nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒09‒18
eleven papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Persuasive signalling By Arianna Degan; Ming Li
  2. Buying Locally By George J. Mailath; Andrew Postlewaite; Larry Samuelson
  3. A Complete Characterization of Equilibria in Two-type Common Agency Screening Games By Martimort, David; Semenov, Aggey; Stole, Lars
  4. Competing with Asking Prices By Ronald Wolthoff; Ludo Visschers; Benjamin Lester
  5. Budgets under Delegation By Kimiko Terai; Amihai Glazer
  6. Insufficient Experimentation Because Agents Herd By Kimiko Terai; Amihai Glazer
  7. Preference Cloud Theory: Imprecise Preferences and Preference Reversals By Bayrak, Oben K.; Hey, John D.
  8. Markov Perfect Equilibria in Stochastic Revision Games By Lovo , Stefano; Tomala , Tristan
  9. Strategic Delegation of Indebted Firms in a Duopoly with Uncertain Demand By Tetsuya Shinkai; Takao Ohkawa; Makoto Okamura; Kozo Harimaya
  10. Information Inertia By Scott Condie; Jayant Ganguli; Philipp Karl Illeditsch
  11. Competition, product safety, and product liability By Chen, Yongmin; Hua, Xinyu

  1. By: Arianna Degan (Université du Québec à Montréal and CIRPEE); Ming Li (Concordia University and CIREQ)
    Abstract: We present a model of persuasive signalling, where a privately-informed sender selects from a class of signals with different precision to persuade a receiver to take one of two actions, where higher precision is more costly. The sender’s information could be either favourable or unfavourable. The receiver observes both the sender’s choice of signal and a random realization of the signal. We show that all plausible equilibria must involve some pooling and any informative signal must be associated with an optimistic posterior. When the receiver is ex ante pessimistic or indifferent, the only plausible equilibrium is semi-separating, with levels of precision independent of the prior. Finally, we investigate the sender’s optimal persuasion policy–choice of signal before (commitment) or after (discretion) he learns his type. We show that the sender is indifferent between commitment and discretion when the prior is optimistic, prefers discretion to commitment when the prior is sufficiently pessimistic, and could either prefer discretion or commitment when the prior is neutral.
    Keywords: signalling, persuasion, divine equilibrium, optimal information provision.
    JEL: D72 D82
    Date: 2015–08
  2. By: George J. Mailath; Andrew Postlewaite; Larry Samuelson
    Abstract: “Buy local” arrangements encourage members of a community or group to patronize one another rather than the external economy. They range from formal mechanisms such as local currencies to informal “I’ll buy from you if you buy from me” arrangements, and are often championed on social or environmental grounds. We show that in a monopolistically competitive economy, buy local arrangements can have salutary effects even for selfish agents immune to social or environmental considerations. Buy local arrangements effectively allow firms to exploit the equilibrium price-cost gap to profitably expand their sales at the going price.
    Keywords: Buy local, local currency, trading favors, reciprocity, monopolistic competition
    JEL: D43 D85 L14 R12
    Date: 2015–03
  3. By: Martimort, David; Semenov, Aggey; Stole, Lars
    Abstract: We characterize the complete set of equilibrium allocations to a two-type intrinsic common agency screening game as the set of solutions to a self-generating optimization program. The program, in turn, can be thought of as a maximization problem facing a fictional “surrogate” principal with a simple set of incentive constraints that embed the non-cooperative behavior of principals in the underlying game. After providing a complete characterization of equilibrium outcomes, we refine the set by imposing a requirement of biconjugacy on equilibrium tariffs: In biconjugate equilibria, the surrogate principal’s incentive constraints are described by marginal conditions. Biconjugate equilibria always exist, they are simple to compute, and they are robust in the sense that they remain equilibria when “out-of-equilibrium” output-price pairs are pruned. After characterizing the set of biconjugate equilibrium allocations, we ask what is the best equilibrium for the principals from an ex ante perspective. We show that the allocation that maximizes the principals’ ex ante collective payoff among all possible equilibria is distinct from the best allocation in the refined set of biconjugate equilibria, although their qualitative properties remain similar.
    Keywords: Intrinsic common agency, aggregate games, screening contracts.
    JEL: D82 D86
    Date: 2015–08–19
  4. By: Ronald Wolthoff (University of Toronto); Ludo Visschers (The University of Edinburgh/Univ Carlos III Madrid); Benjamin Lester (Federal Reserve Bank of Philadelphia)
    Abstract: In many markets, sellers advertise their good with an asking price. This is a price at which the seller will take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers' revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the positive implications of this pricing mechanism for transaction prices and allocations.
