nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒02‒29
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The value of information in risk-sharing environments with unawareness By Galanis, Spyros
  2. A model of belief influence in large social networks By Antonio Jiménez-Martínez
  3. Characterizing lexicographic preferences By Petri, Henrik; Voorneveld, Mark
  4. Bayesian Updating for Complementarily Additive Beliefs under Ambiguity By Mayumi Horie
  5. Endogenous correlated network dynamics By Rui Gong; Frank Page; Myrna Wooders
  6. Unobservable investments, limited commitment, and the curse of firm relocation By Martin Pollrich; Robert Schmidt
  7. Multidimensional auctions for long-term procurement contracts under the threat of early exit: the case of conservation auctions By Di Corato, Luca; Dosi, Cesare; Moretto, Michele
  8. Two-stage contests with effort-dependent rewards By Sela, Aner
  9. Endogenous market making and network formation By Briana Chang; Shengxing Zhang
  10. Crowd Learning without Herding : A Mechanism Design Approach By Glazer, Jacob; Kremer, Ilan; Perry, Motty
  11. Strategic Communication with Reporting Costs By Emons, Winand; Fluet, Claude
  12. Ingratiation and Favoritism in Organizations By Agnieszka Rusinowska; Vassili Vergopoulos
  13. Optimal sequential auctions By Mireia Jofre-Bonet; Martin Pesendorfer
  14. Feasible elimination procedures in social choice: an axiomatic characterization By Bezalel Peleg; Hans Peters
  15. An Egalitarian Value for Cooperative Games with Incomplete Information By Salamanca Lugo, Andrés
  16. False Advertising By Rhodes, Andrew; Wilson, Chris
  18. Bargaining under the Illusion of Transparency By Madarász, Kristóf
  19. Stochastic dominance, risk and disappointment: a synthesis. By Thierry Chauveau

  1. By: Galanis, Spyros
    Abstract: The value of information is examined in a risk-sharing environment with unawareness and complete markets. Information and awareness are symmetric among agents, who have a clear understanding of their actions and deterministic payoffs. We show with examples that public information can make some agents strictly better off at the expense of others, contrasting the standard results of Hirshleifer [1971] and Schlee [2001] that the value of public information is negative for all when risk averse agents are fully insured. We identify the source of this problem to be that, as awareness varies across states, it creates an “awareness signal†that the agents misunderstand and treat asymmetrically. As a result, risk-sharing opportunities that are available when this signal is not used, vanish when it is used. Depending on the allocation of endowments, this asymmetry makes some agents strictly better off and others strictly worse off. We identify a property, Conditional Independence, which we show is sufficient for the value of public information to be negative for all.
    Date: 2016–01–25
  2. By: Antonio Jiménez-Martínez (Division of Economics, CIDE)
    Abstract: This paper develops a model of evolution of beliefs through communication in an exogenous social network. We assume that the agents are Bayesian updaters and that the network enables them to listen to the opinion of others about some uncertain parameter of interest. We explore the effects of the network on the agents' long-run first-order beliefs about the parameter and investigate the aggregation of private information in large societies. Each agent observes private signals about the value of the unknown parameter and, according to his connections in the network, receives private messages from others as well. A message conveys some information about the signal observed by the sender and about the messages that the sender receives from other indirectly connected agents. The informativeness of a message is not strategically chosen but it is exogenously given by the intensity of the connection. Both signals and messages are independent and identically distributed across time but not necessarily across agents. We first characterize the long-run behavior of an agent's beliefs in terms of some entropy-based measures of the conditional distributions of signals and messages available to the agent. Then, we show that the achievement of a consensus in the society is closely related to the presence of prominent agents who are able to change the evolution of other agents' opinions over time. Finally, we show that the influence of the prominent agents must not be very high in order for the agents to aggregate correctly their private sources of information in the long-run.
    Keywords: Communication networks, Bayesian updating, private signals, private messages, consensus, correct limiting beliefs
    JEL: D82 D83 D85
    Date: 2014–04
  3. By: Petri, Henrik (Department of Finance); Voorneveld, Mark (Dept. of Economics)
    Abstract: We characterize lexicographic preferences on product sets of finitely many coordinates. The main new axiom is a robustness property. It roughly requires this: Suppose x is preferred to y; many of its coordinates indicate that the former is better and only a few indicate the opposite. Then the decision maker is allowed a change of mind turning one coordinate in favor of x to an indifference: even if one less argument supports the preference, the fact that we started with many arguments in favor of x suggests that such a small change is not enough to give rise to the opposite preference.
