nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒10‒18
thirty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Coordinating by Not Committing : Efficiency as the Unique Outcome By Rohan Dutta; Ryosuke Ishii
  2. A Theory of Threshold Contracts By Johannes Gerd Becker; Hans Gersbach
  3. Coordination and Equilibrium Selection in Games with Positive Network Effects By Alexander M. Jakobsen; B. Curtis Eaton; David Krause
  4. Global Games Selection in Games with Strategic Substitutes or Complements By Eric Hoffmann
  5. Efficient Nash Equilibrium under Adverse Selection By Theodoros M. Diasakos; Kostas Koufopoulos
  6. Complexity and Bounded Rationality in Individual Decision Problems By Theodoros M. Diasakos
  7. Recursive Stochastic Choice By Drew Fudenberg; Tomasz Strzalecki
  8. Authority and Incentives in Organizations By Kräkel, Matthias
  9. Platform Pricing under Dispersed Information By Jullien, Bruno; Pavan, Alessandro
  10. Auction Platform Design and the Linkage Principle By Wataru Tamura
  11. Search Diversion and Platform Competition By Hagiu, Andrei; Jullien, Bruno
  12. Migration Between Platforms By Gary Biglaiser; Jacques CreÌmer; AndreÌ Veiga
  13. Optimal Contracting with Altruism and Reciprocity By Matteo Bassi; Marco Pagnozzi; Salvatore Piccolo
  14. Revealed Preference Foundations of Expectations-Based Reference-Dependence By David Freeman
  15. Entry and Product Variety with Competing Supply Chains By Matteo Bassi; Marco Pagnozzi; Salvatore Piccolo
  16. Ex post Nash consistent representation of effectivity functions By Vermeulen A.J.; Schröder M.J.W.; Peters H.J.M.
  17. Anonymous, neutral and reversal symmetric majority rules By Michele Gori; Daniela Bubboloni
  18. Optimal Voting Rules By Gershkov, Alex; Moldovanu, Benny; Shi, Xianwen
  19. Indirect control and power in mutual control structures By Peters H.J.M.; Karos D.
  20. Hyper-Stable Social Welfare Functions By Jean Lainé; Ali Ihsan Ozkes; Remzi Sanver
  21. Markovian Elections By Jean Guillaume Forand; John Duggan
  22. Bonus Pools and the Informativeness Principle By Imhof, Lorens; Kräkel, Matthias
  23. Fight Alone or Together? The Need to Belong By Ke, Changxia
  24. Costs and Benefits of Dynamic Trading in a Lemons Market By Fuchs, William; Skrzypacz, Andrzej
  25. Tournaments with Gaps By Imhof, Lorens; Kräkel, Matthias
  26. Ending the myth of the St Petersburg paradox By Robert William, Vivian
  27. Probabilistic Strategy-Proof Rules over Single-Peaked Domains By Storcken A.J.A.; Peters H.J.M.; Roy S.; Sen A.
  28. Audits as Signals By Kotowski, Maciej H.; Weisbach, David A.; Zeckhauser, Richard J.
  29. Provision of Differentiated Public Goods within Organizations By Zudenkova, Galina
  30. Externalities in Recruiting By Kräkel, Matthias; Szech, Nora; von Bieberstein, Frauke

  1. By: Rohan Dutta; Ryosuke Ishii
    Abstract: An important form of commitment is the ability to restrict the set of future actions from which choices can be made. We study a simple dynamic game of complete information which incorporates this type of commitment. For a given initial game, the players engage in an endogenously determined number of commitment periods before choosing from the remaining actions. We show the existence of equilibria with pure strategies in the commitment periods. For important classes of games, including pure coordination games and the staghunt game the equilibrium outcome is unique and efficient. This is despite the synchronous move structure. Moreover, efficient coordination does not necessarily involve commitments on the equilibrium path: the option alone is sufficient.
