The B.E. Journal of Theoretical Economics

Published by De Gruyter

Volume 14 Issue 1 -

Issue of The B.E. Journal of Theoretical Economics

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Contents
Journal Overview

Publicly Available July 1, 2014

Frontmatter

Page range: i-iv

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Contributions

February 19, 2014

Cheap Talk and Editorial Control

Jonathan Newton

Page range: 1-25

Abstract

This paper analyzes simple models of editorial control. Starting from the framework developed by Krishna and Morgan (2001a), we analyze two-sender models of cheap talk where one or more of the senders has the power to veto messages before they reach the receiver. A characterization of the most informative equilibria of such models is given. It is shown that editorial control never aids communication and that for small biases in the senders’ preferences relative to those of the receiver, necessary and sufficient conditions for information transmission to be adversely affected are (i) that the senders have opposed preferences relative to the receiver and (ii) that both senders have powers of editorial control. It is shown that the addition of further senders beyond two weakly decreases information transmission when senders exercising editorial control are anonymous, and weakly increases information transmission when senders exercising editorial control are observed.

January 24, 2014

Adverse Effects of Patent Pooling on Product Development and Commercialization

Thomas D. Jeitschko, Nanyun Zhang

Page range: 27-57

Abstract

The conventional wisdom is that the formation of patent pools is welfare enhancing when patents are complementary, since the pool avoids a double-marginalization problem associated with independent licensing. This conventional wisdom relies on the effects that pooling has on downstream prices. However, it does not account for the potentially significant role of the effect of pooling on downstream product development and commercialization. We consider development technologies that entail spillovers between rivals and assume that final-demand products are imperfect substitutes. When pool formation facilitates information sharing and spillovers in development, then decreases in the degree of product differentiation can adversely affect welfare by reducing the incentives towards product development and product market competition – even with perfectly complementary patents. The analysis modifies and even negates the conventional wisdom for some settings and suggests why patent pools are uncommon in science-based industries such as biotech and pharmaceuticals that are characterized by tacit knowledge and incomplete patents.

February 4, 2014

Discretionary Acquisition of Firm-Specific Human Capital under Non-verifiable Performance

Akhmed Akhmedov, Anton Suvorov

Page range: 59-92

Abstract

In this paper we develop a model of discretionary employee investment in firm-specific human capital. When a firm has full bargaining power, the non-contractibility of this investment completely undermines the employee’s incentives. However, the incumbent firm’s inability to observe competing wage offers at the interim stage prevents it from completely expropriating the surplus, thereby creating incentives for the employee to invest. We demonstrate that commitment to a wage floor for the second period destroys the worker’s incentives to acquire human capital, but makes turnover efficient. Therefore, such a commitment has value only if the return on the employee’s deliberate investment in human capital acquisition is sufficiently low. When firms are privately informed about the productivity of their human capital acquisition technology, more productive firms offer higher entry wages to separate themselves from less productive firms. Furthermore, in contrast to the case of symmetric information about human capital acquisition technology, the commitment opportunity now has value for firms with higher return on investment: commitment to a wage floor acts as a substitute for raising the entry wage.

February 4, 2014

On-the-Job Search and Finding a Good Job Through Social Contacts

Gergely Horvath

Page range: 93-125

Abstract

The interactions between on-the-job search and finding a job through social contacts are investigated in a Diamond–Mortensen–Pissarides search model with heterogeneous wages. Workers may find a job through their social contacts and on the formal market. The presence of social contacts increases the overall welfare in society as it rises the number of workers earning high wages and decreases the unemployment rate. However, unemployed workers finding a job through social ties earn lower wages on average than those who obtain a job on the formal market. This result follows from on-the-job search: employed workers pass only those offers on to their neighbors that pay (weakly) lower wages than their current wages earned. Despite the wage discount, unemployed workers still might find it beneficial to search via social ties because arrival rate of offers is higher for this channel than for the formal market when the number of neighbors is sufficiently large. There is a trade-off between unemployment duration and wages earned for workers obtaining a job via social ties.

February 6, 2014

Replication and Returns to Scale in Production

Christian Jensen

Page range: 127-148

Abstract

Replication alone does not yield a smooth constant-returns-to-scale production function as those usually assumed in the literature. However, such a function arises endogenously with replication, driven by profit-maximization, if the efficiency of the underlying production process varies with the intensity it is operated at, and reaches a maximum at a stationary point. The result applies when the number of production processes must be discrete, thus overcoming the so-called integer problem. When inputs are non-rival, public goods or generated by externalities, replication can lead to increasing or decreasing returns to scale.

