nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒02‒05
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Persuading skeptics and reaffirming believers By Ricardo Alonso; Odilon Câmara
  2. Persuading voters By Ricardo Alonso; Odilon Câmara
  3. The art of brevity By Ricardo Alonso; Heikki Rantakari
  4. Bidding Rings: A Bargaining Approach By Chatterjee, Kalyan; Mitra, Manipushpak; Mukherjee, Conan
  5. Competing trade mechanisms and monotone mechanism choice By Eberhard Feess; Christian Grund; Markus Walzl; Ansgar Wohlschlegel
  6. Bayesian networks and boundedly rational expectations By Ran Spiegler
  7. Equilibrium and matching under price controls By Herings P.J.J.
  8. Plausible Cooperation, Fourth Version By Oliver Compte; Andrew Postlewaite
  9. Unilateral vs. Bilateral link-formation: Bridging the gap By Valenciano Llobera, Federico; Olaizola Ortega, María Norma
  10. How to gamble against all odds By Ron Peretz; Gilad Bavly
  11. Consumer Search with Observational Learning By Sandro Shelegia; Daniel Garcia
  12. Recruitment and selection in organizations By Ricardo Alonso
  13. On the logical structure of de Finetti's notion of event By Tommaso Flaminio; Lluis Godo; Hykel Hosni
  14. Strategic timing of arrivals to a finite queue multi-server loss system By Moshe Haviv; Liron Ravner
  15. Efficient Financial Crises By Ariel Zetlin-Jones
  16. Which club should I attend, Dad?: Targeted socialization and production By Albornoz-Crespo, Facundo; Cabrales, Antonio; Hauk, Esther
  17. Optimal contracting and the organization of knowledge By William Fuchs; Luis Garicano; Luis Rayo
  18. Democratization and Barriers to Entry in a Two-Dimensional Voting Model. By Dmitry A. Veselov
  19. Managerial Incentive Problems and Return Distributions By Szalay, Dezso; Yokeeswaran, Venuga
  20. Pareto Efficiency and Identity By Christopher Phelan; Aldo Rustichini
  21. Optimal Patronage By Drugov, Mikhail

  1. By: Ricardo Alonso; Odilon Câmara
    Abstract: In a world where rational individuals may hold different prior beliefs, a sender can influence the behavior of a receiver by controlling the informativeness of a signal. We characterize the set of distributions of posterior beliefs that can be induced by a signal, and provide necessary and sufficient conditions for a sender to benefit from information control. We examine a class of models with no value of information control under common priors, and show that a sender generically benefits from information control under heterogeneous priors. We extend our analysis to cases where the receiver’s prior is unknown to the sender.
    Keywords: persuasion; information control; heterogeneous priors
    JEL: D72 D83 M31
    Date: 2014–05–28
  2. By: Ricardo Alonso; Odilon Câmara
    Abstract: In a symmetric information voting model, an individual (information controller) can influence voters’ choices by designing the information content of a public signal. We characterize the controller’s optimal signal. With a non-unanimous voting rule, she exploits voters’ heterogeneity by designing a signal with realizations targeting di↵erent winning-coalitions. Consequently, under simple-majority voting rule, a majority of voters might be strictly worse o↵ due to the controller’s influence. We characterize voters’ preferences over electoral rules, and provide conditions for a majority of voters to prefer a supermajority (or unanimity) voting rule, in order to induce the controller to supply a more informative signal.
    Keywords: information control; persuasion; voting
    JEL: D72 D83
    Date: 2014–06–03
  3. By: Ricardo Alonso; Heikki Rantakari
    Abstract: We analyze a class of sender-receiver games with quadratic payoffs, which includes the communication games in Alonso, Dessein and Matouschek (2008) and Rantakari (2008) as special cases, for which the receiver's maximum expected payoff when players have access to arbitrary, mediated communication protocols is attained in one-round of face-to-face, unmediated cheap talk. This result is based on the existence for these games of a communication equilibrium with an infinite number of partitions of the state space. We provide explicit expressions for the maximum expected payoff of the receiver, and illustrate its use by deriving new comparative statics of the quality of optimal communication. For instance, a shift in the underlying uncertainty that reduces expected conflict can worsen the quality of communication.
