nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒04‒09
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Screening and adverse selection in frictional markets By Lester, Benjamin; Shourideh, Ali; Venkateswaran, Venky; Zetlin-Jones, Ariel
  2. Iterative Revelation Mechanisms By Ryuji Sano
  3. Gradual Adjustment and Equilibrium Uniqueness under Noisy Monitoring By Ryota Iijima; Akitada Kasahara
  4. Non-Revelation Mechanisms for Many-to-Many Matching: Equilibria versus Stability By Bettina Klaus; Flip Klijn
  5. Collusion with a Greedy Center in Position Auctions By Emmanuel LORENZON
  6. Categorization and Coordination By Vessela Daskalova; Nicolaas J. Vriend; ;
  7. Robustness of Full Revelation in Multisender Cheap Talk By Margaret Meyer; Ines Moreno de Barreda; Julia Nafziger
  8. Immunity to Credible Deviations from the Truth By Salvador Barberà; Dolors Berga; Bernardo Moreno
  9. The Roommate Problem Revisited By Marilda Sotomayor
  10. Expected utility for nonstochastic risk By Ivanenko, Victor; Pasichnichenko, Illia
  11. Dynamics of Political Systems By Buchheim, Lukas; Ulbricht, Robert
  12. Contracting with Type-Dependent Naïveté. By Matteo Foschi
  13. A Framework for the Analysis of Self-Confi rming Policies By Pierpaolo Battigalli; Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Thomas Sargent
  14. Single-Crossing Random Utility Models By Jose Apesteguia; Miguel Ángel Ballester
  15. Information Asymmetry and Risk Transfer Markets By Eric Stephens; James R. Thompson
  16. Partial Knowledge Restrictions on the Two-Stage Threshold Model of Choice By Paola Manzini; Marco Mariotti; Christopher J. Tyson
  17. Bertrand under Uncertainty: Private and Common Costs By Johan N. M. Lagerlöf
  18. Market Structure and Advance Selling By Marc Möller; Makoto Watanabe

  1. By: Lester, Benjamin (Federal Reserve Bank of Philadelphia); Shourideh, Ali (The Wharton School of the University of Pennsylvania); Venkateswaran, Venky (NYU–Stern School of Business); Zetlin-Jones, Ariel (Carnegi Mellon University)
    Abstract: We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. On the positive side, we show how the structure of equilibrium contracts—and, hence, the relationship between an agent’s type, the quantity he trades, and the corresponding price—is jointly determined by the severity of adverse selection and the concentration of market power. This suggests that quantifying the effects of adverse selection requires controlling for the market structure. On the normative side, we show that increasing competition and reducing informational asymmetries can be detrimental to welfare. This suggests that recent attempts to increase competition and reduce opacity in markets that suffer from adverse selection could potentially have negative, unforeseen consequences
    Keywords: Adverse selection; Imperfect competition; Screening; Transparency; Search theory
    JEL: D41 D42 D43 D82 D83 D86 L13
    Date: 2016–03–10
  2. By: Ryuji Sano (Institute of Economic Research, Kyoto University)
    Abstract: This paper considers dynamic resource allocation processes, called iterative revelation mechanisms, with quasi-linear dichotomous utilities and complete information. Agents gradually reveal their valuation through binary questions. The social planner identifies the efficient outcome, and monetary transfer is determined on a “pay-as-bid” basis. We show that the efficient allocation rule is implemented in a subgame perfect Nash equilibrium, regardless of details of a binary-question process. The analysis applies to the case with limited communication, and every strongly monotone allocation rule is implemented in equilibrium. We also show that if a resource allocation process is ex post incentive compatible, it is an ascending-price mechanism. In a single-object allocation problem, the English auction is a unique mechanism satisfying efficiency, ex post incentive compatibility, and pay-as-bid transfer.
    Keywords: iterative revelation mechanism, limited communication, ascending price, English auction
    JEL: D44 D83 D82 D71 H41
    Date: 2016–03
  3. By: Ryota Iijima; Akitada Kasahara
    Abstract: We study the implications of flexible adjustment in strategic interactions using a class of finite-horizon models in continuous time. Players take costly actions to affect the evolution of state variables that are commonly observable and perturbed by Brownian noise. The values of these state variables influence players' terminal payoffs at the deadline, as well as their flow payoffs. In contrast to the static case, the equilibrium is unique under a general class of terminal payoff functions. Our characterization of the equilibrium builds on recent developments in the theory of backward stochastic differential equations (BSDEs). We use this tool to analyze applications, including team production, hold-up problems, and dynamic contests. In a team production model, the unique equilibrium selects an efficient outcome when frictions vanish.
