nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒02‒16
23 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Recency, Consistent Learning, and Nash Equilibrium By Fudenberg, Drew; Levine, David K.
  2. Games with Strategic Complements and Substitutes By Andrew Monaco; Tarun Sabarwal
  3. Incomplete Preferences and Confidence By Hill , Brian
  4. Sequential screening with privately known characteristics of cost distribution By Daniel Danau; Annalisa Vinella
  5. Necessary and Sufficient Conditions for a Solution of the Bellman Equation to be the Value Function: A General Principle. By Takashi Kamihigashi; Cuong Le Van
  6. Revealed preferences over risk and uncertainty By John Quah; Matthew Polisson; Ludovic Renou
  7. Costly information acquisition and the temporal resolution of uncertainty By Daniele Pennesi
  8. Collusion, Randomization, and Leadership in Groups By Rohan Dutta; David K Levine; Salvatore Modica
  9. Second-Degree Price Discrimination on Two-Sided Markets By Böhme, Enrico
  10. On the Incentive Effect of Job Rotation By Katolnik, Svetlana; Hakenes, Hendrik
  11. Judgment Aggregation Theory Can Entail New Social Choice Results By Mongin , Philippe; Maniquet , Francois
  12. Rent-seeking games and the all-pay auction By Christian Ewerhart
  13. Loss Aversion and Inefficient Renegotiation By Schmidt, Klaus; Herweg, Fabian
  14. Optimal Mechanism Design: Type-Independent Preference Orderings By Hitoshi Matsushima
  15. Incomplete Contracting, Renegotiation, and Expectation-Based Loss Aversion By Herweg, Fabian; Karle, Heiko; Müller, Daniel
  16. Financial Contracting with Tax Evaders By Meyer-Brauns, Philipp
  17. From fixed to state-dependent duration in public-private contracts partnerships By Daniel Danau; Annalisa Vinella
  18. The Bargaining Correspondence: When Edgeworth Meets Nash By Ching-jen Sun
  19. Equilibrium Price Dispersion Across and Within Stores By Menzio, Guido; Trachter, Nicholas
  20. Equilibrium Price Dispersion with Sequential Search By Nicholas Trachter; Guido Menzio
  21. Reputational Concerns and Price Comovements By Maryam Sami; Sandro Brusco
  22. Ex-post Optimal Knapsack Procurement By Jarman, Felix; Meisner, Vincent
  23. Characterizing minimal impartial rules for awarding prizes By Shohei Tamura

  1. By: Fudenberg, Drew; Levine, David K.
    Abstract: We examine the long-term implication of two models of learning with recency bias: recursive weights and limited memory. We show that both models generate similar beliefs and that both have a weighted universal consistency property. Using the limited-memory model we produce learning procedures that both are weighted universally consistent and converge with probability one to strict Nash equilibrium.
    Date: 2014
  2. By: Andrew Monaco (Department of Economics, University of Puget Sound); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: This paper studies games with both strategic substitutes and strategic complements, and more generally, games with strategic heterogeneity (GSH). Such games may behave differently from either games with strategic complements or games with strategic sub- stitutes. Under mild assumptions (on one or two players only), the equilibrium set in a GSH is totally unordered (no two equilibria are comparable in the standard product order). Moreover, under mild assumptions (on one player only), parameterized GSH do not allow decreasing equilibrium selections. In general, this cannot be strengthened to conclude increasing selections. Monotone comparative statics results are presented for games in which some players exhibit strategic substitutes and others exhibit strategic complements. For two-player games with linearly ordered strategy spaces, there is a char- acterization. More generally, there are sufficient conditions. The conditions apply only to players exhibiting strategic substitutes; no additional conditions are needed for players with strategic complements. Several examples highlight the results.
