nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒04‒23
sixteen 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. Dynamic Competition with Network Externalities: Why History Matters By Halaburda, Hanna; Jullien, Bruno; Yehezkel, Yaron
  3. Collusion with a Greedy Center in Position Auctions By Emmanuel LORENZON
  4. A General and Intuitive Envelope Theorem By Andrew Clausen; Carlo Strub
  5. Robustness of Full Revelation in Multisender Cheap Talk By Meyer, Margaret A; Moreno de Barreda, Inés; Nafziger, Julia
  6. Pareto Optimality and Indeterminacy of General Equilibrium under Knightian Uncertainty By Wei Ma
  7. Incentive compatible networks and the delegated networking principle By Rui Gong; Frank Page
  8. Bounded Rationality and Correlated Equilibria By Germano, Fabrizio; Zuazo-Garin, Peio
  9. A Theory of Crowdfunding - a mechanism design approach with demand uncertainty and moral hazard By Strausz, Roland
  10. Social Mobility and Stability of Democracy: Re-evaluating De Tocqueville By Acemoglu, Daron; Egorov, Georgy; Sonin, Konstantin
  11. The value of incumbency in heterogeneous platforms By Biglaiser, Gary; Crémer, Jacques
  12. Gathering support from rivals: the two agent case with random order By Bannikova, Marina; Giménez Gómez, José M. (José Manuel)
  13. You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets By Choi, Jay-Pil; Peitz, Martin
  14. Majority Judgment and Strategy-Proofness By Stefano Vannucci
  15. Team Adaptation By Jordi Blanes i Vidal; Marc Möller
  16. Playing the game the others want to play: Keynes’ beauty contest revisited. By Camille Cornand; Rodolphe Dos Santos Ferreira

  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: Halaburda, Hanna; Jullien, Bruno; Yehezkel, Yaron
    Abstract: We consider dynamic competition among platforms in a market with network externalities. A platform that dominated the market in the previous period becomes "focal"; in the current period, in that agents play the equilibrium in which they adopt the focal platform whenever such equilibrium exists. Yet when faced with higher-quality competition, can a low-quality platform remain focal? In the finite-horizon case, the unique equilibrium is efficient for "patient" platforms; with an infinite time horizon, however, there are multiple equilibria where either the low- or high-quality platform dominates. If qualities are stochastic, the platform with a better average quality wins with a higher probability, even when its realized quality is lower, and this probability increases as platforms become more patient. Hence social welfare may decline as platforms become more forward looking.
    Keywords: coordination; dynamic competition; network externalities
    JEL: L1
    Date: 2016–03
  3. 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
  4. By: Andrew Clausen; Carlo Strub
    Abstract: Previous envelope theorems establish differentiability of value functions in convex settings. Our envelope theorem applies to all functions whose derivatives appear in first-order conditions, and in non-convex settings. For example, in Stackelberg games, the leader’s first-order condition involves the derivative of the follower’s policy. Similarly, we differentiate (i) the borrower’s value function and default cut-off policy function in an unsecured credit economy, (ii) the firm’s value function in a capital adjustment problem with fixed costs, and (iii) the households’ value functions in insurance arrangements with indivisible goods. Our theorem accommodates optimization problems involving discrete choices, infinite horizon stochastic dynamic programming, and Inada conditions.
    Keywords: First-order conditions, policy functions, discrete choice, Inada conditions, dynamic programming, reverse calculus dynamic programming, reverse calculus.
    Date: 2016–04–19
  5. By: Meyer, Margaret A; Moreno de Barreda, Inés; Nafziger, Julia
    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 the receiver. 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; full revelation; information transmission; multisender; robustness
    JEL: C72 D82 D83
    Date: 2016–04
  6. By: Wei Ma (International Business School Suzhou, Xi’an Jiaotong-Liverpool University, China; Department of Economics, University of Pretoria)
    Abstract: This paper studies general equilibrium theory, for both complete and incomplete markets, under Knightian uncertainty. Noting that the preference represented by Knightian uncertainty induces a set of complete preferences, we set ourselves the task of inquiring the relationship between an equilibrium under Knightian uncertainty and its counterpart under the induced complete preferences. It is shown that they are actually equivalent. The importance of this result is due to its applications, among which the existence of equilibria under Knightian uncertainty and their computation follow at once from the existing knowledge on general equilibrium theory under complete preferences. Moreover, by means of that equivalence, we are in a position to investigate the problem of efficiency and indeterminacy of equilibria under Knightian uncertainty.
