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on Microeconomics |
| By: | Tirole, Jean |
| Abstract: | In a number of interesting environments, dynamic screening involves positive selection: in contrast with Coasian dynamics, only the most motivated remain over time. The paper provides conditions under which the principal's commitment optimum is time consistent and uses this result to derive testable predictions under permanent or transient shocks. It also identifies environments in which time consistency does not hold despite positive selection, and yet simple equilibrium characterizations can be obtained. |
| Keywords: | repeated relationships, screening, positive selection, time consistency, shifting preferences, exit games. |
| JEL: | C72 D42 D82 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:30552&r=mic |
| By: | Bernard Herskovic (UCLA Anderson School of Management); Joao Ramos (NYU) |
| Abstract: | We study information acquisition from peers when agents’ actions balance adaptation and coordination motives. Agents acquire information personally and may obtain additional information by connecting to other agents. Although equally informative regarding adaptation, the source’s relative position in the information structure is relevant to form expectations about actions of other players. In our setting, information sources are not perfectly substitutable, and the information of an “opinion maker†—an agent whose information is more public—is more informative of how others act. We show that, when players choose their connections, (i) it is always preferable to connect to opinion makers, and (ii) opinion makers have less incentives to form links. These two results characterize the endogenous shape of the network: Any strict equilibrium of the network formation game generates a hierarchical information structure. Furthermore, if the marginal cost of acquiring information is increasing, the information structure is “core-periphery†. We take advantage of the simplicity of the equilibrium information structure to provide two applications. First, we analyze how much of the aggregate volatility of forecast can the information structure account for. Second, we study the origins of leadership: how individual characteristics influence the role of the agent in the information structure. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:248&r=mic |
| By: | Piero Gottardi (European University Institute); Sarah Auster (Bocconi, IGIER) |
| Abstract: | We study the competitive equilibria in a market with adverse selection and search frictions. Uninformed buyers post general direct mechanisms and informed sellers choose where to direct their search. We demonstrate that there exists a unique equilibrium allocation and characterize its properties: all buyers post the same mechanism and a low quality object is traded whenever such object is present in a meeting. Sellers are thus pooled at the search stage and screened at the mechanism stage. If adverse selection is sufficiently severe, this equilibrium is constrained inefficient. Furthermore, the properties of the equilibrium differ starkly from the case where meetings are restricted to be bilateral, in which case in equilibrium sellers sort themselves at the search stage across different mechanisms. Compared to such sorting equilibria, our equilibrium yields a higher surplus for most, but not all, parameter specifications. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:264&r=mic |
| By: | Bergemann, Dirk; Bonatti, Alessandro; Smolin, Alex |
| Abstract: | This paper analyzes the trade of information between a data buyer and a data seller. The data buyer faces a decision problem under uncertainty and seeks to augment his initial private information with supplemental data. The data seller is uncertain about the willingness-to-pay of the data buyer due to this private information. The data seller optimally offers a menu of (Blackwell) experiments as statistical tests to the data buyer. The seller exploits differences in the beliefs of the buyer’s types to reduce information rents while limiting the surplus that must be sacrificed to provide incentives. |
| Keywords: | experiments; mechanism design; price discrimination; product differentiation.; selling information |
| JEL: | D42 D82 D83 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11412&r=mic |
| By: | Kojima, Fuhito; Yamashita, Takuro |
| Abstract: | We study a double auction environment where buyers and sellers have interdependent valuations and multi-unit demand and supply. We propose a new mechanism which satisfies ex post incentive compatibility, individual rationality, feasibility, non-wastefulness, and no budget deficit. Moreover, this mechanism is asymptotically efficient in that the trade outcome in the mechanism converges to the efficient level as in a competitive equilibrium as the numbers of the buyers and sellers become large. Our mechanism is the first double auction mechanism with these properties in the interdependent values setting. |
