nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒04‒25
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Leniency Bias in Long-Term Workplace Relationships By Jan Tichem
  2. Don't demotivate, discriminate By Jurjen J.A. Kamphorst; Otto H. Swank
  3. Endogenous Effort Norms in Hierarchical Firms By Jan Tichem
  4. Sharing Information through Delegation and Collaboration By Otto H. Swank; Bauke Visser
  5. Sequential Auctions, Price Trends, and Risk Preferences By Audrey Hu; Liang Zou
  6. Task-specific Human Capital and Organizational Inertia By Josse Delfgaauw; Otto H. Swank
  7. Consumer Search and Double Marginalization By Maarten Janssen; Sandro Shelegia
  8. Costless Delay in Negotiations By P. Jean-Jacques Herings; Harold Houba
  9. Paid to quit By Robert Dur; Heiner Schmittdiel
  10. Biased Supervision By Josse Delfgaauw; Michiel Souverijn
  11. Attention Misallocation, Social Welfare and Policy Implications By Chen, Heng; Luo, Yulei; Pei, Guangyu
  12. Social coordination with locally observable types By Ennio Bilancini; Leonardo Boncinelli
  13. Weighted Temporal Utility By Anke Gerber; Kirsten I.M. Rohde
  14. Expected Utility and Catastrophic Risk By Masako Ikefuji; Roger Laeven; Jan Magnus; Chris Muris
  15. Loss Modification Incentives for Insurers under Expected Utility and Loss Aversion By Adriaan R. Soetevent; Liting Zhou
  16. Implementation with Transfers By Chen, Yi-Chun; Kunimoto, Takashi; Sun, Yifei
  17. Pareto Efficiency in the Jungle By Harold Houba; Roland Iwan Luttens; Hans-Peter Weikard
  18. Competitive Equilibrium with Asymmetric Information: an Existence Theorem for Numeraire Assets By Lionel de BOISDEFFRE
  19. Capacity Choice under Uncertainty with Product Differentiation By Christiaan Behrens; Mark Lijesen
  20. Multiplayer Bargaining with Delayed Agreement By Luís Carvalho
  21. Auctions with an asking price By Peyman Khezr; Flavio Menezes

  1. By: Jan Tichem (Erasmus University Rotterdam)
    Abstract: This paper studies how firms can efficiently incentivize supervisors to truthfully report employee performance. To this end, I develop a dynamic principal-supervisor-agent model. The supervisor is either selfish or altruistic towards the agent, which is observable to the agent but not to the principal. The analysis yields two key results. First, supervisor altruism sometimes provides a net incentive to report performance truthfully, rather than to bias evaluations upward. The intuition is that an altruistic supervisor values his job because of his good relationship with the agent, and puts his job at risk by overrating the agent's performance. Second, I show that by screening for one supervisor type, firms can incentivize the supervisor to truthfully report performance at the lowest possible costs. For this reason, screening may be optimal, even though it reduces the probability that vacancies are filled.
    Keywords: Altruism, incentives, leniency bias, screening, subjective performance evaluation, supervisor
    JEL: D86 J33 M52 M55
    Date: 2013–12–12
  2. By: Jurjen J.A. Kamphorst (Erasmus University Rotterdam); Otto H. Swank (Erasmus University Rotterdam)
    Abstract: This paper offers a new theory of discrimination in the workplace. We consider a manager who has to assign two tasks to two employees. The manager has superior information about the employees' abilities. We show that besides an equilibrium where the manager does not discriminate, equilibria exist where the manager discriminates in favor of the employee whom the employees expect to be favored. The manager, who has no taste for discrimination, discriminates in order to avoid demotivating the 'favorite'. We show that the non-discriminatory equilibrium is unstable. Yet the manager would prefer to commit not to discriminate.
