nep-mic New Economics Papers
on Microeconomics
Issue of 2013‒12‒06
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Strategic Experimentation with Heterogeneous Agents and Payoff Externalities By Kaustav Das
  2. Judgment aggregation and agenda manipulation By Dietrich, Franz
  3. Reason-Based Rationalization By Franz Dietrich; Christian List
  4. Probabilistic extention of the cumulative prospect theory By Ilya Zutler
  5. Subjective Evaluations: Discretionary Bonuses and Feedback Credibility By Fuchs, William
  6. Dynamic Moral Hazard and Stopping By Robin Mason; Juuso Välimäki
  7. Dynamic Contracting under Permanent and Transitory Private Information By Ungureanu, S.
  8. Information and Two-Sided Platform Profits By Andrei Hagiu; Hanna Halaburda
  9. Skewed Noise By David Dillenberger; Uzi Segal
  10. Oligopolistic competition and search without priors By Alexei Parakhonyak
  11. Characterizing behavioral decisions with choice data By Patricio S. Dalton; Sayantan Ghosal
  12. Cross-Checking the Media By Rudiger, Jesper
  13. Citizen-Editors' Endogenous Information Acquisition and News Accuracy By Francesco Sobbrio
  14. Contracting over Prices By Shurojit Chatterji; Sayantan Ghosal
  15. An Efficient Multi-Item Dynamic Auction with Budget Constrained Bidders By Dolf Talman; Zaifu Yang

  1. By: Kaustav Das (Department of Economics, University of Exeter)
    Abstract: This paper analyses a two-player game of strategic experimentation with two-armed bandits.At least one of the arms is risky in the sense that it may not yield a lumpsum payoff. There is payoff externality between the players and they differ in their ability to learn across the risky arm. Either player has to decide in a continous time regarding which arm to use. Two alternative settings are analysed. The first setting has two risky arms which are perfectly negatively correlated. The other one has one safe arm and one risky arm. I show that in equilibrium (Markovian) there is always too much of duplication which implies that with respect to a social planner's solution, risky arms are explored excessively.
    Keywords: R&D competition, Two-armed Bandit, Duplication, Learning.
    JEL: C73 D83 O31
    Date: 2013
  2. By: Dietrich, Franz
    Abstract: When individual judgments ('yes' or 'no') on some propositions are aggregated into collective judgments, the agenda setter can sometimes reverse a collective judgment by changing the set of propositions under consideration (the agenda). I define different kinds of agenda manipulation, and axiomatically characterize the aggregation rules immune to each kind. Two axioms emerge as central for preventing agenda manipulation: the familiar independence axiom, requiring propositionwise aggregation, and the axiom of implicit consensus preservation, requiring the respect of any (possibly implicit) consensus. I prove that these axioms can almost never be satisfied together by a (non-degenerate) aggregation rule.
    Keywords: judgment aggregation, agenda manipulation, impossibility theorems
    JEL: D70 D71 D72
    Date: 2013–09
  3. By: Franz Dietrich; Christian List
    Date: 2013–11–26
  4. By: Ilya Zutler (National Research University Higher School of Economics. Faculty of Economics, Department of Higher Mathematics, Docent, PhD)
    Abstract: A number of experiments indicate probabilistic preferences in cases where no one alternative is absolutely optimal. The task of predicting the choice of one of the alternatives among multiple alternatives is then practically important and not trivial. It can occur in situations of choice under risk when no one lottery stochastically dominates others. For risky lotteries there are several complicated models of probabilistic binary preference. For the first time, we herein propose the probabilistic extension of the cumulative prospect theory (CPT). The presented visual graphic justification of this model is intuitively clear and does not use sophisticated cumulative summing or a Choquet integral. Here we propose a model of selecting from a set of alternatives by continuous Markov random walks. It makes predicting the results of a choice easy because it fully uses dates received by probabilistic extension of ÑPT. The proposed methods are quite simple and do not require a large amount of data for practical use
    Keywords: cumulative prospect theory, probabilistic choice, continues Markov process.
