nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒10‒04
twenty-six papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Pandering and Pork-Barrel Politics By Eric Maskin; Jean Tirole
  2. Team Production, Endogenous Learning about Abilities and Career Concerns By Evangelia Chalioti
  3. Delegation and Communication By Arve, Malin; Honryo, Takakazu
  4. Movers and Shakers By Robert Akerlof Author-1-Name-First: Robert Author-1-Name-Last: Akerlof; Richard Holden Author-2-Name-First: Richard Author-2-Name-Last: Holden
  5. Dynamic Agenda Setting By Ying Chen; Hulya Eraslan
  6. On Competitive Nonlinear Pricing By Attar, Andrea; Mariotti, Thomas; Salanié, François
  7. Nonlinear Pricing By Mark Armstrong
  8. Believing when Credible: Talking about Future Plans and Past Actions By Schlag, Karl H.; Vida, Péter
  9. Robust Selling Mechanisms By Vinicius Carrasco; Vitor Farinha Luz; Paulo Monteiro; Humberto Moreira
  10. Efficiency and Stability in Large Matching Markets By Yeon-Koo Che; Olivier Tercieux
  11. Foreclosure Auctions By Niedermayer, Andreas; Shneyerov, Artyom; Xu, Pia
  12. Undiscounted Bandit Games By Keller, Godfrey; Rady, Sven
  13. Electoral Competition with Rationally Inattentive Voters By Filip Matejka; Guido Tabellini
  14. Dynamic Revenue Maximization: A Continuous Time Approach By Dirk Bergemann; Philipp Strack
  15. First Price Auctions with General Information Structures: Implications for Bidding and Revenue By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  16. Information and Market Power By Dirk Bergemann; Tibor Heumann; Stephen Morris
  17. Doing it now, later, or never By Cingiz K.; Flesch J.; Herings P.J.J.; Predtetchinski A.
  18. Crises and Rating Agencies By Loerke, Petra; Niedermayer, Andreas
  19. How Jeremy Bentham would defend against coordinated attacks By Ole Jann; Christoph Schottmüller
  20. Robust Mechanisms: the curvature case By Vinicius Carrasco; Vitor Farinha Luz; Paulo Monteiro; Humberto Moreira
  21. Repeated Implementation By Azacis, Helmuts; Vida, Péter
  22. Competitive Equilibrium and Singleton Cores in Generalized Matching Problems By Jaeok Park
  23. The efficiency of monopolistic provision of public goods through simultaneous bilateral bargaining By Noriaki Matsushima; Ryusuke Shinohara
  24. Does a Platform Monopolist Want Competition? By Niedermayer, Andreas
  25. Frictions in Internet Auctions with Many Traders: a Counterexample By Donna, Javier; Schenone, Pablo; Veramendi, Gregory
  26. Repeated Games with General Discounting By Ichiro Obara; Jaeok Park

  1. By: Eric Maskin; Jean Tirole
    Date: 2014–08
  2. By: Evangelia Chalioti (Cowles Foundation, Yale University)
    Abstract: This paper studies career concerns in teams where the support a worker receives depends on fellow team members’ effort and ability. In this setting, by exerting effort and providing support, a worker can influence her own and her teammates’ performances in order to bias the learning process in her favor. To manipulate the market’s assessments, we argue that in equilibrium, a worker has incentives to help or even sabotage her colleagues in order to signal that she is of higher ability. In a multiperiod stationary framework, we show that the stationary level of work effort is above and help effort is below their efficient levels.
    Keywords: Career concerns, Team incentives, Incentives to help, Incentives to sabotage
    JEL: D83 J24 M54
    Date: 2015–08
  3. By: Arve, Malin; Honryo, Takakazu
    Abstract: This paper analyzes delegation and joint decision making in an environment with private information and partially aligned preferences. We compare the benefits of these two decision making procedures as well as the interaction between them. We give a condition under which delegation is preferred to ex post joint decision making and we show how the interaction between delegation and ex post joint decision making always crowds out delegation. Finally, we analyze how the availability of the principal at the communication stage affects our results.
