nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒12‒20
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information, authority, and smooth communication in organizations By Deimen, Inga; Szalay, Dezso
  2. Principal-Agent Problems When Principal Allocates a Budget By Kimiko Terai; Amihai Glazer
  3. Price Reveal Auctions By Andrea Gallice
  4. Flexible contracts By Piero Gottardi; Jean-Marc Tallon; Paolo Ghirardato
  5. Inefficient equilibria in wage bargaining with discount rates varying in time By Agnieszka Rusinowska; Ahmet Ozkardas
  6. "Small, yet beautiful": Reconsidering the optimal design of multi-winner contests By Subhasish Modak Chowdhury; Sang-Hyun Kim
  7. Rationalizable Strategies in Games With Incomplete Preferences By Kokkala, Juho; Poropudas, Jirka; Virtanen, Kai
  8. Should a non-rival public good always be provided centrally By Nicolas Gravel; Michel Poitevin
  9. Linking individual and collective contests through noise level and sharing rules By Pau Balart; Subhasish Modak Chowdhury; Orestis Troumpounis
  10. Dynamic Matching Markets and the Deferred Acceptance Mechanism By John Kennes; Daniel Monte; Norovsambuu Tumennasan
  11. Bad Reputation under Bounded and Fading Memory By Benjamin Sperisen
  12. Endogenous Mergers in Vertically Differentiated Markets By Gabszewicz, Jean J.; Marini, Marco A.; Tarola, Ornella
  13. Competitive Bundling By Zhou, Jidong
  14. The Optimal Regulation of a Risky Monopoly By Yolande Hiriart; Lionel Thomas
  15. Non stationary additive utility and time consistency By Nicolas Drouhin
  16. Consistent collective decisions under majorities based on difference of votes Consistent collective decisions under majorities based on difference of votes By Mostapha Diss; Patrizia Pérez-Asurmendi
  17. On Publication, Refereeing, and Working Hard By Sascha Baghestanian; Sergey V. Popov
  18. Parabolic Cylinders and Folk Theorems By F. Delbono; L. Lambertini
  19. Public law enforcers and political competition By Éric Langlais; Marie Obidzinski
  20. Biographical By Tirole, Jean

  1. By: Deimen, Inga; Szalay, Dezso
    Abstract: Two divisions of a firm, overarched by a headquarters, are engaged in a decision problem. Division one obtains information and informs division two who has the formal authority to make the decision. Headquarters guides the decision process by affecting the quality of information that division one obtains. In equilibrium, division one honestly communicates the inferences drawn from its observations, but not the underlying observations themselves and division two takes the advice at face value. The communication equilibrium involves smooth strategies and is outcome equivalent to delegation: the informed party gets its way, regardless of the allocation of formal authority.
    Keywords: authority; delegation; endogenous information; strategic communication
    JEL: D82
    Date: 2015–12
  2. By: Kimiko Terai (Faculty of Economics, Keio University); Amihai Glazer (Department of Economics, University of California, Irvine)
    Abstract: Agents benefit from having the principal believe that they share his preferences, whereas the principal may prefer that agents reveal their types. Such incentives are explored in a model which considers a principal who sets a budget in each of two periods, that each of the two agents allocates among different services. In the second period, the principal, having observed the agents' behavior in the first period, gives a larger budget to the agent he believes more likely shares the principal's preferences. Each agent may behave strategically, spending his budget on the service he thinks the principal prefers, thereby hiding his type. The principal may induce agents to reveal their types by hiding from them his preferences, or by giving them a large budget in the initial period. Such an approach, however, may lead agents in the initial period to spend too much on services the principal little values.
    Keywords: delegation, budget, hidden information, fedeCognitive and Non-cognitive Abilities
    JEL: D73 D82 H77
    Date: 2015–11–30
  3. By: Andrea Gallice
    Abstract: A price reveal auction (PRA) is a descending price auction in which the current price of the item on sale is hidden. Buyers can privately observe the price only by paying a fee, and every time an agent does so, the price falls by a predetermined amount. We show that if the number of participants, n, is common knowledge, then in equilibrium a PRA replicates the outcome of a posted price mechanism. In particular, at most one buyer observes the price and the auction immediately ?nishes. In contrast, multiple entries can occur and pro?tability is enhanced when agents are uncertain about n. Under some conditions, a PRA may even yield higher expected revenues than standard auction formats.
