nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒01‒31
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Tenure-Clock Problem By Chia-Hui Chen ; Junichiro Ishida
  2. Learning in Monotone Bayesian Games By Alan Beggs
  3. Coarse Correlated Equilibria in an Abatement Game By Moulin, Herve ; Ray, Indrajit ; Gupta, Sonali Sen
  4. Ambiguity in a Real Option Game By Tobias Hellmann ; Thijssen
  6. Payoff Shares in Two-Player Contests By Samuel Haefner ; Georg Nöldeke
  7. Efficiency may Improve when Defectors Exist By Takako Fujiwara-Greve Author-Name: Masahiro Okuno-Fujiwara ; Nobue Suzuki
  8. Information Disclosure and Consumer Awareness By Li, Sanxi ; Peitz, Martin ; Zhao, Xiaojian
  9. Discrimination in a new model of contests with two-sided asymmetric information By David Perez Castrillo ; David Wettstein
  10. Financing Innovation with Unobserved Progress By Zehao Hu
  11. Diverse Behavior Patterns in a Symmetric Society with Voluntary Partnerships By Takako Fujiwara-Greve ; Masahiro Okuno-Fujiwara
  12. A Dynamic Game of Emissions Pollution with Uncertainty and Learning By Nahid Masoudi ; Marc Santugini ; Georges Zaccour
  13. Welfare Criteria from Choice : The Sequential Solution By Sean HORAN ; Yves SPRUMONT
  14. Equilibrium Price Dispersion Across and Within Stores By Guido Menzio ; Nicholas Trachter
  15. Beliefs and Consumer Search By Maarten Janssen ; Sandro Shelegia
  16. On the Interaction between Player Heterogeneity and Partner Heterogeneity in Strict Nash Networks By Charoensook, Banchongsan
  17. Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive By Jason Pearcy
  18. Incentives and Risks in Relationships Between the Principal and the Agent By Minasyan, Vigen
  19. Auction Mechanisms and Bidder Collusion: Bribes, Signals and Selection By Aniol Llorente-Saguer ; Ro'i Zultan
  20. Securing basic well-being for all By Reiko Gotoh ; Naoki Yoshihara
  21. "Slutsky Matrix Norms and Revealed Preference Tests of Consumer Behaviour" By Victor Aguiar ; Roberto Serrano

  1. By: Chia-Hui Chen ; Junichiro Ishida
    Abstract: We consider a gtenure-clock problemh in which a principal may set a deadline by which she needs to evaluate an agent's ability and decides whether to promote him or not. We embed this problem in a continuous-time model with both hidden action and hidden information, where the principal must induce the agent to exert effort to facilitate her learning process. The value of committing to a deadline is examined in this environment, and factors that make the deadline more profitable are identified. Our simple framework allows us to obtain a complete characterization of the equilibrium, both with and without commitment, and provides insight into why up-or-out contracts are prevalent in some industries while they are almost non-existent in others.
    Date: 2015–01
  2. By: Alan Beggs
    Abstract: This paper studies learning in monotone Bayesian games with one-dimensional types and finitely many actions. Players switch between actions at a set of thresholds.  A learning algorithm under which players adjust their strategies in the direction of better ones using payoffs received at similar signals to their current thresholds is examined.  Convergence to equilibrium is shown in the case of supermodular games and potential games.
    Keywords: bayesian games, monotone strategies, learning, stochastic approximation, supermodular games
    JEL: C72 D83
    Date: 2015–01–08
  3. By: Moulin, Herve ; Ray, Indrajit (Cardiff Business School ); Gupta, Sonali Sen
    Abstract: We consider the well-analyzed abatement game (Barrett 1994) and prove that correlation among the players (nations) can strictly improve upon the Nash equilibrium payoffs. As these games are potential games, correlated equilibrium — CE — (Aumann 1974, 1987) cannot improve upon Nash; however we prove that coarse correlated equilibria — CCE — (Moulin and Vial 1978) may do so. We compute the largest feasible total utility and hence the efficiency gain in any CCE in those games: it is achieved by a lottery over only two pure strategy profiles.
