nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒02‒03
seventeen papers chosen by
Jing-Yuan Chiou
IMT Lucca Institute for Advanced Studies

  1. Gaming and Strategic Ambiguity in Incentive Provision By Margaret Meyer; Florian Ederer; Richard Holden
  2. Poverty and Self-Control By B. Douglas Bernheim; Debraj Ray; Sevin Yeltekin
  3. Relational Incentive Contracts with Persistent Private Information By James Malcomson
  4. Relational Incentive Contracts with Private Information By James Malcomson
  5. A strategic market game approach for the private provision of public goods By Marta Faias; Emma Moreno-garcía; Myrna Wooders
  6. Matching with Contracts: An Efficient Marriage Market? By Chloe Qianzi Zeng
  7. All-pay auctions: Implementation and optimality By Stefan Jönsson; Armin Schmutzler
  8. Coordination and Cheap Talk in a Battle of the Sexes By Chirantan Ganguly; Indrajit Ray
  9. A Competitive Partnership Formation Process By Tommy Andersson; Jens Gudmundsson; Dolf Talman; Zaifu Yang
  10. A Simple Model of Conflict By Sebastian Ille
  11. Cheap talk and editorial control By Newton, Jonathan
  12. Coalitions, tipping points and the speed of evolution By Newton, Jonathan
  13. Existence of equilibrium with unbounded short sales: a new approach By Vladimir Danilov; Gleb Koshevoy; Frank Page; Myrna Wooders
  14. Stochastic Stability in Monotone Economies By Takashi Kamihigashi; John Stachurski
  15. Parenting with Style: Altruism and Paternalism in Intergenerational Preference Transmission By Doepke, Matthias; Zilibotti, Fabrizio
  16. Information and Extremism in Elections By Raphael Boleslavsky; Christopher Cotton
  17. Informational Lobbying and Agenda Distortion By Christopher Cotton; Arnaud Dellis

  1. By: Margaret Meyer; Florian Ederer; Richard Holden
    Abstract: It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming.  We formally investigate these arguments.  Ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent.  If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment.
    Keywords: Contracts, incentives, gaming, strategic ambiguity, randomization
    JEL: L13 L22
    Date: 2013–01–17
  2. By: B. Douglas Bernheim; Debraj Ray; Sevin Yeltekin
    Abstract: The absence of self-control is often viewed as an important correlate of persistent poverty. Using a standard intertemporal allocation problem with credit constraints faced by an individual with quasi- hyperbolic preferences, we argue that poverty damages the ability to exercise self-control. Our theory invokes George Ainslie’s notion of “personal rules,” interpreted as subgame-perfect equilibria of an intrapersonal game played by a time-inconsistent decision maker. Our main result pertains to situations in which the individual is neither so patient that accumulation is possible from every asset level, nor so impatient that decumulation is unavoidable from every asset level. Such cases always possess a threshold level of assets above which personal rules support unbounded accumulation, and a second threshold below which there is a “poverty trap”: no personal rule permits the individual to avoid depleting all liquid wealth. In short, poverty perpetuates itself by undermining the ability to exercise self-control. Thus even temporary policies designed to help the poor accumulate assets may be highly effective. We also explore the implications for saving with easier access to credit, the demand for commitment devices, the design of accounts to promote saving, and the variation of the marginal propensity to consume across classes of resource claims.
    JEL: C61 C63 D31 D91 H31 I3 O12
    Date: 2013–01
  3. By: James Malcomson
    Abstract: This paper investigates relational incentive contracts with a continuum of privatelyobservedagent types that are persistent over time. For a sufficiently productive relationship,a pooling contract exists in which all agent types continuing the relationshipchoose the same action. Necessary and sufficient conditions are given for some separationto be feasible; the parties can then do better than with full pooling. When futureactions are optimal, however, separation of all types is not possible; the finest separationachievable is into partitions each containing a non-degenerate interval of types.Separation always involves lower output initially than after separation has occurred.