    Keywords: Dynamic Commitment, Endogenous Timing, Coordination Games, Uniqueness, Payoff Dominance, Stag Hunt
    JEL: C72 C73
    Date: 2013
  2. By: Johannes Gerd Becker (ZHAW, Switzerland); Hans Gersbach (ETH Zurich, Switzerland)
    Abstract: We consider an innitely repeated reappointment game in a principal- agent relationship. Typical examples are voter-politician or government- public servant relationships. The agent chooses costly effort and enjoys being in office until he is deselected. The principal observes a noisy signal of the agent's effort and decides whether to reappoint the agent or not. We analyse the stationary Markovian equilibria of this game and examine the consequences of threshold contracts, which forbid reappointment if the principal's utility is too low. We identify the circumstances under which such threshold contracts are welfare-improving or beneficial for the principal.
    Keywords: principal-agent model; repeated game; reappointment; stationary Markovian strategies; threshold strategies; threshold contracts, asymmetric information; commitment.
    JEL: C83 D82 D86 H11
    Date: 2013–10
  3. By: Alexander M. Jakobsen; B. Curtis Eaton (University of Calgary); David Krause
    Abstract: When agents make their choices simultaneously, network effects often give rise to a selection problem involving perfectly coordinated, Pareto-optimal equilibria. We characterize this selection problem, and introduce a generalized sequential choice model to address it. In this model, we show how expectation formation under imperfect information combines with network effects to form coordination cascades: ordered partitions of the agent space wherein coordination on one alternative is eventually optimal for all agents. Several theorems are proven regarding both the likelihood and extent of coordination under various parameter changes; in particular, we show that the degree to which agents can observe the choices of others is an important consideration. We also present numerical calculations which shed additional light on the coordination problem, and which suggest that sequential choice resolves, with high probability, the equilibrium selection problem efficiently.
    Date: 2013–10–11
  4. By: Eric Hoffmann (Department of Economics, The University of Kansas)
    Abstract: Global games methods are aimed at resolving issues of multiplicity of equilibria and coordination failure that arise in game theoretic models by relaxing common knowledge assumptions about an underlying parameter. These methods have recently received a lot of attention when the underlying complete information game is one of strategic complements (GSC). Little has been done in this direction concerning games of strategic substitutes (GSS), however. This paper complements the existing literature in both cases by extending the global games method developed by Carlsson and Van Damme (1993) to N-player, multi-action GSS and GSC, using a p-dominance condition as the selection criterion. Moreover, this approach is much less restrictive on the conditions that payo_s and the underlying parameter space must satisfy, and therefore serves to cirumvent recent criticisms to global games methods. The second part of this paper generalizes the model by allowing _groups_ of players to receive homogenous signals, which, under certain conditions, strengthens the model's power of predictability.
    Date: 2013–10
  5. By: Theodoros M. Diasakos (University of St Andrews); Kostas Koufopoulos
    Abstract: This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz (QJE, 1976). We propose a simple extension of the game-theoretic structure in Hellwig (EER, 1987) under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson (ECMA, 1983).
    Keywords: Insurance Market, Adverse Selection, Incentive Efficiency
    JEL: D86
  6. By: Theodoros M. Diasakos (University of St Andrews)
    Abstract: I develop a model of endogenous bounded rationality due to search costs, arising implicitly from the problem's complexity. The decision maker is not required to know the entire structure of the problem when making choices but can think ahead, through costly search, to reveal more of it. However, the costs of search are not assumed exogenously; they are inferred from revealed preferences through her choices. Thus, bounded rationality and its extent emerge endogenously: as problems become simpler or as the benefits of deeper search become larger relative to its costs, the choices more closely resemble those of a rational agent. For a fixed decision problem, the costs of search will vary across agents. For a given decision maker, they will vary across problems. The model explains, therefore, why the disparity, between observed choices and those prescribed under rationality, varies across agents and problems. It also suggests, under reasonable assumptions, an identifying prediction: a relation between the benefits of deeper search and the depth of the search. As long as calibration of the search costs is possible, this can be tested on any agent-problem pair. My approach provides a common framework for depicting the underlying limitations that force departures from rationality in different and unrelated decision-making situations. Specifically, I show that it is consistent with violations of timing independence in temporal framing problems, dynamic inconsistency and diversification bias in sequential versus simultaneous choice problems, and with plausible but contrasting risk attitudes across small- and large-stakes gambles.
