nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒01‒19
twenty papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Bonus Culture: Competitive Pay, Screening and Multitasking By Bénabou, Roland; Tirole, Jean
  2. The New Science of Pleasure By Daniel L. McFadden
  3. Games with Unawareness By Feinberg, Yossi
  4. Observability of information gathering in agency models By Hoppe, Eva I.
  5. Mutual Insurance Networks in Communities By Pascal Billand; Christophe Bravard; Marie Sudipta Sarangi
  6. Ranking Friends By Feinberg, Yossi; Kets, Willemien
  7. Incomplete Information in Cournot Oligopoly: The Case of Unknown Production Capacities By Richter, Jan
  8. Externalities Social Value and Word of Mouth By Pier-Andre Bouchard St-Amant
  9. Variable Temptations and Black Mark Reputations By Aperjis, Christina; Miao, Yali; Zeckhauser, Richard J.
  10. Multi-Object Auctions with Resale: An Experimental Analysis By Pagnozzi, Marco; Saral, Krista Jabs
  11. Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration By Iossa, Elisabetta; Rey, Patrick
  12. Salience and Consumer Choice By Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
  13. Optimal Life-cycle Capital Taxation under Self-Control Problems By Nicola Pavoni; Hakki Yazici
  14. Supervision in Firms By Kouroche Vafaï
  15. Sufficient Conditions for the Unique Stable Sets in Three Agent Pillage Games By Manfred Kerber; Colin Rowat
  16. Harsanyi's aggregation theorem with incomplete preferences By Eric Danan; Thibault Gajdos; Jean-Marc Tallon
  17. Contractive Dual Methods for Incentive Problems By Matthias Messner; Nicola Pavoni; Christopher Sleet
  18. On the Feedback Solutions of Differential Oligopoly Games with Hyperbolic Demand Curve and Capacity Accumulation1 By L. Lambertini; A. Palestini
  19. Distributional Comparative Statics By Martin Kaae Jensen
  20. Evolutionary Exploration of the Finitely Repeated Prisoners' Dilemma--The Effect of Out-of-Equilibrium Play By Lindgren, Kristian; Verendel, Vilhelm

  1. By: Bénabou, Roland; Tirole, Jean
    Abstract: This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be much larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions.
    Date: 2012–12
  2. By: Daniel L. McFadden
    Abstract: The neoclassical view of consumers as relentless egoistic maximizers is challenged by evidence from cognitive psychology, anthropology, evolutionary biology, and neurology. This paper begins by surveying the development of neoclassical consumer theory and the measurement of welfare, and expansions to encompass preference fields, nonlinear budgets, hedonic goods and household production, and consumption dynamics. Following this, it reviews the newer evidence on consumer behavior, and what this implies for the measurement of consumer beliefs, intentions, preferences, choices, and well-being.
    JEL: D03 D1
    Date: 2013–01
  3. By: Feinberg, Yossi (Stanford University)
    Abstract: We provide a tool to model and solve strategic situations where players' perceptions are limited, in the sense that they may only be aware of, or model, some of the aspects of the strategic situations at hand, as well as situations where players realize that other players' perceptions may be limited. We define normal, repeated, incomplete information and dynamic (extensive) form games with unawareness using a unified methodology. A game with unawareness is defined as a collection of standard games (of the corresponding form). The collection specifies how each player views the game, how she views the other players' perceptions of the game and so on. The modeler's description of perceptions, the players' description of other players' reasoning, etc. are shown to have consistent representations. We extend solution concepts such as rationalizability and Nash equilibrium to these games and study their properties. It is shown that while unawareness in normal form games can be mapped to incomplete information games, the extended Nash equilibrium solution is not mapped to a known solution concept in the equivalent incomplete information games, implying that games with unawareness generate novel types of behavior.
    JEL: C72 D81 D82
    Date: 2012–08
  4. By: Hoppe, Eva I.
    Abstract: We consider an adverse selection model in which the agent can gather private information before the principal offers the contract. There are two scenarios. In scenario I, information gathering is a hidden action, while in scenario II, the principal observes the agent's information gathering decision. We study how the two scenarios differ with respect to the agent's expected rent, the principal's expected profit, and the expected total surplus. In particular, it turns out that the principal may be better off when the agent's information gathering decision is a hidden action.
