nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒07‒13
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Moral Hazard in Repeated Procurement of Services By Esteve González, Patrícia
  2. Expected Utility without Parsimony. By Antoine Billot; Vassili Vergopoulos
  3. Bargaining and collusion in a regulatory relationship By Fiocco, Raffaele; Gilli, Mario
  4. Stochastic dominance, risk and disappointment: a synthesis. By Thierry Chauveau
  5. Partial Stochastic Dominance By Takashi Kamihigashi; John Stachurski
  6. Why prediction markets work : The role of information acquisition and endogenous weighting By Siemroth, Christoph
  7. How business community institutions can help fight corruption By Dixit, Avinash
  8. Efficient allocations and Equilibria with short-selling and Incomplete Preferences. By Rose-Anne Dana; Cuong Le Van
  9. A Behavioral Definition of States of the World. By Vassili Vergopoulos
  10. Optimal Security Design under Asymmetric Information and Profit Manipulation By Koufopoulos, Kostos; Kozhan, Roman; Trigilia, Giulio
  11. Utilitarianism with Prior Heterogeneity. By Antoine Billot; Vassili Vergopoulos
  12. Social structure bureaucracy and corruptionA By Jellal, Mohamed
  13. Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation By Loertscher, Simon; Niedermayer, Andras
  14. Incentives and optimal antitrust policy By Jellal, Mohamed; Souam, Said
  15. Information acquisition and learning from prices over the business cycle By BjÖrn Ohl; Taneli Mäkinen
  16. Pessimistic optimal choice for risk-averse agents By Paolo Vitale Author-Name-First Paolo
  17. Bargaining over a common conceptual space. By Marco LiCalzi; Nadia Mâagli
  18. Context Dependent Games as Quantifiers and Selection Functions By Hedges, Jules; Oliva, Paulo; Winschel, Evguenia; Winschel, Viktor; Zahn, Philipp
  19. On existence and bubbles of Ramsey equilibrium with borrowing constraints. By Robert Becker; Stefano Bosi; Cuong Le Van; Thomas Seegmuller
  20. Existence of equilibrium on OLG economies with durable goods. By Lalaina Rakotonindrainy

  1. By: Esteve González, Patrícia
    Abstract: This paper analyzes repeated procurement of services as a four-stage game divided into two periods. In each period there is (1) a contest stage à la Tullock in which the principal selects an agent and (2) a service stage in which the selected agent provides a service. Since this service effort is non-verifiable, the principal faces a moral hazard problem at the service stages. This work considers how the principal should design the period-two contest to mitigate the moral hazard problem in the period-one service stage and to maximize total service and contest efforts. It is shown that the principal must take account of the agent's past service effort in the period-two contest success function. The results indicate that the optimal way to introduce this `bias' is to choose a certain degree of complementarity between past service and current contest efforts. This result shows that contests with `additive bias' (`multiplicative bias') are optimal in incentive problems when effort cost is low (high). Furthermore, it is shown that the severity of the moral hazard problem increases with the cost of service effort (compared to the cost of contest effort) and the number of agents. Finally, the results are extended to more general contest success functions. JEL classification: C72; D82 Key words: Biased contests; Moral Hazard; Repeated Game; Incentives.
    Keywords: Jocs no-cooperatius (Matemàtica), 33 - Economia,
    Date: 2014
  2. By: Antoine Billot (LEMMA - Université Panthéon-Assas and IUF); Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper seeks to interpret observable behavior and departures from Savage's model of Subjective Expected Utility (SEU) in terms of knowledge and belief. It is shown that observable behavior displays sensitivity to ambiguity if and only if knowledge and belief disagree. In addition, such an epistemic interpretation of ambiguity leads to dynamically consistent extensions of non-SEU preferences.
    Keywords: Ambiguity, state of the world, knowledge, dynamic consistency.
    JEL: D81 D83 D90
    Date: 2014–03
  3. By: Fiocco, Raffaele; Gilli, Mario
    Abstract: We investigate regulation as the outcome of a bargaining process between a regulator and a regulated firm. The regulator is required to monitor the firm’s costs and reveal its information to a political principal (Congress). In this setting, we explore the scope for collusion between the regulator and the firm, which results in the manipulation of the regulator’s report on the firm’s costs to Congress. The firm’s bene.t of collusion arises from the higher price the efficient firm is allowed to charge when the regulator reports that it is inefficient. However, a higher price reduces the gains from trade the parties can share in the bargaining process. As a result of this trade-off, the efficient firm has a stake in collusion only if the regulator’s bargaining power in the regulatory relationship is relatively high. Then, we derive the optimal institutional response to collusion and characterize the conditions under which allowing collusion is desirable.
    Keywords: asymmetric information; auditing; bargaining; collusion; regulation.