    Keywords: price reveal auctions, pay-per-bid auctions, endogenous price decrease.
    JEL: D44 C72
    Date: 2015
  4. By: Piero Gottardi (European University Institute - Department of Economics); Jean-Marc Tallon (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Paolo Ghirardato (Collegio Carlo Alberto - Via Real Collegio 30)
    Abstract: This paper studies the costs and benefits of delegating decisions to superiorly informed agents, that is of adopting flexible contracts, relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice in two different environments, one with risk and one with ambiguity. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agent's degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties have imprecise probabilistic beliefs, the agent's degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts. JEL Classification: D86, D82, D81.
    Keywords: Agency Costs,Delegation,Flexibility,Imprecision Aversion,Multiple Priors
    Date: 2015–12–04
  5. By: Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Ahmet Ozkardas (Turgut Ozal University)
    Abstract: We consider a union-firm wage bargaining in which the union must choose between strike and holdout in case of disagreement, and preferences of the union and the firm are expressed by sequences of discount rates varying in time. We show that there may exist inefficient subgame perfect equilibria in the model under which the union engages in several periods of strikes prior to reaching a final agreement. For an inefficient equilibrium to exist, the status quo wage must be sufficiently low and the amounts that the firm offers for itself in the subgame perfect equilibrium under the exogenous always strike decision in every odd period before reaching an agreement must be sufficiently low.
    Keywords: discount rates
    Date: 2015
  6. By: Subhasish Modak Chowdhury (University of East Anglia); Sang-Hyun Kim (University of East Anglia)
    Abstract: We reconsider whether a grand multi-winner contest elicits more equilibrium effort than a collection of sub-contests. Fu and Lu (2009) employ a sequential winner-selection mechanism and find support for running a grand contest. We show that this result is completely reversed if a simultaneous winner-selection mechanism or a sequential loser-elimination mechanism is implemented. We then discuss the optimal allocation of players and prizes among sub-contests, and the case in which there is restriction in the number of sub-contests.
    Keywords: contest design, multiple winner, group-size, selection mechanism
    JEL: C72 D74 D74
    Date: 2015–09–27
  7. By: Kokkala, Juho; Poropudas, Jirka; Virtanen, Kai
    Abstract: Games with incomplete preferences are normal-form games where the preferences of the players are defined as partial orders over the outcomes of the game. We define rationality in these games as follows. A rational player forms a set-valued belief of possible strategies selected by the opponent(s) and selects a strategy that is not dominated with respect to this belief. Here, we say a strategy is dominated with respect to the set-valued belief if the player has another strategy that would yield a better outcome according to the player's preference relation, no matter which strategy combination the opponent(s) play among those contained in the belief. We define rationalizable strategies as the logical implication of common knowledge of this rationality. We show that the sets of rationalizable strategies are the maximal mutually nondominated sets, i.e., the maximal sets that contain no dominated strategies with respect to each other. We show that no new rationalizable strategies appear when additional preference information is included. We consider multicriteria games as a special case of games with incomplete preferences and introduce a way of representing incomplete preference information in multicriteria games by sets of feasible weights of the criteria.