    Keywords: Hidden information; adverse selection; information gathering
    JEL: D86 D82 C72
    Date: 2013–01
  5. By: Pascal Billand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France ; Université Jean Monnet, Saint-Etienne, F-42000, France.); Christophe Bravard (Université Grenoble 2 ; UMR 1215 GAEL, F-38000 Grenoble, France ; CNRS, GATE Lyon St Etienne, Saint-Etienne, F-42000, France); Marie Sudipta Sarangi (DIW Berlin and Louisiana State University)
    Abstract: We study the formation of mutual insurance networks in a model where every agent who obtains more resources gives a fixed amount of resources to all agents who have obtained less resources. The low resource agent must be directly linked to the high resource agent to receive this transfer. We identify the pairwise stable networks and efficient networks. Then, we extend our model to situations where agents differ in their generosity with regard to the transfer scheme. We show that there exist conditions under which in a pairwise stable network agents who provide the same level of transfers are linked together, while there are no links between agents who provide high transfers and agents who provide low transfers.
    Keywords: Mutual insurance networks, Pairwise stable networks, Efficient networks
    JEL: C72 D81 D8
    Date: 2012
  6. By: Feinberg, Yossi (Stanford University); Kets, Willemien (Northwestern University)
    Abstract: We investigate the scope for cooperation within a community engaged in repeated reciprocal interactions. Players seek the help of others and approach them sequentially according to some fixed order, that is, a ranking profile. We study the ranking profiles that are most effective in sustaining cooperation in equilibrium, that is, profiles that support full cooperation in equilibrium under the largest set of parameters. These are the profiles that spread the costs of helping others equally among the members of the community. We show that, generically, these socially optimal ranking profiles correspond to Latin squares--profiles in which each player appears in a given position exactly once in other players' list. In addition, we study equilibria with bilateral enforcement in which only the victims punish non-cooperating deviators. We show that the Latin squares in which every two players rank each other at the same position can sustain cooperation for the widest range of parameters in this case.
    Date: 2012–12
  7. By: Richter, Jan (Energiewirtschaftliches Institut an der Universitaet zu Koeln)
    Abstract: A Cournot oligopoly in which firms face incomplete information with respect to production capacities is studied. For the case where the firms’ capacities are stochastically independent, the functional form of equilibrium strategies is derived. If inverse demand is concave, a unique symmetric equilibrium exists, and if demand is linear, then every equilibrium is symmetric. In the case of duopoly, the impact on social welfare when firms commit ex-ante on exchanging information is analyzed. Sharing information increases expected output and social welfare in a large class of models. If the demand intercept is sufficiently large, sharing information increases producer surplus and decreases consumer surplus (and vice versa).
    Keywords: Oligopoly; Incomplete Information; Cournot; Capacity Constraints; Information Sharing
    JEL: C72 D43 L13
    Date: 2013–01–10
  8. By: Pier-Andre Bouchard St-Amant (Queen s University)
    Abstract: I examine an environment where advertisers can "seed" word-of-mouth advertising by providing initial information about a product to specific users of a social network. Discussion over a social network generates spillover effects for firms when consumers can use the social network to inform each other about products. When a firm can exploit a social network's structure, it can increase its sales. However, when the network formation process is costly, firms free-ride on such costs at the expense of agents on the network. If agents can form coalitions, I show that they can recoup the value of this externality by charging a toll. When users actively modify the information, generating word-of-mouth advertising about a product provides a "social value." This social value stems from the discussions that agents have about the product, without any intervention. Since this process occurs regardless of the firm's actions, the firm cannot capture such valuation. The opinion leaders, or highly regarded agents on the network, play a key role in the formation of this social value.
    Keywords: Network, Word of Mouth, Externalities, Social Value
    JEL: D83 D85
    Date: 2013–01
  9. By: Aperjis, Christina (HP Labs, Palo Alto, CA); Miao, Yali (Jane Street Capital, Tokyo); Zeckhauser, Richard J. (Harvard University)
    Abstract: In a world of imperfect information, reputations often guide the sequential decisions to trust and to reward trust. We consider two-player situations, where the players meet but once. One player--the truster--decides whether to trust, and the other player--the temptee--has a temptation to betray when trusted. The strength of the temptation to betray may vary from encounter to encounter, and is independently distributed over time and across temptees. We refer to a recorded betrayal as a black mark. We study how trusters and temptees interact in equilibrium when past influences current play only through its effect on certain summary statistics. We first focus on the case that players only condition on the number of black marks of a temptee and study the different equilibria that emerge, depending on whether the trusters, the temptees, or a social planner has the ability to specify the equilibrium. We then show that conditioning on the number of interactions as well as on the number of black marks does not prolong trust beyond black marks alone. Finally, we consider more general summary statistics of a temptee's past and identify conditions under which there exist equilibria where trust is possibly suspended only temporarily.
