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Social Efficiency of Entry in a Vertical Structure with Third Degree Price Discrimination The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2022-03-03 Junlin Chen,Arijit Mukherjee,Chenhang Zeng
Abstract We study social efficiency of entry in the presence of downstream cost asymmetry and upstream price discrimination. We show that entry is excessive when the entrants are highly inefficient, and it is insufficient when either the entrants are efficient or their inefficiency is low. The results are in sharp contrast to the existing literature considering upstream uniform pricing (Cao, H., and
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The Effects of Introducing Advertising in Pay TV: A Model of Asymmetric Competition between Pay TV and Free TV The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2022-03-03 Helmut Dietl,Markus Lang,Panlang Lin
Abstract The television broadcasting industry is of crucial economic and social importance. Traditionally, this industry has been dominated by free-to-air TV (FTV) but due to technological progress, subscription-based pay TV (PTV) has emerged as a competing business model. A key question for the PTV broadcasters is whether to air commercials in addition to charging subscription fees. Based on a theoretical
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Insufficient Entry and Consumer Search The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2022-03-01 Toshiki Matsuoka
Abstract This study considers a search market with an outside option and shows that entry may be insufficient. When a firm enters the search market, the price decreases, and consumers can search for more products, which increases the market demand and improves social welfare. However, firms do not internalize the effect, and insufficient entry can occur. Additionally, insufficient entry is likely to
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Arrowian Social Equilibrium: Indecisiveness, Influence and Rational Social Choices under Majority Rule The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2022-02-28 Abhinash Borah,Raghvi Garg,Nitesh Singh
Abstract We introduce the concept of an Arrowian social equilibrium that inverts the schemata of the famous impossibility theorem of Arrow (1950. “A Difficulty in the Concept of Social Welfare.” Journal of Political Economy 58 (4): 328–46) and captures the possibility of aggregating non-rational individual preferences into rational social preferences while respecting the Arrowian desiderata. Specifically
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Uninformed Bidding in Sequential Auctions The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2022-02-28 Emmanuel Lorenzon
Abstract We consider a private-value auction with one-sided incomplete information in which two objects are sold in a sequence of two second-price auctions. The buyers have multiunit demand and are asymmetrically informed at the ex ante stage of the game. One buyer perfectly knows his type, and the other buyer is uninformed about her own type. We consider interim information acquisition by the uninformed
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Quality Competition and Market-Share Leadership in Network Industries The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2022-02-24 Yi-Ling Cheng,Ya-Yuan Chan
Abstract This paper incorporates network externalities into a model of vertical product differentiation to examine how firms determine product quality and network size. We show that, with significant network benefits from quality improvement, the effects of network externalities differ depending on the type of competition. In response to an increase in network externalities, vertical product differentiation
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Equilibrium Pricing under Concave Advertising Costs The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2022-02-23 Klaus Kultti,Teemu Pekkarinen
Abstract We study Butters’s (1977. “Equilibrium Distributions of Sales and Advertising Prices.” The Review of Economic Studies 44 (3): 465–91) model under concave advertising costs, and determine a class of cost functions such that each seller sends the same finite number of ads in equilibrium. Then we consider the limit economy where the number of buyers and sellers grow indefinitely, and show that
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Management Turnover, Strategic Ambiguity and Supply Incentives The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2022-02-23 Nicolas Pasquier,Pascal Toquebeuf
Abstract When a firm appoints a new manager, it reopens the possibility of new contractual friction with its partners. We explore strategic ambiguity as a potential for friction with a supplier. The firm’s new manager probably has fuzzy expectations about the supplier’s strategy. An optimistic manager weights favorable strategies more heavily than detrimental ones, whereas a pessimistic manager does
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Epsilon-Efficiency in a Dynamic Partnership with Adverse Selection and Moral Hazard The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-11-29 Vi Cao
Abstract For a dynamic partnership with adverse selection and moral hazard, we design a direct profit division mechanism that satisfies ϵ-efficiency, periodic Bayesian incentive compatibility, interim individual rationality, and ex-post budget balance. In addition, we design a voting mechanism that implements the profit division rule associated with this direct mechanism in perfect Bayesian equilibrium
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Endogenous Expectations Management with Network Effects: A Note The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-11-29 Kangsik Choi,Seonyoung Lim
