nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒07‒18
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Model Uncertainty By Massimo Marinacci
  2. Informational Robustness and Solution Concepts By Dirk Bergemann; Stephen Morris
  3. Legal Evolution and Contract Evolution under Imperfect Enforcement By Nicola Gennaioli; Giacomo A. M. Ponzetto
  4. Enabling Versus Controlling By Andrei Hagiu; Julian Wright
  5. Can being behind get you ahead? Reference Dependence and Asymmetric Equilibria in an Unfair Tournament By Jan Bergerhoff; Agnes Vosen
  6. Pricing Heterogeneous Goods under Ex Post Private Information By Holger Herbst
  7. Evidence Games: Truth and Commitment By Sergiu Hart; Ilan Kremer; Motty Perry
  8. Expectation-Based Loss Aversion and Strategic Interaction By Simon Dato; Andreas Grunewald; Daniel Müller
  9. On Two-Period Committee Voting: Why Straw Polls Should Have Consequences By Tim Julius Frommeyer
  10. Voluntary Provision of a Public Good in a Strategic Market Game By Somdeb LAHIRI
  11. Organizing for Change: Preference diversity, effort incentives, and separation of decision and execution By ITOH Hideshi
  12. Strategic Interactions and Atoms' Power in Public Goods Economies By Hovav PERETS; Benyamin SHITOVITZ
  13. On Cobb-Douglas Preferences in Bilateral Oligopoly By Alex DICKINSON
  14. Noncooperative Oligopoly in Markets with a Cobb-Douglas Continuum of Traders By Giulio CODOGNATO; Ludovic A. JULIEN
  15. A conceptual foundation for the theory of risk aversion By Yonatan Aumann
  16. A Theory of Civil Disobedience By Edward L. Glaeser; Cass R. Sunstein
  17. Catastrophes and Expected Marginal Utility – How The Value Of The Last Fish In A Lake Is Infinity And Why We Shouldn't Care (Much) By Nævdal, Eric
  18. Partially Binding Platforms: Campaign Promises vis-a-vis Cost of Betrayal By Yasushi Asako
  19. More effort with less pay: On information avoidance, belief design and performance By Huck, Steffen; Szech, Nora; Wenner, Lukas M.

  1. By: Massimo Marinacci
    Abstract: We study decision problems in which the consequences of the alternative actions depend on states determined by a generative mechanism representing some natural or social phenomenon. Model uncertainty arises as decision makers may not know such mechanism. Two types of uncertainty result, a state uncertainty within models and a model uncertainty across them. We discuss some two-stage static decision criteria proposed in the literature that address state uncertainty in the fi…rst stage and model uncertainty in the second one (by considering subjective probabilities over models). We consider two approaches to the Ellsberg-type phenomena that these decision problems feature: a Bayesian approach based on the distinction between subjective attitudes oward the two kinds of uncertainty, and a non Bayesian one that permits multiple subjective probabilities. Several applications are used to illustrate concepts as they are introduced.
    Date: 2015
  2. By: Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: Consider the following "informational robustness" question: what can we say about the set of outcomes that may arise in equilibrium of a Bayesian game if players may observe some additional information? This set of outcomes will correspond to a solution concept that is weaker than equilibrium, with the solution concept depending on what restrictions are imposed on the additional information. We describe a unified approach encompassing prior informational robustness results, as well as identifying the solution concept that corresponds to no restrictions on the additional information; this version of rationalizability depends only on the support of players’ beliefs and implies novel predictions in classic economic environments of coordination and trading games. Our results generalize from complete to incomplete information the classical results in Aumann (1974, 1987) and Brandenburger and Dekel (1987) which can be (and were) given informational robustness interpretations. We discuss the relation between informational robustness and "epistemic" foundations of solution concepts.
    Keywords: Incomplete information, Informational robustness, Bayes correlated equilibrium, Interim corrrelated rationalizability, Belief free rationalizability
    JEL: C72 C79 D82 D83
    Date: 2014–12
  3. By: Nicola Gennaioli; Giacomo A. M. Ponzetto
    Abstract: We model the joint evolution of contracts and precedents by introducing imperfect enforcement into a standard incomplete contracts setup. We assume that biased trial courts can refuse to verify novel evidence but are bound to respect precedents, namely to verify evidence that other judges verified in past cases. We find that optimal contracts are innovative (contingent on both precedents and novel evidence), but noisy evidence and judicial biases introduce enforcement risk and cause incentives to be low-powered. Litigation of innovative contracts refines the law, making it more informative. This evolution improves enforcement and makes contracts more complete, thereby enabling higher-powered incentives and improving welfare. This beneficial mechanism is hampered by judicial bias, which slows down legal evolution and causes enforcement risk to persist for a long time.
