nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒09‒04
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Games with Money and Status: How Best to Incentivize Work By Pradeep Dubey; John Geanakoplos
  2. Uniqueness and Stability of Equilibrium in Economies with Two Goods By John Geanakoplos; Kieran Walsh
  3. A Theory of Community Formation and Social Hierarchy By Susan Athey; Emilio Calvano; Saumitra Jha
  4. Dynamic Model of the Individual Consumer By Craig McLaren
  5. Arrovian Efficiency in Allocation of Discrete Resources By Marek Pycia; M. Utku Ünver
  6. Optimal Illusion of Control and Related Perception Biases By Gossner, Olivier; Steiner, Jakub
  7. A Comment on Revealed Preference with a Subset of Goods By Paul van Bruggen
  8. What renders financial advisors less treacherous? On commissions and reciprocity By Vera Angelova; ;
  9. "The Anglo-Dutch Auction" By Daniel Marszalec
  10. Do the Joneses make you financially vulnerable? By Barnett, Richard; Bhattacharya, Joydeep; Bunzel, Helle
  11. Financial Safety Nets By Bengui, Julien; Bianchi, Javier; Coulibaly, Louphou
  12. Democracy, redistribution and optimal tax structures By Santanu Gupta; Raghbendra Jha
  13. An Equilibrium Selection Theory of Monopolization By Eckert, Andrew; Klumpp, Tilman; Su, Xuejuan
  14. Signaling to Experts By Florian Scheuer; Pablo Kurlat
  15. The Marginal Voter's Curse By Herrera, Helios; Llorente-Saguer, Aniol; McMurray, Joseph C.
  16. A Model of Biased Intermediation By de Cornière, Alexandre; Taylor, Greg

  1. By: Pradeep Dubey (SUNY); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: Status is greatly valued in the real world, yet it has not received much attention from economic theorists. We examine how the owner of a firm can best combine money and status to get her employees to work hard for the least total cost. We find that she should motivate workers of low skill mostly by status and high skill mostly by money. Moreover, she should do so by using a small number of titles and wage levels. This often results in star wages to the elite performers. By analogy, the governance of a society should pay special attention to the status concerns of ordinary citizens, which may often be accomplished by reinforcing suitable social norms.
    Keywords: Status, Incentives, Wages
    JEL: C70 I20 I30
    Date: 2016–08
  2. By: John Geanakoplos (Cowles Foundation, Yale University); Kieran Walsh (University of Virginia; Darden School of Business)
    Abstract: We offer new sufficient conditions ensuring demand is downward sloping local to equilibrium. It follows that equilibrium is unique and stable in the sense that rising supply implies falling prices. In our setting, there are two goods, which we interpret as consumption in different time periods, and many impatience types. Agents have the same Bernoulli utility function, but the types differ arbitrarily in time preference. Our main result is that if endowments are identical and utility displays nonincreasing absolute risk aversion, then market demand is strictly downward sloping local to equilibrium. We discuss implications for the Diamond-Dybvig literature.
    Keywords: uniqueness of equilibrium, absolute risk aversion, excess demand functions, stability of equilibrium, Diamond-Dybvig models
    JEL: C62 D51 D58
    Date: 2016–08
  3. By: Susan Athey (Stanford GSB); Emilio Calvano (Università di Bologna and CSEF); Saumitra Jha (Stanford GSB)
    Abstract: We analyze the classic problem of sustaining trust when cheating and leaving trading partners is easy, and outside enforcement is difficult. We construct equilibria where individuals are loyal to smaller groups – communities - that allow repeated interaction. Hierarchies provide incentives for loyalty and allow individuals to trust agents to extent that the agents are actually trustworthy. We contrast these with other plausible institutions for engendering loyalty that require inefficient withholding of trust to support group norms, and are not robust to coalitional deviations. In communities whose members randomly match, we show that social mobility within hierarchies falls as temptations to cheat rise. In communities where individuals can concentrate their trading with pre-selected members, hierarchies where senior members are favored for trade sustain trust even in the presence of proximate non-hierarchical communities. We link these results to the emergence of trust in new market environments and early human societies
    Date: 2016–08–26
  4. By: Craig McLaren (Department of Economics, University of California Riverside)
    Abstract: This paper presents an alternative formulation of consumer theory that allows consumer behavior to be modeled as a dynamic process. Rather than simply predicting the optimal choices a consumer will make, this formulation provides a time dependent process by which the consumer arrives at equilibrium with the market and maintains stability with it. This formulation is built upon multivariate integral (vector) calculus and is formally analogous to the theory of electric fields in classical physics. This approach allows the consumer’s Marginal Rates of Substitution (MRS) to be accepted as a theoretical given, rather than derived from hypothetical quantities such as utility or preference. Using a basic set of axioms, a vector function giving the consumer’s (observable) Marginal Values is defined from his (her) MRS. Using an additional axiom regarding the reciprocity of substitute and/or complementary goods, a scalar Use Value function is defined as the integral of the Consumer’s Marginal Values using Stokes’ Theorem. While functionally equivalent to utility, the consumer’s Use Value is measurable and unique to constants of integration that correspond to observable quantities. With an additional assumption that guarantees convexity of Use Value’s isotimic surfaces, the formulation developed here is used to solve the traditional consumer choice problem. It is shown that, whenever the consumer holds a bundle of goods that is not his or her “optimal†one, the consumer will undergo a tatonnement–like process consisting of a series of incremental exchanges with the market until her optimal bundle is obtained.
