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on Microeconomics |
| By: | Dertwinkel-Kalt, Markus; Wenzel, Tobias |
| Abstract: | This paper develops a theory of framing in an intertemporal context with risky choices. We provide a unifying account of existing theories of focusing by allowing a decision maker to choose her frame such that her attention is either drawn to salient events associated with an option or to the expected utilities an option yields in different time periods. Our key assumption is that a decision maker can choose her frame in a self-serving manner. We predict that the selected frame induces overoptimistic actions in the sense that subjects underrate risk but overrate chances and accordingly reveal overoptimistic actions. Hence, our theory can explain phenomena such as excessive harmful consumption (smoking, unhealthy diet) and risky investments (enterpreneurship, lotteries, gambling). We also apply our theory to static lotteries and find that classical phenomena of decision making under risk (such as the Common Ratio Allais paradox) can be rationalized by our model. We provide experimental evidence to support our claims. |
| JEL: | D03 D11 D90 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112971&r=mic |
| By: | Wuggenig, Mirjam |
| Abstract: | The paper analyzes a dynamic model of rational strategic learning in a network. It complements existing literature by providing a detailed picture of short-run dynamics in a game of strategic experimentation where agents are located in a social network. We show that the delay in information transmission caused by incomplete network structures may induce players to increase own experimentation efforts. As a consequence a complete network can fail to be optimal even if there are no costs for links. This means that in the design of networks there exists a trade-off between the speed of learning and accuracy. |
| JEL: | C73 D83 D85 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113196&r=mic |
| By: | Gretschko, Vitali; Wambach, Achim |
| Abstract: | We consider the contracting problem of a principal who faces an agent with private information and cannot commit to not renegotiate a chosen contract. To analyze this problem, we propose an infinite horizon negotiation protocol in which renegotiation is frictionless, executed without delay and there are no restrictions on how many times the contracts can be renegotiated. We provide a general characterization of renegotiation-proof outcomes and show that those outcomes are supported by a Perfect Bayesian Equilibrium of the negotiation game. The general characterization of renegotiation-proof outcomes provides a powerful and simple to use tool for finding such outcomes in specific environments. Thus, we proceed by applying the results to adverse selection environments with private and common values. We show that with private values and common values of the 'Spence' type only fully efficient and separating contracts can be renegotiation proof. However, with common values of the 'Rothschild-Stiglitz' type inefficient and (partial) pooling contracts may constitute renegotiation-proof outcomes. |
| JEL: | C73 C78 D82 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113064&r=mic |
| By: | Jarman, Felix; Meisner, Vincent |
| Abstract: | We consider a budget-constrained mechanism designer who wants to select an optimal subset of projects to maximize her utility. Project costs are private information and the value the designer derives from their provision may vary. In this allocation problem the choice of projects - both which and how many - is endogenously determined by the mechanism. The designer faces hard ex-post constraints: The participation and budget constraint must hold for each possible outcome while the mechanism must be implementable in dominant strategies. We derive the class of optimal mechanisms and show that it allows an implementation through a descending clock auction. Only in the case of symmetric projects, price clocks do descend synchronously such that always the cheapest projects are executed. The asymmetric case, where values or costs are asymmetrically distributed, features a novel tradeoff between quantity and quality. Interestingly, this tradeoff mitigates the distortion due to the informational asymmetry compared to environments where quantity is exogenous. |
| JEL: | D44 D45 D82 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112903&r=mic |
| By: | Lang, Matthias |
| Abstract: | Should principals explain and justify their evaluations? Suppose the principal s evaluation is private information, but she can provide justification by sending a costly unverifiable message. If she does not provide justification, her message space is restricted, but the message is costless. I show that the principal justifies her evaluation to the agent if the evaluation indicates bad performance. The justification assures the agent that the principal has not distorted the evaluation downwards. In equilibrium, the wage increases in the agent s performance, when the principal justifies her evaluation. For good performance, however, the principal pays a constant high wage without justification. |
| JEL: | D82 D86 M52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113216&r=mic |
| By: | Schmutzler, Armin; Klein, Arnd |
