nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒07‒23
23 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Strategy and the Strategist: How It Matters Who Develops the Strategy By Eric Van den Steen
  2. Learning the Krepsian State: Exploration Through Consumption By Roee Teper
  3. Evolution of Consistent Conjectures in Semi-Aggregative Representation of Games, with Applications to Public Good Games and Contests By Alex Possajennikov
  4. Efficiency in Decentralized Markets with Aggregate Uncertainty By Lucas Maestri; Dino Gerardi; Braz Camargo
  5. Dynamic Contracts Under Loss Aversion By Sofia Moroni
  6. Existence of trembling hand equilibrium in revision games with imperfect information By Sofia Moroni
  7. Sniping in Proxy Auctions with Deadlines By Sofia Moroni
  8. Temptation in Markets with no Commitment: Give-aways, Scare-aways and Reversals By Matteo Foschi
  9. Eliciting the just-noticeable difference By Pawel Dziewulski
  10. Who is a Bayesian? By Roee Teper
  11. Plans of Action By Roee Teper
  12. Collective Choice in Dynamic Public Good Provision: Real versus Formal Authority By Nicolas Lambert; George Georgiadis; Renee Bowen
  13. Experimentation in Organizations By Sofia Moroni
  14. A Principal-Agent Model of Trading Under Market Impact -Crossing networks interacting with dealer markets- By Jana Bielagk; Ulrich Horst; Santiago Moreno--Bromberg
  15. Firm Reputation and Employee Startups By Jan Zabojnik
  16. Efficiency in decentralized oligopolistic markets By Francesco Nava
  17. Search costs and the severity of adverse selection By Francesco Palazzo
  18. Bankruptcy Problems with Reference-Dependent Preferences By Andrea Gallice
  19. Targeted information and limited attention By Andreas Hefti; Shuo Liu
  20. Solidarity Properties of Choice Correspondences By Bettina Klaus; Panos Protopapas
  21. Utilitarianism with and without expected utility By McCarthy, David; Mikkola, Kalle; Thomas, Teruji
  22. Condorcet domains, median graphs and the single-crossing property By Puppe, Clemens; Slinko, Arkadii
  23. Costly Pretrial Agreements By Luca Anderlini; Leonardo Felli; Giovanni Immordino

  1. By: Eric Van den Steen (Harvard Business School, Strategy Unit)
    Abstract: This paper addresses primarily two questions. First, when or why should a company's strategy be developed by its CEO versus by some outside analyst or other insider? Second, how does strategy, properly defined, interact with vision (in the sense of a strong belief) about various decisions? In the process, the paper also identifies three new criteria that make a decision strategic and derives two new explanations why strategies often reflect the background of the strategist. The paper studies these questions using a (new) functional definition of strategy as 'the smallest set of choices to optimally guide the other choices.' With regard to the first question - when or why should a company's strategy be developed by its CEO - the paper shows that strategy formulation by the CEO (or by a strategist with control over the right decisions) leads to both a better strategy and better execution when the strategic decision is controversial. With regard to the second question, the paper shows that a strategist's vision (as a strong belief) may improve implementation, but only if two conditions are met: the strong belief must be about a strategic decision and that decision must be controlled by the strategist. Vision about non-strategic decisions may in fact hurt the strategy's implementation.
    Date: 2016–07
  2. By: Roee Teper
    Abstract: We take the Krepsian approach to provide a behavioral foundation for a class of responsive subjective learning processes. In contrast to the standard subjective state spacemodels, the resolution of uncertainty regarding the true state is an endogenous process that depends on the decision maker's actions. In addition, there need not be fullresolution of uncertainty between periods. When the decision maker chooses what to consume, she also chooses the information structure to which she will be exposed. When sheconsumes outcomes, she learns her relative preference between them; after each consumption history, the decision maker's information structure is a re nement of the previousinformation structure. We provide the behavioral restrictions corresponding to an innite horizon, recursive representation that exhibits such a learning process. Moreover,through the incorporation of dynamics we are able to identify the set of preferences thedecision maker believes possible after each history of consumption. That is, we identifythe unique subjective state space without appealing to an environment with risk
    Date: 2016–01
  3. By: Alex Possajennikov (School of Economics, University of Nottingham)
    Abstract: In a semi-aggregative representation of a game, the payoff of a player depends on a player's own strategy and on a personalized aggregate of all players' strategies. Suppose that each player has a conjecture about the reaction of the personalized aggregate to a change in the player's own strategy. The players play an equilibrium given their conjectures, and evolution selects conjectures that lead to a higher payoff in such an equilibrium. Considering one player role, I show that for any conjectures of the other players, only conjectures that are consistent can be evolutionarily stable, where consistency means that the conjecture is, to a first approximation, correct at equilibrium. I illustrate this result in public good games and contests.
