nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒04‒16
twelve papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. On the optimal use of correlated information in contractual design under limited liability By Daniel Danau; Analisa Vinella
  2. Categorization and Coordination By Vessela Daskalova; Nicolaas J. Vriend; ;
  3. Mechanism Design and Intentions By Felix Bierbrauer; Nick Netzer
  4. Single-Crossing Random Utility Models By Jose Apesteguia; Miguel Ángel Ballester
  5. Optimal Contracting with Subjective Evaluation: The Effects of Timing, Malfeasance and Guile By W. Bentley MacLeod; Teck Yong Tan
  6. Aggregating time preferences with decreasing impatience By Nina Anchugina; Matthew Ryan; Arkadii Slinko
  7. Strategic Choice of Network Externality By Yuanzhu Lu; Sougata Poddar
  8. Optimal Cost Overruns: Procurement Auctions and Renegotiation By Herweg, Fabian; Schwarz, Marco A.
  9. Equilibria of Deferred Acceptance with Complete Lists By Bettina Klaus; Flip Klijn
  10. Irrational Exuberance and Herding in Financial Markets By Christopher Boortz; ; ;
  11. A Simple Model of Homophily in Social Networks By Sergio Currarini; Jesse Matheson; Fernando Vega Redondo
  12. Endogenous Stock Price Fluctuations with Dynamic Self-Control Preferences By Airaudo, Marco

  1. By: Daniel Danau (Normandie Université, UNICAEN, CREM CNRS, France); Analisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy)
    Abstract: Riordan and Sappington (JET, 1988) show that in an agency relationship in which the type of the agent is correlated with a signal that is observed publicly ex post, the principal may attain first best (full surplus extraction and efficient output levels) if she offers the agent a lottery such that each type is rewarded for one signal realization and punished equally for all the others. Gary-Bobo and Spiegel (RAND, 2006) show that this kind of lottery is most likely to be locally incentive-compatible when the agent is protected by limited liability. In this paper we investigate how the principal should construct the lottery to attain not only local but also global incentive-compatibility. We first assess that the main issue with global incentive-compatibility rests with intermediate types being potentially attractive reports to both lower- and higher-order types. We then show that a lottery including three (rather than two) levels of profit is most likely to be globally incentive-compatible under limited liability, if local incentive constraints are strictly satisfied. We identify conditions under which first best is implemented and pin down the optimal distortions when those conditions are violated. In particular, when the first-best allocation is locally but not globally incentive-compatible, output distortions are induced but no information rent is conceded to the agent.
    Keywords: Incentive compatibility; Limited liability; Correlated signals; Conditional probability; Full-rank condition
    JEL: D82
    Date: 2016–03
  2. 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
  3. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Nick Netzer (University of Zurich)
    Abstract: We introduce intention-based social preferences into mechanism design. We explore information structures that dier with respect to what is commonly known about the weight that agents attach to reciprocal kindness. When the designer has no information on reciprocity types, implementability of an incentive-compatible social choice function is guaranteed if it satises an additional insurance property. By contrast, precise information on reciprocity types may imply that all ecient social choice functions are implementable. We show how these results extend to a two-dimensional mechanism design setting where the agents have private information about their material payo types and their reciprocity types. We also provide a systematic account of the welfare implications of intentionality.
    Keywords: Mechanism Design, Psychological Games, Social Preferences, Reciprocity
    JEL: C70 C72 D02 D03 D82 D86
    Date: 2016–02
  4. 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
  5. By: W. Bentley MacLeod; Teck Yong Tan
    Abstract: We introduce a general Principal-Agent model with subjective evaluation and malfeasance characterized by two-sided asymmetric information on performance that allows for an arbitrary information structure. Two generic contract forms are studied. An authority contract has the Principal reveal his information before the Agent responds with her information. Under such a contract, the Agent's compensation varies only with the Principal's information, while her information is used to punish untruthful behavior by the Principal. Conversely, a sales contract has the Agent reveal her information first. In this case, the Agent's performance incentives are affected by the information revealed by both parties. Because the Agent's information affects her compensation, the information revelation constraints are more complex under a sales contract, and provide a way to integrate Williamson's (1975) notion of guile into agency theory. We find that designing sales contracts for expert agents, such as physicians and financial advisors, are significantly more complex than designing optimal authority contracts.
    JEL: D86 J33 J41
    Date: 2016–04
  6. By: Nina Anchugina; Matthew Ryan; Arkadii Slinko
    Abstract: It is well-known that for a group of time-consistent decision makers their collective time preferences may become time-inconsistent. Jackson and Yariv (2014) demonstrated that the result of aggregation of exponential discount functions always exhibits present bias. We show that when preferences satisfy the axioms of Fishburn and Rubinstein (1982), present bias is equivalent to decreasing impatience (DI). Applying the notion of comparative DI introduced by Prelec (2004), we generalize the result of Jackson and Yariv (2014). We prove that the aggregation of distinct discount functions from comparable DI classes results in the collective discount function which is strictly more DI than the least DI of the functions being aggregated. We also prove an analogue of Weitzman's (1998) result, for hyperbolic rather than exponential discount functions. We show that if a decision maker is uncertain about her hyperbolic discount rate, then long-term costs and benefits will be discounted at a rate which is the probability-weighted harmonic mean of the possible hyperbolic discount rates.