| Keywords: | double auction, interdependent values, multi-unit demand and supply, ex post incentive compatibility, asymptotic efficiency |
| JEL: | D44 D47 D82 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:30563&r=mic |
| By: | Hwang, Sung-Ha; Newton, Jonathan |
| Abstract: | This paper considers populations of agents whose behavior when playing some underlying game is governed by perturbed best (or better) response dynamics with perturbation probabilities that depend log-linearly on payoffs, a class that includes the logit choice rule. A convention is a state at which every agent plays a strategy that corresponds to the same strict Nash equilibrium of the underlying game. For coordination games with zero payoffs off-diagonal, it is shown that the difficulty of leaving the basin of attraction of a convention can be well approximated by only considering paths of transitions on which an identical perturbation repeatedly affects one of the populations. |
| Keywords: | Evolution; Coordination; Logit, Payoff dependence |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2016-12&r=mic |
| By: | Kai A. Konrad; Florian Morath |
| Abstract: | We consider two players' choice about the formation of an alliance ahead of conflict in a framework with incomplete information about the strength of co-players. When deciding on alliance formation, players anticipate the self-selection of other players and the informational value of own and other players' choices. In the absence of these signaling effects, strong players have an incentive to stand alone, which leads to a separating equilibrium. This separating equilibrium can be destabilized by deception incentives if beliefs are updated on the basis of endogenous alliance formation choices. Weak players may find it attractive to appear strong in order to deter competitors from positive effort choices. Strong players may find it attractive to appear weak in order to give their competitors a false sense of security and then beat them with little effort. Moreover, appearing weak allows players to free-ride when alliances are formed. |
| Keywords: | alliance; incomplete information; endogenous formation; all-pay contest |
| JEL: | D72 D74 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:mpi:wpaper:tax-mpg-rps-2015-15&r=mic |
| By: | Rodrigo A. Velez (Texas A&M University, Department of Economics); Antonio Nicolo (School of Economics University of Manchester and Department of Economics University of Padua) |
| Abstract: | We introduce a symmetrized version of the popular divide and choose mechanism for the allocation of a collectively owned indivisible good among two agents when monetary compensation is available. Our proposal retains the simplicity of divide and choose and corrects its ex-post asymmetry. When there is complete information, i.e., agents know each other well, it implements in subgame perfect equilibria a unique allocation that would be obtained by a balanced market. By correcting the ex-post asymmetry of divide and choose, our proposal may reduce welfare losses documented by laboratory studies for both divide and choose and auction-type mechanisms. |
| Keywords: | indivisible goods, no-envy, implementation in subgame perfect equilibria |
| JEL: | D63 C72 |
| Date: | 2016–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:txm:wpaper:20160710-001&r=mic |
| By: | Makoto Shimoji |
| Abstract: | We analyze multi-receiver Bayesian persuasion games with heterogeneous beliefs, originating from Kamenica and Gentzkow (2011). We directly examine the sender's messages, which are supported by rationalizability. With no strategic interactions at the stage game, the sender's optimization problem can be viewed as a set of linear programming problems. We also show some generic properties of solutions. With strategic interactions at the stage game, we provide examples on two aspects of communication (only arising with the receivers' strategic interactions): "talking about others privately" and "tacit understandings", of which the latter is implied by forward induction. |
| Keywords: | Bayesian Persuasion Games, Multiple Receivers, Heterogeneous Beliefs |
| JEL: | C72 D83 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:16/08&r=mic |
| By: | Ely, Jeffrey; Garrett, Daniel F.; Hinnosaar, Toomas |
| Abstract: | We consider optimal pricing policies for airlines when passengers are uncertain at the time of ticketing of their eventual willingness to pay for air travel. Auctions at the time of departure efficiently allocate space and a profit maximizing airline can capitalize on these gains by overbooking ights and repurchasing excess tickets from those passengers whose realized value is low. Nevertheless profit maximization entails distortions away from the efficient allocation. Under regularity conditions, we show that the optimal mechanism can be implemented by a modified double auction. In order to encourage early booking, passengers who purchase late are disadvantaged. In order to capture the information rents of passengers with high expected values, ticket repurchases at the time of departure are at a subsidized price, sometimes leading to unused capacity. |
