nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒06‒14
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Marking to market versus taking to market By Guillaume Plantin; Jean Tirole
  2. Adversarial decision-making: Choosing between models constructed by interested parties By Froeb, Luke M.; Ganglmair, Bernhard; Tschantz, Steven
  3. De-biasing strategic communication By Tobias Gesche
  4. Team adaptation By Jordi Blanes I Vidal; Marc Möller
  5. Homophily and Transitivity in Dynamic Network Formation By Bryan S. Graham
  6. Salience, Framing, and Decisions under Risk, Uncertainty, and Time By Jonathan W. Leland; Mark Schneider
  7. Savage's Theorem Under Changing Awareness By Dietrich, Franz
  8. Regulatory Holidays and Optimal Network Expansion By Willems, Bert; Zwart, Gijsbert
  9. Multidimensional Pigou-Dalton Transfers and Social Evaluation Functions By Marcello Basili; Paulo Casaca; Alain Chateauneuf; Maurizio Franzini
  10. Equilibria of Deferred Acceptance with Complete Lists By Bettina Klaus; Flip Klijn
  11. Robustness of subgame perfect implementation By Eccles, Peter; Wegner, Nora
  12. Vertical Integration and Downstream Collusion By Sara Biancini; David Ettinger
  13. Exclusive dealing with costly rent extraction By Calzolari, Giacomo; Denicolò, Vincenzo; Zanchettin, Piercarlo
  14. Attorney fees in repeated relationships By Graham, Brad; Robles, Jack
  15. Exploring the gap between perfect Bayesian equilibrium and sequential equilibrium By Giacomo Bonanno
  16. Markets for Ideas: Prize Structure, Entry Limits, and the Design of Ideation Contests By Pavel Kireyev
  17. Political Economy of Redistribution By Diermeier, Daniel; Egorov, Georgy; Sonin, Konstantin

  1. By: Guillaume Plantin; Jean Tirole
    Abstract: While the debate on cost and market-value accounting has been raging for years, economists lack a framework allowing a comparison of their relative merits. This paper considers an agency model in which the measurement of an asset can be based on public market data (marking to market) and/or on the realization of its value through costly resale to an informed buyer (taking to market). At the optimal contract, noisier market data lead to cost accounting and gains trading (selling winners/keeping losers) whereas accurate data naturally favor market-value accounting. The quality of market data and the magnitude of resale costs both depend on the volume of transactions, and therefore on accounting rules. The paper studies the mutual feedback between individually optimal accounting rules and asset market liquidity. This equilibrium approach reveals a socially excessive use of market-value accounting that dries up market liquidity and reduces the informativeness of price signals.
    Keywords: cost and market value accounting; agency; gains trading; equilibrium; accounting rules
    JEL: D82 M41 M52
    Date: 2015–12
  2. By: Froeb, Luke M.; Ganglmair, Bernhard; Tschantz, Steven
    Abstract: In this paper, we characterize adversarial decision-making as a choice between competing interpretations of evidence ("models") constructed by interested parties. We show that if a court cannot perfectly determine which party's model is more likely to have generated the evidence, then adversaries face a tradeoff: a model further away from the best (most likely) interpretation has a lower probability of winning, but also a higher payoff following a win. We characterize equilibrium when both adversaries construct optimal models, and use the characterization to compare adversarial decision-making to an inquisitorial benchmark. We find that adversarial decisions are biased, and the bias favors the party with the less-likely, and more extreme, interpretation of the evidence. Court bias disappears when the court is better able to distinguish between the likelihoods of the competing models, or as the amount of evidence grows.
    Keywords: adversarial justice; evidence-based decision-making; expert testimony; inquisitorial justice; litigation; persuasion games; science vs. advocacy
    JEL: C72 D74 K41
    Date: 2016–03–28
  3. By: Tobias Gesche
    Abstract: This paper studies the effect of disclosing conflicts of interests on strategic communication when the sender has lying costs. I present a simple economic mechanism under which such disclosure often leads to more informative, but at the same time also to more biased messages. This benefits rational receivers while it exerts a negative externality from them on naive or delegating receivers; disclosure is thus not a Pareto-improvement among receivers. I identify general conditions of the information structure under which this effect manifests and show that whenever it does, full disclosure is socially inefficient. The results hold independently of the degree of receivers' risk-aversion and for arbitrary precesion of the disclosure statement.
    Keywords: Strategic communication, misreporting, conflict of interest, disclosure
    JEL: D82 D83 L51
    Date: 2016–01
  4. 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: O32 O47
    Date: 2016–04
  5. By: Bryan S. Graham
    Abstract: In social and economic networks linked agents often share additional links in common. There are two competing explanations for this phenomenon. First, agents may have a structural taste for transitive links -- the returns to linking may be higher if two agents share links in common. Second, agents may assortatively match on unobserved attributes, a process called homophily. I study parameter identifiability in a simple model of dynamic network formation with both effects. Agents form, maintain, and sever links over time in order to maximize utility. The return to linking may be higher if agents share friends in common. A pair-specific utility component allows for arbitrary homophily on time-invariant agent attributes. I derive conditions under which it is possible to detect the presence of a taste for transitivity in the presence of assortative matching on unobservables. I leave the joint distribution of the initial network and the pair-specific utility component, a very high dimensional object, unrestricted. The analysis is of the `fixed effects' type. The identification result is constructive, suggesting an analog estimator, whose single large network properties I characterize.
