nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒09‒13
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Cooperation and Signaling with Uncertain Social Preferences By John Duffy; Felix Munoz-Garcia
  2. A Theory of Bargaining Deadlock By Ilwoo Hwang
  3. Keeping Your options Open By Jean Guillaume Forand
  4. The (ir)resistible rise of agency rents By Biais, Bruno; Landier, Augustin
  5. Collateral Equilibrium - A Basic Framework By John Geanakoplos; William Zame
  6. Communication in procurement: silence is not golden By Lucie Ménager
  7. Bertrand Competition under Network Externalities By Masaki Aoyagi
  8. Designing Efficient Resource Sharing For Impatient Players Using Limited Monitoring By Mihaela van der Schaar; Yuanzhang Xiao; William Zame
  9. Range-Dependent Utility By Krzysztof Kontek; Michal Lewandowski
  10. Dominance and Competitive Bundling By Hurkens, Sjaak; Jeon, Doh-Shin; Menicucci, Domenico
  11. Equilibrium Pricing and Trading Volume under Preference Uncertainty By Biais, Bruno; Hombert, Johan; Weill, Pierre-Olivier
  12. Prospect theory and tax evasion: a reconsideration of the Yitzhaki Puzzle By Amadeo Piolatto; Matthew Rablen
  13. Voluntary Pooled Public Knowledge Goods and Coalition Formation By Tom DEDEURWAERDERE; Paolo MELINDI GHIDI
  14. Innovation in a generalized timing game By Smirnov, Vladimir; Wait, Andrew
  15. Spending Biased Legislators - Discipline Through Disagreement By Facundo Piguillem; Alessandro Riboni
  16. The Power of Money: Wealth Effects in Contests. By Schroyen, Fred; Treich, Nicolas
  17. An Industry-Equilibrium Analysis of the LeChatelier Principle By Peter Arendorf Bache; Anders Laugesen

  1. By: John Duffy; Felix Munoz-Garcia
    Abstract: This paper investigates behavior in finitely repeated simultaneous and sequential-move prisoner's dilemma games when there is one-sided incomplete information and signaling about players' concerns for fairness, specifically, their preferences regarding "inequity aversion." In this environment, we show that only a pooling equilibrium can be sustained, in which a player type who is unconcerned about fairness initially cooperates in order to disguise himself as a player type who is concerned about fairness. This disguising strategy induces the uninformed player to cooperate in all periods of the repeated game, including the final period, at which point the player type who is unconcerned about fairness takes the opportunity to defect, i.e., he "backstabs" the uninformed player. Despite such last-minute defection, our results show that the introduction of incomplete information can actually result in a Pareto improvement under certain conditions. We connect the predictions of this "backstabbing" equilibrium with the frequently observed decline in cooperative behavior in the final period of finitely-repeated experimental games.
    Keywords: Prisoner\'s Dilemma, Social Preferences, Inequity Aversion, Incomplete Information, Siganling, Information Transmission
    JEL: C72 C73 D82
    Date: 2012–03
  2. By: Ilwoo Hwang
    Abstract: I study a dynamic one-sided-offer bargaining model between a seller and a buyer under incomplete information. The seller knows the quality of his product while the buyer does not. During bargaining, the seller randomly receives an outside option, the value of which depends on the hidden quality. If the outside option is sufficiently important, there is an equilibrium in which the uninformed buyer fails to learn the quality and continues to make the same randomized offer throughout the bargaining process. As a result, the equilibrium behavior produces an outcome path that resembles the outcome of a bargaining deadlock and its resolution. The equilibrium with deadlock has inefficient outcomes such as a delay in reaching an agreement and a breakdown in negotiations. Bargaining inefficiencies do not vanish even with frequent offers, and they may exist when there is no static adverse selection problem. Under stronger parametric assumptions, the equilibrium with deadlock is unique under a monotonicity criterion, and all equilibria exhibit inefficient outcomes.
