American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Editor's Note AndrewPostlewaiteU PA iii iii http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.iii 10.1257/mic.1.1.iii American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Assessing Strategic Risk R. J.AumannHebrew U Jerusalem J. H.DrezeCORE, Catholic U Louvain 1 16 In recent decades, subjective probabilities have been increasingly applied to an adversary's choices in strategic games (SGs). In games against nature (GANs), the subjective probability of a state can be elicited from lotteries yielding utility 1 if that state obtains, 0 otherwise. But in SGs, making such a lottery available changes the game, and so the players' incentives. Here, we propose a definition of subjective probabilities in SGs that uses actually available strategies only. The definition applies also to GANs where the decision maker's options are restricted. The probabilities that emerge need not be unique, but expected utilities are unique. (JEL D81) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.1 10.1257/mic.1.1.1 American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Asymmetric Networks in Two-Sided Markets AttilaAmbrusHarvard U RossellaArgenzianoU Essex 17 52 This paper investigates pricing decisions and network choices in two-sided markets with network externalities. Consumers are heterogeneous in how much they value the externality. Imposing restrictions on the extent of coordination failure among consumers generates clear qualitative conclusions about equilibrium market configurations. Multiple asymmetric networks can coexist in equilibrium, both in the case of a monopolist network provider and in the case of competing providers. These equilibria have the property that one network is cheaper and larger on one side, while the other network is cheaper and larger on the other side. Product differentiation is endogenized by consumers' network choices. (JEL D85, L12, L13, L14, D42, D43) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.17 10.1257/mic.1.1.17 American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article The Geography of Trade in Online Transactions: Evidence from eBay and MercadoLibre AliHortaçsuU Chicago F. AsísMartínez-JerezHarvard U JasonDouglasApple, Inc, Santa Clara, CA 53 74 We analyze geographic patterns of trade between individuals using transactions data from eBay and MercadoLibre, two large online auction sites. We find that distance continues to be an important deterrent to trade between geographically separated buyers and sellers, though to a lesser extent than has been observed in studies of non-Internet commerce between business counterparties. We also find a strong "home bias" for trading with counterparties located in the same city. Further analyses suggest that location-specific goods such as opera tickets, cultural factors, and the possibility of direct contract enforcement in case of breach may be the main reasons behind the same-city bias. (JEL D44, F11, R12) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.53 10.1257/mic.1.1.53 http://www.aeaweb.org/aej/mic/data/2007-0011_data.zip American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Contracting with Third Parties SandeepBaligaNorthwestern U TomasSjöströmRutgers U 75 100 In bilateral holdup and moral hazard in teams models, introducing a third party allows implementation of the first best, even if renegotiation is possible. Fines paid to the third party provide incentives for truth-telling and investment. This result holds even if the third party is corruptible, as long as the grand coalition has access to the same contracting technology as any colluding subcoalition. (JEL D86, D82) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.75 10.1257/mic.1.1.75 American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Moral Hazard and Customer Loyalty Programs Leonardo J.BassoU Chile Matthew T.ClementsSt Edward's U Thomas W.RossU British Columbia 101 23 Frequent-flier plans (FFPs) may be the most famous of customer loyalty programs, and there are similar schemes in other industries. We present a theory that models FFPs as efforts to exploit the agency relationship between employers (who pay for tickets) and employees (who book travel). FFPs "bribe" employees to book flights at higher prices. While a single airline offering an FFP has an advantage, competing FFPs can result in lower profits for airlines even while ticket prices rise. Thus, in contrast to switching-cost treatments of FFPs, we may observe prices and profits moving in opposite directions. (JEL D82, L93, M31) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.101 10.1257/mic.1.1.101 American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Like Father, Like Son: Social Network Externalities and Parent-Child Correlation in Behavior AntoniCalvó-Armengol? Matthew O.JacksonStanford U 124 50 We build an overlapping generations model where an individual sees higher returns to adopting a behavior as many neighbors adopt the behavior. We show that overlap in the