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on Microeconomics |
|
Issue of 2013‒05‒19
twenty-two papers chosen by Jing-Yuan Chiou IMT Lucca Institute for Advanced Studies |
| By: | John Morgan (University of California, Berkeley); Dana Sisak (Erasmus University Rotterdam); Felix Vardy (University of California, Berkeley and IMF) |
| Abstract: | We study career choice when competition for promotion is a contest. A more meritocratic profession always succeeds in attracting the highest ability types, whereas a profession with superior promotion benefits attracts high types only if the hazard rate of the noise in performance evaluation is strictly increasing. Raising promotion opportunities produces no systematic effect on the talent distribution, while a higher base wage attracts talent only if total promotion opportunities are sufficiently plentiful. |
| Keywords: | career choice, promotion competition, selection, meritocracy |
| JEL: | J45 J24 M52 |
| Date: | 2012–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012077&r=mic |
| By: | Ramon Flores (Universidad Carlos III de Madrid); Maurice Koster (University of Amsterdam); Ines Lindner (VU University Amsterdam); Elisenda Molina (Universidad Carlos III de Madrid) |
| Abstract: | This paper proposes a new measure for a group's ability to lead society to adopt their standard of behavior, which in particular takes account of the time the group takes to convince the whole society to adopt their position. This notion of a group's power to initiate action is computed as the reciprocal of the resistance against it, which is in turn given by the expected absorption time of a related finite state partial Markov chain that captures the social dynamics. The measure is applicable and meaningful in a variety of models where interaction between agents is formalized through (weighted) binary relations. Using Percolation Theory, it is shown that the group power is monotonic as a function of groups of agents. We also explain the differences between our measure and those discussed in the literature on Graph Theory, and illustrate all these concerns by a thorough analysis of two particular cases: the Wolfe Primate Data and the 11S hijackers' network. |
| Keywords: | Collective action, Social networks, Influence and diffusion models, Network intervention, Group centrality measures |
| JEL: | C79 D01 D71 |
| Date: | 2012–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012032&r=mic |
| By: | Otto H. Swank (Faculty of Economics, Erasmus Universiteit Rotterdam); Bauke Visser (Faculty of Economics, Erasmus Universiteit Rotterdam) |
| Abstract: | This article analyzes under which conditions a manager can motivate a junior worker by verbal communication, and explains why communication is often tied up with organizational choices as job enlargement and collaboration. Our model has two important features. First, the manager has more information about a junior's ability than the junior himself. Second, the junior's effort and ability are complements. We show that the manager has an incentive to exaggerate the junior's ability. We discuss two ways in which the manager can make credible statements about the junior's ability. First, the senior can delegate a task to the junior for which it is important that the junior has a correct perception of his ability. Information is shared through a costless signal. Second, the senior can spend more time on a junior she perceives as able than on a junior she perceives as less able. Information is then shared through a costly signal. |
| Keywords: | Communication; incentives; signalling; overconfidence; delegation; collaboration |
| JEL: | C70 D23 D83 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:0000042&r=mic |
| By: | Roland G. Fryer, Jr.; Philipp Harms |
| Abstract: | We present a two-armed bandit model of decision making under uncertainty where the expected return to investing in the "risky arm'' increases when choosing that arm and decreases when choosing the "safe'' arm. These dynamics are natural in applications such as human capital development, job search, and occupational choice. Using new insights from stochastic control, along with a monotonicity condition on the payoff dynamics, we show that optimal strategies in our model are stopping rules that can be characterized by an index which formally coincides with Gittins' index. Our result implies the indexability of a new class of "restless'' bandit models. |
| JEL: | J0 J24 L0 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19043&r=mic |
| By: | Andrei Barbos (Department of Economics, University of South Florida) |