    Keywords: communication equilibrium; information transmission; mediation; one-shot cheap talk
    JEL: C72 D70 D83
    Date: 2014–07–31
  4. By: Chatterjee, Kalyan (Department of Economics, Pennsylvania State University); Mitra, Manipushpak (Economic Research Unit, Indian Statistical Institute, Kolkata, India); Mukherjee, Conan (Department of Economics, Lund University)
    Abstract: We address the issue of bidder ring formation in single and multi-unit Vickrey auctions. We address this issue in a bargaining game set up under the assumption that valuation of bidders is commonly known only amongst themselves. In the single unit case, we show that the equilibrium coalition structure can only be an order preserving r-ring, that includes the winner and the top (r-1) losers. In the multiple units case, we specify sufficient conditions for formation of an interesting class of equilibrium coalition structures, which we call single winner ring with free riding, where exactly one winner colludes with all the losers and generates maximum possible bidders' surplus, and, depending on the protocol, the remaining winners free ride either by staying alone or by colluding in pairs.
    Keywords: Bidding rings; Bargaining games; Coalition formation; Auctions
    JEL: C71 C72 C78 D44 L41
    Date: 2015–01–16
  5. By: Eberhard Feess; Christian Grund; Markus Walzl; Ansgar Wohlschlegel
    Abstract: We analyze mechanism choices of competing sellers with private valuations and show the existence of monotone pure strategy equilibria where sellers with higher reservation value choose mechanisms with a lower selling probability and a larger revenue in case of trade. As an application we investigate the choice between posted prices and auctions and demonstrate that sellers refuse to offer posted prices as long as (risk-neutral) buyers do not differ with respect to their transaction costs in both trade institutions. If some buyers have lower transaction costs when trading at a posted price, it is optimal for sellers to offer posted prices if and only if they have a sufficiently high reservation value. We develop an empirical strategy to estimate revenues of posted prices and auctions that takes selling probabilities explicitly into account, and confirm our theoretical predictions with data from the EURO 2008 European Football Championship.
    Keywords: Competing Sellers, Single-Crossing, Auctions, Fixed Prices
    JEL: D43 D44 D82 L13
    Date: 2015–01
  6. By: Ran Spiegler
    Abstract: I present a framework for analyzing decision makers with an imperfect understanding of their environment's correlation structure. The framework borrows the tool of "Bayesian networks", which is ubiquitous in statistics and artificial intelligence. In the model, a 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 random variables. His subjective belief filters the objective distribution through the graph via the factorization formula for Bayesian networks. This representation of the relation between objective and subjective distributions enables us to capture a variety of systematic departures from rational expectations, such as excessively coarse subjective models, reverse causality, missing variables, and various attribution errors. Optimal choices in this model is fundamentally an equilibrium notion, because the decision maker's own long-run behaviour may affect his perception (via his distorted beliefs) of the consequences of his own actions. Accordingly, I define a "personal equilibrium" notion of optimal choices. A few stylized macroeconomic illustrations of this framework are presented. In particular, I formalize the intuition that an incorrect causal interpretation of the debt-output correlation may lead to sub-optimal fiscal policy, and I translate Sargent's (1999) argument that a mis-specified Phillips curve can cause a central banker to implement above-optimal inflation.
    JEL: J1
    Date: 2014–07
  7. By: Herings P.J.J. (GSBE)
    Abstract: The paper considers a one-to-one matching with contracts model in the presence of price controls. This set-up contains two important streams in the matching literature, those with and those without monetary transfers, as special cases and allows for intermediate cases with some restrictions on the monetary transfers that are feasible. An adjustment process that ends with a stable outcome is presented, thereby proving the existence of stable outcomes. The process contains the deferred acceptance algorithm of Gale and Shapley 1962 and the approximate auction mechanism of Demange, Gale, and Sotomayor 1986 as special cases. The paper presents a notion of competitive equilibrium, called Drze equilibrium, for this class of models, an extension of the concept as developed by Drze 1975 for economies with divisible commodities subject to price controls. It is shown that Drze equilibrium allocations are equivalent to allocations induced by stable outcomes. One implication is the existence of Drze equilibria. Another implication is the equivalence of a competitive equilibrium concept and the concept of stable outcomes that is valid with and with- out monetary transfers as well as when monetary transfers are limited.