state of a parent and child's neighborhood can lead to correlation in parent-child behavior independent of any parent-child interaction. Increasing the sensitivity of individual decisions to the state of their social community leads to increased parent-child correlation and less efficient (more costly) behavior on average in the society. We show this model is distinguished from a direct parental influence model, in that it predicts increased generational effects, implying residual correlation between children and grandparents after including parental information. (JEL J12, J13, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.124 10.1257/mic.1.1.124 American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article The Compromise Game: Two-Sided Adverse Selection in the Laboratory Juan D.CarrilloU Southern CA, Los Angeles Thomas R.PalfreyCA Institute of Technology 151 81 We analyze a game of two-sided private information where players have privately known "strengths" and can decide to fight or compromise. If either chooses to fight, the stronger player receives a high payoff and the weaker player receives a low payoff. If both choose to compromise, each player receives an intermediate payoff. The only equilibrium is for players to always fight. In our experiment, we observe frequent compromise, more fighting the lower the compromise payoff and less fighting by first than second movers. We explore several theories of cognitive limitations in an attempt to understand these anomalous findings. (JEL C91, D82) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.151 10.1257/mic.1.1.151 http://www.aeaweb.org/aej-micro/data/2007-0039_data.zip http://www.aeaweb.org/aej-micro/app/2007-0039_app.pdf American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Veto Constraint in Mechanism Design: Inefficiency with Correlated Types OlivierCompteParis School of Economics PhilippeJehielParis School of Economics and U College, London 182 206 We consider bargaining problems in which parties have access to outside options, the size of the pie is commonly known and each party privately knows the realization of her outside option. We allow for correlations in the distributions of outside options. Parties have a veto right, which allows them to obtain at least their outside option payoff in any event. Besides, agents can receive no subsidy ex post. We show that inefficiencies are inevitable whatever the exact form of correlation, as long as private information is dispersed. We also illustrate how veto constraints differ from ex post participation constraints. (JEL C78, D82) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.182 10.1257/mic.1.1.182 American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article The Origin of the Winner's Curse: A Laboratory Study GaryCharnessU CA, Santa Barbara DanLevinOH State U 207 36 The Winner's Curse (WC) is a robust and persistent deviation from theoretical predictions established in experimental economics and claimed to exist in field environments. Recent attempts to reconcile such deviation include "cursed equilibrium" and level-k reasoning. We design and implement a simplified version of the Acquiring-a-Company game that transformed the game to an individual-choice problem that still retains the adverse-selection problem. We further simplified the problem so that simple ordinal reasoning could replace both Bayesian updating and contingent thinking. Our results suggest that the WC reflects bounded rationality in that people have difficulties performing contingent reasoning on future events. (JEL D81, D82) http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.207 10.1257/mic.1.1.207 http://www.aeaweb.org/aej-micro/data/2007-0003_data.zip American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Reputational Incentives for Restaurant Hygiene Ginger ZheJinU MD PhillipLeslieStanford U 237 67 How can consumers be assured that firms will endeavor to provide good quality when quality is unobservable prior to purchase? We test the hypothesis that reputational incentives are effective at causing restaurants to maintain good hygiene quality. We find that chain affiliation provides reputational incentives and franchised units tend to free-ride on chain reputation. We also show that regional variation in the degree of repeat customers affects the strength of reputational incentives for good hygiene at both chain and nonchain restaurants. Despite these incentives, a policy intervention in the form of posted hygiene grade cards causes significant improvements in restaurant hygiene. (JEL I18, I19, L14, L83). http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.237 10.1257/mic.1.1.237 http://www.aeaweb.org/aej/mic/data/2007-0014_data.zip American Economic Association Nashville, TN 1945-7669 1945-7685 American Economic Journal: Microeconomics http://www.aeaweb.org/aej-micro/ 1 1 February 2009 http://www.aeaweb.org/issue.php?journal=MIC&volume=1&issue=1 Journal Article Front Matter i ii http://www.aeaweb.org/articles.php?doi=10.1257/mic.1.1.i 10.1257/mic.1.1.i