nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒10‒05
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Strategic Determination of Renegotiation Costs By Akitoshi Muramoto
  2. An Axiomatization of Choquet Expected Utility with Cominimum Independence By Takao Asano; Hiroyuki Kojima
  3. Optimal Contract Orders and Relationship-Specific Investments in Vertical Organizations By Sarah Parlane; Ying-Yi Tsai
  4. Cheap Talk with Outside Options By Saori Chiba; Kaiwen Leong; Kaiwen Leong
  5. The Leverage Ratchet Effect By Anat R. Admati; Peter M. DeMarzo; Martin F. Hellwig; Paul Pfleiderer
  6. Trust in Cohesive Communities By Felipe Balmaceda; Juan Escobar
  7. Targeted information release in social networks By Junjie Zhou; Ying-Ju Chen;
  8. When (not) to Segment Markets By Catherine Gendron-Saulnier; Marc Santugini
  9. On Repeated Moral Hazard with a Present Biased Agent By Luigi Balletta; Giovanni Immordino
  10. Game of Platforms: Strategic Expansion in Two-Sided Markets By Sagit Bar-Gill
  11. Cross-Licensing and Competition By Doh-Shin Jeon; Yassine Lefouili
  12. Competing for Influencers in a Social Network By Zsolt Katona
  13. Common Agency and Coordinated Bids in Sponsored Search Auctions By Francesco Decarolis; Maris Goldmanis; Antonio Penta
  14. Dynamic Network Competition By Hanna Halaburda; Bruno Jullien; Yaron Yehezkel
  15. Paths to Stability in the Assignment Problem By Bettina Klaus; Frédéric Payot
  16. Affirmative Action: One Size Does Not Fit All By Krishna, Kala; Tarasov, Alexander
  17. Three Elementary Forms of Economic Organization By Leo Ferraris

  1. By: Akitoshi Muramoto (Graduate School of Economics, Kyoto University)
    Abstract: Recently, some literature on incomplete contracts studies the cases where renegotiations take place inefficiently. We extend the incomplete contract model in Hart (2009) by assuming that one party chooses an action which affects renegotiation costs. In our model, renegotiation costs are determined endogenously. We characterize the condition that she can get higher payoff by manipulating renegotiation costs than when she cannot manipulate renegotiation costs and renegotiations take place efficiently. Whereas she chooses positive renegotiation costs, renegotiations never occur on the equilibrium paths. They work just as "credible threat". Her equilibrium share ratio of the ex ante bargaining surplus is higher than her bargaining power. As an application, we discuss an investment problem by using a variant of our basic model. We show that the agents mitigate the investment problem by setting some positive renegotiation costs and increasing a high skilled agent's share ratio of the ex ante bargaining surplus to give her larger incentive of investment.
    JEL: D23 D86 C78
    Date: 2013–09
  2. By: Takao Asano (Faculty of Economics, Okayama University); Hiroyuki Kojima (Department of Economics, Teikyo University)
    Abstract: This paper proposes a class of independence axioms for simple acts. By introducing the E-cominimum independence axiom that is stronger than the comonotonic independence axiom but weaker than the independence axiom, we provide a new axiomatization theorem of simple acts within the framework of Choquet Expected Utility. Furthermore, in order to provide the axiomatization of simple acts, we generalize Kajii, Kojima, and Ui (2007, Journal of Mathematical Economics) into an infinite state space. Our axiomatization theorem relates Choquet Expected Utility to Multi-prior Expected Utility through the core of a capacity that is explicitly derived within our framework. Our result in this paper also derives Gilboa (1989, Econometrica), Eichberger and Kelsey (1999, Theory and Decision), and Rohde (2010, Social Choice and Welfare) as a corollary.
    Keywords: Cominimum Additivity; Cominimum Independence; Choquet Expected Utility; Multi-prior Expected Utility; Core; E-Capacity Expected Utility
    JEL: C71 D81 D90
    Date: 2013–09
  3. By: Sarah Parlane (University College Dublin); Ying-Yi Tsai (National University of Kaohsiung)
    Abstract: This paper characterizes the optimal contracts issued to suppliers when delivery is subject to disruptions and when they can invest to reduce such a risk. When investment is contractible dual sourcing is generally optimal because it reduces the risk of disruption. The manufacturer (buyer) either issues symmetric contracts or selects one supplier as a major provider who invests while the buffer supplier does not. An increased reliance on single sourcing or on a major supplier is optimal under moral hazard. Indeed, we show that order consolidation increases the manufacturer’s profits because it serves as an incentive device in inducing investment.
