Microeconomics
http://lists.repec.org/mailman/listinfo/nep-mic
Microeconomics
2018-03-12
Dynamic Contracting with Limited Commitment and the Ratchet Effect
http://d.repec.org/n?u=RePEc:cpr:ceprdp:12699&r=mic
We study dynamic contracting with adverse selection and limited commitment. A firm (the principal) and a worker (the agent) interact for potentially infinitely many periods. The worker is privately informed about his productivity and the firm can only commit to short-term contracts. The ratchet effect is in place since the firm has the incentive to change the terms of trade and offer more demanding contracts when it learns that the worker is highly productive. As the parties become arbitrarily patient, the equilibrium outcome takes one of two forms. If the prior probability of the worker being productive is low, the firm offers a pooling contract and no information is ever revealed. In contrast, if this prior probability is high, the firm fires the unproductive worker at the very beginning of the relationship.
Gerardi, Dino
Dynamic Contracting; Limited Commitment; Ratchet Effect
2018-02
Other-Regarding Preferences in Organizational Hierarchies
http://d.repec.org/n?u=RePEc:met:wpaper:1802&r=mic
In this paper, we provide new theoretical insights about the role of collusion in organizational hierarchies by combining the standard principal-supervisor-agent framework with a theory of social preferences. Extending Tirole’s (1986) model of hierarchy with the inclusion of Fehr and Schmidt’s (1999) distributional other-regarding preferences approach, the links between inequity aversion, collusive behavior throughout the levels of a hierarchy and the changes in optimal contracts are studied. It turns out that other-regarding preferences do change the collusive behavior among parties depending on the nature of both the agent’s and the supervisor’s other-regarding preferences. Most prominent impact is on the optimal effort levels. When the agent is inequity averse principal can exploit this fact to make agent exert higher effort level than she would otherwise. In order to satisfy the participation constraint of the supervisor, the effort level induced for the agent becomes lower when the supervisor is status seeker, and it is higher when the supervisor is inequity averse.
Kemal Saygili
Serkan Kucuksenel
Other-Regarding Preferences, Hierarchy, Collusive Behavior, Optimal Contract Design
2018-02
Differentiated Durable Goods Monopoly: A Robust Coase Conjecture
http://d.repec.org/n?u=RePEc:cpr:ceprdp:12708&r=mic
The paper analyzes a durable good monopoly problem in which multiple varieties can be produced and sold. A robust Coase conjecture establishes that the market eventually clears, that profits exceed static optimal market-clearing profits, and that profits converge to this lower bound in all stationary equilibria when prices can be revised instantaneously. In contrast to the one-variety case though, equilibrium pricing is neither efficient nor minimal (that is, equal to the maximum between marginal cost an the minimal value). Conclusions apply even when products can be scrapped albeit at possibly smaller mark-ups. If so, a novel motive for selling high cost products naturally emerges. Moreover, with positive marginal costs, cross-subsidization arises as a result of equilibrium pricing. The online appendix delivers insights on product design.
Nava, Francesco
Schiraldi, Pasquale
2018-02
The Optimal Duration of Contracts
http://d.repec.org/n?u=RePEc:ces:ceswps:_6808&r=mic
We study the optimal duration of contracts in a principal-agent framework with both moral hazard and adverse selection. Agents decide on a contract-specific and non-verifiable investment. Incentive compatibility requires that initial contracts, which serve to screen the ability of newly hired agents, cannot be longer than continuation contracts, offered to successful agents. Initial contracts remain unpaid unless service quality is unobservable to other agents and the share of high-ability agents is high. Optimal durations depend, in non-monotonic ways, on the principal’s ow valuation of the agent’s service and the share of high-ability agents.