    Keywords: Dynamic Consumer Theory, Integrability, Convex Indifference Surface, Engle’s Law, Antonelli Conditions, Marginal Demand, Willingness to Pay, Contingent Valuation, Vector Analysis, general equilibrium, existence, stability, tatonnement
    JEL: B21 B41 C50 C60 D01 D11 D50
    Date: 2015–07
  5. By: Marek Pycia (UCLA); M. Utku Ünver (Boston College)
    Abstract: Efficiency in the Pareto sense and strategy-proofness have been the central design desiderata in market design for allocation of discrete resources, such as dorm allocation, school choice, and kidney exchange. However, more precise efficiency objectives, such as welfare maximization, have been neglected. In a setting where heterogeneous indivisible goods are being allocated without monetary transfers and each agent has a unit demand, we use Arrovian efficiency as the notion of welfare optimization and show that a mechanism is individually strategy-proof and Arrovian efficient, i.e., it always selects the best outcome with respect to some Arrovian social welfare function, if and only if the mechanism is group strategy-proof and Pareto efficient. If the Arrovian social welfare function completely ranks all matchings, then the individually strategy-proof and Arrovian-efficient mechanisms are almost sequential dictatorships.
    Keywords: Individual strategy-proofness, group strategy-proofness, Pareto efficiency, Arrovian preference aggregation, matching, no-transfer allocation and exchange
    JEL: C78 D78
    Date: 2016–08–24
  6. By: Gossner, Olivier; Steiner, Jakub
    Abstract: We study perception biases arising under second-best perception strategies. An agent correctly observes a parameter that is payoff-relevant in many decision problems that she encounters in her environment but is unable to retain all the information until her decision. A designer of the decision process chooses a perception strategy that determines the distribution of the perception errors. If some information loss is unavoidable due to cognition constraints, then (under additional conditions) the optimal perception strategy exhibits the illusion of control, overconfidence, and optimism.
    Keywords: Information Processing; overconfidence; perception
    Date: 2016–08
  7. By: Paul van Bruggen (Erasmus University Rotterdam, the Netherlands)
    Abstract: Varian (1988) introduced an important proposition regarding restrictions on consumption data if observations of the quantities of a good are missing. In this paper, a simple counterexample is presented to show that the original proof is incorrect, and a new proof is provided. The new proof is not based on choosing the missing quantities such that some bundles are revealed preferred to others, but rather on choosing the unknown quantities such that bundles are not revealed preferred to any bundle with a higher index.
    Keywords: Nonparametric analysis; revealed preference; missing observations; GARP
    JEL: C14 D11
    Date: 2016–08–30
  8. By: Vera Angelova; ;
    Abstract: Abstract: An advisor is supposed to recommend a nancial product in the best interest of her client. However, the best product for the client may not always be the product yielding the highest commission to the advisor. Do advisors nevertheless provide truthful advice? If not, will a voluntary or obligatory upfront payment by clients induce more truthful advice? According to the results, both types of payment lead to more truthful advice. More generally, in a senderreceiver game with con ict of interest, an upfront payment to the sender by the receiver improves information transmission.
    JEL: C91 D82 D03 L15 M52
    Date: 2016–08
  9. By: Daniel Marszalec (Faculty of Economics, The University of Tokyo)
    Abstract: I analyze discrete-valuation model of the Anglo-Dutch auction with exogenous entry and derive a complete ranking between this auction and its components - the ascending and rst-price auctions. I nd that the Anglo-Dutch auction can revenue-dominate for a small set of parameters, and similarly ranks revenue-last in a small number of cases. For most parameter values the Anglo-Dutch auction ranks as intermediate. I also show that the auction performs particularly well when bidders face small entry costs and almost- common values.
    Date: 2016–08
  10. By: Barnett, Richard (School of Economics Drexel University); Bhattacharya, Joydeep (Department of Economics Iowa State University); Bunzel, Helle (Department of Economics Iowa State University)
    Abstract: This paper studies a model economy populated with agents of differing incomes that get a utility boost when their consumption keeps up with their neighbors, the proverbial Joneses. The resulting utility function is non-concave. In this setup, participation in a fair consumption lottery has the potential to make some agents ex-ante better off but more financially vulnerable. More people of different incomes join the lottery pool when the ‘kick’ from keeping up increases. Worsening income inequality may increase the number of financially vulnerable people. The analysis offers broad-brushstroke insights into the connection between inequality and financial vulnerability. This paper studies a model economy populated with agents of differing incomes that get a utility boost when their consumption keeps up with their neighbors, the proverbial Joneses. The resulting utility function is non-concave. In this setup, participation in a fair consumption lottery has the potential to make some agents ex-ante better off but more financially vulnerable. More people of different incomes join the lottery pool when the ‘kick’ from keeping up increases. Worsening income inequality may increase the number of financially vulnerable people. The analysis offers broad-brushstroke insights into the connection between inequality and financial vulnerability.
