nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒11‒12
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Too Much of a Good Thing: Attention Misallocation and Social Welfare in Coordination Games By Chen, Heng; Luo, Yulei; Pei, Guangyu
  2. Other regarding principal and moral hazard: the single agent case By Banerjee, Swapnendu; Sarkar, Mainak
  3. Loss Modification Incentives for Insurers under Expected Utility and Loss Aversion By Adriaan R. Soetevent; Liting Zhou
  4. Preferred Suppliers in Asymmetric Auction Markets By Robert Burguet; Martin K. Perry
  5. Ordinal Relative Satisficing Behavior By Salvador Barberà; Alejandro Neme
  6. How to divide things fairly By Brams, Steven; Kilgour, D. Marc; Klamler, Christian
  7. Competing Trade Mechanisms and Monotone Mechanism Choice By Eberhard Feess; Christian Grund; Markus Walzl; Ansgar Wohlschlegel
  8. Reference Dependence and Politicians' Credibility By Edoardo Grillo
  9. Transfers and Exchange-Stability in Two-Sided Matching Problems By Emiliya Lazarova; Peter Borm; Arantza Est�vez-Fern�ndez
  10. Breaking the Curse of Kareken and Wallace with Private Information By Pedro Gomis-Porqueras; Timothy Kam; Christopher Waller
  11. Envelope Theorem without Differentiability By Yuntong Wang
  12. Hierarchies Versus Committees: Communication and Information Acquisition in Organizations By Junichiro Ishida
  13. Incentives and status By Dey, Oindrila; Banerjee, Swapnendu
  14. Cooperative vs. non-cooperative R&D incentives under incomplete information By Kabiraj, Tarun; Chattopadhyay, Srobonti
  15. Sequential lending with dynamic joint liability in micro-finance By Chowdhury, Shyamal; Roy Chowdhury, Prabal; Sengupta, Kunal
  16. Teamwork Efficiency and Company Size By Galashin, Mikhail; Popov, Sergey
  17. Incomplete information and R&D organization By Chattopadhyay, Srobonti; Kabiraj, Tarun
  18. Either or Both Competition: A "Two-sided" Theory of Advertising with Overlapping Viewerships By Attila Ambrus; Emilio Calvano; Markus Reisinger
  19. Internal Hierarchy and Stable Coalition Structures By Massimo Morelli; In-Uck Park
  20. Subsistence induced and complementarity induced irrelevance in preferences By Mitra, Manipushpak; Sen, Debapriya
  21. Optimal Contracting and the Organization of Knowledge By William Fuchs; Luis Garicano; Luis Rayo

  1. By: Chen, Heng; Luo, Yulei; Pei, Guangyu
    Abstract: This paper examines the welfare properties of “beauty contest†games with rationally inattentive agents. Agents allocate attention between private and public signals to reduce the uncertainty about observation noises. In this setting, social welfare may not necessarily increase with the capacity to process information, and can actually decrease as a result of attention misallocation. Strikingly, social welfare can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies.
    Keywords: Coordination game, social welfare, rational inattention
    JEL: C72 D60 E58
    Date: 2014
  2. By: Banerjee, Swapnendu; Sarkar, Mainak
    Abstract: Using the classic moral hazard problem with limited liability we characterize the optimal incentive contracts when first an other-regarding principal interacts with a self-regarding agent. The optimal contract differs considerably when the principal is ‘inequity averse’ vis-a-vis the self-regarding case. Also the agent is generally (weakly) better-off under an ‘inequity averse’ principal compared to a ‘status seeking’ principal. Then we extend our analysis and characterize the optimal contracts when both other-regarding principal and other-regarding agent interact.
    Keywords: Other regarding preferences, self regarding preferences, inequity-averse, status- seeking, optimal contract
    JEL: L2
    Date: 2014–11–01
  3. By: Adriaan R. Soetevent (University of Groningen, the Netherlands); Liting Zhou (University of Amsterdam, the Netherlands)
    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 Köszegi 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.
    Keywords: loss modification, expected utility, reference-dependent preferences, insurance
    JEL: D11 D42 D81 L12
    Date: 2014–08–21
  4. By: Robert Burguet; Martin K. Perry
    Abstract: This paper examines preference in procurement with asymmetric suppliers. The preferred supplier has a right-of-first-refusal to obtain the contract at a price equal to the bid of a competing supplier. Despite the inefficiency created by the right-of-first-refusal, preference increases the joint surplus of the buyer and the preferred supplier. The buyer can increase his surplus by holding a pre-auction for the right-of-first-refusal. This is true even when the ex ante stronger supplier wins this pre-auction for preference.