    Keywords: semi-aggregative games, conjectural variations, evolutionary stability, public good games, contests
    Date: 2016–08
  4. By: Lucas Maestri (FGV/EPGE); Dino Gerardi (Collegio Carlo Alberto); Braz Camargo (Sao Paulo School of Economics - FGV)
    Abstract: We study efficiency in decentralized markets with aggregate uncertainty and one-sided private information. There is a continuum of mass one of uninformed buyers and a continuum of mass one of informed sellers. Buyers and sellers are randomly and anonymously matched in pairs over time, and buyers make the offers. We show that all equilibria become efficient as trading frictions vanish.
    Date: 2016
  5. By: Sofia Moroni
    Abstract: We analyze a dynamic moral hazard principal-agent model with an agent who is lossaverse and whose reference updates according to the previous period’s consumption.When there is full commitment and the agent has no access to credit, in every periodafter the first the optimal payment scheme is insensitive to the current outcome in an interval,offering to pay the reference for a set of performance measures. Therefore, thereis a positive probability of observing wage persistence even if outcomes vary over time.Moreover, the model predicts a “status quo bias†–a preference for consuming the fullallocation if the agent is allowed to intertemporally reallocate consumption after the outcomeis realized. This result in turn implies that unlike the canonical model, the optimalcontract may be implemented even when the agent has access to a savings technology.We use subdifferential calculus to address the non-differentiable utility function.
    Date: 2016–01
  6. By: Sofia Moroni
    Abstract: In revision games a group of players can move at stochastic opportunities before adeadline. Their payoffs are determined by the sequence of actions taken before the endof the game. In this paper I define trembling hand equilibrium in a large class of revisiongames that may feature incomplete and imperfect information, and show that tremblinghand equilibria exist. Since trembling hand perfect equilibria are also Nash, existence ofa Nash equilibrium follows.
    Date: 2015–01
  7. By: Sofia Moroni
    Abstract: In most online auctions with deadlines, bidders submit multiple bids and wait untillate in the auction to submit high bids, a practice popularly known as “sniping.†Thispaper shows that whenever there is a nonzero probability that an auction contains “shillbidders†, who attempt to raise the sale price without winning, equilibrium play mustexhibit sniping. We present a model of online auctions with stochastic bidding opportunitiesand incomplete information regarding competing players’ valuations. We characterizeperfect Bayesian equilibria under a trembling hand refinement, allowing for apositive probability that a player is a bidder who plays a fixed strategy that raises the saleprice. In doing so, we develop a one-shot deviation principle for a class of continuous-timegames with stochastic opportunities to move. We find that in all equilibria, playerswait until a late time threshold to place their bids, even as the probability that a shill bidderis present becomes arbitrarily small. Using data from eBay auctions, we show thatobserved behavior is consistent with equilibrium play and that comparative statics of thetiming of bids match the model’s predictions. In contrast, when there is no possibility ofa shill bidder, the unique equilibrium outcome is that players bid their valuation as soonas a bidding opportunity arrives. The results extend to other types of heuristic bidderswho place incremental bids.
    Date: 2016–01
  8. By: Matteo Foschi
    Abstract: I study a two period model where the buyer suffers from self-control problems and his level of temptation is private information. I derive the optimal behaviour of a seller that offers her product to a buyer. In period 1, the latter decides whether or not to “enter the store” based on the prices posted by the seller. In period 2 he decides how much of the product to buy, if any. Differently from the existing literature, I assume that the seller cannot commit to the prices posted in period 1. I show how, under this framework, the presence of tempted consumers and symmetric information can explain the existence of free vouchers offered by the seller to the consumer in exchange for entering the store. In contrast with classical contract theory, I show that the relatively untempted consumer (the “low type”) can be better off when information about his type is private than when the seller is fully informed. Moreover, the presence of self-control may induce the seller to exclude the relatively strongly tempted consumer (the “high type”) from the market.