April 5, 2014

An Adaptive Learning Model with Foregone Payoff Information

Naoki Funai

Page range: 149-176

Abstract

In this paper, we provide theoretical predictions on the long-run behavior of an adaptive decision maker with foregone payoff information. In the model, the decision maker assigns a subjective payoff assessment to each action based on his past experience and chooses the action that has the highest assessment. After receiving a payoff, the decision maker updates his assessments of actions in an adaptive manner, using not only the objective payoff information but also the foregone payoff information, which may be distorted. The distortion may arise from “the grass is always greener on the other side” effect, pessimism/optimism or envy/gloating; it depends on how the decision maker views the source of the information. We first provide conditions in which the assessment of each action converges, in that the limit assessment is expressed as an average of the expected objective payoff and the expected distorted payoff of the action. Then, we show that the decision maker chooses the optimal action most frequently in the long run if the expected distorted payoff of the action is greater than the ones of the other actions. We also provide conditions, under which this model coincides with the experience-weighted attraction learning, stochastic fictitious play and quantal response equilibrium models, and thus this model provides theoretical predictions for the models in decision problems.

May 21, 2014

A Single Parent’s Labor Supply: Evaluating Different Child Care Fees within an Intertemporal Framework

Junichi Minagawa, Thorsten Upmann

Page range: 177-215

Abstract

In this paper, we present a model of a one-parent, one-child household where parental decisions on labor supply, leisure, and the demand for parental and public child care are simultaneously endogenized and intertemporally determined. We characterize the path of the optimal decisions and investigate the effects of various public child care fees and of the quality of public child care services on the parent’s time allocation and the child’s performance level. Our results show that different public child care policies may induce substantially diverging effects and reveal that each policy frequently faces a trade off between an encouragement of labor supply and an enhancement of the child’s performance. In addition, we find that, from an efficiency perspective, an income-based fee levied on public child care services is dominated by both a flat fee and a use-based fee system.

June 14, 2014

Dynamic Price Discrimination with Customer Recognition

Ching-Jen Sun

Page range: 217-250

Abstract

This paper studies a general two-period model of product line pricing with customer recognition. Specifically, we consider a monopolist who can sell vertically differentiated products over two periods to heterogeneous consumers. Each consumer demands one unit of the product in each period. In the second period, the monopolist can condition the price–quality offers on the observed purchasing behavior in the first period. In this setup, the monopolist can price discriminate consumers in two dimensions: by quality as well as by purchase history. We fully characterize the monopolist’s optimal pricing strategy when there are two types of consumers. When the type space is a continuum, we show that there is no fully separating equilibrium, and some properties of the optimal contracts (price–quality pairs) are characterized within the class of partitional perfect Bayesian equilibria.

June 7, 2014

Cournot and Bertrand Competition in a Model of Spatial Price Discrimination with Differentiated Products

Chia-Hung Sun

Page range: 251-272

Abstract

This study investigates spatial price discrimination with two types of market competition – price competition and quantity competition – and two kinds of cross-relations between goods – substitutes and complements – with endogenous location choices in a barbell model. The results herein present that the maximum differentiation (end point agglomeration) is the unique location equilibrium with substitutes (complements), irrespective of what type of competition. We demonstrate that if the unit transportation rate is sufficiently high, then consumer surplus, profits, and social welfare are higher under price competition than under quantity competition for both substitutes and complements. This means that introducing a spatial barrier to competition generated through transportation costs may solve the problem of inconsistency from the conflict interests between consumers, firms, and a social planner.

July 1, 2014

The Impact of Voter Uncertainty and Alienation on Turnout and Candidate Policy Choice

Natalya R. Brown

Page range: 273-292

Abstract

Formal models of elections typically assume that voters are sure of their ideal points on the policy spectrum. Meanwhile, the empirical evidence suggests that voters are often uncertain about their ideal positions. In addition, alienation appears to play a key role in explaining voter turnout in elections. Using a spatial model that incorporates abstentions and the concepts of alienation and tolerance, I show that a positive correlation between extreme policy preferences and certainty among voters can affect voter turnout and result in the divergence of candidate policy choices.

Topics

February 19, 2014

Trust, Truth, Status and Identity: An Experimental Inquiry

Jeffrey V. Butler

Page range: 293-338

Abstract

To investigate how group-contingent non-pecuniary preferences are affected when one group occupies a position of higher status than another group, experimental participants were divided into two trivially distinct groups and then one of the groups was randomly assigned “high status.” Control sessions were also conducted in which no status distinction was introduced. In all sessions, participants subsequently played two games governed by distinct social norms: a trust game and a cheap talk game where lying was possible. In the control sessions, norm compliance was higher in same-group interactions, consistent with previous research demonstrating that normative obligations are often parochial. In treatment sessions, parochialism vanished and was replaced by noblesse oblige : members of high status groups exhibited more norm compliance in all of their interactions. Finally, in game roles not governed by an unambiguous social norm, identity had no direct impact on behavior. Considered together, the results suggest that the channel through which social identity directly impacts behavior is norm compliance and that the nature of this impact depends crucially on the relationship between involved groups.

