nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒05‒22
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Games with Money and Status: How Bes to Incentivize Work By Pradeep Dubey; John Geanakoplos
  2. The Role of Heterogeneity in a Model of Strategic Experimentation By Kaustav Das
  3. Subgame perfect implementation of the deserving winner of a competition with natural mechanisms By Pablo Amorós
  4. Game Form Representation for Judgement and Arrovian Aggregation By Schoch, Daniel
  5. Who goes first? Strategic Delay and Learning by Waiting By Wagner, Peter
  6. On the regularity of smooth production economies with externalities: Competitive equilibrium à la Nash By Elena L. del Mercato; Vincenzo Platino
  7. On imperfect commitment in contracts By Aggey Semenov
  8. Push or pull? By David Rietzke
  9. On the Equilibrium and Welfare Consequences of 'Keeping up with the Joneses' By Gavrel, Frédéric; Rebiere, Therese
  10. Precision Choices by Management By Toru Ishikawa
  11. Two-Period Resource Duopoly with Endogenous Intertemporal Capacity Constraints By Berk, Istemi
  12. Full Disclosure of Knowledge Between Rivals By Mário Alexandre Patrício Martins da Silva
  13. Multiproduct competition in vertically related industries By Shohei Yoshida
  14. Searching secrets rationally By Michele Boreale; Fabio Corradi
  15. Dynamic Investment with Adverse Selection and Moral Hazard By Miguel Cantillo
  16. Strategic dual sourcing as a driver for free revealing of innovation By Noriaki Matsushima; Laixun Zhao

  1. By: Pradeep Dubey; John Geanakoplos
    Date: 2014
  2. By: Kaustav Das (Department of Economics, University of Exeter)
    Abstract: In this paper, I examine the effect of introducing heterogeneity between players in a model of strategic experimentation. I consider a two-armed bandit problem in continuous time with one safe arm and a risky arm. There are two players and each has an access to such a bandit. A player using the safe arm experiences a safe flow payoff. The risky arm can either be good or bad. A bad risky arm is worse than the safe arm and the good risky arm is better than the safe arm. Players start with a common prior about the probability of the risky arm being good. At a time point, a player can choose only one of the arms. I show that if the degree of heterogeneity between the players is high enough, then there exists a unique Markov perfect equilibrium in simple cut-off strategies. The non-cooperative equilibrium in the heterogeneous model in terms of welfare, always gets a higher rank than any non-cooperative equilibrium of a homogeneous players model with same or more amount of experimentation in the benchmark.
    Keywords: Two-armed Bandit, Free-Riding, Learning.
    JEL: C73 D83 O31
    Date: 2015
  3. By: Pablo Amorós (Department of Economic Theory, Universidad de Málaga)
    Abstract: A jury has to decide the winner of a competition among a group of contestants. All members of the jury know who the deserving winner is, but this contestant is unknown to the planner. The social optimum is that the jury select the deserving winner. Each individual juror may be biased in favor (friend) or against (enemy) some contestant, and therefore her goal does not necessarily coincide with the social objective. We analyze the problem of designing extensive form mechanisms that give the jurors the right incentives to always choose the deserving winner when the solution concept is subgame perfect equilibrium. We restrict the class of mechanisms considered to those which satisfy two conditions: (1) the jurors take turns to announce the contestant they think should win the competition, and (2) telling the truth is always part of a profile equilibrium strategies. A necessary condition for these mechanisms to exist is that, for each possible pair of contestants, there is at least one juror who is impartial with respect to them. This condition, however, is not sufficient. In addition, the planner must know the friend or the enemy of at least one juror.
    Keywords: Mechanism design; Jury; Subgame perfect equilibrium
    JEL: C72 D71 D78
    Date: 2015–04
  4. By: Schoch, Daniel
    Abstract: Judgement aggregation theory provides us by a dilemma since it is plagued by impossibility results. For a certain class of logically interlinked agendas, full independence for all issues leads to Arrovian dictatorship. Since independence restricts the possibility of strategic voting, it is nevertheless a desirable property even if only partially fulfilled. We explore a “Goldilock” zone of issue-wise sequential aggregation rules which offers just enough independence not to constrain the winning coalitions among different issues, but restrict the possibilities of strategic manipulation. Perfect Independence, as we call the associated axiom, characterises a gameform like representation of the aggregation function by a binary tree, where each non-terminal node is associated with an issue on which all voters make simultaneous decisions. Our result is universal insofar as any aggregation rule satisfying independence for sufficiently many issues has a game-form representation. One corollary of the game form representation theorem implies that dictatorial aggregation rules have game-form representations, which can be “democratised” by simply altering the winning coalitions at every node.