    JEL: D81 D83 C44
    Date: 2013
  5. By: Fuchs, William (University of California, Berkeley)
    Abstract: We provide a new rationale for the use of discretionary bonuses. In a setting with unknown match qualities between a worker and a firm and subjective evaluations by the principal, bonuses are useful in order to make the feedback from the firm to the workers credible. This way workers in good matches are less inclined to accept outside offers.
    Keywords: discretionary bonuses, feedback, signalling
    JEL: D82 D83 D86 M5
    Date: 2013–11
  6. By: Robin Mason (Department of Economics, University of Exeter and CEPR.); Juuso Välimäki (Aalto University School of Economics and HECER.)
    Abstract: We analyse a simple model of dynamic moral hazard in which there is a clear and tractable trade-off between static and dynamic incentives. In our model, a principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. We characterise the contracts that the principal sets, with and without commitment. We show that with full commitment, the contract involves the agent’s value and wage declining over time, in order to give the agent incentives to exert effort. The long-run levels of the value and wage depend on the relative discount rates of the principal and agent. We also characterise the set of sequentially rational equilibria, where the principal has no commitment power.
    Keywords: Principal-agent model, continuous time, moral hazard, project completion.
    JEL: C73 D82 J31
    Date: 2013
  7. By: Ungureanu, S.
    Abstract: To understand how firms create and maintain long term relationships with consumers, or how procurement relations evolve over time, it is useful to study a dynamic variant of the classical two-type-buyer contract in mechanism design. It is less trivial and more interesting if the utility determinant (or utility type) is not fixed or completely random, and fair assumptions are that it is either stochastic, or given by a distribution whose parameters are common knowledge. The first approach is that of Battaglini (2005), while the second is pursued in this paper. With two possible types of buyers, the buyer more likely to have a high utility type will receive the first-best allocations, while the other will receive the first best only if he has the high utility type.
    Keywords: dynamic contracting; mechanism design; truthful reporting; information structure; learning
    Date: 2013
  8. By: Andrei Hagiu (Harvard Business School, Strategy Unit); Hanna Halaburda (Bank of Canada)
    Abstract: We study the effect of different levels of information on two-sided platform profits?under monopoly and competition. One side (developers) is always informed about all prices and therefore forms responsive expectations. In contrast, we allow the other side (users) to be uninformed about prices charged to developers and to hold passive expectations. We show that platforms with more market power (monopoly) prefer facing more informed users. In contrast, platforms with less market power (i.e., facing more intense competition) have the opposite preference: they derive higher profits when users are less informed. The main reason is that price information leads user expectations to be more responsive and therefore amplifies the effect of price reductions. Platforms with more market power benefit because this leads to demand increases, which they are able to capture fully. Competing platforms are affected negatively because more information intensifies price competition.
    Keywords: two-sided platforms, information, responsive expectations, passive expectations, wary expectations
    Date: 2013–11
  9. By: David Dillenberger (University of Pennsylvania); Uzi Segal (Boston College)
    Abstract: Experimental evidence suggests that individuals who face an asymmetric distribution over the likelihood of a specific event might actually prefer not to know the exact value of this probability. We address these findings by studying a decision maker who has recursive, non-expected utility preferences over two-stage lotteries. For a binary lottery that yields the better outcome with probability p, we identify noise around p with a compound lottery that induces a probability distribution over the exact value of the probability and has an average value p. We first propose and characterize a new notion of skewed distributions. We then use this result to provide conditions under which a decision maker who always rejects symmetric noise around p will always reject skewed to the left noise, but might accept skewed to the right noise. The model can be applied to the areas of investment under risk, medical decision making, and criminal law procedures, and can also be used to address the phenomenon of ambiguity seeking in the context of decision making under uncertainty.
    Keywords: Asymmetric noise, skewed distributions, recursive non-expected utility, ambiguity seeking, compound lotteries
    JEL: D81
    Date: 2013–11–25
  10. By: Alexei Parakhonyak (National Research University Higher School of Economics, Moscow, Russia.)
    Abstract: I study a model of oligopolistic competition in which consumers search for prices, but have no idea about the underlying price distribution. Consumers’ behaviour satisfies four consistency requirements such that beliefs about the underlying distribution maximize Shannon entropy. I derive the optimal stopping rule and equilibrium price distribution of the model. Unlike in Stahl (1989), the expected price is decreasing in the number of firms. Moreover, consumers can benefit from being uninformed, if the number of firms is sufficiently large.