    Keywords: Lattice games, strategic complements, strategic substitutes, strategic hetero- geneity, equilibrium set, monotone comparative statics
    JEL: C70 C72
    Date: 2015–01
  3. By: Hill , Brian
    Abstract: A theory of incomplete preferences under uncertainty is proposed, according to which a decision maker’s preferences are indeterminate if and only if her confidence in the relevant beliefs does not match up to the stakes involved in the decision. The author uses the model of confidence in beliefs introduced in Hill (2013), and axiomatise a class of models, differing from each other in the appropriate notion of stakes. Comparative statics analysis can distinguish the decision maker’s confidence from her attitude to choosing in the absence of confidence. The model naturally suggests two possible strategies for completing preferences, and hence for choosing in the presence of incompleteness. One strategy respects confidence – it relies only on beliefs in which the decision maker has sufficient confidence given the stakes – whereas the other goes on hunches – it relies on all beliefs, no matter how little confidence the decision maker has in them. Axiomatic characterizations are given for each of the strategies. Finally, the author considers the consequences of the model in markets, where indeterminacy of preference translates into refusal to trade. The incorporation of confidence adds an extra friction, beyond the standard implications of non-expected utility models for Pareto optima.
    Keywords: Incomplete preferences; confidence; multiple priors; choice under incomplete preferences; absence of trade
    JEL: D01 D53 D81
    Date: 2014–07–31
  4. By: Daniel Danau (CREM UMR CNRS 6211, Université de Caen Basse-Normandie, Normandie Université, France); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy)
    Abstract: We consider a sequential screening problem where, in the contracting stage, the agent has private information on both the expected value and the spread of the unit cost of production. As the principals marginal surplus function becomes less concave / more convex in consumption units, information rents and quantity distortions in the optimal contract reect progressively stronger concerns with the agent being eager to misrepresent the spread rather than the expected value. As long as marginal surplus is not very convex, relevant incentives to lie on each of the two information dimensions taken separately go in the same direction as in sequential screening problems where only the expected value, or only the spread, is privately known. Otherwise, unusual incentives come to matter. None of the contractual solutions, which are found for di¤erent principals preferences, reduces to familiar sequential screening mechanisms (Riordan and Sappington, 1987; Courty and Li, 2000). The solution is reminiscent of a multidimensional screening mechanism (Armstrong and Rochet, 1999) only if marginal surplus is sufficiently Convex.
    Keywords: Sequential screening; multidimensional screening; expected cost; spread; marginal surplus function
    JEL: D82
    Date: 2015–02
  5. By: Takashi Kamihigashi (RIEB - Kobe University); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG Business School and VCREME)
    Abstract: In this paper, we give Necessary and Sufficient Conditions for a Solution of the Belman Equation to be the Value Function. This result is a general principle. It requires no structure beyond the common framework of discrete-time stationary optimization problems with time-additive returns. In particular, the state space X is an arbitrary set.
    Keywords: Dynamic programming, Bellman equation, value function, fixed point.
    JEL: C61
    Date: 2015–01
  6. By: John Quah; Matthew Polisson; Ludovic Renou
    Abstract: Consider a finite data set where each observation consists of a bunde of contingent consumption chosen by an agent from a constraint set of such bundles.  We develop a general procedure for testing the consistency of this data set with a broad class of models of choice under risk and under uncertainty.  Unlike previous work, we do not require that the agent has a convex preference, so we allow for risk loving and elation seeking behavior.  Our procedure can also be extended to calculate the magnitude of violations from a particular model of choice, using an index first suggested by Afriat (1972, 1973).  We then apply this index to evaluate different models (including expected utility and disappointment aversion) in the data collected by Choi et al. (2007).  We show that more than half of all subjects exhibiting choice behavior consistent with utility maximization are also consistent with models of expected utility and disappointment aversion.
