nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒12‒01
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Rational Choice with Category Bias By Maltz, Amnon
  2. Experience Based Dynamic Choice: A Revealed Preference Approach By Maltz, Amnon
  3. On strategic complementarities in discontinuous games By Pavlo Prokopovych; Nicholas C. Yannelis
  4. Screening as a Unified Theory of Delinquency, Renegotiation, and Bankruptcy By Igor Livshits; Natalia Kovrijnykh
  5. Deterministic versus stochastic contracts in a dynamic principal-agent model By Thomas Schacherer
  6. First Price Auctions with General Information Structures: Implications for Bidding and Revenue By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  7. A theory of media self-silence By Ascensión Andina Díaz; José A. García-Martínez
  8. On the equivalence of bayesian and dominant strategy implementation: the case of non-linear utilities By Alexey Kushnir; Shuo Liu
  9. LeChatelier-Samuelson principle in games and pass-through of shocks By Alexei Alexandrov; Özlem Bedre-Defolie
  10. Essays on costly and truthful communication By Olivier Body
  11. Resale price maintenance in two-sided markets By Gabrielsen, Tommy S.; Johansen, Bjørn Olav; Lømo, Teis L.
  12. Dynamic Competition in Deceptive Markets By Johannes Johnen
  13. Future-biased government By Francisco M. Gonzalez; Itziar Lazkano; Sjak A. Smulders
  14. Envelope Theorem, Euler, and Bellman Equations without Differentiability By Jan Werner; Ramon Marimon
  15. Corporate Social Responsibility and Strategic Relationships By Hino, Yoshifumi; Zennyo, Yusuke
  16. Contemplation vs. Intuition. A reinforcement learning approach By CHO, IN-KOO; Rubinchik, Anna

  1. By: Maltz, Amnon (Department of Economics, University of Haifa)
    Abstract: This paper develops, using the revealed preference approach, a model of choice with an initial endowment and in the presence of alternatives that are grouped into categories. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of an initial endowment. Given an exogenous endowment, our decision maker follows a 3-step procedure: First, she identifies the best alternative in the choice set which belongs to the same category as her endowment. This alternative serves as her endogenous reference point which in turn, at the second step, induces a “psychological constraint”. Finally, she chooses the best feasible alternative in her constraint set according to her reference-free utility. The model gives rise to a “category bias” which generalizes the status quo bias by attracting the decision maker towards the endowment’s category but not necessarily towards the endowment itself. It also accommodates recent experimental findings on the absence of status quo bias among goods which belong to the same category. We apply the model to a financial choice problem and show that category bias may lead to a risk premium even with risk neutral agents.
    Keywords: Status Quo Bias, Categories, Reference Dependence, Risk Premium, Revealed Preference
    JEL: D03 D11
    Date: 2015–10–08
  2. By: Maltz, Amnon (Department of Economics, University of Haifa)
    Abstract: We use the revealed preference method to derive a model of dynamic choice where the agent’s past experience may influence her current decisions. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of experience. As the agent gains experience her utility changes but only in a very restricted fashion. Every period, after an alternative is chosen, the utility of that, and only that alternative, may change while the utility of all other alternatives remains fixed. The model provides a platform on which many behavioral dynamic phenomena may be examined. We utilize it and look into the behavioral implications of bounded memory, status quo bias and variety seeking.
    Keywords: Experience, Dynamic Choice, Memory, Status Quo Bias, Revealed Preference
    JEL: D11 D83
    Date: 2015–09–28
  3. By: Pavlo Prokopovych (Kyiv School of Economics); Nicholas C. Yannelis (University of Iowa)
    Abstract: We study the existence of a pure strategy Nash equilibrium in normal-form games with strategic complementarities where the players' payoff functions are not necessarily upper semicontinuous in their own strategies. The new equilibrium existence results obtained in this paper cover examples to which the seminal works of Vives (1990), Milgrom and Shannon (1994), and Reny (1999) cannot be applied.
    Keywords: Discontinuous game; Strategic complementarities; Better-reply security; Directional single crossing; Increasing correspondence
    JEL: C65 C72
    Date: 2015–11
  4. By: Igor Livshits (University of Western Ontario); Natalia Kovrijnykh (Arizona State University)
    Abstract: We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bankruptcy all occur in equilibrium as a result of a simple screening mechanism. A borrower has private information about her cost of bankruptcy, and a lender may use random contracts to screen different types of borrowers. In equilibrium, some borrowers choose not to repay, and thus become delinquent. The lender renegotiates with some delinquent borrowers. In the absence of renegotiation, delinquency leads to bankruptcy. We apply the model to analyze effects of a government intervention in debt restructuring. We show that a mortgage modification program aimed at limiting foreclosures that fails to take into account private debt restructuring may have the opposite effect from the one intended.
    Date: 2015
  5. By: Thomas Schacherer (Humboldt-Universität zu Berlin)
    Abstract: This paper studies stochastic dynamic contracting between a principal and an agent, whose type evolution follows a Markov process. I analyze contracts in which the agent can terminate the contract in every period whereas the principal has full-commitment to her offer. The principal tries to screen the true type of the agent to maximize her profit. Therefore, she wants to incentivize him to reveal his true type. I show that stochastic contracts can never bring about more profits than deterministic contracts for the principal if the first-order approach is valid. For this result, it is immaterial if stochastic contracts depend on earlier realizations of the contract or not.