    Keywords: bargaining game, asymmetric information, bargaining deadlock, delay, failure of learning, Coase conjecture
    JEL: C78 D82 D83
    Date: 2013–09–03
  3. By: Jean Guillaume Forand (Department of Economics, University of Waterloo)
    Abstract: In standard models of experimentation, the costs of project development consist of (a) the direct cost of running trials as well as (b)the implicit opportunity cost of leaving alternative projects idle. Another natural type of experimentation cost, the cost of holding on to the option of developing a currently inactive project, has not been studied. In a multi-armed bandit model of experimentation in which inactive projects have explicit maintenance costs and can be irreversibly discarded, I fully characterise optimal experimentation policies and show that the decision-maker's incentive to actively manage its options has important implication for the order of project development. In the model, an experimenter searches for a success among a number of projects by choosing both those to develop now and those to maintain for (potential) future development. In the absence of maintenance costs, optimal experimentation policies incentives to bring the option value of less promising projects forward, and under optimal experimentation policies, 'going -with-the-loser' can be optimal: projects that are less likely to succeed are sometimes developed rast.
    JEL: D83 D81 C61
    Date: 2013–02
  4. By: Biais, Bruno; Landier, Augustin
    Abstract: The rents agents can extract from principals increase with the magnitude of incentive problems, which the literature usually takes as given. We endogenize it, by allowing agents to choose technologies that are more or less opaque and correspondingly prone to agency problems. In our overlapping generations model, agents compete with their predecessors. We study whether the presence of old- timers earning low rents can keep young managersrent-seeking in check. With dynamic contracts, long horizons help principals incentivize agents. Hence, old agents are imperfect substitutes for young ones. This mutes down competition between generations, especially if compensation deferral is strong. As a result, young managers can opt for more opaque and complex technologies, and therefore larger rents, than their predecessors. Thus, in equilibrium, complexity and rents rise over time.
    Keywords: Agency rents, moral hazard, …nance sector, dynamic contracts, opacity.
    JEL: D3 D8 G2
    Date: 2013–05
  5. By: John Geanakoplos (Yale University); William Zame (University of California, Los Angeles)
    Abstract: Much of the lending in modern economies is secured by some form of collateral; residential and commercial mortgages and corporate bonds are familiar examples. This paper builds an extension of general equilibrium theory that incorporates durable goods, collateralized securities and the possibility of default to argue that the reliance on collateral to secure loans and the particular collateral requirements chosen by the social planner or by the market have a profound impact on prices, allocations, market structure and the efficiency of market outcomes. These findings provide insights into housing and mortgage markets, including the sub-prime mortgage market.
    Date: 2013
  6. By: Lucie Ménager (LEM - Laboratoire d'Économie Moderne - Université Paris II - Panthéon-Assas : EA4442, EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille III - Sciences humaines et sociales)
    Abstract: We study the effect of cheap talk between bidders on the outcome of a first-price procurement game with N sellers in which bidding is costly. Although no side-payements or commitments are allowed, we show that the game admits a unique family of symmetric equilibria in which sellers use communication to collude on a subset of participants and/or to reveal information about their valuation. Contrary to the conventional wisdom, the buyer's expected revenue and the surplus need not decrease with collusion, and the ex-ante surplus increases with the amount of information revealed in equilibrium. This is because when communication is cheap, bidders cannot directly collude on higher prices. Rather, communication leads to a competition between fewer, but more aggressive bidders, which entails more allocative efficiency and a decrease in the total wasteful entry cost.
    Keywords: Communication; procurement; collusion
    Date: 2013–08–16
  7. By: Masaki Aoyagi
    Abstract: Two sellers engage in price competition to attract buyers located on a network. The value of the good of either seller to any buyer depends on the number of neighbors on the network who consume the same good. For a generic specification of consumption externalities, we show that an equilibrium price equals the marginal cost if and only if the buyer network is complete or cyclic. When the externalities are approximately linear in the size of consumption, we identify the classes of networks in which one of the sellers monopolizes the market, or the two sellers segment the market.