    Keywords: Normal-form games, incomplete preferences, rationalizable strategies, multicriteria games
    JEL: C72
    Date: 2015–12–11
  8. By: Nicolas Gravel; Michel Poitevin
    Abstract: This paper discusses the problem of optimal design of a jurisdiction structure from the view point of a utilitarian social planner when individuals with identical utility functions for a non-rival public good and private consumption have private information about their contributive capacities. It shows that the superiority of a centralized provision of a non-rival public good over a federal one does not always hold. Specifically, when differences in individuals’ contributive capacities are large, it is better to provide the public good in several distinct jurisdictions rather than to pool these jurisdictions into a single one. In the specific situation where individuals have logarithmic utilities, the paper provides a complete characterization of the optimal jurisdiction structure in the two-type case.  "C’est pour unir les avantages divers qui résultent de la grandeur et de la petitesse des nations que le fédératif a été créé." (Alexis de Toqueville)
    Keywords: Federalism, jurisdictions, asymmetric information, equalization, second best, public goods, city mergers,
    JEL: D6 H2 H7
    Date: 2015–12–15
  9. By: Pau Balart (Universidad Carlos III de Madrid); Subhasish Modak Chowdhury (University of East Anglia); Orestis Troumpounis (Lancaster University)
    Abstract: We provide a theoretical link between the two most prominent ways of modelling individual and collective contests as proposed by Tullock (1980) and Nitzan (1991) respectively. By introducing Nitzan's sharing rule as a way of modeling individual contests we obtain a contest success function nesting a standard Tullock contest and a fair lottery. We first provide an equivalence result between the proposed contest and Tullock's contest for the two-player set-up. We then employ this nested contest as a way of introducing noise in multi-player contests when in the Tullock contest a closed form solution for the equilibrium in pure strategies does not exist. We conclude by comparing the proposed contest with the existing ones in the literature.
    Keywords: individual contest, collective contest, equivalence
    JEL: C72 D72 D74
    Date: 2015–11–06
  10. By: John Kennes (Department of Economics and Business Economics, Aarhus University, Denmark); Daniel Monte (Department of Economics and Business Economics, Aarhus University, Denmark and Sao Paulo School of Economics, Brazil); Norovsambuu Tumennasan (Department of Economics and Business Economics, Aarhus University, Denmark and Department of Economics, Dalhousie University, Canada)
    Abstract: In many dynamic matching markets, priorities depend on previous allocations. In such environments, agents on the proposing side can manipulate the period-by-period deferred acceptance (DA) mechanism. We show that the fraction of agents with incentives to manipulate the DA mechanism approaches zero as the market size increases. In addition, we provide a novel al- gorithm to calculate the percentage of markets that can be manipulated. Based on randomly generated data, we find that the DA becomes approximately non-manipulable when the schools capacity reaches 20. Our theoretical and simulation results together justify the implementation of the period-by-period DA mechanism in dynamic markets.
    Keywords: Large market, dynamic school choice, deferred acceptance mechanism
    JEL: C78 D61 D78 I20
    Date: 2015–12–15
  11. By: Benjamin Sperisen (Department of Economics, Tulane University)
    Abstract: I relax the full memory assumption in Ely and Valimaki's (2003) mechanic game, where reputation is bad for all players. First I consider "bounded memory," where only finitely many recent periods are observed. For long memory, reputation is still bad. Shortening memory avoids bad reputation but only by making it "useless." There is no "happy middle:" reputation is either useless or reduces equilibrium payoffs for any memory length. I find a qualitatively different result for "fading memory," where players randomly sample past periods with probabilities "fading" toward zero. Unlike bounded memory, reputation is not bad but remains useful under sufficiently fast fading. This result extends to a more general class of both good and bad reputation games, suggesting reputation leaves long-run player behavior unaffected in some realistic word-of-mouth environments.
    Keywords: reputation; bounded memory; fading memory; mechanic game
    JEL: C73 D8
    Date: 2015–12
  12. By: Gabszewicz, Jean J.; Marini, Marco A.; Tarola, Ornella
    Abstract: This paper studies the incentives for firms competing in vertically differentiated markets to sign binding collusive agreements, as in the case of mergers and alliances. Empirical investigations show that firms involved in mergers and acquisitions revise prices and qualities as to maximize their joint profits. In a few cases merging firms are also observed shutting down some lines of activities (so called market pruning). In this paper we attempt to test these predictions by modelling a three-stage game in which, at the first stage, three firms selling goods independently in a vertically differentiated market can commit to sign either a full or a partial voluntary agreement (with a subset of firms) via a sequential game of coalition formation while, at the second and third stage they can optimally revise their qualities and prices, respectively. In such a setting we study whether some binding agreements (as full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game. Moreover, we analyse the final effects of different coalition structures on equilibrium qualities, prices and profits accruing to firms. We obtain the following results: (i) initial firms' heterogeneity appears a crucial factor for mergers to arise; (ii) although profitable, the grand coalition of firms (i.e. the whole market merger) is not the outcome of the finite-horizon negotiation, where only partial mergers arise; (iii) all stable mergers comprehends the firm producing the bottom quality good; (iv) all stable mergers reduce the number of variants on sale (market pruning); (v) stable mergers always increase the quality gap among variants. All model findings seem compatible with the existing empirical observations.
