nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒03‒30
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Optimal contracting with endogenous project mission By Lea Cassar
  2. Robust Competitive Auctions: A Theory of Stable Markets By Seungjin Han
  3. Price Cutting and Business Stealing in Imperfect Cartels By B. Douglas Bernheim; Erik Madsen
  4. Equilibrium Selection in Sequential Games with Imperfect Information By Jon X. Eguia; Aniol Llorente-Saguer; Rebecca Morton; Antonio Nicolò
  5. Public Bads, Heterogeneous Beliefs, and the Value of Information By Hiroaki Sakamoto
  6. Optimal Incentives in a Principal-Agent Model with Endogenous Technology By Marco A. Marini; Paolo Polidori; Desiree Teobaldelli; Davide Ticchi
  7. Precautionary Saving and the Notion of Ambiguity Prudence By Loïc Berger
  8. Large and Small Sellers: A Theory of Equilibrium Price Dispersion with Sequential Search By Guido Menzio; Nicholas Trachter
  9. Signaling Quality with Initially Reduced Royalty Rates By Heiko Karle; Christian Staat
  10. Persuasion with Reference Cues and Elaboration Costs By Ennio Bilancini; Leonardo Boncinelli
  11. Costly and Truthful Communication: Two Alternative Objectives By Olivier Body
  12. Stochastic Sorting By Hector Chade
  13. General equilibrium, risk taking and volatility By Araujo A.; Chateauneuf A.; Gama-Torres J.; Novinski R.
  14. On the economics of others By Stark, Oded
  15. A Representation of Risk Measures By AMARANTE, Massimiliano

  1. By: Lea Cassar
    Abstract: I present a model in which a principal selects one among many agents to develop a project and influences the agent’s ex post level of effort not by outcome-contingent rewards, but by the choice of the project’s mission. The closer the project’s mission to the agent’s preferred mission, the higher the agent’s intrinsic benefit from exerting effort. The principal and the agents disagree on what the project’s mission should be and the agents vary in how much they care about the project’s mission, i.e. they have heterogeneous unobservable intrinsic motivation levels. I derive the optimal mechanism (allocation rule, project’s mission, payment) to select and motivate the agent. I also consider situations where the project’s mission must be chosen prior to the allocation of the project and where the agents face budget constraints. Several applications are discussed.
    Keywords: Optimal contracting, non-monetary incentives, mission preferences, intrinsic motivation
    JEL: H41 D64 D82
    Date: 2014–03
  2. By: Seungjin Han
    Abstract: This paper shows that a competitive distribution of auctions (Peters 1997) is robust to the possibility of a seller's deviation to any arbitrary mechanism, let alone any direct mechanism because the sufficient condition for the robustness is embedded in its notion of equilibrium. This sufficient condition is generalized to examine the robustness of equilibrium in any decentralized market institution where competing principals (e.g. sellers) can offer mechanisms only from a set of mechanisms available in that market institution. The equivalence result (Gershkov et al. 2013) between Bayesian incentive compatible direct mechanisms and dominant strategy direct mechanism is also extended to express the generalized sufficient condition in terms of dominant strategy direct mechanisms.
    Keywords: competitive auctions, robust equilibrium, competing mechanism design
    JEL: C71 D82
    Date: 2014–03
  3. By: B. Douglas Bernheim; Erik Madsen
    Abstract: Though economists have made substantial progress toward formulating theories of collusion in industrial cartels that account for a variety of fact patterns, important puzzles remain. Standard models of repeated interaction formalize the observation that cartels keep participants in line through the threat of punishment, but they fail to explain two important factual observations: first, apparently deliberate cheating actually occurs; second, it frequently goes unpunished even when it is detected. We propose a theory of "equilibrium price cutting and business stealing" in cartels to bridge this gap between theory and observation.
