nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒11‒17
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Corruption in PPPs, Incentives and Contract Incompleteness By Elisabetta Iossa; David Martimort
  2. Demand-Theoretic Approach to Choice of Priors, By Chollete, Loran; Schmeidler, David
  3. Misspecification Aversion and Selection of Initial Priors By Chollete, Lor; Schmeidler, David
  4. Sequential Auctions, Price Trends, and Risk Preferences By Audrey Hu; Liang Zou
  5. Informativeness of Experiments for MEU - A Recursive Definition By Heyen, Daniel; Wiesenfarth, Boris R.
  6. Stochastic Games in Continuous Time: Persistent Actions in Long-Run Relationships, Second Version By J. Aislinn Bohren
  7. Coevolution of Deception and Preferences: Darwin and Nash Meet Machiavelli By Heller, Yuval; Mohlin, Erik
  8. Dynamic Allocation of Objects to Queuing Agents: The Discrete Model. By Francis Bloch; David Cantala
  9. The Appeals Process and Incentives to Settle By Wohlschlegel, Ansgar
  10. A target-based foundation for the "hard-easy effect" bias By Robert Bordley; Marco LiCalzi; Luisa Tibiletti
  11. An Equilibrium Framework for Players with Misspecified Models By Ignacio Esponda; Demian Pouzo
  12. The Impact of the Internet on Advertising Markets for News Media By Susan Athey; Emilio Calvano; Joshua S. Gans
  13. A Simple Bargaining Model where Parties Make Errors By Van Essen, Matthew
  14. Pro-competitive rationing in multi-unit auctions By Pär Holmberg
  15. A Theory of Political Accountability and Journalism By Bruns, Christian; Himmler, Oliver
  16. Signaling with Audits: Mimicry, Wasteful Expenditures, and Non-compliance in a Model of Tax Enforcement By Kotowski, Maciej H.; Weisbach, David A.; Zeckhauser, Richard J.
  17. Political Bargaining in a Changing World By Juan Ortner
  18. The Value of User-Specific Information for Two-Sided Matchmakers By Tim Brühn; Annette Meinusch; Georg Götz
  19. Optimal Dynamic Contracts in Financial Intermediation: With an Application to Venture Capital Financing By Igor Salitskiy
  20. A theory of strategic auditing: How should we select one member from a homogeneous group? By Yoshio Kamijo
  21. Bertrand and the Long Run By Roberto Burguet; József Sákovics

  1. By: Elisabetta Iossa; David Martimort
    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
  2. By: Chollete, Loran (UiS); Schmeidler, David (Tel Aviv University)
    Abstract: Decision theory has relatively little to say about the formal choice of priors. We pursue the issue of prior choice in a framework that builds on consumer theory. We analyze discovery decisions of a reasoner, in an environment of hypotheses with heterogeneous, subjective plausibility. We illustrate implications for equilibrium selection when hypotheses that differ in terms of optimism are selected from a distribution with latent probabilities.
    Keywords: Belief Disagreement; Discovery Decision; Latent Probability; Subjective Evidence
    JEL: A10
    Date: 2014–09–02
  3. By: Chollete, Lor (UiS); Schmeidler, David (Tel Aviv University)
    Abstract: Where do prior beliefs come from and how do decisionmakers ascribe confidence in a theory before probabilities are available? To address these questions, we outline an axiomatic approach for selection of priors, where the reasoner is misspecification averse, and exhibits rare event sophistication. A crucial role is played by the dependence between candidate priors. Less dependent priors allow the reasoner to hedge misspecification bias relative to any given benchmark prior. The framework accommodates belief disagreement, since reasoners with relatively less tolerance for dependence select more diverse priors.
    Keywords: Belief Disagreement; Discovery Decision; Latent Probability; Subjective Evidence
    JEL: A10
    Date: 2014–09–11
  4. By: Audrey Hu (University of Amsterdam, the Netherlands); Liang Zou (University of Amsterdam, the Netherlands)
    Abstract: We analyze sequential Dutch and Vickrey auctions where risk averse, or risk preferring, bidders may have heterogeneous risk exposures. We derive and characterize a pure strategy equilibrium of both auctions for arbitrary number of identical objects. A sufficient, and to certain extent necessary, condition for this result is that bidders' marginal utilities are log-submodular in income and type. We then show that when bidders are risk averse (preferring), the equilibrium price sequences should be downward (upward) drifting, and in each period the conditional expected revenue is higher (lower) in the Dutch than in the Vickrey sequential auctions. In particular, the "declining price anomaly" is perfectly consistent with nonincreasing absolute risk aversion when bidders have exposures to background risk.