    JEL: D23 D82 L23
    Date: 2015–09–22
  4. By: Robert Akerlof Author-1-Name-First: Robert Author-1-Name-Last: Akerlof (University of Warwick); Richard Holden Author-2-Name-First: Richard Author-2-Name-Last: Holden (UNSW Australia Business School)
    Abstract: Most projects, in most walks of life, require the participation of multiple parties. While it is difficult to unite individuals in a common endeavor, some people, whom we call “movers and shakers,” seem able to do it. The paper specifically examines moving and shaking of an investment project. We analyze a model with two types of agents: managers and investors. Managers and investors initially form social connections. Managers then bid to buy control of the project, and the winning bidder puts effort into raising awareness of the project among investors. Investors who become aware receive private signals of the project’s quality. Finally, they choose whether to invest in the project, whose return is a function both of its quality and aggregate investment. We characterize the equilibrium of this game, including the endogenously formed network structure and payoffs. We show that, while managers are identical ex ante, a single manager emerges as most connected; these connections confer the ability to increase aggregate investment (i.e., “move and shake” the project); he consequently earns a rent. In extensions, we move away from the assumption of ex ante identical managers to highlight various forces that lead one manager or another to become a mover and shaker. Finally, we explore various applications, including: entrepreneurship, funds management, and seed capital.
    Keywords: Global games, investment, network capital.
    JEL: D85 D20
    Date: 2015–09
  5. By: Ying Chen (Department of Economics, Johns Hopkins University); Hulya Eraslan (Department of Economics, Rice University)
    Abstract: A party can address only a limited number of issues when in power. What issues to address - the party's agenda - has dynamic implications because it affects what issues will be addressed in the future. We analyze a model in which the incumbent in each period addresses one issue among several issues and the remaining issues roll over to the next period. We identify strategic manipulations in the forms of waiting for the moment, seizing the moment, steering, and preemption depending on how power fluctuates. We discuss efficiency implications of these strategic manipulations.
    Keywords: agenda setting; multi-issue bargaining; waiting for the moment; seizing the moment; steering; preemption.
    JEL: C78 D72 D78
    Date: 2015–09
  6. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: Many financial markets rely on a discriminatory limit-order book to balance supply and demand. We study these markets in a static model in which uninformed market makers compete in nonlinear tariffs to trade with an informed insider, as in Glosten (1994), Biais, Martimort, and Rochet (2000), and Back and Baruch (2013). We analyze the case where tariffs are unconstrained and the case where tariffs are restricted to be convex. In both cases, we show that pure-strategy equilibrium tariffs must be linear and, moreover, that such equilibria only exist under exceptional circumstances. These results cast doubt on the stability of even well-organized financial markets.
    Keywords: adverse selection; competing mechanisms; limit-order book
    JEL: D43 D82 D86
    Date: 2015–09
  7. By: Mark Armstrong
    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: Price discrimination, nonlinear pricing, bundling, product-line pricing, screening, discrete choice.
    JEL: D11 D21 D42 D86 L13 M31
    Date: 2015–09–10
  8. By: Schlag, Karl H.; Vida, Péter
    Abstract: We explore in an equilibrium framework whether games with multiple Nash equilibria are easier to play when players can communicate. We consider two variants, modelling talk about future plans and talk about past actions. The language from which messages are chosen is endogenous, messages are allowed to be vague. We focus on equilibria where messages are believed whenever possible, thereby develop a theory of credible communication. Predictions confirm the longstanding intuition for Aumann’s (1990) Stag Hunt game which applies directly to an investment game with positive spillovers. Our results shed new light on the multiplicity of equilibria in economic applications.
    Keywords: Pre-Play Communication; Cheap Talk; Credibility; Coordination; Language; Multiple Equilibria.
    JEL: C72 D83
    Date: 2015–09–17
  9. By: Vinicius Carrasco (Department of Economics PUC-Rio); Vitor Farinha Luz (European University Institute and the Department of Economics, The University of British Columbia); Paulo Monteiro (FGV/EPGE); Humberto Moreira (FGV/EPGE)
    Abstract: We consider the problem of a seller who faces a privately informed buyer and only knows one moment of the distribution from which values are drawn. In face of this uncertainty, the seller maximizes his worst-case expected profits. We show that a robustness property of the optimal mechanism imposes restrictions on the seller’s ex-post profit function. These restrictions are used to derive the optimal mechanism. The optimal mechanism entails distortions at the intensive margin, e.g., except for the highest value buyer, sales will take place with probability strictly smaller than one. The seller can implement such allocation by committing to post prices drawn from a non-degenerate distribution, so that randomizing over prices is an optimal robust selling mechanism. We extend the model to deal with the case in which: (i) M goods are sold and the buyer’s private information is multidimensional and (ii) the seller and the buyer interact for several periods. In the case of multiple goods, there are several optimal mechanisms. With multiple goods full bundling is optimal, as well as selling the goods in a fully separable way. In the dynamic model, we show that repetition, period by period, of the static-optimal mechanism is optimal.