    Keywords: procurement auctions, vertical integration, bargaining solutions
    JEL: D44 D82 C79
    Date: 2014–10
  5. By: Salvador Barberà; Alejandro Neme
    Abstract: We propose a notion of r-rationality, based on the idea that the choices of individuals are guided by a single preference order, but rather than always choosing the very best available alternative, agents are content with selecting one of the r-best. This proposal provides a purely ordinal and relative version of the classical idea of satisficing behavior. No level of satisfaction is exogenously fixed, agents are not full maximizers, but they follow a clear pattern of behavior whose consequences generate testable implications, which we fully characterize. The notion of r-rationalizability is further extended to individuals whose ordinal satisficing level may vary depending on the set of available alternatives: a similar characterization obtains. Since any choice function F is n-rationalizable, we can ask for the minimal r(F) for which F is r(F) rationalizable, and take that value as a measure of the agent's degree of rationality. We provide an algorithm to compute it for any given F. Special cases of ordinal relative satisficing behavior are shown to result from a variety of choice models proposed in the literature. Our notion allows for further flexibility, yet still provides precise restrictions on observable data.
    Keywords: choice, rationality, satisficing behavior, rationazability, preferences, choice functions
    JEL: D71
    Date: 2014–10
  6. By: Brams, Steven; Kilgour, D. Marc; Klamler, Christian
    Abstract: We analyze a simple sequential algorithm (SA) for allocating indivisible items that are strictly ranked by n ≥ 2 players. It yields at least one Pareto-optimal allocation which, when n = 2, is envy-free unless no envy-free allocation exists. However, an SA allocation may not be maximin or Borda maximin—maximize the minimum rank, or the Borda score—of the items received by a player. Although SA is potentially vulnerable to manipulation, it would be difficult to manipulate in the absence of one player’s having complete information about the other players’ preferences. We discuss the applicability of SA, such as in assigning people to committees or allocating marital property in a divorce.
    Keywords: Fair division; indivisible items; envy-freeness
    JEL: C72 C78 D6 D61 D63 D7 D74
    Date: 2014–09–06
  7. By: Eberhard Feess; Christian Grund; Markus Walzl; Ansgar Wohlschlegel
    Abstract: We analyze mechanism choices of competing sellers with private valuations and show the existence of monotone pure strategy equilibria where sellers with higher reservation value choose mechanisms with a lower selling probability and a larger revenue in case of trade. As an application we investigate the choice between posted prices and auctions and demonstrate that sellers refuse to offer posted prices as long as (risk-neutral) buyers do not differ with respect to their transaction costs in both trade institutions. If some buyers have lower transaction costs when trading at a posted price, it is optimal for sellers to offer posted prices if and only if they have a sufficiently high reservation value. We develop an econometric technique to compare the selling probabilities and revenues of posted prices and auctions and confirm our theoretical predictions with data from the EURO 2008 European Football Championship.
    Keywords: Competing Sellers, Single-Crossing, Auctions, Fixed Prices
    JEL: D43 D44 D82 L13
    Date: 2014–11
  8. By: Edoardo Grillo
    Abstract: We consider a model of electoral competition in which two politicians compete to get elected. Each politician is characterized by a valence, which is unobservable to voters and can take one of two values: high or low. The electorate prefers politicians with high valence, but random shocks may lead to the victory of low-valence ones. Candidates make statements concerning their valence. We show that if voters are standard expected utility maximizers, politicians' statements lack any credibility and no information transmission takes place. By introducing reference-dependent preferences and loss aversion a là Koszegi and Rabin, we show that full revelation is possible. Indeed, if the electorate believes to candidates' announcements, such announcements will affect its reference point. As a result, if voters find out that a candidate lied, pretending to be high valence when she is not, they may decide to support the opponent in order to avoid the loss associated with appointing a candidate worse than expected.
    JEL: D03 D72 D82
    Date: 2014
  9. By: Emiliya Lazarova (University of East Anglia, United Kingdom); Peter Borm (Tilburg University, the Netherlands); Arantza Est�vez-Fern�ndez (VU University Amsterdam, the Netherlands)
    Abstract: In this paper we consider one-to-many matching problems where the preferences of the agents involved are represented by monetary reward functions. We characterize Pareto optimal matchings by means of contractually exchange stability and matchings of maximum total reward by means of compensation exchange stability. To conclude, we show that in going from an initial matching to a matching of maximum total reward, one can always provide a compensation schedule that will be ex-post stable in the sense that there will be no subset of agents who can all by deviation obtain a higher reward. The proof of this result uses the fact that the core of an associated compensation matching game with constraints is nonempty.
