nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒03‒10
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Disclosure and Choice By Elchanan Ben-Porath; Eddie Dekel; Barton L. Lipman
  2. Ignorance and Competence in Choices Under Uncertainty By Paulo Casaca; Alain Chateauneuf; José Heleno Faro
  3. Extremists into Truth-tellers: Information Aggregation under Asymmetric Preferences By Bonardi, Jean-Philippe; Cadot, Olivier; Cottier, Lionel
  4. Scoring rules and implementation in iteratively unmoderated strategies By Christian Basteck
  5. The transfer paradox in welfare space By DEMUYNCK, T.; DE ROCK, B.; GINSBURGH, V.
  6. On Noncooperative Oligopoly Equilibrium in the Multiple Leader-Follower Game By Ludovic Alexandre Julien
  7. Waiting in the queue on Hotelling’s Main Street By Peters H.J.M.; Schröder M.J.W.; Vermeulen A.J.
  8. Asymmetric information in the regulation of the access to markets By Simone Ghislandi; Michael Kuhn
  9. Alliance Formation in a Vertically Differentiated Market By Gabszewicz, J.J.; Marini, M.; Tarola, O.
  10. Stability and welfare of 'merit-based' group-matching mechanisms in voluntary contribution game By Heinrich H. Nax; Ryan O. Murphy; Dirk Helbing
  11. Blunt Honesty, Incentives, and Knowledge Exchange By Bruce Knuteson
  12. An evolutionary approach to social choice problems with q-quota rules By Akira Okada; Ryoji Sawa
  13. Evolutionary dynamics and equitable core selection in assignment games By Heinrich H. Nax; Bary S. R. Pradelski
  14. Bread and Bullet By Akerlof, George; Snower, Dennis J.
  15. Attack-Deterring and Damage-Control Investments in Cybersecurity By LAM, W.
  16. Centralized vs. Decentralized Institutions for Expert Testimony By Kim, Chulyoung
  17. Intertemporal equilibria with Knightian Uncertainty By Rose Anne Dana; Frank Riedel
  18. Ingratiation and Favoritism in Organizations By Agnieszka Rusinowska; Vassili Vergopoulos
  19. The Income Effect Under Uncertainty: A Slutsky-like Decomposition with Risk Aversion By Elena Antoniadou; Leonard J. Mirman; Marc Santugini
  20. Competing Mechanisms: Communication under Exclusivity Clauses By Andrea Attar; Eloisa Campioni; Gwenaël Piaser

  1. By: Elchanan Ben-Porath; Eddie Dekel; Barton L. Lipman
    Abstract: An agent chooses among projects with random outcomes. His payoff is increasing in the outcome and in an observer's expectation of the outcome. With some probability, the agent can disclose the true outcome to the observer. We show that choice is inefficient: the agent favors riskier projects even with lower expected returns. If information can be disclosed by a challenger who prefers lower beliefs of the observer, the chosen project is excessively risky when the agent has better access to information, excessively risk{averse when the challenger has better access, and efficient otherwise. We also characterize the agent's worst-case equilibrium payoff.
  2. By: Paulo Casaca; Alain Chateauneuf; José Heleno Faro
    Date: 2016–02–18
  3. By: Bonardi, Jean-Philippe; Cadot, Olivier; Cottier, Lionel
    Abstract: We set up a model of costly information production between two lobbies, a firm and a consumer group, competing for influence over an imperfectly informed but benevolent government. The government is endowed with a parametric amount of information and chooses the best policy from a finite, countable feasible set given the information available (its own and that forwarded by lobbies). Lobbies have asymmetric preferences, the firm being a high-stakes player with relatively extreme preferences and the consumer group a low-stakes player with preferences more aligned with the government's. We show that lobbies spend too much on information production in any Nash equilibrium despite a timing-game structure in which the lobbies are free to choose the order of play. We also show that in some parameter configurations, the firm insures against a consumer win by forwarding unbiased information to the government, in spite of its own extreme preferences and high stakes. The resulting informational rent enables the government to adopt moderate policies aligned with its own (i.e. societal) preferences, suggesting a new way in which lobby competition can produce good policies even when the government is imperfectly informed.