    Keywords: lexicographic preferences; lexicographic order; characterization; preferences
    JEL: D01 D11 D70
    Date: 2015–04–13
  4. By: Mayumi Horie (Hiroshima University of Economics)
    Abstract: This paper proposes a formal characterization of extended Bayesian updating for complementarily additive subjective beliefs under ambiguity, which are compatible with a wide range of choice behavior toward ambiguity. The main result shows that, based on the biseparability of Ghirardato and Marinacci (2001), extended Bayesian updating characterizes the update rule which is a step-by-step composite updating for priors, where one of Dempster-Shafer rule, Bayes'update rule and Fagin-Halpern rule is applied to each step. As applications, more speci c preference relations are examined, such as the maxmin expected utility, the rank-dependent expected utility, and the concave expected utility preferences by Lehrer (2009).
    Keywords: ambiguous belief, Bayesian update rule, multiple priors, non-additive measure, subjective probability, biseparable preference
    JEL: D81
    Date: 2016–02
  5. By: Rui Gong; Frank Page; Myrna Wooders
    Abstract: We model the structure and strategy of social interactions prevailing at any point in time as a directed network and we address the following open question in the theory of social and economic network formation: given the rules of network and coalition formation, preferences of individuals over networks, strategic behavior of coalitions in forming networks, and the trembles of nature, what network and coalitional dynamics are likely to emerge and persist. Our main contributions are to formulate the problem of network and coalition formation as a dynamic, stochastic game and to show that: (i) the game possesses a correlated stationary Markov equilibrium (in network and coalition formation strategies), (ii) together with the trembles of nature, this correlated stationary equilibrium determines an equilibrium Markov process of network and coalition formation, and (iii) this endogenous Markov process possesses a finite set of ergodic measures, and generates a finite, disjoint collection of nonempty subsets of networks and coalitions, each constituting a basin of attraction. Moreover, we extend to the setting of endogenous Markov dynamics the notions of pairwise stability (Jackson-Wolinsky, 1996) and the path dominance core (Page-Wooders, 2009a). We show that in order for any network-coalition pair to emerge and persist, it is necessary that the pair reside in one of finitely many basins of attraction. The results we obtain here for endogenous network dynamics and stochastic basins of attraction are the dynamic analogs of our earlier results on endogenous network formation and strategic basins of attraction in static, abstract games of network formation (Page and Wooders, 2009a), and build on the seminal contributions of Jackson and Watts (2002), Konishi and Ray (2003), and Dutta, Ghosal, and Ray (2005).
    Keywords: endogenous network dynamics; dynamic stochastic games of network formation; stationary Markov correlated equilibrium; equilibrium Markov process of network formation; basins of attraction; Harris decomposition; ergodic probability measures; dynamic path dominance core; dynamic pairwise stability
    JEL: A14 C71 C72
    Date: 2015–06
  6. By: Martin Pollrich (Humboldt-Universitaet zu Berlin, Department of Economics); Robert Schmidt (Humboldt-Universitaet zu Berlin, Department of Economics)
    Abstract: Changes in market conditions or policies can induce firms to relocate. Countries may intervene by subsidizing domestic rms. We analyze a dynamic game where a regulator oers contracts to avert relocation of a rm in each of two periods. The firm can undertake an investment that is unobservable to the regulator, while contracts are contingent on an observable productive activity. Under limited commitment it is impossible to implement outcomes with positive transfers in the second period. To circumvent this problem, the regulator can tighten the regulation of the firm in the first period to induce a larger investment (lock-in effect).
    Keywords: moral hazard, contract theory, limited commitment, firrm mobility, abatement capital
    JEL: D82 D86 L51
    Date: 2014–09–25
  7. By: Di Corato, Luca (Department of Economics, Swedish University of Agricultural Sciences); Dosi, Cesare (Department of Economics and Management, University of Padova); Moretto, Michele (Department of Economics and Management, University of Padova)
    Abstract: In this paper we study how early-exit options, embedded in long-term procurement contracts which do not provide for sufficiently strong incentives against contract breach, can affect bidding behaviors in multidimensional procurement auctions and the parties' expected payoffs. We show first that bidders' payoff is lower when competing for contracts with unenforceable contract terms. Secondly, that neglecting the risk of opportunistic behavior by sellers can lead to contract awards that do not maximize the buyer's potential payoff. Finally, we make suggestions about how to mitigate potential misallocations, by pointing out the role of eligibility rules and competition among bidders.
