Abstracts

Economic and Class Voting in a Model of Redistribution with Social Concerns (joint with Edoardo Grillo) (link) (back to home page)

We investigate how concerns about social status may affect individuals' preferences for redistribution. In our model, agents are heterogeneous across two dimensions, productivity and social class, and an individual's social status is defined as his relative standing in terms of a weighted average of these two components. The weight on each component depends positively on its standard deviation. Redistribution thus simultaneously affects labor supply and the weights that determine social status. As such, taxation not only redistributes resources from the rich to the poor but also becomes a way of preserving or modifying social status. Thus, individuals who have the same productivity but belong to different social classes support different tax rates. We characterize the equilibrium of the political game as the solution of a system of non-linear equations and identify the interclass coalition of voters who support the equilibrium tax rate.

Keywords: economic voting, class voting, social status, voting, redistribution.
JEL Classification: D10, D63, H23.

 
Curious about the Price? Consumers’ Behavior in Price Reveal Auctions (joint with Giuseppe Sorrenti) (link) (back to home page)

We exploit several specific features of a recent online selling mechanism, the so-called price reveal auction, to empirically investigate how consumers' behavior changes in response to an item's intrinsic characteristics and `social attributes'. We document a significant effect of the item's brand and intended use (outdoor vs. indoor) in influencing an agent's degree of impatience and willingness to pay. We show that, while both variables have some explanatory power when considered in isolation, it is their interaction that really matters. We also study the determinants of the mechanism's profitability and show how, in the context of a price reveal auction, the sale of positional goods may backfire and harm revenues.

Keywords: price reveal auction, willingness to pay, social attributes, positional goods.
JEL Classification: D44, D12.

 
A Model of Educational Investment, Social Concerns and Inequality (joint with Edoardo Grillo) (link) (back to home page)

We consider a model in which educational investments entail productivity gains, signaling power, and social returns. The latter depend on the relative position that an agent occupies in one of three different dimensions: (i) his innate characteristics, (ii) his level of schooling, and (iii) his level of income. The agent enjoys social prestige (or suffers from social stigma) if he overperforms (or underperforms) in the relevant dimension. We highlight that fine details in the modelling of social concerns have significant implications on the pattern of inequality within society. In particular, we show that if prestige is relatively stronger than stigma, social concerns always lead to an increase in inequality both in terms of educational achievements and income. In contrast, if stigma is stronger than prestige, we show that inequality may either increase or decrease depending on the relevant social dimension.

Keywords: education, signaling, social status, inequality.
JEL Classification: D03, D10, I20, I21.

A Heuristic Approach to Rent-Seeking Contests with Private Information (back to home page)

We propose a heuristic method for explicitly solving rent-seeking contests in which participants have heterogeneous and private valuations. The heuristic requires only common knowledge about the mean of the distribution of valuations. We obtain a closed-form solution for an agent's level of investment and subject it to comparative statics analysis. We then assess the performance of the heuristic through a series of simulations. The proposed method provides a remarkably effective approximation of the optimal solution that would emerge in a context of perfect information for a wide range of model specifications.

Keywords: rent-seeking contests, private information, heuristics.
JEL Classification: D72, D82.

Optimal Stealing Time (link) (back to home page)

We study a dynamic game in which players can steal parts of a homogeneous and perfectly divisible pie from each other. The effectiveness of a player's theft is a random function which is stochastically increasing in the share of the pie the agent currently owns. We show how the incentives to preempt or to follow the rivals change with the number of players involved in the game and investigate the conditions that lead to the occurrence of symmetric or asymmetric equilibria.

Keywords: stealing, stochastic games, optimal timing, pie allocation.
JEL Classification: C72, D31.

Equilibrium selection through pu-dominance (link) (back to home page)

This note introduces and discusses the concept of p_u-dominance in the context of finite games in normal form. It then presents the p_u-dominance criterion for equilibrium selection. The p_u-dominance criterion is inspired by and closely related to the p-dominance criterion (Morris et al., 1995) but it presents some advantages. In particular, we provide sufficient conditions under which equilibrium selection through p_u-dominance is weakly finer than equilibrium selection through p-dominance.

Keywords: equilibrium selection, normal form games, p_u-dominance, p-dominance.
JEL Classification: C72, C73

Strategic Announcements of Reference Points in Disputes and Litigations (back to home page) 

We show how the common occurrence of seeing exceedingly high claims in disputes and litigations about how to share a limited resource can be rationalized by a model in which claimants display reference dependent preferences, expect the judge to use a generalized social welfare function, and strategically announce their reference points. The scope of the model is wide as the resource over which the dispute arises can be positive or negative, exogenously given or endogenously determined. Moreover, the social welfare specification is consistent with a number of different liability rules.

Keywords: reference points, claims, litigations.
JEL Classification: D03, D63, K41.

Self-Serving Biased Reference Points (back to home page)

This paper formalizes the notion of self-serving bias within a framework of reference-dependent preferences. We argue that the bias affects agents’ expectations in a systematic way and, through this channel, also influences their reference points. We derive some general results both at the individual and the aggregate level and then apply the model to two common situations: a bankruptcy problem and a litigation between two parties. In the first case, we introduce a new allocative rule that, in a context of self-serving biased reference points, outperforms existing ones in terms of the efficiency of the selected allocation. In the second case, we show how the possibility that agents have self-serving biased reference points does not affect the incidence of trials but may increase the probability of appeals against the judge’s verdict.

Keywords: self-serving bias, reference dependent preferences, expectations, bankruptcy problem, litigation.
JEL classification: D03, K41, D63.

