nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒10‒02
25 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Theory of Community Formation and Social Hierarchy By Athey, Susan; Calvano, Emilio; Jha, Saumitra
  2. Reputation with Opportunities for Coasting By Bar-Isaac, Heski; Deb, Joyee
  3. Rational Inattention with Sequential Information Sampling By Hebert, Benjamin; Woodford, Michael
  4. Analyzing Games with Ambiguous Player Types Using the MINthenMAX Decision Model By Ilan Nehama
  5. Valence influence in electoral competition with rank objectives By Alexander, Shapoval; Alexei, Zakharov; Weber, Shlomo
  6. Reason-based choice and context-dependence: An explanatory framework By Franz Dietrich; Christian List
  7. The Scope of Auctions in the Presence of Downstream Interactions and Information Externalities By Onur A. Koska; İlke Onur; Frank Stähler
  8. Ingratiation and Favoritism in Organizations By Agnieszka Rusinowska; Vassili Vergopoulos
  9. Dynamic Mechanism Design with Budget Constrained Buyers under Limited Commitment By Balseiro, Santiago; Besbes, Omar; Weintraub, Gabriel
  10. Dual Decision Processes: Retrieving Preferences when some Choices are Intuitive By Francesco Cerigioni
  11. On symbols and cooperation By Tom Potoms; Tom Truyts
  12. Optimal Risk Sharing with Optimistic and Pessimistic Decision Makers By Aloisio Araujo; Jean-Marc Bonnisseau; Alain Chateauneuf; Rodrigo Novinski
  13. Optimality, Equilibrium, and Curb Sets in Decision Problems without Commitment By Herings, Jean-Jacques; Meshalkin, Andrey; Predtetchinski, Arkadi
  14. Secret Search By Andrew John; Ian King
  15. Belief revision generalized: A joint characterization of Bayes' and Je¤rey's rules By Franz Dietrich; Christian List; Richard Bradley
  16. A "Pencil-Sharpening" Algorithm for Two Player Stochastic Games with Perfect Monitoring By Abreu, Dilip; Brooks, Benjamin; Sannikov, Yuliy
  17. Delegation with a Reciprocal Agent By Ester Manna; Alessandro De Chiara
  18. The Downside of Asset Screening for Market Liquidity By Vanasco, Victoria
  19. Learning, Termination, and Payout Policy in Dynamic Incentive Contracts By DeMarzo, Peter M.; Sannikov, Yuliy
  20. The Impact of Consumer Multi-homing on Advertising Markets and Media Competition By Athey, Susan; Calvano, Emilio; Gans, Joshua S.
  21. Optimal Asset Management Contracts with Hidden Savings By Di Tella, Sebastian; Sannikov, Yuliy
  22. Exclusive Contracts and Bargaining Power By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
  23. How Uncertainty about Judicial Nominees Can Distort the Confirmation Process By Sen, Maya; Spaniel, William
  24. Social Identity and Group Contests By Zaunbrecher, Henrik; Riedl, Arno
  25. Little Green Lies : Optimal environmental regulation with partially verifiable information By Alistair Munro

  1. By: Athey, Susan (Stanford University); Calvano, Emilio (Bologna University); Jha, Saumitra (Stanford University)
    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 nonhierarchical communities. We link these results to the emergence of trust in new market environments and early human societies.
    Date: 2016–08
  2. By: Bar-Isaac, Heski; Deb, Joyee
    Abstract: Reputation concerns can discipline agents and generate good outcomes. But what if outcomes are not always observed? Infrequent observation can strengthen reputation incentives and encourage effort. By exerting effort when outcomes are more likely observed, the agent can improve her reputation, and when the audience is inattentive in the future, she can " coas" on this reputation without additional effort. Such opportunities to coast in the future can in fact lead to greater overall effort than constant observation. We characterize the optimal observability structure to maximize efficient effort. This has implications for the design of review systems or performance feedback systems.