    Keywords: expected utility, rank dependent utility, maxmin expected utility, variational preferences, generalized axiom of revealed preference
    JEL: C14 C60 D11 D12 D81
    Date: 2015–02–05
  7. By: Daniele Pennesi (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper studies the choice of an individual who acquires information before choosing an action froma set of actions,whose consequences depend on the realization of a state of nature. Information processing can be costly, for example, due to limited attention. We show that the preference of the individual over sets of actions, is completely characterized by a preference for early resolution of uncertainty who becomes indifference when facing degenerate choices. When information acquisition is no longer part of the decision process, the individual is indifferent to the timing of resolution of uncertainty and she behaves according to the subjective learning model of Dillenberger et al. (2014).
    Keywords: Costly Information acquisition, Menu Choice, Rational Inattention, Timing of Resolution of Uncertainty
    JEL: D01 D9 D8
    Date: 2015
  8. By: Rohan Dutta; David K Levine; Salvatore Modica
    Date: 2015–01–25
  9. By: Böhme, Enrico
    Abstract: The paper provides an analysis of the second-degree price discrimination problem on a monopolistic two-sided market. In a simple framework with two distinct types of agents on market side 1, we show that under incomplete information the extent of platform access for high-demand agents is strictly reduced below the benchmark level with complete information. In addition, the paper finds that it is feasible in the monopoly optimum that the bundle for low-demand agents is more expensive than the one for high-demand agents if the extent of interaction with agents from the opposite market side is assumed to be bundle-specific.
    JEL: D42 D82 L12
    Date: 2014
  10. By: Katolnik, Svetlana; Hakenes, Hendrik
    Abstract: The longer an agent is employed in a job, the more the principal will have learned about his ability through the history of performance. With implicit incentives, influence perceptions and effort incentives decrease over time. Rotating agents to a different job deletes learning effects about ability, creating fresh impetus for effort. However, job rotation also reduces the time horizon, and thus reduces rents from working and also incentives. In this trade-off, we derive conditions for the desirability of job rotation and show how in the presence of career concerns job rotation may emerge endogenously. Finally, our model allows for more general comments on the optimal rotation frequency as well as the preferred organizational design of a firm.
    JEL: D83 J24 L23
    Date: 2014
  11. By: Mongin , Philippe; Maniquet , Francois
    Abstract: Judgment (or logical) aggregation theory is logically more powerful than social choice theory and has been put to use to recover some classic results of this field. Whether it could also enrich it with genuinely new results is still controversial. To support a positive answer, the authors prove a social choice theorem by using the advanced nonbinary form of judgment aggregation theory developed by Dokow and Holzman (2010c). This application involves aggregating classifications (specifically assignments) instead of preferences, and this focus justifies shifting away from the binary framework of standard judgement aggregation theory to a more general one.
    Keywords: Social choice; Judgment aggregation; Logical aggregation; Aggregation of classifications; Assignments; Nonbinary evaluations
    JEL: C65 D71
    Date: 2014–10–28
  12. By: Christian Ewerhart
    Abstract: This paper considers rent-seeking games in which a small percentage change in a player's bid has a large percentage impact on her odds of winning, i.e., on the ratio of her respective probabilities of winning and losing. An example is the Tullock contest with a high R. The analysis provides a fairly complete characterization of the equilibrium set. In particular, for "sufficiently generic" valuations, any equilibrium of the rent-seeking game is shown to be both payoff- and revenue-equivalent to the first-price all-pay auction. For general valuations, the analysis establishes a robustness property of the all-pay auction.
    Keywords: Rent-seeking games, mixed-strategy Nash equilibrium, robustness of the all-pay auction, Tullock contest
    JEL: C72 D45 D72 L12
    Date: 2015–01
  13. By: Schmidt, Klaus; Herweg, Fabian
    Abstract: We propose a theory of inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegoti- ated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversion makes the renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of long-term contracts. First, it explains why parties often abstain from writing a beneficial long-term contract or why some contracts specify transactions that are never ex post efficient. Second, it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship-specific investments rather than writing a specific performance contract. Third, it shows that employment contracts can be strictly optimal even if parties are free to rene- gotiate.
