nep-mic New Economics Papers
on Microeconomics
Issue of 2014‒12‒29
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Theory of Buyer Fragmentation: Divide-and-Conquer Intensifies Competition By Jeon, Doh-Shin; Menicucci, Domenico
  2. Certification and Market Transparency By Stahl, Konrad; Strausz, Roland
  3. Compromises and Incentives By Sonia Di Giannatale Menegalli; Itza T. Q. Curiel-Cabral
  4. Credence Goods, Costly Diagnosis, and Subjective Evaluation By Bester, Helmut; Dahm, Matthias
  5. Network Games with Incomplete Information By De Martí, Joan; Zenou, Yves
  6. The Generalized Informativeness Principle By Pierre Chaigneau; Alex Edmans; Daniel Gottlieb
  7. The Informativeness Principle Under Limited Liability By Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
  8. The Value of Informativeness for Contracting By Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
  9. Competitive Screening under Heterogeneous Information By Garrett, Daniel; Gomes, Renato; Maestri, Lucas
  10. Group Lending Without Joint Liability By Thiemo Fetzer; Maitreesh Ghatak; Jonathan de Quidt
  11. Optimal influence under observational learning By Nikolas Tsakas
  12. Optimal Taxation with Rent-Seeking By Rothschild, Casey; Scheuer, Florian
  13. Constrained Efficiency with Search and Information Frictions By S. Mohammad R. Davoodalhosseini
  14. Pricing a Package of Services - When (not) to bundle By Ketelaar, Felix; Szalay, Dezsö
  15. Conditions on the jury for the natural implementation of the deserving winner of a contest By Pablo Amorós
  16. Equilibrium in risk-sharing games By Michail Anthropelos; Constantinos Kardaras

  1. By: Jeon, Doh-Shin; Menicucci, Domenico
    Abstract: It is well-known from Innes and Sexton (1993, 1994) that divide-and-conquer contracts allow an incumbent facing a potential entrant to extract more surplus from buyers and hence buyers suffer from the strategy. In this paper, we show that when sellers compete by offering personalized non-linear tariffs, divide-and-conquer strategies intensify competition among sellers in the presence of indirect contracting externalities. Therefore, buyers prefer remaining fragmented to forming a buyer group. When buyer group formation is decided before the entry of an entrant, our result implies that buyers may deliberately induce a socially suboptimal entry by remaining fragmented in order to benefit from more intense competition upon the entry.
    Keywords: Divde-and-Conquer, Buyer Group, Indirect Contracting External- ities, Common Agency, Competition in Non-linear Tari¤s, Multimarket Contact.
    JEL: D4 K21 L41 L82
    Date: 2014–11–26
  2. By: Stahl, Konrad; Strausz, Roland
    Abstract: We provide elementary insights into the effectiveness of certification to increase market transparency. In a market with opaque product quality, sellers use certification as a signaling device, while buyers use it as an inspection device. This difference alone implies that seller-certification yields more transparency and higher social welfare. Under buyer-certification profit maximizing certifiers further limit transparency, but because seller-certification yields larger profits, active regulation concerning the mode of certification is not needed. These findings are robust and widely applicable to, for instance, patents, automotive parts, and financial products.
    Keywords: Market Transparency , Certification , Information and Product Quality , Asymmetric Information
    JEL: D82 G24 L15
    Date: 2014
  3. By: Sonia Di Giannatale Menegalli (Division of Economics, CIDE); Itza T. Q. Curiel-Cabral
    Abstract: We analyze a situation where a Principal does not necessarily have all the bargaining power while negotiating a contract with an Agent by studying a dynamic multi-objective moral hazard model with hidden action. We .nd that the structure of the optimal contracts change along the Pareto Frontier, and that compromise solutions implement higher Agent.s e¤ort levels when compared to contracts located at the Pareto Frontier.s extremes. Our numerical results indicate that in compromise solutions, compared to the contracts located at the Pareto Frontier.s extremes, the Agent exerts higher e¤ort levels, the Agent.s future compensation schedules show higher spread, and the Agent.s salaries become more directly related to productivity outcomes as time goes on. When the coe¢ cient of relative risk aversion increases, compromise solutions tend to become closer to the Agent.s most advan-tageous contract. Improvements in the .rm.s productivity environment bene.t, in relative terms, the Agent more than the Principal when compromise solutions are implemented.
    Keywords: Asymmetric information, Principal-Agent Model, Incentives, Pareto Frontier, Compromise Solutions, Multi-Objective Problems, Evolutionary Algorithms
    JEL: C63 C78 D61 D82 D86 L14
    Date: 2013–09
  4. By: Bester, Helmut; Dahm, Matthias
    Abstract: We study contracting between a consumer and an expert. The expert can invest in diagnosis to obtain a noisy signal about whether a low-cost service is sufficient or whether a high-cost treatment is required to solve the consumer’s problem. This involves moral hazard because diagnosis effort and signals are not observable. Treatments are contractible, but success or failure of the low-cost treatment is observed only by the consumer. Payments can therefore not depend on the objective outcome but only the consumer’s report, or subjective evaluation. A failure of the low-cost treatment delays the solution of the consumer’s problem by the high-cost treatment to a second period. We show that the first-best solution can always be implemented if the parties’ discount rate is zero; an increase in the discount rate reduces the range of parameter combinations for which the first-best can be obtained. In an extension we show that the first-best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents.
