nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒11‒14
eighteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Laws and Norms By Roland Benabou; Jean Tirole
  2. A fair pivotal mechanism for nonpecuniary public goods By Pivato, Marcus
  3. Sandbagging By Matthias Kräkel
  4. How do informal agreements and renegotiation shape contractual reference points? By Ernst Fehr; Oliver Hart; Christian Zehnder
  5. Group Outcomes And Reciprocity By Ioannou, Christos A.; Qi, Shi; ,; Rustichini, Aldo
  6. Stochastic dominance with respect to a capacity and risk measures By Miryana Grigorova
  7. Job Design and Incentives By Felipe Balmaceda
  8. Games with Capacity Manipulation: Incentives and Nash Equilibria By Antonio Romero-Medina; Matteo Triossi
  9. The Dark Side of Reciprocity By Natalia Montinari
  10. Prospect Theory around the World By Rieger, Marc Oliver; Wang, Mei; Hens, Thorsten
  11. Ownership, access and sequential investment By Mai, Maxim; Smirnov, Vladimir; Wait, Andrew
  12. Credibility and Strategic Learning in Networks By Chatterjee, Kalyan; Dutta, Bhaskar
  13. Admissibility and Event-Rationality By Paulo Barelli; Spyros Galanis
  14. Privileged information exacerbates market volatility. By Gabriel Desgranges; Stéphane Gauthier
  15. Knowledge is power: a theory of information, income, and welfare spending By Jo Thori Lind; Dominic Rohner
  16. Rankings games By Bruno S. Frey; Margit Osterloh
  17. Coordination, efficiency and pre-play communication with forgone costly messages By Peter H. Kriss; Andreas Blume; Roberto A. Weber
  18. Overconfidence in the Market for Lemons By Herweg, Fabian; Müller, Daniel

  1. By: Roland Benabou; Jean Tirole
    Abstract: This paper analyzes how private decisions and public policies are shaped by personal and societal preferences ("values"), material or other explicit incentives ("laws") and social sanctions or rewards ("norms"). It first examines how honor, stigma and social norms arise from individuals' behaviors and inferences, and how they interact with material incentives. It then characterizes optimal incentive-setting in the presence of norms, deriving in particular appropriately modified versions of Pigou and Ramsey taxation. Incorporating agents' imperfect knowledge of the distribution of preferences opens up to analysis several new questions. The first is social psychologists' practice of "norms-based interventions", namely campaigns and messages that seek to alter people’s perceptions of what constitutes "normal" behavior or values among their peers. The model makes clear how such interventions operate but also how their effectiveness is limited by a credibility problem, particularly when the descriptive and prescriptive norms conflict. The next main question is the expressive role of law. The choices of legislators and other principals naturally reflect their knowledge of societal preferences, and these same "community standards" are also what shapes social judgments and moral sentiments. Setting law thus means both imposing material incentives and sending a message about society's values, and hence about the norms that different behaviors are likely to encounter. The analysis, combining an informed principal with individually signaling agents, makes precise the notion of expressive law, determining in particular when a weakening or a strengthening of incentives is called for. Pushing further this logic, the paper also sheds light on why societies are often resistant to the message of economists, as well as on why they renounce certain policies, such as "cruel and unusual" punishments, irrespective of effectiveness considerations, in order to express their being "civilized".
    JEL: D64 D82 H41 K1 K42 Z13
    Date: 2011–11
  2. By: Pivato, Marcus
    Abstract: The Clarke pivotal mechanism is inappropriate for nonpecuniary public goods, because the assumption of quasilinear utility is invalid, and because the mechanism gives disproportionate influence to wealthier voters. But by introducing a `stochastic' Clarke tax, we can convert any separable utility function into a quasilinear one. Also, by stratifying a large population by wealth, and applying different `weights' to the votes from different wealth-strata, we can ensure that the mechanism is `fair' in the sense that the voters in different strata all have equal influence (on average) over the outcome. These weights can be fine-tuned to their optimal values over time, by using the rich dataset generated by a series of large-population referenda. The result is a fair, strategy-proof implementation of weighted utilitarian social choice over nonpecuniary public goods.
