nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒09‒28
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Hidden Action or Hidden Information? How Information Gathering Shapes Contract Design By Iossa, Elisabetta; Martimort, David
  2. Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration By Iossa, Elisabetta; Rey, Patrick
  3. Confidence and Competence in Communication. By Kohei Kawamura (University of Edinburgh)
  4. Collateral Equilibrium: A Basic Framework By John Geanakoplos; William R. Zame
  5. Relational Knowledge Transfers By Garicano, Luis; Rayo, Luis
  6. Concave Expected Utility and Event Separability By Ehud Lehrer; Roee Tepper
  7. Afriat from MaxMin By John Geanakoplos
  8. Contracting With Synergies By Edmans, Alex; Goldstein, Itay; Zhu, John
  9. Liquidity and Inefficient Investment By Hart, Oliver; Zingales, Luigi
  10. Statistical utilitarianism By Pivato, Marcus
  11. Group Lending Without Joint Liability By de Quidt, Jonathan; Fetzer, Thiemo; Ghatak, Maitreesh
  12. Strategic Search Diversion, Product Affiliation and Platform Competition By Hagiu, Andrei; Jullien, Bruno
  13. Contractually stable alliances By MAULEON, Ana; SEMPERE-MONERRIS, Jose; VANNETELBOSCH, Vincent
  14. Alfred Marshall's Cardinal Theory of Value: The Strong Law of Demand By Donald Brown; Caterina Calsamiglia
  15. A Reverse Holdup Problem: When workers’ lack of bargaining power slows economic adjustments By Estache, Antonio; Foucart, Renaud

  1. By: Iossa, Elisabetta; Martimort, David
    Abstract: A risk averse agent gathers information on productivity shocks and produces accordingly on behalf of his principal. Information gathering is imperfect so that the agent has either complete or no knowledge at all of those shocks. The model allows for moral hazard in information gathering, private information on productivity shocks and moral hazard on operating effort. Two polar scenarios of the agency literature with either pure hidden action (the agent exerts operating effort not knowing yet the realization of the shock) or pure hidden information (the agent knows that shock when exerting operating effort) arise endogenously with positive probability. An optimal menu of linear contracts mixes high-powered, productivity-dependent screening options following “good news” with a fixed low-powered option that solves a pure moral hazard problem otherwise.
    Keywords: hidden action; hidden information; Incentive mechanisms; information gathering
    JEL: D82 H41
    Date: 2013–07
  2. By: Iossa, Elisabetta; Rey, Patrick
    Abstract: We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent’s productivity is a stochastic function of his past productivity and 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; career duration; contract renewal; dynamic incentives; reputation
    JEL: D21 D23 D86 L24 L51
    Date: 2013–07
  3. By: Kohei Kawamura (University of Edinburgh)
    Abstract: This paper studies information transmission between an uninformed decision maker (receiver) and an informed player (sender) who have asymmetric beliefs ("con?fidence") on the sender?s ability ("competence") to observe the state of nature. We fi?nd that even when the material payoffs of are perfectly aligned, the sender?s over- and underconfi?dence on his information give rise to information loss in communication, although they do not by themselves completely eliminate information transmission in equilibrium. However, an underconfi?dent sender may prefer no communication to informative communication. We also show that when the sender is biased, overconfidence can lead to more information transmission and welfare improvement.
    JEL: D03 D83
    Date: 2013–09–13
  4. By: John Geanakoplos; William R. Zame
    Date: 2013–09–19
  5. By: Garicano, Luis; Rayo, Luis
    Abstract: An expert must train a novice. The novice initially has no cash, so he can only pay the expert with the accumulated surplus from his production. At any time, the novice can leave the relationship with his acquired knowledge and produce on his own. The sole reason he does not is the prospect of learning in future periods. The profit-maximizing relationship is structured as an apprenticeship, in which all production generated during training is used to compensate the expert. Knowledge transfer takes a simple form. In the first period, the expert gifts the novice a positive level of knowledge, which is independent of the players' discount rate. After that, the novice's total value of knowledge grows at the players' discount rate until all knowledge has been transferred. The inefficiencies that arise from this contract are caused by the expert's artificially slowing down the rate of knowledge transfer rather than by her reducing the total amount of knowledge eventually transferred. We show that these inefficiencies are larger the more patient the players are. Finally, we study the impact of knowledge externalities across players.
    Keywords: general human capital; knowledge; relational contracts; skills
    JEL: C73 J24 L14
    Date: 2013–05
  6. By: Ehud Lehrer; Roee Tepper
    Date: 2013–09–19
  7. By: John Geanakoplos
    Date: 2013–09–19
  8. By: Edmans, Alex; Goldstein, Itay; Zhu, John
    Abstract: This paper studies multi-agent optimal contracting with cost synergies. We model synergies as the extent to which effort by one agent reduces his colleague's marginal cost of effort. An agent's pay and effort depend on the synergies he exerts, the synergies his colleagues exert on him and, surprisingly, the synergies his colleagues exert on each other. It may be optimal to "over-work" and "over-incentivize" a synergistic agent, due to the spillover effect on his colleagues. This result can rationalize the high pay differential between CEOs and divisional managers. An increase in the synergy between two particular agents can lead to a third agent being endogenously excluded from the team, even if his own synergy is unchanged. This result has implications for optimal team composition and firm boundaries.