  7. By: Drew Fudenberg; Tomasz Strzalecki
    Abstract: We characterize two sorts of stochastic choice rules in which the agent makes current decisions using a forward-looking value function that takes future randomizations into account. Both sorts of rules generalize logistic choice, and are equivalent to it in static problems. The rules differ in how the agent views future choice sets and how he views his future randomizations. One rule is equivalent to the discounted logit used in applied work, and exhibits a “preference for flexibility;†the other is “error-averse†and penalizes the addition of undesirable choices to a menu.
    Date: 2013–08
  8. By: Kräkel, Matthias
    Abstract: The paper analyzes the choice of organizational structure as solution to the trade-off between controlling behavior based on authority rights and minimizing costs for implementing high efforts. The analysis includes the owner of a firm, a top manager and two division heads. If it is more expensive to incentivize the division heads, the owner will prefer full delegation of authority to them to replace their high incentive pay by incentives based on private benefits of control. In that situation, decentralization is optimal given that selfish behavior is more important than cooperation for maximizing returns, but concentrated delegation of full authority to a single division head is optimal for cooperation being crucial. If, however, incentivizing the division heads is clearly less expensive than creating incentives for the top manager, the owner will choose centralization given that cooperation is the dominating issue, but partial delegation if selfish behavior is crucial.
    Keywords: authority; centralization; contracts; decentralization; moral hazard.
    JEL: D21 D23 D86 L22
    Date: 2013
  9. By: Jullien, Bruno (Toulouse School of Economics (CNRS-GREMAQ and IDEI)); Pavan, Alessandro (Northwestern University)
    Abstract: We study monopoly and duopoly pricing in a two-sided market with dispersed information about users' preferences. We first show how the dispersion of information introduces idiosyncratic uncertainty about participation rates and how the latter shapes the elasticity of the demands and thereby the equilibrium prices. We then study informative advertising campaigns and product design affecting the agents' ability to estimate their own valuations and/or the distribution of valuations on the other side of the market.
    Keywords: two-sided markets, dispersed information, platform competition, global-games, informative advertising
    JEL: D82
    Date: 2013–08
  10. By: Wataru Tamura (The University of Tokyo)
    Abstract: This paper examines an auction platform in which the platform provider maximizes profits by adjusting participation fees and by choosing an auction format. The seller has private information on the quality of the good, and each participating buyer receives a private signal about his valuation of the good. The choice of auction format determines the allocation of trading surplus among participating seller and buyers. This paper shows that when the seller’s type is affiliated with buyers’ signals, the platform provider can charge higher participation fees to both sides by choosing a first-price auction rather than a second-price or English auction. It also examines the effect of allowing participating buyers to acquire information on the seller’s type and shows that the provider can charge higher participation fees under a non-transparency policy.
    Date: 2013–10
  11. By: Hagiu, Andrei (Harvard University); Jullien, Bruno (Toulouse School of Economics (IDEI & GREMAQ))
    Abstract: Platforms use search diversion in order to trade off total consumer traffic for higher revenues derived by exposing consumers to unsolicited products (e.g. advertising). We show that the entry of a platform competitor leads to higher (lower) equilibrium levels of search diversion relative to a monopoly platform when the degree of horizontal differentiation between platforms is intermediate (low). On the other hand, more intense competition between active platforms (i.e. less differentiation) leads to less search diversion. When platforms charge consumers fixed access fees, all equilibrium levels of search diversion under platform competition are equal to the monopoly level, irrespective of the nature of competition. Furthermore, platforms that charge positive (negative) access fees to consumers have weaker (stronger) incentives to divert search relative to platforms that cannot charge such fees. Finally, endogenous affiliation on both sides (consumers and advertising) leads to stronger incentives to divert search relative to the one-sided exogenous affiliation (vertical integration) benchmark, whenever the marginal advertiser derives higher profits per consumer exposure relative to the average advertiser.