    Keywords: Relational incentive contracts, private information, ratchet effect, dynamic enforcement
    JEL: C73 D82 D86
    Date: 2012–12–04
  4. By: James Malcomson
    Abstract: This paper extends the relational contract model in Levin (2003) with shocks to theagent’s cost of effort (agent’s type) to shocks to the principal’s valuation of the agent’seffort (principal’s type). When optimal effort is fully pooled across agent types formultiple principal types, it is also pooled across those principal types. When optimaleffort separates some agent types for multiple principal types, it is not generally fullypooled across those principal types. But somewhat perversely, effort is then lower forsome principal type for which it is more valuable. Implications for employment andsupply relationships are discussed.
    Keywords: Relational incentive contracts, shocks, principal types, agent types
    JEL: C73 D82 D86
    Date: 2012–12–05
  5. By: Marta Faias (Universidade Nova de Lisboa); Emma Moreno-garcía (Universidad de Salamanca); Myrna Wooders (Vanderbilt University)
    Abstract: Bergstrom, Blume and Varian (1986) provides an elegant gametheoretic model of an economy with one private good and one public good. Strategies of players consist of voluntary contributions of the private good to public good production. Without relying on first order conditions, the authors demonstrate existence of Nash equilibrium and an extension of Warr's neutrality result - any redistribution of endowment that left the set of contributors unchanged would induce a new equilibrium with the same total public good provision. The assumption of one-private good greatly facilities the results. We provide analogues of the Bergstrom, Blume and Varian results in a model allowing multiple private and public goods. In addition, we relate the strategic market game equilibrium to the private provision of equilibrium of Villanaci and Zenginobuz (2005), which provides a counter-part to the Walrasian equilibrium for a public goods economy. Our techniques follow those of Dubey and Geanakoplos (2003), which itself grows out of the seminal work of Shapley and Shubik (1977). Our approach also incorporates, into the strategic market game literature, economies with production, not previously treated and, as a by-product, establishes a new existence of private-provision equilibrium.
    Keywords: Public goods, market games, equilibrium, Nash equilibrium, privateprovision, voluntary contributions.
    JEL: H0 C7
    Date: 2012–12–02
  6. By: Chloe Qianzi Zeng
    Abstract: This paper studies a marriage market with two-sided information asymmetry in whichthe gains from marriage are stochastic. Contracts specify divisions of ex-post realizedmarital surplus. I first study a game in which one side of the matching market offerscontracts. I show that when expected marital surplus is strictly monotonic in agents’types, no separating equilibrium that achieves matching efficiency exists. I then studya social planner’s problem, finding necessary and sufficient conditions for a truthful directrevelation mechanism to achieve matching efficiency. These conditions become morestringent as the number of agents in the matching market increases.
    Keywords: Matching, two-sided information asymmetry, endogenous sharing rule, marriage market, stochastic marital surplus
    JEL: C78 D82 J12 D13
    Date: 2012–11–26
  7. By: Stefan Jönsson; Armin Schmutzler
    Abstract: This paper analyzes how all-pay auctions with endogenous prizes can be used to provide effort incentives. We show that wide classes of effort distributions can be implemented as equilibrium outcomes of such games. We also ask how all-pay auctions have to be structured so as to induce high expected highest efforts without generating excessive wasteful efforts of losers. All-pay auctions with endogenous prizes can do better than all-pay auctions with fixed prizes in this respect, in particular, when the prize function is approximately linear. We use the results to compare patents and prizes as innovation incentives, and to explore promotion incentives in organizations.
    Keywords: Contests, all-pay auctions, endogenous prizes, implementation
    JEL: D44 D43 D02
    Date: 2013–01
  8. By: Chirantan Ganguly; Indrajit Ray
    Abstract: We consider a Battle of the Sexes game with incomplete information and allow cheap talk regarding players' private information before the game is played. We prove that the unique fully revealing symmetric cheap talk equilibrium has a desirable coordination property. Such coordination can also be obtained as a partially revealing cheap talk equilibrium. These outcomes can also be achieved using corresponding incentive compatible mechanisms, however, for different ranges of the prior probability.