    Keywords: sequential auction, background risk, risk preferences, declining prices, log-submodularity
    JEL: D44 D82
    Date: 2014–10–20
  5. By: Heyen, Daniel; Wiesenfarth, Boris R.
    Abstract: The well-known Blackwell's theorem states the equivalence of statistical informativeness and economic valuableness. Celen (2012) generalizes this theorem, which is well-known for subjective expected utility (SEU), to maxmin expected utility (MEU) preferences. We demonstrate that the underlying definition of the value of information used in Celen (2012) is in contradiction with the principle of recursively defined utility. As a consequence, Celen's framework features dynamic inconsistency. Our main contribution consists in the definition of a value of information for MEU preferences that is compatible with recursive utility and thus respects dynamic consistency.
    Keywords: Value of information; Maxmin expected utility; Recursive utility
    Date: 2014–10–21
  6. By: J. Aislinn Bohren (Department of Economics, University of Pennsylvania)
    Abstract: This paper studies a class of continuous-time stochastic games in which the actions of a long-run player have a persistent effect on payoffs. For example, the quality of a firm's product depends on past as well as current effort, or the level of a policy instrument depends on a government's past choices. The long-run player faces a population of small players, and its actions are imperfectly observed. I establish the existence of Markov equilibria, characterize the Perfect Public Equilibria (PPE) pay-offset as the convex hull of the Markov Equilibria payoff set, and identify conditions for the uniqueness of a Markov equilibrium in the class of all PPE. The existence proof is constructive: it characterizes the explicit form of Markov equilibria payoffs and actions, for any discount rate. Action persistence creates a crucial new channel to generate intertemporal incentives in a setting where traditional channels fail, and can provide permanent non-trivial incentives in many settings. These results offer a novel framework for thinking about reputational dynamics of firms, governments, and other long-run agents.
    Keywords: Continuous Time Games, Stochastic Games, Reputation
    JEL: C73 L1
    Date: 2011–11–01
  7. By: Heller, Yuval; Mohlin, Erik
    Abstract: We develop a framework in which individuals preferences co-evolve with their abilities to deceive others regarding their preferences and intentions. We show that a pure outcome is stable, essentially if and only if it is an efficient Nash equilibrium. All individuals have the same deception ability in such a stable state. In contrast, there are non-pure outcomes in which non-Nash outcomes are played, and different deception abilities co-exist. We extend our model to study preferences that depend also on the opponent's type.
    Keywords: Evolution of Preferences; Indirect Evolutionary Approach, Theory of Mind; Depth of Reasoning; Deception.
    JEL: C72 C73
    Date: 2014–08–30
  8. By: Francis Bloch (Centre d'Economie de la Sorbonne - Paris School of Economics); David Cantala (El Colegio de Mexico)
    Abstract: This paper analyzes the optimal allocation of objects which arrive sequentially to agents organized in a waiting list. Applications include the assignment of social housing, deceased donor organs and daycare slots. A mechanism is a probability distribution over all priority orders which are consistent with the waiting list. We consider three efficiency criteria: first order stochastic dominance in the vector of agents' values, the probability of misallocation and the expected waste. We show that the strict seniority order dominates uniform random order according to the two first criteria, and the uniform random order dominates strict priority according to the third criterion. If agents values are perfectly correlated, strict priority dominates all other probabilistic mechanisms for all agents values.
    Keywords: Dynamic matching, queuing, queuing disciplines, social housing, organ transplant.
    JEL: C78 D83 R31
    Date: 2014–05
  9. By: Wohlschlegel, Ansgar
    Abstract: This paper analyzes asymmetrically informed litigants' incentives to settle when they anticipate the possibility of appeals. It identifies a strategic effect, which induces a litigant to negotiate pretrial so as to optimize her posttrial bargaining position, and an information effect, which means that litigants will take into account pretrial how the information revealed by the trial court's verdict will translate into posttrial equilibrium payoffs. The paper's main contribution is twofold: First, it establishes a workhorse model of settlement and litigation in the shadow of appeals which may be used in future research to analyze specific issues of litigation and legal reform. Second, the importance of including the possibility of appeals in the litigation model is highlighted by an example in which some results contradict the immediate intuition: It is shown that (i) more accurate trial courts may actually attract less cases and (ii) cases may go to trial court with a larger ex-ante probability for higher legal costs in the appeals stage.
