, revenue maximization, full surplus extraction

JEL classification: C73, D47, D82, D86


Title: Iterated weak dominance and interval-dominance supermodular games

Pages: 71-102

Authors: Joel Sobel

Abstract: This paper extends Milgrom and Robert's   treatment of
supermodular games in two ways.  It points out that their main
characterization result holds under a   weaker assumption.  It refines the
arguments to provide bounds on the set of strategies that survive iterated deletion of weakly dominated strategies.  I derive the bounds by iterating the best-response correspondence. I give conditions under which they are independent of the order of deletion of dominated strategies. The results have implications for equilibrium selection and dynamic stability in games.

Keywords: Supermodularity, dominance, equilibrium selection

JEL classification: C72, D81


Title: Boundedly rational backward induction

Pages: 103-134

Authors: Shaowei Ke

Abstract: This paper proposes simple axioms that characterize a generalization of backward induction. At any node of a decision tree, the decision maker looks forward a fixed number of stages perfectly. Beyond that, the decision maker aggregates continuation values according to a function that captures reasoning under unpredictability. The model is uniquely identified from the decision maker's preference over decision trees. Confronting a decision tree, the decision maker iteratively revises her plan for the future as she moves forward in the decision tree. A comparative measure of unpredictability aversion and several examples are discussed.

Keywords: Dynamic choice, imperfect foresight, time inconsistency

JEL classification: D00


Title: Learning dynamics with social comparisons and limited memory

Pages: 135-172

Authors: Juan I. Block, Drew Fudenberg, David K. Levine

Abstract: We study models of learning in games where agents with limited memory use social information to decide when and how to change their play.
When agents only observe the aggregate distribution of payoffs and only recall information from the last period, aggregate play comes close to Nash equilibrium for generic games, and pure equilibria are generally more stable than mixed equilibria. When agents observe both the payoff distribution of other agents and the actions that led to those payoffs and can remember this for some time, the length of their memory plays a key role: With short memories, aggregate play may not come close to Nash equilibrium unless the game satisfies an acyclicity condition. When agents have sufficiently long memory generically aggregate play comes close to Nash equilibrium. However, unlike in the model where social information is solely about how well other agents are doing, mixed equilibria can be favored over pure ones.

Keywords: Social learning, Nash equilibrium, best response dynamics, equilibrium selection

JEL classification: C72, C73


Title: A theory of personal budgeting

Pages: 173-210

Authors: Simone Galperti

Abstract: Prominent research argues that consumers often use personal budgets to manage self-control problems. This paper analyzes the link between budgeting and self-control problems in consumption-saving decisions.
It shows that the use of good-specific budgets depends on the combination of a demand for commitment and the demand for flexibility resulting from uncertainty about intratemporal trade-offs between goods.
It explains the subtle mechanism which renders budgets useful commitments, their interaction with minimum-savings rules (another widely-studied form of commitment), and how budgeting depends on the intensity of self-control problems. This theory matches several empirical findings on personal budgeting.

Keywords: Budget, minimum-savings rule, commitment, flexibility, intratemporal trade-off, uncertainty, present bias

JEL classification: D23, D82, D86, D91, E62, G31


Title: Decentralized bargaining in matching markets: efficient stationary equilibria and the core

Pages: 211-251

Authors: Matthew L. Elliott, Francesco Nava

Abstract: This paper studies market clearing in matching markets. The model is non-cooperative, fully decentralized, and in Markov strategies. Workers and firms bargain with each other to determine who will be matched with whom and at what terms of trade. Once a worker-firm pair reach agreement, they exit the market. Alternative possible matches affect agents' bargaining positions. We ask under which conditions such markets clear efficiently and find that inefficiencies -- mismatch and delay -- feature frequently. Mismatch occurs whenever an agent's bargaining position is at risk of deteriorating. Delay occurs whenever agents expect their bargaining position to improve. Delay can be extensive and structured with vertically differentiated markets endogenously clearing from the top down.

Keywords: Bargaining, matching markets, mismatch, delay, search

JEL classification: C78, L14


Title: Dynamics of strategic information transmission in social networks

Pages: 253-295

Authors: Manuel Foerster

Abstract: We develop a dynamic framework of strategic information transmission through cheap talk in a social network. Privately informed agents have different preferences about the action to be implemented by each agent and repeatedly communicate with their neighbors in the network. We first characterize myopic (best response) equilibria as well as fully informative myopic equilibria. Second, we provide a sufficient condition for the existence of a fully informative farsighted (perfect Bayesian) equilibrium. Fully informative myopic and farsighted equilibria essentially take a particular simple form: all communication is truthful along a subnetwork that is a tree. We also consider societies in which both myopic and farsighted agents are present and analyze equilibrium welfare.
Furthermore, we extend our model to public communication and investigate the implications of our results for the design of institutions. Finally, our analysis reveals that myopic equilibria tend to Pareto dominate farsighted equilibria, in particular if a social planner has designed the network optimally.

Keywords: Cheap talk, information aggregation, learning, social networks, strategic communication

JEL classification: C72, D82, D83, D85


Title: On competitive nonlinear pricing

Pages: 297-343

Authors: Andrea Attar, Thomas Mariotti, François Salanié

Abstract: We study a discriminatory limit-order book in which market makers compete in nonlinear tariffs to serve a privately informed insider. Our model allows for general nonparametric specifications of preferences and arbitrary discrete distributions for the insider's private information.
Adverse selection severely restricts equilibrium outcomes: in any pure-strategy equilibrium with convex tariffs, pricing must be linear and at most one type can trade, leading to an extreme form of market breakdown. As a result, such equilibria only exist under exceptional circumstances that we fully characterize. These results are strikingly different from those of existing analyses that postulate a continuum of types. The two approaches can be reconciled when we consider E-equilibria of games with a large number of market makers or a large number of types.

Keywords: Adverse selection, competing mechanisms, limit-order book

JEL classification: D43, D82, D86


Publication Date: 
Wednesday, February 13, 2019