nep-mic New Economics Papers
on Microeconomics
Issue of 2012‒07‒29
fourteen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Standardized Enforcement: Access to Justice vs. Contractual Innovation By Nicola Gennaioli; Enrico Perotti
  2. Optimal contract with private information on cost expectation and variability By Daniel Danau; Annalisa Vinella
  3. Public-private contracting under limited commitment By Daniel Danau; Annalisa Vinella
  4. Gambling in Contests By Seel, Christian; Strack, Philipp
  5. The Benefits of Sequential Screening By Krähmer, Daniel; Strausz, Roland
  6. Continuois Time Contests By Seel, Christian; Strack, Philipp
  7. Reserve Price When Bidders are Asymmetric By Hikmet Gunay; Xin Meng; Mark Nagelberg
  8. Exposure Problem in Multi-unit Auctions By Hikmet Gunay; Xin Meng
  9. Optimal Use of Rewards as Commitment Device When Bidding is Costly By Hu, Luke
  10. Security bid auctions for agency contracts By Jun, Byoung Heon; Wolfstetter, Elmar G.
  11. Coarse correlated Equilibria in Linear Duopoly Games By Indrajit Ray; Sonali Sen Gupta
  12. Endogenising Detection in an Asymmetric Penalties Corruption Game By Dominic Spengler
  13. A new stationary game equilibrium induced by stochastic group evolution and rational Individual choice By Dai, Darong; Shen, Kunrong
  14. Public goods and the hold-up problem under asymmetric information By Schmitz, Patrick W

  1. By: Nicola Gennaioli; Enrico Perotti
    Abstract: We model the different ways in which precedents and contract standardization shape the development of markets and the law. In a setup where more resourceful parties can distort contract enforcement to their advantage, we find that the introduction of a standard contract reduces enforcement distortions relative to precedents, exerting two effects: i) it statically expands the volume of trade, but ii) it crowds out the use of innovative contracts, hindering contractual innovation. We shed light on the large scale commercial codification occurred in the 19th century in many countries (even Common Law ones) during a period of booming commerce and long distance trade.
    Keywords: contracting, standardization, inequality, legal evolution
    JEL: K12 K41 G3
    Date: 2012–06
  2. By: Daniel Danau (UFR de sciences économiques et de gestion, Université de Caen Basse-Normandie, CREM-CNRS, UMR 6211); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy)
    Abstract: A multidimensional-and-sequential screening problem arises in a framework where the agent is privately informed about expected cost and cost variability and, subsequently, learns the realized cost as well. As the principal's marginal surplus function becomes less concave/more convex, the optimal mechanism reflects progressively stronger incentives to mimic less inefficient types, and to misrepresent the cost variability relative to the expected cost. When the principal's knowledge imperfection about the cost variability is sufficiently less important than that about the expected cost, quantities are pooled with respect to the former for a high-expected-cost agent. A low-expected-cost agent is not assigned the first-best output at least in some state of nature.
    Keywords: Multidimensional screening; Sequential screening; Expected cost; Cost variability; Marginal surplus function
    JEL: D82
    Date: 2012–06
  3. By: Daniel Danau (UFR de sciences économiques et de gestion, Université de Caen Basse-Normandie, CREM-CNRS, UMR 6211); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy)
    Abstract: A government delegates construction and operation of an essential facility to a private firm. When parties sit at the contracting table, they are uncertain about the operating cost. At the construction stage, the firm can improve its distribution by exerting some non-contractible effort. As soon as the facility is in place, the firm learns the realized cost privately. In case any of the parties breaks down the relationship and the firm is replaced during the operation phase, the government bears a cost that is more important the earlier the interruption, relative to the stipulated duration. We show that, under limited commitment, the optimal full-commitment allocation is implementable if and only if the firm holds some minimum amount of own funds that can be destined to the project, it is able to borrow funds for that specific project, and the replacement cost is sufficiently high. Implementation is made by instructing the firm to invest some intermediate amount of own and borrowed funds, by conditioning the loan guarantee (provided under the aegis of a third party not suffering from commitment problems) on the outcome of the potential renegotiation process between the government and the firm, and by setting duration neither too short nor too long. Making duration contingent on the realized operating cost helps the government lessen the more concerning between moral-hazard and commitment problems.