Panu Poutvaara
Tuomas Takalo
Andreas Wagener
contract length, term length, screening
2017
Opinion formation and targeting when persuaders have extreme and centrist opinions
http://d.repec.org/n?u=RePEc:mse:cesdoc:18005&r=mic
We consider a model of competitive opinion formation in which three persuaders characterized by (possibly unequal) persuasion impacts try to influence opinions in a society of individuals embedded in a social network. Two of the persuaders have the extreme and opposite opinions, and the third one has the centrist opinion. Each persuader chooses one individual to target, i.e., he forms a link with the chosen individual in order to spread his own “point of view” in the society and to get the average long run opinion as close as possible to his own opinion. We examine the opinion convergence and consensus reaching in the society. We study the existence and characterization of pure strategy Nash equilibria in the game played by the persuaders with equal impacts. This characterization depends on influenceability and centrality (intermediacy) of the targets. We discuss the effect of the centrist persuader on the consensus and symmetric equilibria, compared to the framework with only two persuaders having the extreme opinions. When the persuasion impacts are unequal with one persuader having a sufficiently large impact, the game has only equilibria in mixed strategies
Agnieszka Rusinowka
Akylai Taalaibekova
social network; opinion formation; consensus; targeting; lobbying; extreme and centrist persuaders
2018-02
Existence and Optimality of Cournot-Nash Equilibria in a Bilateral Oligopoly with Atoms and an Atomless Part
http://d.repec.org/n?u=RePEc:drm:wpaper:2018-10&r=mic
We consider a bilateral oligopoly version of the Shapley window model with large traders, represented as atoms, and small traders, represented by an atomless part. For this model, we provide a general existence proof of a Cournot-Nash equilibrium that allows one of the two commodities to be held only by atoms. Then, we show, using a corollary proved by Shitovitz (1973), that a Cournot-Nash allocation is Pareto optimal if and only if it is a Walras allocation.
Francesca Busetto
Giulio Codognato
Sayantan Ghosal
Ludovic A. Julien
Simone Tonin
Shapley window model; Atoms; Atomless part; Cournotâ€“Nash equilibrium; Optimality
2018
Balancing Expected and Worst-Case Utility in Contracting Models with Asymmetric Information and Pooling
http://d.repec.org/n?u=RePEc:ems:eureir:104261&r=mic
We consider a principal-agent contracting problem between a seller and a buyer, where the buyer has single-dimensional private information. The buyer's type is assumed to be continuously distributed on a closed interval. The seller designs a menu of finitely many contracts by pooling the buyer types a priori using a partition scheme. He maximises either his minimum utility, his expected utility, or a combination of both (a multi-objective approach). For each variation, we determine tractable reformulations and the optimal menu of contracts under certain conditions. These results are applied to a contracting problem with quadratic utilities. We show that the optimal objective value is completely determined by the partition scheme, a single aggregate instance parameter, and a parameter encoding the seller's guaranteed obtained utility. This enables us to derive the optimal partition and exact performance guarantees. Our analysis shows that the seller should always offer at least two contracts in order to have reasonable performance guarantees, resulting in at least 88% of the expected utility compared to offering infinitely many contracts. By also optimising obtained worst-case utility, he can potentially achieve only 64% of the maximum expected utility.
Kerkkamp, R.B.O.
van den Heuvel, W.
Wagelmans, A.P.M.
mechanism design, asymmetric information, pooling of contracts, multi-objective optimisation
2018-01-09
DISPUTES , DEBT AND EQUITY
http://d.repec.org/n?u=RePEc:gla:glaewp:2017_08&r=mic
We show how the prospect of disputes over firms’ revenue reports promotes debt fi- nancing over equity. These findings are presented within a costly state verification model with a risk averse entrepreneur. The prospect of disputes encourages incentive contracts that limit penalties and avoid stochastic monitoring, even when the lender can commit to stochastic monitoring strategies. Consequently, optimal contracts shift away from equity and toward standard debt. For a useful special case of the model, closed form solutions are presented for leverage and consumption allocations under efficient debt contracts. Some empirical implications of the theory are pursued.
Alfred Duncan
Charles Nola
Microeconomics, costly state verification; external finance; leverage.