| Abstract: | This paper analyzes two-stage rank-order tournaments. A principal decides (i) how to spread prize money across the two periods, (ii) how to weigh performance in the two periods when awarding the second-period prize, and (iii) whether to reveal performance after the rst period. The information revelation policy depends exclusively on properties of the e ort cost function. The principal always puts a positive weight on rst-period performance in the second period. The size of the weight and the optimal prizes depend on properties of the observation error distribution; they should be chosen so as to strike a balance between the competitiveness of rst- and second-period tour- naments. In particular, the principal sets no rst-period prize unless the observations in period one are considerably more precise than in period two |
| JEL: | D02 D86 D21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112882&r=mic |
| By: | Schweizer, Urs |
| Abstract: | This paper compares the incentives of a party to acquire information prior to negotiating contractual terms with a second party. Two legal regimes are compared: disclosing information before negotiations start is mandatory or it remains voluntary. By assumption, information can only truthfully be disclosed but, under voluntary disclosure, the fact that no evidence was found cannot credibly be communicated. If the party that may acquire information enjoys encompassing bargaining power, the incentives to acquire information will be excessive relative to first best quite generally. Otherwise, more surprisingly, acquisition incentives turn out insufficient even under voluntary disclosure for an informational setting referred to as selfish acquisition. For another setting, referred to as cooperative acquisition, the incentives under voluntary disclosure are even lower as compared with mandatory disclosure. All results hold independently of the underlying bargaining structure and equilibrium selection as exclusive use of constraints is made that hold for equilibrium payoffs from any bargaining game. |
| JEL: | K12 C72 D82 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112868&r=mic |
| By: | Göller, Daniel |
| Abstract: | I consider a setting of complete but unverifiable information in which two agents enter a contractual relationship to induce mutually beneficial investments. As my main result, I establish that the famous irrelevance of contracting paradigm, that arises due to the detrimental effect of renegotiation, is resolved if there is a fixed point in time when actions have to be chosen and one accounts for the fact that renegotiation takes time. What drives my optimality result is that, by stipulating when the mechanism is to be played, the agents ensure that renegotiation is possible ex ante but not ex post. |
| JEL: | D86 D82 K12 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113166&r=mic |
| By: | Verbeck, Matthias |
| Abstract: | We study a setting in which one or two agents conduct research on behalf of a principal. The agents binary performance level (suc- cess or failure) depends on their invested research e ort, and their choice of a research technology that is uncertain in respect of its apt- ness to generate a success. While in the single-agent-setting the agent has no incentive to deviate from the principal s preferred technology choice, this is not generally true for the multiagent-setting. When technologies are mutually exclusive - only one of them will be suit- able for yielding a high output - we show that there exists a contract that aligns the principal s and the agents interests. However, under the plausible assumption of scientists free technology choice, our re- sults suggest that there is a bias towards mainstream-research: Agents choose promising technologies more often than socially optimal. |
| JEL: | D82 D86 D83 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112963&r=mic |
| By: | Wasser, Cédric; Loertscher, Simon |
| Abstract: | We derive the optimal incentive compatible and individually rational mechanisms to reallocate arbitrary given ownership shares among a set of agents. These mechanisms are optimal in the sense that they maximize social surplus of the final allocation subject to the aforementioned constraints and a revenue constraint. We allow for the agents' types to be drawn from non-identical distributions and for interdependent values. Because outside options are type dependent, the critical types for which individual rationality binds must be determined simultaneously with the allocation rule. We show that optimality uniquely pins down the set of critical types, which allows us to fully characterize the optimal mechanisms. Moreover, we find that the value function is Schur-concave in ownership shares when types are identically distributed, so that more symmetric shares are better irrespective of size of the revenue constraint. |
| JEL: | D82 D44 C72 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113112&r=mic |
| By: | Katolnik, Svetlana; Schöndube, Jens Robert |
| Abstract: | It's puzzling that most projects fail to complete within the predetermined timeframe given that timing considerations rank among the major goals in project management. We argue that when managers can extract private benefits from working on a project, project delay becomes optimal. We introduce a continuous-time framework for project management activities that incorporates this feature. A manager's unobserved effort cumulatively increases the project's success probability, but decreases the expected duration of the project and with it the expected flow of on-the-job benefits. A strict deadline limits incentives for effort delay, but also decreases the probability that the project will be terminated in due time. In this trade-off, the optimal deadline balances the increase in expected project value against the expected increase in project duration and costs. Because the manager does not want to ``kill the golden goose'' prematurely, he always prefers a stricter deadline compared to the principal. As a result, project completion is threatened by both effort provision over time \textit{and} contractual agreements on time. |
