nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒05‒21
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Image Versus Information: Changing Societal Norms and Optimal Privacy By Ali, S. Nageeb; Benabou, Roland
  2. Knight--Walras Equilibria By Patrick Beissner; Frank Riedel
  3. Extreme Idealism and Equilibrium in the Hotelling-Downs Model of Political Competition By Ronayne, David
  4. Mean-Dispersion Preferences with a Specific Dispersion Function By Mark Schneider; Manuel Nunez
  5. The Sorry Clause By Srivastava, Vatsalya
  6. Pollution Claim Settlements Reconsidered: Hidden Information and Bounded Payments By Goldlücke, Susanne; Schmitz, Patrick W.
  7. Two-echelon supply chain coordination under information asymmetry with multiple types By Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
  8. Collective Action in an Asymmetric World By Cuicui Chen; Richard J. Zeckhauser
  9. Afriat's Theorem and Samuelson's `Eternal Darkness' By Matthew Polisson; Ludovic Renou
  10. What matters and how it matters: A choice-theoretic representation of moral theories By Dietrich, Franz; List, Christian
  11. Additively Separable Preferences Without the Completeness Axiom: An Algebraic Approach By Dino Borie
  12. The Negotiators Who Knew Too Much: Transaction Costs and Incomplete Information By Schmitz, Patrick W.
  13. The Rise of NGO Activism By Julien Daubanes; Jean-Charles Rochet
  14. Vertical Differentiation With Consumers Misperceptions And Information Disparities By Alberto Cavaliere; Giovanni Crea
  15. Informed Principals in the Credit Market when Borrowers and Lenders Are Heterogeneous By F. Barigozzi; P. Tedeschi

  1. By: Ali, S. Nageeb; Benabou, Roland
    Abstract: We analyze the costs and benefits of using social image to foster virtuous behavior. A Principal seeks to motivate reputation-conscious agents to supply a public good. Each agent chooses how much to contribute based on his own mix of public-spiritedness, private signal about the value of the public good, and reputational concern for appearing prosocial. By making individual behavior more visible to the community the Principal can amplify reputational payoffs, thereby reducing free-riding at low cost. Because societal preferences constantly evolve, however, she knows only imperfectly both the social value of the public good (which matters for choosing her own investment, matching rate or legal policy) and the importance attached by agents to social esteem and sanctions. Increasing publicity makes it harder for the Principal to learn from what agents do (the "descriptive norm") what they really value (the "prescriptive norm" ), thus presenting her with a tradeoff between incentives and information aggregation. We derive the optimal degree of privacy/publicity and matching rate, then analyze how they depend on the economy's stochastic and informational structure. We show in particular that in a fast-changing society (greater variability in the fundamental or the image-motivated component of average preferences), privacy should generally be greater than in a more static one.
    Keywords: conformity; esteem; incentives; privacy; reputation; shaming punishments; Social norms; societal change; transparency
    JEL: D62 D64 D82 H41 K42 Z13
    Date: 2016–04
  2. By: Patrick Beissner; Frank Riedel
    Abstract: Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and establish their existence. In general, such equilibria lead to Pareto inefficiency and coincide with Arrow--Debreu equilibria only if the values of net trades are ambiguity--free in the mean. Without aggregate uncertainty, inefficiencies arise generically. We introduce a constrained efficiency concept, uncertainty--neutral efficiency and show that Knight--Walras equilibrium allocations are efficient in this constrained sense. Arrow--Debreu equilibria turn out to be non--robust with respect to the introduction of Knightian uncertainty.
    Date: 2016–05
  3. By: Ronayne, David (University of Warwick)
    Abstract: In the classic Hotelling-Downs model of political competition there is (almost always) no pure strategy equilibrium with three or more strategic candidates where the distribution of voters’ preferred policies are single-peaked. I study the effect of introducing two idealist candidates who are non-strategic (i.e., fixed to their policy platform), to an unlimited number of potential strategic entrants. I present three results that hold for a non-degenerate class of cases: (i) In any equilibrium the idealists are the left-most and right-most candidates i.e., extremists; (ii) Hotelling’s Law fails: in any equilibrium, candidates do not share their policy platforms, which instead are spread across the policy space; (iii) A characterization for symmetric and asymmetric single-peaked distributions of voters’ ideal policy preferences. Equilibria where many strategic candidates enter exist only if the distribution of voter preferences is asymmetric.
    Keywords: Hotelling ; political competition ; equilibrium existence ; idealism JEL classification numbers: C72; D72
    Date: 2016
  4. By: Mark Schneider (Economic Science Institute, Chapman University); Manuel Nunez (School of Business, University of Connecticut)
    Abstract: A popular approach to modeling ambiguity aversion is to decompose preferences into the subjective expected utility of an act and an ambiguity index, or an adjustment factor, or a dispersion function. However, in these approaches the dispersion function (or ambiguity index, or adjustment factor) has very little structure imposed on it, leaving the selection of a specific dispersion function in applications to be rather arbitrary. In this note, working in the Anscombe- Aumann (1963) framework, we provide a simpler axiomatic characterization of mean-dispersion preferences which uniquely identifies the dispersion function from the infinite class of possible alternatives. Given the representation, we also obtain unique identification of subjective probabilities.
