nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒07‒28
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Common Agency Games with Common Value Exclusion, Convexity and Existence By Gwenaël Piaser
  2. What is ambiguity? By AMARANTE, Massimiliano
  3. Corruption, Intimidation, and Whistle-blowing: a Theory of Inference from Unverifiable Reports By Sylvain Chassang; Gerard Padró i Miquel
  4. Motivate and Select: Relational Contracts with Persistent Types By Radoslawa Nikolowa
  5. Expected utility without full transitivity By Bossert, Walter; Suzumura, Kotaro
  6. Delayed-response strategies in repeated games with observation lags By Fudenberg, Drew; Ishii, Yuhta; Kominers, Scott Duke
  7. I Cannot Cheat on You after We Talk By Cristina Bicchieri; Alessandro Sontuoso; ;
  8. Bribing in First-Price Auctions: Corrigendum By Kotowski, Maciej Henryk; Rachmilevitch, Shiran
  9. A Note on Kuhn’s Theorem with Ambiguity Averse Players By Aryal, Gaurab; Stauber, Ronald
  10. On the continuous equilibria of affiliated-value, all-pay auctions with private budget constraints By Li, Fei; Kotowski, Maciej Henryk
  11. Strategy-proofness and essentially single-valued cores revisited By EHLERS, Lars
  12. Audits as Signals By Kotowski, Maciej Henryk; Weisbach, David A.; Zeckhauser, Richard Jay
  13. One-Leader and Multiple-Follower Stackelberg Games with Private Information By Tomoya Nakamura
  14. Optimal Auditing with Heterogeneous Audit Perceptions By Philipp Meyer-Brauns
  15. Recursive Lexicographical Search: Finding all Markov Perfect Equilibria of Finite State Directional Dynamic Games By Fedor Iskhakov; John Rust; Bertel Schjerning; Jean-Robert Tyran
  16. Financial Contracting with Tax Evaders By Philipp Meyer-Brauns

  1. By: Gwenaël Piaser
    Abstract: We consider the model common agency proposed by Biais Martimort and Ro- chet (2000, 2013). We show that in this setting there is no symmetric equilibrium as the one characterized in those articles. We argue that the equilibrium price sched- ules cannot be simultaneously convex and concave. In particular in the monopoly case, under some classical assumptions, some agents will be excluded from trade. In the other that a price schedule at any symmetric equilibrium must be must be convex and concave. We conclude that a symmetric equilibrium cannot exist and discuss the implications of our result and the links with the existing literature.
    Date: 2014–07–15
  2. By: AMARANTE, Massimiliano
    Abstract: The concept of Ambiguity designates those situations where the information available to the decision maker is insufficient to form a probabilistic view of the world. Thus, it has provided the motivation for departing from the Subjective Expected Utility (SEU) paradigm. Yet, the formalization of the concept is missing. This is a grave omission as it leaves non-expected utility models hanging on a shaky ground. In particular, it leaves unanswered basic questions such as: (1) Does Ambiguity exist?; (2) If so, which situations should be labeled as ‘ambiguous’?; (3) Why should one depart from Subjective Expected Utility (SEU) in the presence of Ambiguity?; and (4) If so, what kind of behavior should emerge in the presence of Ambiguity? The present paper fills these gaps. Specifically, it identifies those information structures that are incompatible with SEU theory, and shows that their mathematical properties are the formal counterpart of the intuitive idea of insufficient information. These are used to give a formal definition of Ambiguity and, consequently, to distinguish between ambiguous and unambiguous situations. Finally, the paper shows that behavior not conforming to SEU theory must emerge in correspondence of insufficient information and identifies the class of non-EU models that emerge in the face of Ambiguity. The paper also proposes a new comparative definition of Ambiguity, and discusses its relation with some of the existing literature.
    Keywords: Non-expected utility, Information, Ambiguity
    JEL: D81
    Date: 2014
  3. By: Sylvain Chassang; Gerard Padró i Miquel
    Abstract: We consider a game between a principal, an agent, and a monitor in which the principal would like to rely on messages by the monitor to target intervention against a misbehaving agent. The difficulty is that the agent can credibly threaten to retaliate against likely whistleblowers in the event of an intervention. In this setting intervention policies that are very responsive to the monitor's message provide very informative signals to the agent, allowing him to shut down communication channels. Successful intervention policies must garble the information provided by monitors and cannot be fully responsive. We show that even if hard evidence is unavailable and monitors have heterogeneous incentives to (mis)report, it is possible to establish robust bounds on equilibrium corruption using only non-verifiable reports. Our analysis suggests a simple heuristic to calibrate intervention policies: first get monitors to complain, then scale up enforcement while keeping the information content of intervention constant.
    JEL: D73 D82 D86
    Date: 2014–07
  4. By: Radoslawa Nikolowa (Queen Mary University of London)
    Abstract: We develop a model of relational contracts with moral hazard and asymmetric persistent information about an employee's type. We find that the form of the optimal contract depends on the job characteristics as well as the distribution of employees' talent. Bonus contracts are more likely to be adopted in complex jobs and when high talent is not too common or too rare. Firms with 'normal' jobs are more likely to adopt termination contracts. In labor market equilibrium, different contracts may be adopted by ex ante identical firms. Hence, we offer an explanation for the co-existence of different employment systems within the same industry.