    Keywords: coasting; observability; reputation
    JEL: C73 D82 L14
    Date: 2016–09
  3. By: Hebert, Benjamin (Stanford University); Woodford, Michael (Columbia University)
    Abstract: We generalize the rationalize inattention framework proposed by Sims (2010) to allow for cost functions other than Shannon's mutual information. Unlike other general treatments of the problem, our particular concern is with the additional structure that results when a large number of successive samples of information about the decision situation (each only minimally informative by itself) can be taken before a decision must be made. We assume that the cost required for each individual increment to information satisfies standard assumptions about continuity, differentiability, and convexity, and monotonicity with respect to the Blackwell ordering of experiments, but need not correspond to mutual information. We give particular attention to the case in which the cost function for an individual increment to information satisfies the additional condition of prior-invariance, so that it depends only on the way in which the probabilities of different observations depend on the state of the world, and not on the prior probabilities of different states. In a continuous-time limit of this "sequentially prior-invariant" case, the quantitative implications of rational inattention depend only on a finite number of parameters, which measure the degree of difficulty in distinguishing different states of the world. We characterize optimal information sampling in this case, and show how the resulting theory of rationally inattentive choice differs from both static and dynamic versions of a theory based on mutual information.
    Date: 2016–06
  4. By: Ilan Nehama
    Abstract: In many common interactive scenarios, participants lack information about other participants, and specifically about the preferences of other participants. In this work, we model an extreme case of incomplete information, which we term games with type ambiguity, where a participant lacks even information enabling him to form a belief on the preferences of others. Under type ambiguity, one cannot analyze the scenario using the commonly used Bayesian framework, and therefore one needs to model the participants using a different decision model. To this end, we present the MINthenMAX decision model under ambiguity. This model is a refinement of Wald’s MiniMax principle, which we show to be too coarse for games with type ambiguity. We characterize MINthenMAX as the finest refinement of the MiniMax principle that satisfies three properties we claim are necessary for games with type ambiguity. This prior-less approach we present here also follows the common practice in computer science of worst-case analysis. Finally, we define and analyze the corresponding equilibrium concept, when all players follow MINthenMAX. We demonstrate this equilibrium by applying it to two common economic scenarios: coordination games and bilateral trade. We show that in both scenarios, an equilibrium in pure strategies always exists, and we analyze the equilibria.
    Date: 2016–08
  5. By: Alexander, Shapoval; Alexei, Zakharov; Weber, Shlomo
    Abstract: In this paper we examine the effects of valence in a continuous spatial voting model between two incumbent parties and one potential entrant. All parties are rank-motivated and are driven by their place in the electoral competition. One of our main results is that a sufficiently wide valence gap between the incumbents yields an equilibrium in which no entry will occur. We also show that an increase in valence shifts the high-valence incumbent party closer to the median voter, while the low-valence incumbent selects a more extreme platform.
    Keywords: Candidates; Distribution of Ideal Points.; Electoral equilibrium; Electoral Game; Rank Objectives; Valence
    JEL: C72 D72
    Date: 2016–09
  6. By: Franz Dietrich (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Christian List (LSE - London School of Economics and Political Science)
    Abstract: We introduce a "reason-based" framework for explaining and predicting individual choices. The key idea is that a decision-maker focuses on some but not all properties of the options and chooses an option whose "motivationally salient" properties he/she most prefers. Reason-based explanations can capture two kinds of context-dependent choice: (i) the motivationally salient properties may vary across choice contexts, and (ii) they may include "context-related" properties, not just "intrinsic" properties of the options. Our framework allows us to explain boundedly rational and sophisticated choice behaviour. Since properties can be recombined in new ways, it also offers resources for predicting choices in unobserved contexts.
    Keywords: Rational choice,reasons,context-dependence,bounded and sophisticated rationality,prediction of choice
    Date: 2016
  7. By: Onur A. Koska (Department of Economics, METU); İlke Onur (School of Commerce, Division of Business, University of South Australia, Adelaide, South Australia); Frank Stähler (Department of Economics, University of Tübingen, Tübingen, Germany; Department of Economics, University of Adelaide, Adelaide, Australia; Center for Economic Studies, The Ifo Institute (CESifo), Munich, Germany)
    Abstract: TWe scrutinize the scope of auctions for firm acquisitions in the presence of downstream interactions and information externalities. We Show that no mechanism exists that allows an investor to acquire a low-cost firm under incomplete information: a separating auction implies adverse selection and relies substantially on commitment to allocation and transfer rules. A pooling auction serves as a commitment device against ex-post opportunistic behavior and alleviates adverse selection. It can earn the investor a higher expected payoff than a separating auction, even when consistency is required as to qualify for a sequential equilibrium.