    Date: 2016–04
  4. By: Bettina Klaus; Flip Klijn
    Abstract: We study many-to-many matching markets in which agents from a set A are matched to agents from a disjoint set B through a two-stage non-revelation mechanism. In the first stage, A-agents, who are endowed with a quota that describes the maximal number of agents they can be matched to, simultaneously make proposals to the B-agents. In the second stage, B-agents sequentially, and respecting the quota, choose and match to available A-proposers. We study the subgame perfect Nash equilibria of the induced game. We prove that stable matchings are equilibrium outcomes if all A-agents' preferences are substitutable. We also show that the implementation of the set of stable matchings is closely related to the quotas of the A-agents. In particular, implementation holds when A-agents' preferences are substitutable and their quotas are non-binding.
    Keywords: Matching, mechanisms, stability, substitutability
    JEL: C78 D78
    Date: 2016–04
  5. By: Emmanuel LORENZON
    Abstract: In this paper we aim at studying the sensitivity of the Generalized Second-Price auction to bidder collusion when monetary transfers are allowed. We propose a model of position auction that incorporates third-parties as agents facilitating collusion in complete information. We show that the first-best collusive outcome can be achieved under any Nash condition. Under the locally envy-free criterion, we find that if the collusive gain is uniformly redistributed among members, the best that can be achieved is Vickrey-Clarkes-Groves outcome. Bidders do not have sufficient incentives to reduce even more their expressed demand. We then provide elements upon which an incentive compatible fee can be set by the center. We provide conditions under which bidders can enhance efficient collusion. Doing so we also contribute to the literature on collusion in multiple-objects simultaneous auctions.
    Keywords: Auctions, Online advertising, Position auctions; Bidding ring, Cartel
    JEL: D44 C72 M3 L41
    Date: 2016
  6. By: Vessela Daskalova; Nicolaas J. Vriend; ;
    Abstract: The use of coarse categories is prevalent in various situations and has been linked to biased economic outcomes, ranging from discrimination against minorities to empirical anomalies in financial markets. In this paper we study economic rationales for categorizing coarsely. We think of the way one categorizes one's past experiences as a model of the world that is used to make predictions about unobservable attributes in new situations. We first show that coarse categorization may be optimal for making predictions in stochastic environments in which an individual has a limited number of past experiences. Building on this result, and this is a key new insight from our paper, we show formally that cases in which people have a motive to coordinate their predictions with others may provide an economic rationale for categorizing coarsely. Our analysis explains the intuition behind this rationale.
    Keywords: categorization, prediction, decision-making, coordination, learning.
    JEL: D83 C72
    Date: 2014–06–30
  7. By: Margaret Meyer; Ines Moreno de Barreda; Julia Nafziger
    Abstract: Abstract: This paper studies information transmission in a two-sender, multidimensional cheap talk setting where there are exogenous restrictions on the feasible set of policies for thereceiver. Such restrictions, which are present in most applications, can, by limiting the punishments available to the receiver, prevent the existence of fully revealing equilibria(FRE). We focus on FRE that are i) robust to small mistakes by the senders, in that small differences between the senders’ messages result in only small punishments by the receiver, and ii) independent of the magnitudes of the senders’ bias vectors. For convex policy spaces in an arbitrary number of dimensions, we prove that if there exists a FRE satisfying property ii), then there exists one satisfying both i) and ii). Thus the requirement of robustness is, under these assumptions, not restrictive. For convex policy spaces in two dimensions, we provide a simple geometric condition, the Local Deterrence Condition, on the directions of the senders’ biases relative to the frontier of the policy space, that is necessary and sufficient for the existence of a FRE satisfying i) and ii). We also provide a specific policy rule, the Min Rule, for the receiver that supports a FRE satisfying i) and ii) whenever one exists. The Min Rule is the anonymous rule that punishes incompatible reports in the least severe way, subject to maintaining the senders’ incentives for truthtelling, no matter how large their biases. We characterize necessary and sufficient conditions for collusion-proofness of a FRE supported by the receiver using the Min Rule and show that if such a FRE is not collusion-proof, then no other FRE satisfying ii) can be collusion-proof. We extend our existence results to convex policy spaces in more than two dimensions and to non-convex two-dimensional spaces. Finally, our necessary and sufficient condition, as well as our specific policy rule, can be easily adapted if the receiver is uncertain about the directions of the biases and/or if the biases vary with the state of the world.