    Date: 2013–09
  12. By: Gary Biglaiser (University of North Carolina, Department of Economics); Jacques CreÌmer (Toulouse School of Economics); AndreÌ Veiga (Toulouse School of Economics)
    Abstract: We develop a model of dynamic platform formation under positive platform externalities. Users can switch between an incumbent and entrant platforms, switching opportunities arise stochastically and users can choose whether to accept or reject an opportunity to switch. For homogeneous users, we characterize the incumbency advantage implied by a given equilibrium realization of the switching process. For linear utility, incumbency advantage increases in the mean and dispersion of the incumbent’s share during the switching process, which captures the momentum and coordination of the process. Heterogeneity in preferences may lead some users to delay their switching or never switch at all. Assuming that switching opportunities arrive according to a Poisson process, users switch to the entrant platform if the average preference favors the entrant and if preferences are not too polarized.
    Keywords: platform Formation, Migration, Standardization and Compatibility, Industry Dynamics
    JEL: D85 L14 R23 L15 L16
    Date: 2013–09
  13. By: Matteo Bassi (Università di Napoli Federico II and CSEF); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica delSacro Cuore di Milano and CSEF)
    Abstract: Motivated by the recent experimental evidence on altruistic behavior, we study a simple principal-agent model where each player cares about other players’ utility, and may reciprocate their attitude towards him. We show that, relative to the selfish benchmark, efficiency improves when players are altruistic. Nevertheless, in contrast to what may be expected, an increase in the degree of the agent’s altruism as well as a more reciprocal behavior by players has ambiguous effects on efficiency. We also consider the effects of the presence of spiteful players and discuss how monetary transfers between players depend on their degrees of altruism and spitefulness.
    Keywords: Adverse selection, altruism, reciprocity, optimal contracting
    JEL: D64 D86
    Date: 2013–10–10
  14. By: David Freeman (Simon Fraser University)
    Abstract: This paper provides revealed preference foundations for a model of expectations based reference-dependence a la Koszegi and Rabin (2006). Novel axioms provide distinguishing features of expectations-based reference-dependence under risk. The analysis completely characterizes the model’s testable implications when expectations are unobservable.
    Keywords: Reference-dependent preferences, expectations as the reference point, preferred personal equilibrium, choice under risk
    JEL: D81
    Date: 2013–09
  15. By: Matteo Bassi (Università di Napoli Federico II and CSEF); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica delSacro Cuore di Milano and CSEF)
    Abstract: We study a supply chain model where competing manufacturers located around a circle contract with privately informed and exclusive retailers. The number of brands in the market (determined by the manufacturers’ zero profit condition) depends on the level of asymmetric information within supply chains and on the types of contracts between manufacturers and retailers. With two-part tariffs, wholesale prices fully reflect retailers’ costs. With linear contracts, wholesale prices are constant and independent of retailers’ costs. The number of brands is lower (resp. higher) with asymmetric information than with complete information when contracts are linear (resp. with two-part tariffs). Moreover, the number of brands is always higher with linear contracts than with two-part tari¤s. We also analyze the effects of endogenous entry on welfare.
    Keywords: Product Variety, Entry, Competing Supply Chains, Vertical Contracting, Asymmetric Information
    JEL: D43 D82 L13 L51
    Date: 2013–10–10
  16. By: Vermeulen A.J.; Schröder M.J.W.; Peters H.J.M. (GSBE)
    Abstract: We consider effectivity functions for finitely many players and alternatives. We assume that players have incomplete information with respect to the preferences of the other players. Our main result is the characterization of effectivity functions which have an ex post Nash consistent representation, i.e., there is a game form such that i the distribution of power among coalitions of players is the same as in the effectivity function and ii there is an ex post Nash equilibrium in pure strategiesfor any preference profile.