    JEL: C1 C14 C23 C25 D85
    Date: 2016–04
  6. By: Jonathan W. Leland (Division of Social and Economic Sciences, National Science Foundation); Mark Schneider (Economic Science Institute, Chapman University)
    Abstract: We propose a comparative model of decision making under risk, uncertainty, and time, in which large differences in payoffs and probabilities or dates of receipt are perceived as salient and overweighted in the evaluation process. The predictions of the model depend on what differences are compared across alternatives which, in turn, depends on how the choice is framed. We formalize a class of matrix-based frames which applies to decisions under risk, uncertainty, and time, and we specify two important types of frames within this class: minimal frames which provide the simplest representation of choice alternatives, and transparent frames which make the normative appeal of the classical rationality axioms more transparent. We also propose two simple and natural assumptions regarding the perceived salience of differences in numerical magnitudes. We show that the model predicts systematic framing effects in which people will exhibit major violations of rational choice theory (the Allais paradox, common ratio effect, Ellsberg paradox, present bias, and violations of stochastic dominance) when the options are represented in a minimal frame but will behave more consistently with the classical axioms when the same choices are presented in a transparent frame. The model employs the same salience-based decision algorithm across the domains of risk, uncertainty, and time, thus providing a unified approach to explaining choice anomalies as decision errors. Moreover, because it maintains the assumption that preferences obey expected and discounted utility, it facilitates traditional welfare analysis.
    Keywords: Salience Perception; Allais Paradox; Ellsberg Paradox; Present Bias; Diminishing Sensitivity
    JEL: D03 D81
    Date: 2016
  7. By: Dietrich, Franz
    Abstract: This paper proposes a simple unified framework of changing awareness, addressing both outcome and (nature) state awareness, and both how fine and how exhaustive the awareness is. Six axioms characterize an (essentially unique) expected-utility representation of preferences, in which utilities and probabilities are revised systematically under changes in awareness. Revision is governed by three well-defined rules: (R1) certain utilities are transformed affinely, (R2) certain probabilities are transformed proportionally, and (R3) certain (`objective') probabilities are preserved. Rule R2 parallels Karni and Viero's (2013) 'reverse Bayesianism' and Ahn and Ergin's (2010) 'partition-dependence'. Savage's (1954) theorem emerges in the special case of fixed awareness. The theorem draws mathematically on Kopylov (2007), Niiniluoto (1972) and Wakker (1981).
    Keywords: Decision under uncertainty, outcome unawareness versus state unawareness, non-refinement versus non-exhaustiveness, utility revision versus probability revision
    JEL: D80 D81
    Date: 2016
  8. By: Willems, Bert (Tilburg University, Center For Economic Research); Zwart, Gijsbert (Tilburg University, Center For Economic Research)
    Abstract: We model the optimal regulation of continuous, irreversible, capacity expansion, in a model in which the regulated network firm has private information about its capacity costs, investments need to be financed out of the firm’s cash flows from selling network access and demand is stochastic. If asymmetric information is large, the optimal mechanism consists of a regulatory holiday for low-cost firms, and a mark-up regime for higher-cost rms. With the regulatory holiday, a firm receives the full revenue of capacity sales, and expands capacity as if it were an unregulated monopolist. Under the mark-up regime, a firm receives only a fraction of the capacity revenues, and is obliged to expand capacity whenever the price for capacity reaches a threshold. The regulatory holiday is necessary to fund information rents to the most efficient firms, which invest relatively early, as direct investment subsidies are not feasible.
    Keywords: regulatory holiday; real option value; asymmetric information; optimal contracts
    JEL: D81 D82 L52
    Date: 2016
  9. By: Marcello Basili (University of Siena); Paulo Casaca (Federal University of Minas Gerais); Alain Chateauneuf (Centre d'Economie de la Sorbonne); Maurizio Franzini (University of Rome La Sapienza)
    Abstract: We axiomatize, in the multidimensional case, a social evaluation function that can accommodate a natural Pigou-Dalton principle and correlation increasing majorization. This is performed by building upon a simple class of inframodular functions proposed by Müller and Scarsini under risk
    Keywords: multidimensional inequality; Pigou-Dalton transfer; increasing majorization; inframodular functions; Human Development Index
    JEL: D63
    Date: 2016–05
  10. 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 2). 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 D47
    Date: 2016–04
  11. By: Eccles, Peter (Universidad Carlos III de Madrid); Wegner, Nora (Bank of England)
    Abstract: In this paper we consider the robustness of subgame perfect implementation in situations when the preferences of players are almost perfectly known. More precisely, we consider a class of information perturbations where in each state of the world players know their own preferences with certainty and receive almost perfectly informative signals about the preferences of other players. We show that implementations using two-stage sequential move mechanisms are always robust under this class of restricted perturbations, while those using more stages are often not.