    JEL: J
    Date: 2015–08–12
  6. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We explore the impact of private information in sealed bid first price auctions. For a given symmetric and arbitrarily correlated prior distribution over values, we characterize the lowest winning bid distribution that can arise across all information structures and equilibria. The information and equilibrium attaining this minimum leave bidders uncertain whether they will win or lose and indifferent between their equilibrium bids and all higher bids. Our results provide lower bounds for bids and revenue with asymmetric distributions over values. We report further analytic and computational characterizations of revenue and bidder surplus including upper bounds on revenue. Our work has implications for the identification of value distributions from winning bid data and for the informationally robust comparison of alternative bidding mechanisms.
    Keywords: First price auction, Information structure, Bayes correlated equilibrium, Private values, Interdependent values, Common values, Revenue, Surplus, Welfare bounds, Reserve price
    JEL: C72 D44 D82 D83
    Date: 2015–08
  7. By: Ascensión Andina Díaz (Departamento de Teoría e Historia Económica, Universidad de Málaga); José A. García-Martínez (Departamento de Estudios Económicos y Financieros, Universidad Miguel Hernández)
    Abstract: This paper proposes a theory of media self-silence. The argument is that news organizations have the power to raise public concern and so affect the probability that there is ex-post verification of the true state of the world. Built on the literature of career concerns, we consider a newspaper that seeks to maximize its reputation for high quality. Our results predict more media silence, the higher the prior expectations on the quality of the firm, the greater the probability of ex-post verification, and the higher the power of the newspaper to lead public opinion. We also obtain that the greater the social influence of a news organization, the stricter the firm's vetting process for stories is. Last, competition reduces media silence.
    Keywords: Feedback power; reputation; quality; competition; media silence
    JEL: D72 D82
    Date: 2015–05
  8. By: Alexey Kushnir; Shuo Liu
    Abstract: We extend the equivalence between Bayesian and dominant strategy implementation established by Gershkov et al. (Econometrica, 2013) to environments with non-linear utilities satisfying the average single-crossing property and the convex-valued assumption. The new equivalence result produces novel implications to the literature on the principal-agent problem with allocative externalities, environmental mechanism design, and public good provision.
    Keywords: Bayesian implementation, dominant strategy implementation, mechanism design, non-linear utilities, single-crossing
    JEL: D82
    Date: 2015–11
  9. By: Alexei Alexandrov (Consumer Financial Protection Bureau); Özlem Bedre-Defolie (ESMT European School of Management and Technology)
    Abstract: We show that the LeChatelier-Samuelson principle holds in many strategic environments: the adjustment to changes in parameters (shocks) in the short run (only by one player) is smaller in magnitude than the adjustment in the long run (allowing other players to adjust as well). We show that the principle holds for supermodular games (strategic complements) regardless of whether the shock directly affects only one player's action ("idiosyncratic" shock). The principle holds for submodular games (strategic substitutes) if the shock is idiosyncratic and there are only two players. We provide a simple sufficient condition for the principle to hold in submodular games with more than two players. The principle might fail to hold in submodular games if the shock is not idiosyncratic. We show that our findings explain the breakdown of the principle in non-strategic environments as well, apply our results to multiproduct monopoly and oligopoly cost pass-through, and argue that the principle might explain the empirical findings of overshifting of cost and tax changes.
    Date: 2015–11–19
  10. By: Olivier Body
    Abstract: Based on three essays, this Ph.D. thesis studies costly and truthful communication in the following situation: a sender (S) tries to convince a receiver (R) to accept a project.<p>Before communication, both agents do not know the project quality. On the one hand, they believe with probability α that the project is of high quality and will raise R’s payoff by r_H, and otherwise that it is of low quality and will decrease R’s payoff by
    Keywords: Communication -- Economic aspects; Project management; Communication -- Aspect économique; Gestion de projet; experiment; communication; information
    Date: 2014–01–20
  11. By: Gabrielsen, Tommy S. (Department of Economics, University of Bergen); Johansen, Bjørn Olav (Department of Economics, University of Bergen); Lømo, Teis L. (Department of Economics, University of Bergen)
    Abstract: In many two-sided markets, platforms use intermediary agents to reach consumers at one side of the market. In addition to the usual externalities in two-sided markets, the use of agents creates an additional externality for the platforms. We study if and how competing platforms can internalize the externalities by imposing resale price maintenance (RPM) on the agents. By the appropriate use of RPM, the platforms can induce the fully integrated outcome. Using a speci…c example, we show that consumers’surplus is reduced when the equilibrium involves the use of minimum RPM, and consumers benefi…t when maximum RPM is used.