    JEL: D43 L41
    Date: 2014–03
  4. By: Jon X. Eguia (Department of Economics, Univ. of Bristol. and Department of Politics, New York Univ.); Aniol Llorente-Saguer (School of Economics and Finance, Queen Mary, Univ. of London); Rebecca Morton (Department of Politics, NYU-NYC and NYU-Abu Dhabi.); Antonio Nicolò (School of Social Sciences, Univ. of Manchester)
    Abstract: Games with imperfect information often feature multiple equilibria, which depend on beliefs off the equilibrium path. Standard selection criteria such as passive beliefs, symmetric beliefs or wary beliefs rest on ad hoc restrictions on beliefs. We propose a new selection criterion that imposes no restrictions on beliefs: we select the action profi?le that is supported in equilibrium by the largest set of beliefs. We conduct experiments to test the predictive power of the existing and our novel selection criteria in two applications: a game of vertical multi-lateral contracting, and a game of electoral competition. We fi?nd that our selection criterion outperforms the other selection criteria.
    Keywords: imperfect information, equilibrium selection, passive beliefs, symmetric beliefs, vertical contract- ing, multiple equilibria
    JEL: H41 C72 D86 D72
    Date: 2014–03
  5. By: Hiroaki Sakamoto
    Abstract: This paper develops a simple model of public bads where players have heterogeneous beliefs about the consequence of their collective action. Properties of equilibrium and its relation to beliefs and preference are examined, followed by a detailed investigation of the impacts of new information. Our analysis sheds light on an important trade-off associated with information policies in the presence of belief heterogeneity and ambiguity. In particular, we show that newly available information can unambiguously worsen the free-riding problem even when it better reflects the correct risk than the players’ beliefs. Adding information noise will never mitigate the public-bad nature of the problem if players are equally confident about their beliefs. When the beliefs are highly heterogeneous, however, a certain amount of information noise can be Pareto-improving, for which the degrees of risk and ambiguity aversion play asymmetric roles.
    Keywords: externality; uncertainty; heterogeneous beliefs; information
    JEL: C72 D80 D81 Q54 H23
  6. By: Marco A. Marini (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Paolo Polidori (University of Urbino); Desiree Teobaldelli (University of Urbino); Davide Ticchi (IMT Institute for Advanced Studies Lucca)
    Abstract: One of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher efficiency are also riskier. Using a modified version of the Holmstrom and Milgrom's (1987) framework, we obtain that lower agent's risk aversion unambiguously leads to higher incentives when the technology function linking efficiency and riskiness is elastic, while the risk aversion-incentive relationship can be positive when this function is rigid
    Keywords: principal-agent; incentives; risk aversion; endogenous technology
    Date: 2014
  7. By: Loïc Berger
    Abstract: This letter develops a set of simple conditions under which an individual iswilling to save an extra amount of money due to the presence of ambiguity onits second period wealth. This extra precautionary saving motive is naturallyassociated to the notion of ambiguity prudence.
    Keywords: ambiguity aversion; non-expected utility; uncertainty; saving; prudence
    JEL: D81 D91 E21
    Date: 2013–11
  8. By: Guido Menzio (Department of Economics, University of Pennsylvania); Nicholas Trachter (Federal Reserve Bank of Richmond)
    Abstract: The paper studies equilibrium pricing in a product market for an indivisible good where buyers search for sellers. Buyers search sequentially for sellers, but do not meet every sellers with the same probability. Specifically, a fraction of the buyers’ meetings lead to one particular large seller, while the remaining meetings lead to one of a continuum of small sellers. In this environment, the small sellers would like to set a price that makes the buyers indifferent between purchasing the good and searching for another seller. The large seller would like to price the small sellers out of the market by posting a price that is low enough to induce buyers not to purchase from the small sellers. These incentives give rise to a game of cat and mouse, whose only equilibrium involves mixed strategies for both the large and the small sellers. The fact that the small sellers play mixed strategies implies that there is price dispersion. The fact that the large seller plays mixed strategies implies that prices and allocations vary over time. We show that the fraction of the gains from trade accruing to the buyers is positive and non-monotonic in the degree of market power of the large seller. As long as the large seller has some positive but incomplete market power, the fraction of the gains from trade accruing to the buyers depends in a natural way on the extent of search frictions.
    Keywords: Imperfect competition, Search frictions, Price dispersion.