    Keywords: ambiguity aversion, translation invariance, dispersion, uncertainty, probabilistic sophistication
    JEL: D81
    Date: 2016
  5. By: Srivastava, Vatsalya (Tilburg University, TILEC)
    Abstract: When players face uncertainty in choosing actions, undesirable outcomes cannot be avoided. Accidental defections caused by uncertainty, that does not depend on the level of care, require a mechanism to reconcile the players. This paper shows the existence of a perfect sorry equilibrium in a game of imperfect public monitoring. In the sorry equilibrium, costly apology is self-imposed in case of accidental defections, making private information public and allowing cooperation to resume. Cost of the apology required to sustain this equilibrium is calculated, the efficiency characteristics of the equilibrium evaluated and outcomes compared to those from other bilateral social governance mechanisms and formal legal systems. It is argued that with the possibility of accidental defections, other social mechanisms have limitations, while formal legal systems can generate perverse incentives. Therefore, apologies can serve as a useful economic governance institution.
    Keywords: apology; sorry; imperfect public monitoring; uncertainty; social norms; economics governance; Legal institutions; incentives
    JEL: D80 K40 K41 K42 D02
    Date: 2016
  6. By: Goldlücke, Susanne; Schmitz, Patrick W.
    Abstract: A pollution-generating firm (the principal) can offer a contract to an agent (say, a nearby town) who has the right to be free of pollution. Subsequently, the agent privately learns the disutility caused by pollution. Then a production level and a payment from the principal to the agent are implemented as contractually specified. We explore the implications of a non-negativity constraint on the payment. For low cost types there is underproduction, while for high cost types there is overproduction. Hence, there may be too much pollution compared to the first-best solution (which is in contrast to standard adverse selection models).
    Keywords: Coasean bargaining; externalities; hidden information; incentive contracting; limited liability
    JEL: D23 D62 D82 D86 H23
    Date: 2016–04
  7. By: Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
    Abstract: We analyse a principal-agent contracting model with asymmetric information between a supplier and a retailer. Both the supplier and the retailer have the classical non-linear economic ordering cost functions consisting of ordering and holding costs. We assume that the retailer has the market power to enforce any order quantity. Furthermore, the retailer has private holding costs. The supplier wants to minimise his expected costs by offering a menu of contracts with side payments as an incentive mechanism. We consider a general number of discrete single-dimensional retailer types with type-dependent default options. A natural and common model formulation is non-convex, but we present an equivalent convex formulation. Hence, the contracting model can be solved efficiently for a general number of retailer types. We also derive structural properties of the optimal menu of contracts. In particular, we completely characterise the optimum for two retailer types and provide a minimal list of candidate contracts for three types. Finally, we prove a sufficient condition to guarantee unique contracts in the optimal solution for a general number of retailer types.
    Keywords: economic order quantity, mechanism design, asymmetric information, hidden convexity
    Date: 2016–05–10
  8. By: Cuicui Chen; Richard J. Zeckhauser
    Abstract: A central authority, possessing tax and expenditure responsibilities, can readily provide an efficient level of a public good. Climate change mitigation lacks a central authority. Thus, voluntary arrangements must replace coercive arrangements; significant under-provision must be expected. Potential contributors have strong incentives to free ride or ride cheaply. The players – the many nations of the world – are quite disparate. They thus frame negotiations from their own standpoints, making stalemate likely. Moreover, the focal-point solution where contributions are proportional to benefits clashes with the disproportionate cheap-riding incentives of little players. Our proposed solution, the Cheap-Riding Efficient Equilibrium (CREE), defines the relative contributions of players of differing size (or preference intensity) to reflect cheap riding incentives, yet still achieves Pareto optimality. CREE establishes the Alliance/Nash Equilibrium as a base point. From that point it proceeds to the Pareto frontier by applying the principles of the Lindahl Equilibrium (a focal point) or the Nash Bargaining Solution (a standard approach). We test the Alliance Equilibrium model using nations' Intended Nationally Determined Contributions at the Paris Climate Change Conference. As hypothesized, larger nations made much larger pledges in proportion to their Gross National Incomes. We apply our theory to examine the Nordhaus Climate Club proposal.
    JEL: C72 F53 H87
    Date: 2016–05
  9. By: Matthew Polisson; Ludovic Renou
    Abstract: Suppose that we have access to a finite set of expenditure data drawn from an individual consumer, i.e., how much of each good has been purchased and at what prices. Afriat (1967) was the first to establish necessary and sufficient conditions on such a data set for rationalizability by utility maximization. In this note, we provide a new and simple proof of Afriat's Theorem, the explicit steps of which help to more deeply understand the driving force behind one of the more curious features of the result itself, namely that a concave rationalization is without loss of generality in a classical finite data setting. Our proof stresses the importance of the non-uniqueness of a utility representation along with the finiteness of the data set in ensuring the existence of a concave utility function that rationalizes the data.
