nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒03‒06
twelve papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Contract Competition between Hierarchies, Managerial Compensation and Imperfectly Correlated Shocks By Michela, Cella; Federico, Etro
  2. Ambiguous Games without a State Space and Full Rationality By Giuseppe De Marco
  3. A Simple Model of Two-Stage Choice By Sean HORAN
  4. Strategic trade in pollution permits By Alex Dickson; Ian A MacKenzie
  5. Constructing Social Division to Support Cooperation By Choy , James
  6. Epistemic democracy with correlated voters By Pivato, Marcus
  7. Consumer Search and Retail Market Structure By Rhodes, Andrew; Zhou, Jidong
  8. Bread and Bullets By Akerlof, George A.; Snower, Dennis J.
  9. Optimal Crowdfunding Design By Matthew Ellman; Sjaak Hurkens
  10. The Condorcet Principle Implies the Proxy Voting Paradox By Le Breton, Michel
  11. How Political Parties Shape Electoral Competition By Motz, Nicolas
  12. Malicious Litigation By Guha, Brishti

  1. By: Michela, Cella; Federico, Etro
    Abstract: We analyze competition through incentive contracts for managers in duopoly. Privately informed managers exert surplus enhancing e¤ort that generates an externality on the rival. Asymmetric information on imperfectly correlated shocks creates a two-way distortion of efforts under strategic substitutability in effort and a double downward distortion under strategic complementarity in effort. In the first case, as with contracts for R&D activity or small contractual spillovers for quantity and price competition, increasing the correlation of types reduces the polarization of contracts and the di¤erentials in managerial compensations between efficient and inefficient managers. In the second case, as with large contractual spillovers, the opposite occurs.
    Keywords: oligopoly, screening, two way distortion, incentives, investments
    JEL: D21 D82 D86 L13 L22
    Date: 2016–02–07
  2. By: Giuseppe De Marco (Università di Napoli Parthenope and CSEF)
    Abstract: Aim of this paper to differentiate and to better understand the assumptions that must be imposed on the structure of ambiguity and on the attitudes towards ambiguity in order to have the existence of equilibria in games under ambiguous belief correspondences. In the present paper, this class of games is studied under weaker restrictions on preferences which are not required to be rational. This paper shows that the assumption of imprecision averse (resp. loving) preferences is key to obtain equilibrium existence whenever it is combined with the property of convexity (resp. concavity) of the ambiguous belief correspondences. The paper also studies the role played by these assumptions in different specific models, so as to illustrate the applicability of the results of equilibrium existence.
    Date: 2016–01–18
  3. By: Sean HORAN
    Abstract: I provide choice-theoretic foundations for a simple two-stage model, called transitive shortlist methods, where choices are made by sequentially applying a pair of transitive preferences (or rationales) to eliminate inferior alternatives. Despite its simplicity, the model accommodates a wide range of choice phenomena including the status quo bias, framing, homophily, compromise, and limited willpower. I establish that the model can be succinctly characterized in terms of some well-documented context effects in choice. I also show that the underlying rationales are straightforward to determine from readily observable reversals in choice. Finally, I highlight the usefulness of these results in a variety of applications.
    Keywords: shortlisting; axiomatization; revealed preference; identification
    JEL: D01
    Date: 2016
  4. By: Alex Dickson (Department of Economics, University of Strathclyde); Ian A MacKenzie (School of Economics, 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
  5. By: Choy , James (Department of Economics, University of Warwick)
    Abstract: Many societies are divided into multiple smaller groups. Certain kinds of interaction are more likely to take place within a group than across groups. I model a reputation effect that enforces these divisions. Agents who interact with members of different groups can support lower levels of cooperation with members of their own groups. A hierarchical relationship between groups appears endogenously in equilibrium. Group divisions appear without any external cause, and improvements in formal contracting institutions may cause group divisions to disappear. Qualitative evidence from the anthropological literature is consistent with several predictions of the model.
    Keywords: Cooperation, Caste, Social Institution
    JEL: C73 O12 O17
    Date: 2016
  6. By: Pivato, Marcus
    Abstract: We develop a general theory of epistemic democracy in large societies, which subsumes the classical Condorcet Jury Theorem, the Wisdom of Crowds, and other similar results. We show that a suitably chosen voting rule will converge to the correct answer in the large-population limit, even if there is significant correlation amongst voters, as long as the average correlation between voters becomes small as the population becomes large. Finally, we show that these hypotheses are consistent with models where voters are correlated via a social network, or through the DeGroot model of deliberation.
    Keywords: Condorcet Jury Theorem; Wisdom of Crowds; epistemic social choice; deliberation; social network; DeGroot.