| Abstract: | This paper studies a model in which an agent considers proposing a project of unknown quality to an evaluator, who has to decide on whether or not to accept it. Earlier papers considered the case when the evaluation is perfect and showed than higher submission fees increase the expected quality of projects submitted for review by discouraging long-shot submissions. We examine the case of two-sided incomplete information where not only the agent's, but also the evaluator's assessment of the project is imperfect. We show that under this specifcation, an increase in the submis- sion fee may lead to a decrease in the quality of projects that are implemented because of its adverse effects on the evaluator's acceptance policy. |
| Keywords: | Evaluation, Project Screening, Regulatory Burden |
| JEL: | D02 D82 L50 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:usf:wpaper:0613&r=mic |
| By: | Pascal Billand (Universite de Lyon, Universite Jean Monnet, Saint-Etienne, CNRS, GATE); Christophe Bravard (Universite de Lyon, Universite Jean Monnet, Saint-Etienne, CNRS, GATE); Jurjen Kamphorst (Erasmus University Rotterdam); Sudipta Sarangi (DIW Berlin and Louisiana State University) |
| Abstract: | Social networks, be it on the internet or in real life, facilitate information flows. We model this by giving agents incentives to link with others and receive information through those links. In many networks agents will value confirmation of the information they receive from others. Our paper analyzes the impact such a need for confirmation has on the social networks which are formed. We first study the existence of Nash equilibria and then characterize the set of strict Nash networks. Next, we characterize the set of strictly efficient networks and discuss the relationship between strictly efficient networks and strict Nash networks. |
| Keywords: | connections model, confirmation, two-way flow models |
| JEL: | C72 D85 |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012019&r=mic |
| By: | Maarten Janssen (University of Vienna); Vladimir Karamychev (Erasmus University Rotterdam) |
| Abstract: | We analyze the effects of mergers in first-price sealed-bid auctions on bidders' equilibrium bidding functions and on revenue. We also study the incentives of bidders to merge given the private information they have. We develop two models, depending on how after-merger valuations are created. In the first, single-aspect model, the valuation of the merged firm is the maximum of the valuations of the two firms engaged in the merger. In the multi-aspect model, a bidder's valuation is the sum of two components and a merged firm chooses the maximum of each component of the two merging firms. In the first model, a merger creates incentives for bidders to shade their bids leading to lower revenue. In the second model, the non-merging firms do not shade their bids and revenue is actually higher. In both models, we show that all bidders have an incentive to merge. |
| Keywords: | Mergers, first-price sealed-bid auctions |
| JEL: | D44 D82 |
| Date: | 2013–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013012&r=mic |
| By: | Robert Dur (Erasmus University Rotterdam, CESifo, and IZA); Jan Tichem (Erasmus University Rotterdam) |
| Abstract: | This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players' utility in equilibrium. |
| Keywords: | Altruism, spite, social relations, incentives, relational contracts, efficiency wages, subjective performance evaluation, Nash bargaining |
| JEL: | D23 J33 M52 M55 |
| Date: | 2012–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012054&r=mic |
| By: | Che, XiaoGang (University of Alberta, Department of Economics); Lee, Peter (University of Sydney); Yang, Yibai (University of Nottingham Ningbo China) |
| Abstract: | This paper investigates the effect of resale allowance on entry strategies in a second price auction with two bidders whose entries are sequential and costly. We first characterize the perfect Bayesian equilibrium in cutoff strategies. We then show that there exists a unique threshold such that if the reseller's bargaining power is greater (less) than the threshold, resale allowance causes the leading bidder (the following bidder) to have a higher (lower) incentive on entry; i.e., the cutoff of entry becomes lower (higher). We also discuss asymmetric bidders and the original seller's expected revenue. |
| Keywords: | second price auctions; costly participation; sequential entry; resale |
| JEL: | D44 |
| Date: | 2013–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2013_006&r=mic |
| By: | Giuseppe De Marco (Università di Napoli Parthenope and CSEF); Maria Romaniello (Seconda Università di Napoli) |
| Abstract: | In this paper, we look at the (Kajii and Ui) mixed equilibrium notion, which has been recognized by previous literature as a natural solution concept for incomplete information games in which players have multiple priors on the space of payoff relevant states. We investigate the problem of stability of mixed equilibria with respect to perturbations on the sets of multiple priors. We find out that the (Painlevé-Kuratowski) convergence of posteriors ensures that stability holds; whereas, convergence of priors is not enough to obtain stability since it does not always implies convergence of posteriors when we consider updating rules (for multiple priors) based on the classical Bayesian approach. |