    Keywords: Public procurement; Scoring auctions; Contract breach; Real options; Conservation contracts
    JEL: C61 D44 D86 Q24 Q28
    Date: 2015–08–30
  8. By: Sela, Aner
    Abstract: We study two-stage all-pay contests where there is synergy between the stages. The reward for each contestant is fixed in the first stage while it is effort-dependent in the second one. We assume that a player's effort in the first stage either increases (positive synergy) or decreases (negative synergy) his reward in the second stage. The subgame perfect equilibrium of this contest is analyzed with either positive or negative synergy. We show, in particular, that whether the contestants are symmetric or asymmetric their expected payoffs may be higher under negative synergy than under positive synergy. Consequently, they prefer smaller rewards (negative synergy) over higher ones (positive synergy).
    Keywords: effort-dependent rewards; two-stage all-pay contests
    JEL: C70 D44 L12 O32
    Date: 2016–02
  9. By: Briana Chang; Shengxing Zhang
    Abstract: This paper proposes a theory of intermediation in which intermediaries emerge endogenously as the choice of agents. In contrast to the previous trading models based on random matching or exogenous networks, we allow traders to explicitly choose their trading partners as well as the number of trading links in a dynamic framework. We show that traders with higher trading needs optimally choose to match with traders with lower needs for trade, and they build fewer links in equilibrium. As a result, traders with the least trading need turn out to be the most connected and have the highest gross trade volume. The model therefore endogenously generates a core-periphery trading network that we often observe: a financial architecture that involves a small number of large, interconnected institutions. We use this framework to study bid-ask spreads, trading volume, asset allocation.
    Keywords: over-the-counter market; core-periphery trading network; matching; intermediation
    JEL: C70 G1 G20
    Date: 2015–11
  10. By: Glazer, Jacob (Department of Economics, University of Warwick and Faculty of Management Tel Aviv University); Kremer, Ilan (Department of Economics, University of Warwick and Faculty of Management and Economics Department, The Hebrew University of Jerusalem); Perry, Motty (Department of Economics, University of Warwick)
    Abstract: Crowdfunding, Internet websites, and health care are only a few examples of markets in which agents make decisions not only on the basis of their own investigations and knowledge, but also on the basis of information from a "central planner" about other agents’ actions. While such reciprocal learning can be welfare-improving, it may reduce agents’ incentives to conduct their own investigations, and may lead to harmful cascades. We study the planner’s optimal policy regarding when to provide information and how much information to provide. We show that the optimum policy involves a delicate balance of hiding and revealing information.
    Keywords: Informationio Cascades ; Mechanism Design
    Date: 2015
  11. By: Emons, Winand; Fluet, Claude
    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: active judging; adversarial; disclosure; inquisitorial; persuasion
    JEL: D82 K41
    Date: 2016–02
  12. By: Agnieszka Rusinowska (Paris School of Economics - Centre d'Economie de la Sorbonne); Vassili Vergopoulos (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: We combine in the same theoretical framework two related phenomena that can be present in organizations – ingratiation of subordinates and favoritism of superiors towards some of their employees. There are three actors in the model: a worker, a manager supervising the worker, and a firm that employs the worker and the manager. Ingratiation is defined as a strategic behavior of the worker to make himself more attractive to the manager. In our model ingratiation is expressed by opinion conformity which is exerted by the worker when reporting his opinion to the manager. Favoritism of the manager is based on using a bias when reporting to the firm her observation of the worker's performance. First, we determine to optimal level of the effort and the reported opinion of the worker, and the level of bias of the manager. Then, we ingestigate the effects of favoritism and ingratiation on the expected wages and utilities of the worker and the manager, and on the expected profit of the firm
    Keywords: ingratiation; opinion conformity; favoritism; organization; performance; wage; profit
    JEL: D8 D2 L2 C65
    Date: 2016–01
  13. By: Mireia Jofre-Bonet; Martin Pesendorfer
    Abstract: Sequential sealed first-price and open descending-price procurement auctions are studied. We examine which procurement auction rule achieves the low procurement cost. We show that the answer to this policy question depends on whether the items are complements or substitutes. With substitutes, the first-price procurement auction is preferred, while with complements, the open descending-price procurement auction is preferred. We also illustrate the procurement cost minimizing auction and the auction rule preferred by the bidders. With substitutes, bidders prefer the open descending-price procurement auction, while with complements bidders prefer the first-price procurement auction.
