nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒09‒25
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Prizes versus Contracts as Incentives for Innovation By Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick
  2. Multiple Contracting in Insurance Markets By Thomas Mariotti
  3. Understanding Preferences: “Demand Types”, and the Existence of Equilibrium with Indivisibilities By Elizabeth Baldwin; Paul Klemperer
  4. Push or pull? By David Michael Rietzke; Yu Chen
  5. Prudent Equilibria and Strategic Uncertainty in Discontinuous Games By Philippe Bich
  6. Strategic Arrival Times to Queueing Systems By Breinbjerg, Jesper
  7. Screening multiple potentially false experts By Francisco Barreras; Álvaro J. Riascos
  8. Coexistence of service- and facility-based competition: The relevance of access prices for "make-or-buy"-decisions By Bendery, Christian M.; Goetz, Georg
  9. The effect of sequentiality and heterogeneity in network formation games By Liza Charroin
  10. The Power of Money: Wealth Effects in Contest By Schroyen, Fred; Treich, Nicolas
  11. The refined best reply correspondence and backward induction By Dieter Balkenborg; Josef Hofbauer; Christoph Kuzmics
  12. A counterexample on the completion of preferences with single crossing differences By Kukushkin, Nikolai S.; Quah, John K.-H.; Shirai, Koji
  13. Impossibilities for strategy-proof committee selection mechanisms with vetoes By Martin Van der linden
  14. Supervisory Incentives in a Banking Union By Elena Carletti; Giovanni Dell'Ariccia; Robert Marquez
  15. Coalitional Bargaining with Consistent Counterfactuals By Roberto Burguet; Ramon Caminal
  16. Networks and Markets By Goyal, S.
  17. Narrow Identities By Dasgupta, P.; Goyal, S.

  1. By: Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick
    Abstract: Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator otherwise. A monetary prize is employed as an additional incentive but only when the value of innovation is suficiently high.
    Keywords: Contract rights, Inducement Prizes, Innovation, Procurement and R&D.
    JEL: D44 D82 H57 O31 O38 O39
    Date: 2016–09
  2. By: Thomas Mariotti (Toulouse School of Economics)
    Abstract: We study a model of insurance markets in which multiple contracting endogenously emerges in equilibrium. Different layers of coverage are fairly priced according to the types of consumers who purchase them, giving rise to cross-subsidies between types, but not between contracts. Riskier consumers demand greater total coverage at an increasing unit price, but the contracts offered by firms exhibit quantity discounts. We emphasize the need to regulate the supply side of insurance markets, while consumers can be left free to choose their coverage level.
    Date: 2016
  3. By: Elizabeth Baldwin (London School of Economics); Paul Klemperer (Nuffield College, Oxford University)
    Abstract: We propose new techniques for understanding agents’ valuations. Our classification into “demand types”, incorporates existing definitions (such as substitutes, complements, “strong substitutes”, etc.), and permits additional distinctions. We obtain an easy-to-check necessary and sufficient condition for the existence of a competitive equilibrium for indivisible goods. Our condition generalises many existing results, and provides new insights: contrary to much popular belief, there are more classes of purelycomplements preferences than classes of purely-substitutes preferences for which competitive equilibrium always exists. Our techniques are also powerful when equilibrium cannot be guaranteed from the “demand type”. For a specific set of individual valuations, we often can check for equilibrium existence by simply counting the number of intersection points of the geometric objects we study! Our methods also have applications to matching, and to the Product-Mix Auction, introduced by the Bank of England in response to the financial crisis.
    Keywords: consumer theory; equilibrium existence; general equilibrium; competitive equilibrium; duality; indivisible goods; geometry; tropical geometry; convex geometry; auction; product mix auction; product-mix auction; substitute; complement; demand type; matching
    JEL: C62 D50 D51 D44
    Date: 2015–08–15
  4. By: David Michael Rietzke; Yu Chen
    Abstract: We study a principal-agent model wherein the agent is better informed of the prospects of the project, and the project requires both an observable and unobservable input. We show (1) Performance pay may not be optimal, even if output is the only informative signal of an essential input; (2) Total surplus tends to be higher if one input is unobservable than if both inputs are observable; and (3) Bunching may arise amongst low and intermediate types. We explore the implications for push and pull programs used to encourage R&D activity, but our results have applications beyond this context.
    Keywords: Pay for Performance, Moral Hazard, Adverse Selection, Observable Action, Principal-Agent Problem, Grants, Prizes
    JEL: D82 D86 O31
    Date: 2016
  5. By: Philippe Bich (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: We introduce the new concept of prudent equilibrium to model strategic uncertainty, and prove it exists in large classes of discontinuous games. When the game is better-reply secure, we show that prudent equilibrium refines Nash equilibrium. In contrast with the current literature, we don't use probabilities to model players' strategies and beliefs about other players' strategies. We provide examples (first-price auctions, location game, Nash demand game, etc.) where the prudent equilibrium is the intuitive solution of the game.