| JEL: | D82 M52 M55 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113046&r=mic |
| By: | Dato, Simon; Müller, Daniel; Grunewald, Andreas |
| Abstract: | This paper provides a comprehensive analysis regarding strategic interaction under expectation-based loss-aversion. First, we develop a coherent framework for the analysis by extending the equilibrium concepts of K szegi and Rabin (2006, 2007) to strategic interaction and demonstrate how to derive equilibria. Second, we delineate how expectation-based loss-averse players differ in their strategic behavior from their counterparts with standard expected-utility preferences. Third, we analyze equilibrium play under expectation-based loss aversion and comment on the existence of equilibria. |
| JEL: | C72 D03 D81 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112947&r=mic |
| By: | Breitmoser, Yves |
| Abstract: | People overestimate the probability that others share their values or preferences. I introduce type projection equilibrium (TPE) to capture such projection in Bayesian games. TPE allows each player to believe his opponents share his type with intermediate probability \rho. After establishing existence, I address my main question: How does projection affect behavior in games? I analyze auctions and distribution games. In auctions, projection implies an increased sense of competition, which induces overbidding in all (first-price) auctions. In addition, it biases the perceived value distribution, which induces cursed bidding in common value auctions. Thus, projection induces a hitherto neglected bias in bidding. It is novel in that it explains behavior across conditions and it is independently founded in psychology. I test projection equilibrium in multiple ways on existing data and find that it substantially improves on alternative concepts, both in isolation and in addition to them. The findings are cross-validated by testing projection of social preferences in distribution games. |
| JEL: | C72 C91 D44 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113160&r=mic |
| By: | Frommeyer, Tim |
| Abstract: | We consider a committee voting setup with two rounds of voting where committee members, who possess private information about the state of the world, have to make a binary decision. We investigate incentives for truthful revelation of their information in the first voting period. Coughlan (2000 shows that members reveal their information in a straw poll only if their preferences are homogeneous. By taking costs of time into account, we demonstrate that heterogeneous committees have strictly higher incentives to reveal information and can be strictly better off if the straw poll allows for an earlier decision for high level of consensus. |
| JEL: | D72 D82 D83 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112806&r=mic |
| By: | Gick, Wolfgang |
| Abstract: | Delegated contracting describes a widely observable vertical contractual relationship where a top principal (program designer) hires an intermediary to offer a predesigned screening contract to a downstream agent who should produce a quantity depending on his true marginal cost type. The principal has no direct access to the downstream agent and utilizes budgeting in the sequence of contracts. This paper proposes a general theory of delegated contracting where information acquisition is limited to the (sub-)contract offer stage. To reach delegation proofness, the principal designs information rents accordingly. The solution concept follows the convexity of rent pro le. The paper shows that the optimal contract is fully separating over the subcontracting interval, leading to strictly decreasing output targets. |
| JEL: | D23 D73 L51 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113069&r=mic |
| By: | Herold, Daniel |
| Abstract: | This paper analyzes firm owners' incentives to implement Competition Law Compliance Programs as imperfect monitoring devices in a principal-agent setup and the interaction effects with bonus contracts. The manager chooses working effort and has the option to cartelize. The model reveals a non-monotonic relationship between profit targets and incentives to collude. Contrary to intuition, it might be the case that low instead of high profit targets facilitate collusion. This result is driven by the threat of detection and punishment. A Compliance Program deters the agent from misbehavior and enhances effort as long as the agent did not engage in collusive activity. Additionally, the owner can use the Program as an insurance against fines. |
| JEL: | D21 D82 D02 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112980&r=mic |
| By: | Gauer, Florian |