2017-07
Bargaining Foundation for Ratio Equilibrium in Public Good Economies
http://d.repec.org/n?u=RePEc:mse:cesdoc:18004&r=mic
We provide a bargaining foundation for the concept of ratio equilibrium in public good economies. We define a bargaining game of alternating offers in which players bargain to determine their cost shares of public good production and a level of public good. We study the stationary subgame perfect equilibrium without delay of the bargaining game. We demonstrate that when the players are perfectly patient, they are indifferent between the equilibrium offers of all players. We also show that every stationary subgame perfect equilibrium without delay in which the ratios offered by all players are the same leads to a ratio equilibrium. In addition, we demonstrate that all equilibrium ratios are offered by the players at some stationary subgame perfect equilibrium without delay. We use these results to discuss the case when the assumption of perfectly patient players is relaxed and the cost of delay vanishes
Anne van den Nouweland
Agnieszka Rusinowka
ratio equilibrium; public good economy; bargaining game; stationary subgame perfect equilibrium
2018-02
Contracting in a Continuous-Time Model with Three-Sided Moral Hazard and Cost Synergies
http://d.repec.org/n?u=RePEc:grz:wpaper:2018-06&r=mic
This paper studies optimal contracting in a continuous-time model with three-sided moral hazard and cost synergies. One agent exerts initial effort to start the project; the other two agents exert ongoing effort to manage it. All three agents' efforts jointly determine the probability of the project's survival and its expected cash flows. We model cost synergies between the latter two agents as one's effort reduces the other's cost of effort. In the optimal contract, the timing of payments reflects the timing of efforts as well as cost synergies across agents. The agent exerting upfront effort claims all cash flows prior to a predetermined cutoff date. The two agents exerting ongoing effort divide all subsequent cash flows according to their moral hazard and cost synergies. This study sheds lights on a broad set of contracting problems, such as compensation plans in startups and profit sharing among business partners.
Nian Yang
Jun Yang
Yu Chen
Optimal contracting; Moral hazard in teams; Cost synergies; Continuous time model
2018-02
Does the Potential to Merge Reduce Competition?
http://d.repec.org/n?u=RePEc:cpr:ceprdp:12732&r=mic
We study anti-competitive mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge, which trades off benefits of avoiding price wars against the costs of merging. There are three results. First, mergers are optimal when collusion fails (i.e., firms sufficiently deviate from a collusive regime). Second, long periods of collusion are likely, because colluding is dynamically stable. Therefore, mergers are rare. Third, mergers (and, in particular, lower merger costs) decrease pre-merger collusion, as punishments by price wars are weakened. Thus, although anti-competitive mergers harm competition ex-post, barriers and costs of merging due to regulation should be reduced to promote competition ex-ante.
Hackbarth, Dirk
Taub, Bart
Competition; Horizontal mergers; imperfect information; Industry Structure; market power
2018-02
Collusion in Two-Sided Markets
http://d.repec.org/n?u=RePEc:tse:wpaper:32485&r=mic
This paper explores the incentives for, and the effects of, collusion in prices between two-sided platforms. We characterize the most profitable sustainable agreement when platforms collude on both sides of the market and when they collude on a single side of the market. Under two-sided collusion, prices on both sides are higher than competitive prices, implying that agents on both sides become worse off as compared to the competitive outcome. An increase in cross-group externalities makes two-sided collusion harder to sustain, and reduces the harm from collusion suffered by the agents on a given side as long as the collusive price on that side is lower than the monopoly price. When platforms collude on a single side of the market, the price on the collusive side is lower (higher) than the competitive price if the magnitude of the cross-group externalities exerted on that side is sufficiently large (small). As a result, one-sided collusion may benefit the agents on the collusive side and harm the agents on the competitive side.
Lefouili, Yassine
Pinho, Joana
Collusion; Two-sided markets; Cross-group externalities
2018-02
Naked exclusion under exclusive-offer competition
http://d.repec.org/n?u=RePEc:dpr:wpaper:1021&r=mic
This study constructs a model of anticompetitive exclusive-offer competition between two existing upstream firms. Under exclusive-offer competition, the upstream firm's profit depends on the rival's exclusive offer. If the rival makes an exclusive offer acceptable for the downstream firm, the upstream firm is excluded unless it succeeds in exclusion. Consequently, the upper bound of exclusive offers becomes higher than when one of the upstream firms is a potential entrant that cannot make any exclusive offer. Thus, the exclusion of the existing upstream firm can be an equilibrium outcome even in the case where the potential entrant is never excluded.