    Keywords: pivotal mechanism; strategy-proof implementation; nonpecuniary public good; utilitarian; inequality
    JEL: H41 D61
    Date: 2011–11–04
  3. By: Matthias Kräkel
    Abstract: Participants of dynamic competition games may prefer to play with the rules of the game by systematically withholding e¤ort in the beginning. Such behavior is referred to as sandbagging. I consider a two-period con- test between heterogeneous players and analyze potential sandbagging of high-ability participants in the first period. Such sandbagging can be ben- eficial to avoid second-period matches against other high-ability opponents. I characterize the conditions under which sandbagging leads to a coordina- tion problem, similar to that of the battle-of-the sexes game. Moreover, if players' abilities have a stronger impact on the outcome of the first-period contest than e¤ort choices, mutual sandbagging by all high-ability players can arise.
    Keywords: ecoordination problem, dynamic contest, heterogeneous contestants, withholding e¤ort
    JEL: C72 D72
    Date: 2011–11
  4. By: Ernst Fehr; Oliver Hart; Christian Zehnder
    Abstract: Previous experimental work provides encouraging support for some of the central assumptions underlying Hart and Moore (2008)’s theory of contractual reference points. However, existing studies ignore realistic aspects of trading relationships such as informal agreements and ex post renegotiation. We investigate the relevance of these features experimentally. Our evidence indicates that the central behavioral mechanism underlying the concept of contractual reference points is robust to the presence of informal agreements and ex post renegotiation. However, our data also reveal new behavioral features that suggest refinements of the theory. In particular, we find that the availability of informal agreements and ex post renegotiation changes how trading parties evaluate ex post outcomes. Interestingly, the availability of these additional options affects ex post evaluations even in situations in which the parties do not use them.
    JEL: C91 D86 J41
    Date: 2011–10
  5. By: Ioannou, Christos A.; Qi, Shi; ,; Rustichini, Aldo
    Abstract: Group membership affects an agent's individual behavior. We determine how, by testing two competing hypotheses. One is that group membership operates through social identity, and the other is that group membership implements a correlation among the actions of in-group members in response to an implicit signal. We introduce two novel features in the experimental design. The first feature is the display of group outcomes. This allows us to assess directly the importance of relative group performance on subjects' decisions. The second is a careful manipulation of the Dictator game and the Trust game. More specifically, we choose parameters strategically so as to ensure no change in the pecuniary incentives across the two games. For a precise quantitative test of the two hypotheses we develop a structural model to describe an agent's behavior across treatments. Our findings suggest that the role of social identity on motivating agents' decisions has been exaggerated. The display of group outcomes induces a group effect, but a careful analysis of this effect reveals that participants use group outcomes as a signal to coordinate in-group members on favorable outcomes. Furthermore, we find evidence in support of recent experimental studies which demonstrate that an agent's allocation choice is sensitive to the behavior of the agent that generated the choice set.
    Date: 2011–05–01
  6. By: Miryana Grigorova (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris Diderot - Paris 7)
    Abstract: Pursuing our previous work in which the classical notion of increasing convex stochastic dominance relation with respect to a probability has been extended to the case of a normalised monotone (but not necessarily additive) set function also called a capacity, the present paper gives a generalization to the case of a capacity of the classical notion of increasing stochastic dominance relation. This relation is characterized by using the notions of distribution function and quantile function with respect to the given capacity. Characterizations, involving Choquet integrals with respect to a distorted capacity, are established for the classes of monetary risk measures (defined on the space of bounded real-valued measurable functions) satisfying the properties of comonotonic additivity and consistency with respect to a given generalized stochastic dominance relation. Moreover, under suitable assumptions, a "Kusuoka-type" characterization is proved for the class of monetary risk measures having the properties of comonotonic additivity and consistency with respect to the generalized increasing convex stochastic dominance relation. Generalizations to the case of a capacity of some well-known risk measures (such as the Value at Risk or the Tail Value at Risk) are provided as examples. It is also established that some well-known results about Choquet integrals with respect to a distorted probability do not necessarily hold true in the more general case of a distorted capacity.