| Keywords: | airlines, overbooking, revenue management, dynamic mechanism design |
| JEL: | D42 D44 D82 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:30570&r=mic |
| By: | Ronald Wolthoff (University of Toronto); Pieter Gautier (VU University Amsterdam); Xiaoming Cai (VU University Amsterdam) |
| Abstract: | In a market in which sellers compete for heterogeneous buyers by posting mechanisms, we analyze how the properties of the meeting technology affect the allocation of buyers to sellers. We show that exclusive markets (i.e. a separate submarket for each type of buyer) are the efficient outcome if and only if meetings are bilateral. In contrast, an inclusive market (i.e. a single market in which all buyer types pool) is optimal if and only if the meeting technology satisfies a novel condition, which we call joint concavity." Both outcomes can be decentralized by sellers posting auctions combined with a fee that is paid by (or to) all buyers with whom the seller meets. Finally, we compare joint concavity to two other properties of meeting technologies, invariance and non-rivalry, and explain the differences. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:262&r=mic |
| By: | Raouf Boucekkine (Aix-Marseille Université (AMSE), CNRS and EHESS; Senior member, Institut Universitaire de France); Noël Bonneuil (Institut national d’études démographiques, and Ecole des hautes études en sciences sociales) |
| Abstract: | Two countries produce goods and are penalized by the common pollution they generate. Each country maximizes an inter-temporal utility criterion, taking account of the pollution stock to which both contribute. The dynamic is in continuous time with possible sudden switches to less polluting technologies. The set of Nash equilibria, for which solutions also remain in the set of constraints, is the intersection of two manifolds in a certain state space. At the Nash equilibrium, the choices of the two countries are interdependent: different productivity levels after switching lead the more productive country to hasten and the less productive to delay the switch. In the absence of cooperation, efforts by one country to pollute less motivate the other to pollute more, or encourage the country that will be cleaner or less productive country after switching to delay its transition. |
| Keywords: | Pollution, Dynamic game, Nash, Viability theory. |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1624&r=mic |
| By: | Aniko Ory (Cowles Foundation, Yale University) |
| Abstract: | The Internet allows sellers to track “window shoppers,” consumers who look but do not buy, and to lure them back later by targeting them with an advertised sale. This new technology thus facilitates intertemporal price discrimination, but simultaneously makes it too easy for a seller to undercut her regular price. Because buyers know they could be lured back, the seller is forced to set a lower regular price. Advertising costs can, therefore, serve as a form of commitment: a seller can actually benefit from higher costs of advertising. Based on this framework, the impact of commitment on prices, profits, and welfare are analyzed using a dynamic pricing model. Furthermore, it is demonstrated how buyers’ time preferences give rise to price fluctuation or an everyday-low-price in equilibrium. |
| Keywords: | Advertising, Coases conjecture, commitment, dynamic pricing, intertemporal price discrimination, online markets, everyday-low-pricing |
| JEL: | D11 D21 D42 D90 L11 L12 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2047&r=mic |
| By: | Semyon MALAMUD (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute) |
| Abstract: | Carroll and Kimball (1996) show that the consumption function for an agent with time-separable, isoelastic preferences is concave in the presence of income uncertainty. In this paper I show that concavity breaks down if we abandon time-separability. Namely, if an agent maximizing an isoelastic recursive utility has preferences for early resolution of uncertainty, there always exists a distribution of income risk such that consumption function is not concave in wealth. I also derive sufficient conditions guaranteeing that the consumption function is concave if the agent has preferences for late resolution of uncertainty. |
| Keywords: | consumption, saving, marginal propensity to consume, recursive preferences, resolution of uncertainty |
| JEL: | D14 D91 E21 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1437&r=mic |
| By: | Garrett, Daniel F. |
| Abstract: | We study the profit-maximizing price path of a monopolist selling a durable good to buyers who arrive over time and whose values for the good evolve stochastically. The setting is completely stationary with an infinite horizon. Contrary to the case with constant values, optimal prices fluctuate with time. We argue that consumers'randomly changing values offer an explanation for temporary price reductions that are often observed in practice. |
