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on Microeconomics |
| By: | Martimort, David; Stole, Lars |
| Abstract: | We study games in which multiple principals influence the choice of a privately-informed agent by offering action-contingent payments. We characterize the equilibrium allocation set as the maximizers of an endogenous aggregate virtual-surplus program. The aggregate maximand for every equilibrium includes an information-rent margin which captures the confluence of the principals’ rent-extraction motives. We illustrate the economic implications of this novel margin in two applications: a public goods game in which players incentivize a common public good supplier, and a lobbying game between conflicting interest groups who offer contributions to influence a common political decision-maker. |
| Keywords: | Menu auctions, influence games, common agency, screening contracts, public goods games, lobbying games |
| JEL: | D82 |
| Date: | 2015–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62388&r=mic |
| By: | Dino Gerardi; Lucas Maestri |
| Abstract: | We study dynamic contracting with adverse selection and limited commitment. A firm (the principal) and a worker (the agent) interact for potentially infinitely many periods. The worker is privately informed about his productivity and the firm can only commit to short-term contracts. The ratchet effect is in place since the firm has the incentive to change the terms of trade and offer more demanding contracts when it learns that the worker is highly productive. As the parties become arbitrarily patient, the equilibrium allocation takes one of two forms. If the prior probability of the worker being productive is low, the firm offers a pooling contract and no information is ever revealed. In contrast, if this prior probability is high, the firm fires the unproductive worker at the very beginning of the relationship. |
| Keywords: | Dynamic Contracting; Limited Commitment; Ratchet Effect. |
| JEL: | D80 D82 D86 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:401&r=mic |
| By: | Grenadier, Steven R. (Stanford University); Malenko, Andrey (MIT); Malenko, Nadya (Boston College) |
| Abstract: | We consider a problem in which an uninformed principal repeatedly solicits advice from an informed but biased agent on when to exercise an option. This problem is common in firms: examples include headquarters deciding when to shut down an underperforming division, drill an oil well, or launch a new product. We show that equilibria are different from those in the static "cheap talk" setting. When the agent has a bias for late exercise, full communication of information often occurs, but communication and option exercise are inefficiently delayed. In contrast, when the agent is biased towards early exercise, communication is partial, while exercise is either unbiased or delayed. Given the same absolute bias, the principal is better off when the agent has a delay bias. Next, we consider delegation as an alternative to centralized decision-making with communication. If the agent favors late exercise, delegation is always weakly inferior. In contrast, if the agent is biased towards early exercise, delegation is optimal if the bias is low. Thus, it is not optimal to delegate decisions with a late exercise bias, such as plant closures, but may be optimal to delegate decisions such as product launches. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3049&r=mic |
| By: | John K.-H. Quah (Department of Economics, University of Oxford); Koji Shirai (Institute of Economic Research, Kyoto University) |
| Abstract: | We carry out a revealed preference analysis of monotone comparative statics. We ask what restrictions on an agent's observed choice behavior are necessary and sufficient to rationalize the data with a preference guaranteeing that choices are always monotone with re- spect to a parameter. We extend our analysis to a game-theoretic setting where players' chosen actions, the strategy sets from which actions are chosen, and the parameters which may affect payoffs are observed. Variation in the data arises from changes to parameters and/or changes to the strategy sets. We show that an intuitive and easy-to-check property on the data set is necessary and sufficient for it to be consistent with the hypothesis that each observation is a pure strategy Nash equilibrium in a game with strategic complementarity. When a data set obeys this property, we show how to exploit this data to identify the set of possible Nash equilibria in a game outside the set of observations. |
| Keywords: | monotone comparative statics, single crossing dierences, interval dominance, supermodular games, lattices |
| JEL: | C6 C7 D7 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:914&r=mic |
| By: | Kiho Yoon (Department of Economics, Korea University, Seoul, Republic of Korea) |
| Abstract: | We modify the dynamic pivot mechanism of Bergemann and VAalimAaki (Econometrica, 2010) in such a way that lump-sum fees are collected from the players. We show that the modi?ed mechanism satis?es ex-ante budget balance as well as ex-post e¡¾ciency, periodic ex-post incentive compatibility, and periodic ex-post individual rationality, as long as the Markov chain representing the evolution of players' private information is irreducible and aperiodic and players are su¡¾ciently patient. We also show that the diverse preference assumption of Bergemann and VAalimAaki may preclude budget balance. |
| Keywords: | The dynamic pivot mechanism, dynamic mechanism design, budget balance, VCG mechanism, bilateral bargaining |
| JEL: | C73 D82 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:1501&r=mic |
| By: | Ribeiro, Vitor |
| Abstract: | The paper studies indirect network effects in a market composed by two incompatible intermediaries that choose price (short-term issue) in addition to location (long-term issue). The paper first shows that (i) when the network externality is sufficiently weak, only maximum differentiation prevails, (ii) the location equilibrium can be asymmetric for an intermediate level of the network externality, given that the first entrant locates at the city centre while the follower chooses an extreme (niche) positional location and (iii) tipping occurs favouring the leader in the location choice when the intensity of the network externality is sufficiently strong. Moreover, the paper concludes that the likelihood of an asymmetric location equilibrium is higher when there is no mismatch between the product space occupied by consumers and intermediaries. Finally, the author concludes that a penetration pricing strategy conducted by a third intermediary is more successful when the pre-entry condition is not the tipping equilibrium location. |