    Keywords: Implementation; subgame perfect equilibrium; robustness
    JEL: D04 D82
    Date: 2016–05–13
  12. By: Sara Biancini (Normandie Université, UNICAEN, CREM CNRS, France); David Ettinger (Paris Dauphine, PSL, LEDa and CEREMADE, France)
    Abstract: We investigate the effect of a vertical merger on downstream firms' ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non cooperative state. As a result, vertical integration generally favors collusion.
    Keywords: Vertical Integration, Tacit Collusion
    JEL: D43 L13 L40 L42
    Date: 2016–05
  13. By: Calzolari, Giacomo; Denicolò, Vincenzo; Zanchettin, Piercarlo
    Abstract: We analyze the impact of exclusive contracts on the intensity of competition among firms that supply substitute products. Exclusive contracts would be neutral if firms priced at marginal cost and extracted buyers' rent by means of non distortionary fixed fees. We focus instead on the case in which rent extraction is costly, and hence firms distort marginal prices upwards. We show that in this case exclusive contracts are anti-competitive when the dominant firm enjoys a large enough competitive advantage over its rivals, and are pro-competitive, or neutral, when the competitive advantage is small. These effects appear as soon as marginal prices are distorted upwards, irrespective of which specific factors impede perfect rent extraction.
    Keywords: Antitrust; Dominant firm; Exclusive dealing; Rent extraction
    JEL: D42 D82 L42
    Date: 2016–05
  14. By: Graham, Brad; Robles, Jack
    Abstract: We investigate contracts between a law firm and a corporate client involved in a repeated relationship. In contrast to the previous literature pertaining to one-time interactions between clients and attorneys, we find that the contingent fee is not the best arrangement. Rather, the contingent fee is dominated by a contract which, we argue, an outside observer could not distinguish from simple hourly fee contract. This contract includes an hourly fee equal to the law firm’s opportunity cost, a lump sum, and a retention function. The lump sum payment is independent of the number of hours worked by the law firm and the outcome of the case. The repeated nature of the relationship allows the client to create a contract where the desire to maintain the relationship induces the law firm to exert the optimal level of effort in the current case.
    Keywords: Legal services, Contract, Contingent fee, Repeated relationship,
    Date: 2016
  15. By: Giacomo Bonanno (Department of Economics, University of California Davis)
    Abstract: In (5) a solution concept for extensive-form games was introduced, called perfect Bayesian equilibrium (PBE), and shown to be a strict refinement of subgame-perfect equilibrium; it was also shown that, in turn, sequential equilibrium (SE) is a strict refinement of PBE. In (6) the notion of PBE was used to provide a characterization of SE in terms of a strengthening the two defining components of PBE (besides sequential rationality), namely AGM consistency and Bayes consistency. In this paper we explore the gap between PBE and SE by identifying solution concepts that lie strictly between PBE and SE; these solution concepts embody a notion of ?conservative? belief revision. Furthermore, we provide a method for determining if a plausibility order on the set of histories is choice measurable, which is a necessary condition for a PBE to be a SE.
    Keywords: Plausibility order; conservative belief revision; Bayesian updating, independence, sequential equilibrium
    JEL: C7
    Date: 2016–05–25
  16. By: Pavel Kireyev (Harvard Business School)
    Abstract: Contests are a popular mechanism for the procurement of innovation. In marketing, design, and other creative industries, firms use freelance marketplaces to organize contests and obtain high-quality ideas for ads, new products, and even business strategies from participants. A central question faced by contest sponsors is how to appropriately structure prizes and entry regulations. I develop an empirical model of idea generation (ideation) contests and investigate the impact of the number of prizes, prize amount, and submission limit on participation and quality outcomes using data from a popular marketing ideation platform. The model explains participant submission decisions, jury ratings, and sponsor rankings of winning submissions. Counterfactuals reveal the impact of design parameters on outcomes and provide guidance for the optimal design of ideation contests and platforms.
    Keywords: idea generation; crowdsourcing; contest design; structural estimation.
    Date: 2016–05
  17. By: Diermeier, Daniel; Egorov, Georgy; Sonin, Konstantin
    Abstract: It is often argued that additional constraints on redistribution such as granting veto power to more players in the society makes property better protected from expropriation. We use a legislative bargaining-type model to demonstrate that this intuition may be ‡flawed. Increasing the number of veto players or raising the supermajority requirement for redistribution may reduce protection on the equilibrium path. The reason is the existence of two distinct mechanisms of property rights protection. One is formal constraints that allow individuals or groups to block any redistribution that is not in their favor. The other occurs in equilibrium where players without such powers protect each other from redistribution. Players without formal veto power anticipate that the expropriation of other similar players will ultimately hurt them and thus combine their infl‡uence to prevent redistributions. In a stable allocation, the society exhibits a “"class" ”structure with class members having equal wealth, and strategically protecting each other from redistribution.
    Keywords: institutions; legislative bargaining; political economy; Property rights
    JEL: D72 D74 P48
    Date: 2016–05

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.