    JEL: D21 D43
    Date: 2014–03–01
  9. By: Heiko Karle; Christian Staat
    Keywords: informed principal; moral hazard; signaling; franchising; reduced royalty rates
    JEL: D23 D82 D86
    Date: 2013–12
  10. By: Ennio Bilancini (Università degli Studi di Modena e Reggio Emilia); Leonardo Boncinelli (Università degli Studi di Pisa)
    Abstract: We develop a model of persuasion where, consistent with the psychological literature on dual process theory, the persuadee has to sustain a cognitive effort - the elaboration cost - in order to fully and precisely elaborate information. The persuader makes an offer to the persuadee and, aware that she is a dual process reasoner, also sends her a costly signal - the reference cue - which refers the offer to a category of offers whose average quality is known by the persuadee. Initially, the actual quality of the offer by the persuader is hidden to the persuadee, while the signal is visible. Then, the persuadee can either rely on cheap low elaboration and form expectations on the basis of the signal - thinking coarsely, i.e., by category - or engage in costly high elaboration to attain knowledge of the actual quality of the offer. This signaling setup allows us to keep the assumption that agents are both rational and Bayesian and, at the same time, to match many of the findings emphasized by well established psychological models of persuasion - such as the Elaboration Likelihood Model and the Heuristic-Systematic Model. In addition, the model provides novel theoretical results such as the possibility of separating equilibria that do not rely on the single-crossing property and a new rationale for the phenomenon of counter-signaling.
    Keywords: persuasion, coarse reasoning, peripheral and central route, heuristic and systematic reasoning, counter-signaling
    JEL: D01 D82 D83
    Date: 2014
  11. By: Olivier Body
    Date: 2014–02
  12. By: Hector Chade (arizona state university)
    Abstract: under uncertainty. In the model, agents' payoff-relevant characteristics are realized after matching takes place, and matches are formed based on ex-ante attributes that are noisy signals of the true characteristics. We derive conditions under which there is positive or negative assortative matching, and determine the properties of the distributions of ex-post attributes of matched partners. The conditions for sorting relate properties of the match payoff function with the stochastic order imposed on the conditional distributions of the agents' characteristics given their ex-ante attributes. We analyze both the transferable utility case and a class of risk sharing problems with nontransferable utility. Finally, we provide conditions under which the properties of the match payoff function and its degree of complementarity can be identified from observed match data.
    Date: 2013
  13. By: Araujo A.; Chateauneuf A.; Gama-Torres J.; Novinski R.
    Abstract: Although it is a phenomenon that is routinely observed in financial markets, the interaction between ambiguity averse and ambiguity lovers was not yet analyzed extensively in the literature of general equilibrium, mainly due to technical issues. In this paper, we show that the wealth aggregate risk plays a role on the existence of equilibrium in Arrow-Debreu economies. Moreover, we study properties of the equilibrium allocations such as condition for risk sharing, and the price behavior in equilibrium in presence of regulation, i.e., state price volatility when regulation is increased, and, for preferences with distorted probabilities with CARA utility functions, the decomposition of risk factor and ambiguity factor in these prices.
    Date: 2014–02–25
  14. By: Stark, Oded
    Abstract: We relate to others in two important ways: we care about others, and we care about how we fare in comparison to others. In some contexts, these two forms of relatedness interact. Caring about others can conveniently be labeled altruism. Caring about how we fare in comparison with others who fare better than ourselves can conveniently be labeled relative deprivation. I provide examples of domains in which the incorporation of altruism and relative deprivation can point to novel perspectives and suggest rethinking, and possibly revising, long-held views. And I show that there are domains in which consideration of relative deprivation can substitute for the prevalence of altruism, and vice versa. I conclude that this is a fascinating sphere for research on economics and social behavior.
    Keywords: Altruism, Relative deprivation, Economic and social behavior, Consumer/Household Economics, Institutional and Behavioral Economics, International Development, D01, D03, D13, D31, D63, D64, F22, F24, J61, O15,
    Date: 2014–03
  15. By: AMARANTE, Massimiliano
    Abstract: We provide a representation theorem for risk measures satisfying (i) monotonicity; (ii) positive homogeneity; and (iii) translation invariance. As a simple corollary to our theorem, we obtain the usual representation of coherent risk measures (i.e., risk measures that are, in addition, sub-additive; see Artzner et al. [2]).
    Keywords: Risk measures; capacity; Choquet integral
    JEL: G11 C65
    Date: 2013

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