| Keywords: | simple network effect,unconstrained spatial competition,location leadership |
| JEL: | D43 L13 R12 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201511&r=mic |
| By: | Anderson, Simon P; Baik, Alicia; Larson, Nathan |
| Abstract: | We study personalized price competition with costly advertising among n quality-cost differentiated firms. Strategies involve mixing over both prices and whether to advertise. In equilibrium, only the top two firms advertise, earning “Bertrand-like" profits. Welfare losses initially rise then fall with the ad cost, with losses due to excessive advertising and sales by the “wrong " firm. When firms are symmetric, the symmetric equilibrium yields perverse comparative statics and is unstable. Our key results apply when demand is elastic, when ad costs are heterogeneous, and with noise in consumer tastes. |
| Keywords: | Bertrand equilibrium; consumer targeting; mixed strategy equilibrium; price advertising; price dispersion |
| JEL: | D43 L13 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10464&r=mic |
| By: | Ryan Chahrour (Boston College); Gaetano Gaballo (Banque de France, Monetary Policy Division) |
| Abstract: | We show that non-trivial aggregate fluctuations may originate with vanishingly- small common shocks to either information or fundamentals. These "sentiment" fluctuations can be driven by self-fulfilling variation in either first-order beliefs (as in Benhabib et al., 2015) or higher-order beliefs (as in Angeletos and La'O, 2013), due to an endogenous signal structure. We analyze out-of-equilibrium best-response functions in the underlying coordination game to study whether sentiment equilibria are stable outcomes of a convergent process. We nd that limiting sentiment equilibria are generally unattainable under both higher-order belief and adaptive learning dynamics, whereas equilibria without sentiment shocks show strong stability properties. Away from the limit case, however, multiple noisy rational expectations equilibria may be stable. |
| Keywords: | imperfect information, animal spirits, expectational coordination |
| JEL: | D82 D83 E3 |
| Date: | 2015–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:873&r=mic |
| By: | Nicola Pavoni (Bocconi University); Christopher Sleet (Carnegie Mellon University); Matthias Messner (Bocconi University) |
| Abstract: | We bring together the theories of duality and dynamic programming. We show that the dual of a separable dynamic optimization problem can be recursively decomposed. We provide a dual version of the principle of optimality and give conditions under which the dual Bellman operator is a contraction with the optimal dual value function its unique fixed point. We relate primal and dual problems, address computational issues and give examples. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1267&r=mic |
| By: | Chambers, Christopher P. (University of CA, San Diego); Lambert, Nicolas S. (Stanford University) |
| Abstract: | We answer the following question: At t = 1, an expert has (probabilistic) information about a random outcome X. In addition, the expert will obtain further information about X as time passes, up to some time t = T + 1 at which X will be publicly revealed. (How) Can a protocol be devised that induces the expert, as a strict best response, to reveal at the outset his prior assessment of both X and the information flows he anticipates and, subsequently, what information he privately receives? (The protocol can provide the expert with payoffs that depend only on the realization of X, as well as any decisions he may take.) We show that this can be done with the following sort of protocol: At the penultimate time t = T, the expert chooses a payoff function from a menu of such functions, where the menu available to him was chosen by him at time t = T - 1 from a menu of such menus, and so forth. We show that any protocol that affirmatively answers our question can be approximated by a protocol of the form described. We show how these results can be extended from discrete time to continuous time problems of this sort. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3036&r=mic |
| By: | Vanasco, Victoria (Stanford University); Asriyan, Vladimir (?) |
| Abstract: | We construct a dynamic model of financial intermediation in which changes in the information held by financial intermediaries generate asymmetric credit cycles as the ones documented by Reinhart and Reinhart (2010). We model financial intermediaries as "expert" agents who have a unique ability to acquire information about firm fundamentals. While the level of "expertize" in the economy grows in tandem with information that the "experts" possess, the gains from intermediation are hindered by informational asymmetries. We find the optimal financial contracts and show that the economy inherits not only the dynamic nature of information flow, but also the interaction of information with the contractual setting. We introduce a cyclical component to information by supposing that the fundamentals about which experts acquire information are stochastic. While persistence of fundamentals is essential for information to be valuable, their randomness acts as an opposing force and diminishes the value of expert learning. Our setting then features economic fluctuations due to waves of "confidence" in the intermediaries' ability to allocate funds profitably. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3235&r=mic |
| By: | Vanasco, Victoria (Stanford University) |