    Keywords: Cooperative Games; Bargaining Theory; Matching Theory; Rationing; Licensing; Exchange and Production Economies;
    JEL: C71 C78 D45 D51
    Date: 2015
  8. By: Oliver Compte (Paris School of Economics); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: There is a large repeated games literature illustrating how future interactions provide incentives for cooperation. Much of the earlier literature assumes public monitoring. Departures from public monitoring to private monitoring that incorporate differences in players’ observations may dramatically complicate coordination and the provision of incentives, with the consequence that equilibria with private monitoring often seem unrealistically complex or fragile. We set out a model in which players accomplish cooperation in an intuitively plausible fashion. Players process information via a mental system — a set of psychological states and a transition function between states depending on observations. Players restrict attention to a relatively small set of simple strategies, and consequently, might learn which perform well.
    Keywords: : repeated games, private monitoring, bounded rationality, cooperation
    JEL: D01 D70
    Date: 2010–12–01
  9. By: Valenciano Llobera, Federico; Olaizola Ortega, María Norma
    Abstract: We provide a model that bridges the gap between two benchmark models of strategic network formation: Jackson and Wolinsky' s model based on bilateral formation of links, and Bala and Goyal's two-way fl ow model, where links can be unilaterally formed. In the model introduced and studied here a link can be created unilaterally. When it is only supported by one of the two players the fl ow through the link suffers a certain decay, but when it is supported by both the fl ow runs without friction. When the decay in links supported by only one player is maximal (i.e. there is no flow) we have Jackson and Wolinsky 's connections model without decay, while when flow in such links is perfect we have Bala and Goyal' s two-way flow model. We study Nash, strict Nash and pairwise stability for the intermediate models. Efficiency and dynamics are also examined.
    Keywords: network formation, unilateral link-formation, bilateral link-formation, stability, efficiency, dynamics
    JEL: J00 D20 A14 C72
    Date: 2014–05–28
  10. By: Ron Peretz; Gilad Bavly
    Abstract: A decision maker observes the evolving state of the world while constantly trying to predict the next state given the history of past states. The ability to benefit from such predictions depends not only on the ability to recognize patters in history, but also on the range of actions available to the decision maker. We assume there are two possible states of the world. The decision maker is a gambler who has to bet a certain amount of money on the bits of an announced binary sequence of states. If he makes a correct prediction he wins his wager, otherwise he loses it. We compare the power of betting strategies (aka martingales) whose wagers take values in different sets of reals. A martingale whose wagers take values in a set A is called an A-martingale. A set of reals B anticipates a set A, if for every A-martingale there is a countable set of B-martingales, such that on every binary sequence on which the A- martingale gains an infinite amount at least one of the B-martingales gains an infinite amount, too. We show that for two important classes of pairs of sets A and B, B anticipates A if and only if the closure of B contains r A, for some positive r. One class is when A is bounded and B is bounded away from zero; the other class is when B is well ordered (has no left-accumulation points). Our results generalize several recent results in algorithmic randomness and answer a question posed by Chalcraft et al. (2012).
    Keywords: repeated games; gambling; algorithmic randomness; pseudo-randomness; predictability
    JEL: C72 C73
    Date: 2014
  11. By: Sandro Shelegia; Daniel Garcia
    Abstract: This paper studies observational learning in a consumer search environment. In our model, consumers observe the purchasing decision of a predecessor before deciding which rm to visit. We show that if consumers emulate their predecessor and initiate their search at the rm she purchased from, a social multiplier of demand induces a lower equilibrium price. Further, as the search cost increases, rms compete ercely to attract consumers and prices converge to the marginal cost. We show that the result can be extended to any number of rms, and the eect of emulation on prices is stronger as the number of rms increases. We also show that, as consumers observe more previous purchasing decisions, the downward pressure on prices grows to the degree that the pure strategy equilibrium may cease to exist. We then provide a rationale for emulation by introducing positive correlation in preferences across consumers. This correlation gives rise to free-riding which deters search, and as a result puts further downward pressure on prices for high search cost.