    Keywords: Relational contracts, Job characteristics, Employment systems, Labor market segmentation
    JEL: D82 M5 L14
    Date: 2014–07
  5. By: Bossert, Walter; Suzumura, Kotaro
    Abstract: We generalize the classical expected-utility criterion by weakening transitivity to Suzumura consistency. In the absence of full transitivity, reflexivity and completeness no longer follow as a consequence of the system of axioms employed and a richer class of rankings of probability distributions results. This class is characterized by means of standard expected-utility axioms in addition to Suzumura consistency. An important feature of some members of our new class is that they allow us to soften the negative impact of wellknown paradoxes without abandoning the expected-utility framework altogether.
    JEL: D81
    Date: 2014–06
  6. By: Fudenberg, Drew; Ishii, Yuhta; Kominers, Scott Duke
    Abstract: We extend the folk theorem of repeated games to two settings in which players' information about others' play arrives with stochastic lags. In our first model, signals are almost-perfect if and when they do arrive, that is, each player either observes an almost-perfect signal of period-t play with some lag or else never sees a signal of period-t play. The second model has the same lag structure, but the information structure corresponds to a lagged form of imperfect public monitoring, and players are allowed to communicate via cheap-talk messages at the end of each period. In each case, we construct equilibria in “delayed-response strategies,†which ensure that players wait long enough to respond to signals that with high probability all relevant signals are received before players respond. To do so, we extend past work on private monitoring to obtain folk theorems despite the small residual amount of private information.
    Date: 2014
  7. By: Cristina Bicchieri; Alessandro Sontuoso (Philosophy, Politics and Economics, University of Pennsylvania); ;
    Abstract: This is a draft of a chapter in a planned book on the Prisoner’s Dilemma, edited by Martin Peterson, to be published by Cambridge University Press. - Experimental evidence on pre-play communication supports a “focusing function of communication” hypothesis. Relevant communication facilitates cooperative, pro-social behavior because it causes a shift in individuals’ focus towards strategies dictated by some salient social norm. After reviewing the formal foundations for a general theory of conformity to social norms, we provide an original application illustrating how a framework that allows for different conjectures about norms is able to capture the focusing function of communication and to explain experimental results.
    Keywords: social norms, social dilemmas
    JEL: C72 C92
    Date: 2014–07
  8. By: Kotowski, Maciej Henryk; Rachmilevitch, Shiran
    Abstract: We clarify the sufficient condition for a trivial equilibrium to exist in the model of Rachmilevitch (2013). Rachmilevitch (2013), henceforth R13, studies the following game. Two ex ante identical players are about to participate in an independent-private-value first-price, sealed bid auction for one indivisible object. After the risk-neutral players learn their valuations but prior to the actual auction, player 1 can offer a take-it-or-leave-it (TIOLI) bribe to his opponent in exchange for the opponent dropping out of the contest. If the offer is accepted, player 1 is the only bidder and obtains the item for free; otherwise, both players compete non-cooperatively in the auction as usual. This is called the first-price TIOLI game.1 R13 shows that under the restriction to continuous and monotonic bribing strategies for player 1, any equilibrium of this game must be trivial—the equilibrium bribing function employed by player 1, if it is continuous and non-decreasing, must be identically zero. In this note, we clarify the sufficient conditions under which a trivial equilibrium exists. These are less stringent than originally proposed.
    Date: 2013
  9. By: Aryal, Gaurab; Stauber, Ronald
    Abstract: Kuhn’s Theorem shows that extensive games with perfect recall can equivalently be analyzed using mixed or behavioral strategies, as long as players are expected utility maximizers. This note constructs an example that illustrates the limits of Kuhn’s Theorem in an environment with ambiguity averse players who use a maxmin decision rule and full Bayesian updating.
    Keywords: Extensive games; Ambiguity; Maxmin; Dynamic consistency
    JEL: C72 D81
    Date: 2014–06–17
  10. By: Li, Fei; Kotowski, Maciej Henryk
    Abstract: We consider all-pay auctions in the presence of interdependent, affiliated valuations and private budget constraints. For the sealed-bid, all-pay auction we characterize a symmetric equilibrium in continuous strategies for the case of N bidders. Budget constraints encourage more aggressive bidding among participants with large endowments and intermediate valuations. We extend our results to the war of attrition where we show that budget constraints lead to a uniform amplification of equilibrium bids among bidders with sufficient endowments. An example shows that with both interdependent valuations and private budget constraints, a revenue ranking between the two auction formats is generally not possible. Equilibria with discontinuous bidding strategies are discussed.