    Keywords: Abatement game; Coarse correlated equilibrium; Efficiency gain
    JEL: C72 Q52
    Date: 2014–12
  4. By: Tobias Hellmann (Center for Mathematical Economics, Bielefeld University ); Thijssen (Department of Mathematics, University of York )
    Abstract: In this paper we study a two-player investment game with a first mover advantage in continuous time with stochastic payoffs, driven by a geometric Brownian motion. One of the players is assumed to be ambiguous with maxmin preferences over a strongly rectangular set of priors. We develop a strategy and equilibrium concept allowing for ambiguity and show that equilibira can be preemptive (a player invests at a point where investment is Pareto dominated by waiting) or sequential (one player invests as if she were the exogenously appointed leader). Following the standard literature, the worst case prior for the ambiguous player if she is the second mover is obtained by setting the lowest possible trend in the set of priors. However, if the ambiguous player is the first mover, then the worst case prior can be given by either the lowest or the highest trend in the set of priors. This novel result shows that “worst case prior” in a setting with geometric Brownian motion and kappa-ambiguity does not equate to “lowest trend”.
    Keywords: Real Options, Knightian Uncertainty, Worst Case Prior, Optimal Stopping, Timing Game
    JEL: C61 C73 D81 L13
    Date: 2015–01
  5. By: Kiyohiko G. Nishimura (Graduate School of Economics,The University of Tokyo ); Hiroyuki Ozaki (Faculty of Economics,Keio University )
    Abstract: In this paper, we extend the concept of rational-expectations equilibrium, from a traditional single-belief framework to a multi-belief one. In the traditional framework of single belief, agents are supposed to know the equilibrium price “correctly.” We relax this requirement in the framework of multiple beliefs. While agents do not have to know the equilibrium price exactly, they must be correct in that it must be always contained in the support of each probability distribution they think possible. We call this equilibrium concept a multibelief rational-expectations equilibrium. We then show that such an equilibrium exists, that indeterminacy and complexity of equilibria can happen even when the degree of risk aversion is moderate and, in particular, that a decreasing price sequence can be an equilibrium. The last property is highlighted in a linear-utility example where any decreasing price sequence is a multi-belief rational-expectations equilibrium while only possible single-belief rational-expectations equilibrium price sequences are those which are constant over time.
    Date: 2014–12
  6. By: Samuel Haefner ; Georg Nöldeke (University of Basel )
    Abstract: In contest models with symmetric valuations, equilibrium payoffs are positive<br />shares of the value of the prize. In contrast to a bargaining situation, these<br />shares sum to less than one because a share of the value is lost due to rent-dissipation. We ask: can every such division into payoff shares arise as the<br />outcome of the unique pure-strategy Nash equilibrium of a simple asymmetric<br />contest in which contestants dier in the effectiveness of their efforts? For<br />two-player contests the answer is shown to be positive.
    Keywords: Contests, Pure-Strategy Equilibrium, Rent-Dissipation
    JEL: C72 D72 D74
    Date: 2014
  7. By: Takako Fujiwara-Greve Author-Name: Masahiro Okuno-Fujiwara ; Nobue Suzuki
    Abstract: Voluntarily Separable Repeated Prisoner's Dilemma (Fujiwara-Greve and Okuno-Fujiwara, 2009) has many kinds of equilibria. Focusing on monomorphic and bimorphic equilibria, we show that a bimorphic equilibrium consisting of cooperators and defectors is most efficient, under a mild payoff condition. This is a striking contrast to ordinary repeated Prisoner's Dilemma, where the symmetric efficient payoff is achieved by the symmetric C-trigger equilibrium. Our result indicates that behavioral diversity can be beneficial for the society, when players are free to escape from personalized punishments. Length: 34 pages
    Date: 2013–10
  8. By: Li, Sanxi ; Peitz, Martin ; Zhao, Xiaojian
    Abstract: Whether consumers are aware of potentially adverse product effects is key to private and social incentives to disclose information about undesirable product characteristics. In a monopoly model with a mix of aware and unaware consumers, a larger share of unaware consumers makes information disclosure less likely to occur. Since the firm is not interested in releasing information to unaware consumers, a more precise targeting technology that allows the firm to better keep unaware consumers in the dark leads to more disclosure. A regulator may want to intervene in this market and impose mandatory disclosure rules.