    Keywords: credence goods; information acquisition; moral hazard; subjective evaluation
    JEL: D82 D83 D86 I11
    Date: 2014–11
  5. By: De Martí, Joan; Zenou, Yves
    Abstract: We consider a network game with strategic complementarities where the individual reward or the strength of interactions is only partially known by the agents. Players receive different correlated signals and they make inferences about other players' information. We demonstrate that there exists a unique Bayesian-Nash equilibrium. We characterize the equilibrium by disentangling the information effects from the network effects and show that the equilibrium effort of each agent is a weighted combinations of different Katz-Bonacich centralities where the decay factors are the eigenvalues of the information matrix while the weights are its eigenvectors. We then study the impact of incomplete information on a network policy which aim is to target the most relevant agents in the network (key players). Compared to the complete information case, we show that the optimal targeting may be very different.
    Keywords: Bayesian games; key player policies; social networks; strategic complementarities
    JEL: C72 D82 D85
    Date: 2014–12
  6. By: Pierre Chaigneau; Alex Edmans; Daniel Gottlieb
    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.
    JEL: D86 J33
    Date: 2014–12
  7. By: Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
    Abstract: This paper shows that the informativeness principle does not automatically extend to settings with limited liability. Even if a signal is informative about effort, it may have no value for contracting. An agent with limited liability is paid zero for certain output realizations. Thus, even if these output realizations are accompanied by an unfavorable signal, the payment cannot fall further and so the principal cannot make use of the signal. Similarly, a principal with limited liability may be unable to increase payments after a favorable signal. We derive necessary and sufficient conditions for signals to have positive value. Under bilateral limited liability and a monotone likelihood ratio, the value of information is non-monotonic in output, and the principal is willing to pay more for information at intermediate output levels.
    Keywords: contract theory; Informativeness principle; limited liability; options; pay-for-luck; principal-agent model; relative performance evaluation
    JEL: D86 J33
    Date: 2014–09
  8. By: Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
    Abstract: The informativeness principle demonstrates qualitative benefits to increasing signal precision. However, it is difficult to quantify these benefits -- and compare them against the costs of precision -- since we typically cannot solve for the optimal contract and analyze how it changes with informativeness. We consider a standard agency model with risk-neutrality and limited liability, where the optimal contract is a call option. The direct effect of reducing signal volatility is a fall in the value of the option, benefiting the principal. The indirect effect is a change in the agent's effort incentives. If the original option is sufficiently out-of-the-money, the agent can only beat the strike price if he exerts effort and there is a high noise realization. Thus, a fall in volatility reduces effort incentives. As the agency problem weakens, the gains from precision fall towards zero, potentially justifying pay-for-luck.
    Keywords: contract theory; informativeness principle; limited liability; options; pay-for-luck; principal-agent model; relative performance evaluation
    JEL: D86 J33
    Date: 2014–10
  9. By: Garrett, Daniel; Gomes, Renato; Maestri, Lucas
    Abstract: We study competition in price-quality menus when consumers privately know their valuation for quality (type), and are heterogeneously informed about the offers available in the market. While firms are ex-ante identical, the menus offered in equilibrium are ordered so that more generous menus leave more surplus uniformly over types. More generous menus provide quality more efficiently, serve a larger range of consumers, and generate a greater fraction of profits from sales of low-quality goods. By varying the mass of competing firms, or the level of informational frictions, we span the entire spectrum of competitive intensity, from perfect competition to monopoly.
    Keywords: adverse selection; competition; heterogeneous information; price discrimination; screening
    JEL: D82
    Date: 2014–06
  10. By: Thiemo Fetzer; Maitreesh Ghatak; Jonathan de Quidt
    Abstract: This paper contrasts individual liability lending with and without groups to joint liability lending. By doing so, we shed light on an apparent shift away from joint liability lending towards individual liability lending by some microfinance institutions First we show that individual lending with or without groups may constitute a welfare improvement so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how a purely mechanical argument in favor of the use of groups - namely lower transaction costs - may actually be used explicitly by lenders to encourage the creation of social capital. We also carry out some simulations to evaluate quantitatively the welfare impact of alternative forms of lending, and how they relate to social capital.