    Date: 2015
  5. By: Kimiko Terai (Faculty of Economics, Keio University); Amihai Glazer (Department of Economics, University of California, Irvine)
    Abstract: Consider a principal who sets a budget that the agent allocates among different services. Because the preferences of the agent may differ from those of the principal, the budget the principal sets can be lower or higher than in the first-best solution. When the principal is uncertain about the agentfs preferences, the agent may choose an allocation that signals his type, thereby affecting the size of the budget the principal will set in the following period. The equilibrium may have separation or pooling. In a pooling equilibrium, the agent may mis-represent his preferences, aiming to get a large budget in the future period.
    Keywords: Delegation, Signaling, Budget process, Expenses for public works, Change of government
    JEL: D73 D82 H61
    Date: 2014–11
  6. By: Kimiko Terai (Faculty of Economics, Keio University); Amihai Glazer (Department of Economics, University of California, Irvine)
    Abstract: Consider a principal (say a central government) which allocates a fixed budget among multiple agents (say local governments). Each agent chooses a policy or technology. After observing the success or failure of each agent, the principal allocates a larger share of the budget to agents who succeeded than to those who failed. Under these conditions, a Nash equilibrium may have all agents herd, all choosing the same technology, even though the principal would prefer that they experiment, with different agents choosing different technologies. Relatedly, under some conditions all risk-averse agents may choose a technology whose outcome is risky, over a technology whose outcome is certain.
    Keywords: Delegation, herd behavior, risk-aversion, fiscal decentralization, policy innovation resource allocation in organizations
    JEL: D81 H61 H77
    Date: 2014–12
  7. By: Bayrak, Oben K. (CERE and Department of Forest Economics, SLU); Hey, John D. (Department of Economics, University of York)
    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 individuals’ vague understanding of numerical probabilities. We combine this concept with the use of the Alpha model (which builds on Hurwicz’s criterion) and construct a simple model which helps us to understand various anomalies discovered in the experimental economics literature that standard models cannot explain.
    Keywords: Imprecise Preferences; Preference Reversals; Decision under Uncertainty; Anomalies in Expected Utility Theory
    JEL: D81
    Date: 2015–09–08
  8. By: Lovo , Stefano (HEC); Tomala , Tristan
    Abstract: We introduce the model of Stochastic Revision Games where a finite set of players control a state variable and receive payoffs as a function of the state at a terminal deadline. There is a Poisson clock which dictates when players are called to choose of revise their actions. This paper studies the existence of Markov perfect equilibria in those games. We give an existence proof assuming some form of correlation.
    Keywords: Stochastic Revision Games; Games Theory; Equilibria
    JEL: C73
    Date: 2015–09–01
  9. By: Tetsuya Shinkai (School of Economics, Kwansei Gakuin University); Takao Ohkawa (Faculty of Economics Ritsumeikan University); Makoto Okamura (Faculty of Economics, Hiroshima University); Kozo Harimaya (Faculty of Business Administration Ritsumeikan University)
    Abstract: We examine an effect of strategic delegation on the competition behavior of indebted …firms and welfare in a Cournot duopoly with demand uncertainty. We establish that the owners of each …firm delegate their tasks and decisions to a manager when the demand is sufficiently large but one …firm chooses no delegation and the other chooses delegation when the demand is small. This result is consistent with the duopoly competition example between the Mitsui Gomei Kaisya and Suzuki & Co. from the late Meiji era to Taisho era in Japan.
    Keywords: indebted …firms, delegation, managerial incentives, and Cournot duopoly
    JEL: G32 L13 L12
    Date: 2015–09
  10. By: Scott Condie; Jayant Ganguli; Philipp Karl Illeditsch
    Abstract: We study how aversion to ambiguity about the predictability of future asset values and cash flows affects optimal portfolios and asset prices. We show that optimal portfolios do not always react to new information even though there are no information processing costs or other market frictions. Moreover, the equilibrium price of the market portfolio does not always incorporate all available public information that is worse than expected. This informational inefficiency leads to price underreaction consistent with momentum.
    Date: 2015–08–11
  11. By: Chen, Yongmin; Hua, Xinyu
    Abstract: A firm's incentive to invest in product safety is affected by both the market environment and the liability when its product causes consumer harm. A long-standing question in law and economics is whether competition can (partially) substitute for product liability in motivating firms to improve product safety. We investigate this issue in a spatial model of oligopoly with product differentiation, where reputation provides a market incentive for product safety and higher product liability may distort consumers' incentive for proper product care. We find that partial liability, together with reputation concerns, can motivate firms to make socially desirable safety investment. Increased competition due to less product differentiation lowers equilibrium market price, which diminishes a firm's gain from maintaining reputation and raises the socially desirable product liability. On the other hand, an increase in the number of competitors reduces both the benefit from maintaining reputation and the potential cost savings from cutting back safety investment; consequently, the optimal liability may vary non-monotonically with the number of competitors in the market. In general, therefore, the relationship between competition and product liability is subtle, depending on how competition is measured.
    Keywords: product safety, product liabilty, competition
    JEL: K13 L13 L15
    Date: 2015–09–04

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