    Keywords: Takeover;Auction;Externality;IncompleteInformation;Commitment
    JEL: D44 D82
    Date: 2016–09
  8. By: Agnieszka Rusinowska (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Vassili Vergopoulos (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We combine in the same theoretical framework two related phenomena that can be present in organizations – ingratiation of subordinates and favoritism of superiors towards some of their employees. There are three actors in the model: a worker, a manager supervising the worker, and a firm that employs the worker and the manager. Ingratiation is defined as a strategic behavior of the worker to make himself more attractive to the manager. In our model ingratiation is expressed by opinion conformity which is exerted by the worker when reporting his opinion to the manager. Favoritism of the manager is based on using a bias when reporting to the firm her observation of the worker's performance. First, we determine to optimal level of the effort and the reported opinion of the worker, and the level of bias of the manager. Then, we investigate the effects of favoritism and ingratiation on the expected wages and utilities of the worker and the manager, and on the expected profit of the firm.
    Abstract: Nous incorporons au sein d'une même approche théorique, deux phénomènes complémentaires à l'œuvre dans les organisations – l'ingratiation de la part des employés subordonnés et le favoritisme de la part des supérieurs hiérarchiques envers ces employés. Il y a trois acteurs dans le modèle : un employé, un manager qui supervise l'employé et une firme qui emploie ces deux derniers. L'ingratiation est définie comme un comportement stratégique de l'employé qui vise à obtenir les bonnes grâces de son manager. Dans notre modèle, l'ingratiation s'exprime en termes de conformité d'opinion, lorsque l'employé déclare son opinion auprès du manager. Le favoritisme consiste à appliquer un biais dans le rapport que le manager adresse à la firme et qui est censé décrire son observation de la performance de l'employé. Nous déterminons d'abord le niveau optimal d'effort et l'opinion déclarée par l'employé, ainsi que le niveau du biais appliqué par le manager. Nous étudions ensuite les effets du favoritisme et de l'ingratiation sur les salaires et utilités espérés de l'employé et du manager, et sur le profit espéré de la firme.
    Keywords: opinion conformity,favoritism,organization,wage,organisation,favoritisme,ingratiation,conformité d'opinion,performance,salaire,profit
    Date: 2016–01
  9. By: Balseiro, Santiago (?); Besbes, Omar (?); Weintraub, Gabriel (Stanford University)
    Abstract: We study the dynamic mechanism design problem of a seller that repeatedly auctions independent items over a discrete time horizon to buyers that face a cumulative budget constraint. A driving motivation behind our model is the emergence of real-time bidding markets for online display advertising in which such budgets are prevalent. We assume the seller has a strong form of limited commitment: she commits to the rules of the current auction but cannot commit to those of future auctions. We show that the celebrated Myersonian approach that leverages the envelope theorem fails in this setting, and therefore, characterizing the dynamic optimal mechanism appears intractable. In turn, we make three main contributions. First, we show that the Myersonian approach is recovered in a corresponding fluid continuous-time model in which the time interval between consecutive items becomes negligible. Second, we leverage this approach to characterize the optimal dynamic direct-revelation mechanism, highlighting novel incentives at play in settings with buyers' budget constraints and seller's limited commitment. Third, we provide theoretical results that provide support for using the prescription arising from the fluid continuous-time model in the original discrete-time model.
    Date: 2016–06
  10. By: Francesco Cerigioni
    Abstract: Evidence from cognitive sciences shows that some choices are conscious and reflect individual preferences while others tend to be intuitive, driven by analogies with past experiences. Under these circumstances, usual economic modeling might not be valid because not all choices are the consequence of individual tastes. We here propose a behavioral model that can be used in standard economic analysis that formalizes how conscious and intuitive choices arise by presenting a decision maker composed by two systems. One system compares past decision problems with the one the decision maker faces, and it replicates past behavior when the problems are similar enough (Intuitive choices). Otherwise, a second system is activated and preferences are maximized (Conscious choices). We then present a novel method capable of finding conscious choices just from observed behavior and finally, we provide a choice theoretical foundation of the model and discuss its importance as a general framework to study behavioral inertia.
    Keywords: Dual Processes, Fast and Slow Thinking, Similarity, Revealed Preferences, memory, Intuition
    JEL: D01 D03 D60
    Date: 2016–09
  11. By: Tom Potoms; Tom Truyts
    Abstract: How are group symbols (e.g., a flag, a Muslim veil, a clothing style) helpful in sustaining cooperation and social norms? We study the role of symbols in an infinitely repeated public goods game with random matching, endogenous partnership termination, limited information ‡flows and endogenous symbol choice. We characterize an efficient segregating equilibrium, in which players only cooperate with others bearing the same symbol. In this equilibrium, players bearing a scarcer symbol face a longer expected search time to find a cooperative partner upon partnership termination, and this sacrifice of outside options allows them to sustain higher levels of cooperation. We compare this equilibrium to other equilibria in terms of renegotiation proofness, and we discuss the relation this has to the evolution of intolerance.
