nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒08‒28
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Robust Equilibria in Location Games By Berno Buechel; Nils Roehl
  2. Altruism and Self Control By Anna Dreber; Drew Fudenberg; David K Levine; David G Rand
  3. Strongly Symmetric Equilibria in Bandit Games By Johannes Horner; Nicolas Klein; Sven Rady
  4. Corruption in PPPs, Incentives and Contract Incompleteness By Elisabetta Iossa; David Martimort
  5. Doubts and Dogmatism in Conflict Behavior By Sidartha Gordon; Alessandro Riboni
  6. On the Interaction of Memory and Procrastination: Implications for Reminders By Keith M Marzilli Ericson
  7. Meeting Technologies and Optimal Trading. Mechanisms in Competitive Search Markets By Benjamin Lester (Federal Reserve Bank of Philadelphia), Ludo Visschers (The University of Edinburgh & Universidad Carlos III, Madrid), Ronald Wolthoff (University of Toronto)
  8. On the Existence of Price Equilibrium in Economies with Excess Demand Functions By Tian, Guoqiang
  9. Almost Stochastic Dominance for Risk-Averse and Risk-Seeking Investors By Guo, Xu; Wong, Wing-Keung; Zhu, Lixing
  10. On the Optimality of Not Allocating By Angel Hernando-Veciana; Fabio Michelucci
  11. Dynamic Incentive Effects of Heterogeneity in Multi-Stage Promotion Contests By Stracke, Rudi; Sunde, Uwe
  12. Entry-Deterring Nonlinear Pricing with Bounded Rationality By Meng, Dawen; Tian, Guoqiang
  13. Prejudice and Competitive Signaling By Sue H. Mialon
  14. Two-Stage Allocation Rules By Nils Roehl

  1. By: Berno Buechel (University of Hamburg); Nils Roehl (University of Paderborn)
    Abstract: In the framework of spatial competition, two or more players strategically choose a location in order to attract consumers. It is assumed standardly that consumers with the same favorite location fully agree on the ranking of all possible locations. To investigate the necessity of this questionable and restrictive assumption, we model heterogeneity in consumers' distance perceptions by individual edge lengths of a given graph. A profile of location choices is called a ``robust equilibrium'' if it is a Nash equilibrium in several games which differ only by the consumers' perceptions of distances. For a finite number of players and any distribution of consumers, we provide a full characterization of all robust equilibria and derive structural conditions for their existence. Furthermore, we discuss whether the classical observations of minimal differentiation and inefficiency are robust phenomena. Thereby, we find strong support for an old conjecture that in equilibrium firms form local clusters.
    Keywords: spatial competition, Hotelling-Downs, networks, graphs, Nash equilibrium, median, minimal differentiation
    JEL: C72 D49 P16 D43
    Date: 2013–02
  2. By: Anna Dreber; Drew Fudenberg; David K Levine; David G Rand
    Date: 2014–08–07
  3. By: Johannes Horner (Cowles Foundation, Yale University); Nicolas Klein (Universite de Montreal); Sven Rady (University of Bonn)
    Abstract: This paper studies strongly symmetric equilibria (SSE) in continuous-time games of strategic experimentation with Poisson bandits. SSE payoffs can be studied via two functional equations similar to the HJB equation used for Markov equilibria. This is valuable for three reasons. First, these equations retain the tractability of Markov equilibrium, while allowing for punishments and rewards: the best and worst equilibrium payoff are explicitly solved for. Second, they capture behavior of the discrete-time game: as the period length goes to zero in the discretized game, the SSE payoff set converges to their solution. Third, they encompass a large payoff set: there is no perfect Bayesian equilibrium in the discrete-time game with frequent interactions with higher asymptotic efficiency.
    Keywords: Two-armed bandit, Bayesian learning, Strategic experimentation, Strongly symmetric equilibrium
    JEL: C73 D83
    Date: 2014–08
  4. By: Elisabetta Iossa (Faculty of Economics, University of Rome "Tor Vergata"); David Martimort (Paris School of Economics-EHESS)
    Abstract: In a public procurement setting, we discuss the desirability of completing contracts with state-contingent clauses providing for monetary compensations to the contractor when revenue shocks occur. Realized shocks are private information of the contractor and this creates agency costs of delegated service provision. Verifying the contractor’s messages on the shocks entails contracting costs that make incomplete contracts attractive, despite their higher agency costs. A public official (supervisor) has private information on contracting costs and chooses the degree of contractual incompleteness on behalf of an upper-tier public authority. As the public official may be biased towards the contractor, delegating the contractual choice to that lower-tier may result in incomplete contracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contract terms are discussed.
    Keywords: Corruption, Incomplete Contracts, Moral Hazard, Principal-Agent-Supervisor Model, Public-Private Partnerships, Risk Allocation
    JEL: D23 D82 K42 L33
    Date: 2014–07–18
  5. 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
  6. By: Keith M Marzilli Ericson
    Abstract: I examine the interaction between present-bias and limited memory. Individuals in the model must choose when and whether to complete a task, but may forget or procrastinate. Present-bias expands the effect of memory: it induces delay and limits take-up of reminders. Cheap reminder technology can bound the cost of limited memory for time-consistent individuals but not for present-biased individuals, who procrastinate on setting up reminders. Moreover, while improving memory increases welfare for time-consistent individuals, it may harm present-biased individuals because limited memory can function as a commitment device. Thus, present-biased individuals may be better off with reminders that are unanticipated. Finally, I show how to optimally time the delivery of reminders to present-biased individuals.