    Keywords: Game theory; imperfect information; lobbying model; timing game
    JEL: D72 F13 H4 K0 P1
    Date: 2016–02
  4. By: Christian Basteck (Technische Universitaet Berlin)
    Abstract: We characterize voting procedures according to the solution that they implement when voters cast ballots strategically, applying iteratively undominated strategies. In elections with three candidates, the Borda Rule is the unique positional scoring rule that satisfies unanimity (U) (i.e., elects a candidate whenever it is unanimously preferred) and is majoritarian after eliminating a worst candidate (MEW)(i.e., if there is a unanimously disliked candidate, the majority-preferred among the other two is elected). In the larger class of direct mechanism scoring rules, Approval Voting is characterized by a single axiom – it is majoritarian after eliminating a Pareto dominated candidate (MEPD)(i.e., if there is a Pareto-dominated candidate, the majority-preferred among the other two is elected). However, it fails a desirable monotonicity property: a candidate that is elected for some preference profile, may lose the election once she gains further in popularity. In contrast, the Borda Rule is the unique direct mechanism scoring rule that satisfies U, MEW and monotonicity (MON). Finally, there exists no direct mechanism scoring rule that satisfies both MEPD and MON or Condorcet consistency (CON).
    Keywords: Sophisticated Voting; Iterated Weak Dominance; Implementation; Plurality Rule; Borda Rule; Approval Voting
    JEL: C72 D71 D72
    Date: 2016–02–01
  5. By: DEMUYNCK, T. (Maastricht University, The Netherlands); DE ROCK, B. (Université Libre de Bruxelles, ECARES, Belgium); GINSBURGH, V. (Université Libre de Bruxelles, ECARES, Belgium)
    Abstract: The transfer paradox describes a situation in which a transfer of endowments between two agents results in a welfare decrease for the recipient and a welfare increase for the donor. It is known that in a two-agent regular exchange economy with an arbitrary number of goods, the transfer paradox occurs only if the price equilibrium is unstable. In this paper, we show that in the space of welfare weights, the set of stable equilibria and the set of no-transfer paradox equilibria coincide. As a corollary we also obtain that for two agents and an arbitrary number of goods, the index of an equilibrium in price space coincides with its index in welfare space.
    Keywords: welfare equilibrium, exchange economy, transfer paradox
    JEL: D51 D60
    Date: 2015–09–24
  6. By: Ludovic Alexandre Julien
    Abstract: In this paper, we provide new proofs of existence and uniqueness of a Stackelberg market equilibrium for a multiple leader-follower noncooperative oligopoly model in which heterogeneous firms compete on quantities. To this end, we consider a two-step game of perfect and complete information in which many leaders interact strategically with many followers. The Stackelberg market equilibrium constitutes a pure strategy subgame perfect Nash equilibrium of this game. The existence (and uniqueness) problem is complexified in this framework since strategic interactions occur within each partial game but also between both partial games through sequential decisions. Then, to prove existence, we notably provide a new procedure to determine (the conditions under which) the optimal behavior of the followers (may be written) as functions of the leaders'strategy profile only. Some examples outline our procedure and discuss our assumptions.
    Keywords: Best response functions, existence, uniqueness.
    JEL: D43 L13
    Date: 2016
  7. By: Peters H.J.M.; Schröder M.J.W.; Vermeulen A.J. (GSBE)
    Abstract: We consider a variant of Hotellings location model that was proposed by Kohlberg 1983 when choosing a firm, consumers take travel time and also expected waiting time, which again depends on the number of consumers choosing that firm, into consideration. If we assume that firms are symmetric, then we show that a subgame perfect equilibrium exists if there is an even, but small, number of firms and no subgame perfect equilibrium exists if there is an odd, but small, number of firms. Further, we illustrate by means of examples what other subgame perfect equilibria exist if we allow for asymmetric firms.
    Keywords: Noncooperative Games; Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection; Real Estate Markets, Production Analysis, and Firm Location: General;
    JEL: C72 D43 R30
    Date: 2015
  8. By: Simone Ghislandi (Department of Socioeconomics, Vienna University of Economics and Business); Michael Kuhn (Wittgenstein Centre, Vienna Institute of Demography)
    Abstract: It is frequently argued that the high costs of clinical trials prior to the admission of new pharmaceuticals are stifling innovation. At the same time, regulation of the access to markets is often justified on the basis of consumers’ inability to detect the true quality of a product. We examine these arguments from an information economic perspective by setting a framework where the incentives to invest in R&D are influenced by the information structure prevailing when the product is launched in the market at a later stage. In this setting, by changing the information structure, regulation (or the lack of) can thus indirectly affect R&D efforts. More formally, we construct a moral hazard – cum – adverse selection model in which a pharmaceutical firm exerts an unobservable effort towards developing an innovative (high quality) drug (moral hazard) and then announces the (unobservable) quality outcome to an uninformed regulator and/or consumers (adverse selection). We compare the outcomes in regard to innovation effort and expected welfare under two regimes: (i) regulation, where products undergo a clinical trial designed to ascertain product quality at the point of market access; and (ii) laissez-faire with free entry, where the revelation of quality is left to the market process. Results show that whether or not innovation is greater in the presence of entry regulation crucially depends on the efficacy of the trial in identifying (poor) quality, on the probability that unknown qualities are revealed in the market process, and on the preference and cost structure. The welfare ranking of the two regimes depends on the differential effort incentive and on the net welfare gain from implementing full information instantaneously. For example, in settings of vertical monopoly, vertical differentiation and horizontal differentiation with no variable cost of quality, entry regulation tends to be the preferred regime if the effort incentive under pooling is relatively low and profits do not count too much towards welfare. A complementary numerical analysis shows how the outcomes vary with the market and cost structure.
