nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒02‒23
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Contracting with Endogenous Entry By Marco Pagnozzi; Salvatore Piccolo
  2. Stereotypes By Pedro Bordalo; Katherine Coffman; Nicola Gennaioli; Andrei Shleifer
  3. Competing Mechanisms in Markets for Lemons By Auster, Sarah; Gottardi, Piero
  4. Reasoning about strategies and rational play in dynamic games By Giacomo Bonanno
  5. Information Release in Second–Price Auctions By Cristián Troncoso-Valverde
  6. Patent hold-up and royalty stacking: the case of multiple downstream firms By Karbowski, Adam; Prokop, Jacek
  7. Endogenous contractual externalities By Emre Ozdenoren; Kathy Yuan
  8. Duplicative Search By Matros, Alexander; Smirnov, Vladimir
  9. Projection Equilibrium: Definition and Applications to Social Investment and Persuasion By Kristóf Madarász
  10. General Revealed Preferences By Cesar Martinelli; Mikhail Freer
  11. Collective intertemporal choice: time consistency vs. time invariance By Antony Millner; Geoffrey Heal
  12. Technology transfer with search intensity and project advertising. By Giorgio Calcagnini; Germana Giombini; Paolo Liberati; Giuseppe Travaglini
  13. Optimal Leverage and Strategic Disclosure By Trigilia , Giulio
  14. Incomplete information, proportional representation and strategic voting By Orestis Troumpounis; Dimitrios Xefteris
  15. Innovation Adoption by Forward-Looking Social Learners By Mira Frick; Yuhta Ishii
  16. Oversight and Hierarchies By Landa, Dimitri; Le Bihan, Patrick

  1. By: Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica del Sacro Cuore di Milano and CSEF)
    Abstract: A principal contracts with an agent who is privately informed about his production cost. Before contracting, the agent learns his probability of having a low cost – his ex ante “type” – and decides whether to pay an entry fee. We show that the entry game has two equilibria that determine the possible types of the agent who contract with the principal. Contrasting with standard intuition, in the equilibrium that is “risk dominant” for the agent, an increase in the entry fee increases the mass of types who enter and the expected cost of the entrant. Public policies that increase entry barriers may be welfare improving.
    Keywords: Entry, Vertical Contracting, Asymmetric Information
    JEL: D43 D82 L13 L51
    Date: 2016–01–22
  2. By: Pedro Bordalo; Katherine Coffman; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a model of stereotypes based on Kahneman and Tversky?s representative-ness heuristic. A decision maker assesses a target group by overweighting its representative types, defined as the types that occur more frequently in that group than in a baseline ref-erence group. Stereotypes formed in this way contain a ?kernel of truth?: they are rooted in true di?erences between groups. Because stereotypes focus on di?erences, they cause belief distortions, particularly when groups are similar. Stereotypes are also context dependent: beliefs about a group depend on the characteristics of the reference group. In line with our predictions, beliefs in the lab about abstract groups and beliefs in the field about political groups are context dependent and distorted in the direction of representative types.
  3. By: Auster, Sarah; Gottardi, Piero
    Abstract: We study the competitive equilibria in a market with adverse selection and search frictions. Uninformed buyers post general direct mechanisms and informed sellers choose where to direct their search. We demonstrate that there exists a unique equilibrium allocation and characterize its properties: all buyers post the same mechanism and a low quality object is traded whenever such object is present in a meeting. Sellers are thus pooled at the search stage and screened at the mechanism stage. If adverse selection is sufficiently severe, this equilibrium is constrained inefficient. Furthermore, the properties of the equilibrium differ starkly from the case where meetings are restricted to be bilateral, in which case in equilibrium sellers sort across different mechanisms at the search stage. Compared to such sorting equilibria, our equilibrium yields a higher surplus for most, but not all, parameter specifications.
    Keywords: Adverse Selection, Trade Mechanisms, Competitive Search, Welfare
    JEL: D82 D83 G14
    Date: 2016
  4. By: Giacomo Bonanno (Department of Economics, University of California Davis)
    Abstract: We discuss the issues that arise in modeling the notion of common belief of rationality in epistemic models of dynamic games, in particular at the level of interpretation of strategies. A strategy in a dynamic game is defined as a function that associates with every information set a choice at that information set. Implicit in this definition is a set of counterfactual statements concerning what a player would do at information sets that are not reached, or a belief revision policy concerning behavior at information sets that are ruled out by the initial beliefs. We discuss the role of both objective and subjective counterfactuals in attempting to flesh out the interpretation of strategies in epistemic models of dynamic games.
