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on Microeconomics |
| By: | Nava Ashraf; Edward L. Glaeser; Giacomo A.M. Ponzetto |
| Abstract: | Cities generate negative, as well as positive, externalities; addressing those externalities requires both infrastructure and institutions. Providing clean water and removing refuse requires water and sewer pipes, but the urban poor are often unwilling to pay for the costs of that piping. Standard welfare economics teaches us that either subsidies or Pigouvian fines can solve that problem, but both solution are problematic when institutions are weak. Subsidies lead to waste and corruption; fines lead to extortion of the innocent. Zambia has attempted to solve its problem with subsidies alone, but the subsidies have been too small to solve the “last-mile problem” and so most poor households remain unconnected to the water and sewer system. In nineteenth-century New York, subsidies also proved insufficient and were largely replaced by a penalty-based system. We present a model that illustrates the complementarity between infrastructure and institutions and provides conditions for whether fines, subsidies or a combination of both are the optimal response. One point of the model is that the optimal fine is often not a draconian penalty, but a mild charge that is small enough to avoid extortion. |
| Keywords: | public health, infrastructure, institutions, subsidies, fines, last-mile problem |
| JEL: | O18 R53 O21 H41 I18 N91 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:872&r=mic |
| By: | Gall, Thomas; Reinstein, David |
| Abstract: | When Al makes an offer to Betty that Betty observes and rejects, Al may “lose faceâ€. This loss of face (LoF) may cost Al utility, either directly or through reputation effects. This can lead to fewer offers and inefficiency in the context of bilateral matching problems, e.g., the marriage market, research partnering, and international negotiations. We offer a simple model with asymmetric information, a continuous signal of an individual’s binary type, and a linear marriage production function. We add a primitive LoF term, characterize the stable equilibria, compare the benchmark without LoF to a case where only one side is vulnerable to LoF, and present comparative statics. A small amount of LoF has no effect on low types’ behavior, but, will make high types on both sides more selective. A stronger LoF drives high types out of the market, and makes low types reverse snobs, further reducing welfare. LoF also makes rejecting strictly preferred to being rejected, making the “high types reject†equilibrium stable. We can eliminate the effects of LoF by letting the vulnerable side move second, or setting up a “Conditionally Anonymous Environment†that only reveals when both parties say yes. We motivate our model with a variety of empirical examples, and we suggest policy and managerial implications. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:14460&r=mic |
| By: | Condie, Scott; Ganguli, Jayant; Illeditsch, Philipp Karl |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:15615&r=mic |
| By: | Dicks, David; Fulghieri, Paolo |
| Abstract: | We develop a theory of innovation waves, investor sentiment, and merger activity based on uncertainty aversion. Investors must typically decide whether or not to fund an innovative project with very limited knowledge of the odds of success, a situation that is best described as "Knightian uncertainty." We show that uncertainty-averse investors are more optimistic on an innovation if they can also make contemporaneous investments in other innovative ventures. This means that uncertainty aversion makes investment in innovative projects strategic complements, which results in innovation waves. We also show that innovation waves may be sparked by favorable technological shocks in one sector, and then spill over to other contiguous sectors. Thus, innovation waves ripple through the economy amid strong investor sentiment. Finally, we argue that an active M&A market promotes innovative activity and leads to greater innovation rates and firm valuations. |
| Keywords: | ambiguity aversion; hot IPO markets; innovation |
| JEL: | G31 G32 G34 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11082&r=mic |
| By: | Trigilia, Giulio (University of Warwick) |
| Abstract: | Firms seeking external financing jointly choose what securities to issue, and the extent of their disclosure commitments. The literature shows that enhanced disclosure reduces the cost of financing. This paper analyses how disclosure affects the optimal composition of financing means. It considers a market where firms compete for external financing under costly-state-verification, but,in contrast to the standard model : (i) the degree of asymmetric information between firms and outside investors is variable, and (ii) firms can affect it through a disclosure policy, modeled as a verifiable signal with a cost decreasing in its noise component. Two central predictions emerge. On the positive side, optimal disclosure and leverage are negatively correlated. Efficient equity financing requires that firms are sufficiently transparent, whereas debt does not; it solely relies on the threat of bankruptcy and liquidation. Therefore, more transparent firms issue cheaper equity and face a higher opportunity cost of leveraged external financing. The prediction is shown to be consistent with the behavior of US corporations since the 1980s. On the normative side, disclosure externalities and time inconsistencies lead to under-disclosure and excessive leverage relative to the constrained best. If mandatory disclosures are feasible { that is, they cannot be easily dodged { they increase welfare. Otherwise, endogenously higher transparency can be triggered if regulators set capital requirements. Capital regulation proves especially useful when (i) firm performances are highly correlated, and (ii) disclosure requirements can be easily dodged { conditions that seem to apply to large financial firms. The view of capital standards as a means to improve the information environment is novel in the literature; its policy implications and challenges are discussed. |