    Keywords: public-private contracting; limited commitment; duration; private funds; debt; guarantees; replacement cost
    JEL: D82 H57 H81
    Date: 2012–06
  4. By: Seel, Christian; Strack, Philipp
    Abstract: This paper presents a strategic model of risk-taking behavior in contests. Formally, we analyze an n-player winner-take-all contest in which each player decides when to stop a privately observed Brownian Motion with drift. A player whose process reaches zero has to stop. The player with the highest stopping point wins. Contrary to the explicit cost for a higher stopping time in a war of attrition, here, higher stopping times are riskier, because players can go bankrupt. We derive a closed-form solution of the unique Nash equilibrium outcome of the game. In equilibrium, the trade-off between risk and reward causes a non-monotonicity: highest expected losses occur if the process decreases only slightly in expectation.
    Keywords: Discontinuous games; Contests; Relative performance pay; Risktaking behavior
    JEL: C72 C73 D81
    Date: 2012–03
  5. By: Krähmer, Daniel; Strausz, Roland
    Abstract: This paper considers the canonical sequential screening model and shows that when the agent has an expost outside option, the principal does not benefit from eliciting the agent’s information sequentially. Unlike in the standard model without expost outside options, the optimal contract is static and conditions only on the agent’s aggregate final information. The benefits of sequential screening in the standard model are therefore due to relaxed participation rather than relaxed incentive compatibility constraints. We argue that in the presence of expost participation constraints, the classical, local approach fails to identify binding incentive constraints and develop a novel, inductive procedure to do so instead. The result extends to the multi–agent version of the problem.
    Keywords: Sequential screening; dynamic mechanism design; participation constraints; Mirrlees approach
    JEL: D82 H57
    Date: 2011–10
  6. By: Seel, Christian; Strack, Philipp
    Abstract: This paper introduces a contest model in which each player decides when to stop a privately observed Brownian motion with drift and incurs costs depending on his stopping time. The player who stops his process at the highest value wins a prize. Applications of the model include procurement contests and competitions for grants. We prove existence and uniqueness of the Nash equilibrium outcome, even if players have to choose bounded stopping times. We derive the equilibrium distribution in closed form. If the noise vanishes, the equilibrium outcome converges to - and thus selects - the symmetric equilibrium outcome of an all-pay auction. For two players and constant costs, each player’s profits increase if costs for both players increase, variance increases, or drift decreases. Intuitively, patience becomes a more important factor for contest success, which reduces informational rents.
    Keywords: Contests; all-pay contests; silent timing games
    Date: 2012–03
  7. By: Hikmet Gunay; Xin Meng; Mark Nagelberg
    Abstract: We analyze the optimal reserve price in a second price auction when there are N types of bidders whose valuations are drawn from different distribution functions. The seller cannot determine the specific type of each bidder. First, we show that the number of bidders affects the reserve price. Second, we give the sufficient conditions for the uniqueness of the optimal reserve price. Third, we find that if a bidder is replaced by a stronger bidder, the optimal reserve price may decrease. Finally, we give sufficient conditions that ensure the seller will not use a reserve price; hence, the auction will be efficient.
    Date: 2012–07
  8. By: Hikmet Gunay; Xin Meng
    Abstract: We characterize the optimal bidding strategies of local and global bidders for two heterogenous licenses in a multi-unit simultaneous ascending auction. The global bidder wants to win both licenses to enjoy synergies; therefore, she bids more than her stand-alone valuation of a license. This exposes her to the risk of losing money even when she wins all licenses. We determine the optimal bidding strategies in the presence of an exposure problem. By using simulation methods, first, we show the frequency of inefficient allocation in the simultaneous ascending auction. Then, we show that the Vickrey-Clarke-Groves (VCG) mechanism may generate more revenue than the simultaneous ascending auction.