    Keywords: Afriat's Theorem, concavity, revealed preference, utility maximization
    JEL: C60 D11
    Date: 2016–04
  10. By: Dietrich, Franz; List, Christian
    Abstract: We present a new “reason-based” approach to the formal representation of moral theories, drawing on recent decision-theoretic work. We show that any moral theory within a very large class can be represented in terms of two parameters: (i) a specification of which properties of the objects of moral choice matter in any given context, and (ii) a specification of how these properties matter. Reason-based representations provide a very general taxonomy of moral theories, as differences among theories can be attributed to differences in their two key parameters. We can thus formalize several important distinctions, such as between consequentialist and non-consequentialist theories, between universalist and relativist theories, between agent-neutral and agent-relative theories, between monistic and pluralistic theories, between atomistic and holistic theories, and between theories with a teleological structure and those without.
    Keywords: moral choice, reason-based choice, consequentialism versus deontology, universalism versus relativism, agent-neutrality versus agent-relativity, monism versus pluralism, atomism versus holism, teleology versus non-teleology
    JEL: B0 B4 B40 D6 D63
    Date: 2016–02
  11. By: Dino Borie (GREDEG CNRS; University of Nice Sophia Antipolis)
    Abstract: A simple mathematical result characterizing a partially ordered mean groupoid is proved and used to study the problem of additively separable preferences on preordered Cartesian product set. This means that most of the economic theory based on separable preferences - expected utility,rank-dependent expected utility, qualitative probability, discounted utility - could be generalized to the multi-utility approach.
    Keywords: Additive utility, Separable utility, Completeness axiom, Incomplete preferences
    JEL: D80 D90
    Date: 2016–05
  12. By: Schmitz, Patrick W.
    Abstract: Two parties can at some future date 2 negotiate about whether or not to collaborate in order to generate a surplus. Yet, the negotiation stage will be reached only if at date 1 both parties pay their respective transaction costs. We show that the expected total surplus may be larger when at date 1 the parties do not yet know the size of the surplus that can be generated at date 2. Moreover, joint ownership can be optimal under incomplete information even when it would be suboptimal under complete information.
    Keywords: Bargaining; incomplete information; joint ownership; Property rights; transaction costs
    JEL: C78 D23 D86 L14 L24
    Date: 2016–05
  13. By: Julien Daubanes (ETH Zürich, Switzerland); Jean-Charles Rochet (University of Zurich, Switzerland)
    Abstract: Activist NGOs increasingly oppose industrial projects that have nevertheless been approved by public regulators. To understand this recent rise in NGO activism, we develop a theory of optimal regulation in which a regulated industry seeks to undertake a project that may be harmful to society. On the one hand, public regulation is vulnerable to the influence of the industry, and may approve the project even though it is harmful. On the other hand, an NGO may oppose the project. We characterize the circumstances under which NGO opposition occurs and the circumstances under which this opposition is socially beneficial. The theory is used to explain the role that NGOs have assumed in the last decades, and has implications for the legal status of NGO activism and the appropriate degree of transparency.
    JEL: D02 D74 D82
    Date: 2016–04
  14. By: Alberto Cavaliere (Department of Economics and Management, University of Pavia); Giovanni Crea (Department of Economics and Management, University of Pavia)
    Abstract: We consider vertical differentiation with quality uncertainty and information disparities, in a duopoly where firms supply a product with credence attributes. Consumers choice is affected by misperceptions, but equilibrium prices and qualities depend also on the behavior and the share of informed consumers. With optimistic misperceptions uninformed consumers are cheated in equilibrium as we observe less price competition and minimum differentiation. Alternatively some product differentiation is provided when informed consumers buy high quality goods and the incentive to increase quality is positively affected by optimistic misperceptions. With more informed consumers we find more price competition but less incentive to product differentiation. In most cases the share of informed consumers asymmetrically affects equilibrium prices, to the detriment of the high quality firm. Pessimistic misperceptions prevent more product differentiation and adverse selection arises, but it can be eliminated if the share of informed consumers is high enough. However with pessimistic consumers, information disparities can also lead to inelastic demands and market segmentation, such that externalities
    Keywords: Asymmetric information, Brand premium, Quality uncertainty
    JEL: L15 L13 D82
    Date: 2016–04
  15. By: F. Barigozzi; P. Tedeschi
    Abstract: Both borrowers and lenders can be socially responsible (SR). Ethical banks commit to financing only ethical projects, which have social profitability but lower expected revenues than standard projects. Instead, no credible commitment exists for SR borrowers. The matching between SR borrowers and ethical banks reduces the frictions caused by moral hazard. However, when the type of the borrowers is not observable, then standard borrowers have incentives to invest in ethical projects pretending to be SR. We show that the separation of borrowers entails costs that are paid by SR entrepreneurs but are relatively low because standard lenders offer an outside option that relaxes the self-selection constraint of the borrowers. Technically, we solve a Contract Proposal Game where informed principals (borrowers) offer different menus of contracts to heterogeneous agents (banks). We show that market segmentation improves efficiency and solves the problem of multiplicity of equilibria in Contract Proposal Games.
    JEL: D86 G21 G30
    Date: 2016–01

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