    Keywords: Battle of the Sexes, Private Information, Cheap Talk, Coordination, Mechanism
    JEL: C72
    Date: 2013–01
  9. By: Tommy Andersson; Jens Gudmundsson; Dolf Talman; Zaifu Yang
    Abstract: A group of heterogenous agents may form partnerships in pairs. All single agents as well as all partnerships generate values. If two agents choose to cooperate, they need to specify how to split their joint value among one another. In equilibrium, which may or may not exist, no agents have incentives to break up or form new partnerships. This paper proposes a dynamic competitive adjustment process that always either finds an equilibrium or exclusively proves the nonexistence of any equilibrium in finitely many steps. When an equilibrium exists, partnership and revenue distribution will be automatically and endogenously determined by the process. Moreover, several fundamental properties of the equilibrium solution and the model are derived.
    Keywords: Partnership formation, adjustment process, equilibrium, assignment market
    JEL: C62 C72 D02
    Date: 2013–01
  10. By: Sebastian Ille
    Abstract: This paper develops a simple dynamic, non-symmetric game between two player populations that can be generalised to a large variety of conflicts. One population attempts to re-write a current (social) contract in its favour, whereas the other prefers to maintain the status quo. In the modelùs initial set up, the free-rider problem obstructs the occurrence of a conflict, leading to a low probability of a successful turn-over. The normative and conventional framework, in which players interact, plays however a vital role in the evolution of conflicts. By relating the individual pay-off perceptions for each strategy to the type and frequency of norm violations, the free-rider effect can be considerably weakened, thus enabling the model to predict the existence of two stable equilibria; one with a high rate of conflict, and another in which no conflict arises. This second equilibrium is caused by a triggering event. The model provides an explanation of how and why these events may occur and under which conditions they can be observed more frequently. In addition, it is also shown which factors influence the equilibriaùs basin of attraction, i.e. the likelihood of a transition and hence the probability of a conflict.
    Keywords: Social Conflict, Social Change, Evolutionary Game, Stability of Equilibria
    Date: 2013–01–25
  11. By: Newton, Jonathan
    Abstract: This paper analyzes simple models of editorial control. Starting from the framework developed by Krishna and Morgan (2001a), we analyze 2-sender models of cheap talk where one or more of the senders has the power to veto messages before they reach the receiver. A characterization of the most informative equilibria of such models is given: it is shown that editorial control never aids communication and that for small biases in the senders' pref­erences relative to those of the receiver, necessary and sufficient conditions for information transmission to be adversely affected are that the senders have opposed preferences relative to the receiver and that they both have powers of editorial control. It is shown that the addition of further senders beyond two weakly decreases information transmission.
    Keywords: Wikipedia; editorial control; Cheap talk
    Date: 2013–01
  12. By: Newton, Jonathan
    Abstract: This study considers pure coordination games on networks and the waiting time for an adaptive process of strategic change to achieve efficient coordination. Although it is in the interest of every player to coordinate on a single globally efficient norm, coalitional behavior at a local level can greatly slow, as well as hasten convergence to efficiency. For some networks, parameter values exist at which the effect of coalitional behavior changes abruptly from a conservative effect to a reforming effect. These effects are confirmed for a variety of stylized and empirical social networks found in the literature. For coordination games in which the Pareto efficient and risk dominant equilibria differ, polymorphic states can be the only stochastically stable states.