    JEL: D73 D82 L51
    Date: 2014
  4. By: Thierry Chauveau (Centre d'Economie de la Sorbonne)
    Abstract: Although it is endowed with many interesting properties, the theory of decision-making under risk by Loomes and Sugden [1986] has never been given an axiomatics. In this paper, we make up for this omission because their lottery-dependent functional is endowed with many interesting properties to which little attention has been paid up to now. In particular, investors whose preferences are represented by the functional are rational in that (a) they actually behave differently if they are risk averse or risk prone, (b) risk is defined in a consistent way with risk aversion, (c) the functional is but the opposite to a convex measure of risk (Föllmer ans Schied [2002]) when constant marginal utility is assumed and (d) violations of the second-order stochastic dominance property are allowed for when "utils" are substituted for monetary values. Moreover, the partial weak order induced by stochastic dominance over utils is as "close" to the weak order of preferences as possible and utility functions may be elicited through experimental testing.
    Keywords: Disappointment, risk-aversion, expected utility, risk premium, stochastic dominance, subjective risk.
    JEL: D81
    Date: 2014–06
  5. By: Takashi Kamihigashi; John Stachurski
    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: 2014–06–27
  6. By: Siemroth, Christoph
    Abstract: In prediction markets, investors trade assets whose values are contingent on the occurrence of future events, like election outcomes. Prediction market prices have been shown to be consistently accurate forecasts of these outcomes, but we don't know why. I formally illustrate an information acquisition explanation. Traders with more wealth to invest have stronger incentives to acquire information about the outcome, thus tend to have better forecasts. Moreover, their trades have larger weight in the market. The interaction implies that a few well-endowed traders can move the asset price toward the true value. One implication for institutions aggregating information is to put more weight on votes of agents with larger stakes, which improves on equal weighting, unless prior distribution accuracy and stakes are negatively related.
    Keywords: Information Acquisition , Information Aggregation , Forecasting , Futures Markets , Prediction Markets
    JEL: D83 D84 G10
    Date: 2014
  7. By: Dixit, Avinash
    Abstract: This paper considers the possibility of collective action by the business community to counter corruption in the award of government licenses and contracts. The analogy is with contract enforcement institutions studied by economic historians and contract law scholars. The institution in this context comprises a no-bribery norm, a community system to detect violations, and a multilateral ostracism penalty upon conviction in a community tribunal. The requirements such an institution must meet if it is to be effective are analyzed. It is shown that an institution of sufficient quality -- combining probability of correct detection and severity of punishment -- can eliminate bribery. If the private institution is not sufficiently good, then in conjunction with the state's formal apparatus it reduces the level of bribes demanded, but increases the probability of winning the license or contract through bribery. An improvement in the government's formal anti-corruption mechanism, holding the private institution constant, reduces both the level of bribes and the probability of success through bribery. The two institutions together are shown to achieve substantially better outcomes than either can on its own.
    Keywords: Public Sector Corruption&Anticorruption Measures,E-Business,Corruption&Anticorruption Law,Crime and Society,Social Accountability
    Date: 2014–06–01
  8. By: Rose-Anne Dana (CEREMADE - Université Paris-Dauphine and IPAG Business School); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG and VCREME)
    Abstract: This article reconsiders the theory of existence of efficient allocations and equilibria when consumption sets are unbounded below under the assumption that agents have incomplete preferences. It is motivated by an example in the theory of assets with short-selling where there is risk and ambiguity. Agents have Bewley's incomplete preferences. As an inertia principle is assumed in markets, equilibria are individually rational. It is shown that a necessary and sufficient condition for the existence of an individually rational efficient allocation or of an equilibrium is that the relative interiors of the risk adjusted sets of probabilities intersect. The more risk averse, the more ambiguity averse the agents, the more likely is an equilibrium to exist. The paper then turns to incomplete preferences represented by a family of concave utility functions. Several definitions of efficiency and of equilibrium with inertia are considered. Sufficient conditions and necessary and sufficient conditions are given for the existence of efficient allocations and equilibria with inertia.
    Keywords: Uncertainty, risk, risk adjusted prior, no arbitrage, equilibrium with short-selling, incomplete preferences, equilibrium with inertia.
    JEL: C62 D50 D81 D84 G1
    Date: 2014–05
  9. By: Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper elaborates an axiomatic treatment of the Subjective Expected Utility (SEU) model that dispenses with the assumption of an exogenous state space. Within a state-free description of uncertainty and alternatives, axioms for preferences are formulated and shown to characterize the existence of a subjective state space, a subjective probability and a utility function. In the representation, the individual appears to behave as if he used the state space to describe uncertainty and maximized SEU to make decisions. Moreover, the state space, probability and utility are unique in some appropriate sense.
    Keywords: Expected utility, subjective state space, causality, consequentialism.
