2014 Abstract
2014 Kansas Workshop on Economic Theory
Abstracts of Papers
May 3, 2014
Forward-looking Social Learners
By Mira Frick and Yuhta Ishii
A large population of long-lived consumers faces stochastic opportunities to adopt an innovation of uncertain quality. Consumers are social learners: Over time, news about the product’s quality is generated endogenously, based on the experiences of past adopters. We analyze how the potential for social learning in an economy affects consumers’ informational incentives and how these in turn shape the aggregate adoption dynamics of an innovation. Our main results highlight the importance of two features of the economy: The extent to which consumers are forward-looking and the nature of news events through which social learning occurs. When consumers are forward-looking social learners, the trade-off between the benefit of adopting the innovation at any given time and the option value of waiting for endogenous news can generate rich aggregate adoption dynamics, even in the absence of any consumer heterogeneity. The dynamics of this trade-off and the extent to which it is affected by increased opportunities for social learning interact in interesting ways with the news process of the economy. For a class of Poisson learning processes, we establish the existence and uniqueness of equilibria. In line with empirical findings, equilibrium adoption patterns are either S-shaped or feature successions of concave bursts. In the former case, our analysis predicts a novel saturation effect: Due to informational free-riding, increased opportunities for social learning necessarily lead to temporary slow-downs in learning and do not produce welfare gains.
Timing and Codes of Conduct
By Juan I. Block
In games where players can imperfectly observe an opponent’s intentions, the time at which intentions can be discovered may have a significant impact on the equilibrium outcome set. When players infer intentions at the outset, I show that a folk theorem for finite horizon games holds, whereas if agents glean intentions afterwards the timing leads to different effects depending on the structure of the game. I identify two classes of games with antipodal results concerning the timing. In finitely repeated games with discounting, the folk theorem continues to apply regardless of the time at which intentions are observed, and whether the observation is synchronous or asynchronous. By contrast, the equilibrium outcome is unique in exit games, where players end the game endogenously.
Participation and Unbiased Pricing in CDS Settlement Mechanisms
By Ahmad Peivandi
Credit default swaps are insurance contracts on default. Currently, there are about 25 trillion USD worth of outstanding CDS contracts. These contracts are settled through a centralized market that has been criticized for underpricing the asset. In this paper, I take a mechanism design approach and characterize robust settlement mechanisms that deliver an unbiased price for the asset. A second contribution of my paper is a new notion of the core for games of incomplete information. This is particularly relevant here because participation in the settlement mechanism cannot be compelled.
Credit–fuelled Bubbles
By Antonio Doblas-Madrid and Kevin Lansing
We develop a model of credit-fuelled bubbles in which lenders accept risky assets as collateral. Asset prices and credit reinforce each other, as booming asset prices allow lenders to extend more credit, enabling investors to bid prices even higher. If investors are asymmetrically informed, there exist equilibria in which it is optimal to ride bubbles, buying overvalued assets in hopes of reselling at a profit to a greater fool. Lucky investors sell the bubbly asset at peak prices, only to buy it again at or below fundamental value after the crash. Unlucky investors, who buy at the peak hoping that the bubble continues to grow at least a bit longer, suffer losses. If the degree of leverage is sufficiently high, lenders repossess and liquidate the assets of unlucky investors, and may continue to seize their endowments until debts are fully repaid. In our model, raising interest rates and regulating maximal loan-to-value and loan-to-income ratios can reduce or even eliminate bubbles.
Nash Equilibrium in Games with Quasi-Monotonic Best-Responses
By Rabah Amir and Luciano De Castro
This paper develops a new existence result for pure-strategy Nash equilibrium. In succinct form, for a two-player game with scalar action sets, existence entails that one reaction curve be increasing and continuous and the other quasi-increasing (i.e., not have any downward jumps). The latter property amounts to strategic pseudocomplementarities. We also prove some extensions to n-player games, at the cost of some future plausible assumptions. Along the way, the paper provides a number of ancillary results of independent interest, including sufficient conditions for a quasi-uniqueness of fixed points. For maximal accessibility of the results, in addition to a general lattice-theoretic treatment, the main results are presented in a Euclidean setting. We argue that all these results have broad and elementary applicability by providing simple illustrations with four commonly used models for applied microeconomic fields.
On Market Fragmentation
By Rakesh Vohra and Ahmad Peivandi
Centralized markets reduce the costs of search for buyers and sellers. More importantly, their "thickness" increases the chance of order execution at competitive prices. In spite of the incentives to consolidate, some markets, securities markets being the most notable, have fragmented into multiple trading venues. We argue in this paper that fragmentation is an unavoidable feature of any centralized exchange except in certain special circumstances.
Equilibrium Under Ambiguity
By Nicholas Yannelis
TBA
Submodular Financial Markets with Frictions
By Bernard Cornet
TBA
Relative Likelihood Equilibrium
By Joshua Cherry and Yuval Salant
TBA
Global Games Selection in Games with Strategic Substitutes or Complements
By Eric Hoffman
Global games methods are aimed at resolving issues of multiplicity of equilibria and coordination failure that arise in game theoretic models by relaxing common knowledge assumptions about an underlying parameter. These methods have recently received a lot of attention when the underlying complete-information game is one of strategic complements (GSC). Little has been done in this direction concerning games of strategic substitutes (GSS), however. This paper complements the existing literature in both cases by extending the global games method developed by Carlsson and Van Damme (1993) to N-player, multi-action GSS and GSC, using a p-dominance condition as the selection criterion. Moreover, this approach is much less restrictive on the conditions that payoffs and the underlying parameter space must satisfy, and therefore serves to circumvent recent criticisms to global games methods. The second part of this paper generalizes the model by allowing “groups” of players to receive homogenous signals, which, under certain conditions, strengthens the model’s power of predictability.