    Date: 2012–07
  9. By: Hu, Luke
    Abstract: This paper considers procurement auctions with costly bidding when the auctioneer is unable to commit himself to restrict the number of bidders. The auctioneer can, however, offer a financial reward to be paid to every short-listed bidders as an indirect commitment device. Rewards for short-listed bidders are costly. Nevertheless, it is generally optimal for the procurer to credibly implement the same restriction of the number of bidders that is optimal under full commitment.
    Keywords: Procurement; auctions; industrial organization; mechanism design
    JEL: D21 D43 D44 D45
    Date: 2012–02
  10. By: Jun, Byoung Heon; Wolfstetter, Elmar G.
    Abstract: A principal uses security bid auctions to award an incentive contract to one among several agents, in the presence of hidden action and hidden information. Securities range from cash to equity and call options. “Steeper†securities are better surplus extractors that narrow the gap between the two highest valuations, yet reduce effort incentives. In view of this trade-off, the generalized equity auction that includes a (possibly negative) cash reward to the winner tends to outperform all other auctions, although it cannot extract the entire surplus implement efficient effort. Hence, profit sharing emerges without risk aversion or limited liability.
    Keywords: Auctions; agency problems; licensing; innovation; mechanism design
    JEL: D21 D43 D44 D45
    Date: 2012–01
  11. By: Indrajit Ray; Sonali Sen Gupta
    Abstract: For duopoly models, we analyse the concept of coarse correlated equilibrium using simplesymmetric devices that the players choose to commit to in equilibrium. In a linear duopoly game, we prove that Nash-centric devices, involving a sunspot structure, are simple symmetric coarse correlated equilibria. Any small unilateral perturbation from such a structure fails to be an equilibrium.
    Keywords: Duopoly, Coarse Correlation, Simple devices, Sunspots
    Date: 2012–07
  12. By: Dominic Spengler
    Abstract: We construct a one-shot corruption game with three players, a briber who can decide to bribe or not, an official who can reciprocate or not and an inspector who can decide to inspect or not. We employ four penalties that can be distributed asymmetrically, making it possible to punish bribing and bribe-taking as well as reciprocating and accepting considerations to different degrees. Penalties apply if corruption is detected. The probability of detection is endogenised, as it depends on inspection. The model differs from other inspection games in that the offence (corruption) can only be completed in a joint effort between two of the players. This leads to surprising results, especially in conjunction with asymmetric penalties. First, in contrast to Tsebelis' counterintuitive results, we find confirmed that with endogenous detection, higher penalties do reduce the overall rate of offence. Second, this result holds only if the penalty for reciprocating on the official is raised. Surprisingly, and unlike other asymmetric penalty prescriptions in the corruption literature, higher penalties on on the briber have the opposite effect. They may reduce the probability of bribery, but they also increase the probability of reciprocation to the extent that the overall probability of reciprocated bribery is increased.
    Keywords: Inspection game, Corruption, Asymmetric penalties, Endogenising detection
    JEL: K42 H00 C72 O17
    Date: 2012–07
  13. By: Dai, Darong; Shen, Kunrong
    Abstract: In the present paper, a new approach to equilibrium selection for very general normal form games has been constructed by introducing stochastic optimal stopping theory into classical evolutionary game theory. That is, the new game equilibrium is induced by both stochastic group evolution and decentralized rational individual choice. Moreover, stability of the game equilibrium is confirmed from both time and space dimensions.
    Keywords: Stochastic replicator dynamics; Rational choice; Normal-form game equilibrium; Stability
    JEL: C70 C62
    Date: 2012–01–15
  14. By: Schmitz, Patrick W
    Abstract: An agent can make an observable but non-contractible investment. A principal then offers to collaborate with the agent to provide a public good. Private information of the agent about his valuation may either decrease or increase his investment incentives, depending on whether he learns his type before or after the investment stage.
    Keywords: asymmetric information; incomplete contracts; investment incentives; public goods
    JEL: D82 D86 H41
    Date: 2012–07

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