    JEL: C78 D03 D86
    Date: 2014
  14. By: Hitoshi Matsushima (The University of Tokyo)
    Abstract: We investigate revenue maximization in general allocation problems with incomplete information, where we assume quasi-linearity, private values, independent type distributions, and single-dimensionality of type spaces. We require a mechanism to satisfy strategy-proofness and ex-post individual rationality. We assume that each player has a type-independent preference ordering over deterministic allocations. We show that the Myerson’s technique to solve the incentive-constrained revenue maximization problem in single-unit auctions can be applied to general allocation problems, where the incentive-constrained revenue maximization problem can be reduced to the simple maximization problem of the sum of players’ marginal revenues without imposing any incentive constraint.
    Date: 2015–02
  15. By: Herweg, Fabian; Karle, Heiko; Müller, Daniel
    Abstract: We consider a simple trading relationship between an expectation-based loss-averse buyer and profit-maximizing sellers. When writing a long-term contract the parties have to rely on renegotiations in order to ensure materially efficient trade ex post. The type of the concluded long-term contract affects the buyer's expectations regarding the outcome of renegotiation. If the buyer expects renegotiation always to take place, the parties are always able to implement the materially efficient good ex post. It can be optimal for the buyer, however, to expect that renegotiation does not take place. In this case, a good of too high quality or too low quality is traded ex post. Based on the buyer's expectation management, our theory provides a rationale for ``employment contracts'' in the absence of non-contractible investments. Moreover, in an extension with non-contractible investments, we show that loss aversion can reduce the hold-up problem.
    JEL: C78 D82 D03
    Date: 2014
  16. By: Meyer-Brauns, Philipp
    Abstract: This paper derives the optimal financial contract when a borrowing entrepreneur can evade taxes in a model of costly state verification. In contrast to previous literature on costly state verification and financial contracting, we find that standard debt contracts are not optimal when tax evasion is possible. Instead, the optimal contract is debt-like only for very low and very high profit realizations, and features a constant repayment and verification of returns in an intermediate range. This occurs because the entrepreneur has to be given a positive rent even under verification in order to not abuse her limited liability protection for excessive tax evasion activities.
    JEL: G30 H26 D82
    Date: 2014
  17. By: Daniel Danau (University of Caen Basse-Normandie, CREM CNRS UMR 6211, France); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy)
    Abstract: A government delegates a build-operate-transfer project to a private fi…rm. At the contracting stage, the operating cost is unknown. The fi…rm can increase the likelihood of facing a low cost (the good state), rather than a high cost (the bad state), by exerting costly e¤ort when building the infrastructure. Once this is in place, the …firm learns the true cost and begins to operate. If some partner reneges on the contract thereafter, the court of justice has a limited ability to enforce penalties. Break-up of the partnership occasions a replacement cost for the government that is higher the earlier the contract is terminated. We show that the contract is self-enforcing, entailing no distortions away from e¢ ciency, only if the …firm is instructed to invest both own and borrowed funds in the project, and the duration of the contract is set longer in the good state than in the bad state. The …firms investment should not be massive. The debt payment to the lender, which ultimately lies on the government, should be conditioned on the …firm not defaulting on the project. The result that the contract should have a longer duration in the good state is at odds with the prescription of the literature on "exible-term" contracts, which recommends a longer duration when the operating conditions are unfavourable.
    Keywords: Public-private partnerships; state-dependent duration; …fixed-term contract;limited enforcement; renegotiation; break-up
    JEL: D82 H57 H81
    Date: 2015–01
  18. By: Ching-jen Sun
    Abstract: A new, more fundamental approach is proposed to the classical bargaining problem. The give-and-take feature in the negotiation process is explicitly modelled under the new framework. A compromise set consists of all allocations a bargainer is willing to accept as agreement. We focus on the relationship between the rationality principles (arguments) adopted by bargainers in making mutual concessions and the formation of compromise sets. The bargaining correspondence is then defined as the intersection of bargainers’ compromise sets. We study the non-emptyness, symmetry, efficiency and single-valuedness of the bargaining correspondence, and establish its connection to the Nash solution. Our framework provides the first rational foundation to Nash’s axiomatic approach, and hence bridges the “Edgeworth-Nash gap”.