    Keywords: Vertically Differentiated Markets, Mergers, Merger Policies, Cannibalization, Market Pruning, Endogenous Coalition Formation, Price Collusion, Grand Coalition, Coalition Stability, Core, Sequential Game of Coalition Formation.
    JEL: D2 D4 D42 D43 L1
    Date: 2015–12–10
  13. By: Zhou, Jidong
    Abstract: This paper proposes a model of competitive bundling with an arbitrary number of firms. In the regime of pure bundling, we find that relative to separate sales pure bundling tends to raise market prices, benefit firms, and harm consumers when the number of firms is above a threshold. This is in contrast to the findings in the duopoly case on which the existing literature often focuses. Our analysis also sheds new light on how consumer valuation dispersion affects price competition more generally. In the regime of mixed bundling, having more than two firms raises new challenges in solving the model. We derive the equilibrium pricing conditions and show that when the number of firms is large, the equilibrium prices have simple approximations and mixed bundling is generally pro-competitive relative to separate sales. Firms' incentives to bundle are also investigated.
    Keywords: bundling, multiproduct pricing, product compatibility, oligopoly
    JEL: D43 L13 L15
    Date: 2015–12–12
  14. By: Yolande Hiriart (Université de Bourgogne Franche-Comté, CRESE, IUF); Lionel Thomas (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: We study the potential conflict between cost minimization and investment in prevention for a risky venture. A natural monopoly is regulated i) for economic purposes; ii) because it can cause losses of substantial size to third parties (the environment or people). The regulator observes the production cost without being able to distinguish the initial type (an adverse selection parameter) from the effort (a moral hazard variable). In addition, the investment in prevention is non observable (another moral hazard variable) and the monopoly is protected by limited liability. We fully characterize the optimal regulation in this context of asymmetric information plus limited liability. We show that incentives to reduce cost and to invest in safety are always compatible. But, in some cases, higher rents have to be given up by the regulator.
    Keywords: Risk Regulation, Incentives, Moral Hazard, Adverse Selection, Insolvency
    JEL: L51 D82 Q58
    Date: 2015–12
  15. By: Nicolas Drouhin (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, ENS Cachan - École normale supérieure - Cachan)
    Abstract: By solving dynamic optimization programs, we study the most general class of intertemporal utility functional, that are additive, but not necessarily stationary, nor multiplicatively separating a discount factor from "per period utility". We define the fisherian instantaneous subjective rate of discount as the log-derivative of the marginal utility of consumption. We prove that time consistency holds, if and only if, the "per period" felicity function is multiplicatively separable in t, the date of decision and in s, the date of consumption, or equivalently, if the instantaneous subjective rate of discount does not depend on t. The model allows to explain "anomalies in intertemporal choice" and various empirical regularities even when the agent are time consistent. On the other hand, the model allows to characterize mathematically the "effective consumption profile" of naive time inconsistent agent.