    JEL: D11 D83 L13
    Date: 2015–01
  12. By: Ricardo Alonso
    Abstract: This paper studies employer recruitment and selection of job applicants when productivity is match-specific. Job-seekers have private, noisy assessments of their match value and the firm performs noisy interviews. Job-seekers' willingness to undergo a costly hiring process will depend both on the wage paid and on the perceived likelihood of being hired, while a noisy interview leads the firm to consider the quality of the applicant pool when setting hiring standards. I characterize job-seekers' equilibrium application decision as well as the firm's equilibrium wage and hiring rule. I show that changes in the informativeness of job-seekers assessments, or changes in the informativeness of the firm's interview, affect the size and composition of the applicant pool, and can raise hiring costs when it dissuades applications. As a result, the firm may actually favor noisier interviews, or prefer to face applicants that are less certain of their person-job/organization fit.
    Keywords: hiring; recruitment; selection; employer search.
    JEL: D82 L23
    Date: 2014–05–05
  13. By: Tommaso Flaminio; Lluis Godo; Hykel Hosni
    Abstract: This paper sheds new light on the subtle relation between probability and logic by (i) providing a logical development of Bruno de Finetti's conception of events and (ii) suggesting that the subjective nature of de Finetti's interpretation of probability emerges in a clearer form against such a logical background. By making explicit the epistemic structure which underlies what we call Choice-based probability we show that whilst all rational degrees of belief must be probabilities, the converse doesn't hold: some probability values don't represent decision-relevant quantifications of uncertainty.
    Keywords: events; de Finetti's coherence criterion; informations frames; choice-based probability
    JEL: C02
    Date: 2014–09
  14. By: Moshe Haviv; Liron Ravner
    Abstract: We provide Game-theoretic analysis of the arrival process to a multi-serve r system with a limited queue buffer, which admits customers only during a finite time interval. A customer who arrives at a full system is blocked and do es not receive service. Customers can choose their arrival times with the goal of minimizing their probability of being blocked. We characterize the unique symmetric Nash equilibrium arrival distribution and present a method for computing it. This distribution is comprised of an atom at time zero, an interval with no arrivals (a gap), and a continuous distribution until the closing time. We further present a fluid approximation for the equilibrium behaviour when the population is large, where the fluid solution also admits an atom at zero, no gap, and a uniform distribution throughout the arrival interval. In doing so, we provide an approximation model for the equilibrium behaviour that do es not require a numerical solution for a set of differential equations, as is required in the discrete case. For the corresponding problem of social optimization we provide explicit analysis of some special cases and numerical analysis of the general model. An upper bound is established for the price of anarchy (PoA). The PoA is shown to b e not monotone with respect to population size.
    Date: 2014–12
  15. By: Ariel Zetlin-Jones (Carnegie Mellon University)
    Abstract: We analyze the optimal capital structure and investment strategy of banks and other financial institutions. We develop conditions under which banks optimally choose a fragile capital structure that is subject to runs. We show that when bank depositors have limited ability to commit to long-term lending arrangements, they strictly prefer to lend to banks using short-term debt rather than with long-term debt or equity. We argue that when there are multiple banks, the same limited commitment of depositors leads them to prefer a financial system in which banks pursue correlated, risky investments as opposed to one in which banks pursue independent, less risky investments. The optimal financial system features occasional crises in which all banks are subject to ex-post inefficient liquidations, and in this sense, financial crises are efficient.
    Date: 2014
  16. By: Albornoz-Crespo, Facundo; Cabrales, Antonio; Hauk, Esther
    Abstract: We study a model that integrates productive and socialization efforts with network choice and parental investments. We characterize the unique symmetric equilibrium of this game. We first show that individuals underinvest in productive and social effort, but that solving only the investment problem can exacerbate the misallocations due to network choice, to the point that it may generate an even lower social welfare if one of the networks is sufficiently disadvantaged. We also study the interaction of parental investment with network choice. We relate these equilibrium results with characteristics that we find in the data on economic co-authorship and field transmission between advisors and advisees.
