nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒12‒24
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Shrouded Transaction Costs By Bourguignon, Hélène; Gomes, Renato; Tirole, Jean
  2. Dynamic Contracting: An Irrelevance Result By Peter Eso; Balazs Szentes
  3. The Generalized Informativeness Principle By Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
  4. Relational Contracts and Specific Training By James Malcomson
  5. Procurement Design with Corruption By Roberto Burguet
  6. Industry structure and pricing over the business cycle By Spiegel, Yossi; Stahl, Konrad
  7. Equilibria in Second Price Auctions with Private Participation Costs By Xiaoyong Cao; Guofu Tan; Guoqiang Tian; Okan Yilankaya
  8. The axiomatic approach to the problem of sharing the revenue from bundled pricing By BERGANTINOS, Gustavo; MORENO-TERNERO, Juan; ,
  9. The Closed Primaries versus the Top-two Primary By Pablo Amorós; M. Socorro Puy; Ricardo Martínez
  10. Information, Media and Elections: Incentives for Media Capture By Serena Marianna Drufuca
  11. Auctions with prestige motives By BOS, Olivier; TRUYTS, Tom; ,
  12. Bayesian Networks and Boundedly Rational Expectations By Spiegler, Ran
  13. Ideals should not be too ideal: Identity and public good contribution By Fuhai HONG
  14. Elite capture of democratic politics: the role of social identity By David Juárez-Luna; Christian Ghiglino
  15. A Class of Symmetric and Quadratic Utility Functions Generating Giffen Demand By Massimiliano Landi
  16. Staggered Contracts, Market Power, and Welfare By Cabral, Luís M B
  17. Auction House Guarantees for Works of Art By Graddy, Kathryn; Hamilton, Jonathan
  18. Undeclared Labour in Cournot Oligopoly By Minas Vlassis; Stefanos Mamakis
  19. Public regulatory intervention in consumer-friendly firms By Vitor Miguel Ribeiro
  20. Learning faster or more precisely? Strategic experimentation in networks By Wuggenig, Mirjam

  1. By: Bourguignon, Hélène; Gomes, Renato; Tirole, Jean
    Abstract: The proliferation of new payment methods on the Internet rekindles the old and unsettled debate about merchants’ incentive and ability to differentiate price according to payment choice. This paper develops an imperfect-information framework for the analysis of platform and social regulation of card surcharging and cash discounting. It makes three main contributions. First, it identifies the conditions under which concerns about missed sales induce merchants to perceive that they must take the card. Second, it derives a set of predictions about cash discounts, card surcharges and platform fees that match, and shed light on existing evidence. Finally, it shows that the optimal regulation of surcharging is related to public policy toward merchant fees and substantially differs from current practice.
    Keywords: card surcharges; cash discounts; hold-ups in two-sided markets; missed sales; payment cards
    JEL: D83 L10 L41
    Date: 2014–10
  2. By: Peter Eso (University of Oxford); Balazs Szentes (London School of Economics)
    Abstract: This paper considers a general, dynamic contracting problem with adverse selection and moral hazard, in which the agent's type stochastically evolves over time. The agent's final payoff depends on the entire history of private and public information, contractible decisions and the agent's hidden actions, and it is linear in the transfer between her and the principal. We transform the model into an equivalent one where the agent's subsequent information is independent in each period. Our main result is that for any fixed decision-action rule implemented by a mechanism, the maximal expected revenue that the principal can obtain is the same as if the principal could observe the agent's orthogonalized types after the initial period. In this sense, the dynamic nature of the relationship is irrelevant: the agent only receives information rents for her initial private information. We also show that any monotonic decision-action rule can be implemented in a Markov environment satisfying certain regularity conditions.
    Date: 2014
  3. By: Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
    Abstract: This paper shows that the informativeness principle, as originally formulated by Holmstrom (1979), does not hold if the first-order approach is invalid. We introduce a "generalized informativeness principle" that takes into account non-local incentive constraints and holds generically, even without the first-order approach. Our result holds for both separable and non-separable utility functions.
    Keywords: Contract theory; informativeness principle.; principal-agent model
    JEL: D86 J33
    Date: 2014–12
  4. By: James Malcomson
    Abstract: This paper explores the implications of specific training for relational contracts.  A standard result for sustaining a relational contract is that the parties must jointly receive a surplus over what they can get by separating.  This has been interpreted as employees with relational contracts having discretely higher pay and productivity than inherently equally productive, or near equally productive employees without relational contracts.  Investment in specific training relaxes the incentive constraints on relational contracts, so the optimal level of investment can be higher for those with a relational contract than for those without, adding further to the productivity of those employed under a relational contract.  But the additional cost of optimal investment precisely offsets the post-investment surplus for marginal employees in relational contracts, which removes the discontinuity in the joint payoff from a relational contract.  An example shows that with optimal investment there may not even be a discontinuity in productivity between those employed with a relational contract and those employed without one because the incentive constraints on the former result in lower effort despite their higher training.
