nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒01‒26
eleven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Equilibrium with Mutual Organizations in Adverse Selection Economies By Prescott, Edward C.; Blandin, Adam; Boyd, John H.
  2. Resale in Second-Price Auctions with Costly Participation By Gorkem Celik; Okan Yilankaya
  3. Axiomatizing Multi-Prize Contests: A Perspective from Complete Ranking of Players By Jingfeng Lu; Zhewei Wang
  4. Multidimensional electoral competition between differentiated candidates By Dimitrios Xefteris
  5. To know or not to know: Endogenous market structure when information can be strategically neglected By R. Cellini; L. Lambertini; G. I. P. Ottaviano
  6. The Value of Public Information in Common-Value Tullock Contests By Ezra Einy; Diego Moreno; Benyamin Shitovitz
  7. Legal Uncertainty – a Selective Deterrent By Matthias Lang
  8. Exclusive Contracts with Complementary Inputs By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
  9. An envelope approach to tournament design By Christian Ewerhart
  11. Group Lending and Endogenous Social Sanctions By Jean-Marie Baland; Rohini Somanathan; Zaki Wahhaj

  1. By: Prescott, Edward C. (Federal Reserve Bank of Minneapolis); Blandin, Adam (Arizona State University); Boyd, John H. (University of Minnesota)
    Abstract: An equilibrium concept in the Debreu (1954) theory-of-value tradition is developed for a class of adverse selection economies and applied to the Spence signaling and Rothschild-Stiglitz (1976) adverse selection environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.
    Keywords: adverse selection equilibrium; theory of value; insurance; signaling; mutual organization; the core
    JEL: C62 D46 D82 G22 G29
    Date: 2015–01–09
  2. By: Gorkem Celik (Department of Economics, ESSEC Business School and THEMA Research Center, Cergy-Pontoise, France); Okan Yilankaya (Department of Economics, Koc University)
    Abstract: We investigate efficiency properties of sealed-bid second-price auctions with costly participation and resale. Each bidder chooses to participate in the auction if her valuation is higher than her optimally chosen participation cutoff. If resale is not allowed and the bidder valuations are drawn from a strictly convex distribution function, the symmetric equilibrium (where all bidders use the same cutoff) is less efficient than a class of two-cutoff asymmetric equilibria. Existence of these equilibria without resale is sufficient for existence of similarly constructed two-cutoff equilibria with resale. Moreover, these equilibria with resale are more asymmetric and (under a sufficient condition) more efficient than the corresponding equilibria without resale.
    Keywords: Second-price auctions; resale; participation cost; endogenous entry; endogenous valuations
    JEL: C72 D44 D82
    Date: 2015–01
  3. By: Jingfeng Lu (Department of Economics, National University of Singapore); Zhewei Wang (School of Economics, Shandong University)
    Abstract: Multiple prizes are usually awarded in contests (e.g., internal promotions, school admissions, sports, etc) and players exert effort to increase their chances for winning a higher prize. A multi-prize contest model must provide each player's probabilities of winning each prize as functions of all players' efforts. We find that the key notion of "hypothetical subcontests" in Skaperdas (1996) should be appropriately interpreted and precisely defined from a ranking perspective, as well as the relevant axioms of "Subcontest Consistency" and "Independence of Irrelevant Contestants" (IIC). When there are less than four contestants (exclusive), a set of axioms properly adapted from those in Skaperdas (1996) and Clark and Riis (1998a) are sufficient and necessary for axiomatizing the widely adopted multi-prize nested lottery contest of Clark and Riis (1996a). When there are more than four contestants (inclusive), including a new axiom of "Independence of Irrelevant Ranks" (IIR) is necessary and sufficient.
    JEL: C72 D72 D74
    Date: 2015–01
  4. By: Dimitrios Xefteris
    Abstract: It is known that multidimensional Downsian competition fails to admit an equilibrium in pure strategies unless very stringent conditions on the distribution of voters’ bliss points are imposed (Plott 1967). This paper revisits this problem considering that the two vote share maximizing candidates are differentiated. That is, candidates strategically decide positions only in some of the n dimensions while in the rest their positions are assumed to be fixed. These fixed dimensions may be viewed as candidates’ immutable characteristics (race, religion, culture, etc.). We find that if candidates are sufficiently differentiated - if in the fixed dimensions their positions are sufficiently different - then a unique Nash equilibrium in pure strategies is guaranteed to exist for any distribution of voters’ bliss points. Perhaps more importantly, we show that this is true even if there exists a unique fixed dimension and candidates instrumentally decide their positions in all other n-1 dimensions.