    Date: 2012–11
  10. By: Pagnozzi, Marco; Saral, Krista Jabs
    Abstract: We analyze the effects of resale through bargaining in multi-object uniform-price auctions with asymmetric bidders. The possibility of resale affects bidders' strategies, and hence the allocation of the objects on sale and the seller's revenue. Our experimental design consists of four treatments: one without resale and three resale treatments that vary both the bargaining mechanism and the amount of information available in the resale market. As predicted by theory: (i) without resale, asymmetry among bidders reduces demand reduction; (ii) resale increases demand reduction by high-value bidders; (iii) low-value bidders speculate by bidding more aggressively with resale. Therefore, resale induces speculation and demand reduction which reduce auction efficiency. In contrast to what is usually argued, resale does not necessarily increase final efficiency and may not reduce the seller's revenue. Features of the resale market that tend to increase its efficiency also reduce the seller's revenue.
    Keywords: multi-object auctions; resale; asymmetric bidders; bargaining; economic experiments
    JEL: D44 C90
    Date: 2013–01
  11. By: Iossa, Elisabetta (DEF, University of Rome Tor Vergata, CEPR, CMPO and EIEF); Rey, Patrick (TSE,IDEI)
    Abstract: We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent’s productivity can evolve exogenously (random shocks) or improve endogenously through investment. We show that incentives are stronger and performance is higher when the contract approaches its expiry date. Contrary to common wisdom, long-term contracts may strengthen reputational effects whereas short-term contracting may be optimal when investment has persistent, long-term effects.
    Keywords: Career concerns, contract duration,contract renewal, reputation and dynamic incentives.
    Date: 2012–11
  12. By: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a theory of context-dependent choice in which a consumer's attention is drawn to salient attributes of goods, such as quality or price. An attribute is salient for a good when it stands out among the good's attributes, relative to that attribute's average level in the choice set (or generally, the evoked set). Consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality/price ratios. The model accounts for a variety of disparate evidence, including decoy e ects, context-dependent willingness to pay, and large shifts in demand in response to price shocks.
    Date: 2012
  13. By: Nicola Pavoni; Hakki Yazici
    Abstract: We study optimal taxation of savings in an economy where agents face self-control problems and are allowed to be partially naive. We assume that the severity of self-control problems changes over the life-cycle. We focus on quasihyperbolic discounting with constant elasticity of intertemporal substitution utility functions and linear Markov equilibria. We derive explicit formulas for optimal taxes that implement the efficient allocation. We show that if agents’ ability to self-control increases concavely with age, then savings should be subsidized and the subsidy should decrease with age. We also show that allowing for age-dependent self-control problems creates large effects on the level of optimal subsidies, while optimal taxes are not very sensitive to the level of sophistication. JEL classification: E21, E62, D03. Keywords: Self-control problems, Linear Markov equilibrium, Life cycle taxation of savings.
    Date: 2012
  14. By: Kouroche Vafaï (Université Paris Descartes - Sorbonne Paris Cité - IUT, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: To control, evaluate, and motivate their agents, firms employ supervisors. As shown by empirical investigations, biased evaluation by supervisors linked to collusion is a persistent feature of firms. This paper studies how deceptive supervision affects agency relationships. We consider a three-level firm where a supervisor is in charge of producing a verifiable report on an agent's output. Depending on the output he has observed, the supervisor may either collude with the agent or with the principal, and make an uniformative report. We show that the proliferation of collusive activities in firms : modifies the configuration of the optimal preventive policy, may increase the expected cost of preventing each type collusion, is beneficial to the supervisor and detrimental to the agent, and is not always harmful.
    Keywords: Firm; group decision; control; biased supervision
    Date: 2012–12
  15. By: Manfred Kerber; Colin Rowat
    Abstract: Pillage games [Jordan, 2006, "Pillage and Property", JET] have two features that make them richer than cooperative games in either characteristic or partition function form: they allow power externalities between coalitions; they allow resources to contribute to coalitions' power as well as to their utility. Extending von Neumann and Morgenstern's analysis of three agent games in characteristic function form to anonymous pillage games, we find: when the core is non-empty, it must take one of five forms; all such games with an empty core represent the same dominance relation. When a stable set exists, and the game also satisfies a continuity and a responsiveness axiom, it is unique and contains no more than 15 elements, a tight bound. By contrast, stable sets in three agent games in characteristic or partition function form may not be unique, and may contain continua. Finally, we provide an algorithm for computing the stable set, and can easily decide non-existence. Thus, in addition to offering attractive modelling possibilities, pillage games seem well behaved and analytically tractable, overcoming a difficulty that has long impeded use of cooperative game theory's flexibility.