    Keywords: Bargaining Correspondence, Compromise, Edgeworth-Nash Gap, Nash Solution
    JEL: C78 D74
    Date: 2015–02–05
  19. By: Menzio, Guido (University of Pennsylvania); Trachter, Nicholas (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 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.
    JEL: D43
    Date: 2015–01–15
  20. By: Nicholas Trachter (Federal Reserve Bank of Richmond); Guido Menzio (University of Pennsylvania)
    Abstract: We propose a novel theory of equilibrium price dispersion in product markets with search frictions. As in Diamond (1971), buyers search for sellers sequentially. In contrast to Diamond (1971), buyers do not meet all sellers with the same probability. Specifically, a fraction of the buyers’ meetings leads to one particular large seller, while the remaining fraction of the meetings leads to one of a continuum of small sellers. We prove that the unique equilibrium of this model is such that sellers post a non-degenerate distribution of prices and buyers capture a positive fraction of the gains from trade. The fraction of gains from trade accruing to the buyers is hump-shaped with respect to the market power of the large seller. However, for any degree of market power of the large seller, the fraction of gains from trade accruing to the buyers converges to one when search frictions vanish, and converges to zero when search frictions become arbitrarily large.
    Date: 2014
  21. By: Maryam Sami; Sandro Brusco
    Abstract: We analyze the rational expectation equilibria of a delegated port- folio management model in which two risky assets have completely independent returns and liquidity shocks. Some managers have per- fect information on the assets' returns while others are uninformed and try to infer information from the prices. We show that, as long as some reasonable assumptions on the nature of the equilibrium are imposed, in a rational expectations equilibrium there is always a set of realizations of the shocks such that the returns are not revealed. In this region the prices of the two assets exhibit a strong form of comove- ment, as they must be identical. This occurs despite the fact that the two assets have different ex ante probabilities of repayment.
    Keywords: Delegated Portfolio, Comovement.
    JEL: G11 G12
    Date: 2014
  22. By: Jarman, Felix; Meisner, Vincent
    Abstract: We consider a budget-constrained mechanism designer who wants to select an optimal subset of projects to maximize her utility. Project costs are private information and the value the designer derives from their provision may vary. In this allocation problem the choice of projects - both which and how many - is endogenously determined by the mechanism. The designer faces hard ex-post constraints: The participation and budget constraint must hold for each possible outcome while the mechanism must be implementable in dominant strategies. We derive the class of optimal mechanisms that are characterized by cutoff functions. These cutoff functions exhibit properties that allow an implementation through a descending clock auction. Only in the case of symmetric projects price clocks descend synchronously such that always the cheapest projects are executed. However, the asymmetric case, where values or costs are asymmetrically distributed, features a novel tradeoff between quantity and quality. Interestingly, this tradeoff mitigates the distortion due to the informational asymmetry compared to environments where quantity is exogenous.
    Keywords: Mechanism Design , Knapsack , Budget, Procurement , Auction
    JEL: D02 D44 D45 D87 H57
    Date: 2015
  23. By: Shohei Tamura
    Abstract: We study the problem of choosing prize winners from among a group of experts when each expert nominates another expert for the prize. A nomination rule determines the set of winners on the basis of the profile of nominations; the rule is impartial if one's nomination never influences one's own chance of winning the prize. In this paper, we consider impartial, anonymous, symmetric, and monotonic nomination rules and characterize the set of all minimal such ones. We show that the set consists of exactly one nomination rule: a natural variant of the plurality correspondence called plurality with runners-up.
    Date: 2015–01

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.