    Keywords: Extensive-form game, strategy, counterfactual, belief revision, Kripke frame, modal logic
    JEL: C7
    Date: 2014–03–12
  5. By: Cristián Troncoso-Valverde (School of Business and Economics, Universidad del Desarrollo)
    Abstract: This paper studies the incentives faced by competing auctioneers who can release information to prospective bidders before bidders choose trading partners. I provide sufficient conditions that ensure the existence of a unique equilibrium in which both sellers release all available information. Contrary to previous findings in the literature, the existence of this equilibrium holds true even if there are only two bidders in the market. Thus, the findings of this paper provides support to the idea that competition among sellers improves informational efficiency relatively to monopoly
    Keywords: Competing Auctions, Information Structures, Private Provision of Information
    Date: 2015–04
  6. By: Karbowski, Adam; Prokop, Jacek
    Abstract: The objective of this paper is twofold. First, we study the patent hold-up problem in game-theoretic framework. We show that in subgame perfect equilibrium of the patent hold-up game the innovating manufacturer exerts reduced effort to develop the new product and the patent holder obtains the entire value of product innovation. Second, we show that royalty stacking, which is believed to magnify the patent hold-up, may cause less severe problems than the ones predicted by Lemley and Shapiro [11] when competition on the downstream product market is introduced.
    Keywords: patent hold-up,royalty stacking,downstream competition
    JEL: O32 O34
    Date: 2015
  7. By: Emre Ozdenoren; Kathy Yuan
    Abstract: We study effort and risk-taking behaviour in an economy with a continuum of principal-agent pairs where each agent exerts costly hidden effort. When the industry productivity is uncertain, agents have motivations to match the industry average effort, which results in contractual externalities. Contractual externalities have welfare changing effects when the information friction is correlated and the industry risk is not revealed. This is because principals do not internalise the impact of their choice on other principals' endogenous industry risk exposure. Relative to the second best, if the expected productivity is high, risk-averse principals over-incentivise their own agents, triggering a rat race in effort exertion, resulting in over-investment in effort and excessive exposure to industry risks relative to the second best. The opposite occurs when the expected productivity is low.
    Keywords: Contractual externalities; relative and absolute performance contracts; boom-bust effort exertion and risk taking.
    JEL: D86 G30
    Date: 2015–09
  8. By: Matros, Alexander; Smirnov, Vladimir
    Abstract: In this paper we examine the dynamic search of two rivals looking for a prize of known value that is hidden in an unknown location, modeled as search for treasure on an island. In every period, the players choose how much to search of the previously unsearched portion of the island in a winner-takes-all contest. If the players cannot coordinate so as to avoid searching the same locations, the unique equilibrium involves complete dissipation of rents. On the other hand, if the players have some (even limited) ability to coordinate so as to avoid duplicative search and the search area is sufficiently small, there is a unique equilibrium in which the full area is searched and each player earns a positive expected return.
    Keywords: R&D; search; duplication; uncertainty; coordination
    Date: 2016–01
  9. By: Kristóf Madarász
    Abstract: People exaggerate the extent to which their private information is shared with others. This paper introduces this phenomenon portably into Bayesian games where people wrongly think that if they can condition their strategy on an event others can do as well. I apply the model to a variety of settings. In the context of social investment people misattribute the uncertainty they face about others preferences to others having antagonistic motives. Even if all parties prefer mutual investment, none invests, yet all come to believe that others prefer not to invest. In the context of communication with costly state veri…cation, the model predicts credulity: persuasion by advisors, who are known to have an incentive to exaggerate the quality of an asset, will nevertheless induce uniformly exaggerated average posteriors for receivers. When endogenizing the con‡ict of interest between senders and receivers, I show that such credulous belief-bubbles rise discontinuously as the size of the market or the complexity of the asset increases. Further implications to auctions, common value trade and zero-sum games are explored.
    Keywords: Projection, Social Investment, Pluralistic Ignorance, Persuasion Belief-Bubbles.
    JEL: D03 C7
    Date: 2015–01
  10. By: Cesar Martinelli (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University); Mikhail Freer (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: Following Richter (1966), we provide criteria under which a preference relation implied by a finite set of choice observations has a complete extension that can in turn be represented by a utility function. The usual properties of the original preference relation are inherited by the preference extension represented by the utility function. Noteworthy, our result relaxes the usual assumptions about the structure of budgets generating the observed choices. Against common wisdom, we show that (upper semi-)continuity does not come for free in general and it requires additional assumptions.