    Keywords: Information disclosure , informative advertising , targeted advertising , consumer awareness , behavioral bias , non-common prior , consumer protection , behavioral industrial organization
    JEL: L51 M38
    Date: 2014
  9. By: David Perez Castrillo (Dept. of Economics & CODE, Universitat Aut?noma de Barcelona and Barcelona GSE, 08193 Bellaterra (Barcelona), Spain ); David Wettstein (BGU )
    Date: 2014
  10. By: Zehao Hu (Department of Economics, University of Pennsylvania )
    Abstract: This paper studies the problem of incentivizing an agent in an innovation project when the progress of innovation is known only to the agent. I assume the success of innovation requires an intermediate breakthrough and a final breakthrough, with only the latter being observed by the principal. Two properties of optimal contracts are identified. First, conditional on the total level of financing, optimal contracts induce efficient actions from the agent. Second, the reward for success to the agent is in general non-monotone in success time and later success may be rewarded more. The latter property is consistent with the use of time-vested equity as part of compensation schemes for entrepreneurs. I then extend the model by introducing randomly arriving buyers and apply it to study the financing of startup firms with opportunities to be acquired. I show that the potential acquisition increases the cost of providing incentives. Since an agent with low level of progress is “bailed out” when an offer is made to acquire firms with both high and low levels of progress, the agent has more incentive to shirk. In response, the principal reduces the likelihood that the firm with high level of progress is sold. Moreover, the total financing provided by the principal is less compared to the environment without buyers.
    Keywords: Contract Theory, Dynamic Agency, Multistage Innovation, Asymmetric Information, Venture Capital, Acquisition
    JEL: C73 D82 G32
    Date: 2014–11–26
  11. By: Takako Fujiwara-Greve ; Masahiro Okuno-Fujiwara
    Abstract: In the literature of voluntarily repeated Prisoner's Dilemma, the focus is on how long-term cooperation is established, when newly matched partners cannot know the past actions of each other. In this paper we investigate how non-cooperative and cooperative players co-exist. In many incomplete information versions of a similar model, inherently non-cooperative players are assumed to exist in the society, but their long-run fitness has not been analyzed. In reality and in experiments, we also observe that some people are cooperative, while others never cooperate. We show that a bimorphic equilibrium of the most cooperative strategy and the most myopic strategy exists for sufficiently high survival rate of players, and that it is evolutionarily stable under uncoordinated mutations. For lower survival rates, adding initial periods of defection makes similar bimorphic equilibria. Both types of equilibria confirm persistence of defectors. Length: 48 pages
    Date: 2013–10
  12. By: Nahid Masoudi ; Marc Santugini ; Georges Zaccour
    Abstract: We introduce learning in a dynamic game of international pollution, with ecological uncertainty. We characterize and compare the feedback non-cooperative emissions strategies of players when the players do not know the distribution of ecological uncertainty but they gain information (learn) about it. We then compare our learning model with the benchmark model of full information, where players know the distribution of ecological uncertainty. We find that uncertainty due to anticipative learning induces a decrease in total emissions, but not necessarily in individual emissions. Further, the effect of structural uncertainty on total and individual emissions depends on the beliefs distribution and bias. Moreover, we obtain that if a player’s beliefs change toward more optimistic views or if she feels that the situation is less risky, then she increases her emissions while others react to this change and decrease their emissions.