    Keywords: Choquet integral ; stochastic orderings with respect to a capacity ; distortion risk measure ; quantile function with respect to a capacity ; distorted capacity ; Choquet expected utility ; ambiguity ; non-additive probability ; Value at Risk ; Rank-dependent expected utility ; behavioural finance ; maximal correlation risk measure ; quantile-based risk measure ; Kusuoka's characterization theorem
    Date: 2011–11–09
  7. By: Felipe Balmaceda
    Abstract: This paper studies the problem of how to allocate n =2 independent tasks among an ndogenously determined number of jobs in a setting with risk neutral workers subject to limited liability and ex-post asymmetric information. The main message is that firms narrow down the scope of their jobs to deal with workers’ incentives to game the performance system (workers’ incentives to work harder in tasks that are well rewarded ex-post and to underperform in tasks that are poorly rewarded). Firms’ incentives to narrow job scopes are diminished when workers are intrinsically motivated by moral standards and, in contrast to Holmström and Milgrom (1991), when the degree to which tasks are substitutes increases. JEL-Classification: J41, J24, D21.
    Date: 2011
  8. By: Antonio Romero-Medina; Matteo Triossi
    Abstract: Studying the interaction between preference and capacity manipulation in matching markets, we prove that acyclicity is a necessary and su!cient condition that guarantees the stability of a Nash equilibrium and the strategy-proofness of truthful capacity revelation under the hospital-optimal and intern-optimal stable rules. we then introduce generalized capacity manipulations games where hospitals move first and state their capacities, and interns are subsequently assigned to hospitals using a sequential mechanism. In this setting, we first consider stable revelation mechanisms and introduce conditions guaranteeing the stability of the outcome. Next, we prove that every stable non-revelation mechanism leads to unstable allocations, unless restrictions on the preferences of the agents are introduced. JEL Classification Numbers: C71, C78, D71, D78.
    Date: 2011
  9. By: Natalia Montinari (Max Planck Institute of Economics)
    Abstract: Whether friendship or competitive relationships deserve to be encouraged in the workplace is not obvious a priori. In this paper we derive the conditions under which a profit-aximizing employer finds it convenient to induce a rat race among workers exhibiting horizontal reciprocity in order to obtain underpaid or unpaid extra eort. We characterize the optimal compensation scheme under both symmetric and asymmetric information about workers'actions, and we also derive conditions for our result to hold in the presence of vertical reciprocity.
    Keywords: Extra Effort, Horizontal Reciprocity, Negative Reciprocity
    JEL: D83 J33
    Date: 2011–11–04
  10. By: Rieger, Marc Oliver (Dept. IV, Business Administration, University of Trier); Wang, Mei (WHU - Otto Beisheim School of Management); Hens, Thorsten (Department of Banking and Finance, University of Zurich)
    Abstract: We present results from the first large-scale international survey on risk preferences, conducted in 45 countries. We show substantial cross-country differences in risk aversion, loss aversion and probability weighting. Moreover, risk attitudes in our sample depend not only on economic conditions, but also on cultural factors, as measured by the Hofstede dimensions Individuality and Uncertainty Avoidance. The presented data might also serve as an interesting starting point for further research in cultural economics.
    Keywords: Risk preferences; prospect theory; cross-cultural comparison
    JEL: D90 F40
    Date: 2011–10–31
  11. By: Mai, Maxim; Smirnov, Vladimir; Wait, Andrew
    Abstract: We extend the property-rights framework to allow for: a separation of the ownership rights of access and veto; and sequential investment. Parties investing first (ex ante) do so before contracting is possible. Parties that invest second (ex post) can contract on (at least some) of their investment costs. Along with this cost-sharing effect, the incentive to invest is affected by a strategic effect generated by sequential investment. Together these effects can overturn some of the predictions of the property-rights literature. For example, the most inclusive ownership structure might not be optimal, even if all investments are complementary.
    Keywords: holdup; sequential investment; firm organization; veto; access; property rights
    Date: 2011–10
  12. By: Chatterjee, Kalyan (Department of Economics, The Pennsylvania State University); Dutta, Bhaskar (Department of Economics,University of Warwick)
    Abstract: This paper studies a model of diffusion in a fixed, finite connected network. There is an interested party that knows the quality of the product or idea being propagated and chooses an implant in the network to influence other agents to buy or adopt. Agents are either “innovators”, who adopt immediately, or rational. Rational consumers buy if buying rather than waiting maximizes expected utility. We consider the conditions on the network under which efficient diffusion of the good product with probability one is a perfect Bayes equilibrium. Centrality measures and the structure of the entire network are both important. We also discuss various inefficient equilibria.