    Keywords: relational incentive contracts, investment, specific training, dual labour market
    JEL: C73 D82 D86
    Date: 2014–11–19
  5. By: Roberto Burguet
    Abstract: This paper investigates the design of optimal procurement mechanisms in the presence of corruption. After the sponsor and the contractor sign the contract, the latter may bribe the inspector to misrepresent quality. Thus, the mechanism affects whether bribery occurs. I show how to include bribery as an additional constraint in the optimal-control problem that the sponsor solves, and characterize the optimal contract. I discuss both the case of fixed bribes and bribes that depend on the size of the quality misrepresentation, and also uncertainty about the size of the bribe. In all cases, the optimal contract curtails quality not only for low efficiency contractors but also for the most efficient contractors. Implementation is also discussed.
    Keywords: bribery, quality, contract design
    JEL: D82 D73 H57
    Date: 2014–10
  6. By: Spiegel, Yossi; Stahl, Konrad
    Abstract: We consider the interaction between an incumbent firm and a potential entrant, and examine how this interaction is affected by demand fluctuations. Our model gives rise to procyclical entry, prices, and price-cost margins, although the average price in the market can be countercyclical if the entrant is the first mover, and capacity utilization can be either pro- or countercyclical if the incumbent is the first mover. Moreover, our results show that entry deterrence by the incumbent firm can either amplify or dampen the effect of demand fluctuations on prices, price-cost margins, and capacity utilization.
    Keywords: business cycle; entry; entry deterrence; price competition
    JEL: D43 L41
    Date: 2014–06
  7. By: Xiaoyong Cao (Department of Economics, University of International Business and Economics, Beijing); Guofu Tan (Department of Economics, University of Southern California); Guoqiang Tian (Department of Economics, Texas A&M University); Okan Yilankaya (Department of Economics, Koc University)
    Abstract: We study equilibria in second price auctions when bidders are independently and privately informed about both their values and participation costs and their joint distributions across bidders are not necessarily identical. We show that there always exists an equilibrium in this general setting with two dimensional types of ex ante heterogeneous bidders. We provide conditions under which the equilibrium is unique. Moreover, when the bidders are ex ante symmetric, we show that there is a unique symmetric equilibrium. We also identify sufficient conditions for existence of asymmetric equilibria.
    Keywords: Two-Dimensional Types, Private Participation Costs, Second Price Auctions, Existence and Uniqueness of Equilibrium.
    JEL: C62 C72 D44 D61 D82
    Date: 2014–12
  8. By: BERGANTINOS, Gustavo (Universidad de Vigo, Spain); MORENO-TERNERO, Juan (Universidad Pablo de Olavide, Spain; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); ,
    Abstract: We explore in this paper the axiomatic approach to the problem of sharing the revenue from bundled pricing. We formalize two models for this problem on the grounds of two different informational bases. In both models, we provide axiomatic rationale for natural rules to solve the problem. We, nonetheless, obtain drastic differences under each scenario, which highlights the importance of setting the appropriate informational basis of the problem.
    Keywords: resource allocation, bundled pricing, museum passes, proportional, axioms
    JEL: D63 C71
    Date: 2014–08–19
  9. By: Pablo Amorós (Department of Economic Theory, Universidad de M‡laga); M. Socorro Puy (Department of Economic Theory, Universidad de M‡laga); Ricardo Martínez (Department of Economics, Universidad Carlos III de Madrid)
    Abstract: The top-two primary is the new primary system passed in several states of the US that creates a single ballot in which the top two vote getters pass to the general election. Primary elections induce a sequential game with three stages: the candidate-entry stage, the primary election stage, and the general election. We analyze the electoral winner in equilibrium of the top-two primaries versus the traditional closed party primaries in terms of the Condorcet Consistency criterion, when voters and candidates are strategic. We show that up to four potential candidates (with no more than two democrats and no more than two republicans), the top-two system generally elects the median voter?s most preferred candidate. On the contrary, with the closed party primaries, extreme candidates can be elected even when the median voter prefers the moderated counterpart. When there are more potential candidates, the closed primaries system does not show, in general, any other di¤erent deviation. The top-two system then shows every type of deviation from the Condorcet Consistency criterion: it can elect an extreme candidate when the median voter prefers the moderated counterpart, or it can elect a democratic candidate when the median voter?s most preferred candidate is republican (or the other way around).