    Keywords: consumer search, search without priors, bounded rationality, entropy
    JEL: D83 D43 L11
    Date: 2013
  11. By: Patricio S. Dalton; Sayantan Ghosal
    Abstract: A number of different models with behavioral economics have a reduced form rep- resentation where potentially boundedly rational decision-makers do not necessarily in- ternalize all the consequences of their actions on payo¤ relevant features (which we label as psychological states) of the choice environment. This paper studies the restrictions that such behavioral models impose on choice data and the implications they have for welfare analysis. First, we propose a welfare benchmark that is justi…ed using standard axioms of rational choice and can be applied to a number of existing seminal behavioral economics models. Second, we show that Sens axioms and fully characterize choice data consistent with behavioral decision-makers. Third, we show how choice data to infer information about the normative signi…cance of psychological states and establish the possibility of identifying welfare dominated choices.
    Keywords: Behavioral Choices, Revealed and Normative Preferences, Individual Welfare, Axiomatic Characterization.
    JEL: D03 D60 I30
    Date: 2013–11
  12. By: Rudiger, Jesper
    Abstract: A characteristic of the news market is that consumers often cross-check information, i.e. observe several news outlets. At the same time, data on political media suggest that more partisan consumers are more likely to cross-check. We explore these phenomena by building a model of horizontal competition in newspaper endorsements. Without cross-checking, outlets are unbiased and minimally differentiated. When cross-checking is allowed, we show that cross-checkers are indeed more partisan than those who only acquire one report. Furthermore, cross-checking induces outlets to differentiate, and the degree of differentiation is increasing in the dispersion of consumer beliefs. Differentiation is detrimental to consumer welfare, and a single monopoly outlet may provide higher consumer welfare than a competitive duopoly.
    Keywords: News Markets; Media Bias; Cross-checking; Hotelling
    JEL: D82 D83 L81
    Date: 2013–11–28
  13. By: Francesco Sobbrio (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: This paper provides a model of the market for news where profit-maximizing media outlets choose their editors from a population of rational citizens. The analysis identifies a novel mechanism of media bias: the bias in a media outlet's news reports is the result of the slanted endogenous information acquisition strategy of its editor. In particular, the results show that the expected accuracy of news reports is lower the more ideological an editor is. Nevertheless, citizens find it optimal to acquire information from a media outlet whose editor has similar ideological preferences. Depending on the distribution of citizens' ideological preferences, a media outlet may choose an ideological editor even in a monopolistic market. Moreover, ideological editors are more likely to be present in the market for news: i) the higher the number of media outlets competing in the market for news; ii) the lower the opportunity cost that citizens have to incur to acquire information
    Keywords: Media Bias, Slant, Information Acquisition, Valence, Competition
    JEL: D81 D82 L82
    Date: 2013–11
  14. By: Shurojit Chatterji; Sayantan Ghosal
    Abstract: We dene a solution concept, perfectly contracted equilibrium, for an intertempo- ral exchange economy where agents are simultaneously price takers in spot commodity markets while engaging in non-Walrasian contracting over future prices. In a setting with subjective uncertainty over future prices, we show that perfectly contracted equi- librium outcomes are a subset of Pareto optimal allocations. It is a robust possibility for perfectly contracted equilibrium outcomes to differ from Arrow-Debreu equilibrium outcomes. We show that both centralized banking and retrading with bilateral con- tracting can lead to perfectly contracted equilibria.
    Keywords: equilibrium, future prices, uncertainty, contracts
    JEL: D5 D70 D72 D84
    Date: 2013–11
  15. By: Dolf Talman; Zaifu Yang
    Abstract: An auctioneer wishes to sell several heterogeneous indivisible items to a group of potential bidders. Each bidder has valuations over the items but might face a budget constraint and may therefore not be able to pay up to his values. In such markets, a competitive equilibrium typically fails to exist. We develop a novel dynamic auction and prove that the auction always ï¬nds a core allocation. The core allocation consists of an assignment of the items and its associated supporting price vector and is Pareto efficient.
    Keywords: Dynamic auction, multi-item auction, budget constraint, core, efficiency
    JEL: D44
    Date: 2013–11

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.