nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒09‒05
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. First Price Auctions with General Information Structures: Implications for Bidding and Revenue By Bergemann, Dirk; Brooks, Benjamin A; Morris, Stephen
  2. Multi-period Matching By Kadam, Sangram V.; Kotowski, Maciej H.
  3. Unique Stationary Behavior By Heller, Yuval; Mohlin, Erik
  4. Regular economies with ambiguity aversion By Noé Biheng; Jean-Marc Bonnisseau
  5. Understanding preferences: "demand types", and the existence of equilibrium with indivisibilities By Elizabeth Baldwin; Paul Klemperer
  6. Sunk Cost as a Self-Disciplining Device By Fuhai HONG; Xiaojian ZHAO
  7. Information and Market Power By Bergemann, Dirk; Heumann, Tibor; Morris, Stephen
  8. Non-zero-sum stopping games in discrete time By Zhou Zhou
  9. Intra Firm Bargaining and Shapley Values By Brügemann, Björn; Gautier, Pieter A.; Menzio, Guido
  10. Dynamic coordination among heterogeneous agents By GUIMARAES, Bernardo; PEREIRA, Ana Elisa
  11. Short-term, Long-term, and Continuing Contracts By Maija Halonen-Akatwijuka; Oliver Hart
  12. Sustaining Cooperation: Community Enforcement vs. Specialized Enforcement By Daron Acemoglu; Alexander Wolitzky
  13. Directional Monotone Comparative Statics* By Anne-Christine Barthel; Tarun Sabarwal
  14. Modified VCG Mechanisms in Combinatorial Auctions with Budget Constraints By Le, Phuong
  15. Optimal liquidation of an asset under drift uncertainty By Erik Ekstr\"om; Juozas Vaicenavicius
  16. Prosocial Behavior and Policy Spillovers: A Multi-Activity Approach By Ek, Claes
  17. A Note on Stability in One-to-One, Multi-period Matching Markets By Kotowski, Maciej H.
  18. A model of the rule of law By GUIMARAES, Bernardo; SHEEDY, Kevin D.
  19. Mediocracy By Mattozzi, Andrea; Merlo, Antonio
  20. The Behavior of Other as a Reference Point By Francesco Bogliacino; Pietro Ortoleva
  21. Asymmetric Sequential Search under Incomplete Information By Yizhaq Minchuk; Aner Sela

  1. By: Bergemann, Dirk; Brooks, Benjamin A; Morris, Stephen
    Abstract: This paper explores the consequences of information in sealed bid first price auctions. For a given symmetric and arbitrarily correlated prior distribution over valuations, we characterize the set of possible outcomes that can arise in a Bayesian equilibrium for some information structure. In particular, we characterize maximum and minimum revenue across all information structures when bidders may not know their own values, and maximum revenue when they do know their values. Revenue is maximized when buyers know who has the highest valuation, but the highest valuation buyer has partial information about others’ values. Revenue is minimized when buyers are uncertain about whether they will win or lose and incentive constraints are binding for all upward bid deviations. We provide further analytic results on possible welfare outcomes and report computational methods which work when we do not have analytic solutions. Many of our results generalize to asymmetric value distributions. We apply these results to study how entry fees and reserve prices impact the welfare bounds.
    Keywords: Bayes correlated equilibrium; common values; first price auctions; information structure; interdependent values; private values; revenue; welfare bounds
    JEL: C72 D44 D82 D83
    Date: 2015–08
  2. By: Kadam, Sangram V. (Harvard University); Kotowski, Maciej H. (Harvard University)
    Abstract: We examine a dynamic, multi-period, bilateral matching market, such as a labor market where workers are long-lived and production occurs over a period of time. We define and identify sufficient conditions for the existence of a dynamically stable matching. Our framework accommodates many forms of inter-temporal preference complementarities, including a taste for variety and a status-quo bias. Extensions of our model incorporating imperfect information and financial transfers are proposed. We relate our analysis to market unraveling and to common market design applications, including the medical residency match.
    JEL: C78
    Date: 2015–06
  3. By: Heller, Yuval; Mohlin, Erik
    Abstract: We study environments in which agents from a large population are randomly matched to play a one-shot game, and, before the interaction begins, each agent observes noisy information about the partner's aggregate behavior. Agents follow stationary strategies that depend on the observed signal. We show that every strategy distribution admits a unique behavior if each player observe on average less than action of his partner. On the other hand, if each player observes on average more than one action, we show that there exists a stationary strategy that admits multiple consistent outcomes.