    Date: 2016–09
  12. By: Aloisio Araujo (IMPA - Instituto Nacional de Matemática Pura e Aplicada - Instituto Nacional de matematica pura e aplicada, FGV-EPGE - Universidad de Brazil); Jean-Marc Bonnisseau (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Alain Chateauneuf (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Rodrigo Novinski (Faculdades Ibmec - Faculdades Ibmec)
    Abstract: We prove that under mild conditions individually rational Pareto optima will exist even in presence of non-convex preferences. We consider decision makers dealing with a countable flow of payoffs or choosing among financial assets whose outcomes depend on the realization of a countable set of states of the world. Our conditions for the existence of Pareto optima can be interpreted as a requirement of impatience in the first context and of some pessimism or not unrealistic optimism in the second context. A non-existence example is provided when, in the second context, some decision maker is too optimistic. We furthermore show that at an individually rational Pareto optimum at most one strictly optimistic decision maker will avoid ruin at each state or date. Considering a risky context this entails that even is risk averters will share risk in a comonotonic way as usual, at most one classical strong risk lover will avoid ruin at each state or date. Finally some examples illustrate circumstances when a risk averter could take advantage of sharing risk with a risk lover rather than with a risk averter.
    Abstract: Nous montrons que sous des conditions peu contraignantes des optima de Pareto individuellement rationnels existent même en présence de préférences non-convexes. Nous considérons des décideurs munis de flux dénombrables de paiements ou choisissant parmi des actifs financiers dont les gains dépendent de la réalisation d'un ensemble dénombrable d'états du monde. Nos conditions pour l'existence d'optima de Pareto peuvent s'interpréter comme une exigence d'impatience dans le premier contexte et d'un certain pessimisme ou d'un optimisme non irréaliste dans le second contexte. Un exemple de non-existence est proposé lorsque dans le second contexte l'un des décideurs est trop optimiste. De plus, nous montrons qu'à un optimum de Pareto individuellement rationnel au plus un décideur strictement optimiste évitera la ruine à chaque date ou dans chaque état. Finalement, quelques exemples illustrent dans quelles circonstances un adversaire du risque aurait avantage à partager ses risques avec un joueur plutôt qu'avec un adversaire du risque.
    Keywords: Pareto optimum,optimistic,Risk sharing,optimiste,optimum de Pareto,Partage de risque
    Date: 2015–09
  13. By: Herings, Jean-Jacques (General Economics 1 (Micro)); Meshalkin, Andrey (General Economics 1 (Micro)); Predtetchinski, Arkadi (General Economics 1 (Micro))
    Abstract: The paper considers a class of decision problems with infinite time horizon that contains Markov decision problems as an important special case. Our interest concerns the case where the decision maker cannot commit himself to his future action choices. We model the decision maker as consisting of multiple selves, where each history of the decision problem corresponds to one self. Each self is assumed to have the same utility function as the decision maker. We introduce the notions of Nash equilibrium, subgame perfect equilibrium, and curb sets for decision problems. An optimal policy at the initial history is a Nash equilibrium but not vice versa. Both subgame perfect equilibria and curb sets are equivalent to subgame optimal policies. The concept of a subgame optimal policy is therefore robust to the absence of commitment technologies.
    JEL: C61 C62 C73
  14. By: Andrew John (Melbourne Business School, University of Melbourne); Ian King (School of Economics, University of Queensland)
    Abstract: We consider the problem faced by an organization that seeks to fill a high-profile position. We focus on a key decision about the recruitment process: should the organization make the identities of applicants public knowledge within the organization (“open search†) or keep the identities of applicants confidential (“secret search†). We analyse a very simple model that nonetheless yields a non-trivial problem: a single firm seeks to hire one of two possible candidates, whose abilities are known to the candidates themselves, but are unknown to the firm unless it conducts an open search process. Firms choose their search strategies, and post a salary. Candidates then decide whether to apply. A successful applicant earns the posted salary, but a rejected applicant under open search suffers a disutility cost. We characterise the unique Bayesian Nash equilibrium and find, among other things, that salaries are lower under secret search, and the expected ability level of applicants decreases as the posted salary increases under open search. We also show that when all candidates are willing to apply the salary is inefficiently low, and that the firm will, for some parameter values, choose secret search even when open search is more efficient.
