nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒09‒18
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Product Differentiation with Multiple Qualities By F. Barigozzi; C. A. Ma
  2. Random Categorization and Bounded Rationality By Victor H. Aguiar
  3. Truth-Tracking Judgment Aggregation Over Interconnected Issues By Irem Bozbay
  4. A Bayesian implementable social choice function may not be truthfully implementable By Wu, Haoyang
  5. Vertical conflict of interest and horizontal inequities By Sémirat, S.
  6. The Category of Node-and-Choice Preforms for Extensive-Form Games By Peter A. Streufert
  7. Too good to be truthful: Why competent advisers are fired By Christoph Schottmüller
  8. Two-Stage Contests with Preferences over Style By David Wettstein; Todd R. Kaplan
  9. The Advantage of Dual Discrimination in Lottery Contest Games By MEALEM, Yosef; NITZAN, Shmuel; UI, Takashi
  10. Multiple Lenders, Strategic Default and Covenants By Jean Paul Decamps; Catherine Casamatta; Arnold Chassagnon; Andrea Attar
  11. Optimal Prizes By Pradeep Dubey; Siddhartha Sahi
  12. Continuous Quasi-Hyperbolic Discounting By Craig Webb
  13. Correlated accidents By L. A. Franzoni

  1. By: F. Barigozzi; C. A. Ma
    Abstract: We study subgame-perfect equilibria of the classical quality-price, multistage game of vertical product differentiation. Each firm can choose the levels of an arbitrary number of qualities. Consumers’ valuations are drawn from independent and general distributions. The unit cost of production is increasing and convex in qualities. We characterize equilibrium prices, and the equilibrium effects of qualities on the rival’s price in the general model. We present necessary and sufficient conditions for equilibrium differentiation in any of the qualities.
    JEL: D43 L13
    Date: 2016–09
  2. By: Victor H. Aguiar (University of Western Ontario)
    Abstract: In this study we introduce a new stochastic choice rule that categorizes objects in order to simplify the choice procedure. At any given trial, the decision maker deliberately randomizes over mental categories and chooses the best item according to her utility function within the realized consideration set formed by the intersection of the mental category and the menu of alternatives. If no alternative is present both within the considered mental category and within the menu the decision maker picks the default option. We provide the necessary and sufficient conditions that characterize this model in a complete stochastic choice dataset in the form of an acyclicicity restriction on a stochastic choice revealed preference and other regularity conditions. We recover the utility function uniquely up to a monotone transformation and the probability distribution over mental categories uniquely. This model is able to accommodate violations of IIA (independence of irrelevant alternatives), of stochastic transitivity, and of the Manzini-Mariotti menu independence notion (i-Independence). A generalization of the categorizing procedure accommodates violations of regularity and thus provides an alternative model to random utility.
    Keywords: Decision Theory; Random Choice; Bounded Rationality; Categorization; Consideration Sets
    JEL: C60 D10
    Date: 2016
  3. By: Irem Bozbay (University of Surrey)
    Abstract: This paper analyses the problem of aggregating judgments over multiple interconnected issues. Voters share a common preference for reaching true collective judgments, but hold private information about what the truth might be. Information conflicts may occur both between and within voters. Following Bozbay, Dietrich and Peters (2014), we assume strategic voting in a Bayesian voting game setting and we want to determine voting rules which induces an ecient Bayesian Nash equilibrium in truthful strategies, hence lead to collective judgments that efficiently incorporate all private information. Unlike in judgment aggregation problems with two independent issues where it is always possible to aggregate information eciently, efficient information aggregation is not always possible with interconnected issues. We characterize the (rare) situations in which such rules exist, as well as the nature of these rules.
    JEL: C70 D70 D71 D80 D82
    Date: 2015–06
  4. By: Wu, Haoyang
    Abstract: The revelation principle is a fundamental theorem in many economics fields such as game theory, mechanism design and auction theory etc. In this paper, I construct an example to show that a social choice function which can be implemented in Bayesian Nash equilibrium is not truthfully implementable. The key point is that agents pay cost in the indirect mechanism, but pay nothing in the direct mechanism. As a result, the revelation principle may not hold when agent's cost cannot be neglected in the indirect mechanism.
    Keywords: Revelation principle; Game theory; Mechanism design; Auction theory
    JEL: D70
    Date: 2016–09–11
  5. By: Sémirat, S.
    Abstract: We analyze a cheap talk game, à la Crawford and Sobel, in a two dimensional framework, with uniform prior, quadratic preferences and binary signaling rule. Credible information is revealed from the Sender to the Receiver when the conflict of interest vanishes through the alternative issues. The literature has focused on symmetrical equilibria and their sustainability upon limited exogenous asymmetry in preferences. We exhibit a second type of equilibrium, with endogenous asymmetry with respect to the revealed information. This type of equilibrium occurs with or without conflict of interest between the players, and is introduced by the multi-dimensionality. However, the conflict of interest conditions the design of decisions and their intrinsic meaning. Finally, we derive the existence of an influential equilibria for any conflict of interest.
