nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒11‒28
nine papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Fair Contracts By Shingo Ishiguro
  2. Relationships and Growth By Shingo Ishiguro
  3. Market Power Screens Willingness-to-Pay By Tirole, Jean; Weyl, Glen
  4. Wars of attrition and all-pay auctions with stochastic competition By Bos, Olivier
  5. Contracting With Synergies By Alex Edmans; Itay Goldstein; John Y. Zhu
  6. Signaling in deterministic and stochastic settings By Jeitschko, Thomas D.; Normann, Hans-Theo
  7. Variational Bewley Preferences By Faro, José Heleno
  8. The roles of reputation and transparency on the behavior of biased experts By Bourjade, Sylvain; Jullien, Bruno
  9. Equilibrium Selection with Payoff-Dependent Mistakes By Kang-Oh Yi

  1. By: Shingo Ishiguro (Graduate School of Economics, Osaka University)
    Abstract: In this paper we present an axiomatic approach to characterize the optimal contracts, which we call gfair contracts,h in the general moral hazard model. The two main axioms we employ are incentive efficiency and no-envyness. The incentive efficiency requires that agents of organization select the Pareto efficient contracts among all possible incentive compatible contracts. No-envyness is equity requirement to ensure that each agent does not envy contracts of others in the same organization. We then show that, due to the tension between incentive efficiency and no-envyness, fair contracts have the very simple feature that risk averse agents are offered the fixed wage to choose only the least costly action.
    Keywords: Moral Hazard, Incentive Contracts, Fairness.
    JEL: D82 D86
    Date: 2011–11
  2. By: Shingo Ishiguro (Graduate School of Economics, Osaka University)
    Abstract: In this paper we present a dynamic general equilibrium model to investigate how different contracting modes based on formal and relational enforcements endogenously emerge and are dynamically linked with the process of economic development. Formal contracts are enforced by third party institutions (courts), while relational contracts are self-enforcing agreements without any third party involvement. The novel feature of our model is to demonstrate the co-evolution of these different enforcement modes and market equilibrium conditions, all of which are jointly determined. We then characterize the equilibrium paths of such dynamic processes and show the time structure of relational contracting (self-enforcing agreement) in the endogenous process of economic development. In particular we show that relational contracting fosters the emergence of the market-based economy in low development stages but its role declines as the economy grows and enters high development stages.
    Keywords: dynamic general equilibrium, economic development, armfs length contract, relational contract
    JEL: D86 E10 O11
    Date: 2011–11
  3. By: Tirole, Jean; Weyl, Glen
    Date: 2011–06
  4. By: Bos, Olivier
    Abstract: We extend the war of attrition and all-pay auction analysis of Krishna and Morgan (1997) to a stochastic competition setting. We determine the existence of equilibrium bidding strategies and discuss the potential shape of these strategies. Results for the war of attrition contrast with the characterization of the bidding equilibrium strategies in the first-price all-pay auction as well as the winner-pay auctions. Furthermore we investigate the expected revenue comparisons among the war of attrition, the all-pay auction and the winner-pay auctions and discuss the Linkage Principle as well. Our findings are applicable to future works on contests and charity auctions.
    Keywords: All-pay auction; war of attrition; number of bidders
    JEL: D44 D82
    Date: 2011–11–17
  5. By: Alex Edmans; Itay Goldstein; John Y. Zhu
    Abstract: This paper studies optimal contracting under synergies. We define influence as the extent to which effort by one agent reduces a colleague's marginal cost of effort, and synergy to be the sum of the (unidimensional) influence parameters across a pair of agents. In a two-agent model, effort levels are equal even if influence is asymmetric. The optimal effort level depends only on total synergy and not individual influence parameters. An increase in synergy raises total effort and total pay, consistent with strong equity incentives in small firms, including among low-level employees. The influence parameters matter only for individual pay. Pay is asymmetric, with the more influential agent being paid more, even though the level and productivity of effort are both symmetric. With three agents, effort levels differ and are higher for more synergistic agents. An increase in the synergy between two agents can lead to the third agent being excluded from the team, even if his productivity is unchanged. This has implications for optimal team composition and firm boundaries. Agents that influence a greater number of colleagues receive higher wages, consistent with the salary differential between CEOs and divisional managers.
    JEL: D86 J31 J33
    Date: 2011–11
  6. By: Jeitschko, Thomas D.; Normann, Hans-Theo
    Abstract: We contrast a standard deterministic signaling game with one where the signal-generating mechanism is stochastic. With stochastic signals a unique equilibrium emerges that involves separation and has intuitive comparative-static properties as the degree of signaling depends on the prior type distribution. With deterministic signals both pooling and separating configurations occur. Laboratory data support the theory: In the stochastic variant, there is more signaling behavior than with deterministic signals, and less frequent types distort their signals relatively more. Moreover, the degree of congruence between equilibrium and subject behavior is greater in stochastic settings compared to deterministic treatments. --
    Keywords: experiments,learning,noise,signaling,stochastic environments
    JEL: C7 C9 D8
    Date: 2011
  7. By: Faro, José Heleno
    Date: 2011–10
  8. By: Bourjade, Sylvain; Jullien, Bruno
    Abstract: We analyze situations in which an expert is biased toward some decision but cares also about his reputation in the market for experts. The information the expert reveals decreases as his bias moves toward stronger preference for the status quo. We show that it is optimal to publicly disclose both the expert's contribution and his identity. Surprisingly, revealing the intensity of the expert's bias doesn't always improve the information he reveals in equilibrium. The presence of a second expert raises the first expert's incentives to report truthfully when reports are public, but reduces them when they are secret. In particular, having an option to call another expert may be detrimental in terms of information production if reports are not public. Finally, sequential consultation of experts reduces the information obtained when reports are public, but raises it when they are secret.
    Keywords: Experts; Bias; Reputation
    JEL: D82 L40
    Date: 2011
  9. By: Kang-Oh Yi (Department of Economics, Sogang University, Seoul)
    Abstract: This paper studies equilibrium selection via stochastic dynamics in the style of Young (Econometrica 61, 1993, 57-84), when the mistake probabilities are allowed to depend on their expected payoffs. Although any strict equilibrium can be selected with properly constructed state-dependent mistakes (Bergin and Lipman, Econometrica, 64, 1996, 943-956), reasonable assumptions on state dependence could produce a consistent equilibrium selection. The main analysis shows how payoff dependency and payoffs interact to determine a long-run equilibrium and characterizes the selection relating to the traditional notions of risk dominance, payoff dominance, and maxmin in 2x2 games
    Keywords: Equilibrium selection, stochastic stability, coordination game, payoff dependent mistake
    JEL: C70 C72 D70
    Date: 2011

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