Hiroshi Kitamura
Noriaki Matsushima
Misato Sato
2018-03
On Existence of a Global Games Equilibrium Selection
http://d.repec.org/n?u=RePEc:kan:wpaper:201702&r=mic
We formulate a model of a global game that allows for arbitrary strategic interaction, and we prove existence of a global games equilibrium selection in this model. This shows that the global games method is well-defined in a large class of global games, thus providing a foundation for the study of their equilibrium behavior, especially as research in global games moves beyond cases with strategic complements. We also show that in every global game, even though the information of each player is correlated, the joint information measure is absolutely continuous with respect to the product of its marginals. In particular, the result here can be used to show that there is a global games equilibrium selection in the finite-player version of the model in Karp, Lee, and Mason (2007), thus addressing a gap in the proof of equilibrium existence documented in Hoffmann and Sabarwal (2015).
Eric J. Hoffmann
Tarun Sabarwal
Global games, strategic complements, strategic substitutes, strategic heterogeneity, monotone games, equilibrium selection Women’s Health, Preventive Care, Ethnicity
2017-02
Beating the Matthew Effect: Head Starts and Catching Up in a Dynamic All-Pay Auction*
http://d.repec.org/n?u=RePEc:hhs:osloec:2018_002&r=mic
We consider an effort-maximizing principal distributing a prize fund over two consecutive all-pay auctions. The two contestants are doubly heterogeneous: one of them has a head start in the fi rst contest; and winning contest one gives an advantage in contest two that varies between players. We show that, with a large head start, the principal chooses a zero prize in contest two, i.e., runs a single contest. Otherwise, the laggard winning contest one may overturn the leaders head start, possibly inciting expected efforts equal to the prize value, avoiding the laggard giving up, and this way mitigating the Matthew effect.
Clark, Derek J.
Nilssen, Tore
Contest; All-pay auction; Head start; Catching up; Mathhew effect
2018-02-27
Limited consideration and limited data: revealed preference tests and observable restrictions
http://d.repec.org/n?u=RePEc:kgu:wpaper:176&r=mic
This paper develops revealed preference tests for choices under limited consideration, allowing a partially observed data set. Our tests are based on a common structure of various limited consideration models, and cover leading theories in the literature including the limited attention model, the rationalization model, the categorize-then-choose model, and the rational shortlist model. While tests involve combinatorial calculation, by applying the backtracking method, we perform simulations to numerically compare observable restrictions of various models. As a result, we find remarkable differences in observable restrictions across models.
Yuta Inoue
Koji Shirai
Revealed preference; Limited consideration; Limited attention; Rational shortlisting; Bounded rationality; Bronars test
2018-03
Voting in Hiring Committees: Which "Almost" Rule Is Optimal?
http://d.repec.org/n?u=RePEc:zbw:glodps:185&r=mic
We determine the scoring rule that is most likely to select a high-ability candidate. A major result is that neither the widely used plurality rule nor the inverse-plurality rule are ever optimal, and that the Borda rule is hardly ever optimal. Furthermore, we show that only the almost-plurality, the almost-inverse-plurality, and the almost-Borda rule can be optimal. Which of the "almost" rules is optimal depends on the likelihood that a candidate has high ability and how likely committee members are to correctly identify the abilities of the different candidates.
Baharad, Eyal
Danziger, Leif
Committee decisions,Scoring rules,"Almost" voting rules
2018
Nudges in network
http://d.repec.org/n?u=RePEc:lef:wpaper:2017-02&r=mic
This paper presents a model of voluntary contributions for a local public good, with individuals in a fixed network (complete, circle, line and star), based on the model of Bramoulle and Kranton (2007). We first characterize the equilibrium conditions in the absence of external incentives. We then consider the introduction of an informational nudge (announcement of the socially optimal contribution), both under complete and incomplete information regarding individuals' positions in the network. We show that, regardless of the regulator's level of information, an informational nudge may induce higher levels of aggregate contributions in circle and complete networks, and reduces strategic uncertainty, as long as individuals' sensitivity to the nudge (or their interest in the public good that is provided) is high enough. However, in star and line networks, the level of information available to the contributions or reduce strategic uncertainty. Our main conclusion is therefore that a nudge policy should target specific individuals in specific networks. Moreover, we consider a "second best" nudge for line networks under incomplete information because the socially efficient profile of contributions may be complex to implement in such a situation.