    Keywords: General equilibrium, Knightian uncertainty, Pareto optimality
    Date: 2016–03
  7. By: Rui Gong; Frank Page
    Abstract: We construct a model of a principal-agent game of network formation (over layered networks) with asymmetric information and we consider the following two questions: (1) Is it possible for the principal to design a mechanism that links the reports of agents about their private information and the set of connections allowed and recommended by the principal via the mechanism in such a way that players truthfully reveal their private information to the principal and follow the recommendations specified by the mechanism. (2) An even more fundamental question we address is whether or not it is possible for the principal to achieve the same outcome (as that achieved via a mechanism and centralized reporting) by instead choosing a profile of sets of allowable ways to connect (here modeled as player—club specific sets - or catalogs - of networks) and then delegating connection choices to each pair of agents. We call this approach to network formation with incomplete information delegated networking and we show, under relatively mild conditions on our game-theoretic model of network formation, that strategic network formation with incomplete information, implemented via a mechanism and centralized reporting, is equivalent to implementation via delegated networking with monitoring.
    Keywords: Incentive compatible multilayered networks; delegated networking principle; delegation principle; bilateral incentive compatibility; mechanism design; catalog games
    JEL: J1 F3 G3
    Date: 2016–02–15
  8. By: Germano, Fabrizio; Zuazo-Garin, Peio
    Abstract: We study an interactive framework that explicitly allows for nonrational behavior. We do not place any restrictions on how players' behavior deviates from rationality. Instead we assume that there exists a probability p such that all players play rationally with at least probability p, and all players believe, with at least probability p, that their opponents play rationally. This, together with the assumption of a common prior, leads to what we call the set of p-rational outcomes, which we define and characterize for arbitrary probability p. We then show that this set varies continuously in p and converges to the set of correlated equilibria as p approaches 1, thus establishing robustness of the correlated equilibrium concept to relaxing rationality and common knowledge of rationality. The p-rational outcomes are easy to compute, also for games of incomplete information, and they can be applied to observed frequencies of play to derive a measure p that bounds from below the probability with which any given player chooses actions consistent with payoff maximization and common knowledge of payoff maximization. Keywords: strategic interaction, correlated equilibrium, robustness to bounded rationality, approximate knowledge, incomplete information, measure of rationality, experiments. JEL Classification: C72, D82, D83.
    Keywords: Jocs no-cooperatius (Matemàtica), Teoria de la informació (Economia), 33 - Economia,
    Date: 2015
  9. By: Strausz, Roland
    Abstract: Crowdfunding provides innovation in that it enables entrepreneurs to contract with consumers before investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard threatens this benefit. Studying the subsequent trade-off between screening and moral hazard, the paper characterizes optimal mechanisms. Popular all-or-nothing reward-crowdfunding schemes reflect their salient features. Efficiency is sustainable only if returns exceed investment costs by a margin reflecting the degree of moral hazard. Constrained efficient mechanisms exhibit underinvestment. As a screening tool for valuable projects, crowdfunding promotes social welfare. Crowdfunding complements rather than substitutes traditional entrepreneurial financing.
    Keywords: aggregate demand uncertainty; Crowdfunding; entrepreneurship; moral hazard; venture capital
    JEL: D82 G32 L11 M31
    Date: 2016–04
  10. By: Acemoglu, Daron; Egorov, Georgy; Sonin, Konstantin
    Abstract: An influential thesis often associated with De Tocqueville views social mobility as a bulwark of democracy: when members of a social group expect to join the ranks of other social groups in the near future, they should have less reason to exclude these other groups from the political process. In this paper, we investigate this hypothesis using a dynamic model of political economy. As well as formalizing this argument, our model demonstrates its limits, elucidating a robust theoretical force making democracy less stable in societies with high social mobility: when the median voter expects to move up (respectively down), she would prefer to give less voice to poorer (respectively richer) social groups. Our theoretical analysis shows that in the presence of social mobility, the political preferences of an individual depend on the potentially conflicting preferences of her "future selves", and that the evolution of institutions is determined through the implicit interaction between occupants of the same social niche at different points in time. When social mobility is endogenized, our model identifies new political economic forces limiting the amount of mobility in society - because the middle class will lose out from mobility at the bottom and because a peripheral coalition between the rich and the poor may oppose mobility at the top.