Abstract We examine the endogenous choice of commitment device to consumers’ expectations with network effects. Under Cournot competition, we show that choosing commitment to expectations for each firm is a dominant strategy regardless of the strength of network effects. However, under Bertrand competition, three types of commitment with both/no commitment/multiple emerge in equilibrium depending on
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Duty to Read vs Duty to Disclose Fine Print. Does the Market Structure Matter? The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-11-29 Elena D’Agostino,Marco Alberto De Benedetto,Giuseppe Sobbrio
Abstract Firms use standard contracts and possibly include unfavorable fine print which consumers may read at some positive cost. We propose a comparison between a monopoly and a perfect competition market under (1) an unregulated legal regime (duty to read) and (2) a regulation that mandates clause disclosure (duty to disclose). If consumers bear the duty to read contract terms, regardless of market
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Cobb-Douglas Preferences and Pollution in a Bilateral Oligopoly Market The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-11-25 Anicet B. Kabré
Abstract In this paper, we investigate how pollution changes with preferences, focusing on a finite bilateral oligopoly model where agents have asymmetric Cobb-Douglas preferences. Producers are also consumers and the choice of heterogeneous preferences is related to the psychological foundations and identity aspects of group membership. We compare two strategic equilibria: the Stackelberg-Cournot
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Politically Connected Firms and the Environment The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-11-24 Haowei Yu,Lin Zhang
Abstract This paper examines the environmental effect of political connections at the individual and organizational levels. We integrate political connections at both levels in a four-stage game-theoretic framework to study the political interplay between an entrepreneur, a bureaucrat and a government. We distinguish individual-level political connections from bribery and argue that while the latter
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Optimality of a Linear Decision Rule in Discrete Time AK Model The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-11-24 Myungkyu Shim
Abstract Surprisingly, formal proof on the optimality of a linear decision rule in the discrete time AK model with a CRRA utility function has not been established in the growth literature while that in the continuous time counterpart is well-established. This note fills such a gap: I provide a formal proof that consumption being linearly related to investment is a sufficient and necessary condition
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Single- and Double-Elimination Tournaments under Psychological Momentum The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-10-25 Bo Chen,Xiandeng Jiang,Zijia Wang
Abstract This paper studies the effects of “psychological momentum” on strategic behavior in single- and double-elimination tournaments. We show that in presence of both positive and negative momentum a single-elimination tournament elicits a higher total effort than that of a double-elimination tournament if and only if the positive momentum is insignificant and the negative momentum is significant
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Injurers versus Victims: (A)Symmetric Reactions to Symmetric Risks The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-09-28 Alice Guerra,Francesco Parisi
Abstract Tort models assume symmetry in the behavior of injurers and victims when faced by a threat of liability and a risk of harm without compensation, respectively. This assumption has never been empirically validated. Using a novel experimental design, we study the behavior of injurers and victims when facing symmetric accident risks. Experimental results provide qualified support for the symmetric
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Legal Environment and Contractual Choice The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-09-01 Ho Cheung Cheng
Abstract This paper considers contractual choice under imperfect legal systems, in particular, contracts with different timing of payment. Ex-ante payment contracts are risky for the buyer, because the seller may shirk. Ex-post payment contracts are risky for the seller, as the buyer may default. Optimal contract is solved for any given legal environment. Exchanges with lower gains from trade tend
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Cheap Talk with Multiple Experts and Uncertain Biases The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-08-27 Gülen Karakoç
Abstract A decision maker solicits information from two partially informed experts and then makes a choice under uncertainty. The experts can be either moderately or extremely biased relative to the decision maker, which is their private information. I investigate the incentives of the experts to share their private information with the decision maker and analyze the resulting effects on information
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A Note on the Existence of the Competitive Equilibrium in Grossman and Shapiro (1984) The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-08-25 Anthony Creane
Abstract In their seminal paper, Grossman, G. M., and C. Shapiro. 1984. “Informative Advertising with Differentiated Products.” The Review of Economic Studies 51: 63–81 assume that it is not profitable for a firm to deviate to the supercompetitive price of Salop, S. C. 1979. “Monopolistic Competition with outside Goods.” The Bell Journal of Economics 10: 141–56. In this note, it is shown that this
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Workplace Heterogeneity and the Returns to Versatility The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-08-20 Damir Stijepic
