nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒08‒28
twelve papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Choice and Competition in Public Service Provision By Timothy Besley; James M. Malcolmson
  2. Information Acquisition, Referral, and Organization By Simona Grassi; Ching-to Albert Ma
  3. Quality and Competition between Public and Private Firms By Liisa Laine; Ching-to Albert Ma
  4. Procurement with specialized firms By Boone, Jan; Schottmuller, C.
  5. Protocol Invariance and the Timing of Decisions in Dynamic Games By Doraszelski, Ulrich; Escobar, Juan
  6. Marketmaking Middlemen By Gautier, Pieter A.; Hu, Bo; Watanabe, Makoto
  7. Sorting in Iterated Incumbency Contests By Samuel Häfner; Georg Nöldeke
  8. Collective Intertemporal Choice: the Possibility of Time Consistency By Antony Millner; Geoffrey Heal
  9. Dividing Goods or Bads Under Additive Utilities By Anna Bogomolnaia; Herve Moulin; Fedor Sandomirskiy; Elena Yanovskaya
  10. Horizontal and Vertical Tax Interactions in a Common Agency Game By Florence LACHET-TOUYA
  11. Signaling and Opitmal Sorting By Tim Perri
  12. Axioms for Salience Perception By Jonathan W. Leland; Mark Schneider; Jonathan Leland

  1. By: Timothy Besley; James M. Malcolmson
    Abstract: In spite of a range of policy initiatives in sectors such as education, health care and legal services, whether choice and competition is valuable remains contested territory. This paper studies the impact of choice and competition on different dimensions of quality, examining the role of not-for-profit providers. We explore two main factors which determine whether an alternative provider enters the market: cost efficiency and the preferences of an incumbent not-for-profit provider (paternalism). The framework developed can incorporate standard concerns about the downside of choice and competition when consumer choice is defective (an internality) or choice imposes costs on those who do not switch (an externality). The paper considers optimal funding levels for incumbents and entrants showing when the "voucher" provided for consumers to move to the incumbent should be more or less generous than the funding for consumers who remain with the incumbent. Finally, the model also offers an insight into why initiatives are frequently opposed by incumbent providers even if the latter have not-for-profit objectives.
    Keywords: choice, competition, public Service, not-for-profit
    JEL: H11 H44 L21 L31
    Date: 2016–08
  2. By: Simona Grassi (UniversitÈ de Lausanne); Ching-to Albert Ma (Boston University)
    Abstract: Each of two experts may provide a service to a client. Expertsícost comparative advantage depends on an unknown state, but an expert may exert effort to get a private signal about it. In a market, an expert may refer the client to the other for a fee. In equilibrium, only one expert exerts effort and refers, and the equilibrium allocation is ine¢ cient. Referral e¢ ciency can be restored when experts form an organization, in which a referring expert must bear the referred expertís cost. However, the referred expert shirks from work effort because of the lack of cost responsibility.
    Keywords: information acquisition, referral, organization, adverse selection, cost-reduction incentive
    JEL: D00 D02 D80 D83
    Date: 2016–02
  3. By: Liisa Laine (University of Jyvaskyla); Ching-to Albert Ma (Boston University)
    Abstract: We study a multi-stage, quality-price game between a public firm and a private firm. The market consists of a set of consumers who have di§erent quality valuations. A public firm aims to maximize social surplus, whereas the private firm maximizes profit. In the first stage, both firms simultaneously choose qualities. In the second stage, both firms simultaneously choose prices. Consumers' qualty valuations follow a general distribution. Firms' unit production cost is a an increasing and convex function of quality. There are multiple equilibria. In some, the public firm chooses a low quality, and the private firm chooses a high quality. In others, the opposite is true. We characterize subgame-perfect equilibria, and provide conditions on consumer valuation distribution for first-best equilibrium qualities. Various policy implications are drawn.