    Keywords: discrimination, confidence management, Bayesian games
    JEL: D82 J71 M51 M54
    Date: 2014–01–31
  3. By: Jan Tichem (Erasmus University Rotterdam)
    Abstract: This paper studies how a three-layer hierarchical firm (principal-supervisor-agent) optimally creates effort norms for its employees. The key assumption is that effort norms are affected by the example of superiors. In equilibrium, norms are eroded as one moves down the hierarchy. The reason is that, because exerting effort is costly, the supervisor only partially complies with the principal's example, and thereby transmits a lower norm to the agent. The principal optimally responds to norm erosion by setting a higher example to begin with. In equilibrium, norm erosion gives rise to three inefficiencies: the principal works too hard, the supervisor's norm is too high, and the agent's norm is too low. To reduce these inefficiencies, firms should keep the extent of hierarchy to a minimum, promote employees with the strongest sensitivity to social norms, and distort man agerial spans of control.
    Keywords: delayering, hierarchy, leading by example, norms, promotion, span of control
    JEL: D23 M50 M51
    Date: 2013–12–12
  4. By: Otto H. Swank (Faculty of Economics, Erasmus Universiteit Rotterdam); Bauke Visser (Faculty of Economics, Erasmus Universiteit Rotterdam)
    Abstract: This article analyzes under which conditions a manager can motivate a junior worker by verbal communication, and explains why communication is often tied up with organizational choices as job enlargement and collaboration. Our model has two important features. First, the manager has more information about a junior's ability than the junior himself. Second, the junior's effort and ability are complements. We show that the manager has an incentive to exaggerate the junior's ability. We discuss two ways in which the manager can make credible statements about the junior's ability. First, the senior can delegate a task to the junior for which it is important that the junior has a correct perception of his ability. Information is shared through a costless signal. Second, the senior can spend more time on a junior she perceives as able than on a junior she perceives as less able. Information is then shared through a costly signal.
    Keywords: Communication; incentives; signalling; overconfidence; delegation; collaboration
    JEL: C70 D23 D83
  5. By: Audrey Hu (University of Amsterdam, the Netherlands); Liang Zou (University of Amsterdam, the Netherlands)
    Abstract: We analyze sequential Dutch and Vickrey auctions where risk averse, or risk preferring, bidders may have heterogeneous risk exposures. We derive and characterize a pure strategy equilibrium of both auctions for arbitrary number of identical objects. A sufficient, and to certain extent necessary, condition for this result is that bidders' marginal utilities are log-submodular in income and type. We then show that when bidders are risk averse (preferring), the equilibrium price sequences should be downward (upward) drifting, and in each period the conditional expected revenue is higher (lower) in the Dutch than in the Vickrey sequential auctions. In particular, the "declining price anomaly" is perfectly consistent with nonincreasing absolute risk aversion when bidders have exposures to background risk.
    Keywords: sequential auction, background risk, risk preferences, declining prices, log-submodularity
    JEL: D44 D82
    Date: 2014–10–20
  6. By: Josse Delfgaauw (Erasmus University Rotterdam); Otto H. Swank (Erasmus University Rotterdam)
    Abstract: Employees' incentive to invest in their task proficiency depends on the likelihood that they will execute the same tasks in the future. Changes in tasks can be warranted as a result of technological progress and changes in firm strategy as well as from fine-tuning job design and from monitoring individuals' performance. However, the possibility of a change in tasks reduces employees' incentive to invest in task-specific skills. We develop a simple two-period principal-agent model showing that some degree of inertia benefits the principal. We then analyze how organizations can optimally combine several policies to approach the optimal degree of inertia. In particular, we consider the optimal mixture of (abstaining from) exploration, managerial vision, organizational task-specific investments, and incentive pay. Our analysis yields testable predictions concerning the relations between these organizational policies.