    Keywords: adverse selection, (entry) regulation, moral hazard, pharmaceutical industry, R&D incentives
    JEL: D82 I18 L15 L51 O31
    Date: 2016–02
  9. By: Gabszewicz, J.J. (Université catholique de Louvain, CORE, Belgium); Marini, M. (University of Rome La Sapienza); Tarola, O. (University of Rome La Sapienza)
    Abstract: This paper studies how the possibility for firms to sign collusive agreements (as for instance being part of alliances, cartels and mergers) may affect their quality and price choice in a market with vertically differentiated goods. For this purpose we model the firm decisions as a three-stage game in which, at the first stage, firms can form an alliance via a sequential game of coalition formation and, at the second and third stage, they decide simultaneously their product qualities and prices, respectively. In such a setting we study whether there exist circumstances under which either full or partial collusion can be sustained as a subgame perfect Nash equilibrium of the coalition formation game. Also, we analyse the effects of different coalition structures on equilibrium qualities, prices and profits accruing to firms. It is shown that only intermediate coalition structures arise at the equilibrium, with the bottom quality firm always included. Moreover, all equilibrium price and quality configurations always coincide with that observed in the duopoly case, with only two quality variants on sale.
    Keywords: Vertically differentiated market, endogenous alliance formation, coalition structures, price collusion, grand coalition, coalition stability, sequential games of coalition formation
    JEL: D42 D43 L1 L12 L13 L41
    Date: 2015–04–01
  10. By: Heinrich H. Nax; Ryan O. Murphy; Dirk Helbing
    Abstract: We study the stability and welfare properties of merit-based (meritocratic) group-matching mechanisms in voluntary contribution games. Meritocratic matching in this context means that players tend to be assortatively grouped according to their contributions. We let regimes di ffer from one another with respect to their matching fidelity. The stability analysis summarizes as follows. When there is not enough meritocracy, the only equilibrium state is universal free-riding. Above a first threshold, several Nash equilibria above free-riding emerge, but only the free-riding equilibrium is stochastically stable. There exists a second meritocratic threshold, above which an equilibrium with high contributions becomes the unique stochastically stable state. This operationalization of meritocracy sheds light on critical transitions, that are enabled by contribution-assortative matching, between equilibria related to "tragedy of the commons
    Keywords: meritocracy; voluntary contribution; public goods; stochastic stability; evolutionary stability; assortative matching; welfare; efficiency-equality tradeoff
    JEL: C73 D02 D63
    Date: 2014–10–21
  11. By: Bruce Knuteson
    Abstract: We propose a simple mechanism to facilitate the buying and selling of useful, bluntly honest information. The for-profit, arm's length knowledge exchange this mechanism enables may dramatically increase the pace of scientific progress.
    Date: 2016–02
  12. By: Akira Okada (Kyoto University); Ryoji Sawa (University of Aizu)
    Abstract: This paper considers a dynamic process of n-person social choice problems under q-majority where a status-quo policy is challenged by an opposing policy drawn randomly in each period. The opposing policy becomes the next status-quo if it receives at least q votes. We characterize stochastically stable policies under a boundedly rational choice rule of voters. Under the best response rule with mutations, a Condorcet winner is stochastically stable for all q-quota rules, and uniquely so if q is greater than the minmax quota. Under the logit choice rule, the Borda winner is stochastically stable under the unanimity rule. Our evolutionary approach provides a dynamic foundation of the mini-max policies in multidimensional choice problems with Euclidean preferences.
    Keywords: Stochastic stability; Social choice; Voting; Condorcet winner.