    Keywords: price-quality competition, quality, public firm, private firm
    JEL: D4 L1 L2 L3
    Date: 2016–03
  4. By: Boone, Jan (Tilburg University, School of Economics and Management); Schottmuller, C. (Tilburg University, School of Economics and Management)
    Abstract: We analyze optimal procurement mechanisms when firms are specialized. The procurement agency has incomplete information concerning the firms' cost functions and values high quality as well as low price. Lower type firms are cheaper (more expensive) than higher type firms when providing low (high) quality. With specialized firms, distortion is limited and a mass of types earns zero profits. The optimal mechanism can be inefficient: types providing lower second-best welfare win against types providing higher second-best welfare. As standard scoring rule auctions cannot always implement the optimal mechanism, we introduce a new auction format implementing the optimal mechanism.
    Date: 2016
  5. By: Doraszelski, Ulrich; Escobar, Juan
    Abstract: The timing of decisions is an essential ingredient in modelling any strategic situation. Yet, determining the most realistic and appropriate protocol of moves can be challenging. We introduce a class of dynamic stochastic games that we call separable dynamic games with noisy transitions and establish that they are protocol invariant provided that periods are sufficiently short. Protocol invariance means that the set of Markov perfect equilibria is nearly the same irrespective of the order in which players are assumed to move within a period. We also show that the equilibria have a remarkably simple structure.
    Keywords: Dynamic games; Markov perfect equilibrium; Protocol of moves
    Date: 2016–08
  6. By: Gautier, Pieter A.; Hu, Bo; Watanabe, Makoto
    Abstract: This paper develops a model in which market structure is determined endogenously by the choice of intermediation mode. We consider two representative business modes of intermediation that are widely used in real-life markets: one is a middleman mode where an intermediary holds inventories which he stocks from sellers for the purpose of reselling to buyers; the other is a market-making mode where an intermediary offers a platform for buyers and sellers to trade with each other. In our model, buyers and sellers can simultaneously search in an outside market and use the intermediation service. We show that a marketmaking middleman, who adopts the mixture of these two intermediation modes, can emerge in a directed search equilibrium.
    Keywords: directed search; Marketmakers; Middlemen; Platform
    JEL: D4 G2 L1 L8 R1
    Date: 2016–08
  7. By: Samuel Häfner; Georg Nöldeke (University of Basel)
    Abstract: This paper analyzes iterated incumbency contests with heterogeneous valuations in a large population setting. Incumbents repeatedly face di erent challengers, holding on to their positions until defeated in a contest. Defeated incumbents turn into challengers until they win a contest against an incumbent, thereby regaining an incumbency position. We consider steady-state equilibria of this process and study how and to which extend individuals sort into the incumbency positions depending on their valuations. In particular, we identify sucient conditions for positive sorting, meaning that the share of individuals with a given valuation holding an incumbency position is increasing in the valuation, and provide an example to show that negative rather than positive sorting may arise in equilibrium. Further results show how incumbency rents and sorting are a ected by the frequency at which incumbency is contested and the scarcity of the incumbency positions.
    Keywords: Contests, Sorting, Incumbency Rents, Steady-State Equilibrium
    JEL: C72 D72 D74
    Date: 2016
  8. By: Antony Millner; Geoffrey Heal
    Abstract: Recent work on collective intertemporal choice suggests that non-dictatorial social preferences are generically time inconsistent. We argue that this claim conflates time consistency with two distinct properties of preferences: stationarity and time invariance. While the conjunction of time invariance and stationarity implies time consistency, the converse does not hold. Although social preferences cannot be stationary, they may be time consistent if time invariance is abandoned. If individuals are discounted utilitarians, revealed preference provides no guidance on whether social preferences should be time consistent or time invariant. Nevertheless, we argue that time invariant social preferences are often normatively and descriptively problematic.