    Keywords: Moral Hazard; Vertical Organization; Supply Base Management;Contract Order Size; Relationship-specific Investment; Strategic Outsourcing
    JEL: D23 D86 L24
    Date: 2013–10–01
  4. By: Saori Chiba (Dept. of Management, Università Ca' Foscari Venice); Kaiwen Leong; Kaiwen Leong (Division of Economics, Nanyang Technological University)
    Abstract: In Crawford and Sobel (1982) (CS), a sender (S) uses cheap talk to persuade a receiver (R) to select an action as profitable to S as possible. This paper shows that the presence of an outside option Ð that is, allowing R to avoid taking any action, yielding state-independent reservation utilities to R and S Ð has an important qualitative impact on the results. Contrary to CS, in this model, the informativeness of communication is not always decreasing in the level of conflict of interest. Relatedly, communication can be more informative than in CS.
    Keywords: Cheap Talk, Information Transmission, Experts
    JEL: D82 D83
    Date: 2013–09
  5. By: Anat R. Admati (Graduate School of Business, Stanford University); Peter M. DeMarzo (Graduate School of Business, Stanford University); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods); Paul Pfleiderer (Graduate School of Business, Stanford University)
    Abstract: Shareholder-creditor conflicts can create leverage ratchet effects, resulting in inefficient capital structures. Once debt is in place, shareholders may inefficiently increase leverage but avoid reducing it no matter how beneficial leverage reduction might be to total firm value. We present conditions for an irrelevance result under which shareholders view asset sales, pure recapitalization and asset expansion with new equity as equally undesirable. We then analyze how seniority, asset heterogeneity, and asymmetric information affect shareholders’ choice of leverage-reduction method. Our results are particularly relevant to banking and highlight the benefit and importance of capital regulation to constrain inefficient excessive borrowing.
    Date: 2013–08
  6. By: Felipe Balmaceda (Facultad de Economía y Empresa, Universidad Diego Portales); Juan Escobar (Departamento de Ingenieria Industrial, Universidad de Chile)
    Abstract: This paper investigates the social structures that maximize trust and cooperation when agreements are implicitly enforced. We study a repeated trust game in which the social network determines the information transmission technology. We show that cohesive communities, modeled as social networks of complete components, emerge as the optimal community design. Cohesive communities generate some degree of common knowledge of transpired play that allows players to coordinate their punishments and, as a result, yield relatively high equilibrium payos. Our results provide an economic rationale for the commonly argued optimality of cohesive social networks.
    Date: 2013–06
  7. By: Junjie Zhou (School of International Business Administration, Shanghai University of Finance and Economics); Ying-Ju Chen (University of California at Berkeley);
    Abstract: As a common practice, various firms initially make information and access to their products/services scarce within a social network; identifying influential players that facilitate information dissemination emerges as a pivotal step for their success. In this paper, we tackle this problem using a stylized model that features payoff externalities and local network effects, and the network designer is allowed to release information to only a subset of players (leaders); these targeted players make their contributions first and the rest followers move subsequently after observing the leaders' decisions. In the presence of incomplete information, the signaling incentive drives the optimal selection of leaders and can lead to a first-order materialistic effect on the equilibrium outcomes. We propose a novel index for the key leader selection (i.e., a single player to provide information to) that can be substantially different from the key player index in \ \cite{ballester2006s} and the key leader index with complete information proposed in \cite{zhou13benefit}. We also show that in undirected graphs, the optimal leader group identified in \cite{zhou13benefit} is exactly the optimal follower group when signaling is present. The pecking order in complete graphs suggests that the leader should be selected by the ascending order of intrinsic valuations. We also examine the out-tree hierarchical structure that describes a typical economic organization. The key leader turns out to be the one that stays in the middle, and it is not necessarily exactly the central player in the network.
    Keywords: social network, signaling, information management, targeted advertising, game theory
    JEL: D21 D29 D82
    Date: 2013–09
  8. By: Catherine Gendron-Saulnier; Marc Santugini
    Abstract: A monopoly decides whether to segment two separate markets. Demand depends on stochastic shocks and some buyers are uninformed about the quality of the good. Contrary to the case of complete information, we show that it is not always more profitable for the firm to segment the markets in an environment in which some buyers have incomplete information. The reason is that the presence of uninformed buyers provides the firm with the incentive to engage in noisy price-signaling. Indeed, if the benefit from price flexibility (through market segmentation) is offset by the cost of signaling quality through two distinct prices, then it is optimal not to segment the markets and to use uniform pricing.