    Keywords: prudent equilibrium,Nash equilibrium,refinement,strategic uncertainty,better-reply secure
    Date: 2016–06–24
  6. By: Breinbjerg, Jesper (Department of Business and Economics)
    Abstract: We examine a non-cooperative queueing game where a finite number of customers seek service at a bottleneck facility which opens at a given point in time. The facility servers one customer at a time on a first-come, first-serve basis and the amount of time required to service each customer is identically and independently distributed according to some general probability distribution. The customers must individually choose when to arrive at the facility, and they prefer to complete service as early as possible, while minimizing the time spent waiting in the queue. These preferences are captured by a general utility function which is decreasing in the waiting time and service completion time of each customer. Applications of such queueing games range from people choosing when to arrive at a grand opening sale to travellers choosing when to line up at the gate when boarding an airplane. We develop a constructive procedure that characterizes an arrival strategy which constitutes a symmetric Nash equilibrium and show that there is at most one symmetric equilibrium. We accompany the equilibrium characterization with numerically computed examples of symmetric equilibria induced by a non-multilinear utility function.
    Keywords: Non-cooperative queueing games; strategic arrivals; Nash equilibrium
    JEL: C72 D62 R41
    Date: 2016–09–20
  7. By: Francisco Barreras; Álvaro J. Riascos
    Abstract: A decision maker is presented with a theory from a self proclaimed expert about the probability of occurrence of certain events. The decision maker faces the possibility that the expert is completely ignorant about the data generating process and so she’s interested in mechanisms that allow her to screen informed experts from uninformed ones. The decision maker needs to control for type I error, however, since she’s also uncertain about the true stochastic process, this gives room for uninformed experts to make strategic forecasts and ignorantly pass tests and profit from contracts. We present an original multiple expert model where a contract achieves screening of informed and uninformed experts by means of pitting experts’ predictions against each other. Additionally, we present a theoretical review of the main findings in two branches of literature that attempt to solve the expert screening problem. Namely models about testing experts and models in contract theory that pursue screening of experts.
    Keywords: Testing of multiple experts, manipulation, adverse selection
    Date: 2016–09–10
  8. By: Bendery, Christian M.; Goetz, Georg
    Abstract: This paper models competition between two firms, which provide broadband In-ternet access in regional markets with different population densities. The firms, an incumbent and an entrant, differ in two ways. First, consumers bear costs when switching to the entrant. Second, the entrant faces a make-or-buy decision in each region and can choose between service-based and facility-based entry. The usual trade-off between static and dynamic efficiency does not apply in the sense that higher access fees might yield both, lower retail prices and higher total coverage. This holds despite a strategic effect in the entrant's investment decision. While investment lowers marginal costs in regions with facility-based entry, it intensifies competition in all regions. We show that the cost-reducing potential of investments dominates the strategic effect: Higher access fees increase facility-based competition, decrease retail prices and increase total demand.
    Keywords: Broadband access markets,facility- and service-based entry,investments,economies of density,switching costs
    JEL: D43 L13 L51 L96
    Date: 2015
  9. By: Liza Charroin (Univ Lyon, ENS de Lyon, GATE L-SE UMR 5824, F-69342 Lyon, France)
    Abstract: In the benchmark model of Bala and Goyal (2000) on network formation, the equilibrium network is asymmetric and unfair as agents have different payoffs. While they are prominent in reality, asymmetric networks do not emerge in the lab mainly because of fairness concerns. We extend this model with a sequential linking decision process to ease coordination and with heterogeneous agents. Heterogeneity is introduced with the presence of a special agent who has either a higher monetary value or a different status. The equilibrium is asymmetric and unfair. Our experimental results show that thanks to sequentiality and fairness concerns, individuals coordinate on fair and efficient networks in homogeneous settings. Heterogeneity impacts the network formation process by increasing the asymmetry of networks but does not decrease the level of fairness nor efficiency
    Keywords: Network formation, sequentiality, heterogeneity, fairness, asymmetry
    JEL: C72 C92 D85 Z13
    Date: 2016
  10. By: Schroyen, Fred; Treich, Nicolas
    Abstract: The relationship between wealth and power has long been debated. Nevertheless, this relationship has been rarely studied in a strategic game. In this paper, we study wealth effects in a strategic contest game. Two opposing effects arise: wealth reduces the marginal cost of effort but it also reduces the marginal benefit of winning the contest. We consider three types of contests which vary depending on whether rents and efforts are commensurable with wealth. Our theoretical analysis shows that the effects of wealth are strongly "contestdependent". It thus does not support general claims that the rich lobby more or that low economic growth and wealth inequality spur conflicts.