    Date: 2015–04
  10. By: Yeon-Koo Che (Dept. of Economics, Columbia University); Olivier Tercieux (Dept. of Economics, Paris School of Economics)
    Abstract: We study efficient and stable mechanisms in matching markets when the number of agents is large and individuals’ preferences and priorities are drawn randomly. When agents’ preferences are uncorrelated, then both efficiency and stability can be achieved in an asymptotic sense via standard mechanisms such as deferred acceptance and top trading cycles. When agents’ preferences are correlated over objects, however, these mechanisms are either inefficient or unstable even in an asymptotic sense. We propose a variant of deferred acceptance that is asymptotically efficient, asymptotically stable and asymptotically incentive compatible. This new mechanism performs well in a counterfactual calibration based on New York City school choice data.
    Keywords: Large matching markets, Pareto efficiency, Stability, Fairness, Payoff equivalence, Asymptotic efficiency, and Asymptotic stability
    JEL: C70 D61 D63
    Date: 2015–07
  11. By: Niedermayer, Andreas; Shneyerov, Artyom; Xu, Pia
    Abstract: We develop a novel theory of real estate foreclosure auctions, which have the special feature that the lender acts as a seller for low and as a buyer for high prices. The theory yields several empirically testable predictions concerning the strategic behavior of the agents, both under symmetric and asymmetric information. Using novel data from Palm Beach County (FL, US), we �nd evidence of both strategic behavior and asymmetric information, with the lender being the informed party. Moreover, the data are consistent with moral hazard in mortgage securitization: banks collect less information about the value of the mortgage collateral.
    Keywords: Foreclosure Auctions; Asymmetric Information; Bunching; Discontinuous Strategies; Securitization
    JEL: C72 D44 D82 G21
    Date: 2015–09–22
  12. By: Keller, Godfrey; Rady, Sven
    Abstract: We analyze continuous-time games of strategic experimentation with two-armedbandits when there is no discounting. We show that for all specifications of priorbeliefs and payoff-generating processes that satisfy some separability condition, the unique symmetric Markov perfect equilibrium can be computed in a simple closed form involving only the expected current payoff of the risky arm and the expected full-information payoff, given current information. The separability condition holds in a variety of models that have been explored in the literature, all of which assume that the risky arm’s expected payoff per unit of time is time-invariant and actual payoffs are generated by a process with independent and stationary increments. The separability condition does not hold when the expected payoff per unit of time is subject to state-switching.
    Keywords: Strategic Experimentation; Two-Armed Bandit; Markov-Perfect Equilibrium
    JEL: C73 D83
    Date: 2015–09–21
  13. By: Filip Matejka; Guido Tabellini
    Abstract: This paper studies how voters optimally allocate costly attention in a model of probabilistic voting. The equilibrium solves a modified social planning problem that reflects voters’ choice of attention. Voters are more attentive when their stakes are higher, when their cost of information is lower and prior uncertainty is higher. We explore the implications of this in a variety of applications. In equilibrium, extremist voters are more influential and public goods are under-provided. The analysis also yields predictions about the equilibrium pattern of information, and about policy divergence by two opportunistic candidates. Endogenous attention can lead to multiple equilibria, explaining how poor voters in developing countries can be politically empowered by welfare programs .
    Date: 2015
  14. By: Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Microsoft Research New England & UC Berkeley)
    Abstract: We characterize the revenue-maximizing mechanism for time separable allocation problems in continuous time. The valuation of each agent is private information and changes over time. At the time of contracting every agent privately observes his initial type which influences the evolution of his valuation process. The leading example is the repeated sales of a good or a service. We derive the optimal dynamic mechanism, analyze its qualitative structure and frequently derive its closed form solution. This enables us to compare the distortion in various settings. In particular, we discuss the cases where the type of each agent follows an arithmetic or geometric Brownian motion or a mean reverting process. We show that depending on the nature of the private information the distortion might increase or decrease over time.