    Keywords: Markovian process, Random matching.
    JEL: C72 C73 D83
    Date: 2015–08–13
  4. By: Noé Biheng (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Jean-Marc Bonnisseau (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: We consider a family of exchange economies with complete markets where consumers have multiprior preferences representing their ambiguity aversion. Under a linear independence assumption, we prove that regular economies are generic. Regular economies exhibit enjoyable properties: odd finite number of equilibrium prices, local constancy of this number, local differentiable selections of the equilibrium prices. Thus, even if ambiguity aversion is represented by non-differentiable multiprior preferences, economies retain generically the properties of the differentiable approach.
    Date: 2015
  5. By: Elizabeth Baldwin; Paul Klemperer
    Abstract: We propose new techniques for understanding agents' valuations. Our classification into "demand types", incorporates existing definitions (such as substitutes, complements, "strong substitutes", etc.), and permits additional distinctions. We obtain an easy-to-check necessary and sufficient condition for the existence of a competitive equilibrium for indivisible goods. Our condition generalises many existing results, and provides new insights: contrary to much popular belief, there are more classes of purely complements preferences than classes of purely-substitutes preferences for which competitive equilibrium always exists. Our techniques are also powerful when equilibrium cannot be guaranteed from the "demand type". For a specific set of individual valuations, we often can check for equilibrium existence by simply counting the number of intersection points of the geometric objects we study! Our methods also have applications to matching, and to the Product-Mix Auction, introduced by the Bank of England in response to the �financial crisis.
    Keywords: consumer theory; equilibrium existence; general equilibrium; competitive equilibrium; duality; indivisible goods; geometry; tropical geometry; convex geometry; auction; product mix auction; product-mix auction; substitute; complement; demand type; matching
    JEL: C62 D44 D50 D51
    Date: 2015–07
  6. By: Fuhai HONG (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, 14 Nanyang Drive, Singapore 637332); Xiaojian ZHAO (Department of Economics, Hong Kong University of Science and Technology, Hong Kong)
    Abstract: Building on an intra-personal self-signaling game, the paper pro- vides an economic model to show that the sunk cost effect may stem from an attempt to overcome the under-investment problem associ- ated with present bias. The current self may take a costly action (which is a sunk cost for the future self) to signal the individual's ability that motivates his future self-disciplining behaviors. In equi- librium, a higher level of sunk cost gives rise to a higher probability for the individual to continue the project.
    Keywords: Present bias, signaling, sunk cost fallacy, limited memory.
    JEL: D03 D83 Z13
    Date: 2014–11
  7. By: Bergemann, Dirk; Heumann, Tibor; Morris, Stephen
    Abstract: We analyze demand function competition with a finite number of agents and private information. We show that the nature of the private information determines the market power of the agents and thus price and volume of equilibrium trade. We provide a characterization of the set of all joint distributions over demands and payoff states that can arise in equilibrium under any information structure. In demand function competition, the agents condition their demand on the endogenous information contained in the price. We compare the set of feasible outcomes under demand function to the feasible outcomes under Cournot competition. We find that the first and second moments of the equilibrium distribution respond very differently to the private information of the agents under these two market structures. The first moment of the equilibrium demand, the average demand, is more sensitive to the nature of the private information in demand function competition, reflecting the strategic impact of private information. By contrast, the second moments are less sensitive to the private information, reflecting the common conditioning on the price among the agents.
    Keywords: Bayes correlated equilibrium; demand function competition; incomplete information; linear best responses; market power; moment restrictions; price impact; quadratic payoffs; supply function competition; volatility
    JEL: C72 C73 D43 D83 G12
    Date: 2015–08
  8. By: Zhou Zhou
    Abstract: We consider two-player non-zero-sum stopping games in discrete time. Unlike Dynkin games, in our games the payoff of each player is revealed after both players stop. Moreover, each player can adjust her own stopping strategy according to the other player's action. In the first part of the paper, we consider the game where players act simultaneously at each stage. We show that there exists a Nash equilibrium in mixed stopping strategies. In the second part, we assume that one player has to act first at each stage. In this case, we show the existence of a Nash equilibrium in pure stopping strategies.