    Date: 2016–02
  11. By: Antony Millner; Geoffrey Heal
    Abstract: We study collective choice when individuals have heterogeneous discounted utilitarian preferences. Two attractive properties of intertemporal preferences are indistinguishable for individuals, but have dramatically different implications for collective choice. Time Consistency requires a plan that is optimal at one evaluation date to be optimal at all later evaluation dates, while Time Invariance requires preferences to be unchanged under translations of the time axis. We study the implications of these two properties in a tractable dynamic model that captures both common resource and public goods problems. Utilitarian social planners implement the first best if collective preferences are time consistent, but not if they are time invariant. Decentralized alternatives { property rights (for common resources) and voting (for public goods) { can strictly improve on the planning equilibrium if social preferences are time invariant. We reflect on the implications of these fndings for dynamic welfare economics. Revealed preference cannot determine which property we should adopt, but each property is normatively attractive in some contexts.
    Date: 2015–12
  12. By: Giorgio Calcagnini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo" and Mo.Fi.R., Ancona, Italy); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo" and Mo.Fi.R., Ancona, Italy); Paolo Liberati (Department of Economics, Università degli Studi di Roma Tre, Rome, Italy.); Giuseppe Travaglini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")
    Abstract: TIn this paper we present a model where technology transfer is embedded into a competitive model of utility and profit maximization and is the result of a matching process between heterogeneous Knowledge Transfer Offices (KTOs) and innovative firmrms. Our model improves on previous literature by endogenizing the process that drives the dynamics of university researchers in search and firm vacant projects. We are able to show that the KTOs' reservation fee rate must be greater than the ratio between the marginal researcher cost and the marginal utility of matched projects, and that technology transfer strictly depends on the efficiency units of searching researchers and vacant projects. Further, we show that firm technological progress might be too low when KTOs too much intensively search for project matches. This occurs because both sides of the market ignore the externalities of their decisions. Finally, behavioral complementarity, substitutability, and free riding are all potential equilibrium outcomes.
    Keywords: Technology transfer, Matching, Externalities
    JEL: O31 O32
    Date: 2015
  13. By: Trigilia , Giulio (Department of Economics, 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.
    Keywords: leverage, costly-state-verification, disclosure, asymmetric information, capital requirements, financial regulation, optimal contracting
    JEL: D82 G21 G32 G38
    Date: 2016
  14. By: Orestis Troumpounis; Dimitrios Xefteris
    Abstract: We introduce incomplete information to a multiparty election under proportional representation: each voter knows her preferences and votes strategically to maximize her payoffs, but is uncertain about the number and the preferences of the other voters. Parties are assumed to be purely office motivated and, hence, the resulting governments are always minimum winning. In this framework we prove a) generic existence of equilibria where only two parties receive a positive fraction of the votes and therefore lead to single party governments and b) generic inexistence of equilibria that lead to coalition governments. That is, contrary to common wisdom, a proportional rule is found not to promote sincere voting and to be favorable towards single party governments. The existence of two-party equilibria that lead to single party governments is robust to parties having ideological concerns.
    Keywords: Proportional elections, strategic voters, incomplete information, Duverger's Hypothesis, Poisson games, Gamson's Law
    JEL: D72
    Date: 2015
  15. By: Mira Frick (Dept. of Economics, Harvard University); Yuhta Ishii (Cowles Foundation, Yale University & Centro de Investigacion Economica, ITAM)
    Abstract: Motivated by the rise of social media, we build a model studying the effect of an economy’s potential for social learning on the adoption of innovations of uncertain quality. Provided consumers are forward-looking (i.e., recognize the value of waiting for information), equilibrium dynamics depend non-trivially on qualitative and quantitative features of the informational environment. We identify informational environments that are subject to a saturation effect, whereby increased opportunities for social learning can slow down adoption and learning and do not increase consumer welfare. We also suggest a novel, purely informational explanation for different commonly observed adoption curves (S-shaped vs. concave).
    Keywords: Innovation adoption, Social learning, Poisson bandits, Informational free-Riding
    JEL: D81 D83
    Date: 2015–02
  16. By: Landa, Dimitri; Le Bihan, Patrick
    Date: 2015–10

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