| Keywords: | Incomplete information games, multiple priors, equilibrium stability |
| Date: | 2013–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:332&r=mic |
| By: | Harold Houba (VU University Amsterdam); Roland Iwan Luttens (Amsterdam University College); Hans-Peter Weikard (Wageningen University) |
| Abstract: | We include initial holdings in the jungle economy of Piccione and Rubinstein (Economic Journal, 2007) and relax the assumptions on consumption sets and preferences. We show that initial holdings are irrelevant for lexicographic welfare maximization. Equilibria other than such maximizers can be jungle equilibria due to myopia. We show that farsightedness restores the equivalence between jungle equilibria and lexicographic welfare maximization. However, we also derive farsighted equilibria in which stronger agents withhold goods from weaker agents. Then, gift giving by stronger agents is needed to restore Pareto efficiency. Our results add to understanding coercion and the crucial assumptions underlying jungle economies. |
| Keywords: | jungle economy, withholding, coercion, power |
| JEL: | D51 D61 P52 |
| Date: | 2013–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013053&r=mic |
| By: | Zara Sharif (Erasmus University Rotterdam); Otto H. Swank (Erasmus University Rotterdam) |
| Abstract: | Decisions-makers often rely on information supplied by interested parties. In practice, some parties have easier access to information than other parties. In this light, we examine whether more powerful parties have a disproportionate influence on decisions. We show that more powerful parties influence decisions with higher probability. However, in expected terms, decisions do not depend on the relative strength of interested parties. When parties have not provided information, decisions are biased towards the less powerful parties. Finally, we show that compelling parties to supply information destroys incentives to collect information. |
| Keywords: | information collection, communication, interest groups, decision-making |
| JEL: | D72 D78 D82 H39 |
| Date: | 2012–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012134&r=mic |
| By: | Vincent van den Berg (VU University Amsterdam) |
| Abstract: | Consider a government tendering the right to operate, for example, an airport, telecommunication network, or utility. There is an 'incumbent bidder' who owns a complement or substitute facility, and one entering 'new bidder'. With a 'standard auction' on the payment to the government, the incumbent is willing to bid higher than its expected profit from the facility as winning implies that it is a monopolist instead of a duopolist. The incumbent is therefore more likely to win. However, it tends to have a lower expected surplus unless the new bidder can never win, which occurs with 'private values' when the facilities are strong complements or substitutes and always with 'common values'. The 'standard auction' leads to an unregulated outcome which hurts consumers as tendered facilities tend to have limited competition. The government could improve the outcome by endogenously regulating using a 'price auction' on the price to be a sked to consumers. Now, it depends who is advantaged: with complements, the incumbent bids below its marginal cost and is more likely to win; with substitutes, it bids above and is less likely to win. The same effects occur in auctions on service quality or number of users. In many settings, the advantaged bidder always wins, and this can greatly affect the competition for the field. |
| Keywords: | tendering, overbidding, advantaged bidders, network markets |
| JEL: | D43 D44 L51 R42 |
| Date: | 2013–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013033&r=mic |
| By: | Jurjen J.A. Kamphorst (Erasmus University Rotterdam); Otto H. Swank (Erasmus University Rotterdam) |
| Abstract: | In many organizations, reward decisions depend on subjective performance evaluations. However, evaluating an employee's performance is often difficult. In this paper, we develop a model in which the employee is uncertain about his own performance and about the manager's ability to assess him. The manager gives an employee a performance appraisal with a view of affecting the employee's self perception, and the employee's perception of the manager's ability to assess performance. We examine how performance appraisals affect the employee's future performance. The predictions of our model are consistent with various empirical findings. These comprise (i) the observation that managers tend to give positive appraisals, (ii) the finding that on average positive appraisals motivate more than negative appraisals, and (iii) the observation that the effects of appraisals depend on the employee's perception of the manager's ability to assess performance accurately. |