Abstract In the canonical random on-the-job search model with continuous firm heterogeneity, I show that a mean-preserving spread of the firm-productivity distribution raises the returns to mobility, i.e., the inter-firm mobility of workers as measured by the number of outside contacts per employment spell. Both sorting and rent-share mechanisms play a role. In a further contribution, I distinguish
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On an “Important Principle” of Arrow and Debreu The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-08-17 Arnis Vilks
Abstract In their seminal 1954 paper on the existence of competitive equilibrium, Arrow and Debreu state what they call an “important principle”, namely that it is necessary for the existence of equilibrium that every consumer has some asset or can supply some labour service which has a positive price at equilibrium. It does not seem to have been noticed that this claim is incorrect. We provide a very
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Passive Cross-Holding in a Stackelberg Oligopoly The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-07-19 Hongkun Ma,Chenhang Zeng
Abstract We show that bilateral cross-holding can be profitable for firms with symmetric technologies in a Stackelberg oligopoly. Furthermore, if firms involved in cross-holding obtain a strategic advantage to be the leaders (i.e. Stackelberg leadership through cross-holding), such cross-holding will improve both consumer surplus and social welfare. We also discuss robustness of our main results with
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A Rehabilitation of the Law of Diminishing Marginal Utility: An Ordinal Marginal Utility Approach The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-07-19 Chung-Cheng Lin,Shi-Shu Peng
Abstract The model in which an individual maximizes his ordinal or cardinal total utility has long been the paradigm of individual choice theory. However, the two mainstream utility theories, the ordinal and cardinal total utility theories, have caused a dilemma, i.e. one has to sacrifice one of the following two: the good property of utility ordinality, or common-sense notions such as the law of diminishing
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Expert Panels with Selective Investigation The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-06-21 Qiang Gong,Huanxing Yang
Abstract In a model of information disclosure with multiple experts we compare homogeneous panels and diverse panels. The distinguishing feature of our model is selective investigation: there are multiple aspects relevant to decision making and each expert can strategically choose some aspects to investigate. We show that homogeneous panels lead to unbalanced investigation and unbalanced action, while
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Delegation and Information Disclosure with Unforeseen Contingencies The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-06-17 Haoran Lei,Xiaojian Zhao
Abstract We incorporate unawareness into the delegation problem between a financial expert and an investor, and study their pre-delegation communication. The expert has superior awareness of the possible states of the world, and decides whether to reveal some of them to the investor. We find that the expert reveals all the possible states to the investor if the investor is initially aware of a large
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Self-Control Preferences and Status-Quo Bias The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-06-11 Guy Barokas
Abstract In a setting of choice with an observable status quo, we model an agent who struggles with temptation by exercising (costly) self-control, and who views the status quo as a commitment opportunity that allows him to avoid the self-control costs incurred when making an active choice. Our model is rational in that the agent always maximizes the same ex-post utility function; hence, when the standard
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Game Theory Without Partitions, and Applications to Speculation and Consensus The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-06-01 John Geanakoplos
Abstract Decision theory and game theory are extended to allow for information processing errors. This extended theory is then used to reexamine market speculation and consensus, both when all actions (opinions) are common knowledge and when they may not be. Five axioms of information processing are shown to be especially important to speculation and consensus. They are called nondelusion, knowing
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Introduction to the Special Issue on Unawareness The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-06-01 Burkhard C. Schipper
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Competitively-Issued Convertible Bank Notes in a Theory of Finance: Earl Thompson Meets Fischer Black The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-04-02 Joshua R. Hendrickson
Abstract In this paper, I show the validity of and the relationship between two previously unrelated claims in monetary theory. The first claim, made by Earl Thompson, is that privately-issued bank notes pay a positive rate of return in a competitive equilibrium. The second claim, made by Fischer Black, is that it is possible to have a gold standard in which the gold reserves of the central bank are
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When is Knowledge Acquisition Socially Beneficial in the Laffont–Tirole Regulatory Framework? The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-03-22 Alexander Zimper,Mpoifeng Molefinyane
Abstract The Laffont–Tirole regulator observes the accounting costs of a firm but she can neither observe its true cost-type nor its chosen effort level. This paper considers a Laffont–Tirole regulator who could employ an expert to obtain better, albeit not perfect, knowledge about the firm’s true cost type. Both the welfare gains through superior allocations from better knowledge but also the knowledge