    Keywords: Temptation, Self-Control, Commitment, Price Discrimination, Participation Fees, Online Markets, Menus, Vouchers, Screening
    JEL: D42 D82 D86 L19 M31
  9. By: Pawel Dziewulski
    Abstract: In this paper we provide the testable implications for the model of consumer choice with just-noticeable differences. A preference relation admits such a representation whenever there is a utility function u and a constant δ such that bundlex is preferred to y if and only if u(x)≥u(y)+δ. Equivalently,we say that the relation is a semiorder. We introduce a necessary and sufficient condition under whicha finite set of observations can be rationalised with the above model. Specifically, our restriction weakens the well-known generalised axiom of revealed preference,or GARP for short. In addition, we argue that the condition allows to determine an informative and computationally efficient measure of violations of GARP.
    Keywords: just-noticeable difference, revealed preference, Afriat's theorem, generalised budget sets, Afriat's efficiency index, money-pump index
    JEL: C14 C60 C61 D11 D12
    Date: 2016–07–06
  10. By: Roee Teper
    Abstract: We take a decision theoretic approach to predictive inference. We construct a simple dynamic setup in the presence of inherent uncertainty. At any giventime period the decision maker updates her posterior regarding the uncertainty related to the subsequent period. The posteriors reflect the decision maker's preferences, period by period. We study the evolution of the agent's posteriors and provideaxioms under which the decision maker exhibits learning in a Bayesian fashion. Weshow how behavioral implications of diff erent Bayesian models diff er from one another, and specifi cally from those dictated by exchangeability.
    Date: 2016–01
  11. By: Roee Teper
    Abstract: We introduce a decision theoretic foundation for a class of learning models in which thedecision maker's beliefs over the present uncertainty is dictated by the outcomes of herpast actions. This type of learning underlies models of strategic experimentation. Weconstruct a framework in which an alternative is a recursive function contingent at anystage on the outcomes of previous actions, and provide axiomatizations for subjectivediscounted expected utility maximization, both for independent actions and correlatedactions. We point out that models of strategic experimentation have inherent limitedobservability, which in turn leads to partial identification of the subjective belief structure. We show that a class of processes we refer to as strongly exchangeable are the fullcharacterization of Bayesianism in such environments.
    Date: 2016–01
  12. By: Nicolas Lambert (Stanford University); George Georgiadis (Northwestern University, Kellogg School); Renee Bowen (Stanford University)
    Abstract: Two heterogeneous agents exert effort over time to complete a project and collectively decide its scope. A larger scope requires greater cumulative effort and delivers higher benefits upon completion. To study the scope under collective choice, we derive the agents' preferences over scopes. The efficient agent prefers a smaller scope, and preferences are time-inconsistent: as the project progresses, the efficient agent's preferred scope shrinks, whereas the inefficient agent's preferred scope expands. In equilibrium without commitment, the efficient agent obtains his ideal project scope with either agent as dictator and under unanimity. In this sense, the efficient agent always has real authority.
    Date: 2016
  13. By: Sofia Moroni
    Abstract: I consider a moral hazard problem in which a principal provides incentives to a team of agents towork on a risky project. The project consists of two milestones of unknown feasibility. While workingunsuccessfully, the agents’ private beliefs regarding the feasibility of the project decline. This learningrequires the principal to provide rents to prevent the agents from procrastinating and free-riding onothers’ discoveries. To reduce these rents the principal stops the project inefficiently early and givesidentical agents asymmetric experimentation assignments. The principal prefers to reward agents withbetter contract terms or task assignments rather than monetary bonuses.
    Date: 2016–01
  14. By: Jana Bielagk; Ulrich Horst; Santiago Moreno--Bromberg
    Abstract: We use a principal-agent model to analyze the structure of a book-driven dealer market when the dealer faces competition from a crossing network or dark pool. The agents are privately informed about their types (e.g. their portfolios), which is something that the dealer must take into account when engaging his counterparties. Instead of trading with the dealer, the agents may chose to trade in a crossing network. We show that the presence of such a network results in more types being serviced by the dealer and that, under certain conditions and due to reduced adverse selection effects, the book's spread shrinks. We allow for the pricing on the dealer market to determine the structure of the crossing network and show that the same conditions that lead to a reduction of the spread imply the existence of an equilibrium book/crossing network pair.