    Keywords: Mechanism design, Dynamic auctions, Repeated sales, Impulse response function, Stochastic flow
    JEL: D44 D82 D83
    Date: 2014–07
  15. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University)
    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: First price auction, Information structure, Bayes correlated equilibrium, Private values, Interdependent values, Common values, Revenue, surplus, Welfare bounds, Reserve price, Entry fee
    JEL: C72 D44 D82 D83
    Date: 2015–08
  16. By: Dirk Bergemann (Cowles Foundation, Yale University); Tibor Heumann (Dept. of Economics, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    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 establish our results by providing 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: Demand function competition, Supply function competition, Price impact, Market power, Incomplete information, Bayes correlated equilibrium, Volatility, Moments restrictions, Linear best responses, Quadratic payoffs
    JEL: C72 C73 D43 D83 G12
    Date: 2015–08
  17. By: Cingiz K.; Flesch J.; Herings P.J.J.; Predtetchinski A. (GSBE)
    Abstract: We study centipede games played by an infinite sequence of players. Following the literature on time-inconsistent preferences, we distinguish two types of decision makers, naive and sophisticated, and the corresponding solution concepts, nave -equilibrium and sophisticated -equilibrium. We show the existence of both naive and sophisticated -equilibria for each positive . Under the assumption that the payoff functions are upper semicontinuous, we furthermore show that there exist both naive and sophisticated 0-equilibria in pure strategies. We also compare the probability to stop of a naive versus a sophisticated decision maker and show that a sophisticated decision maker stops earlier.
    Keywords: Game Theory and Bargaining Theory: General; Consumer Economics: Theory; Welfare Economics: General; Conflict; Conflict Resolution; Alliances; Intertemporal Consumer Choice; Life Cycle Models and Saving;
    JEL: C70 D11 D60 D74 D91
    Date: 2015
  18. By: Loerke, Petra; Niedermayer, Andreas
    Abstract: We analyze a rating agency's incentives to distort ratings in a model with a monopolistic profit maximizing rating agency, a continuum of heterogeneous firms, and a competitive market of risk-neutral investors. Firms sell bonds, the value of a firm's bond is known to the firm and observable by the agency, but not by buyers. Firms can choose to get a rating. The rating agency can reveal a signal of arbitrary precision about the quality of the bond. In contrast to the existing literature, we allow aggregate uncertainty. As in the existing literature, one rating class is optimal. However, the rating agency does not choose a socially optimal cutoff: the agency is more likely to be too lenient if the distribution of aggregate uncertainty has a lower mean, a higher variance, and is more left skewed. It is more likely to be too strict if the opposite holds.
    Keywords: Rating Agencies; Certification; Aggregate Uncertainty
    JEL: C72 D42 D82 G20
    Date: 2015–09–21
  19. By: Ole Jann (Department of Economics, University of Copenhagen); Christoph Schottmüller (Department of Economics, University of Copenhagen)
    Abstract: How can a single player defend against the threat of a coordinated attack by a group? For example, how can a central bank defend a currency peg against speculators, a government against a revolution or a prison warden against a breakout? Bentham (1787) proposed an innovative prison concept based on information asymmetries - "the panopticon" - as an answer to this question. We consider dierent information structures in a stylized model of a prison, in which a warden chooses a costly guard level with the goal of avoiding breakouts. Successful breakouts require coordination among prisoners. We show that the information structure corresponding to the panopticon often performs best, especially if there are many prisoners.
    Keywords: panopticon, coordination games, global games, transparency
    JEL: D23 D74 D82 E58 Z13 F31
    Date: 2015–08–12
  20. By: Vinicius Carrasco (Department of Economics PUC-Rio); Vitor Farinha Luz (European University Institute and the Department of Economics, The University of British Columbia); Paulo Monteiro (FGV/EPGE); Humberto Moreira (FGV/EPGE)
    Abstract: This note considers the problem of a principal (she) who faces a privately informed agent (he) and only knows one moment of the distribution from which his types are drawn. Payoffs are non-linear in the allocation and the principal maximizes her worst-case expected profits. We recast the robust design problem as a zero-sum game played by the principal and an adversarial nature who seeks to minimize her expected payoffs. The robust mechanism and the worst case distribution are, then, the Nash equilibrium of such game. A robustness property of the optimal mechanism imposes restrictions on the principal’s ex-post profit function. These restrictions then lead to the optimal mechanism. The robust mechanism entails exclusion of low types and distortions at the intensive margin that (in a precise sense) are larger than what those that prevail in standard Bayesian mechanism design problems.
    Date: 2015–06
  21. By: Azacis, Helmuts; Vida, Péter
    Abstract: We prove that a social choice function is repeatedly implementable if and only if it is dynamically monotonic when the number of agents is at least three. We show how to test dynamic monotonicity by building an associated repeated game. It follows that a weaker version of Maskin monotonicity is necessary and sufficient among the social choice functions that are efficient. As an application, we show that utilitarian social choice functions, which can only be one-shot implemented with side-payments, are repeatedly implementable, as continuation payoffs can play the role of transfers. Under some additional assumptions, our results also apply when the number of agents is two.
