nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒08‒07
nine papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information Transmission and Rational Inattention By Antonella Tutino
  2. Rational Inattention Dynamics: Inertia and Delay in Decision-Making By Matejka, Filip; Steiner, Jakub; Stewart, Colin
  3. Procrastination and projects By Külpmann, Philipp
  4. Nonlinear Pricing By Armstrong, Mark
  5. Negative Voters: Electoral Competition with Loss-Aversion By Lockwood, Ben; Rockey, James
  6. Designing Institutions for Diversity By Letina, Igor; Schmutzler, Armin
  7. Minimal conditions for parametric continuity of a utility representation By O'Callaghan, Patrick
  8. Pricing as a risky choice: Uncertainty and survival in a monopoly market By Andersen, Per; Vetter, Henrik
  9. Optimal Organization of Financial Intermediaries By Spiros Bougheas; Tianxi Wang

  1. By: Antonella Tutino (Federal Reserve Bank of Dallas)
    Abstract: We study the problem of optimal communication strategy between a fully informed agent and a rationally inattentive agent. The fully informed agent observes a sequence of shocks and transmits a message to the limited-capacity agent who takes a set of actions in response to the message. The problem of the informed agent is to seek the optimal signaling strategy that induces a behavior consistent with minimal welfare loss, uniformly over a given class of bounded utility functions. We characterize the optimal signaling strategy for both the static and the dynamic cases.
    Date: 2015
  2. By: Matejka, Filip; Steiner, Jakub; Stewart, Colin
    Abstract: We solve a general class of dynamic rational-inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions. The solution resembles the choice rule in a dynamic logit model, but it is biased towards an optimal default rule that depends only on the history of actions, not on the realized state. We apply the general solution to the study of (i) the status quo bias; (ii) inertia in actions leading to lagged adjustments to shocks; and (iii) the tradeoff between accuracy and delay in decision-making.
    Keywords: adjustment delay; dynamic logit; information acquisition; rational inattention
    JEL: D81 D83 D90
    Date: 2015–07
  3. By: Külpmann, Philipp (Center for Mathematical Economics, Bielefeld University)
    Abstract: In this paper I analyze a dynamic moral hazard problem in teams with imperfect monitoring in continuous time. In the model, players are working together to achieve a breakthrough in a project while facing a deadline. The effort needed to achieve such a breakthrough is unknown but players have a common prior about its distribution. Each player is only able to observe their own effort, not the effort of others. I characterize the optimal effort path for general distributions of breakthrough efforts and show that, in addition to free-riding, procrastination arises. Furthermore, in this model, procrastination is not a result of irrational behavior and is even present in the welfare-maximizing solution.
    Keywords: Procrastination, Public good provision , Moral hazard in teams
    Date: 2015–07–29
  4. By: Armstrong, Mark
    Abstract: I survey the use of nonlinear pricing as a method of price discrimination, both with monopoly and oligopoly supply. Topics covered include an analysis of when it is profitable to offer quantity discounts and bundle discounts, connections between second- and third-degree price discrimination, the use of market demand functions to calculate nonlinear tariffs, the impact of consumers with bounded rationality, bundling arrangements between separate sellers, and the choice of prices for upgrades and add-on products.
    Keywords: Nonlinear pricing; price discrimination; bundling; multidimensional screening; oligopoly
    JEL: D21 D42 L13 L15 M31
    Date: 2015–07
  5. By: Lockwood, Ben (Department of Economics University of Warwick,); Rockey, James (University of Leicester)
    Abstract: This paper studies how voter loss-aversion affects electoral competition in a Downsian setting. Assuming that the voters’ reference point is the status quo, we show that loss-aversion has a number of effects. First, for some values of the status quo, there is policy rigidity both parties choose platforms equal to the status quo, regardless of other parameters. Second, 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. JEL classification: electoral competition ; loss-aversion ; incumbency advantage ; platform rigidity
    Keywords: D72 ; D81
    Date: 2015
  6. By: Letina, Igor; Schmutzler, Armin
    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: auctions; contests; diversity; procurement; tournaments
    JEL: D02 D21 D44 L14 L22 L23
    Date: 2015–07
  7. By: O'Callaghan, Patrick
    Abstract: When sufficiently small perturbations of parameters preserve strict preference for one alternative over another, dependence on the parameters is continuous. We characterise this property with a utility function over alternatives that depends continuously on the parameter. The class of parameter spaces such that this form of representation is guaranteed to exist is also characterised. When the parameters are beliefs, these results have implications for robust portfolio choice, Bayesian games and psychological games. When alternatives are discrete, the representation is jointly continuous, and an extension of Berge’s theorem of the maximum, yields a continuous value function. We apply this result to generalise a standard consumer choice problem: where parameters are price-wealth vectors. When the parameter space is lexicographically ordered, a novel application to referencedependent preferences is possible.
    Keywords: Risk and Uncertainty, D8, C6,
    Date: 2015–04–01
  8. By: Andersen, Per; Vetter, Henrik
    Abstract: Roy (Safety First and the Holding of Assets, 1952) argues that decisions under uncertainty motivate firms to avoid bankruptcy. In this paper the authors ask about the behaviour of a monopolist who pre-commits to price when she has only probabilistic knowledge about demand. They argue that pricing in order to maximise the likelihood of survival explains anomalies such as inelastic pricing, why the firm takes on more risk as gains become less likely, and asymmetric responses to demand and cost changes. When demand is a linear demand, the monopolist's response to an increase in the marginal cost is similar to the response when mark-up pricing is used. That is, there is a one-to-one relationship between an increase of the marginal cost and an increase in price.
    Keywords: monopoly,uncertainty,safety-first principle
    JEL: D42 L12 L21
    Date: 2015
  9. By: Spiros Bougheas; Tianxi Wang
    Abstract: This paper provides a unified framework for endogenizing two distinct organizational structures of financial intermediation. In one structure, called Bank, the intermediary is financed by issuing debt contracts to investors, and thus resembles commercial banks. In the other structure, called Fund, the intermediary is financed by issuing equity contracts to investors, thus resembling private-equity funds. The paper finds that in the former incentives can be provided in a less costly way, but the latter is more robust to negative shocks on the asset side. Our model predicts that relative to banks, private equity funds are more involved in the running of the firms that they finance, contribute more to the success of these firms, and provide funds to higher-risk, higher-return firms.
    Keywords: Financial Intermediation; Bank; Equity Funds
    Date: 2015

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