    Keywords: Litigation; settlement; appeals; sequential bargaining; asymmetric information
    JEL: D82 K41
    Date: 2014–02–14
  10. By: Robert Bordley; Marco LiCalzi; Luisa Tibiletti
    Abstract: The "hard-easy effect" is a well-known cognitive bias on self-confidence calibration that refers to a tendency to overestimate the probability of success in hard-perceived tasks, and to underestimate it in easy-perceived tasks. This paper provides a target-based foundation for this effect, and predicts its occurrence in the expected utility framework when utility functions are S-shaped and asymmetrically tailed. First, we introduce a definition of hard-perceived and easy-perceived task based on the mismatch between an uncertain target to meet and a suitably symmetric reference point. Second, switching from a target-based language to a utility-based language, we show how this maps to an equivalence between the hard-perceived target/gain seeking and the easy-perceived target/loss aversion. Third, we characterize the agent's miscalibration in self-confidence. Finally, we derive sufficient conditions for the Òhard-easy effectÓ and the "reversed hard-easy effect" to hold.
    Keywords: Expected utility, Hard-easy effect bias, Endowment effect bias, Sunk cost effect bias, Benchmarking procedure, Loss-gain asymmetry, van Zwet skewness conditions
    JEL: C91 D81
    Date: 2014–10
  11. By: Ignacio Esponda; Demian Pouzo
    Abstract: We introduce an equilibrium framework that relaxes the standard assumption that people have a correctly-specified view of their environment. Players repeatedly play a simultaneous-move game where they potentially face both strategic and payoff uncertainty. Each player has a potentially misspecified view of the environment and uses Bayes' rule to update her views based on the (possibly partial) feedback obtained at the end of each period. We show that steady-state behavior of this multi-player decision and learning problem is captured by a generalized notion of equilibrium: a strategy profile such that each player optimizes given certain beliefs and where these beliefs put probability one on those subjective distributions over consequences that are closest---in terms of relative entropy---to the correct, equilibrium distribution. Standard solution concepts such as Nash equilibrium and self-confirming equilibrium constitute special cases where players learn with correctly-specified models. The framework provides a systematic approach to modeling players with misspecified views and also unifies a specific bounded rationality literature where mistakes are driven by misspecifications.
    Date: 2014–11
  12. By: Susan Athey (Stanford University); Emilio Calvano (CSEF, Università di Napoli Federico II); Joshua S. Gans (University of Toronto and NBER)
    Abstract: We provide a model of online advertising display markets where consumer attention may be divided among multiple publishers and, consequently, their advertising attention may be allocated to different platforms. We demonstrate that this gives rise to a mixture of single- and multi-homing advertisers and some consequent matching inefficiency between advertisers and consumers. Thus, as the number of switching consumers expands (associated with, say, the internet’s impact on news publishers), ad prices fall and a number of other competitive effects arise. We demonstrate that increased switching leads advertisers to favor reach over frequency and creates an incentive for contracting and technology improvements that can guarantee impressions to advertisers. Finally, we analyze the strategic choice of ad capacity, showing that, in general, increased switching leads to greater equilibrium ad capacity and lower prices.
    Keywords: advertising, media, newspapers, matching, multi-homing, singlehoming, tracking, two-sided markets, platforms
    JEL: L11 L82
    Date: 2014–10–28
  13. By: Van Essen, Matthew
    Abstract: In this paper, we develop a bargaining model where parties (or their intermediaries) make errors when reporting their bid. We characterize the Nash equilibria of the game and show that there is a unique equilibrium where trade takes place. This trade equilibrium is shown to converge to the Nash Bargaining Solution of the problem as trembles diminish. Finally, we discuss our results in the context of the previous literature providing a critique of the model and analysis found in Carlsson (1991).
    Keywords: Nash Program, Nash Bargaining Solution, Equilibrium Selection, Nash Demand Game
    JEL: C7 C71 C72 C78
    Date: 2014–09–28
  14. By: Pär Holmberg
    Abstract: In multi-unit auctions, such as auctions of commodities and securities, and financial exchanges, it is necessary to specify rationing rules to break ties between multiple marginal bids. The standard approach in the literature and in pratice is to ration marginal bids proportionally. This paper shows how bidding can be made more competitive if the rationing rule instead gives increasing priority to bidders with a small volume of marginal bids at clearing prices closer to the reservation price. In comparison to standard rationing, such a rule can have almost the same effect on the competitiveness of bids as a doubling of the number of bidders.