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Skepticism and Credulity: A Model and Applications to Political Spin, Belief Formation, and Decision Weights The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-03-19 James David Campbell
Abstract In this paper I model a decision maker who forms beliefs and opinions using a dialectic heuristic that depends on their degree of skepticism or credulity. In an application to political spin, two competing parties choose how to frame commonly observed evidence. If the receiver is sufficiently credulous, equilibrium spin is maximally extreme and generates short, superficial news cycles. When
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Entry Deterrence and Free Riding in License Auctions: Incumbent Heterogeneity and Monotonicity The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-03-11 Biung-Ghi Ju,Seung Han Yoo
Abstract We examine free riding for entry deterrence in license auctions with heterogeneous incumbents. We establish the monotonicity of randomized preemptive bidding equilibria: an incumbent with a higher entry-loss rate has greater free-riding incentive, choosing a lower deterring probability. We then identify conditions for the existence of a series of fully or partially participating equilibria
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Knowledge, Awareness and Probabilistic Beliefs The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-02-17 Tomasz Sadzik
Abstract Bayesian game theory investigates strategic interaction of players with full awareness but incomplete information about their environment. We extend the analysis to players with incomplete awareness, who might not be able to reason about all contingencies in the first place. We develop three logical systems for knowledge, probabilistic beliefs and awareness, and characterize their axiom systems
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Tacit Collusion with Consumer Preference Costs The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2021-01-13 Guillem Roig
Abstract When consumers have preference costs, two opposing effects need to be assessed to analyse the incentives of firms to set collusive prices. On the one hand, preference costs make a deviation from collusion less attractive, as the deviating firm must offer a large enough discount to cover the preference costs. On the other hand, preference costs lock in consumers and make punishment from rivals
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Corporate Profit Tax and Strategic Corporate Social Responsibility Under Foreign Acquisition The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-12-22 Lili Xu,Sang-Ho Lee
Abstract This study investigates government public policies facing competing firms’ strategic corporate social responsibility (CSR) activities and finds that the choice of CSR crucially depends on corporate profit tax. We demonstrate that strategic CSR decreases while social welfare increases with corporate tax. When the government grants uniform output subsidies, we show that bilateral CSR leads to
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Examining the Impact of Electoral Competition and Endogenous Lobby Formation on Equilibrium Policy Platforms The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-12-17 Deepti Kohli
Abstract This paper formulates a mathematical model that combines the dynamics of interest group formation with electoral politics, involving office-seeking and corrupt political candidates and voting population with well-defined policy as well as ideological preferences. The analysis provides several interesting insights into the factors affecting lobby membership, free-riding incentives of citizen-voters
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Search Costs and Wage Inequality The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-11-19 Jiancai Pi,Kaiqi Zhang
Abstract This paper analyzes how search costs affect skilled-unskilled wage inequality. In the basic model, we find that an increase in skilled labor’s search costs will decrease wage inequality if the skilled labor market and the unskilled labor market are separated. In the extended model, our findings are as follows: (i) Even if there exists free entry into the unskilled labor market or the endogenous
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Uncertain Outcomes and Climate Change Policy Using an Expo-Power Utility Function The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-11-17 Jules Sadefo Kamdem,David Akame
Abstract This paper extends the work of Pindyck, R. S. 2012. “Uncertain Outcomes and Climate Change Policy.” Journal of Environmental Economics and Management 63 (3): 289–303. by taking into consideration a large class of different utility functions of economic agents. As in Pindyck, R. S. 2012. “Uncertain Outcomes and Climate Change Policy.” Journal of Environmental Economics and Management 63 (3):
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Product Differentiation in a Vertical Structure The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-11-13 Tien-Der Han,M. Emranul Haque,Arijit Mukherjee
Abstract We consider final goods producers’ preference for horizontal product differentiation in the presence of strategic input price determination. Final goods producers may not prefer maximal differentiation but may prefer moderate differentiation under both Cournot and Bertrand competition in the final goods market if product differentiation does not increase the market size significantly and there
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An Entropy-Based Information Sharing Rule for Asymmetric Information Economies The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-10-14 Claudia Meo