    Keywords: matching, Pareto optimal matching, contractually exchange stability, compensation stability, compensation schedule
    JEL: C78 C71 D60
    Date: 2014–07–08
  10. By: Pedro Gomis-Porqueras; Timothy Kam; Christopher Waller
    Abstract: We study the endogenous choice to accept fiat objects as media of exchange and the implications for nominal exchange rate determination. We consider an economy with two currencies which can be used to settle any transactions. However, currencies can be counterfeited at a fixed cost and the decision to counterfeit is private information. This induces equilibrium liquidity constraints on the currencies in circulation. We show that the threat of counterfeiting can pin down the nominal exchange rate even when the currencies are perfect substitutes, thus breaking the Kareken-Wallace indeterminacy result. We also find that with appropriate fiscal policies we can enlarge the set of monetary equilibria with determinate nominal exchange rates. Finally, we show that the threat of counterfeiting can also help determine nominal exchange rates in a variety of different trading environments. These include a two-country setup with tradable and non-tradable goods sectors, and with an alternative timing of money injections.
    Keywords: Multiple Currencies, Counterfeiting Threat, Liquidity, Exchange Rates
    JEL: D82 D83 F4
    Date: 2014–10–10
  11. By: Yuntong Wang (Department of Economics, University of Windsor)
    Abstract: We establish a new envelope theorem in which the choice variables are discrete and the objective function and the constraints are Lipschitz continuous with respect to the parameters. The parameters can be ?nite or in?nite dimensional vectors in a Banach space. In an application, we revisit the principal-agent problem and derive a weaker ?rst-order condition than the traditional one in the literature. In an insurance example, we use the condition to show an insurance contract that is discontinuous at some level of the loss.
    Keywords: Envelope theorem, Discrete choice set, Lipschitz continuity, Generalized gradients, Principal-agent problem.
    JEL: C61
    Date: 2014–10–27
  12. By: Junichiro Ishida
    Abstract: In most firms, if not all, workers are divided asymmetrically in terms of authority and responsibility. In this paper, we view the asymmetric allocations of authority and responsibility as essential features of hierarchy and examine why hierarchies often prevail in organizations from that perspective. A key departure is that we consider a case where the authority relationship is defined only by the allocation of responsibility via contingent contracts. Within this framework, we show that the contractual arrangement which allocates responsibility asymmetrically often emerges as the optimal organizational form, which gives rise to the chain of command pertaining to hierarchical organizations.
    Date: 2014–09
  13. By: Dey, Oindrila; Banerjee, Swapnendu
    Abstract: This paper characterizes the structure of monetary incentives in an organization with varying differences in employee status. With the help of a moral hazard framework with limited liability we show that for agents with lower outside option increased status leads to lower incentive pay whereas exactly the opposite happens for agents with higher outside option. For agents with very high status such that the limited liability doesn’t bind, an exogenous increase in status level leads to an unambiguous decrease in optimal incentive payment.
    Keywords: Status, incentives, motivation, moral hazard, optimal contract
    JEL: L1 L14
    Date: 2014–09–01
  14. By: Kabiraj, Tarun; Chattopadhyay, Srobonti
    Abstract: This paper studies incentives for cooperative research vis-à-vis non-cooperative research in an incomplete information framework. We show that with quantity competition under asymmetric information, the expected payoff from non-cooperative research goes down compared to the case of symmetric information; hence RJV incentives of the firms are larger under asymmetric information. In either case, however, the larger is the size of the cost-reducing innovation the lower is the incentive for cooperative research. Finally in our model, incomplete information does not affect the consumers’ welfare, but the firms become worse off.
    Keywords: Cooperative R&D, non-cooperative R&D, RJV, incomplete information, consumers’ welfare.
    JEL: D43 L13 O31
    Date: 2014–09–30
  15. By: Chowdhury, Shyamal; Roy Chowdhury, Prabal; Sengupta, Kunal
    Abstract: This paper develops a theory of sequential lending in groups in micro-finance that centers on the notion of dynamic incentives, in particular the simple idea that default incentives should be relatively uniformly distributed across time. In a framework that allows project returns to accrue over time, as well as strategic default, we show that sequential lending can help resolve problems arising out of coordinated default, thus improving project efficiency vis-a-vis individual lending. Inter alia, we also provide a justification for the use of frequent repayment schemes, as well as demonstrate that, depending on how it is manifested, social capital has implications for project efficiency and borrower default. We next examine the optimal choices for the MFI and derive conditions for the optimality of the group lending arrangement. Our framework also provides for some plausible hypotheses as to why there has been a recent transition from group to individual lending.
