nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒06‒02
24 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Delegation and Dynamic Incentives By Shin, Dongsoo; Strausz, Roland
  2. Hidden Insurance in a Moral Hazard Economy By Bertola, Giuseppe; Koeniger, Winfried
  3. All-pay auctions with certain and uncertain prizes By Minchuk, Yizhaq; Sela, Aner
  4. Optimal Allocations in Round-Robin Tournaments By Krumer, Alex; Megidish, Reut; Sela, Aner
  5. Monopoly Insurance with Endogenous Information By Lagerlöf, Johan N. M.; Schottmüller, Christoph
  6. Variational Preferences and Equilibria in Games under Ambiguous Beliefs Correspondences By Giuseppe De Marco; Maria Romaniello
  7. Ex post information rents in sequential screening By Krähmer, Daniel; Strausz, Roland
  8. Incomplete Contracting, Renegotiation, and Expectation-Based Loss Aversion By Herweg, Fabian; Karle, Heiko; Müller, Daniel
  9. Optimal Delegated Search with Adverse Selection and Moral Hazard By Ulbricht, Robert
  10. The Politics of Compromise By Bonatti, Alessandro; Rantakari, Heikki
  11. The Ratchet Effect Re-examined: A Learning Perspective By Bhaskar, Venkataraman
  12. Contracting With Synergies By Edmans, Alex; Goldstein, Itay; Zhu, John
  13. Efficient Competition through Cheap Talk: Competing Auctions and Competitive Search without Ex Ante Price Commitment By Kim, Kyungmin; Kircher, Philipp
  14. Dynamic Quality Signaling with Hidden Actions By Francesc Dilmé
  15. Public Procurement in Times of Crisis: The Bundling Decision Reconsidered By Schmitz, Patrick W
  16. Doubts and Dogmatism in Conflict Behavior By Sidartha Gordon; Alessandro Riboni
  17. On discrimination in procurement auctions By Jehiel, Philippe; Lamy, Laurent
  18. Net Neutrality with Competing Internet Platforms By Bourreau, Marc; Kourandi, Frago; Valletti, Tommaso
  19. A Constructive Proof of the Nash Bargaining Solution By Luís Carvalho
  20. Regulating Deferred Incentive Pay By Hoffmann, Florian; Inderst, Roman; Opp, Marcus
  21. Partial Stochastic Dominance By Takashi Kamihigashi; John Stachurski
  22. Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation By Fiocco, Raffaele; Strausz, Roland
  23. A Theory of Price Adjustment under Loss Aversion By Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
  24. Giffen’s Good: A case of mistaken identification By Brunt, Liam

  1. By: Shin, Dongsoo; Strausz, Roland
    Abstract: Using an agency model, we show how delegation, by generating additional private information, improves dynamic incentives under limited commitment. It circumvents ratchet effects and facilitates the revelation of persistent private information through two effects: a play-hardball effect, which mitigates an efficient agent's ratchet incentive, and a carrot effect which reduces an inefficient agent's take-the-money-and-run incentive. Although delegation entails a loss of control, it is optimal when uncertainty about operational efficiency is large. Moreover, delegation is more effective with production complementarity. We also consider different modes of commitment to yield insights into optimal organizational boundaries.
    Keywords: Agency; Delegation; Dynamic Incentives; Limited Commitment
    JEL: D82 D86 L22
    Date: 2014–04
  2. By: Bertola, Giuseppe; Koeniger, Winfried
    Abstract: We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional form restrictions ensure that individual objective functions are optimized by an effort and insurance combination that is unique and satisfies first- and second-order conditions. Modeling insurance incompleteness in terms of costly production of private insurance services, we characterize the constrained inefficiency arising in general equilibrium from competitive pricing of non-exclusive financial contracts.