    Keywords: Two-sided markets; resale price maintenance
    JEL: L13 L41 L42
    Date: 2015–11–25
  12. By: Johannes Johnen (European School of Management and Technology)
    Abstract: This paper studies the impact of private customer data about consumer naiveté in markets for deceptive products in which firms use these data to distinguish their existing customers’ level of sophistication. To do so, I introduce a dynamic model in which competing firms can shroud hidden fees from naive customers, but not from sophisticated ones. Data on past usage is highly valuable to firms in competitive settings only if it identifies naive customers. Firms exploit private information on their existing customers’ types to make type-specific offers. Since naives believe to be sophisticated, consumers do not self-select when given type-specific offers, making it impossible for rivals to compete effectively. Privately informed firms make offers to induce sophisticated customers to switch already at higher prices. Thus, competitors cannot attract profitable naives without attracting unprofitable sophisticates as well. This adverse-attraction effect enables firms to keep positive margins on existing naives, while breaking even on sophisticates. Since this implies that margins of naive consumers decrease in the share of sophisticated ones, firms prefer a balanced customer base. Achieving positive continuation profits from exploiting naive consumers requires each firm to have a substantial customer base. Thus, even when firms compete before learning about customers’ types, firms have an incentive to coordinate on prices and competition is mitigated even more. I analyze the effects of a policy that discloses customer information to all firms and thereby increases consumer surplus, and illustrate the robustness of the results through several extensions.
    Keywords: Deceptive Products; Shrouded Attributes; History-based Price Discrimination; Industry Dynamics; Big Data
    JEL: D14 D18 D21 D99 D89
    Date: 2015–07–25
  13. By: Francisco M. Gonzalez (Department of Economics, University of Waterloo); Itziar Lazkano (University of Wisconsin-Milwaukee); Sjak A. Smulders (Tilburg University)
    Abstract: We argue that governments are future biased when they aggregate the preferences of overlapping generations. Future bias, which involves preference reversals favoring future over current consumption, explains why governments legislate old-age transfers at the expense of capital accumulation and growth, even if generations are altruistic.
    JEL: D71 D72 H55
    Date: 2015–10
  14. By: Jan Werner (University of Minnesota); Ramon Marimon (European University Inst. & UPF - Barcelona GSE)
    Abstract: We extend the envelope theorem, the Euler equation, and the Bellman equation to dynamic constrained optimization problems where binding constraints can give rise to non-differentiable value functions. The envelope theorem -- an extension of Milgrom and Segal (2002) theorem for concave functions -- provides a generalization of the Euler equation and establishes a relation between the Euler and the Bellman equation. For example, we show how solutions to the standard Belllman equation may fail to satisfy the respective Euler equations, in contrast with solutions to the infinite-horizon problem. In standard maximisation problems the failure of Euler equations may result in inconsistent multipliers, but not in non-optimal outcomes. However, in problems with forward looking constraints this failure can result in inconsistent promises and non-optimal outcomes. We also show how the inconsistency problem can be resolved by a minimal extension of the co-state. As an application we extend the theory of recursive contracts of Marcet and Marimon (1998, 2015) to the case where solutions are not unique, resolving a problem pointed out by Messner and Pavoni (2004).
    Date: 2015
  15. By: Hino, Yoshifumi; Zennyo, Yusuke
    Abstract: We analyze a delegation game relevant to the conduct of corporate social responsibility (CSR) in which the firm's owner offers the manager a contract consisting of firm profit and social welfare. We derive three results that distinctly differ from existing findings. First, CSR decisions are strategic complements for firms. Second, with simultaneous CSR decisions, the equilibrium price is equal to marginal cost, despite the fact that firms compete in a Cournot duopoly. Finally, with sequential CSR decisions, unlike the follower firm, the leader firm never exhibits CSR. However, the follower firm can enjoy a profit equal to that derived by the leader in a Cournot-Stackelberg game.
    Keywords: Keywords Corporate social responsibility, Cournot, Strategic substitute, Strategic complement
    JEL: L13 L21 M14
    Date: 2015
  16. By: CHO, IN-KOO (Department of Economics, University of Illinois, USA); Rubinchik, Anna (Department of Economics, University of Haifa)
    Abstract: In a search for a positive model of decision-making with observable primitives, we rely on the burgeoning literature in cognitive neuroscience to construct a three-element machine (agent). Its control unit initiates either impulsive or cognitive element to solve a problem in a stationary Markov environment, the element "chosen" depends on whether the problem is mundane or novel, memory of past successes and the strength of inhibition. Our predictions are based on a stationary asymptotic distribution of the memory, which, depending on the parameters, can generate different "characters", e.g., an uptight dimwit, who could succeed more often with less inhibition, as well as a relaxed wise-guy, who could gain more with a stronger inhibition of impulsive (intuitive) responses. As one would expect, stronger inhibition and lower cognitive costs increase the frequency of decisions made by the cognitive element. More surprisingly, increasing the "carrot" and reducing the "stick" (being in a more supportive environment) enhances contemplative decisions (made by the cognitive unit) for an alert agent, i.e., the one who identifies novel problems frequently enough.
    Keywords: the two-system decision-making, executive control, inhibition, adaptive learning, stochastic approximation
    JEL: D01

This nep-mic issue is ©2015 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.