    Date: 2013–09
  8. By: Mihaela van der Schaar (Electrictal Engineering, UCLA); Yuanzhang Xiao (Electrictal Engineering, UCLA); William Zame (Economics, UCLA)
    Abstract: The problem of efficient sharing of a resource is nearly ubiquitous. Except for pure public goods, each agent's use creates a negative externality; often the negative externality is so strong that efficient sharing is impossible in the short run. We show that, paradoxically, the impossibility of efficient sharing in the short run enhances the possibility of efficient sharing in the long run, even if outcomes depend stochastically on actions, monitoring is limited and users are not patient. We base our analysis on the familiar framework of repeated games with imperfect public monitoring, but we extend the framework to view the monitoring structure as chosen by a designer who balances the benefits and costs of more accurate observations and reports. Our conclusions are much stronger than in the usual folk theorems: we do not require a rich signal structure or patient users and provide an explicit online construction of equilibrium strategies.
    Date: 2013
  9. By: Krzysztof Kontek (Artal Investments); Michal Lewandowski (Warsaw School of Economics)
    Abstract: This paper introduces the concept of range-dependent utility. Instead of reference dependence which evaluates outcomes relative to some reference point, we postulate dependence on a given lottery (set of lotteries) outcomes range. In this way the decision maker is a fully rational expected utility maximizer only within a certain range. Range-dependent utility enables experimental results to be explained without recourse to the probability weighting function. Experimental data show that range-dependent utilities can be normalized to obtain decision utility - a single utility function able to describe decisions involving lotteries defned over diferent ranges. Both the data analysis as well as theoretical considerations concerning monotonicity indicate that the decision utility should be of S-shape
    Keywords: range-dependent utility, decision utility, Certainty Equivalent, quasilinear mean, Expected Utility Theory, Prospect Theory, Allais paradox, insurance and gambling
    JEL: D81 D03 C91
    Date: 2013–01–13
  10. By: Hurkens, Sjaak; Jeon, Doh-Shin (TSE); Menicucci, Domenico
    Abstract: We study bundling by a dominant multi-product rm facing competition from a rival multi-product rm. Compared to competition under independent pricing, competition under pure bundling reduces (increases) each rm's prot for low (high) levels of dominance, while for intermediate levels of dominance, it increases the dominant rm's prot but reduces the rival's prot. The latter result provides a justication for the use of contractual bundling to build entry barrier. When we allow for mixed bundling, we nd a threshold level of dominance above which the unique outcome is the one under pure bundling.
    JEL: D43 L13 L41
    Date: 2013–08–13
  11. By: Biais, Bruno; Hombert, Johan; Weill, Pierre-Olivier
    Abstract: Information collection, processing and dissemination financial institutions is challenging. This can delay the observation by traders of the exact capital charges and constraints of their institution. During this delay, traders face preference uncertainty. In this context, we study optimal trading strategies and equilibrium prices in a continuous centralized market. We focus on liquidity shocks, during which preference uncertainty is likely to matter most. Preference uncertainty generates allocative ineficiency, but need not reduce prices. Traders progressively learning about the preferences of their institution conduct round-trip trades, which generate excess volume relative to the frictionless market. In a cross section of liquidity shocks, the initial price drop is positively correlated with total trading volume. Across traders, the number of round-trips is negatively correlated with trading profits and average inventory.
    JEL: D8 G1
    Date: 2013–07–16
  12. By: Amadeo Piolatto; Matthew Rablen
    Abstract: The standard expected utility model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki Puzzle). The existing literature disagrees on whether prospect theory overturns the puzzle. We disentangle four distinct elements of prospect theory and find loss aversion and probability weighting to be redundant in endogenous specification of the reference level. These classes include, as special cases, the most common specifications in the literature. New specifications of the reference level are needed, we conclude.
    Keywords: prospect theory, tax evasion, Yitzhaki puzzle, stigma, diminishing sensitivity, reference dependence, endogenous audit probability, endogenous reference level
    JEL: H26 D81 K42
    Date: 2013–08
    Abstract: In this paper we develop a theoretical model of the mechanisms behind the voluntary provision of public knowledge goods in coalitions in presence of social preferences. The model builds on the large empirical literature on voluntary production of pooled public knowledge goods, such as source code in communities of software developers or data voluntarily provided to open access data repositories. This literature shows that the provision of public goods is strongly dependent on the presence of social preferences such as group identity and social approval of individual pro-social attitudes. To integrate these effects in standard public good theory this paper builds a private-collective model of public good provision, where contribution to public knowledge goods generates both public and exclusive private benefits for the members of the coalition only. The analysis shows that, when the private benefit is important, the effect of the social preferences on the coalition formation is ambiguous. In particular, in the latter case, in presence of strong individual reputational effects, the public knowledge goods will be more difficult to produce. The comparison of the predictions of the theoretical model with the stylized facts of large scale surveys of Free/Libre/Open-Source (FLOSS) software developers confirms the results of the model.