    Keywords: Cheap talk, information transmission, multisender, full revelation, robustness
    JEL: D83 D82 C72
    Date: 2016–03–23
  8. By: Salvador Barberà; Dolors Berga; Bernardo Moreno
    Abstract: We introduce a new notion of non-manipulability by groups, based on the idea that some of the agreements among a set of potential manipulators may be credible, while others may not. The derived notion of immunity to credible manipulations by groups is intermediate between individual and group strategy-proofness. We show that our new concept has bite, by applying it to the analysis of a large family of public good decision problems in separable environments, where there exist many attractive strategy-proof rules that are, however, manipulable by groups. In these environments we show that some of these rules are indeed, immune to credible group manipulations, while others are not. We provide characterization results that separate these two classes.
    Keywords: group strategy-proofness, credibility, Implementation, voting
    JEL: D71
    Date: 2016–04
  9. By: Marilda Sotomayor
    Abstract: We approach the roommate problem by focusing on simple matchings, which are those individually rational matchings whose blocking pairs, if any, are formed with unmatched agents. We show that the core is non-empty if and only if no simple and unstable matching is Pareto optimal among all simple matchings. The economic intuition underlying this condition is that blocking can be done so that the transactions at any simple and unstable matching need not be undone, as agents reach the core. New properties of economic interest are proved.
    Keywords: Core; Stable matching
    JEL: C78 D78
    Date: 2016–03–04
  10. By: Ivanenko, Victor; Pasichnichenko, Illia
    Abstract: The world of random phenomena exceeds the domain of the classical probability theory. In the general case the description of randomness requires a specific set of probability distributions (which is called statistical regularity) rather than a singe distribution. Such statistical regularity arises as a limit of relative frequencies. This approach to randomness allows to generalize the expected utility theory in order to cover the decision problems under nonstochastic random events. Applying the von Neumann-Morgenstern utility theorem, we derive the maxmin expected utility representation for statistical regularities. The derivation is based on the axiom of the preference for stochastic risk, i.e. the decision maker wishes to reduce the set of probability distributions to a single one.
    Keywords: expected utility, risk, mass phenomena, statistical regularity, nonstochastic randomness, multiple prior
    JEL: C10 D81
    Date: 2016–04–01
  11. By: Buchheim, Lukas; Ulbricht, Robert
    Abstract: We develop a model of regime dynamics that embeds the principal transition scenarios examined by the literature. Political systems are a priori unrestricted and dynamics emerge through the combination and interaction of transition events over time. The model attributes a key role to beliefs held by political outsiders about the vulnerability of regimes, governing the likelihood and outcome of transitions. In equilibrium, transition likelihoods are declining in a regime's maturity,generating episodes of political stability alternating with rapid successions of revolts, counter revolts, and reforms. The stationary distribution of regimes is bimodal. The model dynamics match the data remarkably well.
    Keywords: Critical junctures; democratization; invariant distribution; iron law of oligarchy; regime dynamics; revolts
    JEL: D74 D78 P16
    Date: 2015–11–27
  12. By: Matteo Foschi
    Abstract: I analyse the optimal contracting behaviour of an employer who faces workers with different, incorrect beliefs about their own productivity. While the literature has focused mostly on the exploitative (when the principal knows agents’ types, Eliaz and Spiegler, 2006) and speculative (when the principal has priors on agents’ types, Eliaz and Spiegler, 2008) aspects of contracts, I introduce the assumption that workers’ naïveté depends on their actual productivity level. The employer uses this information to form posteriors on agents’productivity and design more efficient contracts. In particular, I highlight the employer’s trade-off between exploiting strongly naïve workers and designing efficient contracts for the most widespread type of worker, according to her posteriors.
    Keywords: Self-Awareness, Naïveté, Contract, Screening, Non-Common Priors, Mechanism Design, Multidimensional Types.