    Keywords: contracts, imperfect enforcement, legal evolution, precedents
    JEL: D86 K12 K40 K41
    Date: 2015–06
  4. By: Andrei Hagiu (Harvard Business School, Strategy Unit); Julian Wright (National University of Singapore)
    Abstract: In an increasing number of industries, firms choose how much control to give professionals over the provision of their services to clients. We study the tradeoffs that arise in choosing between a traditional mode (where the firm takes control of service provision) and a platform mode (where professionals retain control over service provision). The choice of mode is determined by the need to balance two-sided moral hazard problems arising from investments that only professionals can make and investments that only the firm can make, while at the same time minimizing distortions in decisions that either party could make (e.g. promotion and marketing of professionals' services, price setting, choice of service offering, etc.).
    Keywords: platforms, theory of the firm, vertical integration, control rights, moral hazard
    JEL: D4 L1 L5
    Date: 2015–07
  5. By: Jan Bergerhoff; Agnes Vosen
    Abstract: Everyone remembers a plot where a disadvantaged individual facing the prospect of failure, spends more effort, turns around the game and wins unexpectedly. Most tournament theories, however, predict the opposite pattern and see the disadvantaged agent investing less effort. We show that ’turn arounds’, i.e. situations where the trailing player spends more effort and becomes the likely winner of the tournament, can be the outcome of a Nash equilibrium when the initial unevenness is known and players have reference-dependent preferences. Under certain conditions, they are the only pure strategy equilibrium. If the initial unevenness is large enough the advantaged player will always invest the most effort. We also show that equilibria in which the player behind catches up without becoming the likely winner do not exist.
    Keywords: loss aversion, gain-loss utility, normal distribution, competition
    JEL: C72 D63 D44
    Date: 2015–02
  6. By: Holger Herbst
    Abstract: This paper studies the role of exchange policies as a price discrimination device in a sequential screening model with heterogeneous goods. In the first period, agents are uncertain about their ordinal preferences over a set of horizontally differentiated goods, but have private information about their intensity of preferences. In the second period, each individual privately learns his preferences and consumption takes place. Revenue maximizing mechanisms are completely characterized. They partially restrict the flexibility between the goods in the second stage for consumers that care little about which variety they obtain while granting always the favorite good to consumers that care much. The optimal design of the partial restriction of flexibility can be implemented by offering Limited Exchange Contracts. A Limited Exchange Contract consists of an initial product choice and a subset of products to which free exchange is possible in the second period. The use of exchange fees in contracts is not optimal for the purpose of price discrimination.
    Keywords: Sequential screening, dynamic mechanism design,heterogeneous goods
    JEL: D42 D82 L12
  7. By: Sergiu Hart; Ilan Kremer; Motty Perry
    Abstract: An evidence game is a strategic disclosure game in which an agent who has different pieces of verifiable evidence decides which ones to disclose and which ones to conceal, and a principal chooses an action (a "reward"). The agent's preference is the same regardless of his information (his "type")—he always prefers the reward to be as high as possible—whereas the principal prefers the reward to fit the agent's type. We compare the setup where the principal chooses the action only after seeing the disclosed evidence, to the setup where the principal can commit ahead of time to a reward policy (the latter is the standard mechanism-design setup). We compare the setup where the principal chooses the action only after seeing the disclosed evidence to the setup where the principal can commit ahead of time to a reward policy (the mechanism-design setup). The main result is that under natural conditions on the truth structure of the evidence, the two setups yield the same equilibrium outcome.
    Date: 2015–05
  8. By: Simon Dato; Andreas Grunewald; Daniel Müller
    Abstract: This paper provides a comprehensive analysis regarding strategic interaction under expectation-based loss-aversion. First, we develop a coherent framework for the analysis by extending the equilibrium concepts of Koszegi and Rabin (2006, 2007) to strategic interaction and demonstrate how to derive equilibria. Second, we delineate how expectation-based loss-averse players differ in their strategic behavior from their counterparts with standard expected-utility preferences. Third, we analyze equilibrium play under expectation-based loss aversion and comment on the existence of equilibria.
    Keywords: Non-Cooperative Games, Expectation-Based Loss Aversion, Reference-Dependent Preferences, Mixed Strategies
    JEL: C72 D01 D03 D81
  9. By: Tim Julius Frommeyer
    Abstract: We consider a committee voting setup with two rounds of voting where committee members, who possess private information about the state of the world, have to make a binary decision. We investigate incentives for truthful revelation of their information in the first voting period. Coughlan (2000) shows that members reveal their information in a straw poll only if their preferences are in fact homogeneous. By taking costs of time into account, we demonstrate that committees have strictly higher incentives to reveal information if a decision can be made for high levels of consensus in the straw poll already. In such scenarios, members of all homogeneous and some heterogeneous juries are strictly better off when the requirement for early decisions is chosen carefully.