    Keywords: coalition formation, private-collective model, social group identity, pro-social reputation, public knowledge goods, social dilemma
    JEL: H42 D71
    Date: 2013–09–03
  14. By: Smirnov, Vladimir; Wait, Andrew
    Abstract: We examine innovation as a timing game with complete information and observable actions in which firms decide when to enter a market. We characterize all pure strategy subgame perfect equilibria for the two-player symmetric game. In particular, we describe all subgame perfect equilibria when both the leader's and the followers' payoff functions are multi-peaked, non-monotonic and discontinuous. We find that there are potentially multiple equilibria, which could involve: joint adoption by both firms, with and without rent equalization; and, alternatively, single-firm adoption with a second-mover advantage. Economic applications are discussed including process and product innovation and the timing of the sale of an asset.
    Keywords: product innovation; process innovation; follower; leader; entry; timing games
    Date: 2013–08
  15. By: Facundo Piguillem (EIEF); Alessandro Riboni (Ecole Polytechnique)
    Abstract: This paper studies politicians who have a present-bias for spending; they want to increase current spending and procrastinate spending cuts. We argue that legislators' bias is more severe in economies with low institutional quality. We show that disagreement in legislatures leads to policy persistence and that this attenuates the temptation to overspend. Depending on the environment, legislators' decisions to be fiscally responsible may either complement or substitute other legislator's decisions. In economies with weak institutions, politicians' actions are strategic complements. Thus, institutional changes that induce fiscal responsibility are desirable, they generate a positive responsibility multiplier and reduce inefficient spending. However, in economies with better institutions, the same institutional change would induce some legislators to free ride on others' responsibility and may lead to more inefficient spending.
    Date: 2013
  16. By: Schroyen, Fred (Dept. of Economics, Norwegian School of Economics and Business Administration); Treich, Nicolas (Toulouse School of Economics)
    Abstract: Two wealth effects typically arise in any contest: i) wealth decreases the marginal cost of effort, but also ii) decreases the marginal benefit of winning the contest. In this paper, we introduce three types of strategic contest models depending on whether the first, second, or both wealth effects play a role: namely, a privilege contest, an ability contest, and a rent-seeking contest. Our theoretical analysis reveals that the effects of wealth and wealth inequality are strongly “contestdependent” and are complex in the sense that they depend on the decisiveness of the contest and on the higher-order derivatives of the utility functions of wealth. Our analysis thus does not support general claims that the rich should lobby more or that low economic growth and wealth inequality should lead to additional conflicts.
    Keywords: Conflict; contest; rent-seeking; wealth; risk aversion; lobbying; power; redistribution.
    JEL: C72 D72 D74 D81
    Date: 2013–07–09
  17. By: Peter Arendorf Bache (Department of Economics and Business, Aarhus University); Anders Laugesen (Department of Economics and Business, Aarhus University)
    Abstract: By considering firms operating in a perfectly- or monopolisticallycompetitive industry with free entry, we show that well-established results on the celebrated LeChatelier principle (LCP) do not extend into an endogenous competitive environment. For instance, labour demand may be more elastic in the short run (where capital is fixed) than in the long run even if capital and labour are either complements or substitutes in profits. This may also be true locally at a point of long-run equilibrium. A novel insight is that industry-equilibrium effects introduce an asymmetry such that the LCP may hold for wage increases but not for wage decreases. These results are important for the interpretation of estimated labour-demand elasticities. Finally, we show that the LCP may hold for the total industry labour demand in situations where it does not hold for the labour demand of individual firms.
    Keywords: Complements, Substitutes, Monopolistic Competition, Industry Equilibrium, Labour Demand, LeChatelier Principle
    JEL: C61 D21 J23
    Date: 2013–09–04

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