    Keywords: co-operative game theory, stable sets, algorithm, core
    JEL: C63 C71 P14
    Date: 2012–11
  16. By: Eric Danan (THEMA - THéorie Economique, Modélisation et Applications - université de Cergy-Pontoise); Thibault Gajdos (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR7316); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We provide a generalization of Harsanyi (1995)'s aggregation theorem to the case of incomplete preferences at the individual and social level. Individuals and society have possibly incomplete expected utility preferences that are represented by sets of expected utility functions. Under Pareto indifference, social preferences are represented through a set of aggregation rules that are utilitarian in a generalized sense. Strengthening Pareto indifference to Pareto preference provides a refinement of the representation.
    Keywords: Incomplete preferences; aggregation; expected multi-utility; utilitarianism
    Date: 2012–12
  17. By: Matthias Messner; Nicola Pavoni; Christopher Sleet
    Abstract: Several recent papers have proposed recursive Lagrangian-basedmethods for solving dynamic contracting problems. Thesemethods give rise to Bellman operators that incorporate either a dual inf-sup or a saddle point operation. We give conditions that ensure the Bellman operator implied by a dual recursive formulation is contractive. JEL codes: C61, C73, D82, E61. Keywords: Dynamic Contracts, Duality, Dynamic Programming, Contraction Mapping Theorem.
    Date: 2012
  18. By: L. Lambertini; A. Palestini
    Abstract: We characterise the subgame perfect equilibrium of a differential market game with hyperbolic inverse demand where firms are quantity-setters and accumulate capacity over time à la Ramsey. The related Hamilton-Jacobi-Bellman are solved in closed form both on infinite and on finite horizon setups and the optimal strategies are determined. Then, we analyse the feasibility of horizontal mergers in both static and dynamic settings, and find appropriate conditions for their profitability under both circumstances. Static profitability of a merger implies dynamic profitability of the same merger. It appears that such a demand structure makes mergers more likely to occur than they would on the basis of the standard linear inverse demand.
    JEL: C73 L13
    Date: 2013–01
  19. By: Martin Kaae Jensen
    Abstract: An important set of questions in economics concern how changes in the distribution of economic parameters (income, wealth, productivity, distortions, information, etc.) impact individual choices and market outcomes. We currently do not have tools to answer such questions. In this paper, I develop a theory of distributional comparative statics that addresses this set of issues. Central to the developments is a new concept called strategic risk-aversion which determines the outcome of the most distributional comparative statics exercises. As illustrations, I analyze the relationship between savings and the inequality, ask how risk influences agents' behavior in Bayesian games, and study con-cavity of policy functions in general stochastic dynamic programming problems.
    Keywords: Comparative statics, strategic risk-aversion, income distribution, inequality, uncertainty, Bayesian games, dynamic stochastic general equilibrium models, concavity, convexity, policy functions, arg max correspondence
    JEL: C61 D80 D90 E20 I30
    Date: 2012–06
  20. By: Lindgren, Kristian; Verendel, Vilhelm
    Abstract: The finitely repeated Prisoners' Dilemma is a good illustration of the discrepancy between the strategic behaviour suggested by a game-theoretic analysis and the behaviour often observed among human players, where cooperation is maintained through most of the game. A game-theoretic reasoning based on backward induction eliminates strategies step by step until defection from the first round is the only remaining choice, reflecting the Nash equilibrium of the game. We investigate the Nash equilibrium solution for two different sets of strategies in an evolutionary context, using replicator-mutation dynamics. The first set consists of conditional cooperators, up to a certain round, while the second set in addition to these contains two strategy types that react differently on the first round action: The "Convincer" strategies insist with two rounds of initial cooperation, trying to establish more cooperative play in the game, while the "Follower" strategies, although being first round defectors, have the capability to respond to an invite in the first round. For both of these strategy sets, iterated elimination of strategies shows that the only Nash equilibria are given by defection from the first round. We show that the evolutionary dynamics of the first set is always characterised by a stable fixed point, corresponding to the Nash equilibrium, if the mutation rate is sufficiently small (but still positive). The second strategy set is numerically investigated, and we find that there are regions of parameter space where fixed points become unstable and the dynamics exhibits cycles of different strategy compositions. The results indicate that, even in the limit of very small mutation rate, the replicator-mutation dynamics does not necessarily bring the system with Convincers and Followers to the fixed point corresponding to the Nash equilibrium of the game. We also perform a detailed analysis of how the evolutionary behaviour depends on payoffs, game length, and mutation rate.
    Keywords: backward induction; rationality; prisoners' dilemma; evolutionary dynamics
    JEL: C7 C73 C72
    Date: 2013–01–04

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