    Keywords: Communication, Committees, Voting
    JEL: D72 D82 D83
    Date: 2015–04
  10. By: Somdeb LAHIRI
    Abstract: The purpose of this paper is to investigate the mutual compatibility of the voluntary provision of a public good and the strategic behavior of consumers in the market for private goods. We study the existence of equilibrium in the private provision of a public good within a general strategic equilibrium framework with a finite number of players. The mechanism for the provision of public good follows that of Bergstrom, Blume, and Varian (1986), and the trading mechanism for private goods follows the strategic market game with wash sales of Dubey and Shubik (1986). The paper demonstrates the existence of an equilibrium point in pure strategies for a finite number of players. Due to the existence of trivial equilibria at which all markets are closed, equilibrium points are constructed as limits to sequences of ? - equilibria in perturbed games.
    Keywords: Strategic market game, Public good, Equilibrium points
    JEL: C72 D43 H41
    Date: 2013–12–01
  11. By: ITOH Hideshi
    Abstract: We study the decision process of an organization that faces a problem of choosing between the status quo project ("no change") and the new project ("change"). The organization consists of a decision maker and an implementer. The implementer first chooses a costly effort to develop a new project. If it is developed, the decision maker formally selects either the status quo project or the new project. Otherwise, only the status quo project is available (and is selected). The implementer then chooses an implementation effort to execute the selected project. Both the decision maker and the implementer have intrinsic and possibly divergent preferences over two projects that are either status-quo-biased (anti-changer) or change-biased (pro-changer). The owner of the organization must choose one of four feasible organizational forms: both status-quo-biased, both change-biased, a status-quo-biased decision maker and a change-biased implementer, and a change-biased decision maker and a status-quo-biased implementer. We analyze how the organizational form affects the decision maker's project selection, the implementer's implementation motive, and his incentive to develop a new project, and solves for the organization optimal for the unbiased owner.
    Date: 2015–07
  12. By: Hovav PERETS (Israel Institute of Technology, Faculty of Industrial Engineering and Management); Benyamin SHITOVITZ (University of Haifa, Department of Economics)
    Abstract: In this paper, we study Nash equilibrium in a smooth public goods economy, described as a noncooperative game, where the set of players is a mixed-measure space of consumers. We assume a finite number of private goods. We show that under certain conditions, there exists a unique Nash equilibrium in the economy, where the public goods are produced with a linear technology. Moreover, we discuss the difference in market power between an atomless sector and an atom with the same utility function and an atom with its split atomless sector in both a pure exchange economy and a public goods economy.
    Keywords: Public Goods, Private provision of public goods, Nash equilibrium, Mixed measure space of consumers, Linear technology
    JEL: C72 H41
    Date: 2013–12–01
  13. By: Alex DICKINSON (University of Strathclyde)
    Abstract: Bilateral oligopoly is a simple model of exchange in which a finite set of sellers seek to exchange the goods they are endowed with for money with a finite set of buyers, and no price-taking assumptions are imposed. If trade takes place via a strategic market game bilateral oligopoly can be thought of as two linked proportional-sharing contests: in one the sellers share the aggregate bid from the buyers in proportion to their supply and in the other the buyers share the aggregate supply in proportion to their bids. The analysis can be separated into two ‘partial games’. First, fix the aggregate bid at B; in the first partial game the sellers contest this fixed prize in proportion to their supply and the aggregate supply in the equilibrium of this game is X(B) . Next, fix the aggregate supply at X; in the second partial game the buyers contest this fixed prize in proportion to their bids and the aggregate bid in the equilibrium of this game is . The analysis of these two partial games takes into account competition with ~b (X)in each side of the market. Equilibrium in bilateral oligopoly must take into account competition between sellers and buyers and requires, for example, ~B (~x(b)))=B. When all traders have Cobb-Douglas preference~X(B)s does not depend on B ~B (x) and does not depend on X: whilst there is competition within each side of the market there is no strategic interdependence between the sides of the market. The Cobb-Douglas assumption provides a tractable framework in which to explore the features of fully strategic trade but it misses perhaps the most interesting feature of bilateral oligopoly, the implications of which are investigated
    Keywords: Strategic market game, Bilateral oligopoly, Cobb-Douglas preferences, Aggregative games
    JEL: C72 D43 D50
    Date: 2013–12–01
  14. By: Giulio CODOGNATO (Università degli Studi di Udine, Dipartimento di Scienze Economiche e Statistiche); Ludovic A. JULIEN (Université de Dijon LEG)
    Abstract: In this paper, we revisit two models of noncooperative oligopoly in general equilibrium proposed by Busetto et al. (2008, 2011), a version of Shapley’s “window†model for mixed exchange economies following Shitovitz and its reformulation following Cournot-Walras. We introduce the assumption that the preferences of traders belonging to the atomless portion are represented by Cobb-Douglas utility functions. This assumption permits us to prove the existence of a Cournot-Nash equilibrium in Shapley’s window model, known as the Cobb-Douglas-Cournot-Nash equilibrium, without introducing further assumptions of atom endowments and preferences previously used by Busetto et al. (2011). We then show that the set of Cobb-Douglas-Cournot-Nash equilibrium allocations coincides with that of Cournot-Walras equilibrium.