    JEL: D81 D90
    Date: 2014–02
  10. By: Koufopoulos, Kostos (University of Pireaus, Department of Banking and Financial Management); Kozhan, Roman (Warwick Business School); Trigilia, Giulio (Department of Economics, University of Warwick)
    Abstract: We consider a model of external financing under ex ante asymmetric information and profit manipulation (non verifability). Contrary to conventional wisdom, the optimal contract is not standard debt, and it is not monotonic. Instead, it resembles a contingent convertible (CoCo) bond. In particular: (i) if the profit manipulation and/or adverse selection are not severe, there exists a unique separating equilibrium in CoCos; (ii) in the intermediate region, if the distribution of earnings is unbounded above there exists a unique pooling equilibrium in CoCos, otherwise debt might be issued but it is never the unique equilibrium; (iii) finally, if profit manipulation is severe, there is no financing. These findings suggest that the standard monotonicity constraint exogenously imposed in the security design literature must be reconsidered. Crucially, profit manipulation is part of the optimal contract, and non-monotonic, convertible securities mitigate the asymmetric information problem. We discuss milestone payments in venture capital as an application. Key words: Security design ; nancial innovation ; capital structure ; asymmetric information ; venture capital
    Date: 2014
  11. By: Antoine Billot (LEMMA - Université Panthéon-Assas and IUF); Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: Harsanyi's axiomatic justification of utilitarianism is extended to a framework with subjective and heterogenous priors. Contrary to the existing literature on aggregation of preferences under uncertainty, society is here allowed to formulate probability judgements, not on the actual state of the world as individuals do, but rather on the opinion they each have on the actual state. An extended Pareto condition is then proposed that characterizes the social utility function as a convex combination of individual ones and the social prior as the independent product of individual ones.
    Keywords: Utilitarianism, prior heterogeneity, Pareto condition.
    JEL: D71 D81
    Date: 2014–06
  12. By: Jellal, Mohamed
    Abstract: Using the principal-agent- supervisor paradigm, this paper examines the occurrence of collusion in a setting where the principal has no information about the supervisor and the agent does not necessarily know the supervisor’s preferences. We formally prove the occurrence of collusion is more likely when the agent has information about the preferences of the supervisor. This result suggests that corruption, which is likely to emerge in long term social reciprocal relationships between public officials and potential bribery may be reduced by the means of bureaucratic staff rotation. Evidence from an experimental study supports this proposition and our theoretical finding.
    Keywords: Principal-agent-supervisor, collusion, staff rotation, social structure
    JEL: A13 D82 K42
    Date: 2014–07–06
  13. By: Loertscher, Simon; Niedermayer, Andras
    Abstract: Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries.
    Keywords: brokers , applied mechanism design , linear commission fees , optimal indirect mechanisms , auction houses
    JEL: C72 C78 L13
    Date: 2014
  14. By: Jellal, Mohamed; Souam, Said
    Abstract: We analyze a model where an antitrust authority delegates to an audit inspector the mission of gathering the sufficient information to condemn a cartel. The authority has two instruments at her disposal: rewarding the inspector with a proportion of the collected fine or providing him with information which enhances the probability of the success of the prosecution. More precisely, we explore the efficiency consequences of a contest between the audit inspector and the cartel. Both of them bid to win the contest by expending efforts. We show that the race issue depends positively on the financial incentives proposed to the inspector but the impact of an increase of the level of the fine, to be paid once an illegal agreement is detected, is ambiguous. Moreover, we show that the optimal combination of the two instruments consists in two regimes. When the marginal cost of providing the relevant information is relatively high, the antitrust authority equally shares the collected fine and does not provide the inspector with any information. Conversely, when this marginal cost is relatively small, the authority uses the two instruments. She has to provide him with the maximum level of information consistent with winning the contest with certainty.
    Keywords: Antitrust Enforcement, Incentives, Collusion, Moral Hazard, Contest
    JEL: K2 K21 K42 L4 L44
    Date: 2014–07–10
  15. By: BjÖrn Ohl (Narodowy Bank Polski); Taneli Mäkinen (Banca d'Italia.)
    Abstract: We study firms’ incentives to acquire costly information in booms and recessions to understand the role of endogenous information in explaining business cycles. We find that when the economy has been in a recession in the previous period, and firms enter the current period with a pessimistic belief, the incentive to acquire information is stronger than when the economy has been in a boom and firms share an optimistic belief. The cyclicality of the aggregate learning outcome is moderated by the price system, which transmits information from informed to uninformed firms, thus dampening information demand. Though learning from equilibrium prices acts to stabilize fluctuations by discouraging information acquisition, it can be welfare-enhancing to make information prohibitively costly to obtain.