    Keywords: Constrained efficiency; First-order approach; Hidden action; Principal agent
    JEL: D81 D82 E21
    Date: 2014–03
  3. By: Minchuk, Yizhaq; Sela, Aner
    Abstract: We study all-pay auctions with multiple prizes. The players have the same value for all the certain prizes except for one uncertain prize for which each player has a private value. We characterize the equilibrium strategy and show that if the number of prizes is smaller than the number of players, independent of the ranking of the uncertain prize, a player's probability to win as well as his expected utility increases in his value for this prize. We demonstrate that a stochastic dominance relation between two distribution functions of the players' private values may increase but also even decrease the players' ex-ante expected utility as well the players' expected total effort. Also, increasing the number of prizes may decrease the players' ex-ante expected utility. Thus, we may conclude that a larger number of prizes does not necessarily benefit the players in a contest.
    Keywords: All-pay auctions; contests; uncertain prizes
    JEL: D44 D82 J31 J41
    Date: 2014–03
  4. By: Krumer, Alex; Megidish, Reut; Sela, Aner
    Abstract: We study round-robin tournaments with three players whose values of winning are common knowledge. In every stage a pair-wise match is modelled as an all-pay auction. The player who wins in two matches wins the tournament. We characterize the sub-game perfect equilibrium for symmetric (all players have the same value) and asymmetric players (each one is either weak (low value) or strong (high value)) and prove that if the asymmetry between the players' values are relatively weak, each player maximizes his expected payoff if he competes in the first and the last stages of the tournament. Moreover, even when the asymmetry between the players' values are relatively strong, the strong players maximize their expected payoffs if they compete in the first and the last stages. We show that a contest designer who wishes to maximize the length of the tournament such that the winner of the tournament will be decided in the last stage should allocate the stronger players in the last stage. But if he wishes to maximize the players' expected total effort he should not allocate them in the last stage of the tournament.
    Keywords: All-pay auctions; Round-robin tournaments
    JEL: D44 D72 D82
    Date: 2014–03
  5. By: Lagerlöf, Johan N. M.; Schottmüller, Christoph
    Abstract: We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner.
    Keywords: adverse selection; asymmetric information; information acquisition; insurance; screening
    JEL: D82 I13
    Date: 2013–12
  6. By: Giuseppe De Marco (Università di Napoli Parthenope and CSEF); Maria Romaniello (Università di Napoli Federico II)
    Abstract: In previous papers we studied a game model in which players' uncertainty is expressed entirely in the space of probabilities (lotteries) over consequences, it depends on the entire strategy profile chosen by the agents and it is described by the so called ambiguous beliefs correspondences. In this paper, we extend the previous results by embodying variational preferences in the model. We give a general existence result that we apply to a particular example in which beliefs correspondences depend on the equilibria of specific subgames. Then, we study the limit behavior of equilibria under perturbations on the index of ambiguity aversion.
    Date: 2014–05–20
  7. By: Krähmer, Daniel; Strausz, Roland
    Abstract: We study ex post information rents in sequential screening models where the agent receives private ex ante and ex post information. The principal has to pay ex post information rents for preventing the agent to coordinate lies about his ex ante and ex post information. When the agent's ex ante information is discrete, these rents are positive, whereas they are zero in continuous models. Consequently, full disclosure of ex post information is generally suboptimal. Optimal disclosure rules trade off the benefits from adapting the allocation to better information against the effect that more information aggravates truth-telling.
    Keywords: information disclosure; information rents; sequential screening
    JEL: D82 H57
    Date: 2014–04
  8. By: Herweg, Fabian; Karle, Heiko; Müller, Daniel
    Abstract: We consider a simple trading relationship between an expectation-based loss-averse buyer and profit-maximizing sellers. When writing a long-term contract the parties have to rely on renegotiations in order to ensure materially efficient trade ex post. The type of the concluded long-term contract affects the buyer's expectations regarding the outcome of renegotiation. If the buyer expects renegotiation always to take place, the parties are always able to implement the materially efficient good ex post. It can be optimal for the buyer, however, to expect that renegotiation does not take place. In this case, a good of too high quality or too low quality is traded ex post. Based on the buyer's expectation management, our theory provides a rationale for ``employment contracts'' in the absence of non-contractible investments. Moreover, in an extension with non-contractible investments, we show that loss aversion can reduce the hold-up problem.