| Keywords: | Subjective Performance Appraisal, Credibility, Cheap Talk |
| JEL: | M52 M54 D82 D83 |
| Date: | 2012–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012034&r=mic |
| By: | Makoto Watanabe (VU University Amsterdam) |
| Abstract: | This paper studies an intermediated market operated by middlemen with high inventory holdings. I present a directed search model in which middlemen are less likely to experience a stockout because they have the advantage of inventory capacity, relative to other sellers. The model explains why popular items are sold at a larger premium, and everyday items at a larger discount, by large-scaled intermediaries. The concentration of middlemen's market, i.e., few middlemen, each with large capacity, can lead to a higher matching efficiency, but with a lower total welfare, compared to having many middlemen, each with small capacity. |
| Keywords: | Directed Search, Intermediation, Inventory holdings |
| JEL: | D4 F1 G2 L1 L8 R1 |
| Date: | 2012–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012138&r=mic |
| By: | Margaret Meyer; Bruno Strulovici |
| Abstract: | In many economic applications involving comparisons of multivariate distributions, supermodularity of an objective function is a natural property for capturing a preference for greaterinterdependence. One multivariate distribution dominates another according to the supermodular stochastic ordering if it yields a higher expectation than the other for all supermodular objective functions. We prove that this ordering is equivalent to one distribution being derivable from another by a sequence of elementary, bivariate, interdependence-increasing transformations, and develop methods for determining whether such a sequence exists. For random vectors resulting from common and idiosyncratic shocks, we provide non-parametric sufficient conditions for supermodular dominance. Moreover, we characterize the orderings corresponding to supermodular objective functions that are also increasing or symmetric. We use the symmetric supermodular ordering to compare distributions generated by heterogeneous lotteries. Applications to welfare economics, committee decision-making, insurance, finance, and parameter estimation are discussed. JEL Classification Numbers: D63, D81, G11, G22 |
| Keywords: | Interdependence, Supermodular, Correlation, Copula, Concordance, Mixture, Majorization, Tournament |
| Date: | 2013–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1563&r=mic |
| By: | Jiri Strelicky; Kresimir Zigic |
| Abstract: | We study price discrimination in a monopolistic software market. The monopolist charges different prices for the upgrade version and for the full version. Consumers are heterogeneous in taste for infinitely durable software and there is no resale. We show that price discrimination leads to a higher software quality but raises both absolute price and price per quality. This price discrimination does not increase sales and it decreases the total number of consumers compared to no discrimination. Finally, such discrimination decreases consumers' surplus but increases the developer's profit and social welfare that attains the social optimum in the limit. |
| Keywords: | monopoly; durable goods; software; upgrades; price discrimination; |
| JEL: | C61 L12 L15 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp478&r=mic |
| By: | Berliant, Marcus; Tabuchi, Takatoshi |
| Abstract: | We consider information aggregation in national and local elections when voters are mobile and might sort themselves into local districts. Using a standard model of private information for voters in elections in combination with a New Economic Geography model, agglomeration occurs for economic reasons whereas voter stratification occurs due to political preferences. We compare a national election, where full information equivalence is attained, with local elections in a three-district model. We show that full information equivalence holds at a stable equilibrium in only one of the three districts when transportation cost is low. The important comparative static is that full information equivalence is a casualty of free trade. When trade is more costly, people tend to agglomerate for economic reasons, resulting in full information equivalence in the political sector. Under free trade, people sort themselves into districts, most of which are polarized, resulting in no full information equivalence in these districts. We examine the implications of the model using data on corruption in the legislature of the state of Alabama and in the Japanese Diet. |
| Keywords: | information aggregation in elections; informative voting; new economic geography; local politics |
| JEL: | D72 D82 R12 |
| Date: | 2013–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47002&r=mic |