    JEL: D03 D81 D86 D9
    Date: 2014–08
  7. By: Benjamin Lester (Federal Reserve Bank of Philadelphia), Ludo Visschers (The University of Edinburgh & Universidad Carlos III, Madrid), Ronald Wolthoff (University of Toronto)
    Abstract: In many markets, sellers advertise their good with an asking price. This is a price at which the seller will take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers’ revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the positive implications of this pricing mechanism for transaction prices and allocations.
    Keywords: Asking Prices, Directed Search, Inspection Costs, Efficiency.
    JEL: C78 D44 D82 D83 L11 R31 R32
    Date: 2014–05–12
  8. By: Tian, Guoqiang
    Abstract: This paper provides a price equilibrium existence theorem in economies where commodities may be indivisible and aggregate excess demand functions may be discontinuous. We introduce a very weak notion of continuity, called recursive transfer lower semi-continuity, which is weaker than transfer lower semi-continuity and in turn weaker than lower semicontinuity. It is shown that the condition, together with Walras’s law, guarantees the existence of price equilibrium in economies with excess demand functions. The condition is also necessary, and thus our results generalize all the existing results on the existence of price equilibrium in economies where excess demand is a function.
    Keywords: Existence of price equilibrium; recursive transfer lower semi-continuity; discontinuity; excess demand function
    JEL: C62 C72 D44 D61 D82
    Date: 2010–11
  9. By: Guo, Xu; Wong, Wing-Keung; Zhu, Lixing
    Abstract: In this paper we first develop a theory of almost stochastic dominance for risk-seeking investors to the first three orders. Thereafter, we study the relationship between the preferences of almost stochastic dominance for risk-seekers with that for risk averters.
    Keywords: Almost Stochastic Dominance, expected-utility maximization, risk averters, risk seekers.
    JEL: C0 D81 G11
    Date: 2014–02–01
  10. By: Angel Hernando-Veciana; Fabio Michelucci
    Abstract: We show that the commitment to not allocate may be exploited by a seller/social planner to increase the expected social surplus that can be achieved in the sale of an indivisible unit.
    Keywords: efficiency; auctions; mechanism design;
    JEL: D44 D82
    Date: 2014–07
  11. By: Stracke, Rudi (University of Munich); Sunde, Uwe (University of Munich)
    Abstract: This paper shows that the incentive effects of heterogeneity may be positive rather than negative in dynamic contests with multiple stages. In particular, the well-studied adverse effects of heterogeneity in static interactions are compensated by positive continuation-value and selection effects. Due to these positive dynamic incentive effects of heterogeneity that increase the incentives of relatively more able workers, heterogeneity is unlikely to be as detrimental as commonly perceived for incentives in organizations with multiple hierarchy levels. Heterogeneity of the workforce may even be optimal from the perspective of a firm that provides incentives using a multi-stage promotion contest.
    Keywords: incentive provision, multiple-stages, promotion contest, heterogeneity
    JEL: M52 J33
    Date: 2014–08
  12. By: Meng, Dawen; Tian, Guoqiang
    Abstract: This paper considers an entry-deterring nonlinear pricing problem faced by an incumbent firm of a network good. The analysis recognizes that the installed user base/network of incumbent monopolist has preemptive power in deterring entry if the entrant’s good is incompatible with the incumbent’s network. This power is, however, dramatically weakened by the bounded rationality of consumers in the sense that it is vulnerable to small pessimistic forecasting error when the marginal cost of entrants falls in some medium range. These findings provide a formal analysis that helps reconcile two seemingly contrasting phenomena: on one hand, it is very difficult for a new, incompatible technology to gain a footing when the product is subject to network externalities; on the other hand, new technologies may frequently escape from inefficient lock-in and supersede the old technologies even in the absence of backward incompatibility. Our results therefore shed light on how the market makes transition between incompatible technology regimes.
    Keywords: Nonlinear pricing, Entry deterrence, Network Externalities, Bounded rationality
    JEL: D42 D62 D82
    Date: 2013–08
  13. By: Sue H. Mialon
    Abstract: In a signaling game between a receiver and senders, prejudice occurs if senders are prejudged based on an index such as race without reference to their qualifying signals. This paper investigates what makes the receiver ignore senders' informative signals in favor of the uninformative index. Prejudice arises when competition between senders erodes their signaling incentive and reduces the quality of signaling significantly. To minimize the decrease in quality, the receiver may prescreen the senders using the index, removing the impact of competition. We advocate policies that enhance the quality of signals to ensure the effectiveness of competitive signaling systems.
    Date: 2013–11
  14. By: Nils Roehl (University of Paderborn)
    Abstract: Suppose some individuals are allowed to engage in different groups at the same time and they generate a certain welfare by cooperation. Finding appropriate ways for distributing this welfare is a non-trivial issue. The purpose of this work is to analyze two-stage allocation procedures where first each group receives a share of the welfare which is then, subsequently, distributed among the corresponding members. To study these procedures in a structured way, cooperative games and network games are combined in a general framework by using mathematical hypergraphs. Moreover, several convincing requirements on allocation procedures are discussed and formalized. Thereby it will be shown, for example, that the Position Value and iteratively applying the Myerson Value can be characterized by similar axiomatizations.
    Keywords: Allocation Rules, Economic and Social Networks, Hypergraphs, Myerson Value, Position Value
    JEL: C71 D85 L22
    Date: 2013–12

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