Benjamin Ouvrard
Anne Stenger
nudge; network, local public goods, information disclosure
2017-02
The Multiplier Effect in Two-Sided Markets with Bilateral Investments
http://d.repec.org/n?u=RePEc:ces:ceswps:_6803&r=mic
Agents in a finite two-sided market are matched assortatively, based on costly investments. Besides signaling private, complementary types, investments generate direct benefits for partners. We explore quantitative properties of the equilibrium investment behavior. The bilateral external benefits induce an investment multiplier effect. This multiplier effect depends in a complex way on agents’ uncertainty about their own rank and about the types and investments of potential partners. We characterize how the multiplier effect hinges on market size, and how it interacts with other important factors such as the costs of investment and the signaling incentives induced by competition.
Deniz Dizdar
Benny Moldovanu
Nora Szech
matching, signaling, investment, multiplier effect
2017
Agency Conflicts over the Short and Long Run: Short-termism, Long-termism, and Pay-for-Luck
http://d.repec.org/n?u=RePEc:cpr:ceprdp:12720&r=mic
We develop a dynamic agency model in which the agent controls current earnings via short-term effort and firm growth via long-term effort and the firm is subject to both short- and long-run shocks. Under the optimal contract, agency conflicts can induce both over- and underinvestment in short- and long-term efforts compared to first best, leading to short- or long-termism in corporate policies. Exposure to long-run shocks introduces pay-for-luck in incentive compensation but only after sufficiently good performance due to incentive compatibility, thereby rationalizing the asymmetric benchmarking observed in the data. Correlated short- and long-run shocks to earnings and firm size lead to externalities in incentive provision over different time horizons.
Gryglewicz, Sebastian
Mayer, Simon
Morellec, Erwan
2018-02
Whom can you trust? Reputation and Cooperation in Networks
http://d.repec.org/n?u=RePEc:qmw:qmwecw:842&r=mic
Community enforcement is an important device for sustaining efficiency in some repeated games of cooperation. We investigate cooperation when information about players' reputations spreads to their future partners through links in a social network that connects them. We nd that information supports cooperation by increasing trust between players, and obtain the `radius of trust': an endogenous network listing the potentially cooperative relationships between pairs of players in a community. We identify two aspects of trust, which relate to the network structure in different ways. Where trust depends on the shadow of punishment, players are trusted if others can communicate about them. This is linked to 2-connectedness of the network and the length of cycles within it. Where trust relates to knowledge of a player's type, players are trusting if they are more likely to receive information through their network connections. Both aspects of trust are linked to new centrality measures that we construct from the probabilities of node-to-node information transmission in networks, for which we provide a novel and simple method of calculation.
Maia King
Cooperation, community enforcement, information transmission, networks, im-perfect private monitoring, repeated games, reputation, trust
2017-12-12
Delegated Expertise, Authority, and Communication
http://d.repec.org/n?u=RePEc:cpr:ceprdp:12706&r=mic
A decision-maker needs to reach a decision and relies on an expert to acquire information. Ideal actions of expert and decision-maker are partially aligned and the expert chooses what to learn about each. The decision-maker can either get advice from the expert or delegate decision-making to him. Under delegation, the expert learns his privately optimal action and chooses it. Under communication, advice based on such information is discounted, resulting in losses from strategic communication. We characterize the communication problems that make the expert acquire information of equal use to expert and decision-maker. In these problems, communication outperforms delegation.
Deimen, Inga
Szalay, Dezso
delegated expertise; delegation; effectiveness of biased communication; endogenous information; strategic information transmission
2018-02
The Big Match with a Clock and a Bit of Memory
http://d.repec.org/n?u=RePEc:huj:dispap:dp716&r=mic
The Big Match is a multi-stage two-player game. In each stage Player 1 hides one or two pebbles in his hand, and his opponent has to guess that number; Player 1 loses a point if Player 2 is correct, and otherwise he wins a point. As soon as Player 1 hides one pebble, the players cannot change their choices in any future stage. Blackwell and Ferguson (1968) give an $\varepsilon$-optimal strategy for Player 1 that hides, in each stage, one pebble with a probability that depends on the entire past history. Any strategy that depends just on the clock or on a finite memory is worthless. The long-standing natural open problem has been whether every strategy that depends just on the clock and a finite memory is worthless. The present paper proves that there is such a strategy that is $\varepsilon$-optimal. In fact, we show that just two states of memory are sufficient.