    JEL: C71 C73 D71
    Date: 2016–02
  13. By: Heinrich H. Nax; Bary S. R. Pradelski
    Abstract: We study evolutionary dynamics in assignment games where many agents interact anonymously at virtually no cost. The process is decentralized, very little information is available and trade takes place at many different prices simultaneously. We propose a completely uncoupled learning process that selects a subset of the core of the game with a natural equity interpretation. This happens even though agents have no knowledge of other agents’ strategies, payoffs, or the structure of the game, and there is no central authority with such knowledge either. In our model, agents randomly encounter other agents, make bids and offers for potential partnerships and match if the partnerships are profitable. Equity is favored by our dynamics because it is more stable, not because of any ex ante fairness criterion.
    Keywords: assignment games; cooperative games; core; equity; evolutionary game theory; learning; matching markets; stochastic stability
    JEL: C71 C73 C78 D8 D83
    Date: 2015–11
  14. By: Akerlof, George; Snower, Dennis J.
    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: attention; identity; motivation; Narrative; prediction; social assignment
    JEL: A12 A13 A14 D03 D04 D20 D23 D30 D62 D71 D72 D74
    Date: 2016–02
  15. By: LAM, W. (University of Liege)
    Abstract: This paper studies investment in cybersecurity, where both the software vendor and the consumers can invest in security. In addition, the vendor can undertake attack-deterring and damage-control investments. I show that full liability, under which the vendor is liable for all damages, does not achieve eciency and, in particular, the vendor underinvests in attack deterrence and overinvests in damage control. Instead, the joint use of an optimal standard, which establishes a minimum compliance framework, and partial liability can restore eciency. This suggests that policies that encourage not only firms, but also consumers to invest in security might be desirable.
    Keywords: cybersecurity, investment, standard, liability, bilateral care
    JEL: K13 L1 L8
    Date: 2015–05–01
  16. By: Kim, Chulyoung
    Abstract: The legal community has been debating the question of who should select and provide expert witnesses at trial: the litigant or the judge? Using a persuasion-game framework, I show that there is a trade-off. On the one hand, the litigant is willing to consult an expert even when the judge is reluctant to appoint her own experts due to high costs. On the other hand, given the same amount of expert advice, the judge can make a more accurate decision when using a court-appointed expert's advice at trial. I show that the cost of expert advice is an important factor in this trade-off and, therefore, in the argument for the reform toward a centralized system for expert witnesses.
    Keywords: expert witnesses, decentralized institution, centralized institution, persuasion game, evidence distortion
    JEL: C72 D82 K41
    Date: 2015–08
  17. By: Rose Anne Dana; Frank Riedel
    Date: 2016–02–18
  18. By: Agnieszka Rusinowska (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Vassili Vergopoulos (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    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 investigate 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.
    Abstract: Nous incorporons au sein d'une même approche théorique, deux phénomènes complémentaires à l'œuvre dans les organisations – l'ingratiation de la part des employés subordonnés et le favoritisme de la part des supérieurs hiérarchiques envers ces employés. Il y a trois acteurs dans le modèle : un employé, un manager qui supervise l'employé et une firme qui emploie ces deux derniers. L'ingratiation est définie comme un comportement stratégique de l'employé qui vise à obtenir les bonnes grâces de son manager. Dans notre modèle, l'ingratiation s'exprime en termes de conformité d'opinion, lorsque l'employé déclare son opinion auprès du manager. Le favoritisme consiste à appliquer un biais dans le rapport que le manager adresse à la firme et qui est censé décrire son observation de la performance de l'employé. Nous déterminons d'abord le niveau optimal d'effort et l'opinion déclarée par l'employé, ainsi que le niveau du biais appliqué par le manager. Nous étudions ensuite les effets du favoritisme et de l'ingratiation sur les salaires et utilités espérés de l'employé et du manager, et sur le profit espéré de la firme.
    Keywords: opinion conformity,favoritism,organization,wage,organisation,favoritisme,ingratiation,conformité d'opinion,performance,salaire,profit
    Date: 2016–01
  19. By: Elena Antoniadou; Leonard J. Mirman; Marc Santugini
    Abstract: We study the effect of changing income on optimal decisions in the multidimensional expected utility framework with strongly separable preferences. Using the Kihlstrom and Mirman (1974) (KM) utility representation, we show that the effect of changing income can be decomposed into a modified income effect linked to the classical income effect and an effect representing attitudes to risk, modified by income.
    Date: 2016–02
  20. By: Andrea Attar; Eloisa Campioni; Gwenaël Piaser
    Date: 2016–02–18

This nep-mic issue is ©2016 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.