    Keywords: intertemporal choice, life cycle theory of consumption and saving, stationarity, time consistency, time invariance, exponential discounting, hyperbolic discounting, aging
    Date: 2015–12–05
  16. By: Mostapha Diss (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Patrizia Pérez-Asurmendi (PRESAD - PReferencias, Elección Social y Ayuda a la Decisión - UNIVERSIDAD DE VALLADOLID, SEED - Social Equilibrium and Economic Decisions - Universidad Pública de Navarra)
    Abstract: The main criticism to the aggregation of individual preferences under majority rules refers to the possibility of reaching inconsistent collective decisions from the election process. In these cases, the collective preference includes cycles and even could prevent the election of any alternative as the collective choice. The likelihood of consistent outcomes under a class of majority rules constitutes the aim of this paper. Specifically, we focus on majority rules that require certain consensus in individual preferences to declare an alternative as the winner. Under majorities based on difference of votes, the requirement asks to the winner alternative to obtain a difference in votes with respect to the loser alternative taking into account that individuals are endowed with weak preference orderings. Same requirement is asked to the restriction of these rules to individual linear preferences.. Abstract The main criticism to the aggregation of individual preferences under majority rules refers to the possibility of reaching inconsistent collective decisions from the election process. In these cases, the collective preference includes cycles and even could prevent the election of any alternative as the collective choice. The likelihood of consistent outcomes under a class of majority rules constitutes the aim of this paper. Specifically, we focus on majority rules that require certain consensus in individual preferences to declare an alternative as the winner. Under majorities based on difference of votes, the requirement asks to the winner alternative to obtain a difference in votes with respect to the loser alternative taking into account that individuals are endowed with weak preference orderings. Same requirement is asked to the restriction of these rules to individual linear preferences. Keywords Majorities based on difference of votes · Probability · Transitivity · Triple-acyclicity.
    Keywords: Majorities based on difference of votes,Probability,Transitivity,Triple-acyclicity
    Date: 2015
  17. By: Sascha Baghestanian; Sergey V. Popov
    Abstract: We present a model for academia with heterogeneous author types and endogenous effort to explain changes in the publication process in Economics. We analyze the implications of these developments on research output. Lowering the precision of refereeing signals lowers effort choices of golden middle authors, but invites more submissions from less able authors. Increasing the number of journals stimulates less able authors to submit their papers. The editor can improve the journal’s quality pool of submitted manuscripts by improving the precision of refereeing, but not by lowering acceptance standards. The submission strategy of an author is informative of his ability.
    Keywords: Academia, Publishing, Effort, Refereeing, Journals
    JEL: I23
    Date: 2014–10
  18. By: F. Delbono; L. Lambertini
    Abstract: We study a class of games featuring payo¤ functions being parabolic cylinders where best reply functions are orthogonal and therefore the pure-strategy non-cooperative solution is attained as a Nash equilibrium in dominant strategies. We prove that the resulting threshold of the discount factor above which implicit collusion on the Pareto frontier is stable in the in…nite supergames is independent of the number of players. This holds irrespective of whether punishment is based on in…nite Nash reversion or one-shot stick-and-carrot strategy. We outline two examples stemming from economic theory and one from international relations.
    JEL: C73
    Date: 2015–12
  19. By: Éric Langlais; Marie Obidzinski
    Abstract: In this paper, we analyze how political competition affects the designof public law enforcement policies. Assuming that the cost of enforcement is linear, criminals'type is uniformally distributed, and society's wealth is large enough, the article arrives at two main conclusions: 1) electoral competition entails no loss of efficiency at equilibrium for both minor and major offenses (e.g. minor offenses are not enforced, while major ones are fully deterred); 2) different distortions arises at equilibrium for the intermediate offenses: enforcement expenditures for small offenses are lower than the optimal level, such that the issue of under-deterrence is exacerbated; in contrast, for larger offenses, enforcement measures are higher, and there is more deterrence than what efficiency requires. We show that these results also holds under more general assumptions (convex costs of enforcement, a general cdf of illegal bene.ts, a lower society's wealth), excepted that full deterrence of major offenses is not achievable.
    Keywords: public law enforcement, deterrence, monetary sanctions, electoral competition.
    JEL: D72 D73 H1 K14 K23 K4
    Date: 2015
  20. By: Tirole, Jean (University of Toulouse)
    Abstract: I was born and raised in Troyes, a town located east of Paris and north of Burgundy. Troyes was the capital of Champagne in the middle ages; its fairs hosted trade between Northern Italian cities and Flanders among others; Troyes has accordingly preserved a rich cultural heritage. My father, who passed away in 1992, was an obstetrician/gynecologist; my mother, who still lives in Troyes, taught French, Latin and Greek in high school. My parents as well of some of my teachers taught me the value of knowledge. I have two sisters, Marie-Claude and Laurence. My youth was a pretty uneventful and happy one.
    Keywords: Market power;
    JEL: D40
    Date: 2015

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