Kristoffer Arnsfelt Hansen
Rasmus Ibsen-Jensen
Abraham Neyman
2018-02
Achieving perfect coordination amongst agents in the co-action minority game
http://d.repec.org/n?u=RePEc:arx:papers:1802.06770&r=mic
We discuss the strategy that rational agents can use to maximize their expected long-term payoff in the co-action minority game. We argue that the agents will try to get into a cyclic state, where each of the $(2N +1)$ agent wins exactly $N$ times in any continuous stretch of $(2N+1)$ days. We propose and analyse a strategy for reaching such a cyclic state quickly, when any direct communication between agents is not allowed, and only the publicly available common information is the record of total number of people choosing the first restaurant in the past. We determine exactly the average time required to reach the periodic state for this strategy. We show that it varies as $(N/\ln 2) [1 + \alpha \cos (2 \pi \log_2 N)$], for large $N$, where the amplitude $\alpha$ of the leading term in the log-periodic oscillations is found be $\frac{8 \pi^2}{(\ln 2)^2} \exp{(- 2 \pi^2/\ln 2)} \approx {\color{blue}7 \times 10^{-11}}$.
Hardik Rajpal
Deepak Dhar
2018-02
Neutral candidates in approval and disapproval vote
http://d.repec.org/n?u=RePEc:ehu:ikerla:25274&r=mic
In this article, the question is to select the “best” candidates within a set of candidates when voters cast approval-disapproval ternary ballots. That is, three options are offered to voters: casting a vote “in favor”, a “neutral” vote or a vote “against” each candidate. We first review desirable properties that a rule aggregating approval-disapproval ternary ballots should satisfy. We check whether the rules that have been proposed in the literature satisfy them. Then, we provide comparable axiomatizations of three rules: one is the lexicographical extension of the Approval rule for binary ballots; the second is the lexicographical extension of the Disapproval rule for binary ballots; and the third rule eliminates candidates with more opponents and fewer supporters than other candidates.
González, Stéphane
Laruelle, Annick
Solal, Philippe
approval, disapproval, voting, compromise, condorcet, principle
2017-11-24
A Network Approach to Public Goods
http://d.repec.org/n?u=RePEc:cam:camdae:1813&r=mic
Suppose agents can exert costly effort that creates nonrival, heterogeneous benefits for each other. At each possible outcome, a weighted, directed network describing marginal externalities is defined. We show that Pareto efficient outcomes are those at which the largest eigenvalue of the network is 1. An important set of efficient solutions - Lindahl outcomes - are characterized by contributions being proportional to agents' eigenvector centralities in the network. The outcomes we focus on are motivated by negotiations. We apply the results to identify who is essential for Pareto improvements, how to efficiently subdivide negotiations, and whom to optimally add to a team.
Elliott, M.
Golub, B.
2018-02-07
Financially-Constrained Lawyers: An Economic Theory of Legal Disputes
http://d.repec.org/n?u=RePEc:ris:albaec:2018_003&r=mic
Financial constraints reduce the lawyer's ability to file lawsuits and bring cases to trial. As a result, access to justice for victims, pretrial bargaining, and potential injurers' precaution might be affected. We study civil litigation using a model that allows for asymmetric information, financially-constrained lawyers, third-party lawyer lending, and a continuum of plaintiff's types. We contribute to the economic analysis of law by generalizing seminal models of litigation (Bebchuk, 1984, 1988; Katz, 1990), offering the first formal definition of access to justice, and presenting comprehensive social welfare analysis of relevant public policy. We provide complete equilibrium characterization and identify necessary conditions for the existence of the mixed- and pure-strategy PBE. The mixed-strategy equilibrium arises in a state of the world characterized by lawyers facing strong financial constraints. Access to justice is denied to some victims under the mixed-strategy equilibrium. We then study the social welfare effects of policies aimed at relaxing lawyers' financial constraints, and identify a necessary and sufficient condition for a welfare-enhancing effect.
Landeo, Claudia
Nikitin, Maxim
Civil Litigation; Access to Justice; Social Welfare; Financially-Constrained Lawyers; Asymmetric Information; Perfect Bayesian Equilibrium; Deterrence; Lawsuits; Settlement; Litigation; Third-Party Lawyer Lending Industry; Third-Party Litigation Funding
2018-02-28