    Date: 2014
  11. By: EHLERS, Lars
    Abstract: We consider general allocation problems with indivisibilities where agents' preferences possibly exhibit externalities. In such contexts many different core notions were proposed. One is the gamma-core whereby blocking is only allowed via allocations where the non-blocking agents receive their endowment. We show that if there exists an allocation rule satisfying ‘individual rationality’, ‘efficiency’, and ‘strategy-proofness’, then for any problem for which the gamma-core is non-empty, the allocation rule must choose a gamma-core allocation and all agents are indifferent between all allocations in the gamma-core. We apply our result to housing markets, coalition formation and networks.
    Keywords: General allocation problems, Externalities, Strategy-proofness, Gamma-core
    JEL: C78 D61 D78
    Date: 2014
  12. By: Kotowski, Maciej Henryk; Weisbach, David A.; Zeckhauser, Richard Jay
    Abstract: A broad array of law enforcement strategies, from income tax to bank regulation, involve self-reporting by regulated agents and auditing of some fraction of the reports by the regulating bureau. Standard models of self-reporting strategies assume that although bureaus only have estimates of the of an agent’s type, agents know the ability of bureaus to detect their misreports. We relax this assumption, and posit that agents only have an estimate of the auditing capabilities of bureaus. Enriching the model to allow two-sided private information changes the behavior of bureaus. A bureau that is weak at auditing, may wish to mimic a bureau that is strong. Strong bureaus may be able to signal their capabilities, but at a cost. We explore the pooling, separating, and semi-separating equilibria that result, and the policy implications. Important possible outcomes are that a cap on penalties increases compliance, audit hit rates are not informative of the quality of bureau behavior, and by mimicking strong bureaus even weak bureaus can induce compliance.
    Date: 2014
  13. By: Tomoya Nakamura
    Abstract: This study analyzes one-leader and multiple-follower Stackelberg games with private information regarding demand uncertainty. In the equilibrium of the Stackelberg games, a leader's private information becomes public information among followers. This study demonstrates that the strategic relationship between the leader and each follower is determined by the weight on public information regarding a follower's estimation of demand uncertainty. If the weight is sufficiently low (high), then the relationship is a strategic substitute (complement), and the leader has a first-mover (dis)advantage, respectively. In the case of strategic complementarity, the leader can exit from a market. The threshold is determined by the intensity of Cournot competition among the followers.
    Date: 2014–07
  14. By: Philipp Meyer-Brauns
    Abstract: This paper derives a government's optimal tax audit policy when taxpayers hold different beliefs about the likelihood of a tax audit. When audits are inexpensive, differences in perceived audit risk lead to stricter optimal auditing in equilibrium. If audits are relatively costly, heterogeneity in audit perceptions lowers the equilibrium audit intensity. Except when beliefs are near-identical throughout the population, both tax evasion and honest reporting occur in equilibrium. A welfare analysis shows a non-monotonic, U-shaped relationship between perception heterogeneity and social welfare. High levels of social welfare are associated with very homogeneous or very heterogeneous populations. Moderately heterogeneous taxpayer populations are associated with lower levels of social welfare.
    Keywords: optimal auditing, heterogeneity, tax evasion
    JEL: D82 H26
    Date: 2014–06
  15. By: Fedor Iskhakov (University New South Wales); John Rust (Georgetown University); Bertel Schjerning (Department of Economics, Copenhagen University); Jean-Robert Tyran
    Abstract: We define a class of dynamic Markovian games that we call directional dynamic games (DDG) in which directionality is represented by a partial order on the state space. We propose a fast and robust state recursion algorithm that can find a Markov perfect equilibrium (MPE) via backward induction on the state space of the game. When there are multiple equilibria, this algorithm relies on an equilibrium selection rule (ESR) to pick a particular MPE.We propose a recursive lexicographic search (RLS) algorithm that systematically and efficiently cycles through all feasible ESRs and prove that the RLS algorithm finds all MPE of the overall game. We apply the algorithms to find all MPE of a dynamic duopoly model of Bertrand price competition and cost reducing investments which we show is a DDG. Even with coarse discretization of the state space we find hundreds of millions of MPE in this game.
    Keywords: Dynamic games, directional dynamic games, Markov-perfect equilibrium, subgame perfect equilibrium, multiple equilibria, partial orders, directed acyclic graphs, d-subgames, generalized stage games, state recursion, recursive lexicographic search algorithm, variable-base arithmetic, successor function
    JEL: D92 L11 L13
    Date: 2014–06–01
  16. By: Philipp Meyer-Brauns
    Abstract: This paper derives the optimal financial contract when an entrepreneur can evade taxes in a model of costly state verification. In contrast to the previous literature, we find that standard debt contracts are not optimal when tax evasion is possible. Instead, the optimal contract is debt-like only for very low and very high profit realizations, and features a constant repayment and verification of returns in an intermediate range. This occurs because the entrepreneur has to be given a positive rent even under verification in order to not abuse her limited liability protection for excessive tax evasion activities.
    Keywords: financial contracting, security design, corporate tax evasion, costly state verification
    JEL: D82 D86 G3 H25 H26
    Date: 2014–01

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