    Keywords: Divisible-good auctions, multi-unit auctions, rationing rules, bidding format
    JEL: C72 D44 D45
    Date: 2014–10–03
  15. By: Bruns, Christian; Himmler, Oliver
    Abstract: Journalism is widely believed to be crucial for holding elected officials accountable. At the same time economic theory has a hard time providing a straightforward explanation for the phenomenon of "accountability journalism". According to the common Downsian reasoning, rational voters should not be willing to pay for information out of purely instrumental motives because the individual probabilities of casting the decisive vote are typically very low. We show that this rationale does not apply when a group of voters shares a common goal such as accountability and information is delivered via mass media. In contrast to the pessimistic Downsian view, rational voters can have a considerable willingness to pay journalists for the provision of instrumental information in these scenarios. Our model thus reconciles the rational voter approach with the common perception of journalism as a watchdog that holds elected officials accountable. We also show that competition does not lead to more information and accountability, and that entertainment can crowd out informative media content.
    Keywords: accountability, elections, information, media
    JEL: D72 D83 H41 L86
    Date: 2014–09
  16. By: Kotowski, Maciej H. (Harvard University); Weisbach, David A. (University of Chicago); Zeckhauser, Richard J. (Harvard University)
    Abstract: The audit policy of a tax authority can signal its audit effectiveness. We model this process and show that in limited circumstances an ineffective authority can masquerade as being effective. We show that high maximal penalties imply underreporting of income.
    JEL: C71 D82 D86
    Date: 2014–01
  17. By: Juan Ortner (Boston University)
    Abstract: This paper studies negotiations between two parties whose political power changes over time. The model has a unique subgame perfect equilibrium, which becomes very tractable when parties can make offers frequently. This tractability facilitates studying how changes in political power affect implemented policies. An extension of the model analyses how elections influence inter-party negotiations when implemented policies affect the parties’ political power. Long periods of gridlock may arise when the time left until the election is short and parties have similar levels of political power.
    Date: 2014
  18. By: Tim Brühn (University of Giessen); Annette Meinusch (University of Giessen); Georg Götz (University of Giessen)
    Abstract: This paper analyzes the incentives of a monopolistic matchmaker to generate user-specific information in order to increase match-quality and profits. By merging two-sided-markets with two-sided-matching we derive a micro-foundation of cross-side externalities dependent on the number of potential matches and the accuracy-level of user-specific information. Incentives to invest into identification technologies are determined by the scalability of the (fixed) investments and the resulting effect on match-quality. We show that these effects work into opposing directions, i.e., while scalability works in favor for platforms with large customer bases, the effect of identification on match-quality is greater for small scale platforms.
    Keywords: two-sided markets, two-sided matching, advertising, segmentation and identification
    Date: 2014
  19. By: Igor Salitskiy (Stanford University)
    Abstract: This paper extends the costly state verification model from Townsend (1979) to a dynamic and hierarchical setting with an investor, a financial intermediary, and an entrepreneur. Such a hierarchy is natural in a setting where the intermediary has special monitoring skills. This setting yields a theory of seniority and dynamic control: it explains why investors are usually given the highest priority on projects' assets, financial intermediaries have middle priority and entrepreneurs have the lowest priority; it also explains why more cash flow and control rights are allocated to financial intermediaries if a project's performance is bad and to entrepreneurs if it is good. I show that the optimal contracts can be replicated with debt and equity. If the project requires a series of investments until it can be sold to outsiders, the entrepreneur sells preferred stock (a combination of debt and equity) each time additional financing is needed. If the project generates a series of positive payoffs, the entrepreneur sells a combination of short-term and long-term debt.
    Date: 2014
  20. By: Yoshio Kamijo (School of Management, Kochi University of Technology)
    Abstract: This paper theoretically analyzes an audit rule that selects a taxpayer for an audit based on the reported income profile and creates strategic interdependence. Such strategic auditing contrasts with the random auditing rule. This paper proposes the lowest-reporter-audited rule. This rule ensures that the taxpayer with the lowest reported income is inspected from a group of taxpayers that are categorized according to factors such as social status, income level, occupation, and place of residence. We show that, under a realistic penalty rate condition, the lowest-reporter-audited rule is superior to the random audit rule.
    Date: 2014–10
  21. By: Roberto Burguet; József Sákovics
    Abstract: We propose a new model of simultaneous price competition, based on firms offering personalized prices to consumers. In a market for a homogeneous good and decreasing returns, the unique equilibrium leads to a uniform price equal to the marginal cost of each firm, at their share of the market clearing quantity. Using this result for the short-run competition, we then investigate the long-run investment decisions of the firms. While there is underinvestment, the overall outcome is more competitive than the Cournot model competition. Moreover, as the number of firms grows we approach the competitive long-run outcome.
    Keywords: price competition, personalized prices, marginal cost pricing
    JEL: D43 L13
    Date: 2014–08

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