    Keywords: Pollution emissions, Dynamic games, Uncertainty, Learning
    JEL: Q50 D83 D81 C73
    Date: 2015
  13. By: Sean HORAN ; Yves SPRUMONT
    Abstract: We study the problem of deriving a complete welfare ordering from a choice function. Under the sequential solution, the best alternative is the alternative chosen from the universal set; the second best is the one chosen when the best alternative is removed; and so on. We show that this is the only completion of Bernheim and Rangel's (2009) welfare relation that satisfies two natural axioms: neutrality, which ensures that the names of the alternatives are welfare-irrelevant; and persistence, which stipulates that every choice function between two welfare-identical choice functions must exhibit the same welfare ordering.
    Keywords: choice-based welfare analysis, bounded rationality
    JEL: D01
    Date: 2015
  14. By: Guido Menzio (Department of Economics, University of Pennsylvania ); Nicholas Trachter (Federal Reserve Bank of Richmond )
    Abstract: We develop a search-theoretic model of the product market that generates price dispersion across and within stores. Buyers differ with respect to their ability to shop around, both at different stores and at different times. The fact that some buyers can shop from only one seller while others can shop from multiple sellers causes price dispersion across stores. The fact that the buyers who can shop from multiple sellers are more likely to be able to shop at inconvenient times induces causes price dispersion within stores. Specifically, it causes sellers to post different prices for the same good at different times in order to discriminate between different types of buyers.
    Keywords: Search, Price dispersion, Price discrimination, Bargain hunting
    JEL: D43
    Date: 2015–01–12
  15. By: Maarten Janssen ; Sandro Shelegia
    Abstract: When consumers search sequentially for prices and product matches, their beliefs of what they will encounter at the next rm are important in deciding whether or not to continue to search. In search environments where retailers have a common cost that is not known to consumers and is either the outcome of a random process or strategically set by an upstream rm, it is natural for consumers to have symmetric beliefs. We show that market outcomes under symmetric beliefs are quantitatively and qualitatively dierent from outcomes when consumers hold passive beliefs. Market prices are higher with symmetric beliefs (and can be as high as the joint prot maximizing prices), and are non-monotonic in the search cost. Moreover, price rigidities arise endogenously as retailers are not willing to charge prices above consumers' reservation utility. These phenomena become exacerbated in a vertical relations environment.
    JEL: D40 D83 L13
    Date: 2015–01
  16. By: Charoensook, Banchongsan
    Abstract: This paper brings together analyses of Strict Nash networks under exclusive player heterogeneity assumption and exclusive partner heterogeneity assumption. This is achieved through examining how the interactions between these two assumptions influence important properties of Strict Nash networks. Built upon the findings of Billand et al (2011) and Galleotti et al (2006), which assume exclusive partner hetero- geneity and exclusive player heterogeneity respectively, I provide a proposition that generalizes the results of these two models by stating that: (i) Strict Nash network consists of multiple non-empty components as in Galleotti et al (2006), and (ii) each non-empty component is a branching or Bi network as in Billand et al (2011). This proposition requires that a certain restriction on link formation cost (called Uniform Partner Rankng), which encloses exclusive partner heterogeneity and exclusive player heterogeneity as a specific case, is satisfied. In addition, this paper shows that value heterogeneity plays a relatively less important role in changing the shapes of Strict Nash networks.
    Keywords: Strict Nash Network, Two-way Flow Network, Information Network, Branch- ing Network, Agent Heterogeneity
    JEL: C72 D85
    Date: 2015–01–10
  17. By: Jason Pearcy (Montana State University )
    Abstract: In markets where consumers have switching costs and firms cannot price discriminate, firms have two conflicting strategies. A firm can either offer a low price to attract new consumers and build future market share or a firm can offer a high price to exploit the partial lock-in of their existing consumers. This paper develops a theory of competition when overlapping generations of consumers have switching costs and firms produce differentiated products. Competition takes place over an infinite horizon with any number of firms. This paper shows that the relationship between the level of switching costs and the number of firms determines whether firms offer low or high prices. Similar to previous duopoly studies, switching costs are likely to facilitate higher equilibrium prices only when there is a small number of firms and switching costs are large. Unlike previous studies this paper demonstrates that with a sufficiently large number of firms, switching costs have the opposite effect and prices are lower with switching costs when compared to equilibrium prices without switching costs. The equilibrium of the model also contains realistic features uncommon to other models in the literature where some consumers switch in equilibrium and a symmetric pure strategy price exists with more than two firms.