    Keywords: Market integration, market segmentation, learning, monopoly, profits, noisy signaling, third-degree price discrimination
    JEL: D82 D83 L12 L15
    Date: 2013
  9. By: Luigi Balletta (Università di Palermo); Giovanni Immordino (Università di Salerno and CSEF)
    Abstract: This paper introduces time inconsistent preferences into a moral hazard setting where the agent is risk-averse. We derive a necessary optimality condition on the consumption allocation that is different from the so-called Inverse Euler Equation of Rogerson (1985). Specifically, inverse marginal utility is not a martingale, rather it follows a partial adjustment process. If the bias for the present is sufficiently large the optimal allocation will leave the agent with the desire to borrow. We extend the analysis to the case in which the principal does not know if the agent is time consistent or not. Finally, we show that in a setting with a risk-neutral agent and limited liability everything is as if the principal faces a time consistent agent.
    Keywords: repeated moral hazard, time-inconsistency
    JEL: D82 D03 E21 D86
    Date: 2013–09–25
  10. By: Sagit Bar-Gill (Tel Aviv University)
    Abstract: Online platforms, such as Google, Facebook, or Amazon, are constantly expanding their activities, while increasing the overlap in their service offering. In this paper, we study the scope and overlap of online platforms' activities, when they are endogenously determined. We model an expansion game between two online platforms offering two different services to users for free, while selling user clicks to advertisers. At the outset, each platform offers one service, and users may subscribe to one platform or both (multihoming). In the second stage, each platform decides whether to expand by adding the service already offered by its rival. Platforms' expansion decisions affect users' mobility, and thus the partition of users in the market, which, in turn, affects platform prices and profits. We analyze the equilibrium of the expansion game, demonstrating that, in equilibrium, platforms may decide not to expand, even though expansion is costless. Such strategic "no expansion" decisions are due to quantity and price effects of changes in user mobility, brought on by expansion. Both symmetric expansion and symmetric no-expansion equilibria may arise, as well as asymmetric expansion equilibria, even for initially symmetric platforms.
    Keywords: Two-sided markets, Platforms, Entry, Online advertising
    JEL: L11 L13 L14
    Date: 2013–09
  11. By: Doh-Shin Jeon (Toulouse School of Economics); Yassine Lefouili (Toulouse School of Economics)
    Abstract: We study bilateral cross-licensing agreements among N(> 2) firms that engage in competition after the licensing phase. It is shown that the most collusive cross-licensing royalty, i.e. the one that allows the industry to achieve the monopoly profit, is sustainable as the outcome of bilaterally efficient agreements. When the terms of the agreements are not observable to third parties, the monopoly royalty is the unique symmetric bilaterally efficient royalty. However, when the terms of the agreements are public, the most competitive royalty (i.e. zero) can also be bilaterally efficient. Policy implications regarding the antitrust treatment of cross-licensing agreements are derived from these results.
    Keywords: Cross-Licensing, Collusion, Antitrust and Intellectual Property
    JEL: L44 O33 O34
    Date: 2013–09
  12. By: Zsolt Katona (Haas School of Business, UC Berkeley)
    Abstract: This paper studies the competition between firms for influencers in a network. Firms spend effort to convince influencers to recommend their products. The analysis identifies the offensive and defensive roles of spending on influencers. The value of an influencer only depends on the in-degree distribution of the influence network. Influencers who exclusively cover a high number of consumers are more valuable to firms than those who mostly cover consumers also covered by other influencers. Firm profits are highest when there are many consumers with a very low or with very high in-degree. Consumers with an intermediate level of in-degree contribute negatively to profits and high in-degree consumers increase profits when market competition is not intense. Prices are generally lower when consumers are covered by many influencers, however, firms are not always worse off with lower prices. The nature of consumer response to recommendations makes an important difference. When first impressions dominate, firm profits for dense networks are higher, but when recommendations have a cumulative influence profits are reduced as the network becomes dense.
