The B.E. Journal of Theoretical Economics

Published by De Gruyter

Volume 1 Issue 1

November 2001

Issue of The B.E. Journal of Theoretical Economics

Contents
Journal Overview

Frontiers Article

August 8, 2002

Ascending Auctions with Package Bidding

Lawrence M Ausubel, Paul R Milgrom

Article number: 20011001

Abstract

A family of ascending package auction models is introduced in which bidders may determine their own packages on which to bid. In the proxy auction (revelation game) versions, the outcome is a point in the core of the exchange economy for the reported preferences. When payoffs are linear in money and goods are substitutes, sincere reporting constitutes a Nash equilibrium and the outcome coincides with the Vickrey auction outcome. Even when goods are not substitutes, ascending proxy auction equilibria lie in the core with respect to the true preferences. Compared to the Vickrey auction, the proxy auctions generate higher equilibrium revenues, are less vulnerable to shill bidding and collusion, can handle budget constraints much more robustly, and may provide better ex ante investment incentives.

Advances Article

February 27, 2001

Genericity with Infinitely Many Parameters

Robert M. Anderson, William R. Zame

Article number: 20011002

Abstract

Genericity analysis is widely used to show that desirable properties that fail in certain "knife-edge" economic situations nonetheless obtain in "typical" situations. For finite-dimensional spaces of parameters, the usual notion of genericity is full Lebesgue measure. For infinite dimensional spaces of parameters (for instance, the space of preferences on a finite-dimensional commodity space, no analogue of Lebesgue measure is available; the lack of such an analogue has prompted the use of less compelling topological notions of genericity. Christensen (1974) and Hunt, Sauer and Yorke (1992) have proposed a measure-theoretic notion of genericity, which Hunt, Sauer and Yorke call prevalence, which coincides with full Lebesgue measure in Euclidean space and which extends to infinite-dimensional vector spaces. This notion is not directly applicable in most economic settings because the relevant parameter sets are small subsets of vector spaces -- especially cones or order intervals -- not vector spaces themselves. We adapt the notion to economically relevant environments by defining two notions of prevalence relative to a convex set in a topological vector space. The first notion is very easy to understand and apply, and has all of the properties one would desire except that it is not closed under countable unions; the second notion contains the first and has all the good properties of the first notion except simplicity; it is closed under countable unions. We provide four economic applications: 1) generic existence of equilibrium in financial models, 2) generic finiteness of the number of pure strategy Nash equilibria and Pareto inefficiency of "non-vertex" Nash equilibria for games with a continuum of actions and smooth payoffs, 3) generic regularity of exchange economies when some agents are constrained to have 0 endowment of some goods, 4) generic single-valuedness of the core of transferable utility games.

March 9, 2001

Efficient Non-Contractible Investments in Finite Economies

Harold Linh Cole, George J. Mailath, Andrew Postlewaite

Article number: 20011003

Abstract

Individuals making investments typically do not have incentives to invest efficiently when they cannot contract prior to their decisions. When they bargain over the surplus generated by their investments, they will usually not obtain the full fruits of the investment. Intuitively, this hold-up problem should be ameliorated if, in the bargaining stage, each agent has alternatives to the partner he is bargaining with. We characterize the matching and division of surplus in finite economies for any initial investment decisions. We provide conditions on those decisions that guarantee that each agent will capture the change in the aggregate social surplus that results from any investment change he makes. We further show that for any given problem, there exists a bargaining rule by which pairs split their surplus that will support efficient investment choices in equilibrium. We also show, however, that overinvestment or underinvestment can occur for natural bargaining rules.

March 30, 2001

Reinforcement Learning in Repeated Interaction Games

Jonathan Bendor, Dilip Mookherjee, Debraj Ray

Article number: 20011004

Abstract

We study long run implications of reinforcement learning when two players repeatedly interact with one another over multiple rounds to play a finite action game. Within each round, the players play the game many successive times with a fixed set of aspirations used to evaluate payoff experiences as successes or failures. The probability weight on successful actions is increased, while failures result in players trying alternative actions in subsequent rounds. The learning rule is supplemented by small amounts of inertia and random perturbations to the states of players. Aspirations are adjusted across successive rounds on the basis of the discrepancy between the average payoff and aspirations in the most recently concluded round. We define and characterize pure steady states of this model, and establish convergence to these under appropriate conditions. Pure steady states are shown to be individually rational, and are either Pareto-efficient or a protected Nash equilibrium of the stage game. Conversely, any Pareto-efficient and strictly individually rational action pair, or any strict protected Nash equilibrium, constitutes a pure steady state, to which the process converges from non-negligible sets of initial aspirations. Applications to games of coordination, cooperation, oligopoly, and electoral competition are discussed.

April 30, 2001

Incentives and Coordination in Hierarchies

Dilip Mookherjee, Stefan Reichelstein

Article number: 20011005

Abstract

The internal organization of large firms as well as procurement and regulation contexts frequently involve a hierarchical nexus of contracts, with substantial delegation of decision making across layers. Such hierarchical delegation of decision making creates problems of aligning incentives of vertically related agents, and coordinating the actions of different branches of the hierarchy. In a principal-agent setting with private information, it is shown that under certain assumptions (top-down contracting, observability of subcontracting outcomes, absence of limited liability constraints) the hierarchy can implement second-best allocations. Incentive problems are overcome via compensations that are linear in a measure of performance of the concerned department, defined as the difference between a measure of imputed revenues and procurement costs. The coordination problem is overcome by conditioning output targets and payments on cost reports submitted by other branches; despite this, agents' strategies are dominant with respect to the behavior of members of other branches. The result provides conditions for the lack of a `control loss' from hierarchical decentralization of decision making, owing to incentive or coordination problems.

