nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒01‒03
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Minimizing errors, maximizing incentives: Optimal court decisions and the quality of evidence By Juan José Ganuza; Fernando Gomez; Jose Penalva
  2. Residual Deterrence By Dilmé, Francesc; Garrett, Daniel
  3. Observing Each Other's Observations in a Bayesian Coordination Game By Dominik Grafenhofer; Wolfgang Kuhle
  4. Pay Schemes, Bargaining, and Competition for Talent By Lindbeck, Assar; Weibull, Jörgen
  5. Oligopolistic Competition with Choice-Overloaded Consumers By Gerasimou, Georgios; Papi, Mauro
  6. Efficient networks for a class of games with global spillovers By Pascal Billand; Christophe Bravard; Jacques Durieu; Sudipta Sarangi
  7. Asymmetric information allocation to avoid coordination failure By MORIYA, Fumitoshi; YAMASHITA, Takuro
  8. Equilibrium pricing under relative performance concerns By Jana Bielagk; Arnaud Lionnet; Gonçalo Dos Reis
  9. Optimal Taxation with Behavioral Agents By Farhi, Emmanuel; Gabaix, Xavier
  10. Hidden Action and Outcome Contractibility: An Experimental Test of Contract Theory By Hoppe, Eva I; Schmitz, Patrick W
  11. Risk Aversion in the Small and in the Large under Rank-Dependent Utility By Louis R. Eeckhoudt; Roger J. A. Laeven
  12. The quantitative view of Myerson regularity By Schweizer, Nikolaus; Szech, Nora
  13. Fair Threats and Promises By Moreno-Okuno, Alejandro

  1. By: Juan José Ganuza; Fernando Gomez; Jose Penalva
    Abstract: We characterize the best mechanism for a Court to impose liability (and generate incentives) in a setting in which the injurer's behavior is imperfectly observed and Courts also care about judicial errors. First, we show that the optimal decision rule is an evidentiary standard. Then, we make three main contributions. i) We develop a new methodological approach to deal with this classic problem: rewrite the incentive compatibility constraint in terms of Court errors. This approach can be applied to more general incentive problems, and greatly simplies the characterization of the optimal standard. ii)We state that the harshness of the optimal evidentiary standard decreases as the quality (informativeness) of the evidence increases. iii) When the informativeness of the evidence is determined by the injurer's choice of the care technology, the interests of Court and injurer are not aligned. The optimal Court policy is to penalize (even forbid) the use of the less informative care technology.
    Keywords: Incentives, evidentiary standards, judicial errors, statistical discrimination and informativeness.
    JEL: C44 D82 K13 K40
    Date: 2015–03
  2. By: Dilmé, Francesc; Garrett, Daniel
    Abstract: Successes of law enforcement in apprehending offenders are often publicized events. Such events have been found to result in temporary reductions in offending, or "residual deterrence". We provide a theory of residual deterrence which accounts for the incentives of both enforcement officials and potential offenders. Our theory rests on the costs of reallocating enforcement resources. In light of these costs, we study the determinants of offending such as the role of public information about enforcement and offending.
    Keywords: deterrence; enforcement; reputation
    JEL: C73 K42
    Date: 2015–12
  3. By: Dominik Grafenhofer (Max Planck Institute for Research on Collective Goods, Bonn); Wolfgang Kuhle (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We study a Bayesian coordination game where agents receive private information on the game's payoff structure. In addition, agents receive private signals that inform them of each other's private information. We show that once agents possess these different types of information, there exists a coordination game in the evaluation of this information. Even though the precisions of both signal types is exogenous, the precision with which agents forecast each other's actions in equilibrium turns out to be endogenous. As a consequence, there exist multiple equilibria which differ with regard to the way that agents weight their private information to forecast each other's actions. Finally, even though all players' signals are of identical quality, it turns out that efficient equilibria are asymmetric.