    Keywords: Social Networks, Influencers, Competition
    JEL: M31 C72 D44
    Date: 2013–09
  13. By: Francesco Decarolis (Department of Economics and Hariri Institute, Boston University); Maris Goldmanis (Department of Economics, Royal Holloway, University of London); Antonio Penta (Department of Economics, University of Wisconsin at Madison)
    Abstract: As auctions are becoming the main mechanism for selling advertisement space on the web, marketing agencies specialized in bidding in online auctions are proliferating. We analyze theoretically how bidding delegation to a common marketing agency can undermine both revenues and efficiency of the generalized second price auction, the format used by Google and Microsoft-Yahoo!. Our characterization allows us to quantify the revenue losses relative to both the case of full competition and the case of agency bidding under an alternative auction format (specifically, the VCG mechanism). We propose a simple algorithm that a search engine can use to reduce efficiency and revenue losses.
    Keywords: Online Advertising, Internet Auctions, Common Agency
    JEL: C71 D44 L41 L81 M37
    Date: 2013–09
  14. By: Hanna Halaburda (Bank of Canada); Bruno Jullien (Toulouse School of Economics); Yaron Yehezkel (Tel Aviv University)
    Abstract: This paper considers a dynamic platform competition in a market with network externalities. We ask two research questions. The first one asks how the beliefs advantage carries over in time, and whether a low-quality platform can maintain its focal position along time. We show that for very high and very low discount factors it is possible for the low-quality platform to maintain its focal position indefinitely. But for the intermediate discount factor the higher quality platform wins and keeps the market. The second question asks what drives changes in the market leadership along time (observed in many markets, like smartphones and video-game consoles), and how such changes can be supported as a dynamic equilibrium outcome. We offer two explanations. The first explanation relies on intrinsic equilibrium uncertainty. The second explanation relies on the adoption of technology. One could expect such change in the market leader to be a sign of intense competition between platforms. However, we find that changes in leadership indicate softer price competition.
    Date: 2013–09
  15. By: Bettina Klaus; Frédéric Payot
    Abstract: We study a labor market with finitely many heterogeneous workers and firms to illustrate the decentralized (myopic) blocking dynamics in two-sided one-to-one matching markets with continuous side payments (assignment problems, Shapley and Shubik, 1971). A labor market is unstable if there is at least one blocking pair, that is, a worker and a firm who would prefer to be matched to each other in order to obtain higher payoffs than the payoffs they obtain by being matched to their current partners. A blocking path is a sequence of outcomes (specifying matchings and payoffs) such that each outcome is obtained from the previous one by satisfying a blocking pair (i.e., by matching the two blocking agents and assigning new payoffs to them that are higher than the ones they received before). We are interested in the question if starting from any (unstable) outcome, there always exists a blocking path that will lead to a stable outcome. In contrast to discrete versions of the model (i.e., for marriage markets, one-to-one matching, or discretized assignment problems), the existence of blocking paths to stability cannot always be guaranteed. We identify a necessary and sufficient condition for an assignment problem (the existence of a stable outcome such that all matched agents receive positive payoffs) to guarantee the existence of paths to stability and show how to construct such a path whenever this is possible.
    Keywords: Assignment problem; competitive equilibria; core; decentralized market; random path; stability
    JEL: C71 C78 D63
    Date: 2013–09
  16. By: Krishna, Kala; Tarasov, Alexander
    Abstract: This paper identifies a new reason for giving preferences to the disadvantaged using a model of contests. There are two forces at work: the effort effect working against giving preferences and the selection e¤ect working for them. When education is costly and easy to obtain (as in the U.S.), the selection effect dominates. When education is heavily subsidized and limited in supply (as in India), preferences are welfare reducing. The model also shows that unequal treatment of identical agents can be welfare improving, providing insights into when the counterintuitive policy of rationing educational access to some subgroups is welfare improving.
    Keywords: contests; educational quotas; private benefits; social welfare
    JEL: D61 I23
    Date: 2013–09
  17. By: Leo Ferraris (University of Rome "Tor Vergata")
    Abstract: We present a model where larger societies experience advances in specialization at the cost of diluted monitoring, which limits enforcement and hinders trade possibilities. Cash and financial instruments can replace monitoring. Advances in specialization may make it feasible to replace agriculture with manufacturing. The model generates three stable regimes with different combinations of productive systems and trade arrangements. In small societies, agriculture is accompanied by mutual sharing arrangements of the gift exchange type; in medium sized societies, agriculture is accompanied by monetary trade; in large societies, manufacturing is accompanied by circulating private banknotes issued by specialized agents acting as intermediaries.
    Date: 2013–10–01

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