    Keywords: Behavioral Contract Theory; Expectation-Based Loss Aversion; Incomplete Contracts; Renegotiation
    JEL: C78 D03 D86
    Date: 2014–03
  9. By: Ulbricht, Robert
    Abstract: The paper studies a model of delegated search. The distribution of search revenues is unknown to the principal and has to be elicited from the agent in order to design the optimal search policy. At the same time, the search process is unobservable, requiring search to be self-enforcing. The two information asymmetries are mutually enforcing each other; if one is relaxed, delegated search is efficient. With both asymmetries prevailing simultaneously, search is almost surely inefficient (it is stopped too early). Second-best remuneration is shown to optimally utilize a menu of simple bonus contracts. In contrast to standard adverse selection problems, indirect nonlinear tariffs are strictly dominated.
    Keywords: adverse selection; bonus contracts; delegated search; moral hazard; optimal stopping.
    JEL: D82 D83 D86 C72
    Date: 2014–03–11
  10. By: Bonatti, Alessandro; Rantakari, Heikki
    Abstract: A team must select among competing projects that differ in their payoff consequences for its members. Each agent chooses a project and exerts costly effort affecting its random completion time. When one or more projects are complete, agents bargain over which one to implement. A consensus requirement can (but need not) induce the efficient balance between compromise in project selection and equilibrium effort. Imposing deadlines for presenting counteroffers is beneficial, while delegating decision-making to an impartial third party leads agents to select extreme projects. Finally, hiring agents with opposed interests can foster both effort and compromise in project selection.
    Keywords: bargaining; compromise; conflict; consensus; deadlines; free-riding
    JEL: C72 D71 D83
    Date: 2014–03
  11. By: Bhaskar, Venkataraman
    Abstract: We study dynamic moral hazard where principal and agent are symmetrically uncertain about job difficulty. Since effort is unobserved, shirking leads the principal to believe that the job is hard, increasing the agent's continuation value. So deterring shirking requires steeper incentives, which induce the agent to over-work today, since he can quit if the principal believes that the job is easy. With continuous effort choices, no interior effort is implementable in the first period. The agent's continuation value function is non-differentiable and convex, since the principal makes the agent indifferent between his discrete (participation) choices in the second period. The problem can be solved if the agent's participation decision is made continuous, or if there are long-term commitments, and we provide conditions for the first order approach to work. However, the impossibility result recurs in other agency models that combine discrete and continuous choices.
    Keywords: envelope theorem; first-order approach; learning; moral hazard; ratchet effect
    JEL: D83 D86
    Date: 2014–05
  12. By: Edmans, Alex; Goldstein, Itay; Zhu, John
    Abstract: This paper studies multi-agent optimal contracting with cost synergies. We model synergies as the extent to which effort by one agent reduces his colleague's marginal cost of effort. An agent's pay and effort depend on the synergies he exerts, the synergies his colleagues exert on him and, surprisingly, the synergies his colleagues exert on each other. It may be optimal to "over-work" and "over-incentivize" a synergistic agent, due to the spillover effect on his colleagues. This result can rationalize the high pay differential between CEOs and divisional managers. An increase in the synergy between two particular agents can lead to a third agent being endogenously excluded from the team, even if his own synergy is unchanged. This result has implications for optimal team composition and firm boundaries.
    Keywords: complementarities; Contract theory; influence.; multiple agents; principal-agent problem; synergies; teams
    JEL: D86 J31 J33
    Date: 2013–11
  13. By: Kim, Kyungmin; Kircher, Philipp
    Abstract: We consider a frictional two-sided matching market in which one side uses public cheap-talk announcements so as to attract the other side. We show that if the first-price auction is adopted as the trading protocol, then cheap talk can be perfectly informative, and the resulting market outcome is efficient, constrained only by search frictions. We also show that the performance of an alternative trading protocol in the cheap-talk environment depends on the level of price dispersion generated by the protocol: If a trading protocol compresses (spreads) the distribution of prices relative to the first-price auction, then an efficient fully revealing equilibrium always (never) exists. Our results identify the settings in which cheap talk can serve as an efficient competitive instrument, in the sense that the central insights from the literature on competing auctions and competitive search continue to hold unaltered even without ex ante price commitment.