January 22, 2002

Faulty Communication: Some Variations on the Electronic Mail Game

Stephen E Morris

Article number: 20011006

Abstract

The electronic mail game of Rubinstein (1989) showed that a lack of common knowledge generated by faulty communication can make coordinated action impossible. This paper shows how this conclusion is robust to having a more realistic timing structure of messages, more than two players who meet publicly but not as a plenary group, and may be robust to strategic decisions about whether to communicate.

Contributions Article

May 2, 2001

Regulating Endogenous Customer Switching Costs

Joshua S Gans, Stephen Peter King

Article number: 20011007

Abstract

Recent concern has arisen with regard to the potential for introducing competition in previously protected sectors as customer switching costs may make entry (and hence, aggressive price competition) difficult to achieve. An excellent example of this arises telecommunications deregulation with regard to the costs customers face in changing phone numbers. Interestingly, in such cases, switching costs can be ameliorated by incumbent action. For telecommunications, technologies exist that port existing phone numbers between networks. Regulators therefore, favour mandating such amelioration of switching costs but issues arise as to the allocation of the costs of implementing such solutions. This paper examines the issues associated with the regulation of customer switching costs. We compare regimes whereby customers as opposed to firms bear amelioration costs and find that while a customers-pay approach assists in facilitating an efficient choice regarding amelioration, incumbents have an incentive to distort those costs upwards under such a regime. Our central result is that a better approach would be to have incumbents bear amelioration costs but encourage the exercise of 'buy back’ options whereby the incumbent pays the switching customer to bear their original cost of switching rather than utilize amelioration technologies. In the case of number portability, this regulatory option is similar to vesting customers with property rights over their existing number that they can sell to their current network.

June 21, 2001

Incomplete Contracts. Non-Contractible Quality, and Renegotiation

Christoph Lülfesmann

Article number: 20011008

Abstract

The paper reconsiders the hold-up problem in long-term bilateral trade with specific investments. In our framework, the parties face several trading opportunities (goods) whose characteristics cannot be described at the start of the relationship. Specifically, there exists an investment responsive `innovative' good, and (at least one) non-responsive `standard' good. In line with Hart and Moore (1988), renegotiation takes place as outside option bargaining. We first establish a first-best outcome for the case where trading the innovation is always efficient. This results contrasts with findings in Segal (1999) and Hart and Moore (1999) who adopt an alternative view of renegotiation. Then, we consider a setting where final trade is not always efficient, and show that a properly chosen at-will contract still implements the first best for a non-empty set of parameterizations. Finally, we show that at-will contracts strictly outperform option or specific-performance contracts.

November 6, 2001

Bilateral Trade and Opportunism in a Matching Market

Garey Ramey, Joel Watson

Article number: 20011009

Abstract

We develop a model of bilateral contracting in a dynamic market setting. Asset owners must be paired via a matching process in order to form productive relationships involving long-term investments and ongoing effort. Market frictions shape the owners' incentives to invest in the absence of complete contracts. We identify cases in which there exists an optimal positive level of market friction implementing first-best investment levels. We also endogenize the choice between integrated and nonintegrated organizational forms. Changes in structural variables can induce crashes by disrupting existing relationships.

Topics Article

December 19, 2001

Monotone Preferences over Information

Juan Dubra, Federico Echenique

Article number: 20011010

Abstract

We consider preference relations over information that are monotone: more information is preferred to less. We prove that, if a preference relation on information about an uncountable set of states of nature is monotone, then it is not representable by a utility function.

About this journal

Objective
The B.E. Journal of Theoretical Economics (BEJTE) welcomes submissions in all areas of economic theory, both applied and pure theory, as well as submissions on economic experiments that feature substantial theory components. The journal especially welcomes novel approaches and interdisciplinary work on economic theory. The editors of the BEJTE understand that novel and interdisciplinary approaches may be difficult to evaluate, that their relationship to standard approaches may not be entirely clear yet, and that not all potential applications of such novel and interdisciplinary have been fully developed yet. Pure theory papers to be published in the BEJTE include, but are by no means limited to, those in behavioral economics, decision theory, game theory, general equilibrium theory, information economics, mechanism design, matching theory, networks, and entirely new fields yet to be created. Applications could encompass, but are not restricted to, contract theory, financial economics, industrial organization, internet economics, labor economics, law and economics, personnel economics, public finance, and novel applications yet to be developed.

Topics

behavioral economics
decision theory
game theory
general equilibrium theory
information economics
mechanism design
contract theory
matching theory
social networks

Article formats
BEJTE recently switched from the previous four-tier system (Frontiers, Advances, Contributions, and Topics) to a two-tier system. Besides "Research Articles" we publish now also "Notes", which typically are more concise manuscripts.

> Information on submission process