AbstractThe possibility to compare information partitions is investigated for economies with asymmetric information. First, we focus on two potentially suitable instruments, the Boylan distance and the entropy, and show that the former does not fit the purpose. Then, we use the entropy associated with the information partition of each trader to construct a partially endogenous rule which regulates
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Price Versus Quantity Competition in a Vertically Related Market with Retailer’s Effort The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-10-09 Qian Liu,Leonard F. S. Wang
Abstract Allowing downstream retailers to engage in demand-enhancing investment, this paper demonstrates that the classical conclusions regarding the comparison of Cournot and Bertrand competition in a vertically related market with decentralized bargaining are completely reversed. It shows that Bertrand competition is more efficient than Cournot competition, in the sense that both consumer surplus
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On the Microfoundation of Linear Oligopoly Demand The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-10-07 Iwan Bos,Dries Vermeulen
Abstract We critically assess the representative consumer with quadratic aggregate utility function which forms the foundation of a well-known class of linear oligopoly demand structures. It is argued that this approach is problematic and redundant. Regarding the latter, we show how the same demand system can be derived directly from a population of heterogeneous buyers for any number of products.
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Working Time under Alternative Pay Contracts in the Ride-Sharing Industry The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-10-05 Filippo Belloc
Abstract We study hours worked by drivers in the peer-to-peer transportation sector with cross-side network effects. Medallion lease (regulated market), commission-based (Uber-like pay) and profit-sharing (“pure” taxi coop) compensation schemes are compared. Our static model shows that network externalities matter, depending on the number of active drivers. When the number of drivers is limited, in
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Games with Unawareness The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-09-15 Yossi Feinberg
We provide a tool to model and solve strategic situations where players' perceptions are limited, in the sense that they may only be aware of, or model, some of the aspects of the strategic situations at hand, as well as situations where players realize that other players' perceptions may be limited. We define normal, repeated, incomplete information and dynamic (extensive) form games with unawareness
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On the Choice of Liability Rules The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-09-11 Rajendra P. Kundu,Debabrata Pal
AbstractLegal assignment of liabilities for losses arising out of interactions involving negative externalities usually depend on which of the interacting parties are negligent and which are not. It has been established in the literature that, if negligence is defined as failure to take some cost-justified precaution then there is no liability rule which can always lead to an efficient outcome. The
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Ambiguity and Awareness: A Coherent Multiple Priors Model The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-08-26 Simon Grant, Ani Guerdjikova, John Quiggin
Ambiguity in the ordinary language sense means that available information is open to multiple interpretations. We model this by assuming that individuals are unaware of some possibilities relevant to the outcome of their decisions and that multiple probabilities may arise over an individual's subjective state space depending on which of these possibilities are realized. We formalize a notion of coherent
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Long-Run Growth, Speed of Convergence and the Specification of Technology The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-08-24 Manuel A. Gómez
AbstractThis note analyzes the effect that the specification of technology has on the long-run growth rate and the asymptotic speed of convergence in the one-sector endogenous-growth model. We compare three otherwise identical economies – with the same baseline and parameter values – but with different production technologies: CES, VES or Sobelow, respectively. The long-run growth rate and the asymptotic
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Social Image Concern and Reference Point Formation The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-08-20 Yosuke Hashidate
Abstract This paper develops an axiomatic context-dependent model of social image concerns. Allowing for context-dependence based on choice sets, it examines how context-dependence impacts social image concerns, in particular how a decision maker exhibits various social emotions stemming from their intrinsic reference point, which may not be captured by conforming to social norms. To elicit the intrinsic
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Social Coordination and Network Formation in Bipartite Networks The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-08-07 Ge Jiang
AbstractIn this paper, we consider a model of social coordination and network formation, where players of two groups play a 2 × 2 coordination game when they are connected. Players in one group actively decide on whom they play with and on the action in the game, while players in the other group decide on the action in the game only and passively accept all the connections from the active group. The
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Financial Integration, Savings Gluts, and Asset Price Booms The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-08-07 Felix Zhiyu Feng,Will Jianyu Lu,Caroline H. Zhu