    Keywords: Judgment aggregation; Arrow’s theorem; Escape-routes; Game form
    JEL: D70 D71
    Date: 2015–01–24
  5. By: Wagner, Peter
    Abstract: This paper considers a "war of attrition" game in which agents learn about an uncertain state of the world through private signals and from their peers. I provide existence and uniqueness results for a class of equilibria that satisfy a "full-participation" condition, and show that asymmetries in the distribution of information can lead to excessive stopping and an oversupply of information relative to the social optimum.
    Date: 2015–05–04
  6. By: Elena L. del Mercato (Paris School of Economics - Centre d'Economie de la Sorbonne); Vincenzo Platino (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: We consider a general equilibrium model of a private ownership economy with consumption and production externalities. The choices of all agents (households and firms) may affect utility functions and production technologies. The equilibrium notion blends Arrow-Debreu with Nash, that is, agents (households and firms) maximize their goals by taking as given both commodity prices and choices of every other agent in the economy. We provide an example showing that under standard assumptions, such economies may have infinitely many equilibria. We present our model with firms' endowments following Geanakoplos, Magill, Quinzii and Drèze (1990). Firms' endowments consist of amounts of commodities held by the firms to generate receipts from sales of initially-held stocks of commodities and claims from debts, subsidies and taxes expressible in terms of them. We prove that almost all economies are regular in the space of endowments of households and firms
    Keywords: Externalities; private ownership economies; competitive equilibrium à la Nash; regular economies
    JEL: C62 D51 D62
    Date: 2015–05
  7. By: Aggey Semenov (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: In this paper I consider a repeated buyer-seller relationship wherein a seller has private information on his fixed cost parameter. Once a buyer pays for the good - but before its delivery - he may fear opportunistic behavior by the seller; the latter may prefer not to produce, in which case he pays a penalty and the trade is terminated. Depending on the magnitude of the penalty and the valuation of the future I identify three contractual regimes corresponding to the strength of legal system. The optimal stationary contract consists of two distinct parts. For the most efficient types of seller, the contract entails bunching with a fixed payment and a fixed output. For higher costs output is significantly reduced below the optimal static mechanism.
    Keywords: Adverse selection, penalty for breach, discount rate
    JEL: D82 D86
    Date: 2015
  8. By: David Rietzke
    Abstract: In the funding of R&D, push mechanisms, such as research grants, subsidize research input, while pull mechanisms, such as innovation prizes, reward research output. By rewarding research output, pull mechanisms create strong incentives for researchers to devote non observable inputs to R&D. Push mechanisms, in contrast, may reward a researcher independently of her output. In the presence of moral hazard, it might seem that push mechanisms generate weak incentives for non observable inputs from the researcher and, absent risk-sharing considerations, would be inferior to pull mechanisms; it is the aim of this paper to critically assess this hypothesis. I analyze a principal-agent model in which a funder encourages R&D activity through a push incentive (a grant) and/or a pull incentive (a prize); R&D input consists of both an observable and non observable component. In contrast to the stated hypothesis, it is shown that a grant may emerge as an optimal means of funding as a result of the interaction between adverse selection and moral hazard. The model also helps to explain the use of matching grants, it is shown that such grants serve as an effective sorting device in the presence of adverse selection.
    Keywords: grants, prizes, moral hazard, adverse selection, innovation, principal-agent problem
    JEL: D82 D86
    Date: 2015
  9. By: Gavrel, Frédéric (University of Caen); Rebiere, Therese (CNAM, Paris)
    Abstract: This paper provides an analysis of the social consequences of people seeking to keep up with the Joneses. All individuals attempt to reach a higher rank than the Joneses, including the Joneses themselves. This attitude gives rise to an equilibrium in which all individuals have equal utilities but unequal (gross) incomes. Due to a rat-race effect, individuals devote too much energy to climbing the social scale in this equilibrium. However, laissez-faire equilibrium is an equal-utility constrained social optimum. Unexpectedly, numerical simulations show that this theory could account for the observed distribution of intermediate wages.
    Keywords: Keeping up with the Joneses, social interactions, well-being, inequalities, efficiency
    JEL: D3 D6 D8 I3 Z1
    Date: 2015–05
  10. By: Toru Ishikawa (Graduate School of Economics, Osaka University)
    Abstract: This paper examines the effects of mandatory disclosure information on unobservable precision choices by management of voluntary disclosure. Prior research articles investigate the precision of information disclosed by management, but they do not consider the relationships between mandatory and voluntary disclosure information. In this paper, I focus on the relation- ships and analyze precision choices under the situation that there are manda- tory and voluntary disclosure. I find that mandatory disclosure information influences precision choices of voluntary disclosure.