    Keywords: Closed primaries; Open primaries; Top-two primary; Citizen-candidate; Strategic Voting; Sequential voting. Condorcet consistency
    JEL: C72 D72
    Date: 2014–11
  10. By: Serena Marianna Drufuca
    Abstract: Media play an essential role in democracy by making available valuable information for electoral decisions. In a framework of political economy of mass media, I inquiry the possibility of capture by rent-seeking o cers in a heterogeneous electoral environment. This allow me to discuss when relevant information is traded, when government captures media and what e ect this has on political outcomes. I nd media capture to be a pervasive phenomenon which implies minimum costs on politicians' side. However, incentives to corruption decrease if the possibility of being detected is introduced, leading to a more intermediate result with respect to the one obtained by Besley and Prat (2006). I show that information is a fundamental element for electoral choices and that any attempt to increase quality of news and to reduce information's costs can have positive e ects on the selection of politicians.
    Keywords: mass media; information acquisition; media capture; elections; incumbency advantage
    JEL: L82 D72 D73 D81 H10
    Date: 2014
  11. By: BOS, Olivier (Panthéon-Assas University, LEMMA, France); TRUYTS, Tom (CEREC, Saint-Louis University, B-1000 Brussels, Belgium; CES, KU Leuven, B-3000 Leuven, Belgium and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); ,
    Abstract: Social status, or prestige, is an important motive for buying art or collectibles and for participation in charity auctions. We study a symmetric private value auction with prestige motives, in which the auction outcome is used by an outside observer to infer the bidders’ types. We elicit conditions under which an essentially unique D1 equilibrium bidding function exists in four auction formats: first-price, second-price, all-pay and the English auction. We obtain a strict ranking in terms of expected revenues: the first-price and all-pay auctions are dominating the English auction but are dominated by the second-price auction. Expected revenue equivalence is restored asymptotically for the number of bidders going to infinity.
    Keywords: costly signaling, D1 criterion, social status, art auctions, charity auctions
    JEL: D44 D82
    Date: 2014–08–19
  12. By: Spiegler, Ran
    Abstract: I present a framework for analyzing decision makers with an imperfect understanding of their environment's correlation structure. The decision maker faces an objective multivariate probability distribution (his own action is one of the random variables). He is characterized by a directed acyclic graph over the set of variables. His subjective belief filters the objective distribution through his graph, via the factorization formula for Bayesian networks. This belief distortion implies that the decision maker's long-run behavior may affect his perception of the consequences of his actions. Accordingly, I define a "personal equilibrium" notion of optimal choices. I show how recent models of boundedly rational expectations (as well as new ones, e.g. reverse causality) can be subsumed into this framework as special cases. Some general properties of the Bayesian-network representation of subjective beliefs are presented, as well as a "missing data" foundation.
    Keywords: Bayesian networks; boundedly rational expectations; coarse reasoning; directed acyclic graphs; misspecified models; personal equilibrium; reverse causality
    JEL: D03
    Date: 2014–07
  13. By: Fuhai HONG (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological Univer- sity. Address: 14 Nanyang Drive, Singapore, 637332.)
    Abstract: This paper incorporates identity into a model of voluntary public good contribution. An ideal of contributing to public goods divides players to di¤erent social categories: Players who identify with the ideal become insiders, obtaining identity utility but incurring disu- tility if their contributions depart from the ideal, while players who do not identify with the ideal remain as outsiders. We show that identity could increase public good contribution; the ideal that best resolves the free-riding problem in the public good game equals either the contribution level of the most altruistic player in the absence of the identity, or a level that makes the least altruistic player indi¤erent between becoming an insider and not, depending on the size of the group. These results have implications for social policymaking.
    Keywords: Ideals, Identity, Public Goods, Social Categories
    JEL: D03 H41
    Date: 2014–11
  14. By: David Juárez-Luna; Christian Ghiglino (Division of Economics, CIDE)
    Abstract: In the present paper we uncover a novel mechanism through which a minority can gain a disproportionate power in a perfectly functioning democracy. In our model, a government elected by majority within a two party democracy, decides on a unique redistributive instrument, the tax rate. We show that a minority characterised by a high degree of social identification may, in the presence of ideological motives, influence the policy outcome. In particular, a rise in social identification among the rich minority may be able to reduce the tax rate. Importantly, this may happen even if the minority is more ideological than the majority. Finally, we attempt an explanation of the divide in the tax rate between the US and Europe.