    Keywords: Keeping up with the Joneses; consumption externalities; non-concave utility; lotteries; inequality
    JEL: D01 R21
    Date: 2016–08–31
  11. By: Bengui, Julien (Université de Montréal); Bianchi, Javier (Federal Reserve Bank of Minneapolis); Coulibaly, Louphou (Université de Montréal)
    Abstract: In this paper, we study the optimal design of financial safety nets under limited private credit. We ask when it is optimal to restrict ex ante the set of investors that can receive public liquidity support ex post. When the government can commit, the optimal safety net covers all investors. Introducing a wedge between identical investors is inefficient. Without commitment, an optimally designed financial safety net covers only a subset of investors. Compared to an economy where all investors are protected, this results in more liquid portfolios, better social insurance, and higher ex ante welfare. Our result can rationalize the prevalent limited coverage of safety nets, such as the lender of last resort facilities.
    Keywords: Bailouts; Safety nets; Time inconsistency; Public liquidity provision
    JEL: E58 E61 G28
    Date: 2016–08–25
  12. By: Santanu Gupta; Raghbendra Jha
    Abstract: In a probabilistic voting model with three jurisdictions and residents with different incomes, we analyze inefficiencies in local public good allocation that emerge from trying to satisfy the median voter. The median voter and the rich may gain but the poor lose out. We analyze a uniform tax rate and progressive two and three bracket tax structures. If the government extracts part of tax revenues as political rents and maximizes expected payoff there is a possibility of taxing away all private income with no allocation of public good, if electoral uncertainty is high, especially when the government is risk neutral.
    Keywords: median voter, local public good, income redistribution
    JEL: H11 H50
    Date: 2016
  13. By: Eckert, Andrew (University of Alberta, Department of Economics); Klumpp, Tilman (University of Alberta, Department of Economics); Su, Xuejuan (University of Alberta, Department of Economics)
    Abstract: We develop a duopoly model in which firms compete for the market (e.g., investing in process innovation or product development) as well as in the market (e.g., setting quantities or prices). Competition for the market generates multiple equilibria that differ in the firms' investment levels, relative size, and profi tability. We show that monopolization that affects competition in the market can act as an equilibrium selection device in competition for the market. In particular, it eliminates equilibria that are undesirable for the monopolizing rm, while not generating new equilibria. This result complicates the task of determining whether a rm's dominance in a given market is the result of fair competition or unlawful monopolization. We discuss a number of implications for antitrust policy and litigation, and illustrate these by means of two well-known antitrust cases.
    Keywords: Monopolization; antitrust; multiple equilibria; indeterminacy; firm behavior
    JEL: D40 K20 L40
    Date: 2016–08–29
  14. By: Florian Scheuer (Stanford University); Pablo Kurlat (Stanford University)
    Abstract: We study an otherwise standard education signaling economy with one additional feature: some of the potential employers can (imperfectly) observe workers' types directly. We propose a definition of competitive equilibrium for such an economy. The separating allocation is an equilibrium, in which employer's direct observation is irrelevant. However, there is another equilibrium where more informed employers hire high type workers with no education and pay lower wagers.
    Date: 2016
  15. By: Herrera, Helios; Llorente-Saguer, Aniol; McMurray, Joseph C.
    Abstract: This paper proposes a rational model of voter participation by generalizing a common-value model of costless voting to include not just pivotal voting but also marginal voting incentives. A new strategic incentive for abstention arises in that case, to avoid the marginal voter's curse of pushing the policy outcome in the wrong direction. The marginal voter's curse presents a larger disincentive for voting than the swing voter's curse. Moreover, marginal motivations are shown to dominate pivotal motivations in large elections. Model predictions are confirmed in a laboratory experiment and applied in a comparative analysis of electoral rules.
    Keywords: Experiment; information aggregation; Turnout; Underdog effect
    JEL: C72 C92 D70
    Date: 2016–08
  16. By: de Cornière, Alexandre; Taylor, Greg
    Abstract: This paper studies situations in which some consumers rely on a potentially biased intermediary to choose among downstream firms. We introduce the notion that firms' and consumers' payoffs can be congruent or conflicting, and show that this has important implications for the effects of bias. Under congruence, the firm towards which the intermediary is biased invests more than its rival and consumers can be better-off than under no bias. Under conflict, bias hurts consumers and the favored firm charges higher prices. We study various oft-proposed policies for dealing with a biased intermediary and show that the efficacy of each intervention depends strongly on whether the environment exhibits congruence or conflict. We discuss how the model relates to recent issues in online markets.
    Keywords: bias; intermediary; regulation
    JEL: D21 L15 L40
    Date: 2016–08

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