| By: | Christiaan Behrens (VU University Amsterdam); Mark Lijesen (VU University Amsterdam) |
| Abstract: | This article analyses the capacity-then-price game for a duopoly market. We add to the literature by explicitly taking product differentiation into account. We study the impact of capacity costs, demand uncertainty, and vertical and horizontal product differentiation on equilibrium capacities, efficiency, and price dispersion. We identify a minimum degree of vertical product differentiation, relative to horizontal product differentiation, for which the subgame perfect Nash equilibrium in pure strategies is guaranteed to exist. We find that if firms' quality differences exactly offset cost differences, asymmetric outcomes in the capacity stage arise, with the low-cost, low-quality firm providing more capacity than its competitor. We show that the highest level of efficiency is reached at the degree of vertical product differentiation where it would be optimal for welfare if firms had equal capacities. Furthermore, our model provides an explanation for ambiguous results in empirical research on price dispersion. |
| Keywords: | Price competition, Capacity choice, Demand uncertainty, Product differentiation, Price dispersion |
| JEL: | D43 L11 L13 |
| Date: | 2012–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012113&r=mic |
| By: | Rene van den Brink (VU University Amsterdam); Chris Dietz (VU University Amsterdam) |
| Abstract: | A situation in which a finite set of agents can generate certain payoffs by cooperation can be described by a cooperative game with transferable utility (or simply a TU-game) where each agent is represented by one player in the game. In this paper, we assume that one agent can be represented by more than one player. We introduce two solutions for this multi-player agent game model, both being generalizations of the Shapley value for TU-games. The first is the agent-Shapley value and considers the agents in the most unified way in the sense that when an agent enters a coalition then it enters with all its players. The second is the player-Shapley value which takes all players as units, and the payoff of an agent is the sum of the payoffs over all its players. We provide axiomatic characterizations of these two solutions that differ only in a collusion neutrality axiom. The agent-Shapley value satisfies player collusion neutrality stating that collusion of two players belonging to the same agent does not change the payoff of this agent. On the other hand, the player-Shapley value satisfies agent collusion neutrality stating that after a collusion of two agents, the sum of their payoffs does not change. After axiomatizing the player- and agent-Shapley values we apply them to airport games and voting games. |
| Keywords: | Cooperative TU-game, Shapley value, multi-player agent, collusion neutrality, airport games |
| JEL: | C71 |
| Date: | 2012–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012001&r=mic |
| By: | Harold Houba (VU University Amsterdam); Gerard van der Laan (VU University Amsterdam); Yuyu Zeng (VU University Amsterdam) |
| Abstract: | We study multiple agents along a general river structure that is expressed by a geography matrix and who have access to limited local resources, quasi-linear preferences over water and money and cost functions dependent upon river inflow and own extraction. Unanimity bargaining determines the water allocation and monetary transfers. We translate International Water Law into either disagreement outcomes or individual aspiration levels. In the former case, we apply the asymmetric Nash bargaining solution, in the latter case the agents have to compromise in order to agree and we apply the asymmetric Nash rationing solution. In both cases the optimization problem is separable into two subproblems: the efficient water allocation that maximizes utilitarian welfare given the geography matrix; and the determination of the monetary transfers associated with the weights. We show that the Nash rationing solution may result in nonparticipation, therefore we generalize to the case with participation constraints. |
| Keywords: | River Basin Management, International Water Law, Negotiations, Externalities, Political Economy of Property Rights |
| JEL: | C70 D60 Q53 |
| Date: | 2013–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013051&r=mic |
| By: | Paolo Bertoletti (Department of Economics and Management, University of Pavia); Federico Etro (Department of Economics, University of Venice Ca' Foscari) |
| Abstract: | We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms’ size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms’ size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry. |
| Keywords: | Monopolistic competition, Indirect additivity, Dixit-Stiglitz model, Endogenous entry |
| JEL: | D11 D43 L11 F12 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0043&r=mic |