    Keywords: Coordination Games, Equilibrium Selection, Primary Signals, Secondary Signals
    Date: 2015–11
  4. By: Lindbeck, Assar (Research Institute of Industrial Economics (IFN)); Weibull, Jörgen (Department of Economics)
    Abstract: The paper provides a framework for analysis of remuneration to agents whose task is to make well-informed decisions on behalf of a principal, with managers in large corporations as the most prominent example. The principal and agent initially bargain over the pay scheme to the latter. The bargaining outcome depends both on competition for agents and on the relative bargaining power of the two parties, given their outside options, thus allowing for the possibility that the agent may be the current CEO who may have considerable power. Having signed a contract, the agent chooses how much effort to make to acquire information about the project at hand. This information is private and the agent uses it in his subsequent decision whether or not to invest in a given project. In model A the agent’s effort to acquire information is exogenous, whereas in model E it is endogenous. Model A lends no support for other payment schemes than flat salaries is weak. Model E contains a double moral hazard problem; how much information to acquire and what investment decision to make. As a consequence, the equilibrium contracts in model E involve both bonuses and penalties. We identify lower and upper bounds on these, and study how the bonus and bonus rate depend on competition and bargaining power. We also analyze the nature of contracts when the agent is overconfident.
    Keywords: Principal-agent; Investment; Endogenous uncertainty; Contract; Bonus; Penalty
    JEL: D01 D82 D86 G11 G23 G30
    Date: 2015–12–21
  5. By: Gerasimou, Georgios; Papi, Mauro
    Abstract: A large body of experimental work has suggested the existence of a "choice overload" effect in consumer decision making: Faced with large menus of choice options, decision makers often defer or avoid choice. A suggested reason for the occurrence of this effect is that the agents attempt to avoid the cognitive effort that is associated with choosing from larger menus. Building on this explanation, we propose and analyse a model of duopolistic competition where firms compete in menu design in the presence of a consumer population with heterogeneous preferences and overload menu-size thresholds. The firms' strategic trade-off is between offering a large menu in order to match the preferences of as many consumers as possible, and offering a small menu in order to avoid losing choice-overloaded consumers to their rival. Assuming uniformly distributed preferences, we focus on symmetric pure-strategy equilibria under various assumptions on the overload distribution and product markups. We also propose and analyse a measure of consumer welfare that applies to this environment. Among other things, we provide conditions for "maximum-" and "minimum-variety equilibria" to be possible, whereby both firms either offer the entire set of available products or the same one product, respectively.
    Keywords: Choice overload; choice deferral; choice complexity; cognitive costs; oligopolistic competition
    JEL: D01 D03 D11 D18 D21 D60
    Date: 2015–12–18
  6. By: Pascal Billand (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); Christophe Bravard (GAEL - Laboratoire d'Economie Appliquée de Grenoble - Institut national de la recherche agronomique (INRA) - Université Grenoble Alpes - Grenoble 2); Jacques Durieu (CREG - Centre de recherche en économie de Grenoble - Grenoble 2 UPMF - Université Pierre Mendès France); Sudipta Sarangi (DIW - Deutsches Institut fur Wirtschaftsforschung, LSU - Louisiana State University at Baton Rouge)
    Abstract: In this paper we examine efficient networks in network formation games with global spillovers that satisfy convexity and sub-modularity properties. Unlike the previous literature we impose these properties on individual payoff functions. We establish that efficient networks of this class of games are nested split graphs. This allows us to complete the work of Goyal and Joshi (2006) and Westbrock (2010) on collaborative oligopoly networks.
    Keywords: networks, effi ciency, convexity, sub - modularity, oligopolies
    Date: 2015
  7. By: MORIYA, Fumitoshi; YAMASHITA, Takuro
    Abstract: This study addresses optimal information allocation in team production. We present a unique implementation problem of desirable effort levels and show that, under certain conditions, it is optimal to asymmetrically inform the agents even if they are ex ante symmetric. The main intuition is that the asymmetric information allocation is effective in avoiding "bad" equilibria, that is, equilibria with coordination failure. This analysis provides an explanation as to why informing agents asymmetrically might be beneficial in improving the agents' coordination behaviors.