| Abstract: | This paper presents a model of securitization that highlights the link between information acquisition at the loan screening stage and liquidity in markets where securities backed by loan cashflows are sold. While information is beneficial ex-ante when used to screen loans, it becomes detrimental ex-post because it introduces a problem of adverse selection. The model matches key features of the securitization practice, such as the tranching of loan cashflows, and it predicts that when gains from securitization are 'sufficiently' large, loan screening is inefficiently low. There are two channels that drive this inefficiency. First, when gains from trade are large, a loan issuer is tempted ex-post to sell a large portion of its cashflows, and lower retention reduces incentives to screen loans. Second, the presence of adverse selection in secondary markets creates informational rents for issuers holding low quality loans, reducing the value of loan screening. This suggests that incentives for loan screening not only depend on the portion of loans retained by issuers, but also on how the market prices different securities. Turning to financial regulation, I characterize the optimal mechanism and show that it can be implemented with a simple tax scheme. This paper, therefore, contributes to the recent debate on how to regulate securitization. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3248&r=mic |
| By: | Atabati, Omid; Farzad, Babak |
| Abstract: | We study the dynamics of a game-theoretic network formation model that yields large-scale small-world networks. So far, mostly stochastic frameworks have been utilized to explain the emergence of these networks. On the other hand, it is natural to seek for game-theoretic network formation models in which links are formed due to strategic behaviors of individuals, rather than based on probabilities. Inspired by Even-Dar and Kearns' model [8], we consider a more realistic framework in which the cost of establishing each link is dynamically determined during the course of the game. Moreover, players are allowed to put transfer payments on the formation and maintenance of links. Also, they must pay a maintenance cost to sustain their direct links during the game. We show that there is a small diameter of at most 4 in the general set of equilibrium networks in our model. We achieved an economic mechanism and its dynamic process for individuals which firstly; unlike the earlier model, the outcomes of players' interactions or the equilibrium networks are guaranteed to exist. Furthermore, these networks coincide with the outcome of pairwise Nash equilibrium in network formation. Secondly; it generates large-scale networks that have a rational and strategic microfoundation and demonstrate the main characterization of small degree of separation in real-life social networks. Furthermore, we provide a network formation simulation that generates small-world networks. |
| Keywords: | network formation; linking game with transfer payments; pairwise stability; pairwise Nash equilibrium; small-world phenomenon |
| JEL: | C79 D85 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62529&r=mic |
| By: | F. Delbono; L. Lambertini |
| Abstract: | Within a simple model of homogeneous oligopoly, we show that the traditional ranking between Bertrand and Cournot equilibria may be reversed. For price setting entails a continuum of price equilibria under convex variable costs, departure from marginal cost pricing may be observed. As a consequence, Bertrand-Nash equilibrium profi ts (welfare) may be higher (lower) than Cournot-Nash ones. The reversal of the standard rankings occurs when pricing strategies mimic collusive behaviour. |
| JEL: | D43 L13 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp994&r=mic |
| By: | DeMarzo, Peter M. (Stanford University); Livdan, Dmitry (University of CA, Berkeley); Tchistyi, Alexei (University of CA, Berkeley) |
| Abstract: | We consider optimal incentive contracts when managers can, in addition to shirking or diverting funds, increase short term profits by putting the firm at risk of a low probability "disaster." To avoid such risk-taking, investors must cede additional rents to the manager. In a dynamic context, however, because managerial rents must be reduced following poor performance to prevent shirking, poorly performing managers will take on disaster risk even under an optimal contract. This risk taking can be mitigated if disaster states can be identified ex-post by paying the manager a large bonus if the firm survives. But even in this case, if performance is sufficiently weak the manager will forfeit eligibility for a bonus, and again take on disaster risk. When effort costs are convex, reductions in effort incentives are used to limit risk taking, with a jump to high powered incentives in the gambling region. Our model can explain why suboptimal risk taking can emerge even when investors are fully rational and managers are compensated optimally. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3149&r=mic |
| By: | Besancenot, Damien (Centre d'Economie de l'Université Paris Nord (CEPN)); Vranceanu, Radu (ESSEC Business School and THEMA) |
| Abstract: | This paper analyzes the production of fundamental research as a coordination game played by scholars. In the model, scholars decide to adopt a new idea only if they believe that a critical mass of peers is following a similar research strategy. If researchers observe only a noisy idiosyncratic signal of the true scientiÖc potential of a new idea, we show that the game presents a single threshold equilibrium. In this environment, fundamental research proceeds with large structural breaks followed by long periods of time in which new ideas are unsuccessful. The likelihood of a new idea emerging depends on various parameters, including the rewards of working in the old paradigm, the critical mass of researchers required to create a new school of thought and scholarsí ability to properly assess the scientific value of new ideas. |
| Keywords: | Economics of science; Scientific discovery; Strategic complementarity; Strategic uncertainty; Global games |
| JEL: | A14 C72 O31 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-15003&r=mic |
| By: | Martin Szydlowski (University of Minnesota) |
| Abstract: | I study the optimal choice of investment projects in a continuous-time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project selection which depends on both a project's NPV as well as its risk-return ratio. The cutoff shifts dynamically depending on the past history of shocks, the current firm size, and the agent's continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice depends more on the NPV and less on the risk-return ratio. The optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection criterion resembles a hurdle rate. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1240&r=mic |