AbstractCapital outflows after financial integration can lead to simultaneous increases in the national savings rate and asset prices of an economy with substantial financing costs. Under autarky, firms invest in risky capital while facing a borrowing constraint that creates a need for precautionary savings. Financial integration provides firms with access to foreign risk-free assets and results in
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Absence of Envy among “Neighbors” Can Be Enough The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-08-07 Chiara Donnini, Marialaura Pesce
We propose a notion of local fairness by requiring absence of envy only among agents who are related each other. We identify conditions under which fairness is ensured in the entire society by imposing absence of envy just locally. Our analysis is conducted in atomless economies as well as in mixed markets. JEL Classification: D51, D63
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On the Observational Implications of Knightian Uncertainty The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-08-07 Kevin A. Hassett, Weifeng Zhong
We develop a model of a prediction market with ambiguity and derive testable implications of the presence of Knightian uncertainty. Our model can explain two commonly observed empirical regularities in betting markets: the tendency for longshots to win less often than odds would indicate and the tendency for favorites to win more often. Using historical data from Intrade, we further present empirical
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A Comment on Arrow’s Impossibility Theorem The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-07-06 Alec Sandroni,Alvaro Sandroni
AbstractArrow (1950) famously showed the impossibility of aggregating individual preference orders into a social preference order (together with basic desiderata). This paper shows that it is possible to aggregate individual choice functions, that satisfy almost any condition weaker than WARP, into a social choice function that satisfy the same condition (and also Arrow’s desiderata).
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Functions with Linear Price Elasticity for Forecasting Demand and Supply The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-07-01 Melita Hajdinjak
AbstractIn theoretical demand and supply analyses, functions with constant price elasticity are still frequently used although price elasticity is known to change in response to price. We relax the assumption of constant price elasticity to linear price elasticity which allows us to model demand and supply that decreases or increases with price. Quantity functions with linear price elasticity have
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Updating Awareness and Information Aggregation The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-07-01 Spyros Galanis, Stelios Kotronis
The ability of markets to aggregate information through prices is examined in a dynamic environment with unawareness. We find that if all traders are able to minimally update their awareness when they observe a price that is counterfactual to their private information, they will eventually reach an agreement, thus generalising the result of Geanakoplos and Polemarchakis [1982]. Moreover, if the traded
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Extreme Parties and Political Rents The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-05-26 R. Emre Aytimur
AbstractWe study the rent-seeking behavior of political parties in a proportional representation system. In our model, the final policy choice of the parliament is a weighted average of parties’ policy positions, weights being their vote shares. An extreme party chooses a higher rent level than a moderate party in exchange for greater policy influence, except in some cases of unlikely distributions
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Do I Know Ω? An Axiomatic Model of Awareness and Knowledge The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-05-26 Cesaltina Pacheco Pires
In modelling game and decision theory situations, it has been usual to start by considering Ω, the set of conceivable states
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Prudent Rationalizability in Generalized Extensive-form Games with Unawareness The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-05-19 Aviad Heifetz, Martin Meier, Burkhard C. Schipper
We define a cautious version of extensive-form rationalizability for generalized extensive-form games with unawareness that we call prudent rationalizability. It is an extensive-form analogue of iterated admissibility. In each round of the procedure, for each tree and each information set of a player a surviving strategy of hers is required to be rational vis-a-vis a belief system with a full-support
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Reverse Bayesianism: A Generalization The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-05-15 Edi Karni, Quitzé Valenzuela-Stookey, Marie-Louise Vierø
In this note we clarify and generalize the main result in Karni and Viero (2013) by allowing the discovery of new consequences to nulllify some states that were non-null before the discovery.
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Foreign Direct Investment and Crime Linkage: Drug Traffic and Kidnapping The B.E. Journal of Theoretical Economics (IF 0.288) Pub Date : 2020-05-06 Rafael Salvador Espinosa Ramirez
Abstract We develop a theoretical model in which a country hosts foreign investment in the presence of a drug dealer, acting as a leader, and a drug seller, acting as a follower. A policy addressed to eradicate the drug trafficking encourages the kidnapping activity, and increase the security cost of firms. When the drug is not consumed in the host country the best policy is not to fight against drug