| JEL: | D82 L12 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:30568&r=mic |
| By: | Rhodes, Andrew; Wilson, Chris M |
| Abstract: | There is widespread evidence that some firms use false advertising to overstate the value of their products. We consider a model in which a policymaker is able to punish such false claims. We characterize an equilibrium where false advertising actively influences rational buyers, and analyze the effects of policy under different welfare objectives. We establish precise conditions where policy optimally permits a positive level of false advertising, and show how these conditions vary intuitively with demand and market parameters. We also consider the implications for product investment and industry self-regulation, and connect our results to the literature on demand curvature. |
| Keywords: | Misleading Advertising; Product Quality; Pass-through; Self-Regulation |
| JEL: | D83 L15 M37 |
| Date: | 2016–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72693&r=mic |
| By: | Luis A. Alcal\'a |
| Abstract: | A model of collective decisions made by a finite number of agents with constant but heterogeneous discount factors is developed. Collective utility is obtained as the weighted sum of all individual utilities with time-varying weights. It is shown that under standard separability assumptions, collective preferences may be nonstationary but still satisfy time consistency. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1607.02688&r=mic |
| By: | Yuichiro Kamada (Haas School of Business, University of California Berkeley); Aniko Ory (Cowles Foundation, Yale University) |
| Abstract: | We incorporate word of mouth (WoM) in a classic Maskin-Riley contracting problem, allowing for referral rewards to senders of WoM. Current customers’ incentives to engage in WoM can affect the contracting problem of a firm in the presence of positive externalities of users. We fully characterize the optimal contract scheme and provide other comparative statics. In particular, we show that offering a free contract is optimal only if the fraction of premium users in the population is small. The reason is that by offering a free product, the firm can incentivize senders to talk by increasing expected externalities that they receive and this can (partly) substitute for paying referral rewards only if there are few premium customers. This result is consistent with the observation that companies that successfully offer freemium contracts oftentimes have a high percentage of free users. |
| Keywords: | Word-of-mouth, referral rewards, freemium, contract theory |
| JEL: | D82 L21 M3 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2048&r=mic |
| By: | Santiago Moreno-BROMBERG (University of Zurich - Department of Banking and Finance); Guillaume ROGER (University of Sydney - School of Economics) |
| Abstract: | We study a dynamic contracting problem in which size is relevant. The agent may take on excessive risk to enhance short-term gains, which exposes the principal to large, infrequent losses. To preserve incentive compatibility, the optimal contract uses size as an instrument; there is downsizing on the equilibrium path. The contract may be implemented using the full array of financial securities or as a regulation contract with a leverage ratio. We show that holding equity is essential to curb risk taking. Firms that are less prone to risk taking can afford a higher leverage. |
| Keywords: | asymmetric information; dynamic contracts; moral hazard; risk taking |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1564&r=mic |
| By: | Zaporozhets, Vera |
| Abstract: | We study a simple in?uence game, in which a lobby tries to manipulate the decision of a legislature via monetary o¤ers to one or more members. We compute the minimum budget needed for the lobby to pass the bill and the distribution of this budget between the legislators. We also show the connection of the problem to the combinatorial optimization. |
| Keywords: | Legislative lobbying; Combinatorial optimization; Knapsack problem |
| JEL: | C61 D71 D72 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:30553&r=mic |
| By: | Mindy X. Zhang (University of Texas at Austin); Qi Sun (Shanghai University of Finance and Economics) |
| Abstract: | Firms nance intangible investment through employee compensation contracts. In a dynamic model in which intangible capital is embodied in a rm's employees, we analyze the rm's optimal decisions of intangible investment, employee compensation contracts, and nancial leverage. Employee nancing is achieved by delaying wage payments in the form of future claims. We document that intangible capital investment is highly correlated with employee nancing, but not with debt issuance or regular equity renancing. In the quantitative analysis, we show that this new channel of employee nancing can explain the cross-industry dierences in leverage and nancing patterns. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:230&r=mic |