    Date: 2016–07
  15. By: Jan Zabojnik (Queen's University)
    Abstract: This paper studies a repeated-game model in which firms can build a reputation for rewarding innovative employees. In any Pareto efficient equilibrium, low-value innovations get developed in established firms, while high-value innovations get developed in startups. The threshold level can be discontinuous, so otherwise similar firms may exhibit very different levels of innovation. The paper also shows that the optimal incentive contract for innovative employees has an option-like form, and that a firm may want to worsen the distribution of possible innovations. The model's predictions are consistent with a broad set of observed regularities regarding the creation of employee startups.
    Keywords: Startups, innovation, reputation, venture capital
    JEL: L14 L26 O31 O34 M13
    Date: 2016–07
  16. By: Francesco Nava
    Abstract: The paper analyzes quantity competition in economies in which a network describes the set of feasible trades. A model is presented in which the identity of buyers, of sellers, and of intermediaries is endogenously determined by the trade flows in the economy. The analysis first considers small economies, and provides sufficient conditions for equilibrium existence, a characterization of prices and flows, and some negative results relating welfare to network structure. The second and central part of the analysis considers behavior in large markets, and presents necessary and sufficient conditions on the network structure for equilibria to be approximately efficient when the number of players is large.
    Keywords: decentralized markets; intermediation; oligopoly; efficiency; market power
    JEL: C7 D6 D85 L13
    Date: 2015–05
  17. By: Francesco Palazzo (Bank of Italy)
    Abstract: In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If instead search costs are not negligible and buyers receive sufficiently precise signals, sellers’ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can avoid to exacerbate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.
    Keywords: dynamic adverse selection, decentralized markets, search theory, time on market observability
    JEL: D47 D82 D83
    Date: 2016–07
  18. By: Andrea Gallice (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: We study bankruptcy problems under the assumption that claimants have reference-dependent preferences. We show that in such a context, standard allocative rules are no longer equivalent from the viewpoint of the level of welfare that they generate. A clear ranking of the most prominent rules actually emerges. Welfare thus becomes an additional dimension that an arbitrator may want to consider in deciding which allocation to implement. We then introduce a new rule that always maximizes welfare and discuss its pros and cons.
    Keywords: Bankruptcy Problems, Claims, Reference-Dependent Preferences, Welfare.
    JEL: D63 D03
    Date: 2016–07
  19. By: Andreas Hefti; Shuo Liu
    Abstract: We study targeted information in a duopoly model with differentiated products, allowing for consumers with limited attention. The presence of inattentive consumers incentivizes firms to behave as if they were mass-advertisers, despite their ability to direct their mes- sages precisely towards consumers with the strongest preferences. We show that the scope for targeting as an efficient marketing instrument can be severely reduced, for both firms and consumers, if the standard assumption of unbounded attention capacities is dropped. A central insight of our model is that limited attention may explain the recent evidence on increased ad-blocking, which has become a key concern to the entire advertising in- dustry. Our main findings are robust to several variations, including price and salience competition as well as varying quality of the available marketing data.
    Keywords: Targeting, limited attention, advertising avoidance, salience competition
    JEL: D43 L13 M37
    Date: 2016–07
  20. By: Bettina Klaus; Panos Protopapas
    Abstract: We consider the problem of choosing a set of locations of a public good on the real line. Similarly to Klaus and Storcken (2002), we ordinally extend the agents' preferences over compact subsets of the real line, and extend the results of Ching and Thomson (1996), Vohra (1909), and Klaus (2001) to choice correspondences. Specifically, we show that Pareto-efficiency and either population-monotonicity or one-sided replacement-domination characterize the class of target set correspondences on the domains of single-peaked preferences and symmetric single-peaked preferences.