    Keywords: Mechanism Design; Dynamic Monotonicity; Efficiency; Repeated Implementation; Repeated Games; Approximation of the Equilibrium Set; Sufficient and Necessary Condition
    JEL: C73 D71
    Date: 2015–09–17
  22. By: Jaeok Park (Yonsei University)
    Abstract: We study competitive equilibria in generalized matching problems. We show that, if there is a competitive matching, then it is unique and the core is a singleton consisting of the competitive matching. That is, a singleton core is necessary for the existence of competitive equilibria. We also show that a competitive matching exists if and only if the matching produced by the top trading cycles algorithm is feasible, in which case it is the unique competitive matching. Hence, we can use the top trading cycles algorithm to test whether a competitive equilibrium exists and to construct a competitive equilibrium if one exists. Lastly, in the context of bilateral matching problems, we compare the condition for the existence of competitive matchings with existing suffcient conditions for the existence or uniqueness of stable matchings and show that it is weaker than the existing conditions.
    Keywords: matching, competitive equilibrium, core, top trading cycles algorithm
    JEL: C78 D51
    Date: 2015–10
  23. By: Noriaki Matsushima; Ryusuke Shinohara
    Abstract: We examine a monopolistic supplier's decision about a pure public good when he/she must negotiate with beneficiaries of the good. In our model, while the level of the public good is decided unilaterally by the supplier, the cost share of the public good is negotiated between the supplier and beneficiaries. Our bargaining model is built on simultaneous bilateral bargaining and the bargaining power of the supplier is a key factor for the analysis. We show that under some mild conditions, the supplier produces the public good at a Pareto-efficient level in equilibrium if and only if his/her bargaining power is sufficiently weak. In addition, under some reasonable parametric functions, we show that the equilibrium likelihood of the efficient provision of the public good diminishes as the number of beneficiaries increases. We show by a numerical example that the source of the inefficient provision of the public good when the supplier's bargaining power is sufficiently strong may be the excessive supply of the public good.
    Date: 2015–09
  24. By: Niedermayer, Andreas
    Abstract: We consider a software vendor first selling a monopoly platform and then an application running on this platform. He may face competition by an entrant in the applications market. The platform monopolist can benefit from competition for three reasons. First, his profits from the platform increase. Second, competition serves as a credible commitment to lower prices for applications. Third, higher expected product variety may lead to higher demand for his application. Results carry over to non-software platforms and, partially, to upstream and downstream firms. The model also explains why Microsoft Office is priced significantly higher than Microsoft’s operating system.
    Keywords: Platforms; Entry; Complementary Goods; Price Commitment; Product Variety; Microsoft; Vertical Integration; Two-Sided Markets
    JEL: D41 D43 L13 L86
    Date: 2015–09–22
  25. By: Donna, Javier; Schenone, Pablo; Veramendi, Gregory
    Abstract: Peters and Severinov (2006) (PS henceforth) characterize a perfect Bayesian equilibrium (PBE) in a competing auctions environment, where all buyers are linked to all the sellers. PS characterize a PBE using a simple bidding rule, whereby buyers select in which auction to bid. In this note we show that when buyers are linked with a subset of the sellers (i.e. when there are search frictions), the PS bidding rule is no longer guaranteed to be efficient nor a PBE of the competing auctions game of PS. Our results indicate that researchers should be cautious when using the PS bidding rule to make inference about the behavior of buyers and sellers in a market where frictions are present such as eBay.
    Keywords: Auctions; Internet; Frictions; Networks
    JEL: C73 C78 D44 L00
    Date: 2015–09–01
  26. By: Ichiro Obara (University of California); Jaeok Park (Yonsei University)
    Abstract: We introduce a general class of time discounting, which includes time-inconsistent ones, into repeated games with perfect monitoring. A strategy prole is called an agent subgame perfect equilibrium if there is no protable one-shot deviation at any history. We characterize strongly symmetric agent subgame perfect equilibria for repeated games with symmetric stage game. We nd that the harshest punishment takes different forms given different biases. When players are future biased, the harshest punishment is supported by a version of stick-and-carrot strategy. When players are present biased, the harshest punishment may take a more complex form. In particular, the worst punishment path may need to be cyclical. We also nd that the worst punishment payoff is different from the stage game minmax payoff even when players are patient. For some class of discounting, we show that the worst punishment payoff is larger than the stage game minmax payoff with present bias and smaller than the stage game minmax payo with future bias. We also characterize the set of limit equilibrium payoffs as the length of periods converges to 0, without changing the intertemporal structure of biases.
    Keywords: Hyperbolic Discounting, Present Bias, Repeated Game, Time Inconsistency
    JEL: C73 D03
    Date: 2015–10

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