    Keywords: Existence and Stability Conditions of Equilibrium; Game Theory and Bargaining Theory: General; Asymmetric and Private Information; Mechanism Design;
    JEL: C62 C70 D82
    Date: 2013
  17. By: Michele Gori (Dipartimento di Scienze per l'Economia e l'Impresa, Universita' degli Studi di Firenze); Daniela Bubboloni (Dipartimento di Scienze per l'Economia e l'Impresa, Universita' degli Studi di Firenze)
    Abstract: In the standard arrovian framework and under the assumptions that individual preferences and social outcomes are linear orders over the set of alternatives, we provide necessary and sufficient conditions for the existence of anonymous, neutral and reversal symmetric rules and for the existence of anonymous, neutral, reversal symmetric majority rules
    Keywords: Social welfare function; anonymity; neutrality; reversal symmetry; majority; linear order; group theory
    JEL: D71
    Date: 2013–10
  18. By: Gershkov, Alex; Moldovanu, Benny; Shi, Xianwen
    Abstract: We study dominant strategy incentive compatible (DIC) and deterministic mechanisms in a social choice setting with several alternatives. The agents are privately informed about their preferences, and have single-crossing utility functions. Monetary transfers are not feasible. We use an equivalence between deterministic, DIC mechanisms and generalized median voter schemes to construct the constrained-efficient, optimal mechanism for an utilitarian planner. Optimal schemes for other welfare criteria such as, say, a Rawlsian maximin can be analogously obtained.
    Date: 2013–08–07
  19. By: Peters H.J.M.; Karos D. (GSBE)
    Abstract: In a mutual control structure agents exercise control over each other. Typical examples occur in the area of corporate governance firms and investment companies exercise mutual control, in particular by owning each others stocks. In this paper we formulate a general model for such situations. There is a fixed set of agents, and a mutual control structure assigns to each subset coalition the subset of agents controlled by that coalition. Such a mutual control structure captures directcontrol. We propose a procedure in order to incorporate indirect control as well if S controls T, and S and T jointly control R, then S controls R indirectly. This way, invariant mutual control structures result. Alternatively, mutual control can be described by vectors of simple games, called simple gamestructures, each simple game describing who controls a certain player, and also those simple games can be updated in order to capture indirect control. We show that both approaches lead to equivalent invariant structures. In the second part of the paper, we axiomatically develop a class of power indices for invariant mutual control structures. We impose four axioms with a plausible interpretation in this framework, which together characterize a broad class of power indices based on dividends resulting both from exercising and from undergoing control. By adding an extra condition a unique power index is singled out. In this index, each player accumulates his Shapley-Shubik power index assignments from controlling other players, diminished by the sum of the Shapley-Shubik power index assignments to other players controlling him.
    Keywords: Cooperative Games; Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance;
    JEL: C71 G34
    Date: 2013
  20. By: Jean Lainé (Department of Economics, Bilgi University - Istanbul Bilgi University); Ali Ihsan Ozkes (Department of Economics, Bilgi University - Istanbul Bilgi University, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Remzi Sanver (Department of Economics, Bilgi University - Istanbul Bilgi University)
    Abstract: We introduce a new consistency condition for neutral social welfare functions, called hyperstability. A social welfare function ! selects a complete weak order from a profile P of linear orders over any finite set of alternatives. Each linear order p in P generates a linear order over orders of alternatives, called hyper-preference, by means of a preference extension. Hence each profile P generates an hyper-profile ˙P . We assume that all preference extensions are separable: the hyper-preference of some order p ranks order q above order q! if the set of alternative pairs p and q agree on contains the one p and q! agree on. A special sub-class of separable extensions contains all Kemeny extensions, which build hyper-preferences by using the Kemeny distance criterion. A social welfare function ! is hyper stable (resp. Kemeny stable) if at any profile P, at least one linearization of !(P) is ranked first by !( ˙P ), where ˙P is any separable (resp. Kemeny) hyper-profile induced from P. We show that no scoring rule is hyper stable, and that no unanimous scoring rule is Kemeny stable, while there exists an hyper stable Condorcet social welfare function.