    JEL: D42 D82 D84 D86 J41
    Date: 2016–03
  13. By: Pierpaolo Battigalli; Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Thomas Sargent
    Abstract: This paper provides a general framework for the analysis of self-con firming policies. We fi rst study self-con firming equilibria in recurrent decision problems with incomplete information about the true stochastic model. Next we illustrate the theory with a characterization of stationary monetary policies in a linear-quadratic setting. Finally we provide a more general discussion of self-confi rming policies. Key words: Self-con firming equilibrium, partial identifi cation, law of large numbers, Keynesian, new classical.
    Date: 2016
  14. By: Jose Apesteguia; Miguel Ángel Ballester
    Abstract: We propose a novel model of stochastic choice: the single-crossing random utility model (SCRUM). This is a random utility model in which the collection of utility functions satisfies the single-crossing property. We offer a characterization of SCRUMs based on three easy-to-check properties: Positivity, Monotonicity and Centrality. The identified collection of utility functions and associated probabilities is basically unique. We establish a stochastic monotone comparative result for the case of SCRUMs and study several generalizations of SCRUMs.
    Keywords: stochastic choice; single-crossing property; random utility models; monotone comparative statics
    JEL: D00
    Date: 2016–03
  15. By: Eric Stephens (Department of Economics, Carleton University); James R. Thompson (School of Accounting and Finance, University of Waterloo)
    Abstract: We provide a tractable model of counterparty risk in an intermediated risk transfer market, and analyze the consequences of this risk being private information. We show that unknown type information can be revealed when large trades are observable; however, the allocation is shown to be constrained inefficient. The inefficiency is highlighted by considering the imposition of a transaction tax, which can improve welfare by encouraging more information revelation and increasing risk transfer. The results suggest that increased transparency and/or central counterparty arrangements in over-the-counter derivative markets may promote transparency of counterparty risk.
    Keywords: Risk Transfer Markets, Asymmetric Information, Counterparty Risk, Regulation
    Date: 2016–03–17
  16. By: Paola Manzini (University of St. Andrews and IZA); Marco Mariotti (Queen Mary University of London); Christopher J. Tyson (Queen Mary University of London)
    Abstract: In the context of the two-stage threshold model of decision making, with the agent's choices determined by the interaction of three "structural variables," we study the restrictions on behavior that arise when one or more variables are exogenously known. Our results supply necessary and sufficient conditions for consistency with the model for all possible states of partial knowledge, and for both single- and multi-valued choice functions.
    Keywords: Attention, Revealed preference, Salience, Satisficing
    JEL: D01 D03
    Date: 2016–03
  17. By: Johan N. M. Lagerlöf (Department of Economics, University of Copenhagen)
    Abstract: This paper proposes an n-firm homogeneous-good Bertrand model with private information about costs. The model allows for any non-negative correlation between the cost draws and for any demand elasticity but still yields a closed-form solution. The solution is simple, in pure strategies, and involves price dispersion. For some parameter values, a weak version of the winner’s curse arises. This framework is used to study the question whether cost uncertainty softens competition. Earlier literature has shown that the answer (perhaps counter-intuitively) is “no,” while assuming (i) independent cost draws and (ii) no drastic innovations. The analysis here shows that relaxing (ii) but not (i) does not alter that result. However, when the cost draws are sufficiently highly correlated and the price elasticity of demand is sufficiently low, cost uncertainty indeed softens competition.
    Keywords: Bertrand competition, Hansen-Spulber model, private information, information sharing, common values, private values, winner’s curse
    JEL: D43 D44 L13
    Date: 2016–02–12
  18. By: Marc Möller (University of Bern, Switzerland); Makoto Watanabe (Faculty of Economics and Business Administration, VU University Amsterdam, the Netherlands)
    Abstract: When products are sold in advance, i.e. prior to consumption, consumers trade off an early, uninformed purchase at a low price against a late, informed purchase at a high price. This paper considers the effect of market structure on the prevalence of advance selling. We show that in an oligopolistic market with multi-product firms, advance selling (with its associated allocative inefficiency) is decreasing in market concentration when the consumers’ preference uncertainty is high but can be increasing when uncertainty is low.
    Keywords: Competition; Price Discrimination; Individual Demand Uncertainty; Advance Purchase Discounts
    JEL: D43 D80 L13
    Date: 2016–03–31

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.