    Keywords: Executive recruitment, search, asymmetric information
    JEL: M51 M52
    Date: 2016–09–23
  15. By: Franz Dietrich (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Christian List (LSE - London School of Economics and Political Science); Richard Bradley (LSE - London School of Economics and Political Science)
    Abstract: We present a general framework for representing belief-revision rules and use it to characterize Bayes' rule as a classical example and Jeffrey's rule as a non-classical one. In Je¤rey's rule, the input to a belief revision is not simply the information that some event has occurred, as in Bayes' rule, but a new assignment of probabilities to some events. Despite their differences, Bayes' and Je¤rey's rules can be characterized in terms of the same axioms: responsiveness, which requires that revised beliefs incorporate what has been learnt, and conservativeness, which requires that beliefs on which the learnt input is 'silent' do not change. To illustrate the use of non-Bayesian belief revision in economic theory, we sketch a simple decision-theoretic application.
    Keywords: Belief revision,subjective probability,Bayes's rule,Je¤rey's rule,axio-matic foundations,fine-grained versus coarse-grained beliefs,unawareness
    Date: 2016
  16. By: Abreu, Dilip (Princeton University); Brooks, Benjamin (University of Chicago); Sannikov, Yuliy (Princeton University)
    Abstract: We study the subgame perfect equilibria of two player stochastic games with perfect monitoring and geometric discounting. A novel algorithm is developed for calculating the discounted payoffs that can be attained in equilibrium. This algorithm generates a sequence of tuples of payoffs vectors, one payoff for each state, that move around the equilibrium payoff sets in a clockwise manner. The trajectory of these "pivot" payoffs asymptotically traces the boundary of the equilibrium payoff correspondence. We also provide an implementation of our algorithm, and preliminary simulations indicate that it is more efficient than existing methods. The theoretical results that underlie the algorithm also yield a bound on the number of extremal equilibrium payoffs.
    JEL: C63 C72 C73 D90
    Date: 2016–04
  17. By: Ester Manna (Universitat de Barcelona); Alessandro De Chiara (Central European University)
    Abstract: We consider a model in which a principal may delegate the choice of a project to a better informed agent. The preferences of the agent and the principal about which project should be undertaken can be discordant. Moreover, the agent benefits from being granted more discretion in the project choice and may be motivated by reciprocity. We find that the impact of the agent's reciprocity on the discretion he receives crucially depends on the conflict of interest with the principal. If preferences are very discordant, the principal is more likely to retain authority about the choice of the project when the agent is more reciprocal. Hence, reciprocity exacerbates a severe conflict of interest. In contrast, if preferences are more congruent, discretion is broader when the agent is more reciprocal. Hence, reciprocity mitigates a mild conflict of interest. In addition, we find that the possibility of being able to offer monetary payments to the agent can make the principal worse off when the agent reciprocates. We also empirically test the predictions of our model using the German Socio-Economic Panel finding some support for our theoretical results.
    Keywords: Authority, Delegation, Reciprocity.
    JEL: D03 D82 D83 D86
    Date: 2016
  18. By: Vanasco, Victoria (Stanford University)
    Abstract: This paper explores the tension between asset quality and liquidity in a model where an originator exerts effort to screen assets, whose cash flows can be later sold in secondary markets. Screening improves asset quality, but introduces a problem of asymmetric information that may hinder trade. In the optimal mechanism, costly retention of cash flows is essential to implement positive effort. Market allocations can feature too-much or too-little effort relative to the second best, where over-exertion comes with inefficiently illiquid markets. When gains from trade are large, markets are prone to multiple equilibria. The optimal mechanism is decentralized with differential retention rules and transfers across markets.
    Date: 2016–04
  19. By: DeMarzo, Peter M. (Stanford University); Sannikov, Yuliy (Princeton University)
    Abstract: We study a principal-agent setting in which both sides learn about future profitability from output, and the project can be abandoned/terminated if profitability is too low. With learning, shirking by the agent both reduces output and lowers the principal's estimate of future profitability. The agent can exploit this belief discrepancy and earn information rents, reducing his incentives to exert effort. The optimal contract controls information rents to improve incentives by distorting the termination decision. Our results capture the transition from a young, financially constrained firm to a mature firm that pays dividends. For young firms, poor performance permanently raises the termination threshold, as doing so lowers information rents. Mature firms pay smoothed dividends and have a fixed termination threshold. Dividend smoothing occurs because earnings surprises are used to adjust financial slack in line with profitability. When profitability only reflects the agent's private ability, a simple equity contract is optimal.