    Date: 2011
  13. By: Paulo Barelli (University of Rochester); Spyros Galanis (University of Southampto)
    Abstract: We develop an approach to providing epistemic conditions for admissible behavior in games. Instead of using lexicographic beliefs to capture infinitely less likely conjectures, we postulate that players use tie-breaking sets to help decide among strategies that are outcome-equivalent given their conjectures. A player is event-rational if she best responds to a conjecture and uses a list of subsets of the other players' strategies to break ties among outcome-equivalent strategies. Using type spaces to capture interactive beliefs, we show that common belief of event-rationality (RCBER) implies that players play strategies in S1W, that is, admissible strategies that also survive iterated elimination of dominated strategies (Dekel and Fudenberg (1990)). We strengthen standard belief to validated belief and we show that event-rationality and common validated belief of event-rationality (RCvBER) implies that players play iterated admissible strategies (IA). We show that in complete, continuous and compact type structures, RCBER and RCvBER are nonempty, and hence we obtain epistemic criteria for SinfW and IA.
    Date: 2011–10
  14. By: Gabriel Desgranges (THEMA - Université de Cergy-Pontoise); Stéphane Gauthier (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We study how asymmetric information affects market volatility in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium will be stable when it is the only rationalizable solution. It has been established in the literature that stability is obtained when the sensitivity of the outcome to agents' forecasts is less than 1, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, instability is obtained when the proportion of agents who a priori know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than 1.
    Keywords: Asymmetric information, common knowledge, eductive learning, rational expectations, rationalizability, volatility.
    JEL: C62 D82 D84
    Date: 2011–10
  15. By: Jo Thori Lind; Dominic Rohner
    Abstract: No voters cast their votes based on perfect information, but better educated and richer voters are on average better informed than others. We develop a model where the voting mistakes resulting from low political knowledge reduce the weight of poor voters, and cause parties to choose political platforms that are better aligned with the preferences of rich voters. In US election survey data, we find that income is more important in affecting voting behavior for more informed voters than for less informed voters, as predicted by the model. Further, in a panel of US states we find that when there is a strong correlation between income and political information, Congress representatives vote more conservatively, which is also in line with our theory.
    Keywords: Redistribution, welfare spending, information, income, voting, political economics
    JEL: D31 D72 D82 H53
    Date: 2011–10
  16. By: Bruno S. Frey; Margit Osterloh
    Abstract: Research rankings based on publications and citations today dominate governance of academia. Yet they have unintended side effects on individual scholars and academic institutions and can be counterproductive. They induce a substitution of the “taste for science” by a “taste for publication”. We suggest as alternatives careful selection and socialization of scholars, supplemented by periodic self-evaluations and awards. Neither should rankings be a basis for the distributions of funds within universities. Rather, qualified individual scholars should be supported by basic funds to be able to engage in new and unconventional research topics and methods.
    Keywords: Academic governance, rankings, motivation, selection, socialization
    JEL: A10 D02 H83 L23 M50
    Date: 2011–08
  17. By: Peter H. Kriss; Andreas Blume; Roberto A. Weber
    Abstract: We examine communication in a two-player coordination game with Pareto-ranked equilibria. Prior research demonstrates that efficient coordination is difficult without communication but obtains regularly with (mandatory) costless pre-play messages. In a laboratory experiment, we introduce two realistic features of communication by making the sending of messages optional and costly. Even small costs dramatically reduce message use, but efficient coordination of actions occurs with similar frequency to that observed under costless communication. By varying communication costs we corroborate several predictions from a theoretical analysis based on forward induction. Our results indicate that, for some levels of communication costs, explicit communication may be unnecessary for efficient coordination; instead, players simply need to know that the option to send messages was available. Thus, the relationship between communication and coordination is more complex than suggested by prior research.
    Keywords: Coordination, communication, experiment
    JEL: C72 C92 D83
    Date: 2011–10
  18. By: Herweg, Fabian; Müller, Daniel
    Abstract: We extend Akerlof ’s (1970) “Market for Lemons” by assuming that some buyers are overconfident. Buyers in our model receive a noisy signal about the quality of the good that is at display for sale. Overconfident buyers do not update according to Bayes’ rule but take the noisy signal at face value. The main finding is that the presence of overconfident buyers can stabilize the market outcome by preventing total adverse selection. This stabilization, however, comes at a cost: rational buyers are crowded out of the market.
    Keywords: Adverse Selection; Market for Lemons; Overconfidence
    JEL: D82 L15
    Date: 2011–11

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