Armitage, M.L.; (2006) Essays in microeconomic theory. Doctoral thesis , University of London.

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Abstract

This thesis investigates how introducing bounded rationality to a range of theoretical microeconomic situations can help explain empirical results. Biased Screening and Coarse Information: A decision maker must choose one of two projects. Each project has an identically independently distributed value which is observed by an agent, but only a coarse signal can be communicated to the decision maker. Despite the symmetric setup, agents optimally partition the possible realisations of value differently to minimise the error cost in the decision stage. This is generalised to a screening process, where projects are grouped exogenously and different thresholds can be used to assess projects in different groups. A project in a minority group has a lower probability of being chosen, an insight which is related to the literature on categories and discrimination. Endogenous Analogy Classes: An Analogy Equilibrium (Jehiel, 2005) involves players bundling nodes at which their opponent moves into analogy classes. The robustness of analogy classes is examined when players form their analogy classes endogenously, so are more likely to form analogies over nodes in which their opponent's behaviour is similar and when suboptimal actions would not prove very costly. These ideas are applied in a generalised Centipede game. Pure strategy equilibria involving passing may survive refinement in some long games, but mixed strategy equilibria can be dramatically more robust. In the most cooperative, robust equilibrium players pass for many nodes and mix at the end of the game. Common Value Multi-Unit Auctions: The implications of using different multi-unit auction mechanisms are investigated when bidders have multi-unit demand and a common valuation Vm for the mth object they win. Revenue equivalence holds across many auction formats when bidders have constant or increasing marginal utility for additional units. When bidders have diminishing marginal utility however, an almost common-values problem means that inefficient first-price auctions are expected to raise the most revenue. Bounded rationality is important in explaining empirics and reinforces some of the theoretical results. (Abstract shortened by UMI.).

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