    Keywords: cheap talk; commitment; competitive search; directed search
    JEL: C72 D82 D83
    Date: 2013–12
  14. By: Francesc Dilmé (Department of Economics, University of Bonn)
    Abstract: Asymmetric information is an important source of inefficiency when an asset (such as a firm) is transacted. The two main sources of this asymmetry are the unobserved idiosyncratic characteristics of the asset (such as future profitability) and unobserved idiosyncratic choices (like secret price cuts). Buyers may use noisy signals (such as sales) in order to infer actions and characteristics. In this situation, does the seller prefer to release information fast or slowly? Is it incentive compatible? When the market is pessimistic, is it better to give up or keep signaling? We introduce hidden actions in a dynamic signaling model in order to answer these questions. Separation is found to be fast in equilibrium when sending highly informative signals is more efficient than sending lowly informative signals. When the market is pessimistic about the quality of the asset, depending on the cost structure, the seller either “gives-up” by stopping signaling, or the seller “rushes-out” by increasing the informativeness of the signal. We find that the unobservability of the action causes equilibrium effort to be too low and the seller to stop signaling too early. The model can be applied to education where grades depend on students’ effort, which is endogenously related to their skills.
    Keywords: Dynamic Signaling, Dynamic Moral Hazard, Endogenous Effort
    JEL: D82 D83 C73 J24
    Date: 2014–05–18
  15. By: Schmitz, Patrick W
    Abstract: The government wants two tasks to be performed. In each task, unobservable effort can be exerted by a wealth-constrained private contractor. If the government faces no binding budget constraints, it is optimal to bundle the tasks. The contractor in charge of both tasks then gets a bonus payment if and only if both tasks are successful. Yet, if the government has only a limited budget, it may be optimal to separate the tasks, so that there are two contractors each in charge of one task. In this case, high efforts in both tasks can be implemented with smaller bonus payments.
    Keywords: bundling; limited liability; moral hazard; procurement contracts; public goods provision
    JEL: D86 H12 H57 L24 L33
    Date: 2013–10
  16. By: Sidartha Gordon (Département d'économie); Alessandro Riboni
    Abstract: Conflicts are likely less violent if individuals entertain the possibility that the opponent may be right. Why is it so difficult to observe this attitude? In this paper, we consider a game of conflict where two opponents fight in order to impose their preferred policy. Before entering the conflict, one opponent (the agent) trusts the information received by his principal. The principal wants to a↵ect the agent’s e↵ort, but he also cares that the agent selects the correct policy and that he has the right incentives to acquire information.We find conditions under which the principal induces hawkish attitudes in the agent. As a result, the agent has no doubts about the optimality of his preferred policy, conflicts are violent and bad decisions are sometimes made. Under some other conditions, the agent adopts dovish attitudes of systematic doubt and conflicts are less violent.
    Date: 2014–04
  17. By: Jehiel, Philippe; Lamy, Laurent
    Abstract: With exogenous participation, strong bidders should be discriminated against weak bidders to maximize revenues (Myerson 1981). When participation is endogenous and the set of potential entrants is large, optimal discrimination if any takes a very different form. Without incumbents, there should be no discrimination even if entrants come from groups with different characteristics. With incumbents, those should be discriminated against entrants no matter how strong/weak they are even if some share of their surplus is internalized by the designer. The optimal reserve policy in standard auctions is also analyzed to shed light on situations in which discrimination is not permitted.
    Keywords: asymmetric buyers; auctions with endogenous entry; bid preference programs; cartels; favoritism; government procurement; incumbents; optimal auction design; Poisson games
    JEL: D44 H57 L10
    Date: 2014–01
  18. By: Bourreau, Marc; Kourandi, Frago; Valletti, Tommaso
    Abstract: We propose a two-sided model with two competing Internet platforms, and a continuum of Content Providers (CPs). We study the effect of a net neutrality regulation on capacity investments in the market for Internet access, and on innovation in the market for content. Under the alternative discriminatory regime, platforms charge a priority fee to those CPs which are willing to deliver their content on a fast lane. We find that under discrimination investments in broadband capacity and content innovation are both higher than under net neutrality. Total welfare increases, though the discriminatory regime is not always beneficial to the platforms as it can intensify competition for subscribers. As platforms have a unilateral incentive to switch to the discriminatory regime, a prisoner's dilemma can arise. We also consider the possibility of sabotage, and show that it can only emerge, with adverse welfare effects, under discrimination.
