nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒09‒05
seven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Aggregating Tastes, Beliefs, and Attitudes under Uncertainty By Eric Danan; Thibault Gajdos; Brian Hill; Jean-Marc Tallon
  2. Optimal Design of Internal Disclosure By Dmitry Orlov
  3. Games With Possibly Naive Hyperbolic Discounters By Haan, Marco; Hauck, Dominic
  4. Differential Games with (A)symmetric Players and Heterogeneous Strategies (II) By Benteng Zou
  5. Loss Modification Incentives for Insurers Under Expected Utility and Loss Aversion By Zhou, Liting; Soetevent, Adriaan R.
  6. A repeated principal-agent model with on-the-job search By Herbold, Daniel
  7. Declining Moral Standards and the Role of Law By Sue H. Mialon

  1. By: Eric Danan; Thibault Gajdos; Brian Hill; Jean-Marc Tallon (Université de Cergy-Pontoise, THEMA; Université d’Aix-Marseille; GREGHEC, CNRS, HEC Paris; Paris School of Economics, CNRS)
    Abstract: We provide possibility results on the aggregation of beliefs and tastes for Monotone, Bernoullian and Archimedian preferences of Cerreia-Vioglio, Ghirardato, Maccheroni, Marinacci, and Siniscalchi (2011). We propose a new axiom, Unambiguous Pareto Dominance, which requires that if the unambiguous part of individuals’ preferences over a pair of acts agree, then society should follow them. We characterize the resulting social preferences and show that it is enough that individuals share a prior to allow non dictatorial aggregation. A further weakening of this axiom on common-taste acts, where cardinal preferences are identical, is also characterized. It gives rise to a set of relevant priors at the social level that can be any subset of the convex hull of the individuals’ sets of relevant priors. We then apply these general results to the Maxmin Expected Utility model, the Choquet Expected Utility model and the Smooth Ambiguity model. We end with a characterization of the aggregation of ambiguity attitudes.
    Keywords: Preference Aggregation, Social Choice, Uncertainty
    JEL: D71 D81
    Date: 2014
  2. By: Dmitry Orlov (Stanford Graduate School of Business)
    Abstract: This paper studies the joint design of optimal incentive pay and information disclosure in a dynamic moral hazard problem. The principal is more informed about the outcomes of agent's actions and actively manages information available to the agent. Sharing information with the agent increases productivity (for example, allowing a better allocation of resources or effort), but increases the cost of providing incentives. The optimal contract features incomplete information sharing with positive information shared more than negative information and past negative information leading to less information sharing in the future.
    Date: 2014
  3. By: Haan, Marco; Hauck, Dominic
    Abstract: We propose a solution concept for games that are played among hyperbolic discounters that are possibly naive about their own, or about their opponent's future time inconsistency. Our perception-perfect equilibrium essentially requires each player to take an action consistent with the subgame perfect equilibrium, given her perceptions concerning future types, and under the assumption that other present and future players have the same perceptions. Applications include a common pool problem and Rubinstein bargaining. When players are naive about their own time consistency and sophisticated about their opponent's, the common pool problem is exacerbated, and Rubinstein bargaining breaks down completely.
    Keywords: Hyperbolic Discounting, naivety, bargaining
    JEL: C72 C78 D03 D91
    Date: 2014–08–15
  4. By: Benteng Zou (CREA, Université de Luxembourg)
    Abstract: One family of heterogeneous strategies in differential games with (a)symmetric players is developed in which one player adopts an anticipating open-loop strategy and the other adopts a standard Markovian strategy. Via conjecturing principle, the anticipating open-loop strategic player plans his strategy based on the possi- ble updating the rival player may take. These asymmetric strategies frame non- degenerate Markovian Nash Equilibrium, which can be subgame perfect. Except the stationary path, this kind of strategy makes the study of short-run trajectory possible, which usually are not subgame perfect. However, the short-run non- perfection provides very important policy suggestions.
    Keywords: Differential Games, subgame perfect Markovian Nash Equilibrium, Heterogeneous strategy, anticipating open-loop strategy
    JEL: C73 C72
    Date: 2014
  5. By: Zhou, Liting; Soetevent, Adriaan R. (Groningen University)
    Abstract: Given the possibility to modify the probability of a loss, will a profit-maximizing insurer engage in loss prevention or is it in his interest to increase the loss probability? This paper investigates this question. First, we calculate the expected profit maximizing loss probability within an expected utility framework. We then use K?oszegi and Rabin?s (2006, 2007) loss aversion model to answer the same question for the case where consumers have reference-dependent preferences. Largely independent of the adopted framework, we find that the optimal loss probability is sizable and for many commonly used parameterizations much closer to 1/2 than to 0. Previous studies have argued that granting insurers market power may incentivize them to engage in loss prevention activities, this to the benefit of consumers. Our results show that one should be cautious in doing so because there are conceivable instances where the insurer?s interests in modifying the loss probability to against those of consumers.
    Date: 2014
  6. By: Herbold, Daniel
    Abstract: This paper analyzes how on-the-job search (OJS) by an agent impacts the moral hazard problem in a repeated principal-agent relationship. OJS is found to constitute a source of agency costs because efficient search incentives require that the agent receives all gains from trade. Further, the optimal incentive contract with OJS matches the design of empirically observed compensation contracts more accurately than models that ignore OJS. In particular, the optimal contract entails excessive performance pay plus efficiency wages. Efficiency wages reduce the opportunity costs of work effort and hence serve as a complement to bonuses. Thus, the model offers a novel explanation for the use of efficiency wages. When allowing for renegotiation, the model generates wage and turnover dynamics that are consistent with empirical evidence. I argue that the model contributes to explaining the concomitant rise in the use of performance pay and in competition for high-skill workers during the last three decades. --
    Keywords: Repeated Principal-Agent Model,On-the-Job Search,Moral Hazard,Multitasking,Efficiency Wages
    JEL: C73 D82 D86 J33 L14
    Date: 2014
  7. By: Sue H. Mialon
    Abstract: This paper examines how moral rules form in the process of social learning in order to analyze the relationship between legal rules and moral rules. Members of society learn morality from the observed behavior of other members. Their incentive to act morally is influenced by their expectation of other members' moral behavior. The moral standards of a society are built on the outcomes of such interactions over time. We show that moral standards can quickly deteriorate even if the majority of the members have a strong moral sense individually. When insufficient moral sanctions for wrongful actions are observed, the members form a belief that the society's moral standards are lower than what they had expected. Such a belief encourages more wrongful actions and results in less incentive for the members to act morally. As the moral standards decline, moral rules may not be able to regulate behavior. Legal sanctions can prevent such a decline as they offer an objective and time-invariant level of expectation for the enforcement of rules. Hence, morality is less likely to degenerate in the presence of legal rules. We discuss how strong morality can enhance the effectiveness of law enforcement, in turn.
    Date: 2014–08

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