Theoretical Economics May 2019 is now online

Theoretical Economics
Volume 14, Number 2 (May 2019)
Table of contents


Title: Selling with evidence

Pages: 345-371

Authors: Frederic Koessler, Vasiliki Skreta

Abstract: We study the informed-principal problem in a bilateral asymmetric information trading setting with interdependent values and quasi-linear utilities. The informed seller proposes a mechanism and voluntarily certifies information about the good's characteristics. When the set of certifiable statements is sufficiently rich, we show that there is an ex-ante profit-maximizing selling procedure that is an equilibrium of the mechanism proposal game. In contrast to posted price settings, the allocation obtained when product characteristics are commonly known (the unravelling outcome) may not be an equilibrium allocation, even when all buyer types agree on the ranking of product quality.  Our analysis relies on the concept of strong Pareto optimal allocation, originally introduced by Maskin and Tirole (1990) in private value environments.

Keywords: Informed principal, consumer heterogeneity, interdependent valuations, product information disclosure, mechanism design, certification

JEL classification: C72, D82


Title: Information and targeted spending

Pages: 373-402

Authors: Jon X. Eguia, Antonio Nicolo

Abstract: We present an electoral theory on the public provision of local public goods to an imperfectly informed electorate. We show that electoral incentives lead to greater spending if the electorate is not well informed. A more informed electorate induces candidates to target funds only to specific constituencies, which can reduce aggregate welfare.

Keywords: Local public goods, information, elections, targeted spending

JEL classification: H41, D72, D82


Title: Observational learning in large anonymous games

Pages: 403-435

Authors: Ignacio Monzón

Abstract: I present a model of observational learning with payoff interdependence. Agents, ordered in a sequence, receive private signals about an uncertain state of the world and sample previous actions.  Unlike in standard models of observational learning, an agent's payoff depends both on the state and on the actions of others. Agents want both to learn the state and to anticipate others' play. As the sample of previous actions provides information on both dimensions, standard informational externalities are confounded with payoff externalities. I show that in spite of these confounding factors, when signals are of unbounded strength there is learning in a strong sense:
agents' actions are ex-post optimal given both the state of the world and others' actions. With bounded signals, actions approach ex-post optimality as the signal structure becomes more informative.

Keywords: Observational learning, payoff interdependence, information aggregation, position uncertainty

JEL classification: C72, D83, D85


Title: Market selection in large economies: a matter of luck

Pages: 437-473

Authors: Filippo Massari

Abstract: In a general equilibrium model with a continuum of traders and bounded aggregate endowment, I investigate the Market Selection Hypothesis that markets favor traders with accurate beliefs. Contrary to known results for economies with (only) finitely many traders, I find that risk attitudes affect traders' survival and that markets can favor “lucky” traders with incorrect beliefs over “skilled” traders with accurate beliefs. My model allows for a clear distinction between luck and skills and it shows that market selection forces induce efficient prices even when accurate traders do not survive in the long run.

Keywords: Market selection hypothesis, asset pricing, general equilibrium

JEL classification: D50,D90, G12


Title: Efficiency and endogenous fertility

Pages: 475-512

Authors: Mikel Pérez-Nievas, José I. Conde-Ruiz, Eduardo L. Giménez

Abstract: This paper explores the properties of the notions of A-efficiency and P-efficiency, proposed by Golosov, Jones and Tertilt (Econometrica, 2007), to evaluate allocations in a general overlapping generations setting in which fertility choices are endogenously selected from a continuum and any two agents of the same generation are identical. First, we show that the properties of A-efficient allocations vary depending on the criterion used to identify potential agents. If one identifies potential agents by their position in their siblings' birth order --as Golosov, Jones and Tertilt do--, then A-efficiency requires that a positive measure of agents use most of their endowment to maximize the utility of the dynasty head, which, in environments with finite horizon altruism, implies that some agents --the youngest in every family-- obtain an arbitrary low income to finance their own consumption and fertility plans. If potential agents are identified by the dates in which they may be born, then A-efficiency reduces to dynastic maximization, which, in environments with finite horizon altruism, drives the economy to a collapse in finite time. To deal with situations, like those arising in economies with finite horizon altruism, in which A-efficiency may be in conflict with individual rights, we propose to evaluate the efficiency of a given allocation with a particular class of specifications of P-efficiency, for which the utility attributed to the unborn depends on the utility obtained by their living siblings. Under certain concavity assumptions on value functions, we also characterize every symmetric, P-efficient allocation as a Millian efficient allocation, that is, as a symmetric allocation that is not A-dominated --with the Birth-Order criterion-- by any other symmetric allocation.