    Keywords: Strategic market games, Noncooperative oligopoly, Atoms, Atomless part
    JEL: C72 D51
    Date: 2013–12–01
  15. By: Yonatan Aumann
    Abstract: Classically, risk aversion is equated with concavity of the utility function. In this work we explore the conceptual foundations of this definition. In accordance with neo-classical economics, we seek an ordinal definition, based on the decisions maker’s preference order, independent of numerical values. We present two such definitions, based on simple, conceptually appealing interpretations of the notion of risk-aversion. We then show that when cast in quantitative form these ordinal definitions coincide with the classical Arrow-Pratt definition (once the latter is defined with respect to the appropriate units), thus providing a conceptual foundation for the classical definition. The implications of the theory are discussed, including, in particular, to the understanding of insurance. The entire study is within the expected utility framework.
    Keywords: Risk aversion, Utility theory, Ordinal preferences, Multiple objectives decision making
    Date: 2015–06
  16. By: Edward L. Glaeser; Cass R. Sunstein
    Abstract: From the streets of Hong Kong to Ferguson, Missouri, civil disobedience has again become newsworthy. What explains the prevalence and extremity of acts of civil disobedience?This paper presents a model in which protest planners choose the nature of the disturbance hoping to influence voters (or other decision-makers in less democratic regimes) both through the size of the unrest and by generating a response. The model suggests that protesters will either choose a mild “epsilon” protest, such as a peaceful march, which serves mainly to signal the size of the disgruntled population, or a “sweet spot” protest, which is painful enough to generate a response but not painful enough so that an aggressive response is universally applauded. Since non-epsilon protests serve primarily to signal the leaders’ type, they will occur either when protesters have private information about the leader’s type or when the distribution of voters’ preferences are convex in a way that leads the revelation of uncertainty to increase the probability of regime change. The requirements needed for rational civil disobedience seem not to hold in many world settings, and so we explore ways in which bounded rationality by protesters, voters, and incumbent leaders can also explain civil disobedience.
    JEL: K0 P16 R28
    Date: 2015–07
  17. By: Nævdal, Eric (The Ragnar Frisch Centre for Economic Research)
    Abstract: Catastrophic risk is currently a hotly debated topic. This paper contributes to this debate by showing two results. First it shown that the value function in dynamic optimization can have an infinite derivative at some point even if the model specification has functional forms that are finite and without infinite derivatives. In the process it is shown that standard phase diagrams used in optimal control theory contain more information than generally recognized. Second we show that even if the value function has an infinite derivative at some point, it is not correct that this point should be avoided in finite time at almost any cost. The results are illustrated in a simple linear-quadratic fisheries model, but proven for a more general class of growth functions.
    Keywords: Catastrophic risk; fisheries; optimal control; shadow prices
    JEL: C61 Q22 Q54
    Date: 2015–03–30
  18. By: Yasushi Asako (School of Political Science and Economics, Waseda University)
    Abstract: This study examines and models the e?ects of partially binding campaign platforms in a political competition. Here, a candidate who implements a policy that di?ers from the platform must pay a cost of betrayal, which increases with the size of the discrepancy. I also analyze endogenous decisions by citizens to run for an election. In particular, the model is able to show two implications that previous frameworks have had di¢ culty with. First, candidates with di?erent characteristics have di?erent probabilities of winning an election. Second, even knowing that he/she will lose an election, a candidate will still run, hoping to make an opponent?s policy approach his/her own policy.
    Keywords: political competition, endogenous candidates, campaign promises
    JEL: C72 D72
    Date: 2014–08
  19. By: Huck, Steffen; Szech, Nora; Wenner, Lukas M.
    Abstract: In a tedious real effort task, agents can choose to receive information about their piece rate that is either low or ten times higher. One third of subjects deliberately decide to forego this instrumental information, revealing a preference for information avoidance. Strikingly, agents who face uncertainty about their wage outperform all others, including those who know that their wage is high. This also holds for enforced uncertainty. We demonstrate that all our findings can be captured by a model of optimally distorted expectations following Brunnermeier and Parker (2005).
    Keywords: Optimal Expectations,Belief Design,Performance,,Real Effort Task
    JEL: D83 D84 J31 M52
    Date: 2015

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