    Keywords: Hyperpreferences - Kemeny distance - Social Welfare Functions - Stability
    Date: 2013–10–09
  21. By: Jean Guillaume Forand (Department of Economics, University of Waterloo); John Duggan (Department of Economics, University of Rochester)
    Abstract: We establish existence and continuity properties of equilibria in a model of dynamic elections with a discrete (countable) state space and general policies and preferences. We provide conditions under which there is a representative voter in each state, and we give characterization results in terms of the equilibria of an associated “representative voting game.” When the conditions for these results are not met, we provide examples that uncover new classes of dynamic political failures.
    JEL: C62 C73 D72
    Date: 2013–10
  22. By: Imhof, Lorens; Kräkel, Matthias
    Abstract: Previous work on moral-hazard problems has shown that, under certain conditions, bonus contracts create optimal individual incentives for risk-neutral workers. In our paper we demonstrate that, if a firm employs at least two workers, it may further bene.t from combining worker compensation via a bonus-pool contract and relative performance evaluation. Such combination leads to saved rents under a wide class of luck distributions. In addition, if the employer is wealth-constrained, complementing individual bonus contracts by the possibility of pooling bonuses can increase the set of implementable effort levels. All our results hold even though workers’ outputs are technically and stochastically independent so that, in view of Holmstrom’s informativeness principle, individual bonus contracts would be expected to dominate bonus-pool contracts.
    Keywords: contract; hazard rate; informativeness principle; limited liability; relative performance.
    JEL: C72 D86
    Date: 2013
  23. By: Ke, Changxia
    Abstract: Alliances often face both free-riding and hold-up problems, which under- mine the effectiveness of alliances in mobilizing joint fighting effort. Despite of these disadvantages, alliances are still ubiquitous in all types of contests. This paper asks if there are non-monetary incentives to form alliances, e.g., intimidating/discouraging the single player(s) who is/are left alone. For this purpose, I compare symmetric (2 vs. 2) and asymmetric (2 vs. 1) contests to their equivalent 4-player and 3-player individual contests, respectively. We find that alliance players in symmetric (2 vs. 2) contests behave the same as those in equivalent 4-player individual contests. However, in asymmetric (2 vs. 1) contests, stand-alone players were strongly discouraged to exert effort (especially the females), compared to the 3-player individual contests. Alliance players may have anticipated this effect and also reduced their effort, if alliances share the prize according to the merit rule. Behavioural factors such as the need to belong can help reconcile the "paradox of alliance formation".
    Keywords: Alliance Formation; Contest and Conflict; Experiment
    JEL: D72 D74 C91
    Date: 2013–03–12
  24. By: Fuchs, William (University of CA, Berkeley); Skrzypacz, Andrzej (Stanford University)
    Abstract: We study a dynamic market with asymmetric information that creates the lemons problem. We compare efficiency of the market under different assumptions about the timing of trade. We identify positive and negative aspects of dynamic trading, describe the optimal market design under regularity conditions and show that continuous-time trading can be always improved upon.
    Date: 2013–08
  25. By: Imhof, Lorens; Kräkel, Matthias
    Abstract: A standard tournament contract specifies only tournament prizes. If agents’ performance is measured on a cardinal scale, the principal can complement the tournament contract by a gap which defines the minimum distance by which the best performing agent must beat the second best to receive the winner prize. We analyze a tournament with two risk averse agents. Under unlimited liability, the principal strictly benefits from a gap by partially insuring the agents and thereby reducing labor costs. If the agents are protected by limited liability, the principal sticks to the standard tournament.