Keywords: Efficiency, optimal population, endogenous fertility, A-efficiency, P-efficiency, millian efficiency, birth-order criterion, birth-date criterion

JEL classification: D91, H21, H5, E62, J13


Title: Communication and cooperation in repeated games

Pages: 513-553

Authors: Yu Awaya, Vijay Krishna

Abstract: We study the role of communication in repeated games with private monitoring. We first show that without  communication, the set of Nash equilibrium payoffs in such games is a subset of the set of ε-coarse correlated equilibrium payoffs (ε-CCE) of the underlying one-shot game. The value of ε depends on the discount factor and the quality of monitoring. We then identify conditions under which there are equilibria with "cheap talk" that result in nearly efficient payoffs outside the set ε-CCE. Thus, in our model, communication is necessary for cooperation.

Keywords: Repeated games, private monitoring, communication

JEL classification: C73


Title: Voting on multiple issues: what to put on the ballot?

Pages: 555-596

Authors: Alex Gershkov, Benny Moldovanu, Xianwen Shi

Abstract: We study a multi-dimensional collective decision under incomplete information. Agents have Euclidean preferences and vote by simple majority on each issue (dimension), yielding the coordinate-wise median. Judicious rotations of the orthogonal axes -- the issues that are voted upon -- lead to welfare improvements. If the agents' types are drawn from a distribution with independent marginals then, under weak conditions, voting on the original issues is not optimal. If the marginals are identical (but not necessarily independent), then voting first on the total sum and next on the differences is often welfare superior to voting on the original issues. We also provide various lower bounds on incentive efficiency: in particular, if agents' types are drawn from a log-concave density with I.I.D. marginals, a second-best voting mechanism attains at least 88% of the first-best efficiency. Finally, we generalize our method and some of our insights to preferences derived from distance functions based on inner products.

Keywords: Multi-dimensional voting, rotation, budgeting procedure, mechanism design

JEL classification: D72, D78, D82


Title: Protocol invariance and the timing of decisions in dynamic games

Pages: 597-646

Authors: Ulrich Doraszelski, Juan F. Escobar

Abstract: We characterize a class of dynamic stochastic games  that we call separable dynamic games with noisy transitions and establish that these widely used models are protocol invariant provided that periods are sufficiently short. Protocol invariance means that the set of Markov perfect equilibria is nearly the same irrespective of the order in which players are assumed to move within a period.  Protocol invariance can facilitate applied work and  renders the implications and predictions of a model more robust. Our class of dynamic stochastic games includes investment games, R\&D races, models of industry dynamics, dynamic public contribution games, asynchronously repeated games, and many other models from the extant literature.

Keywords: Dynamic stochastic games, timing of decisions, commitment, protocol invariance

JEL classification: C7, C6, D0


Title: Strategic experimentation in queues

Pages: 647-708

Authors: Martin W. Cripps, Caroline D. Thomas

Abstract: We analyze the social and private learning at the symmetric equilibria of a queueing game with strategic experimentation. An infinite sequence of agents arrive at a server which processes them at an unknown rate. The number of agents served at each date is either: a geometric random variable in the good state, or zero in the bad state. The queue lengthens with each new arrival and shortens if the agents are served or choose to quit the queue. Agents can only observe the evolution of the queue after they arrive; they, therefore, solve a strategic experimentation problem when deciding how long to wait to learn about the probability of service. The agents, in addition, benefit from an informational externality by observing the length of the queue and the actions of other agents. They also incur a negative payoff externality, as those at the front of the queue delay the service of those at the back. We solve for the long-run equilibrium behavior of this queue and show there are typically mass exits from the queue, even if the server is in the good state.

Keywords: Experimentation, bandit problems, social learning, herding, queues

JEL classification: C72, C73


Title: A foundation for probabilistic beliefs with or without atoms

Pages: 709-778

Authors: Andrew Mackenzie

Abstract: We propose two novel axioms for qualitative probability spaces (Bernstein, 1917; de Finetti, 1937; Koopman, 1940; Savage, 1954): (i) unlikely atoms, which requires that there is an event containing no atoms that is at least as likely as its complement; and (ii) third-order atom-swarming, which requires that for each atom, there is a countable pairwise-disjoint collection of less-likely events that can be partitioned into three groups, each with union at least as likely as the given atom. We prove that under monotone continuity (Villegas, 1964; Arrow, 1970), each of these axioms is sufficient to guarantee a unique countably additive probability measure representation, generalizing Villegas (1964) to allow atoms. Unlike previous contributions that allow atoms, we impose no cancellation or solvability axiom.

Keywords: Beliefs, qualitative probability, unlikely atoms, atom-swarming

JEL classification: D81, D83

Publication Date: 
Thursday, May 30, 2019