nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒01‒14
eleven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Search Deterrence By Armstrong, Mark; Zhou, Jidong
  2. A Dual Approach to Ambiguity Aversion By Antoine Bommier
  3. Asset Demand and Ambiguity Aversion By Chiaki Hara; Toshiki Honda
  4. Opportunistic Disclosure in the Inter-Organizational Relationships By Oll, Grete
  5. Multitasking and performance measurement By Nannerup, Niels; Olsen, Kasper Krogh
  6. A generalization of the expenditure function. By Noé Biheng
  7. Non-bossiness By William Thomson
  8. When Is Voting Optimal? By Ben-Yashar, Ruth; Danziger, Leif
  9. Generalized Comparative Statics for Political Economy Models By Dotti, Valerio
  10. Preventing Bank Runs By Andolfatto, David; Nosal, Ed; Sultanum, Bruno
  11. More on Middlemen: Equilibrium Entry and Efficiency in Intermediated Markets By Nosal, Ed; Wong, Yuet-Yee; Wright, Randall

  1. By: Armstrong, Mark; Zhou, Jidong
    Abstract: This paper studies sales techniques which discourage consumer search by making it harder or more expensive to return to buy after a search for alternatives. It is unilaterally profitable for a seller to deter search under mild conditions, but sellers can suffer when all do so. When a seller cannot commit to its policy, it exploits the inference that those consumers who try to buy later have no good alternative, and in many cases the outcome is as if the seller could only make an exploding offer. Search deterrence results in sub-optimal matching of products to consumers and often raises the price consumers pay.
    Keywords: Consumer search, price discrimination, sequential screening, exploding offers, sales techniques
    JEL: D18 D43 D82 D83 D86 L13
    Date: 2014–12
  2. By: Antoine Bommier (ETH Zurich, Switzerland)
    Abstract: In this paper, the assumption of monotonicity of Anscombe and Aumann (1963) is replaced by a weaker assumption of monotonicity with respect to first order stochastic dominance. I derive a representation result where ambiguous distributions of objective beliefs are first aggregated into “equivalent unambiguous beliefs” and then risk preferences are used to compute the utility of these equivalent unambiguous beliefs. Such an approach makes it possible to disentangle ambiguity aversion, related to the treatment of information, and risk aversion, related to the evaluation of the equivalent unambiguous beliefs. An application shows the tractability of the framework and its intuitive appeal.
    Keywords: ambiguity aversion; first-order stochastic dominance; separability; comonotonic sure-thing principle; rank-dependent utility; saving behavior.
    JEL: D81
    Date: 2014–12
  3. By: Chiaki Hara (Institute of Economic Research, Kyoto University); Toshiki Honda (Graduate School of International Corporate Strategy, Hitotsubashi University)
    Abstract: We study the optimal portfolio choice problem of an investor who is averse to both risk and ambiguity. Using the class of utility functions proposed by Klibano, Marinacci, and Mukerji (2005), we establish a generalized mutual fund theorem, which shows that there are a xed number of mutual funds that cater for all investors, regardless of their ambiguity aversion. We prove that the optimal portfolio is decomposed into two, one remaining and the other vanishing as the degree of ambiguity aversion goes to innity. We also introduce factor models with ambiguity and compare our results with the Bayesian portfolio approach.
    Keywords: Ambiguity aversion, optimal portfolio, 1=N portfolio, mutual fund theorem, factor model, Bayesian portfolio choice problem
    Date: 2014–12
  4. By: Oll, Grete (Department of Business and Economics)
    Abstract: The purpose of this paper is to explore the effect the accounting system choice has, when the supplier discloses accounting information opportunistically in an Inter-Organizational Relationship. A contract governs the trade and specifies: (i) a cost reimbursement and (ii) a profit sharing arrangement. The supplier’s opportunism emerges as he can manages the rate that is used for allocating overhead costs to the reimbursed product. Two methods of allocation rate management are available, leading to two distinct inefficiencies. First, the supplier can use some input factors in excess (Real Cost Management). Second, the supplier can influence the trade quantity (Real Activity Management). We find that even with opportunistic disclosure, the total profit of the relationship exceeds the profit under the arm’s-length relationship. With a traditional accounting system, the supplier engages in Real Cost Management if the total overhead cost is high compared to the total direct labour cost. With an Activity-Based Accounting system, the supplier engages in Real Cost Management when the overhead cost of the traded product is small compared to the overhead cost of other products. We further show that the supplier engage in Real Activity Management regardless of the accounting system. However, the size and the direction of the quantity distortion depends on the accounting system.