    Date: 2016–04
  7. By: Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics, Beijing, China); Sougata Poddar (Department of Economics, Faculty of Business and Law, Auckland University of Technology)
    Abstract: In many product markets, impact of network externality plays an important role to affect the overall quality of a product. However, the degree or the strength of network externality is assumed as a parameter in most of the literature. We propose a model of vertical product differentiation with two competing firms where the strength of network externality is endogenized as a strategic choice of the high quality firm. We show how the equilibrium market structure and market coverage depend on the cost of choosing the network strength and on the relative quality difference of the competing products. We also show that the relationship between the optimal level of network externalities and the relative quality differences of the products can be monotonic or non-monotonic.
    Keywords: Vertical product differentiation, Network externality, Market structure, Market coverage, Investment cost
    Date: 2015–03
  8. By: Herweg, Fabian; Schwarz, Marco A.
    Abstract: Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constraint optimal award procedure when the procurer cannot commit not to renegotiate. If cost differences are more pronounced for more complex designs, it is optimal to fix a simple design ex ante and to renegotiate to a more complex and costlier design ex post. Specifying a simple design initially enhances competition in the auction. Moreover, the procurer cannot benefit from using a multi-dimensional auction, as the optimal scoring rule depends only on the price.
    Keywords: Auction; Cost Overrun; Procurement; Renegotiation
    JEL: D44 D82 H57
    Date: 2016–03
  9. By: Bettina Klaus; Flip Klijn
    Abstract: We study the structure of the set of (Nash) equilibria of a deferred acceptance game with complete lists: for a given marriage market with complete lists, men propose to women truthfully while women can accept or reject proposals strategically throughout the deferred-acceptance algorithm. Zhou (1991) studied this game and showed that a matching that is stable with respect to the true preferences can be supported by some preference profile (possibly a non-equilibrium one) if and only if it can be supported by an equilibrium as well. In particular, this result implies the existence of equilibria since the men-optimal stable matching is supported by true preferences and hence an equilibrium outcome. We answer an open question Zhou posed by showing that there need not exist an equilibrium matching that weakly dominates all other equilibrium matchings from the women's point of view (Theorem 1). We complement Zhou's and our findings by showing that the set of equilibrium matchings also need not be "connected'" (Example 2).
    Keywords: Matching, stability, complete lists, Nash equilibria
    JEL: C72 C78
    Date: 2016–04
  10. By: Christopher Boortz; ; ;
    Abstract: In the context of a two-state, two-trader financial market herd model introduced by Avery and Zemsky (1998) we investigate how informational ambiguity in conjunction with waves of optimism and pessimism affect investor behavior, social learning and price dynamics. Without ambiguity, neither herding nor contrarianism is possible. If there is ambiguity and agents have invariant ambiguity preferences, only contrarianism is possible. If on the other hand ambiguity is high and traders become overly exuberant (or desperate) as the asset price surges (or plummets), we establish that investor herding may drive prices away from fundamentals with economically relevant probability.
    Keywords: Social Learning, Herding, Contrarianism, (Partial) Informational Cascade, Ambiguity, Choquet Expected Utility, NEO-Additive Capacities
    JEL: D81 D82 G12 G14
    Date: 2016–03
  11. By: Sergio Currarini; Jesse Matheson; Fernando Vega Redondo
    Abstract: Biases in meeting opportunities have been recently shown to play a key role for the emergence of homophily in social networks (see Currarini, Jackson and Pin 2009). The aim of this paper is to provide a simple microfoundation of these biases in a model where the size and typecomposition of the meeting pools are shaped by agents' socialization decisions. In particular, agents either inbreed (direct search only to similar types) or outbreed (direct search to population at large). When outbreeding is costly, this is shown to induce stark equilibrium behavior of a threshold type: agents \inbreed" (i.e. mostly meet their own type) if, and only if, their group is above certain size. We show that this threshold equilibrium generates patterns of in-group and cross-group ties that are consistent with empirical evidence of homophily in two paradigmatic instances: high school friendships and interethnic marriages.
    Keywords: Homophily, social networks, segregation.
    JEL: D7 D71 D85 Z13
    Date: 2016–04
  12. By: Airaudo, Marco (School of Economics)
    Abstract: This paper studies the global equilibrium dynamics implied by a Lucas’ tree asset pricing model where the representative agent has dynamic self-control preferences, as defined by Gul and Pesendorfer (Econometrica, 2004). It shows that endogenous cycles of period 2 and higher, as well as chaotic dynamics exist provided temptation utility is sufficiently important (with respect to standard commitment utility) and sufficiently convex. For parameterizations leading to complex deterministic dynamics, the model also admits stationary and non-stationary sunspot equilibria.
    Keywords: Asset Pricing; Temptation; Self-Control; Endogenous Cycles; Chaotic Dynamics; Sunspot Equilibrium
    JEL: C62 E32 G12
    Date: 2016–01–21

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