    Keywords: Mandatory Disclosure; Voluntary Disclosure; Unobservable; Preci- sion choice; Relationship
    JEL: M41 M48
    Date: 2015–05
  11. By: Berk, Istemi (Energiewirtschaftliches Institut an der Universitaet zu Koeln)
    Abstract: This paper analyzes the strategic firm behavior within the context of a two-period resource duopoly model in which firms face endogenous intertemporal capacity constraints. Firms are allowed to invest in capacity in between two periods in order to increase their initial endowment of exhaustible resource stocks. Using this setup, we find that the equilibrium price weakly decreases over time. Moreover, asymmetric distribution of initial resource stocks leads to a significant change in equilibrium outcome, provided that firms do not have the same cost structure in capacity additions. It is also verified that if only one company is capable of investment in capacity, the market moves to a more concentrated structure in the second period.
    Keywords: Dynamic Duopoly; Cournot Competition; Endogenous Intertemporal Capacity Constraints; Subgame Perfect Nash Equilibrium
    JEL: D43 L13 Q32
    Date: 2015–05–05
  12. By: Mário Alexandre Patrício Martins da Silva (Faculdade de Economia do Porto)
    Abstract: We develop a symmetric duopoly model with strategic R&D spillovers where a specific type of innovation, recombinant innovation is introduced. Two major factors of effective knowledge spillovers, the technological learning parameters of the recombinant generation of new knowledge and the absorptive capacity of firms, are assumed to be exogenously determined. However, the third principal factor of the effectiveness of learning from rivals is endogenous: it is assumed that firms have control over the two individual spillover coefficients of the model. It is shown that identical firms operating in the same industry choose the highest level for the two spillover variables under plausible constellations of learning parameters. Furthermore, the realistic set of learning parameters is enlarged in the case where firms are able to commit to knowledge sharing strategies at the outset, thereby increasing the possibility of firms fully disclosing their knowledge in equilibrium.
    Keywords: Endogenous spillovers, knowledge sharing, absorptive capacity, recombinant innovation.
    JEL: O30
    Date: 2015–05
  13. By: Shohei Yoshida
    Abstract: The paper investigates how competition between two multiproduct downstream firms in vertical relationships affects horizontal relationships: competitor collaboration and performance difference. When the upstream market consists of exclusive suppliers, the efficient firm may have incentive for technology transfer without any payment to its less efficient rival, which can be a credible device of the efficient firm to enlarge its more profitable product. Moreover, such technology transfer enhances both consumer surplus and social welfare. The inefficient downstream firm may earn more than the efficient firm under upstream markets with exclusive suppliers and with discriminatory monopolist.
    Date: 2015–05
  14. By: Michele Boreale (Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", Università di Firenze); Fabio Corradi (Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", Università di Firenze)
    Abstract: We study quantitative information flow, from the perspective of an analyst who is interested in maximizing its expected gain in the process of discovering a secret, or settling a hypothesis, represented by an unobservable <i>X</i>, after observing some <i>Y</i> related to <i>X</i>. In our framework, inspired by Bayesian decision theory, discovering the secret has an associated reward, while the investigation of the set of possibilities prompted by the observation has a cost. We characterize the optimal strategy for the analyst and the corresponding expected gain (payoff) in a variety of situations. We argue about the importance of <i>advantage</i>, defined as the increment in expected gain after the observation if the analyst acts optimally, and representing the value of the information conveyed by <i>Y</i>. We also argue that the proposed strategy is more effective than others, based on probability coverage. Applications to cryptographic systems and to familial DNA searching are examined.
    Keywords: Confidentiality, quantitative information flow, decision theory
    JEL: D89
    Date: 2015–05
  15. By: Miguel Cantillo (Universidad de Costa Rica)
    Abstract: This paper develops a dynamic model of capital structure and investment. In a world with low and high ability managers, the former mask as the latter, but to do so have to overstate both earnings and investment. Debt is a mechanism that eventually separates investors’ abilities, at the cost of intervening unlucky high productivity managers. Immediate separation is counterproductive, as it generates costs and no expected payoff. The security design that asymptotically implements optimal investment includes the use of excess non-operating cash, of proportional cash flow compensation, and of ”golden parachutes”. Relative to a first best case, high ability managers will underinvest. Low ability managers will generally overinvest, except when their firm is close to bankruptcy, in which case they will loot the company by underinvesting and overstating their earnings.
    Date: 2015–03
  16. By: Noriaki Matsushima; Laixun Zhao
    Abstract: This paper examines the role of dual sourcing (e.g., outside options) in vertical and horizontal relations. In a bilateral monopoly market, if either the upstream or downstream firm has outside options, the other firm could lose from seemingly positive shocks, e.g., market expansion or technology improvements. We extend this setting to a bilateral duopoly market in which each downstream firm has outside options and upstream firms can engage in cost reducing investments and generate technological spillovers. We find that each upstream firm has an incentive to voluntarily generate technological spillovers to its upstream rival if the downstream firms have better outside options.
    Date: 2015–05

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.