    Keywords: De Tocqueville; democracy; dynamics.; institutions; Social mobility; stability
    JEL: D71 D74
    Date: 2016–04
  11. By: Biglaiser, Gary; Crémer, Jacques
    Abstract: We study the dynamics of competition in a model with network effects, an incumbent and entry. We propose a new way of representing the strategic advantages of incumbency in a static model. We then embed this static analysis in a dynamic framework with heterogeneous consumers. We completely identify the conditions under which inefficient equilibria with two platforms will emerge at equilibrium; explore the reasons why these inefficient equilibria arise; and compute the profits of the incumbent when there is only one platform at equilibrium.
    Keywords: network effects; network externalities; plaforms
    JEL: L12 L13 L86
    Date: 2016–03
  12. By: Bannikova, Marina; Giménez Gómez, José M. (José Manuel)
    Abstract: Which alternative is selected when voters are called to participate in a sequential voting? Does the ordering matter? The current approach is the first attempt to analyze these questions. Specifically, we propose a two- alternative sequential voting procedure in which two voters are randomly ordered. Each voter has complete information about the preference of both of them. The alternative is implemented if there is unanimity. We obtain that the most patient individual has some advantage in the election, but it is not enough to guarantee that his most-preferred alternative will be selected. The probability to vote first also plays a central role, since the election also depends on the voting order. Keywords: Sequential Voting; Random order; Sub-game perfect equilibrium
    Keywords: Elecció (Psicologia), Eleccions, 32 - Política,
    Date: 2015
  13. By: Choi, Jay-Pil; Peitz, Martin
    Abstract: This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream firm. The supplier's adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality vis-à-vis the supplier. The supplier may enter the market by initially renting the downstream firm’s reputation. The downstream firm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs.
    Keywords: Adverse Selection; Barriers to Entry; Branding; Certification Intermediaries; Experience Goods; Incumbency Advantage; Outsourcing
    JEL: D4 L12 L4 L43 L51 L52
    Date: 2016–04
  14. By: Stefano Vannucci
    Abstract: Majority judgment as recently formulated and advo- cated by Balinski and Laraki in their in?uential monograph (Ma- jority Judgment (2010)) is a method to aggregate pro?les of judg- ments which are expressed in a common language consisting of a bounded linearly ordered set of grades. It is shown that major- ity judgment is strategy-proof but not coalitionally strategy-proof on a very comprehensive class of rich single peaked preference do- mains. The proof relies on the key observation that a common bounded linear order of grades makes the set of gradings a prod- uct of bounded chains, which is a special instance of a bounded distributive lattice. As a by-product, we also obtain a character- ization of majority judgment with an odd number of agents by anonymity, bi-idempotence and strategy-proofness on rich single peaked domains.
    Keywords: Strategy-proofness, bounded distributive lattice, single peakedness, majority rule, majority judgment
    JEL: D71
    Date: 2016–03
  15. By: Jordi Blanes i Vidal; Marc Möller
    Abstract: We model an organization as a team choosing between a status quo project and a potentially superior alternative. We show that the members' concern for each other's motivation leads to a lack of communication, resulting in a failure to adapt (i.e. the status quo is maintained even when evidence for the alternative's superiority has been observed). Adaptation failures are particularly severe when production exhibits strong complementarities. Improving the organization's aggregate information has the adverse effect of reducing communication. In the long run, the organization can become "locked-in" with the status quo, in that adaptation is impaired for every adoptable alternative.
    Keywords: teams, organizations, communication, disclosure, adaptation, motivation
    JEL: D02 D23 L29
    Date: 2016–04
  16. By: Camille Cornand; Rodolphe Dos Santos Ferreira
    Abstract: In Keynes’ beauty contest, agents make choices by referring to their expectations of some fundamental value and of the conventional value to be set by the market. In doing so, agents respond to fundamental and strategic motives, respectively. The prevalence of either motive is usually set exogenously. Our contribution is to consider whether agents favor one of the two motives when the relative weights put on them are taken as strategic variables. We show that the strategic motive tends to prevail over the fundamental one, yielding a disconnection of agents’ actions from the fundamental. This is done in a simple valuation game emphasizing the role of public information. We then extend the same result to competition between the owners of two firms, by using a delegation game in which informational issues are embedded into a broader microfounded setting.
    Keywords: beauty contest, dispersed information, public signals, coordination, competition.
    Date: 2016

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