    Keywords: Democracy, Influential elite, Social identity, Tax rate, Redistribution.
    Date: 2014–05
  15. By: Massimiliano Landi (Singapore Management University)
    Abstract: I provide a simple example of a quadratic utility function that generates a Giffen demand. The utility function is symmetric, increasing and concave. Interestingly, the Giffen effect arises in the subspace where the utility function is strictly increasing and strictly concave. A full characterization of the parameter conditions under which the Giffen demand arises is provided.
    Date: 2014–11
  16. By: Cabral, Luís M B
    Abstract: I show that exclusive, staggered supply contracts can decrease industry competition when there are economies of scale: buyers pay a higher price to the incumbent seller and the expected value received by an entrant seller is lower when contracts are staggered. Moreover, under staggered contracts there may exist equilibria where an inefficient firm forecloses a more efficient one. Given that contracts are staggered, contract length further increases market power; however, increasing contract length may also eliminate the inefficient foreclosure equilibrium. Finally, I show that, allowing firms to choose contract structure endogenously, the resulting equilibrium path features staggered contracts.
    Keywords: dynamic competition; exclusion; staggered contracts
    JEL: L12 L41
    Date: 2014–08
  17. By: Graddy, Kathryn; Hamilton, Jonathan
    Abstract: Auction houses use both in-house and third-party guarantees for sellers who are concerned about the risk that not enough bidders will enter the auction for their works. Auction houses are compensated for guarantees by buyers’ commissions and successful sales after attracting important works of art. Sellers compensate third-party guarantors by splitting the excess of the final sale price over the guarantee. The guarantor can bid in the auction, and at Christie's, the third-party guarantor still receives a share of the difference between the winning price and the guarantee price, even if he wins the auction, which means the guarantor has a “toehold”. We explore the effect of guarantees (both in-house and third-party) on prices in art auctions, using a large database of auctions and a smaller database of repeat sales.
    Keywords: economics of art; price guarantees; toeholds in auctions
    JEL: D44 L82 Z11 Z18
    Date: 2014–05
  18. By: Minas Vlassis (Department of Economics, University of Crete, Greece); Stefanos Mamakis (Department of Economics, University of Crete)
    Abstract: In a duopoly where firms are competing by adjusting their quantities and the wages are exogenously determined, we analyze the undeclared labour phenomenon and its side effects in product market. Our analysis focuses on the opportunity cost between the taxation and the contributions for social security. The findings of our analysis indicate that there is a strong relationship between the tax rate, the rate of contributions for social insurance and undeclared labour. It is furthermore determined that any combination of tax (t) / contributions (k) rates under the t*1=k/(1+k) curve, will lead firms to practice undeclared labour, in order to avoid paying contributions for social security, since the alternative choice is more costly.
    Keywords: Undeclared Labour, Cournot Duopoly, Labour Unions, Unionisation, Endogenous Objectives
    JEL: J50 J51 L13 E26 H26
    Date: 2014–12–03
  19. By: Vitor Miguel Ribeiro (Vitor Miguel Ribeiro - FEP - Vitor Miguel de Sousa Ribeiro)
    Abstract: We study a duopoly with differentiated and substitutable goods composed of one consumer-friendly firm and one pure-profit maximizing firm. In such a duopoly, a regulatory authority intervenes to control the degree of altruism of the consumer-friendly firm. We conclude that under quantity competition, if firms sell goods that are too homogeneous the policymaker should impose a ceiling on the level of benevolence of the consumer-friendly firm. However, under price competition, the policymaker never imposes a ceiling on the level of kindness of the consumer-friendly firm. Our results also show that, whatever the degree of product differentiation, the social welfare under price competition is always higher than the social welfare under quantity competition, which restores the arguments pointed out by the traditional literature and constitutes a sharp contrast with Nakamura (2013).
    Keywords: Consumer-Friendly Firm, Product Differentiation, Public Intervention
    JEL: D43 L11 L13 R12
    Date: 2014–11
  20. By: Wuggenig, Mirjam
    Abstract: The paper analyzes a dynamic model of rational strategic learning in a network. It complements existing literature by providing a detailed picture of short-run dynamics in a game of strategic experimentation where agents are located in a social network. We show that the delay in information transmission caused by incomplete network structures may induce players to increase own experimentation efforts. As a consequence a complete network can fail to be optimal even if there are no costs for links. This means that in the design of networks there exists a trade-off between the speed of learning and accuracy.
    Keywords: Strategic Experimentation; Networks; Learning
    JEL: C73 D83 D85
    Date: 2014–12–04

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