    Keywords: Task-specific human capital, organizational inertia, time-inconsistency, exploration, exploitation
    JEL: D23 D83 D92
    Date: 2014–03–13
  7. By: Maarten Janssen; Sandro Shelegia
    Abstract: The well-known double marginalization problem understates the inefficiencies arising from vertical relations in consumer search markets where consumers are uninformed about the wholesale prices charged by manufacturers to retailers. Con- sumer search provides a monopoly manufacturer with an additional incentive to increase its price, worsening the double marginalization problem and lowering the manufacturer's prots. Nevertheless, manufacturers in more competitive wholesale markets may not have an incentive to reveal their prices to consumers. We show that retail prices decrease in search cost, and so both industry prots and consumer surplus increase in search cost.
    JEL: D40 D83 L13
    Date: 2014–12
  8. By: P. Jean-Jacques Herings (Maastricht University, the Netherlands); Harold Houba (VU University Amsterdam, the Netherlands)
    Abstract: We study strategic negotiation models featuring costless delay, general recognition procedures, endogenous voting orders, and finite sets of alternatives. Two examples show: 1. non-existence of stationary subgame-perfect equilibrium (SSPE). 2. the recursive equations and optimality conditions are necessary for SSPE but insufficient because these equations can be singular. Strategy profiles excluding perpetual disagreement guarantee non-singularity. The necessary and sufficient conditions for existence of stationary best responses additionally require either an equalizing condition or a minimality condition. Quasi SSPE only satisfy the recursive equations and optimality conditions. These always exist and are SSPE if either all equalizing conditions or all minimality conditions hold.
    Keywords: Bargaining, existence, one-stage-deviation principle, dynamic programming, recursive equations, Markov Decision Theory
    JEL: C72 C73 C78
    Date: 2015–01–22
  9. By: Robert Dur (Erasmus University Rotterdam); Heiner Schmittdiel (Erasmus University Rotterdam)
    Abstract: Inspired by a recent observation about an online retail company, this paper explains why a firm may find it optimal to offer an exit bonus to recent hires so as to induce self-selection. We study a double adverse selection problem, in which the principal can neither observe agents’ commitment to the job nor their intrinsic motivation. A steep wage-tenure profile deters uncommitted agents from applying. An exit bonus can stimulate that –among the committed agents– those who discovered that they are not intrinsically motivated for the job discontinue employment with the principal. Our key findings are that offering an exit bonus increases profits when the first adverse selection problem is sufficiently severe compared to the second and that the exit bonus needs to come as a surprise for the agents in order to function well.
    Keywords: intrinsic motivation, commitment, self-selection, wage compensation, exit bonus, transparency
    JEL: J31 J33 M52 M55
    Date: 2013–10–22
  10. By: Josse Delfgaauw (Erasmus University Rotterdam); Michiel Souverijn (Erasmus University Rotterdam, the Netherlands)
    Abstract: When verifiable performance measures are imperfect, organizations often resort to subjective performance pay. This may give supervisors the power to direct employees towards tasks that mainly benefit the supervisor rather than the organization. We cast a principal-supervisor-agent model in a multitask setting, where the supervisor has an intrinsic preference towards specific tasks. We show that subjective performance pay based on evaluation by a biased supervisor has the same distorting effect on the agent's effort allocation as incentive pay based on an incongruent performance measure. If the principal can combine incongruent performance measures with biased supervision, the distortion in the agent's efforts is mitigated, but cannot always be eliminated. We apply our results to the choice between specialist and generalist middle managers, where a trade-off between expertise and bias may arise.
    Keywords: subjective performance evaluation, middle managers, incentives, multitasking
    JEL: J24 M12 M52
    Date: 2014–08–25
  11. By: Chen, Heng; Luo, Yulei; Pei, Guangyu
    Abstract: We examine how agents allocate attention between private and public signals to reduce the uncertainty about observation noises when coordination is an important concern. In this setting, the attention allocation may not be monotone in endowed attention capacity. Agents may decrease their attention on or even ignore the more accurate signal when capacity increases. As a result, social welfare may decrease when they have more attention to process information. And it can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies.