    Date: 2015–08
  9. By: Brügemann, Björn; Gautier, Pieter A.; Menzio, Guido
    Abstract: The paper revisits the problem of wage bargaining between a firm and multiple workers. We show that the Subgame Perfect Equilibrium of the extensive-form game proposed by Stole and Zwiebel (1996a) does not imply a profile of wages and profits that coincides with the Shapley values as claimed in their classic paper. We propose an alternative extensive-form bargaining game, the Rolodex Game, that follows a simple and realistic protocol and that, under some mild restrictions, admits a unique Subgame Perfect Equilibrium generating a profile of wages and profits that are equal to the Shapley values. The vast applied literature that refers to the Stole and Zwiebel game to give a game-theoretic foundation to the use of the Shapley values as the outcome of the bargain between a firm and multiple workers should instead refer to the Rolodex game.
    Keywords: intra firm bargaining; Shapley value
    JEL: D21 J30
    Date: 2015–08
  10. By: GUIMARAES, Bernardo; PEREIRA, Ana Elisa
    Abstract: We study a dynamic model of coordination with timing frictions and payoff heterogeneity. There is a unique equilibrium, characterized by thresholds that determine the choices of each type of agent. We characterize equilibrium for the limiting cases of vanishing timing frictions and vanishing shocks to fundamentals. A lot of conformity emerges: despite payoff heterogeneity, agents’ equilibrium thresholds partially coincide as long as there exists a set of beliefs that would make this coincidence possible – though they never fully coincide. In case of vanishing frictions, the economy behaves almost as if all agents were equal to an average type. Conformity is not inefficient. The efficient solution would have agents following others even more often and giving less importance to the fundamental
    Date: 2015–03–16
  11. By: Maija Halonen-Akatwijuka; Oliver Hart
    Abstract: Parties often regulate their relationships through ‘continuing’ contracts that are neither long-term nor short-term but usually roll over. We study the trade-off between long-term, short-term, and continuing contracts in a two period model where gains from trade exist in the first period, and may or may not exist in the second period. A long-term contract that mandates trade in both periods is disadvantageous since renegotiation is required if there are no gains from trade in the second period. A short-term contract is disadvantageous since a new contract must be negotiated if gains from trade exist in the second period. A continuing contract can be better. In a continuing contract there is no obligation to trade in the second period but if there are gains from trade the parties will bargain ‘fairly’ using the first period contract as a reference point. This can reduce the cost of negotiating the next contract. Continuing contracts are not a panacea, however, since fair bargaining may limit the use of outside options in the bargaining process and as a result parties will sometimes fail to trade when this is efficient.
    Keywords: Short-term, Long-term, Continuing Contracts, Fairness, Good Faith Bargaining.
    JEL: D23 D86 K12
    Date: 2015–08–26
  12. By: Daron Acemoglu; Alexander Wolitzky
    Abstract: We introduce the possibility of direct punishment by specialized enforcers into a model of community enforcement. Specialized enforcers need to be given incentives to carry out costly punishments. Our main result shows that, when the specialized enforcement technology is sufficiently effective, cooperation is best sustained by a “single enforcer punishment equilibrium,” where any deviation by a regular agent is punished only once, and only by enforcers. In contrast, enforcers themselves are disciplined (at least in part) by community enforcement. The reason why there is no community enforcement following deviations by regular agent is that such actions, by reducing future cooperation, would decrease the amount of punishment that enforcers are willing to impose on deviators. Conversely, when the specialized enforcement technology is ineffective, optimal equilibria do punish deviations by regular agents with community enforcement. The model thus predicts that societies with more advanced enforcement technologies should rely on specialized enforcement, while less technologically advanced societies should rely on community enforcement. Our results hold both under perfect monitoring of actions and under various types of private monitoring.
    JEL: C73 D72 D74
    Date: 2015–08
  13. By: Anne-Christine Barthel (Department of Economics and Business, Randolph College); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: Many questions of interest in economics can be stated in terms of monotone comparative statics: if a parameter of a constrained optimization problem “increases,” when does its solution “increase” as well. This paper studies monotone comparative statics in different directions in finite-dimensional Euclidean space. The conditions on the objective function are ordinal and retain the same flavor as their counterparts in the standard theory. They can be naturally specialized to cardinal conditions, and to differential conditions using directional derivatives. Conditions on both the objective function and the constraint set do not require new binary relations or convex domains. The results allow flexibility to explore comparative statics with respect to the constraint set, with respect to parameters in the objective function, or both. Results from Quah (2007) are included as a special case. The usefulness of the results is highlighted with applications in consumer theory, producer theory, and game theory, including applications to consumer demand, theory of competition, labor-leisure decisions with discrete choices, environmental emissions standards, and auctions.
    Keywords: monotone comparative statics, directional single-crossing property, directional set order
    JEL: C60 C61 D10 D20 D40
    Date: 2015–08
  14. By: Le, Phuong
    Abstract: I present two modifications of the Vickrey-Clark-Groves mechanism to accommodate bidders' budget constraints in the combinatorial auction setting and show that they are Pareto-Optimal and (partially) incentive compatible in certain domains.