    JEL: D71 D81
    Date: 2016–02–15
  7. By: Rhodes, Andrew; Zhou, Jidong
    Abstract: This paper proposes a framework for studying how consumer search frictions affect retail market structure. In our model single-product firms which supply different products can merge to form a multiproduct firm. Consumers wish to buy multiple products and value the one-stop shopping convenience associated with a multiproduct firm. We find that when the search friction is relatively large all firms are multiproduct in equilibrium. However when the search friction is smaller the equilibrium market structure is asymmetric, with single-product and multiproduct firms coexisting. This asymmetric market structure often leads to the weakest price competition, and is the worst for consumers among all possible market structures. Due to the endogeneity of market structure, a reduction in the search friction can increase market prices and decrease consumer welfare.
    Keywords: consumer search; conglomerate merger; multiproduct pricing; one-stop shopping; retail market structure
    JEL: D11 D43 D83 L13
    Date: 2016–02
  8. By: Akerlof, George A. (Georgetown University); Snower, Dennis J. (Kiel Institute for the World Economy)
    Abstract: Standard economics omits the role of narratives (the stories that people tell themselves and others) when they make all kinds of decisions. Narratives play a role in understanding the environment; focusing attention; predicting events; motivating action; assigning social roles and identities; defining power relations; and establishing and conveying social norms. This paper describes the role narratives play in decision making, as it also juxtaposes this description against the backdrop of the Bolshevik-spawned narrative that played a critical role in the history of Russia and the Soviet Union in the 20th Century.
    Keywords: narrative, motivation, attention, prediction, identity, social assignment
    JEL: A12 A13 A14 D03 D04 D20 D23 D30 D62 D71 D72 D74 E02
    Date: 2016–02
  9. By: Matthew Ellman; Sjaak Hurkens
    Abstract: We characterize optimal reward-based crowdfunding where production is contingent on an aggregate funding threshold. Crowdfunding adapts project-implementation to demand (market-testing) and its multiple prices enhance rent-extraction via pivotality, even for large crowds, indeed for arbitrarily large if tastes are correlated. Adaptation raises welfare and rent-extraction can enhance adaptation, but sometimes distorts production and lowers welfare. Threshold commitment, central to All-Or-Nothing platforms, raises profits but can lower consumer welfare. When new buyers arrive ex-post, crowdfunding’s market-test complements traditional finance and informs subsequent pricing. We prove that crowdfunding is a general optimal mechanism in our baseline.
    Keywords: crowdfunding, Mechanism Design, entrepreneurial finance, market-testing, adaptation, rent-extraction
    JEL: C72 D42 L12
    Date: 2016–01
  10. By: Le Breton, Michel
    Abstract: In this note, we formulate a condition describing the vulnerability of a social choice function to a specific kind of strategic behavior and show that two well known classes of choice functions suffer from it.
    Keywords: Condorcet, Departing Voter Paradox, Backward Induction
    JEL: D71 D72
    Date: 2016–02
  11. By: Motz, Nicolas
    Abstract: This paper provides a model of party formation that can explain the contrast observable in the US between highly competitive presidential elections and state election that are often dominated by one party. The puzzling aspect of this pattern is that the barriers to entry that seem to exist at the state level do not apply to the federal level. The explanation that the model provides rests on the career concerns of politicians: state politicians would like to advance their career to the federal level, but only have the opportunity of doing so as a member of a federally successful party. If politicians value such career opportunities sufficiently strongly, entry of additional parties at the state level does not occur. There then exists an equilibrium with two parties, one centre-left and one centre-right, where each party dominates some states. When career concerns are weak, on the other hand, the number of parties in equilibrium will be larger with a tendency towards parties with a narrower ideological profile. In addition to explaining the patterns observable in election results, the model also makes empirical predictions regarding the sorting of politicians into parties across different regions.
    Keywords: Political Parties, Electoral Competition
    JEL: D72
    Date: 2016–02
  12. By: Guha, Brishti
    Abstract: It has long been recognized that some plaintiffs sue defendants out of malice, but malicious litigation has not been previously modeled in the law and economics literature. I construct a simple model of malicious litigation, wherein malice is defined by the plaintiff’s obtaining some utility whenever the defendant incurs costs. When plaintiffs are malicious, they are more likely to file even non-meritorious suits; both probability of filing and the plaintiff’s settlement payoff increase in the plaintiff’s malice. However, if the defendant is also malicious, obtaining utility when the plaintiff incurs litigation expenses, settlements may fail even with complete information. Two-sided malice deters filing over a certain parameter range; outside it, it raises the ratio of cases that go to trial instead of being resolved through settlement. Giving the defendant the right to call for a bar on settlement is less effective at deterring malicious lawsuits relative to non-malicious “negative-expected-value” (NEV) or “nuisance” suits. However, combining the optional settlement bar with a “commitment requirement” stipulating that the plaintiff commit to going to trial (rather than withdraw) whenever the defendant opts to defend discourages malicious litigation for a wider range of parameters.
    Keywords: Malice, lawsuits, settlement, withdrawal, trial.
    JEL: K10 K4 K41
    Date: 2016–02–15

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