    Keywords: Switching Costs, Product Differentiation, Dynamic Competition, Discrete Choice
    JEL: D2 D4 L1
    Date: 2009–04–28
  18. By: Minasyan, Vigen
    Abstract: The paper addresses a basic model of moral hazard (risk) [Gibbons, 2010; Gibbons, 2005] and suggests some of its modifications. In the basic model of moral risk, questions are put and examined that have not been considered in the previous researches. In particular, it is proved that the level of agent's efforts that maximizes its expected utility coincides with the level of efforts that minimize the risk of obtaining this maximum utility. Modifications of the moral risk model are considered where the optimal behavior of the principal and the agent considerably differ from the respective behavior in the moral risk model. The paper introduces moral risk measures VaR for the principal and VaR for the agent that specify the qualitative assessments of risk on the part of the principal and the agent in their relationships.
    Keywords: model of moral hazard (risk), expected utility, VaR for the principal, VaR for the agent, measure of the utility risk, lognormally distributed random variable.
    JEL: C10 G22
    Date: 2014–05
  19. By: Aniol Llorente-Saguer (School of Economics and Finance, Queen Mary, University of London ); Ro'i Zultan (Department of Economics, Ben-Gurion University )
    Abstract: The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. In equilibrium, collusive negotiations are either successful or are avoided altogether, hence such analysis neglects the effects of failed collusion attempts. In such contingencies, information revealed in the negotiation process is likely to affect the bidding behavior in firstprice (but not second-price) auctions. We test experimentally a setup in which collusion is possible, but negotiations often break down and information is revealed in an asymmetric way. The existing theoretical analysis of our setup predicts that the first-price mechanism deters collusion. In contrast, we find the same level of collusion in first-price and second-price auctions. Furthermore, failed collusion attempts distort the bidding behavior in the ensuing auction, leading to loss of efficiency and eliminating the revenue dominance typically observed in first-price auctions.
    Keywords: Collusion, experiment, auctions, bribes
    JEL: C72 C91 D44
    Date: 2014–11
  20. By: Reiko Gotoh (Hitotsubashi University ); Naoki Yoshihara (Hitotsubashi University )
    Abstract: The purpose of this paper is to examine the possibility of a social choice rule to implement a social policy for “securing basic well-being for all.†The paper introduces a new scheme of social choice, called a social relation function (SRF), which associates a reflexive and transitive binary relation over a set of social policies to each profile of individual well-being appraisals and each profile of group evaluations. As part of the domains of SRFs, the available class of group evaluations is constrained by three conditions. Furthermore, the non-negative response (NR) and the weak Pareto condition (WP) are introduced. NR demands giving priority to group evaluation, while treating the groups as formally equal relative to each other. WP requires treating impartially the well-being appraisals of all individuals. In conclusion, this paper shows that under some reasonable assumptions, there exists an SRF that satisfies NR and WP.
    Keywords: basic well-being, individual well-being appraisals, social relation functions
    JEL: D63
  21. By: Victor Aguiar ; Roberto Serrano
    Abstract: Given any observed finite sequence of prices, wealth and demand choices, we characterize the relation between its underlying Slutsky matrix norm (SMN) and some popular discrete revealed preference (RP) measures of departures from rationality, such as the Afriat index. We show that testing rationality in the SMN aproach with finite data is equivalent to testing it under the RP approach. We propose a way to “summarize” the departures from rationality in a systematic fashion in finite datasets. Finally, these ideas are extended to an observed demand with noise due to measurement error; we formulate an appropriate modification of the SMN approach in this case and derive closed-form asymptotic results under standard regularity conditions.
    Keywords: consumer theory; rationality; Slutsky matrix function; revealed preference approach; bounded rationality.
    Date: 2015

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