nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒08‒01
six papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Negative Voters: Electoral Competition with Loss-Aversion By Ben Lockwood; James Rockey
  2. Designing institutions for diversity By Igor Letina; Armin Schmutzler
  3. Existence, Uniqueness, and Comparative Statics in Contests By Martin Kaae Jensen
  4. Vertical integration and accommodation effects under Cournot competition By Christos Constantatos; Ioannis Pinopoulos
  5. Preference Cloud Theory: Imprecise Preferences and Preference Reversals By Oben Kurtulus Bayrak; John Hey
  6. Is Dynamic Competition Socially Beneficial? The Case of Price as Investment By Yaroslav Kryukov; Ulrich Doraszelski; David Besanko

  1. By: Ben Lockwood; James Rockey
    Abstract: This paper studies how voter loss-aversion affects electoral competition in a Downsian setting. Assuming that voters’ reference point is the status quo, we show that loss-aversion has a number of effects. First, there is policy rigidity both parties choose platforms equal to the status quo, regardless of other parameters. Second, that there is a moderation effect when there is policy rigidity, the equilibrium policy outcome is closer to the moderate voters’ ideal point than in the absence of loss-aversion. In a dynamic extension of the model, we consider how parties strategically manipulate the status quo to their advantage, and we find that this increases policy rigidity. Finally, we show that with loss-aversion, incumbents adjust less than challengers to changes in voter preferences. The underlying force is that the status quo works to the advantage of the incumbent. This prediction of asymmetric adjustment is new, and we test it using elections to US state legislatures. The results are as predicted: incumbent parties respond less to shocks in the preferences of the median voter.
    Keywords: electoral competition, loss-aversion, incumbency advantage, platform rigidity
    JEL: D72 D81
    Date: 2015–07
  2. By: Igor Letina; Armin Schmutzler
    Abstract: This paper analyzes the design of innovation contests when the quality of an innovation depends on the research approach of the supplier, but the best approach is unknown. Diversity of approaches is beneficial because of the resulting option value. An auction induces the social optimum, while a fixed-prize tournament induces insufficient diversity. The optimal contest for the buyer is an augmented fixed-prize tournament, where suppliers can choose from a set of at most two prizes. This allows the buyer to implement any level of diversity at the lowest cost.
    Keywords: Contests, tournaments, auctions, diversity, procurement
    JEL: L14 L22 L23
    Date: 2015–07
  3. By: Martin Kaae Jensen
    Abstract: Many important games are aggregative allowing for robust comparative statics analysis even when a game does not exhibit strategic complements or substitutes (Acemoglu and Jensen (2013)). This paper establishes such comparative statics results for contests improving upon existing results by (i) allowing payoff functions to be discontinuous at the origin, and (ii) allowing for asymmetric rent-seeking contests and patent races. A leading example where (i) is relevant is the classical Tullock contest (Tullock (1980)). The paper also studies existence and uniqueness of equilibria extending the results of Szidarovszky and Okuguchi (1997) and Cornes and Hartley (2005) to patent races.
    Keywords: Comparative statics, Uniqueness, Existence, Contest, Rent-seeking, Aggregative game, Local solvability condition.
    JEL: C61 D80 D90 E20 I30
    Date: 2015–07
  4. By: Christos Constantatos (Department of Economics, University of Macedonia); Ioannis Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: We consider a two-tier industry where a vertically integrated firm sells input to, and competes against a downstream rival. We show that when the upstream divi- sion of the integrated firm uses a two-part tari¤ contract, the downstream division will behave less agressively despite common presumption that Cournot conjectures preclude such behavior. By limiting its quantity, the downstream division increases rival's profits that can be recouped by the upstream division via a fixed fee. This ac- commodation e¤ect allows the integrated firm to achieve full decisions-coordination between its divisions, and Stackelberg-leader profits, even though downstream deci- sions are taken simultaneously.
    Keywords: Vertical integration, accommodation effect, two-part tariffs, product differentiation, Cournot competition.
    JEL: L4 L22
    Date: 2015–06
  5. By: Oben Kurtulus Bayrak; John Hey
    Abstract: This paper presents a new theory, called Preference Cloud Theory, of decision-making under uncertainty. This new theory provides an explanation for empirically-observed Preference reversals. Central to the theory is the incorporation of preference imprecision which arises because of individualsâ vague understanding of numerical probabilities. We combine this concept with the use of the Alpha model (which builds on Hurwiczâs criterion) and construct a simple model which helps us to understand various anomalies discovered in the experimental economics literature that standard models cannot explain.
    JEL: D81
    Date: 2015–07–20
  6. By: Yaroslav Kryukov (Carnegie-Mellon University); Ulrich Doraszelski (University of Pennsylvania); David Besanko (Northwestern University)
    Abstract: --
    Date: 2015

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