    Keywords: Innovation; Investment; Net neutrality; Platform competition; Two-sided markets
    JEL: L13 L51 L52 L96
    Date: 2014–02
  19. By: Luís Carvalho
    Abstract: This paper oers a constructive proof of the Nash Bargaining solution. We start by proving that Nashs solution is representable based on its continuity. This property along with the linearity of the choice function will then allow us to identify the function representing Nashs bargaining choice. Finally, supported on the result for two players, we will generalize it to n-players.
    Keywords: Nash Bargaining; Constructive Proof
    JEL: C73
    Date: 2014–05–22
  20. By: Hoffmann, Florian; Inderst, Roman; Opp, Marcus
    Abstract: Our paper examines the effect of recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses for compensation contracts in the financial sector. We study a multi-task setting in which a bank employee, the agent, privately chooses (deal or customer) acquisition effort and diligence, which stochastically reduces the occurrence of negative events over time (such as loan defaults or customer cancellations). The key ingredient of the compensation contract is the endogenous timing of a long-term bonus that trades off the cost and benefit of delay resulting from agent impatience and the informational gain, respectively. Our main finding is that government interference with this privately optimal choice may
    Keywords: Compensation design; Financial regulation; Principal-agent models
    JEL: D86 G21 G28
    Date: 2014–03
  21. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); John Stachurski (Research School of Economics, Australian National University, Australia)
    Abstract: The stochastic dominance ordering over probability distributions is one of the most familiar concepts in economic and financial analysis. One difficulty with stochastic dominance is that many distributions are not ranked at all, even when arbitrarily close to other distributions that are. Because of this, several measures of "partial" or "near" stochastic dominance have been introduced into the literature—albeit on a somewhat ad hoc basis. This paper argues that there is a single measure of extent of stochastic dominance that can be regarded as the most natural default measure from the perspective of economic analysis.
    Keywords: Stochastic dominance, Stochastic order
    JEL: D81 G11
    Date: 2014–05
  22. By: Fiocco, Raffaele; Strausz, Roland
    Abstract: Strategic delegation to an independent regulator with a pure consumer standard improves dynamic regulation by mitigating ratchet effects associated with short term contracting. A pure consumer standard alleviates the regulator's myopic temptation to raise output after learning the firm is inefficient. Anticipating this tougher regulatory behavior, efficient firms find it less attractive to exaggerate costs. This reduces the need for long term rents and mitigates ratchet effects. A welfare standard biased towards consumers entails, however, allocative costs arising from partial separation of the firms' cost types. A trade-off results which favors strategic delegation when efficient firms are relatively likely.
    Keywords: consumer standard; Dynamic regulation; limited commitment; ratchet effects; strategic delegation
    JEL: D82 L51
    Date: 2014–04
  23. By: Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
    Abstract: We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers' perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers' rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers' reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks.
    Keywords: loss aversion; price sluggishness; state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014–05
  24. By: Brunt, Liam
    Abstract: Giffen reported that, in the late nineteenth century, English wheat consumption rose when its price increased – the first recorded “Giffen good”. Using Giffen’s data, I explain how he reached his conclusion. I then show that his analysis was faulty: price elasticity of demand appears positive when the demand curve is incorrectly identified, but is significantly negative – like any normal good – when it is correctly identified. Since the pathological Giffen good case was actually just mistaken identification, it is no surprise that Giffen goods are impossible to find elsewhere. Popularization of the Giffen good stemmed from Marshall’s and Samuelson’s influential textbooks.
    Keywords: endogeneity; Giffen good; identification; stationarity
    JEL: B13 B16 D12
    Date: 2013–11

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