    Keywords: Coordination game, social welfare, rational inattention
    JEL: D8 D81 D83 E5
    Date: 2015–04–22
  12. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: In this paper we study the typical dilemma of social coordination between a risk- dominant convention and a payoff-dominant convention. In particular, we consider a model where a population of agents play a coordination game over time, choosing both the action and the network of agents with whom to interact. The main novelty with respect to the existing literature is that: (i) agents come in two distinct types, (ii) the interaction with a di.erent type is costly, and (iii) an agent's type is unobservable prior to interaction. We show that when the cost of interacting with a different type is small with respect to the payo. of coordination, then the payoff-dominant convention is the only stochastically stable convention; instead, when the cost of interacting with a different type is large, the only stochastically stable conventions are those where all agents of one type play the payoff-dominant action and all agents of the other type play the risk-dominant action.
    Keywords: coordination, equilibrium selection, stochastic stability, learning, network formation
    JEL: C73 D83
    Date: 2014–12
  13. By: Anke Gerber (University of Hamburg, Germany); Kirsten I.M. Rohde (Erasmus University Rotterdam, the Netherlands)
    Abstract: We propose a utility representation for preferences over risky timed outcomes, the weighted temporal utility model. It separates subjective evaluations of outcomes from attitudes towards psychological distance induced by risks and delays. Subjective evaluations of outcomes may depend on the time of receipt. A natural special case of our model arises when decision makers evaluate an outcome according to the extra utility it generates on top of expected baseline consumption, which can be interpreted as the status quo. Thus, deviations from stationarity can be driven by expected changes in baseline consumption, and need not be irrational. Moreover, a decision maker with a weighted temporal utility function can have time-consistent yet non-stationary preferences or stationary yet time-inconsistent preferences. We provide a characterization of our model and propose a non-parametric approach to elicit a weighted temporal utility function.
    Keywords: Intertemporal choice, stationarity, time consistency
    JEL: D91 D81
    Date: 2013–10–14
  14. By: Masako Ikefuji (University of Southern Denmark, Denmark); Roger Laeven (University of Amsterdam, the Netherlands); Jan Magnus (VU University Amsterdam, the Netherlands); Chris Muris (Simon Fraser University, Canada)
    Abstract: An expected utility based cost-benefit analysis is in general fragile to its distributional assumptions. We derive necessary and sufficient conditions on the utility function of the expected utility model to avoid this. The conditions ensure that expected (marginal) utility remains finite also under heavy-tailed distributional assumptions. Our results are context-free and are relevant to many fields encountering catastrophic risk analysis, such as, perhaps most noticeably, insurance and risk management.
    Keywords: Expected utility, Catastrophe, Cost-benefit analysis, Risk management, Power utility, Exponential utility, Heavy tails
    JEL: D61 D81 G10 G20
    Date: 2014–10–14
  15. By: Adriaan R. Soetevent (University of Groningen, the Netherlands); Liting Zhou (University of Amsterdam, the Netherlands)
    Abstract: Given the possibility to modify the probability of a loss, will a profit-maximizing insurer engage in loss prevention or is it in his interest to increase the loss probability? This paper investigates this question. First, we calculate the expected profit maximizing loss probability within an expected utility framework. We then use Köszegi and Rabin's (2006, 2007) loss aversion model to answer the same question for the case where consumers have reference-dependent preferences. Largely independent of the adopted framework, we find that the optimal loss probability is sizable and for many commonly used parameterizations much closer to 1/2 than to 0. Previous studies have argued that granting insurers market power may incentivize them to engage in loss prevention activities, this to the benefit of consumers. Our results show that one should be cautious in doing so because there are conceivable instances where the insurer's interests in modifying the loss probability to against those of consumers.