    Keywords: choice correspondences; Pareto-eciency; population-monotonicity; replacement-domination; single-peaked preferences; solidarity
    JEL: C71 D63 D78 H41
    Date: 2016–07
  21. By: McCarthy, David; Mikkola, Kalle; Thomas, Teruji
    Abstract: We give two social aggregation theorems under conditions of risk, one for constant population cases, the other an extension to variable populations. Intra and interpersonal comparisons are encoded in a single `individual preorder'. The individual preorder then uniquely determines the social preorder. The theorems have features that may be considered characteristic of Harsanyi-style utilitarianism, such as indifference to ex ante and ex post equality. If in addition the individual preorder satisfies expected utility, the social preorder must be represented by expected total utility. In the constant population case, this is the conclusion of the social aggregation theorem of Harsanyi (1955) under anonymity, but contra Harsanyi, it is derived without assuming expected utility at the social level. However, the theorems are also consistent with the rejection of all of the expected utility axioms, at both the individual and social levels. Thus expected utility is inessential to Harsanyi's approach under anonymity. In fact, the variable population theorem imposes only a mild constraint on the individual preorder, while the constant population theorem imposes no constraint at all. We therefore give further results related to additional constraints on the individual preorder. First, stronger utilitarian-friendly assumptions, like Pareto or strong separability, are essentially equivalent to the main expected utility axiom of strong independence. Second, the individual preorder satisfies strong independence if and only if the social preorder has a mixture-preserving total utility representation; here the utility values can be taken as vectors in a preordered vector space, or more concretely as lexicographically ordered matrices of real numbers. Third, if the individual preorder satisfies a `local expected utility' condition popular in nonexpected utility theory, then the social preorder is `locally utilitarian'.
    Keywords: Harsanyi, utilitarianism, expected utility, nonexpected utility, egalitarianism, variable populations.
    JEL: D60 D63 D71 D81
    Date: 2016–07–19
  22. By: Puppe, Clemens; Slinko, Arkadii
    Abstract: Condorcet domains are sets of linear orders with the property that, whenever the preferences of all voters of a society belong to this set, their majority relation has no cycles. We observe that, without loss of generality, every such domain can be assumed to be closed in the sense that it contains the majority relation of every profile with an odd number of voters whose preferences belong to this domain. We show that every closed Condorcet domain can be endowed with the structure of a median graph and that, conversely, every median graph is associated with a closed Condorcet domain (in general, not uniquely). Condorcet domains that have linear graphs (chains) associated with them are exactly the preference domains with the classical single-crossing property. As a corollary, we obtain that a domain with the so-called 'representative voter property' is either a single-crossing domain or a very special domain containing exactly four different preference orders whose associated median graph is a 4-cycle. Maximality of a Condorcet domain imposes additional restrictions on the associated median graph. We prove that among all trees only (some) chains can be associated graphs of maximal Condorcet domains, and we characterize those single-crossing domains which are maximal Condorcet domains. Finally, using the characterization of Nehring and Puppe [2007] of monotone Arrovian aggregation, our analysis yields a rich class of strategy-proof social choice functions on any closed Condorcet domain.
    Keywords: social choice,Condorcet domains,acyclic sets of linear orders,median graphs,single-crossing property,distributive lattice,Arrovian aggregation,strategy-proofness,intermediate preferences
    JEL: D71 C72
    Date: 2016
  23. By: Luca Anderlini (Georgetown University); Leonardo Felli (London School of Economics); Giovanni Immordino (Università di Napoli Federico II and CSEF)
    Abstract: Legal disputes are either settled or end up in Court. Settling a dispute involves some costs (time and money invested in preparations) that the parties have to incur ex-ante, in order for the pretrial negotiation and possible agreement to become feasible. Even in a full information world, if the distribution of these costs is sufficiently mismatched with the distribution of the parties' bargaining powers, a pretrial agreement may never be reached even though actual Court litigation is overall wasteful. As parameters vary, the equilibrium of our full information model with costly pretrial agreements sheds light on two key features of how disputes are initiated and subsequently handled. First, in some cases a Plaintiff may initiate a law suit even though the parties fully anticipate that it will be settled out of Court. Second, the “likelihood” that a given law suit ends up in Court is unaffected by the way trial costs are distributed among the litigants (e.g. English Rule or American Rule). The choice of fee-shifting rule can only affect whether the Plaintiff files a law suit in the first place. It does not affect whether a given suit is settled before trial or litigated in Court.
    Keywords: Pretrial Agreements, Costly Negotiations, Court Litigation
    JEL: D23 D86 C79 K12 K13
    Date: 2016–07–13

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.