| Keywords: | leverage ; costly-state-verification ; disclosure ; asymmetric information ; capital requirements ; financial regulation ; optimal contracting JEL classification numbers: D82 ; G21 ; G32 ; G38 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:18&r=mic |
| By: | Gabriel Garber; Márcio Issao Nakane |
| Abstract: | We study two-sided markets where there are buyers and sellers, with heterogeneous participants on each side. Buyers care about the quality of the good purchased, but sellers care only about the price they get. When there is informational asymmetry about types between the sides, the role of a platform as a certifier that guarantees a minimum quality becomes central to the transactions. We analyze first-best (perfect information) and pooling equilibria without platforms and a monopolist platform that coexists with an external pooling. We also show there is no equilibrium in a simultaneous game with two platforms. |
| Keywords: | Platforms; two-sided markets; heterogeneous agents; certification. |
| JEL: | D42 D43 D82 D85 L12 L13 L15 L81 |
| Date: | 2016–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2016wpecon2&r=mic |
| By: | Elisabeth Schulte (University of Marburg); Mike Felgenhauer (Plymouth University) |
| Abstract: | We study the effects of preselection on an expert’s incentive to give truthful advice in a decision environment in which certain decisions yield more precise estimates about the expert’s expertise. The introduction of a preselection stage, in which the decision maker can study the case before asking for advice, alters the expert’s perception of the problem. We identify conditions under which preselection occurs in equilibrium. We show that if the expert adjusts his behavior, the option to preselect may reduce the expected utility of the decision maker. |
| Keywords: | Reputation, cheap talk, safe haven |
| JEL: | D82 D83 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201524&r=mic |
| By: | Fabrizio Germano (Universitat Pompeu Fabra and Barcelona Graduate School of Economics); Peio Zuazo-Garin (Universitat Rovira i Virgili, CREIP and BRiDGE) |
| Abstract: | We study an interactive framework that explicitly allows for nonrational behavior. We do not place any restrictions on how players’ behavior deviates from rationality. Instead we assume that there exists a probability p such that all players play rationally with at least probability p, and all players believe, with at least probability p, that their opponents play rationally. This, together with the assumption of a common prior, leads to what we call the set of p-rational outcomes, which we define and characterize for arbitrary probability p. We then show that this set varies continuously in p and converges to the set of correlated equilibria as p approaches 1, thus establishing robustness of the correlated equilibrium concept to relaxing rationality and common knowledge of rationality. The p-rational outcomes are easy to compute, also for games of incomplete information, and they can be applied to observed frequencies of play to derive a measure p that bounds from below the probability with which any given player chooses actions consistent with payoff maximization and common knowledge of payoff maximization. |
| Keywords: | strategic interaction,correlated equilibrium,robustness to bounded rationality,approximate knowledge,incomplete information,measure of rationality,experiments |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01251512&r=mic |
| By: | Iaryczower, Matias; Oliveros, Santiago |
| Abstract: | We consider a class of dynamic collective action problems in which either a single principal or two competing principals vie for the support of members of a group. We focus on the dynamic problem that emerges when agents negotiate and commit their support to principals sequentially. A danger for the agents in this context is that a principal may be able to succeed by exploiting competition among members of the group. Would agents benefit from introducing competition between opposing principals? We show that when principals’ policies provide value to the agents, competition actually reduces agents’ welfare. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:14459&r=mic |
| By: | Hans Haller; Britta Hoyer |
| Abstract: | Social psychology studies the “common enemy effectâ€, the phenomenon that members of a group work together when they face an opponent, although they otherwise have little in common. An interesting scenario is the formation of an information network where group members individually sponsor costly links. Suppose that ceteris paribus, an outsider appears who aims to disrupt the information flow within the network by deleting some of the links. The question is how the group responds to this common enemy. We address this question for the homogeneous connections model of strategic network formation, with two-way flow of information and without information decay. For sufficiently low linkage costs, the external threat can lead to a more connected network, a positive common enemy effect. For very high but not prohibitively high linkage costs, the equilibrium network can be minimally connected and efficient in the absence of the external threat whereas it is always empty and inefficient in the presence of the external threat, a negative common enemy effect. |