    Keywords: Collusion; coordinated default; dynamic incentives; frequent repayment; group-lending; MFI competition; micro-finance; sequential financing; social capital; switch to individual lending
    JEL: D7 D9 G2 O2
    Date: 2014–09
  16. By: Galashin, Mikhail; Popov, Sergey
    Abstract: We study how ownership structure and management objectives interact in determining the company size without assuming information constraints or explicit costs of management. In symmetric agent economies, the optimal company size balances the returns to scale of the production function and the returns to collaboration efficiency. For a general class of payoff functions, we characterize the optimal company size, andwe compare the optimal company size across different managerial objectives. We demonstrate the restrictiveness of common assumptions on effort aggregation (e.g., constant elasticity of effort substitution), andwe showthat common intuition (e.g., that corporate companies are more efficient and therefore will be larger than equal-share partnerships) might not hold in general.
    Keywords: team; partnership; effort complementarities; firm size
    JEL: D02 D2 J5 L11
    Date: 2014–06–19
  17. By: Chattopadhyay, Srobonti; Kabiraj, Tarun
    Abstract: The paper studies incentives for cooperative research vis-à-vis non-cooperative research under incomplete information when the R&D outcome is stochastic and continuously distributed with a given mean and a constant variance. We show that the non-cooperative R&D incentive increases with the variance of the R&D outcome. And this result does not depend on the nature of the product market competition.
    Keywords: Cooperative R&D, non-cooperative R&D, incomplete information, variance of the research outcome
    JEL: D43 L13 O31
    Date: 2014–09–10
  18. By: Attila Ambrus (Duke University); Emilio Calvano (CSEF, Università di Napoli Federico II); Markus Reisinger (Otto Beisheim School of Management)
    Abstract: In media markets, consumers spread their attention to several outlets, increasingly so as consumption migrates online. The traditional framework for studying competition among media outlets rules out this behavior by assumption. We propose a new model that allows consumers to choose multiple outlets and use it to study the effect of strategic interaction on advertising levels, and the impact of entry and mergers. We show that novel forces come into play, which reflect the outlets' incentives to control the composition of the customer base in addition to its size. We link consumer preferences and advertising technologies to market outcomes. The model can explain a number of empirical regularities that are difficult to reconcile with existing models.
    Keywords: Media Competition, Two-Sided Markets, Multi-Homing, Viewer Composition, Viewer, Preference Correlation
    JEL: D43 L13 L82 M37
    Date: 2014–10–18
  19. By: Massimo Morelli; In-Uck Park
    Abstract: In deciding whether to join a coalition or not, an agent must consider both i) the expected power of the coalition and ii) her position in the vertical structure within the coalition. We establish the existence of a positive relationship between the degree of inequality in remuneration across ranks within coalitions and the number of coalitions to be formed endogenously in stable systems. An inherent feature of such coalitions is that they are mixed and balanced, rather than segregated, in terms of members abilities. When the surplus of a coalition is assumed to be linear in its relative power conditional on its size, we also establish the existence of stable systems and characterise them fully: a system is stable if and only if all coalitions are of an ecient size and every agent is paid her marginal contribution. (JEL Codes: C71, D71) Keywords: Stable systems, Abilities, Hierarchy, Cyclic partition.
    Date: 2014
  20. By: Mitra, Manipushpak; Sen, Debapriya
    Abstract: In a two-good setting we axiomatize (a) preferences with subsistence consumption and (b) a generalized version of Leontief preferences. Our axiomatization allows for different levels of subsistence and captures the presence of poverty and prosperity. Our axioms are based on the irrelevance of one of the goods at certain consumption bundles. For subsistence, the irrelevance is induced by the subsistence requirement and for generalized Leontief, it is induced by complementarity. We capture this difference using the notion of unhappy sets.
    Keywords: Subsistence, irrelevance, unhappy sets, generalized Leontief
    JEL: D11 O12
    Date: 2014–10–25
  21. By: William Fuchs; Luis Garicano; Luis Rayo
    Abstract: We study contractual arrangements that support an efficient use of time in a knowledge-intensive economy in which agents endogenously specialize in either production or consulting. The resulting market for advice is plagued by informational problems, since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess. We show that spot contracting is not efficient since lemons (in this case, self-employed producers with intermediate knowledge) cannot be appropriately excluded from the market. However, an ex-ante, firm-like contractual arrangement uniquely delivers the first best. This arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts. This simple characterization of the optimal ex-ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge-intensive sectors. Our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs.
    Keywords: Contracting, experts, professional service firms, partnership, venture capital
    JEL: D86 L22 J33 J44
    Date: 2014–10

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