    Keywords: loss modification, expected utility, reference-dependent preferences, insurance
    JEL: D11 D42 D81 L12
    Date: 2014–08–21
  16. By: Chen, Yi-Chun; Kunimoto, Takashi; Sun, Yifei
    Abstract: We say that a social choice rule is implementable with (small) transfers if one can design a mechanism whose set of equilibrium outcomes coincides with that specified by the rule but the mechanism allows for (small) ex post transfers among the players. We then show in private-value environments that any incentive compatible rule is implementable with small transfers. Therefore, our mechanism only needs small ex post transfers to make our implementation results completely free from the multiple equilibrium problem. In addition, our mechanism possesses the unique equilibrium that is robust to higher-order belief perturbations. We also identify a class of interdependent-value environments to which our results can be extended.
    Keywords: Full implementation, universal type space, robustness, transfers
    JEL: C72 D78 D82
    Date: 2015–03–06
  17. By: Harold Houba (VU University Amsterdam, the Netherlands); Roland Iwan Luttens (Amsterdam University College, the Netherlands); Hans-Peter Weikard (Wageningen University, the Netherlands)
    Abstract: We include initial holdings in the jungle economy of Piccione and Rubinstein (Economic Journal, 2007) in which the unique equilibrium satisfies lexicographic welfare maximization. When we relax assumptions on consumption sets and preferences slightly, equilibria other than lexicographic welfare maximizers can be jungle equilibria. This result is due to myopia. We introduce the concept of farsightedness and show that farsighted jungle equilibria coincide with lexicographic welfare maximization. However, we also find farsighted equilibria that are Pareto inefficient since stronger agents may withhold goods from weaker agents. Here, gift giving by stronger agents is needed to achieve Pareto efficiency. We argue that even trade has a role in the jungle. Our results add to understanding coercion and the subtle role of gift giving and trade in an economy purely based on po wer relations.
    Keywords: power, coercion, jungle economy, farsightedness, withholding
    JEL: D51 D61 P52
    Date: 2014–10–30
  18. By: Lionel de BOISDEFFRE
    Keywords: general equilibrium, asymmetric information, arbitrage, existence
    JEL: D52
    Date: 2015–04
  19. By: Christiaan Behrens (VU University Amsterdam); Mark Lijesen (VU University Amsterdam)
    Abstract: We explore the characteristics of a capacity-then-price game for a duopoly market with product differentiation and stochastic demand. The analysis shows that a minimum threshold value for the level of vertical product differentiation exists, relative to horizontal product differentiation, for which existence of a Nash equilibrium in pure strategies is guaranteed. We find that when the quality and cost differences between the firms exactly offset each other, demand uncertainty causes equilibrium outcomes in capacities to become asymmetric. Without demand uncertainty, only a symmetric equilibrium can be established. This difference between stochastic and deterministic demand is the main driver behind our finding that if the regulator ignores the stochastic nature of demand, regulation lowers welfare for a large range of parameters, that is for approximately 10 per cent of the plausible parameter space.
    Keywords: Price competition, Capacity choice, Demand uncertainty, Product differentiation, Price dispersion
    JEL: D43 L11 L13
    Date: 2012–10–26
  20. By: Luís Carvalho
    Abstract: The best known equilibrium strategies of multiplayer bargaining dene that the agreement is established at the rst moment. In this paper two new subgame perfect Nash equilibria strategies are proposed, one in which the agreement moment is delayed for T > 1 periods and one other in which the bargaining proposals proceed endlessly.
    Keywords: Multiplayer Bargaining
    JEL: C72 C78
    Date: 2015–04–20
  21. By: Peyman Khezr (School of Economics, The University of Queensland); Flavio Menezes (School of Economics, The University of Queensland)
    Abstract: This paper studies a sales mechanism, prevalent in housing markets, where the seller does not reveal or commit to a reserve price but instead publicly an- nounces an asking price. We show that the seller sets an asking price such that, in equilibrium, buyers of certain types would accept it with positive probability. We also show that this sales mechanism, with an optimally chosen asking price set above the seller’s reservation value, does better than any standard auction with a reserve price equal to the seller’s reservation value.
    Keywords: asking price,auctions
    JEL: D44 R3

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