    Keywords: Sequential auctions; Optimal auctions; Complementarities; Substitutes
    JEL: D4 D44 D82 L00 L13
    Date: 2014–03
  14. By: Bezalel Peleg; Hans Peters
    Abstract: Feasible elimination procedures (Peleg, 1978) play a central role in constructing social choice functions which have the following property: in the associated game form, for any preference profile there exists a strong Nash equilibrium resulting in the sincere outcome. In this paper we provide an axiomatic characterization of the social choice correspondence resulting from applying feasible elimination procedures. The axioms are anonymity, Maskin monotonicity, and independent blocking.
    Keywords: Feasible elimination procedure, anonymity, Maskin monotonicity, independent blocking, axiomatization
    Date: 2015–12
  15. By: Salamanca Lugo, Andrés
    Abstract: A bargaining solution concept generalizing the Harsanyi (1963) NTU value is defined for cooperative games with incomplete information. When compared with Myerson's (1984a) bargaining solution, our solution concept differs from the former in that we require coalitional agreements to be equitable when players make interpersonal utility comparisons in terms of some virtual utility scales. When there are only two players, the two solutions are easily seen to coincide (whenever utility weights are strictly positive), however they may differ for general n-person games. By using the concept of virtual utility, our bargaining solution reflects the fact that players negotiate at the interim stage.
    Keywords: Cooperative games, incomplete information, virtual utility.
    JEL: C71 C78 D82
  16. By: Rhodes, Andrew; Wilson, Chris
    Abstract: There is widespread evidence that some firms use false advertising to overstate the value of their products. Using a model in which a policymaker is able to punish such false claims, we characterize a natural equilibrium in which false advertising actively influences rational buyers. We analyze the effects of policy under different welfare objectives and establish a set of demand and parameter conditions where policy optimally permits a positive level of false advertising. Further analysis considers some wider issues including the implications for product investment and industry self-regulation.
    Keywords: Misleading Advertising; Product Quality; Pass-through; Self-Regulation
    JEL: D83 L15 M37
    Date: 2015–12
  17. By: Matias Nunez (Université Paris IX - Paris Dauphine); Dimitrios Xefteris (University of Cyprus [Nicosia] - University of Cyprus)
    Abstract: We consider a class of indirect mechanisms, the Approval ones, in which the players' strategies coincide with the subsets of the outcome space. We focus on the single-peaked domain and we prove that: a) each of these rules is characterized by a unique equilibrium outcome and b) for every strategy-proof single-peaked rule there exists an Approval one that unanimously implements it. That is, Approval rules fix the problem of equilibrium-outcome multiplicity that is inherent to the ensuing games of strategy-proof single-peaked rules and, perhaps more importantly, promote social coherence: the implemented outcome is approved by every player.
    Keywords: Indirect Mechanisms ,Nash Implementation,Strategy-proof,Unanimity
    Date: 2016–02–06
  18. By: Madarász, Kristóf
    Abstract: An uninformed seller offers an object to a privately informed buyer. The buyer projects information and exaggerates the probability that the seller is informed. Letting the buyer bargain and name her own price raises the seller's payoff above the full-commitment payoff. Under seller-offer bargaining, any positive degree of projection implies a full reversal of the Coasian result in stationary strategies. As delay between offers decreases, the seller raises his initial price and, in the limit, extracts the full surplus from trade. Dynamic bargaining without price-commitment is revenue-optimal. Existing experimental evidence is consistent with the comparative static predictions of the model.
    Keywords: Bargaining; Coase Conjecture.; Information Projection; Pricing
    JEL: C79 D03
    Date: 2015–02
  19. By: Thierry Chauveau (Centre d'Economie de la Sorbonne)
    Abstract: In this article, utilities are substituted for monetary values in the definition of second order stochastic dominance (SSD). Doing so yields a family of preorders induced by SSD among which one is the "closest" to the original preorder of preferences. The corresponding utility function is the most likely to be that of the decision maker. It may be defined before behavioural axioms are set. Theories of decision making under risk can then be restated in a more general and consistent way. As an example, a new theory of disappointment is developed, which is endowed with three important properties: (a) risk premia are invariant by translation, (b) when constant marginal utility is assumed, preferences are represented by a functional which is the opposite to a convex measure of risk and (c) the functional representing preferences and the utility function can be easily elicited through experimental testing
    Keywords: Disappointment; risk-aversion; expected utility; risk premium; stochastic dominance; subjective risk
    JEL: D81
    Date: 2014–06

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