    Keywords: complementarities; contract theory; influence; multiple agents; principal-agent problem; synergies; teams
    JEL: D86 J31 J33
    Date: 2013–07
  9. By: Hart, Oliver; Zingales, Luigi
    Abstract: We study the role of fiscal policy in a complete markets model where the only friction is the non-pledgeability of human capital. We show that the competitive equilibrium is constrained inefficient, leading to too little risky investment. We also show that fiscal policy following a large negative shock can increase ex ante welfare. Finally, we show that if the government cannot commit to the promised level of fiscal intervention, the ex post optimal fiscal policy will be too small from an ex ante perspective.
    Keywords: aggregate shocks; fiscal policy; liquidity; nonpledgeability; pecuniary externalities
    JEL: E41 E51 G21
    Date: 2013–07
  10. By: Pivato, Marcus
    Abstract: We show that, in a sufficiently large population satisfying certain statistical regularities, it is often possible to accurately estimate the utilitarian social welfare function, even if we only have very noisy data about individual utility functions and interpersonal utility comparisons. In particular, we show that it is often possible to identify an optimal or close-to-optimal utilitarian social choice using voting rules such as the Borda rule, approval voting, relative utilitarianism, or any Condorcet-consistent rule.
    Keywords: utilitarian; relative utilitarian; approval voting; Borda; scoring rule; Condorcet.
    JEL: D60 D70
    Date: 2013–09–06
  11. By: de Quidt, Jonathan; Fetzer, Thiemo; Ghatak, Maitreesh
    Abstract: This paper contrasts individual liability lending with and without groups to joint liability lending. By doing so, we shed light on an apparent shift away from joint liability lending towards individual liability lending by some microfinance institutions First we show that individual lending with or without groups may constitute a welfare improvement so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how a purely mechanical argument in favor of the use of groups - namely lower transaction costs - may actually be used explicitly by lenders to encourage the creation of social capital. We also carry out some simulations to evaluate quantitatively the welfare impact of alternative forms of lending, and how they relate to social capital.
    Keywords: group lending; joint liability; micro finance; mutual insurance
    JEL: G11 G21 O12 O16
    Date: 2013–07
  12. By: Hagiu, Andrei; Jullien, Bruno
    Abstract: Platforms use search diversion in order to trade off total consumer traffic for higher revenues derived by exposing consumers to products other than the ones that best fit their preferences. Our analysis yields three key and novel insights regarding search diversion incentives, which have direct implications for platforms’ strategies and empirical predictions. First, platforms that charge positive access fees to consumers have weaker incentives to divert search relative to platforms that cannot (or choose not to) charge such fees. Second, endogenizing the affiliation of products that consumers are not interested in (advertising) leads to stronger incentives to divert search relative to the exogenous affiliation (vertical integration) benchmark, whenever the marginal product yields higher profits per consumer exposure relative to the average product. Third, the effect of platform competition on search diversion incentives depends on the nature of competition. Competition for advertising leads to more search diversion relative to competition for consumers. Both types of competition lead to at least as much search diversion as a monopoly platform. Nevertheless, in the case of competing platforms, the equilibrium level of search diversion increases with the degree of horizontal differentiation between platforms.
    Keywords: Competition; Search platforms; Two-sided market
    JEL: L1 L2 L8
    Date: 2013–04
  13. By: MAULEON, Ana (CEREC, Saint-Louis University, Brussels, Belgium; Université catholique de Louvain, CORE, Belgium); SEMPERE-MONERRIS, Jose (Department of Economic Analysis and ERI-CES, University of Valencia, Spain; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); VANNETELBOSCH, Vincent (CEREC, Saint-Louis University, Brussels, Belgium; Université catholique de Louvain, CORE, Belgium)
    Abstract: We analyze how different rules for exiting an alliance (simple majority, unanimity or unanimity with side payments) will affect the formation of strategic alliances. We find that no alliance structure is contractually stable under the simple majority rule. Once unanimous consent is required, asymmetric alliance structures consisting of two alliances are contractually stable. In addition, the grand alliance which is the efficient structure is stable. Allowing for side payments to compensate former partners improves efficiency. Finally, we show that different rules of exit may coexist in different alliances in the long run.
    Keywords: strategic alliances, coalition formation, contractual stability, exit rules
    JEL: C70 L13
    Date: 2013–07–09
  14. By: Donald Brown; Caterina Calsamiglia
    Date: 2013–09–19
  15. By: Estache, Antonio; Foucart, Renaud
    Abstract: In a model of horizontal matching on the labor market, we show that increasing workers’ bargaining power may increase some employers’ incentive to switch to new production activities. In particular, this could lead to (i) higher wages, (ii) more jobs, (iii) better jobs and (iv) higher profits. Paradoxically, the median voter may object to the economic adjustments because search costs could cut the surplus for a majority of workers, even when it creates jobs for the other ones and increases aggregate surplus.
    JEL: C78 J3 J6
    Date: 2013–05

This nep-mic issue is ©2013 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.