Price Reveal Auctions  (back to home page)

A price reveal auction is a Dutch auction in which the current price of the item on sale remains hidden. Bidders can privately observe the price only by paying a fee, and every time a bidder does so, the price falls by a predetermined amount. We solve for the perfect Bayesian equilibria of the game. If the number of participants n is common knowledge, then in equilibrium at most one bidder observes the price and the profits that the mechanism raises, if any, are only marginally higher than those that would stem from a normal sale. If instead n is a random variable then multiple entry can occur and profitability is enhanced.

Keywords: price reveal auctions, pay-per-bid auctions.
JEL classification: D44, C72.

Lowest Unique Bid Auctions with Signals (back to home page)

A lowest unique bid auction allocates a good to the agent who submits the lowest bid that is not matched by any other bid. This peculiar auction format is becoming increasingly popular over the Internet. We show that when all the bidders are rational such a selling mechanism can lead to positive profits only if there is a large mismatch between the auctioneer's and the bidders' valuation. On the contrary, the auction becomes highly lucrative if at least some bidders are myopic. In this second case, we analyze the key role played by the existence of some private signals that the seller sends to the bidders about the status of their bids. Data about actual auctions confirm the profitability of the mechanism and the limited rationality of the bidders.

Keywords: lowest unique bid auctions, signals, bounded rationality.
JEL classification: D44, C72, D82.

The Neglected Effects of Demand Characteristics on the Sustainability of Collusion (back to home page)

According to traditional IO models, the characteristics of market demand (intercept, slope, elasticity) and of technology (level of symmetric marginal costs) do not play any role in defining the sustainability of collusive behaviors in Bertrand oligopolies. The paper modifies this counterintuitive result by showing that all the above mentioned factors do affect the sustainability of collusion when prices are assumed to be discrete rather than continuous. The sign of these effects is unambiguous. Their magnitude varies greatly: in some cases it is totally negligible, in others it becomes extremely relevant.

Keywords: collusion, market demand, Bertrand supergames.
JEL Classification: L13, L41.

 
Education, Dynamic Signalling and Social Distance (back to home page) 

In many European countries the average level of education has grown steadily over the last few generations. The paper shows how such a trend can be easily rationalized by a model that extends a standard signaling game in two directions. First, a temporal structure is induced by having two different cohorts of individuals playing the game. Second, in addition to standard rational agents, the model postulates the existence of two classes of agents that care about their relative position in the distribution of educational choices. Conformist individuals wish to be close to the average level; status seeking individuals seek to be above it. Results show that the presence of these two classes of individuals generates an average level of education that changes and increases over time for a wide range of choice of parameters. Consequences of this increasing level of education on the behaviour of the firms are also explored.

Keywords: education, signalling, status seeeking, conformist behaviour.
JEL Classification: I20, D82.

Best Responding to What? A Behavioural Approach to One Shot Play in 2x2 Games (back to home page)

We introduce a simple procedure to be used for selecting the strategies most likely to be played by inexperienced agents who interact in one shot 2x2 games. We start with an axiomatic description of a function that may capture players' beliefs. Various proposals connected with the concept of mixed strategy Nash equilibrium do not match this description. On the other hand minimax regret obeys all the axioms. Therefore we use minimax regret to approximate players' beliefs and we let players best respond to these conjectured beliefs. When compared with existing experimental evidences about one shot matching pennies games, this procedure correctly indicates the choices of the vast majority of the players. Applications to other classes of games are also explored.

Keywords: prediction, beliefs, mixed strategy Nash equilibrium, minimax regret, matching pennies, experiments.
JEL Classification: C72, C91.

Some Equivalence Results between Mixed Strategy Nash Equilibria and Minimax Regret in 2x2 Games (back to home page)

We show that in any 2x2 game in which a unique mixed strategy Nash equilibrium exists, the probability distribution that this equilibrium assigns to player i is either the same or the mirror image of the distribution that the minimax regret criterion defines for player j. Sharper results that connect the two distributions for the same player are then established for the class of symmetric games.

Keywords: mixed strategy Nash equilibria, minimax regret .
JEL Classification: C72, C92.

Un Bilancio dell’Esperienza UMTS in Europa: fu Collusione? (back to home page)

Something relevant happened in the mobile telecommunications field in the last two years: the allocation of the UMTS licenses, needed to supply the new third generation services, heavily involved the governments of all European countries and the most important telecom companies in the world. At the same time, it called the attention of the media and of the public opinion. After the run to 3G licenses finished a few months ago, it is now possible to draw up a first balance of the UMTS experience at a continental level. In both the two categories winners and losers can easily be spotted. But other interesting points arise: can the actual allocation be considered stable? Has competition been limited on purpose in some auctions? Did a secret plan exist, a plan devoted to share the European market among the biggest operators in their different areas of influence?

Keywords: auctions, telecommunications, collusion..
JEL classification: D44, L96.

Some Social Welfare Implications of Behavioral Preferences (back to home page)

We investigate how the assumption that individuals are characterized by some recent forms of behavioral preferences changes the analysis of an otherwise classical welfare problem, namely the optimal allocation of a scarce resource among a finite number of claimants. We consider two preference specifications: inequity aversion and reference dependence. In the latter case we also study the implications of the claimants displaying a self serving bias when setting their reference point. Using standard welfare criteria, we compute the optimal allocations that a benevolent social planner should implement in the various scenarios. Results are often remarkably different with respect to traditional (i.e., rational preferences) analysis. We discuss the policy implications and the role of a social planner.

Keywords: social welfare, optimal allocation, inequity aversion, reference dependence, self serving bias.
JEL classification: D01, D61.