    Keywords: Moral hazard, Unique implementation, Asymmetric information
    JEL: D21 D23 D86
    Date: 2015–12–14
  8. By: Jana Bielagk (Humboldt Universität zu Berlin [Berlin]); Arnaud Lionnet (INRIA - Institut National de Recherche en Informatique et en Automatique - INRIA); Gonçalo Dos Reis (University of Edinburgh)
    Abstract: We investigate the effects of the social interactions of a finite set of agents on an equilibrium pricing mechanism. A derivative written on non-tradable underlyings is introduced to the market and priced in an equilibrium framework by agents who assess risk using convex dynamic risk measures expressed by Backward Stochastic Differential Equations (BSDE). Each agent is not only exposed to financial and non-financial risk factors, but she also faces performance concerns with respect to the other agents. Within our proposed model we prove the existence and uniqueness of an equilibrium whose analysis involves systems of fully coupled multi-dimensional quadratic BSDEs. We extend the theory of the representative agent by showing that a non-standard aggregation of risk measures is possible via weighted-dilated infimal convolution. We analyze the impact of the problem's parameters on the pricing mechanism, in particular how the agents' performance concern rates affect prices and risk perceptions. In extreme situations, we find that the concern rates destroy the equilibrium while the risk measures themselves remain stable.
    Keywords: performance concerns,social interactions,Financial innovation,equilibrium pricing,representative agent,multidimensional quadratic BSDE
    Date: 2015–12–19
  9. By: Farhi, Emmanuel; Gabaix, Xavier
    Abstract: This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.
    Keywords: behavioural public finance; inattention; mistakes; nudges
    JEL: D03 H21
    Date: 2015–12
  10. By: Hoppe, Eva I; Schmitz, Patrick W
    Abstract: We present the first large-scale laboratory experiment designed to capture the canonical hidden action problem as studied in contract theory, comparing treatments with unobservable effort to benchmark treatments with verifiable effort. In line with contract theory, when effort is a hidden action, the chosen effort levels crucially depend on the contractibility of the outcome. In our one-shot experiment the players endogenously negotiate contracts. In the absence of communication, they typically avoid gift-exchange situations. Even when the outcome is contractible and the hidden action problem is typically overcome with incentive-compatible contracts, communication is helpful since it may reduce strategic uncertainty.
    Keywords: Contract theory; Hidden action; Incentive theory; Laboratory experiments; Moral hazard
    JEL: C72 C92 D82 D86
    Date: 2015–12
  11. By: Louis R. Eeckhoudt; Roger J. A. Laeven
    Abstract: Under expected utility the local index of absolute risk aversion has played a central role in many applications. Besides, its link with the "global" concepts of the risk and probability premia has reinforced its attractiveness. This paper shows that, with an appropriate approach, similar developments can be achieved in the framework of Yaari's dual theory and, more generally, under rank-dependent utility.
    Date: 2015–12
  12. By: Schweizer, Nikolaus; Szech, Nora
    Abstract: In mechanism design, Myerson regularity is often too weak for a quantitative analysis of performance. For instance, ratios between revenue and welfare, or sales probabilities may vanish at the boundary of Myerson regularity. This paper therefore explores the quantitative version of Myerson regularity, which we call λ-regularity. It measures how Myerson regular a distribution is. In doing so, we unify separate literatures in economics, computer science, applied mathematics and statistics. The concept has appeared before, e.g., under the names of ρ-concavity and α-strong-regularity. We provide many new results for quantitative auction and mechanism design.
    Keywords: lambda-regularity,Myerson regularity,monotone hazard rate,auctions,mechanism design,approximation
    JEL: D44 D82
    Date: 2015
  13. By: Moreno-Okuno, Alejandro
    Abstract: In this paper I argue that the concept of Sequential Reciprocity of Dufwenberg and Kirchsteiger (2004) doesn't take correctly into consideration the role of threats and promises and I develop a solution concept of reciprocity which I call Fair Threats Equilibrium, that I believe is better at evaluating the fairness of threats and promises.
    Keywords: Fairness, Threats, Promises, Game Theory
    JEL: D0 D01 D03
    Date: 2015–12–23

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