December 20, 2013

Macro Meets Micro: Stochastic (Calvo) Revisions in Games

Jan Libich, Dat Thanh Nguyen

Page range: 339-369

Abstract

The timing of moves in conventional games is deterministic. To better capture the uncertainty of many real world situations, we postulate a stochastic timing framework. The players get a revision opportunity at a pre-specified time (common to them) with some known probability (different across them). The probabilistic revisions resemble the Calvo (1983) timing widely used in macroeconomics, and by nesting the standard simultaneous move game and Stackelberg leadership they can serve as a “dynamic commitment” device. The analysis shows how the revision time and probabilities affect the outcomes in games with multiple and/or inefficient equilibria. Unsurprisingly, we show in the Battle of the sexes that commitment – low revision probability relative to the opponent – improves the player’s chances to uniquely achieve his preferred outcome (i.e. to dominate). What may, however, seem surprising is that the less committed (higher revision probability) player may dominate the game under some circumstances (for which we derive the necessary and sufficient conditions). This is in contrast to the intuition of Stackelberg leadership where the more committed player (leader) always does so. The paper then applies the framework to the strategic interaction between monetary and fiscal policies in the aftermath of the Global financial crisis. It is modelled as the Game of chicken in which a double-dip recession and deflation can occur when both policies postpone stimulatory measures – attempting to induce the other policy to carry them out. In order to link our theoretic results to the real world, we develop new indices of monetary and fiscal policy leadership (pre-commitment) and quantify them using institutional characteristics of high-income countries. This exercise shows that the danger of the undesirable deflationary scenario caused by a monetary–fiscal policy deadlock may be high in some major economies.

January 11, 2014

The Robustness Case for Proportional Liability

Alexander Stremitzer, Avraham D. Tabbach

Page range: 371-395

Abstract

In important areas like medical malpractice and environmental torts, injurers are potentially insolvent and courts may make errors in determining liability (e.g. due to hindsight bias). We show that proportional liability, which holds a negligent injurer liable for harm discounted with the probability that the harm was caused by the injurer’s negligence, is less susceptible to these imperfections and therefore socially preferable to all other liability rules currently contemplated by courts. We also provide a result which might be useful to regulators when calculating minimum capital requirements or minimum mandatory insurance for different industries.

April 4, 2014

The Rise and Spread of Favoritism Practices

Miguel A. Duran, Antonio J. Morales

Page range: 397-414

Abstract

The common sensical definition of favoritism implies some kind of discrimination. We propose a model where a group of agents commit to give preference to their members when making job offers. This endogamic behavior is advantageous because members enjoy preferential job offers, but they incur in link costs and potential efficiency losses. Unlike the standard approach to favoritism, agents in our model make strategic joining decisions and as a result of the counterbalancing effects of favoritism, an optimal clique size appears in equilibrium. We show that favoritism is not compatible with large inefficiency losses and that there exists a non-monotonic relation between the unemployment level and favoritism practices. Societies with multiple equilibria are also found.

April 12, 2014

Moral Hazard and Tradeable Pollution Emission Permits

Francisco Alvarez, Ester Camiña

Page range: 415-444

Abstract

We consider a market for pollution emission permits in a model in which pollution, generated as by-product of firm’s activity, is determined as the sum of firm-specific random shocks and each firm’s abatement effort. In such a setting, an expected utility maximizing society demands an efficient abatement effort from each firm. We assume that the abatement effort is decided by each firm and is not observed by the environmental regulator. This leads to a moral hazard problem between firms (agents) and the regulator (principal). The regulator assigns contracts to each firm, each contract consisting of an amount of permits and a linear fine for over-polluting firms. We distinguish those policies where the regulator assigns a low number of permits (restrictive policies) and policies where the number of permits to distribute is high (permissive policies). We show that in a context of restrictive policies there exist policies that achieve efficiency and do not need to discriminate in terms of penalties among over-polluting firms when a market for permits is allowed to operate. We also find that the regulator can set up policies with low penalty levels for almost all firms. Finally, we show that in a context of permissive policies, the market leads to the same efficiency-inducing fine scheme than the corresponding one under autarky.

April 12, 2014

Reciprocity in the Principal–Multiple Agent Model

Giuseppe De Marco, Giovanni Immordino

Page range: 445-482

Abstract

This paper studies how incentives are affected by intention-based reciprocity preferences when the principal hires many agents. Our results describe the set of agents’ sensitivities to reciprocity required to sustain a given strategy profile. We also show that hiring reciprocal agents to implement a first- or a second-best contract will always benefit the principal if the strategy profile is symmetric. Instead, when the profile (first or second best) is asymmetric the principal’s interest might be better served by self-interested agents. We conclude the paper by clarifying when symmetric profiles are most likely to arise.

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.

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