    JEL: D82 D84 D63
    Date: 2016
  6. By: Peter A. Streufert (University of Western Ontario)
    Abstract: It would be useful to have a category of extensive-form games whose isomorphisms specify equivalences between games. Since working with entire games is too large a project for a single paper, I begin here with preforms, where a “preform” is a rooted tree together with choices and information sets. My first contribution is to introduce a compact preform specification called a “node-and-choice” preform. This specification’s compactness allows me to introduce tractable morphisms which map one node-and-choice preform to another. I incorporate these morphisms into a category called the “category of node-and-choice preforms”. Finally, I characterize the isomorphisms of this category.
    Date: 2016
  7. By: Christoph Schottmüller (Department of Economics, University of Copenhagen)
    Abstract: A decision maker repeatedly asks an adviser for advice. The adviser is either competent or incompetent and his preferences are not perfectly aligned with the decision maker's preferences. Over time the decision maker learns about the adviser's type and fires him if he is likely to be incompetent. If the adviser's reputation for being competent improves, it is more attractive for him to push his own agenda because he is less likely to be fired for incompetence. Consequently, competent advisers are also fired with positive probability. Firing is least likely if the decision maker is unsure about the adviser's type.
    Keywords: advice, cheap talk, reputation
    JEL: C73 D83 G24
    Date: 2016–09–12
  8. By: David Wettstein (BGU); Todd R. Kaplan (University of Haifa)
    Keywords: contests, innovation, all-pay auctions, mechanism design.
    JEL: C70 D44 L12 O32
    Date: 2016
  9. By: MEALEM, Yosef; NITZAN, Shmuel; UI, Takashi
    Abstract: In a simple class of contest games, the designer can combine two types of discrimination: a change of the contestants' prize valuations subject to a balanced-budget constraint (direct discrimination), as well as a bias of the impact of their efforts (structural discrimination). Applying dual discrimination, the designer reduces (increases) the higher (lower) prize value up to a mimimal (maximal) level, but suitably increases (reduces) the corresponding prize share. Our main result establishes that in some cases this dual discrimination is advantageous and can yield almost the maximal possible efforts - the highest valuation of the contested prize. The efforts in our setting can therefore be larger than those obtained under alternative contests with optimal structural discrimination. This is true in particular with respect to the optimally biased simple N-player lottery, Franke et al. (2013). In contrast to the main findings in Franke et al. (2014a, 2014b), in our setting, efforts under the simple lottery are not necessarily smaller than those under an optimally biased N-player all-pay auction. Finally, the exclusion principle noted in Baye et al. (1999) – the elimination of the strongest player - is not valid under dual discrimination.
    Keywords: contest design, dual discrimination, direct discrimination, balanced-budget-constraint, structural discrimination.
    JEL: D70 D72 D74 D78
    Date: 2016–09
  10. By: Jean Paul Decamps (Toulouse School of Economics); Catherine Casamatta (Toulouse School of Economics); Arnold Chassagnon (Paris School of Economics); Andrea Attar (Toulouse School of Economics and University of Roma Tor Vergata)
    Abstract: We study capital markets subject to moral hazard when investors cannot prevent side trading, thereby facing an externality if firms raise funds from multiple sources. We analyze whether investors’ ability to design financial covenants that may include exclusivity clauses mitigates this externality. Following covenant violations, investors can accelerate the repayment of their loan, adjust its size, or increase interest rates. Enlarging contracting opportunities generates a severe market failure: with covenants, equilibria are indeterminate and Pareto ranked. We show that an investors-financed subsidy scheme to entrepreneurs alleviates the incentive to overborrow and sustains the competitive allocation as the unique equilibrium one.
    Date: 2016
  11. By: Pradeep Dubey; Siddhartha Sahi
    Date: 2016
  12. By: Craig Webb
    Date: 2016
  13. By: L. A. Franzoni
    Abstract: This paper investigates cases in which harms are statistically correlated. When parties are risk averse, correlation plays an important role in the choice between liability rules. Specifically, positively correlated harms favor a liability rule that spreads the risk over a multitude of parties, as in the negligence rule. Negatively correlated harms favor a liability rule that pools risks together, as in strict liability. The same applies when parties can purchase costly insurance (first party or third party). This policy recommendation is in line with current products liability law, which places design defects and warning failures under a de facto negligence regime.
    JEL: K13
    Date: 2016–08

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