    Keywords: Vickrey-Clark-Groves, Combinatorial Auctions, Budget Constraints, Pareto-Optimal, Mechanism Design
    JEL: D44
    Date: 2014–03–01
  15. By: Erik Ekstr\"om; Juozas Vaicenavicius
    Abstract: We study a problem of finding an optimal stopping strategy to liquidate an asset with unknown drift. Taking a Bayesian approach, we model the initial beliefs of an individual about the drift parameter by allowing an arbitrary probability distribution to characterise the uncertainty about the drift parameter. Filtering theory is used to describe the evolution of the posterior beliefs about the drift once the price process is being observed. An optimal stopping time is determined as the first passage time of the posterior mean below a monotone boundary, which can be characterised as the unique solution to a non-linear integral equation. We also study monotonicity properties with respect to the prior distribution and the asset volatility.
    Date: 2015–09
  16. By: Ek, Claes (Department of Economics, Lund University)
    Abstract: Observing that people who wish to engage in prosocial behavior are often presented with more than one means to the same end, we develop a theory in which agents may contribute to a single public good through a range of different activities. Our aim with this extension is twofold. First, we deliver positive results. Noting that effort on one activity has been argued to crowd out ("moral licensing") as well as in ("moral consistency") effort on other activities, we predict that for a large set of plausible cases, policy to facilitate one activity reduces effort on other activities. However, this negative spillover effect is incomplete in the sense that overall public-good production still increases. Second, we revisit prominent results from single-activity models in the published literature and show that they grow rather more ambiguous, or even fall apart, when they are extended to our multi-activity setting. This is not due to dimensionality per se, but to the fact that single-activity models implicitly assume that agents use narrow mental accounts to categorize activities. By contrast, our model imposes broad accounting.
    Keywords: public goods; prosocial behavior; moral licensing; self-image
    JEL: D03 D11 H41
    Date: 2015–08–27
  17. By: Kotowski, Maciej H. (Harvard University)
    Abstract: We introduce a new stability concept for multi-period matching markets. Robust prescient stability asserts that agents exhibit foresight concerning how a market can develop in the future, but they retain ambiguity concerning how the market will develop. We show that a robustly presciently stable matching exists for any configuration of agents' preferences.
    JEL: C71 C78 D90
    Date: 2015–08
  18. By: GUIMARAES, Bernardo; SHEEDY, Kevin D.
    Abstract: Economic development requires some limits on what those in power can do | the rule of law | but how can restraints be imposed on the powerful when there is no-one above them? This paper studies equilibrium rules allocating power and resources established by selfinterested incumbents under the threat of rebellions from inside and outside the group in power. Commitment to uphold individuals' rights can only be achieved if power is not as concentrated as incumbents would like it to be, ex post. Power sharing endogenously enables incumbents to commit to otherwise time-inconsistent laws by ensuring more people receive rents under the status quo, and thus want to defend it.
    Date: 2015–03–16
  19. By: Mattozzi, Andrea (European University Institute, Florence and MOVE, Florence); Merlo, Antonio (Rice University)
    Abstract: We study the recruitment of individuals in the political sector. We propose an equilibrium model of political recruitment by two political parties competing in an election. We show that political parties may deliberately choose to recruit only mediocre politicians, in spite of the fact that they could select better individuals. Furthermore, we show that this phenomenon is more likely to occur in proportional than in majoritarian electoral systems.
    JEL: D72
    Date: 2014
  20. By: Francesco Bogliacino; Pietro Ortoleva
    Abstract: We use prospect theory to model reference dependent consumers, where the reference point is the average behavior of the society in the current period. We show that after a finite number of steps under any equilibrium, the distribution of wealth will become and remain equal, or admit a missing class (a particular form of polarization). Under equilibria that admit the highest growth rates, the initial wealth distribution that maximizes this growth rate is one of perfect equality. Conversely, under equilibria that admit the lowest growth rates, perfect equality minimizes this growth rate and societies with a small level of initial inequality grow the fastest. In addition growth rates in corresponding economics without reference dependent consumers admit lower growth rates.
    Keywords: Prospect Theory, Reference-dependence, Aspirations
    JEL: D11 D91
    Date: 2015–08–25
  21. By: Yizhaq Minchuk (Shamoon College of Engineering, Israel.); Aner Sela (BGU)
    Date: 2015

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