nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒03‒01
eight papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Dynamic Contracts and Learning by Doing By Prat, Julien
  2. Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case By Kazumi Hori
  3. Strategic Experimentation with Competition and Private Arrival of Information By Kaustav Das
  4. Cautious Expected Utility and the Certainty Effect By Simone Cerreia-Vioglio; David Dillenberger; Pietro Ortoleva
  5. Symmetric majority rules. By Michele Gori; Daniela Bubboloni
  6. On the Optimal Composition of Committees By Ben-Yashar, Ruth; Danziger, Leif
  7. Pay-What-You-Want Pricing Schemes: A Self-Image Perspective By Kahsay, Goytom Abraha; Samahita, Margaret
  8. Awareness of Unawareness: A Theory of Decision Making in the Face of Ignorance By Edi Karni; Marie-Louise Vierø

  1. By: Prat, Julien (CREST)
    Abstract: This paper studies the design of optimal contracts in dynamic environments where agents learn by doing. We derive a condition under which contracts are fully incentive compatible. A closed-form solution is obtained when agents have CARA utility. It shows that human capital accumulation strengthens the power of incentives and allows the principal to provide the agent with better insurance against transitory risks.
    Keywords: human capital, principal agent problem, moral hazard
    JEL: D82 D83 J24 J41
    Date: 2014–02
  2. By: Kazumi Hori (College of Economics, Ritsumeikan University)
    Abstract: This paper investigates how a buyer and a seller exchanging two goods should write the contract, where the seller makes sequences of unobservable relation-specific investments and the buyer privately learns valuations for goods which are stochastically influenced by the investments and these two types of asymmetric information cause inefficiency in trading. Three types of contract structures are possible. In a dynamic contract, the goods are traded sequentially and the order for the second good can be canceled to restore efficiency for the first good. In separate contracts, two goods are treated independently, whereas the two goods are bundled as a single good in bundled contracts. It will be shown that the dynamic contract is suboptimal and that the second-best contract is either a separate or a bundle contract, depending on the costs of investments.
    Keywords: bilateral trading, cooperative investment, dynamic contract, hidden action, hidden information.
    JEL: C72 D23 D82 D86
    Date: 2014–02
  3. By: Kaustav Das (Department of Economics, University of Exeter)
    Abstract: This paper considers a two-armed bandit problem with one safe arm and one risky arm. The risky arm if good, can potentially experience two kinds of arrivals. One is publicly observable and the other is private to the agent who experiences it. The safe arm experiences publicly observable arrivals according to a given intensity. Private arrivals yield no payoff. Only the first publicly observed arrival(in any of the arms) yields a payo of 1 unit. Players start with a common prior about the quality of the risky arm. It has been shown that in a particular kind symmetric equilibrium, conditional on no arrival players tend to experiment too much along the risky arm if they start with too high a prior and experiment too less if they start with a low prior.
    Keywords: Two-armed Bandit, R&D competition, Duplication, Learning.
    JEL: C73 D83 O31
    Date: 2014
  4. By: Simone Cerreia-Vioglio (Department of Decision Sciences, Università Bocconi); David Dillenberger (Department of Economics, University of Pennsylvania); Pietro Ortoleva (Department of Economics, Columbia University)
    Abstract: Many violations of the Independence axiom of Expected Utility can be traced to subjects' attraction to risk-free prospects. The key axiom in this paper, Negative Certainty Independence (Dillenberger, 2010), formalizes this tendency. Our main result is a utility representation of all preferences over monetary lotteries that satisfy Negative Certainty Independence together with basic rationality postulates. Such preferences can be represented as if the agent were unsure of how to evaluate a given lottery p; instead, she has in mind a set of possible utility functions over outcomes and displays a cautious behavior: she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one. The set of utilities is unique in a well-defined sense. We show that our representation can also be derived from a `cautious' completion of an incomplete preference relation.
    Keywords: Preferences under risk, Allais paradox, Negative Certainty Independence, Incomplete preferences, Cautious Completion, Multi-Utility representation
    JEL: D80 D81
    Date: 2014–02–03
  5. 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 assumption that individual preferences and social outcomes are linear orders on the set of alternatives, we study the rules which satisfy suitable symmetries and obey the majority principle. In particular, supposing that individuals and alternatives are exogenously partitioned into subcommittees and subclasses, we provide necessary and sucient conditions for the existence of reversal symmetric majority rules that are anonymous and neutral with respect to the considered partitions. We also determine a general method for constructing and counting those rules and we explicitly apply it to some simple cases.
    Keywords: social welfare function, anonymity, neutrality, reversal symmetry, majority, group theory.
    JEL: D71
    Date: 2014–02
  6. By: Ben-Yashar, Ruth (Bar-Ilan University); Danziger, Leif (Ben Gurion University)
    Abstract: This paper derives a simple characterization of how to optimally divide an organization's experts into different decision-making committees. The focus is on many three-member committees that make decisions by a simple majority rule. We find that the allocation of experts to committees is optimal if and only if it minimizes the sum of the products of the experts' skills in each committee. As a result, given the experts of any two committees, the product of the experts' skills should be as similar as possible in the two committees, and it is never optimal to have the three worst experts in one committee and the three best experts in another.
    Keywords: optimal composition of committees, simple majority rule
    JEL: D71
    Date: 2014–02
  7. By: Kahsay, Goytom Abraha (Department of Food and Resource Economics, University of Copenhagen); Samahita, Margaret (Department of Economics, Lund University)
    Abstract: Pay-What-You-Want (PWYW) pricing schemes are becoming increasingly popular in a wide range of industries. We develop a model incorporating self-image into the buyer's utility function and introduce heterogeneity in consumption utility and image-sensitivity, which generates different purchase decisions and optimal prices across individuals. When a good is sold at a fixed price higher than a threshold value, a price that the individual thinks is fair, the adoption of PWYW increases his utility and hence results in a weakly higher purchase rate. When a good is sold at a fixed price lower than this threshold, however, PWYW can lead to a lower utility. This may result in a lower purchase rate and higher average price, in line with previously unexplained evidence from field experiments. Moreover, an increase in the threshold value decreases the buyer's utility and may further lower the purchase rate, possibly resulting in a further increase in purchase price. Using simple assumptions of quadratic self-image function and uniformly distributed individual preferences, we investigate the conditions under which PWYW yields higher total welfare.
    Keywords: pay-what-you-want; self-image; fairness; voluntary contribution
    JEL: D03 D11 D49 D64 D82
    Date: 2014–02–17
  8. By: Edi Karni (Johns Hopkins University); Marie-Louise Vierø (Queen's University)
    Abstract: In the wake of growing awareness, decision makers anticipate that they might become aware of material possibilities and ideas that, in their current state of ignorance, are unimaginable. This anticipation manifests itself in their choice behavior. This paper models this awareness of unawareness and axiomatizes a probabilistic sophisticated representation of beliefs about ignorance and subjective expected utility representation, in an enriched framework, that assigns utility to the unknown while maintaining, in both instances, the flavor of reverse Bayesianism of Karni and Vierø (2013, 2014).
    Keywords: Awareness, Unawareness, Ignorance, Reverse Bayesianism
    JEL: D8 D81 D83
    Date: 2014–01

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