    Keywords: Conflict, contest, rent-seeking, wealth, risk aversion, lobbying, power, redistribution.
    JEL: C72 D72
    Date: 2016–09
  11. By: Dieter Balkenborg (University of Exeter); Josef Hofbauer (University of Vienna); Christoph Kuzmics (University of Graz)
    Abstract: Fixed points of the (most) refined best reply correspondence, introduced in Balkenborg, Hofbauer, and Kuzmics (2013), in the agent normal form of extensive form games with perfect recall have a remarkable property. They induce fixed points of the same correspondence in the agent normal form of every subgame. Furthermore, in a well-defined sense, fixed points of this correspondence refine even trembling-hand perfect equilibria, while, on the other hand, reasonable equilibria that are not weak perfect Bayesian equilibria would be fixed points of this correspondence.
    Keywords: subgame perfection; Nash equilibrium refinements; backward induction; sequential rationality
    JEL: C62 C72 C73
    Date: 2016–09
  12. By: Kukushkin, Nikolai S.; Quah, John K.-H.; Shirai, Koji
    Abstract: We provide an example of a data set where all the revealed preference relations seem to be consistent with single crossing differences and yet the revealed preference relations cannot be extended to a complete preference obeying that property
    Keywords: monotone comparative statics; single crossing differences; interval dominance; supermodular games; lattices
    JEL: C6 C7 D7
    Date: 2016–09–16
  13. By: Martin Van der linden (Department of Economics, Vanderbilt University)
    Abstract: Many mechanisms used to select a committee of k members out of a candidates endow voters with some veto power over candidates. Impossibility results are provided showing that, in most cases, even limited veto power implies that the mechanism is not strategy-proof. These impossibilities hold on a large set of domains including the domain of additive preferences and even when probabilistic mechanisms are allowed.
    Keywords: Mechanism design, Strategy-proofness, Veto, Probabilistic mechanism, Committee selection
    JEL: C7 D7
    Date: 2016–09–21
  14. By: Elena Carletti; Giovanni Dell'Ariccia; Robert Marquez
    Abstract: We explore the behavior of supervisors when a centralized agency has full power over all decisions regarding banks, but relies on local supervisors to collect the information necessary to act. This institutional design entails a principal-agent problem between the central and local supervisors if their objective functions differ. Information collection may be inferior to that under fully independent local supervisors or under centralized information collection. And this may increase risk-taking by regulated banks. Yet, a “tougher†central supervisor may increase regulatory standards. Thus, the net effect of centralization on bank risk taking depends on the balance of these two effects.
    Keywords: Banking sector;Euro Area;Bank supervision;European Central Bank;Centralized bank supervision, bank risk taking, limited liability
    Date: 2016–09–15
  15. By: Roberto Burguet; Ramon Caminal
    Abstract: We propose a new solution concept for TU cooperative games in characteristic function form, the SCOOP, that builds on the Nash Bargaining Solution (NBS ), adding to it a consistency requirement for negotiations inside every coalition. The SCOOP specifies the probability of success and payoffs of each coalition. Players share the surplus of a coalition according to the NBS, with disagreement payoffs that are computed as the expectation of payoffs in other coalitions, using some common probability distribution, which in turn is derived from the prior distribution. The predicted outcome can be probabilistic or deterministic, but only the efficient coalition can succeed with probability one. We discuss necessary and sufficient conditions for an efficient solution. In either case, the SCOOP always exists, is generically unique, easy to compute, and exhibits smooth comparative statics. We also discuss non-cooperative implementation of the SCOOP.
    Keywords: cooperative games, coalitional bargaining, endogenous disagree- ment payoffs, consistent beliefs
    JEL: C71 C78
    Date: 2016–09
  16. By: Goyal, S.
    Abstract: Networks influence human behavior and well being, and realizing this, individuals make conscious efforts to shape their own networks. Over the past decade, economists have combined these ideas with concepts from game theory, oligopoly, general equilibrium, and information economics to develop a general framework of analysis. The ensuing research has deepened our understanding of classical questions in economics and opened up entirely new lines of enquiry.
    Date: 2016–09–12
  17. By: Dasgupta, P.; Goyal, S.
    Abstract: A person's social identity has many facets, involving language, personal interests, customs, religion, and ethnicity, among other attributes. Yet, all over the world many people seek to define themselves in exclusive terms. This paper develops a simple model of personal incentives and group interests to offer one possible explanation for the puzzle.
    Date: 2016–09–12

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.