    JEL: D60 D71 D90
    Date: 2016–08
  9. By: Anna Bogomolnaia (National Research University Higher School of Economics); Herve Moulin (National Research University Higher School of Economics); Fedor Sandomirskiy (National Research University Higher School of Economics); Elena Yanovskaya (National Research University Higher School of Economics)
    Abstract: The Competitive Equilibrium with Equal Incomes is an especially appealing ecient and envy-free division of private goods when utilities are additive: it maximizes the Nash product of utilities and is single-valued and continuous in the marginal rates of substitution. The CEEI to divide bads captures similarly the critical points of the Nash product in the ecient frontier. But it is far from resolute, allowing routinely many divisions with sharply di erent welfare consequences. Even the much more permissive No Envy property is profoundly ambiguous in the division of bads: the set of ecient and envy-free allocations can have many connected components, and has no single-valued selection continuous in the marginal rates. The CEEI to divide goods is Resource Monotonic (RM): everyone (weakly) bene ts when the manna increases. But when we divide bads eciently, RM is incompatible with Fair Share Guarantee, a much weaker property than No Envy.
    Keywords: fair division of goods, fair division of bads, competitive equilibrium with equal incomes, Nash product, envy-freeness, resource monotonicity, independence of lost bids.
    JEL: D61 D63 D82
    Date: 2016
  10. By: Florence LACHET-TOUYA
    Abstract: The decisions made by one government affect the tax revenue that can be collected by the decisionmakers belonging to the same tier of government or by stacked jurisdictions : externalities arise, the existence and the magnitude of which are closely related to the nature of the tax, to the mobility of the base and to the distribution of tax competence among decisionmakers. Indeed, when same authorities belonging to a same level of government derive their receipts from a mobile tax base, a competition mechanism takes place among them that triggers externalities. Likewise, when different layers of decision-makers exert their taxing power upon a common base, the choices made by one tier affect the receipts that the other governments can collect. As a by-product, this paper proposes a model where both horizontal and vertical interactions are tackled, ?first successively then simultaneously. Uncertainty concerning the base, that is, the amount of capital likely to be invested, is introduced and a generalization of taxation schemes is provided. The analysis shows that horizontal and vertical externalities point towards opposite directions : while horizontal competition leads to ine¢ ciently low rates, the common pool problem arising from the stacking of decisionmakers taxing a same base gives rise to a phenomenon of over-taxation. Besides, the combination of both externalities yields to an intermediary tax rate : the outcome is brought closer to the social optimum.
    Keywords: Vertical and horizontal tax externalities; Informational asymmetry; Tax competition; Common Agency; Nonlinear taxes
    JEL: D72 D82 H23 H30 H32 H71 H77
    Date: 2016–08
  11. By: Tim Perri
    Abstract: I consider education as a discrete signal of inherent ability. More able individuals are more productive in the primary sector, and less able individuals are more productive in the secondary sector. If, absent signaling, all would be in the secondary sector, signaling increases but never maximizes welfare. When all would be in the primary sector without signaling, signaling may increase welfare. Interestingly, signaling is more likely to increase welfare the greater is productivity in the secondary sector, and, possibly, the lower is productivity in the primary sector. Excessive signaling occurs by less able individuals, which is consistent with recent increased undergraduate enrollment in the U.S. If education increases human capital, total welfare likely increases. However, unless all invest in education, the more human capital is increased by education, the greater the number of individuals who over-invest in education. Key Words: Signaling, Sorting
    JEL: D82
    Date: 2016
  12. By: Jonathan W. Leland (National Science Foundation); Mark Schneider (Economic Science Institute, Chapman University); Jonathan Leland (National Science Foundation, Division of Social and Economic Sciences)
    Abstract: Models of salience-based choice have become popular in recent years, although there is still no known set of simple conditions or axioms which implies the existence of a salience function. In this paper, we provide simple and natural axioms that characterize the general class of salience functions. As an application we consider a salience-based model of decision making and show that within that setup the fourfold pattern of risk attitudes is a general property of a salience function and that the properties producing that pattern also account for other anomalies involving risky and intertemporal choice.
    Keywords: Salience; Diminishing Sensitivity; Fourfold Pattern of Risk Attitudes
    JEL: D01 D03 D8 D9
    Date: 2016

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