| Abstract: | We analyze a model of strategic network formation prior to a Manea (2011) bargaining game: ex-ante homogeneous players form an undirected network with explicit linking costs anticipating expected equilibrium payoffs from the subsequent sequential network bargaining. Assuming patient players, we provide a complete characterization of networks being pairwise (Nash) stable on a cost interval of positive length: specific disjoint unions of separated pairs, odd circles and isolated players constitute this class. Even for all single cost levels we are able to exclude a wide range of structures from being pairwise stable, including all other equitable networks. As an important implication, this reveals the diversity of possible bargaining outcomes to be substantially narrowed down provided pairwise stability. Further, we find that for sufficiently high costs the pairwise stable and efficient networks coincide whereas this does not hold if costs are low or at an intermediate level. As a robustness check, we also study the case of time-discounting players. |
| JEL: | C72 C78 D85 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112943&r=mic |
| By: | Gamp, Tobias |
| Abstract: | Consumers buy products even if they find it too time-consuming to evaluate products carefully. I present a simple market model with sequential consumer search and differentiated products in which consumers may purchase products without evaluation. In a market with evaluation cost heterogeneity and endogenous consumer participation, market prices and profits may fall with increasing product diversity. Resulting concerns that the market may fail to provide the welfare optimal variety of products are gratuitous if product diversity is endogenized. Firms find it nonetheless individually rational to offer niche products. I endogenize evaluation costs and interpret this as the firms opportunity to aggravate the acquisition of information by obfuscation. A firm s equilibrium strategy whether to obfuscate product information is monotonic in product diversity: while obfuscation is individually rational for high product diversity, firms simplify information acquisition if product diversity is low. |
| JEL: | D43 D83 L13 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112886&r=mic |
| By: | Haita-Falah, Corina; Gerber, Anke; Lange, Andreas |
| Abstract: | Motivated by the recent concerns of the scientists participating in the elaboration of the Intergovernmental Panel on Climate Change assessment reports, we study a principal-agent relationship between a politician and a researcher that captures some stylized facts regarding the involvement of politics into scientific research. The politician contracts with a researcher in order to get some scientific advice about a policy relevant variable. The politician trades off the policy that he would implement in the absence of any reelection concerns with a desire to please voters by choosing a policy that is supported by scientific advice and that turns out to be the ``right'' policy ex post. As a consequence, the politician bribes the researcher to bias his scientific advice towards the ideal policy of the politician. We study the optimal contracts under symmetric and under asymmetric information about the researcher's ability and concern for reputation, as well as the selection of a researcher by the politician. Thereby we identify several conflicts between the interests of the voters and those of the politician. |
| JEL: | D72 D82 D83 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113227&r=mic |
| By: | Winand Emons; Claude Fluet |
| Abstract: | A decision-maker relies on information of parties affected by her decision. These parties try to influence her decision by selective disclosure of facts. As is well known from the literature, competition between the informed parties constrains their ability to manipulate information. We depart from this literature by introducing a cost to communicate. Our parties trade off their reporting cost against the effect on the decision. Typically, they never reveal all information. A better outcome may be implemented if the decision-maker adopts an active stance by barring one party from reporting or through cheap talk allowing coordination on a particular equilibrium. |
| Keywords: | disclosure, persuasion, active judging, adversarial, inquisitorial, disclosure, persuasion, active judging, adversarial, inquisitorial |
| JEL: | D82 K41 |
| Date: | 2016–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2016s-06&r=mic |
| By: | Siemering, Christian |
| Abstract: | Traditional business models of credit rating agencies (CRAs) are criticized for creating incentives for misreporting. This paper investigates a potential alternative in which CRAs receive revenue from advertisement only. We use a two-period Bayesian reputation model and show that CRAs will shirk when their reputation is either very high or very low. When reputation is at a medium level, the prospect of exploiting better reputation in the future might discipline CRAs to exert high effort in the present. However, when misreporting is possible, the CRA will always shirk and conduct either rating inflation or deflation with positive probability. |
| JEL: | G24 D82 L15 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113195&r=mic |
| By: | Boom, Anette |
| Abstract: | Inspired by recent regulations in the New York ICAP market, this paper examines the effect of price regulations on a multi-unit uniform price auction. General bid caps reduce the maximum price below the bid cap, but also the minimum potential market price below the cap. A bid cap only for the larger firms does not guarantee a market price below the cap. A sufficiently high bid floor only for relatively small firms destroys some or all pure strategy equilibria with equilibrium prices above the marginal costs. With a general bid floor this happens only with considerably larger bid floors. |
| JEL: | D44 D43 L13 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112998&r=mic |