    Keywords: microfinance, group lending, joint liability, mutual insurance
    JEL: G11 G21 O12 O16
    Date: 2013–07
  11. By: Nikolas Tsakas (Singapore University of Technology and Design and Universidad Carlos III de Madrid)
    Abstract: We study a problem of optimal influence in a society where agents learn from their neighbors. We consider a firm that seeks to maximize the diffusion of a new product whose quality is ex–ante uncertain, to a market where consumers are able to compare the qualities of two alternative products as soon as they observe both of them. The firm can seed the product to a subset of the population and our goal is to find which is the optimal subset to target. We provide a necessary and sufficient condition that fully characterizes the optimal targeting strategy for any network structure. The key parameter in this condition is the agents’ decay centrality, which is a measure that takes into account how close an agent is to others, but in a way that very distant agents are weighted less than closer ones.
    Keywords: Social Networks, Targeting, Diffusion, Observational Learning.
    JEL: D83 D85 H23 M37
    Date: 2014–11
  12. By: Rothschild, Casey; Scheuer, Florian
    Abstract: We develop a framework for optimal taxation when agents can earn their income both in traditional activities, where private and social products coincide, and in rent-seeking activities, where private returns exceed social returns either because they involve the capture of pre-existing rents or because they reduce the returns to traditional work. We characterize Pareto optimal non-linear taxes when the government does not observe the shares of an individual’s income earned in each of the two activities. We show that the optimal externality correction typically deviates from the Pigouvian correction that would obtain if rent-seeking incomes could be perfectly targeted, even at income levels where all income is from rent-seeking. If rent-seeking externalities primarily affect other rent-seeking activity, then the optimal externality correction lies strictly below the Pigouvian correction. If the externalities fall mainly on the returns to traditional work, the optimal correction strictly exceeds it. We show that this deviation can be quantitatively important.
    Keywords: Multidimensional screening; Rent-seeking; Tax policy
    JEL: D5 D8 E6 H2 J6
    Date: 2014–11
  13. By: S. Mohammad R. Davoodalhosseini
    Abstract: I characterize the constrained efficient (or planner's) allocation in a directed (competitive) search model with private information. There are sellers with private information on one side of the market and homogeneous buyers on the other side. They match bilaterally in different submarkets and trade. In each submarket, there are search frictions. In the market economy, homogeneous buyers enter different submarkets (i.e., post different contracts) and sellers with private information direct their search toward their preferred submarket. I define a planner whose objective is to maximize social welfare subject to the information and matching frictions of the environment. The planner can impose taxes and subsidies on agents that vary across submarkets while being subject to an overall budget-balance condition. I show that the planner generally achieves strictly higher welfare than the market economy. I also derive conditions under which the planner achieves the complete information allocation. I present examples in the context of financial and labor markets, explicitly solve for the efficient tax and transfer schemes and compare the planner's allocation with the equilibrium allocation.
    JEL: D8 E24 G1 J31 J64
    Date: 2014–11–30
  14. By: Ketelaar, Felix; Szalay, Dezsö
    Abstract: We study a tractable two-dimensional model of price discrimination. Consumers combine a rigid with a more flexible choice, such as choosing the location of a house and its quality or size. We show that the optimal pricing scheme involves no bundling if consumer types are affiliated. Conversely, if consumer types are negatively affiliated over some portion of types then some bundling occurs.
    Keywords: Price discrimination; Bundling; Monopoly; Multidimensional screening
    JEL: D42 D82 D86
    Date: 2014–12
  15. By: Pablo Amorós (Department of Economic Theory, Universidad de M‡laga)
    Abstract: A jury has to choose the winner of a contest. There exists a deserving winner, whose identity is common knowledge among the jurors, but not known by the planner. Jurors may be biased in favor (friend) or against (enemy) some contestants. We study conditions on the confi?guration of the jury so that it is possible to implement the deserving winner in Nash equilibrium when we restrict ourselves to mechanisms satisfying two conditions: (1) each juror only has to announce a contestant, and (2) announcing the deserving winner is an equilibrium. We call this notion natural implementation. We show that, in order to naturally implement the deserving winner, the planner needs to know a number of jurors with friends or a number of jurors with enemies. Speci?cally, the number of jurors with friends that the planner needs to know to naturally implement the deserving winner is less than the number of jurors with enemies that the planner would need to know for it.
    Keywords: Mechanism design; contests; jury; Nash equilibrium
    JEL: C72 D71 D78
    Date: 2014–11
  16. By: Michail Anthropelos; Constantinos Kardaras
    Abstract: The paper studies equilibrium sharing of risk among limited number of strategically-behaved agents. We propose a Nash game where agents' strategic sets consist of all possible sharing securities and pricing kernels that are consistent with Arrow-Debreu sharing rules. First, it is shown that the best response problem of each agent admits a unique solution. The risk-sharing Nash equilibrium admits a finite-dimensional characterisation and it is proved to be unique in the case of two agents. In Nash risk-sharing equilibrium agents choose to share random endowments that are different than their actual ones, and the shared securities are endogenously bounded, implying (amongst other things) loss of efficiency. In addition, an analysis regarding extremely risk tolerant agents indicates that they profit more from the Nash risk-sharing equilibrium as compared to the Arrow-Debreu one.
    Date: 2014–12

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