    Keywords: cultural identity; immigrant sorting; network formation; parental involvement; peer effects
    JEL: I20 I28 J15 J24 J61
    Date: 2014–12
  17. By: William Fuchs; Luis Garicano; Luis Rayo
    Abstract: We study contractual arrangements that support an efficient use of time in a knowledge-intensive economy in which agents endogenously specialize in either production or consulting. The resulting market for advice is plagued by informational problems, since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess. We show that spot contracting is not efficient since lemons (in this case, self-employed producers with intermediate knowledge) cannot be appropriately excluded from the market. However, an ex-ante, firm-like contractual arrangement uniquely delivers the first best. This arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts. This simple characterization of the optimal ex-ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge-intensive sectors. Our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs.
    Keywords: Contracting; experts; professional service firms; partnership; venture capital
    JEL: D86 J33 J44 L22
    Date: 2014–10
  18. By: Dmitry A. Veselov (National Research University Higher School of Economics)
    Abstract: We propose a simple quality-ladder model with heterogeneous agents differing in their skills and wealth endowment to explain the persistence of barriers to entry in new democracies. In the model agents vote for a rate of redistribution and for the level of barriers to entry, which protect the incumbent firms from competition with new entrants. We show that even if a society democratizes, under certain conditions this leads only to the rise of redistribution, rather than to the elimination of barriers to entry. We show that this argument is particularly relevant for countries with a low level of human capital and high inequality in incomes and in skills.
    Keywords: Barriers to entry, majority voting, quality-ladders model, income inequality, skills inequality, persistence of economic institutions.
    JEL: O33 P16
    Date: 2015–01
  19. By: Szalay, Dezso; Yokeeswaran, Venuga
    Abstract: We study a model of managerial incentive problems where a manager chooses the first two moments of his firm's profit distribution - mean and volatility - along an efficient frontier. Assuming that managers differ with respect to their marginal cost of effort and their risk aversion we explore our model's comparative statics predictions in full detail. If managers' preference parameters are commonly known and associated, then a positive correlation between expected returns, volatility of profits, and incentives is the natural outcome. Allowing in addition for adverse selection with respect to the managers' preference parameters does not change the predicted correlation if the variation in observed contracts is not too large. Moreover, observed incentive schemes reflect exclusion of some manager types. Neglecting the endogeneity of risk in empirical studies biases estimates towards zero.
    Keywords: Managerial incentive problems; multidimensional heterogeneity; multidimensional screening
    JEL: D82 J33
    Date: 2014–12
  20. By: Christopher Phelan; Aldo Rustichini
    Abstract: Inherent in the definition of Pareto efficiency is the idea that, in dynamic environments, an individual is indexed by the history of events up to his birth (rather than, as usual, the date of birth). Here, we explore the implications of this natural formulation. The set of Pareto efficient allocations that is consistent with this view is potentially larger than those considered so far in the literature. We show that the set of allocations is strictly larger because we do not require individuals to have insurance motives of the Harsanyi-Rawls type regarding risks on their own type realization. We do, however, maintain the insurance motives of parents toward their children. Even in our more general framework, efficiency criteria impose substantial restrictions on the set of allocations. Interestingly, the restrictions are of a new nature. Our different, more natural view has some important policy implications. The first is that some policy criteria (for example, the progressive nature of taxes) cannot be defended on efficiency grounds, once the Harsanyi-Rawlsian insurance criterion is rejected as being normatively unsound. Second, we show that the condition of imposing no taxes of any kind, coupled with each agent owning his own production, results in a Pareto efficient allocation.
    JEL: D6 E24 H21
    Date: 2015–01
  21. By: Drugov, Mikhail
    Abstract: We study the design of promotions in an organization where agents belong to groups that advance their cause. Examples and applications include political groups, ethnicities, agents motivated by the work in the public sector and corruption. In an overlapping generations model, juniors compete for promotions. Seniors have two kinds of discretion: direct discretion which allows an immediate advancement of their cause and promotion discretion ("patronage") which allows a biasing of the promotion decision in favour of the juniors from their group. We consider two possible goals of the principal, maximizing juniors' efforts and affecting the steady-state composition of the senior level towards the preferred group, and show that patronage may be strictly positive in both of them. We also apply the second setting to the case of corruption.
    Keywords: bureaucracy; contest; corruption; motivated agents; patronage; promotion
    JEL: D73 H41 J45 J70
    Date: 2015–01

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