    Keywords: limited liability; moral hazard; risk aversion; tournament; unlimited liability
    JEL: C72 D86
    Date: 2013
  26. By: Robert William, Vivian
    Abstract: Nicolas Bernoulli suggested the St Petersburg game, nearly 300 years ago, which is widely believed to produce a paradox in decision theory. This belief stems from a long standing mathematical error in the original calculation of the expected value of the game. This article argues that, in addition to the mathematical error, there are also methodological considerations which gave rise to the paradox. This article explains these considerations and why because of the modern computer, the same considerations, when correctly applied, also demonstrate that no paradox exists. Because of the longstanding belief that a paradox exists it is unlikely the mere mathematical correction will end the myth. The article explains why it is the methodological correction which will dispel the myth.
    Keywords: Central Limit Theorem, deductive logic, inductive logic, Law of Large Numbers, simulation of games; economic paradoxes; St Petersburg game; St Petersburg Paradox
    JEL: C44 C9 D81 N00
    Date: 2013–09
  27. By: Storcken A.J.A.; Peters H.J.M.; Roy S.; Sen A. (GSBE)
    Abstract: It is proved that every strategy-proof, peaks-only or unanimous, probabilistic rule defined over a minimally rich domain of single-peaked preferences is a probability mixture of strategy-proof, peaks-only or unanimous, deterministic rules over the same domain. The proof employs Farkas Lemma and the max-flow min-cut theorem for capacitated networks.
    Date: 2013
  28. By: Kotowski, Maciej H. (Harvard University); Weisbach, David A. (University of Chicago); Zeckhauser, Richard J. (Harvard University)
    Abstract: A broad array of law enforcement strategies, from income tax to bank regulation, involve self-reporting by regulated agents and auditing of some fraction of the reports by the regulating bureau. Standard models of self-reporting strategies assume that although bureaus only have estimates of the of an agent's type, agents know the ability of bureaus to detect their misreports. We relax this assumption, and posit that agents only have an estimate of the auditing capabilities of bureaus. Enriching the model to allow two-sided private information changes the behavior of bureaus. A bureau that is weak at auditing, may wish to mimic a bureau that is strong. Strong bureaus may be able to signal their capabilities, but at a cost. We explore the pooling, separating, and semi-separating equilibria that result, and the policy implications. Important possible outcomes are that a cap on penalties increases compliance, audit hit rates are not informative of the quality of bureau behavior, and by mimicking strong bureaus even weak bureaus can induce compliance.
    Date: 2013–09
  29. By: Zudenkova, Galina
    Abstract: This paper analyzes provision of a differentiated public good within an organization. A moderate principal assigns a public good production to one of two extreme agents. A contributing agent then gets the opportunity to choose a public good variety he prefers but has to carry a cost of production. If a production cost is lower than a benefit from having their preferred public good variety implemented then the agents seek assignment. I show that in this case the principal makes the agents compete by committing to public good varieties they would provide if selected. The agents want to make themselves an attractive choice and so announce moderate (still divergent) varieties if production is costly, and the principal's preferred variety if production is not costly. However, if the production cost exceeds the benefit from having their preferred public good variety implemented then the agents want to avoid assignment. My results suggest that in this case the principal just assigns an unpopular public good production to a less extreme agent.
    Keywords: Differentiated Public Goods, Public Good Provision, Spatial Competition.
    JEL: H41
    Date: 2013–09–01
  30. By: Kräkel, Matthias; Szech, Nora; von Bieberstein, Frauke
    Abstract: External recruiting at least weakly improves the quality of the pool of applicants, but the incentive implications are less clear. Using a contest model, this paper investigates the pure incentive effects of external recruiting. Our results show that if workers are heterogeneous, the opening of a firm’s career system may lead to a homogenization of the pool of contestants and, thus, encourage the firm’s high ability workers to exert more effort. If this positive effect outweighs the discouragement of low ability workers, the firm will benefit from external recruiting. If, however, the discouragement effect dominates the homogenization effect, the firm should disregard external recruiting. In addition, product market competition makes opening of the career system less attractive for a firm since it increases the incentives of its competitors’ workers and hence strengthens the competitors.
    Keywords: contest; externalities; recruiting; wage policy.
    JEL: C72 J2 J3
    Date: 2013

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