    Keywords: information acquisition, rational expectations equilibrium, asymmetric information, strategic substitutability
    JEL: D51 D83 E32
    Date: 2014
  16. By: Paolo Vitale Author-Name-First Paolo (Department of Economics, Gabriele D'Annunzio University of Chieti and Pescara)
    Abstract: We propose a general framework for the analysis of dynamic optimization with risk- averse agents, extending WhittleÕs (Whittle, 1990) formulation of risk-sensitive optimal control problems to accommodate time-discounting. We show how, within a Markovian set-up, optimal risk-averse behavior is identified via a pessimistic choice mechanism and described by simple recursive formulae. We apply this methodology to two distinct problems formulated respectively in discrete- and continuous-time. In the former, we extend SvennsonÕs (Svennson, 1997) analysis of optimal monetary policy, showing that with a risk-averse central bank the inflation forecast is not longer an explicit intermediate target, the monetary authorities do not expect the inflation rate to mean revert to its target level and apply a more aggressive Taylor rule than under risk-neutrality, while the inflation rate is less volatile. In the latter, we investigate the optimal production policy of a monopolist which faces a demand schedule subject to stochastic shocks, once again showing that risk-aversion induces her to act more aggressively.
    Keywords: Pessimistic Agents, Time-discounting, Linear Exponential Quadratic Gaussian.
    JEL: C61
    Date: 2013
  17. By: Marco LiCalzi (Università Ca' Foscari Venezia - Department of Management); Nadia Mâagli (Centre d'Economie de la Sorbonne et Università Ca'Foscari Venezia)
    Abstract: Two agents endowed with different individual conceptual spaces are engaged in a dialectic process to reach a common understanding. We model the process as a simple non-cooperative game and demonstrate three results. When the initial disagreement is focused, the bargaining process has a zero-sum structure. When the disagreement is widespread, the zero-sum structure disappears and the unique equilibrium requires a retraction of consensus: two agents who individually agree to associate a region with the same concept end up rebranding it as a different concept. Finally, we document a conversers' dilemma: such equilibrium outcome is Pareto-dominated by a cooperative solution that avoids retraction.
    Keywords: Cognitive maps, language differences, semantic bargaining, organisational codes, mental models.
    JEL: C78 D83
    Date: 2014–01
  18. By: Hedges, Jules; Oliva, Paulo; Winschel, Evguenia; Winschel, Viktor; Zahn, Philipp
    Abstract: We use quantifiers and selection functions to represent simultaneous move games. Quantifiers and selection functions are examples of higher-order functions. A higher order function is a function whose domain is itself a set of functions. Thus, quantifiers and selection func- tions allow players to form goals not only about outcomes but about the whole (or parts) of the game play. They encompass standard pref- erences and utility functions as special cases, but also extend to non-maximizing behavior and context-dependent motives. We adapt the Nash equilibrium concept to our new representation and also introduce a refinement to capture the essential features of context-dependent motives. As an example, we discuss fixpoint operations as context dependent goals of coordination and differentiation in simultaneous game variants of Keyne's beauty contest and the minority game.
    Keywords: context dependent refinement of Nash equilibrium , higher order functions , quantifiers , selection functions , beauty contest , minority game , endogenous economist
    JEL: C0 D01 D03 D63 D64
    Date: 2014
  19. By: Robert Becker (Indiana University - Department of Economics); Stefano Bosi (EPEE - University of Evry); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG and VCREME); Thomas Seegmuller (CNRS-GREQAM, EHESS - Aix-Marseille University)
    Abstract: We study the existence of equilibrium and rational bubbles in a Ramsey model with heterogeneous agents, borrowing constraints and endogenous labor. Applying a Kakutani's fixed-point theorem, we prove the existence of equilibrium in a time-truncated bounded economy. A common argument shows this solution to be an equilibrium for any unbounded economy with the same fundamentals. Taking the limit of a sequence of truncated economies, we eventually obtain the existence of equilibrium in the Ramsey model. In the second part of the paper, we address the issue of rational bubbles and we prove that they never occur in a productive economy à la Ramsey.
    Keywords: Existence of equilibrium, bubbles, Ramsey model, heterogeneous agents, borrowing constraint, endogenous labor.
    JEL: C62 D31 D91 G10
    Date: 2014–03
  20. By: Lalaina Rakotonindrainy (Centre d'Economie de la Sorbonne)
    Abstract: We consider a standard pure exchange overlapping generations economy. The demographic structure consists of a new cohort of agents at each period with an economic activity extended over two successive periods. Our model incorporates durable goods that may be stored from one period to a successive period through a linear technology. In this model, we intend to study the mechanism of transfer between generations, and we show that the existence of an equilibrium can be established by considering an equivalent economy “without” durable goods, where the agents economic activity is extended over three successive periods.
    Keywords: Overlapping generations model, durable goods, irreducibility, equilibrium, existence.
    JEL: C62 D50 D62
    Date: 2014–05

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