    Keywords: Management accounting and control; inter-organizational relationships; cost reimbursement; profit-sharing; accounting system choice; private disclosure
    JEL: M41
    Date: 2014–12–17
  5. By: Nannerup, Niels (Department of Business and Economics); Olsen, Kasper Krogh (Department of Business and Economics)
    Abstract: In a principal-agent setting, we consider a combined problem of multitasking and performance measurement. The principal can choose to reward the agent both directly for providing effort into a specific activity, and based on the outcome delivered to the principal. Both the issue of multitasking and any private knowledge the agent might possess will lead the principal to use a performance measurement more. This applies even if the measurement is poorly correlated with the actual outcome to the principal.
    Keywords: Multitasking; pay for performance
    JEL: D82 D86 L51
    Date: 2014–12–16
  6. By: Noé Biheng (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We consider a generalized expenditure function and the associated Hicksian demand. First, we provide some economic interpretation of the problem that we study. Then, we study different properties of the solution: existence, Lipschitz behavior and differential properties. We conclude by a Slutsky-type property.
    Keywords: Expenditure function, incomplete preferences, Lipschitz behavior.
    JEL: C6 D4
    Date: 2014–11
  7. By: William Thomson (University of Rochester)
    Date: 2014–12
  8. By: Ben-Yashar, Ruth (Bar-Ilan University); Danziger, Leif (Ben Gurion University)
    Abstract: We consider a framework where the optimal decision rule determining the collective choice depends in a simple way on the decision makers' posterior probabilities of a particular state of nature. Nevertheless, voting is generally an inefficient way to make collective choices and this paper sheds light on the relationship between the optimal decision rule and voting mechanisms. The paper derives the conditions under which the optimal decision rule is equivalent to some well-known voting procedure (weighted supermajority, weighted majority, and simple majority) and shows that these are very stringent. The paper also considers more general voting procedures, as for example allowing for abstentions, and shows that the conditions for reaching the optimal collective choice remain very stringent.
    Keywords: voting rule, common goal, collective choice
    JEL: D70 D71
    Date: 2014–12
  9. By: Dotti, Valerio
    Abstract: The Median Voter Theorem is an extremely popular result in Political Economy that holds only if the policy space is unidimensional. This assumption restricts its use to a class of very simple problems. In most applications in the literature this implied an oversimplification of the problem studied, which is one of the possible explanations for the lack of empirical support for several predictions derived with this tool. In this paper I show that under suitable restrictions on individual preferences a Median Voter Theorem can be derived even if the policy space is multidimensional and I derive the comparative statics of the resulting model induced by a change in the pivotal voter. I show that this tool can invalidate the predictions of the Meltzer-Richard model of size of goverment and that it can be useful to study other Political Economy problems that cannot be analyzed using the traditional framework, including games in which players have a richer strategy set than the policy vector to be chosen.
    Keywords: median voter, multidimensionality, monotone comparative statics
    JEL: C71 D71 D78
    Date: 2014–12–17
  10. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Nosal, Ed (Federal Reserve Bank of Chicago); Sultanum, Bruno (Pennsylvania State University)
    Abstract: Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria. It has never been clear, however, whether bank-run equilibria in this framework are a natural byproduct of the economic environment or an artifact of suboptimal contractual arrangements. In the class of direct mechanisms, Peck and Shell (2003) demonstrate that bank-run equilibria can exist under an optimal contractual arrangement. The difficulty of preventing runs within this class of mechanism is that banks cannot identify whether withdrawals are being driven by psychology or by fundamentals. Our solution to this problem is an indirect mechanism with the following two properties. First, it provides depositors an incentive to communicate whether they believe a run is on or not. Second, the mechanism threatens a suspension of convertibility conditional on what is revealed in these communications. Together, these two properties can eliminate the prospect of bank-run equilibria in the Diamond-Dybvig environment.
    Keywords: Bank runs; optimal deposit contract; financial fragility
    JEL: D82 E58 G21
    Date: 2014–09–01
  11. By: Nosal, Ed (Federal Reserve Bank of Chicago); Wong, Yuet-Yee (Binghamton University); Wright, Randall (University of Wisconsin-Madison)
    Abstract: This paper generalizes Rubinstein and Wolinsky’s model of middlemen (intermediation) by incorporating production and search costs, plus more general matching and bargaining. This allows us to study many new issues, including entry, efficiency and dynamics. In the benchmark model, equilibrium exists uniquely, and involves production and intermediation for some parameters but not others. Sometimes intermediation is essential: the market operates iff middlemen are active. If bargaining powers are set correctly equilibrium is efficient; if not there can be too much or too little economic activity. This is novel, compared to the original Rubinstein-Wolinsky model, where equilibrium is always efficient.
    Keywords: Middlemen; intermediation; search; bargaining; entry
    JEL: D83 G24
    Date: 2014–11–01

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