| Keywords: | strategic network formation, strategic network disruption, common enemy effect. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:vpi:wpaper:e07-49&r=mic |
| By: | Pierre Andreoletti (MAPMO - Mathématiques - Analyse, Probabilités, Modélisation - Orléans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique); Pierre Gazé (LEO - Laboratoire d'Economie d'Orléans - CNRS - Université d'Orléans); Maxime Menuet (LEO - Laboratoire d'Economie d'Orléans - CNRS - Université d'Orléans) |
| Abstract: | We model a specific two-sided monopoly market in which agents can switch from a side to the other. We define two periods of time. In the first period, agents buy the platform services on each side and in the second period of time, they can possibly enhance their satisfaction by going to the other face of the platform. We analyze the link between mobility, consumer’s utility, prices and profit. We show that mobility is a valuable feature which can be compared with an increase of product quality. Finally, the firm is able to capture the mobility in its monopoly’s profit. The relative size of each group then appears as a strategical variable for the firm. |
| Keywords: | externalities, side-switching, two-sided markets |
| Date: | 2016–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01251365&r=mic |
| By: | Ulrich Berger (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | Interpersonal trust is a one-sided social dilemma.Building on the binary trust game, we ask how trust and trustworthiness can evolve in a population where partners are matched randomly and agents sometimes act as trustors and sometimes as trustees. Trustors have the option to costly check a trustee's last action and to condition their behavior on the signal they receive. We show that the resulting population game admits two components of Nash equilibria. Nevertheless, the long-run outcome of an evolutionary social learning process modeled by the best response dynamics is unique. Even if unconditional distrust initially abounds, the trustors' checking option leads trustees to build a reputation for trustworthiness by honoring trust. This invites free-riders among the trustors who save the costs of checking and trust blindly, until it does no longer pay for trustees to behave in a trustworthy manner. This results in cyclical convergence to a mixed equilibrium with behavioral heterogeneity where suspicious checking and blind trusting coexist while unconditional distrust vanishes. |
| Keywords: | trust game, evolutionary game theory, reputation, best response dynamics |
| JEL: | C72 C90 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp212&r=mic |
| By: | Alex Dickson (Department of Economics, University of Strathclyde); Ian A. MacKenzie (School of Economics, The University of Queensland) |
| Abstract: | Markets for pollution have become a popular regulatory instrument. Yet these markets are often highly concentrated, which may lead to strategic behavior by all participants. In this article we investigate the implications of strategic trade in pollution permits. The permit market is developed as a strategic market game, where all firms are allowed to behave strategically and their roles as buyers or sellers of permits are determined endogenously with price-mediated trade. In a second stage, firms transact on a product market and we allow for a variety of market structures. Our framework establishes the endogenous determination of equilibrium price, market structure, and levels of exchange in the permit market. |
| Keywords: | Pollution market, Market power, Strategic market game |
| JEL: | C72 D43 D51 L13 Q53 |
| Date: | 2016–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:554&r=mic |
| By: | Larbi Alaoui (Universitat Pompeu Fabra and Barcelona Graduate School of Economics); Fabrizio Germano (Universitat Pompeu Fabra and Barcelona Graduate School of Economics) |
| Abstract: | We develop a theory of news coverage in environments of information abundance that include both new and traditional news media, from online and print newspapers to radio and television. News consumers are time-constrained and browse through news items that are available across competing outlets, choosing which outlets to access and which stories to read or skip. Media firms are aware of consumers’ preferences and constraints, and decide on rankings of news items that maximize their profits. We find that the news consumed in equilibrium is highly sensitive to the details of the environment. We show that even when readers and outlets are rational and unbiased, readers may consume more than they would like to, and the news items they consume may be significantly different from the ones they prefer. Important news items may be crowded out. Next, we derive implications on diverse aspects of current media, including a rationale for tabloid news, a rationale for why readers prefer like-minded news, and how advertising can contribute to crowding out news. We also analyze methods for restoring reader-efficient standards and discuss the political economy implications of the theory. |
| Keywords: | news markets,time constrained consumers,digital media,news coverage,public media |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01251522&r=mic |