    Keywords: social networks; networks; conservatism; reform; social norm; coalition; learning; Stochastic stability; Evolution
    Date: 2013–01
  13. By: Vladimir Danilov (Central Economics and Mathematics Institute, Russian Academy of Sciences); Gleb Koshevoy (Central Economics and Mathematics Institute, Russian Academy of Sciences); Frank Page (Department of Economics, Indiana University); Myrna Wooders (Vanderbilt University)
    Abstract: We introduce a new approach to showing existence of equilibrium in models of economies with unbounded short sales. Inspired by the pioneering works of Hart (1974) on asset market models, Grandmont (1977) on temporary economic equilibrium, and of Werner (1987) on general equilibrium exchange economies, all papers known to us stating conditions for existence of equilibrium with unbounded short sales place conditions on recession cones of agents' preferred sets or, more recently, require compactness of the utility possibilities set. In contrast, in this paper, we place conditions on the preferred sets themselves. Roughly, our condition is that the sum of the weakly preferred sets is a closed set. We demonstrate that our condition implies existence of equilibrium. In addition to our main theorem, we present two theorems showing cases to which our main theorem can we applied. We also relate our condition to the classic condition of Hart (1974).
    Keywords: arbitrage, unbounded short sales, asset market models, sum of weakly preferred sets, existence of equilibrium
    JEL: C3 D5
    Date: 2012–12–03
  14. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); John Stachurski (Research School of Economics, Australian National University, Australia)
    Abstract: This paper extends a family of well-known stability theorems for monotone economies to a significantly larger class of models. We provide a set of general conditions for existence, uniqueness and stability of stationary distributions when monotonicity holds. The conditions in our main result are both necessary and sufficient for global stability of monotone economies that satisfy a weak mixing condition introduced in the paper. Through our analysis we develop new insights into the nature and causes of stability and instability.
    Keywords: Stability, Monotonicity, Stationary equilibria
    JEL: C62 C63
    Date: 2013–01
  15. By: Doepke, Matthias (Northwestern University); Zilibotti, Fabrizio (University of Zurich)
    Abstract: We construct a theory of intergenerational preference transmission that rationalizes the choice between alternative parenting styles (related to Baumrind 1967). Parents maximize an objective function that combines Beckerian and paternalistic altruism towards children. They can affect their children's choices via two channels: either by influencing their preferences or by imposing direct restrictions on their choice sets. Different parenting styles (authoritarian, authoritative, and permissive) emerge as equilibrium outcomes, and are affected both by parental preferences and by the socioeconomic environment. We consider two applications: patience and risk aversion. We argue that parenting styles may be important for explaining why different groups or societies develop different attitudes towards human capital formation, entrepreneurship, and innovation.
    Keywords: intergenerational preference transmission, altruism, paternalism, entrepreneurship, innovation
    JEL: D10 J10 O10 O40
    Date: 2012–12
  16. By: Raphael Boleslavsky (Department of Economics, University of Miami); Christopher Cotton (Department of Economics, University of Miami)
    Abstract: We show that informative political campaigns can increase political extremism and decrease voter welfare. We present a model of elections in which candidate ideology is strategically selected prior to a campaign which reveals information about candidate quality. Documented means by which campaigns can harm voters are not present in our model; special interest groups, fundraising, and biased or private information are not part of the analysis. Even under these optimistic assumptions, informative campaigns have negative consequences. Our results have implications regarding media coverage, the number of debates, and campaign finance reform.
    Keywords: Campaigns, elections, persuasion, policy divergence, probabilistic voting
    JEL: D72 D83
    Date: 2012–11–04
  17. By: Christopher Cotton (Department of Economics, University of Miami); Arnaud Dellis (Department of Economics, Universite Laval and CIRPEE)
    Abstract: This paper challenges the prevailing view in the literature that informational lobbying is socially beneficial. Key to our analysis is the fact that policymakers are constrained on the number of issues they can address, which forces them to prioritize issues. Under reasonable conditions, interest groups advocating less-salient reforms produce information, inducing policymakers to prioritize those reforms instead of more-salient ones. Such distortion of the policy agenda reduces social welfare. Our story is consistent with empirical accounts of the lobbying process.
    Keywords: Informational lobbying, agenda setting, information collection, persuasion
    JEL: D72 D78 D83
    Date: 2012–09–15

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