    Date: 2016–05
  20. By: Athey, Susan (Stanford University); Calvano, Emilio (University of Bologna); Gans, Joshua S. (University of Toronto)
    Abstract: We develop a model of advertising markets in an environment where consumers may switch (or "multi-home") across publishers. Consumer switching generates inefficiency in the process of matching advertisers to consumers, because advertisers may not reach some consumers and may impress others too many times. We find that when advertisers are heterogeneous in their valuations for reaching consumers, the switching-induced inefficiency leads lower-value advertisers to advertise on a limited set of publishers, reducing the effective demand for advertising and thus depressing prices. As the share of switching consumers expands (e.g., when consumers adopt the internet for news or increase their use of aggregators), ad prices fall. We demonstrate that increased switching creates an incentive for publishers to invest in quality as well as extend the number of unique users, because larger publishers are favored by advertisers seeking broader "reach" (more unique users) while avoiding inefficient duplication.
    JEL: L11 L82
    Date: 2016–04
  21. By: Di Tella, Sebastian (?); Sannikov, Yuliy (Stanford University)
    Abstract: We study the role of hidden savings in optimal contracts for delegated asset management. The principal uses the agent's access to capital to manipulate his precautionary motive and reduce the cost of providing incentives. After bad outcomes, the agent's consumption is somewhat insured, and he is punished instead with less access to capital and lower growth. As a result, in addition to an equity constraint, the optimal contract requires a leverage constraint to be implemented. Hidden investment limits the principal's ability to provide incentives, but doesn't change the contract's qualitative features. We provide a sufficient analytical condition for the validity of the first-order approach: if the agent's precautionary motive falls after bad outcomes, the contract is globally incentive compatible. This condition holds in the optimal contract and in a broader class of contracts.
    Date: 2016–04
  22. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: This study constructs a simplest model to examine anticompetitive exclusive contracts that prevent a downstream buyer from buying input from a new upstream supplier. Incorporating Nash bargaining into the standard one-buyer-one-supplier framework in the Chicago School critique, we show a possibility that an inefficient incumbent supplier can deter a socially efficient entry through exclusive contracts.
    Date: 2016–09
  23. By: Sen, Maya (Harvard University); Spaniel, William (Stanford University)
    Abstract: Why are judicial nominees allowed to refuse to answer questions about important issues that could come before the courts? We address this question by examining the information environment surrounding judicial nominations. Using the Supreme Court as our example, we formulate a model that departs from the existing literature by incorporating the fact that the Senate often does not know what type of candidate the President is trying to appoint. Our model shows when the President and Senate are ideologically divergent, low information about nominees' views results in the Senate occasionally rejecting acceptable nominees. However, when the President and Senate are ideologically close, the President benefits from leaving the process opaque-that is, allowing his nominees to avoid answering tough questions. Thus, even though low information can be costly to both parties, keeping the process nontransparent shields the President from being penalized for selecting more like-minded (and possibly extreme) judges.
    JEL: K49
    Date: 2015–08
  24. By: Zaunbrecher, Henrik (General Economics 1 (Micro)); Riedl, Arno (General Economics 1 (Micro))
    Abstract: Social identity has been shown to successfully enhance cooperation and effort in cooperation and coordination games. Little is known about the causal effect of social identity on the propensity to engage in group conflict. In this paper we explore theoretically and experimentally whether social identity increases investments in group contests. We show theoretically that increased social identity with the own group implies higher investments in Tullock contests. Empirically we find that induced social identity does increase group closeness but does not increase conflict investments.
    Keywords: social identity, group, contest, experiment
    JEL: C92 D03 D71 D74
    Date: 2016
  25. By: Alistair Munro (National Graduate Institute for Policy Studies)
    Abstract: When the set of possible messages depends on the actual state of the world, optimal incentive schemes to control environmental problems may not always satisfy the revelation principle. As a result, in equilibrium some agents may send false messages, particularly when the information rents in the truth- telling scheme are high. I characterise optimal pollution regulation schemes and produce some numerical examples to show mechanisms which allow some dishonesty in equilibrium may frequently outperform truth-telling schemes.
    Date: 2016–09

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.