    Keywords: electoral competition, multidimensional model, equilibrium existence, differentiated candidate
    Date: 2015–01
  5. By: R. Cellini; L. Lambertini; G. I. P. Ottaviano
    Abstract: We study the firms’ choice of whether or not to consider pieces of information concerning their interdependence. In particular, any firm can strategically choose to consider or not the fact that industry output is affected by its own production choice. If this piece of information is considered, the firm behaves as an aligopolist; if not, firm behaves in a monopolistically competitive way. Thus, the market regime is endogenously determined. We show that different outcomes can emerge, depending on the number of firms, the degree of product substitutability and the cost structure.
    JEL: D43 L13
    Date: 2015–01
  6. By: Ezra Einy (BGU); Diego Moreno (Departamento de Economia, Universidad Carlos III de Madrid, Spain); Benyamin Shitovitz (Department of Economics, University of Haifa, Israel)
    Keywords: Tullock Contests, Common-Values, Value of Public Information
    JEL: C72 D44 D82
    Date: 2014
  7. By: Matthias Lang (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: I show that legal uncertainty, i.e., uncertainty about the legality of a specific action, has positive welfare effects. Legal uncertainty works as a screening device provided that the threshold of legality is uncertain. The uncertainty discourages controversial actions, while it encourages socially beneficial actions. Legal uncertainty is a selective deterrent, because the uncertainty changes the probability of being convicted in opposite directions. Hence, in designing optimal rules there is no reason to avoid legal uncertainty at all costs. For example, the positive effect of legal uncertainty influences the balance between per-se rules and rules of reason in competition law.
    Keywords: Regulation, asymmetric information, Deterrence, Enforcement, Legal Uncertainty, Rules of Reason
    JEL: K2 D8 K4 L5
    Date: 2014–11
  8. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: This study constructs a model of anticompetitive exclusive contracts in the presence of complementary inputs. A downstream firm transforms multiple complementary inputs into final products. When complementary input suppliers have market power, upstream competition within a given input market benefits not only the downstream firm (by lowering the input price) but also complementary input suppliers (by raising complementary input prices). The downstream firm is thus unable to earn higher profits even when socially efficient entry is allowed. Hence, the inefficient incumbent supplier can deter socially efficient entry by using exclusive contracts even in the absence of economies of scale and downstream competition. These results have important implications for antitrust agencies, showing the importance of considering the existence of complementary inputs when examining cases of potential anticompetitive exclusive dealing.
    Date: 2015–01
  9. By: Christian Ewerhart
    Abstract: Optimal rank-order tournaments have traditionally been studied using a first-order approach. The present analysis relies instead on the construction of an "upper envelope" over all incentive compatibility conditions. lt turns out that the first-order approach is not innocuous. For example, in contrast to the traditional understanding, tournaments may be dominated by piece rates even if workers are risk-neutral. The paper also offers a strikingly simple characterization of the optimal tournament for quadratic costs and CARA utility, as well as an extension to large tournaments.
    Keywords: Rank-order tournaments, first-order approach, envelope theorem
    JEL: C62 D86 L23
    Date: 2014–12
  10. By: Tadashi Sekiguchi
    Abstract: The present paper studies repeated oligopoly where the firms compete with price in multiple markets. The markets are subject to independent, stochastic fluctuations in demands. The literature points out that while the demand fluctuations generally hinder collusion, the multimarket contact sometimes facilitates it. We show that on an intermediate range of discount factors where only partial collusion is possible under a single market, the difference between the profit under full collusion and the maximum equilibrium profit converges to zero, if the number of markets goes to infinity. Thus the collusion-deterrence effects of fluctuated demands completely vanish in the limit.
  11. By: Jean-Marie Baland; Rohini Somanathan; Zaki Wahhaj
    Abstract: In recent years, microfinance institutions have expanded into group lending with individual liability, leaving out the joint liability clause which was an important feature in earlier lending contracts. Recent experimental evidence indicates that group lending may yield benefits, specifically lowering default rates, even in the absence of joint liability. In this paper, we develop a theoretical model where the public nature of group meetings means that borrowers have incentives to repay a group loan to safeguard their reputation. We show that the introduction of group loans with individual liability will cause sorting between joint liability and individual liability group loans. Specifically, borrowers who attach more importance to their reputation will select into individual liability loans, causing default rates and interest rates to rise for joint liability loans. The introduction of group loans with individual liability can even make joint liability loans infeasible in equilibrium.
    Keywords: Microfinance; Group Lending; Joint Liability; Social Sanctions; Reputation
    JEL: G21 O12 O16 D8
    Date: 2014–12

This nep-mic issue is ©2015 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.