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on Microeconomics |
| By: | DeMarzo, Peter; Kaniel, Ron |
| Abstract: | We consider a multi-agent contracting setting when agents derive utility based in part on their pay relative to their peers. Because agents' productivity is affected by common as well as idiosyncratic shocks, it is optimal to base pay on the agent's performance relative to a benchmark of his peers. But when agents have "keeping up with the Joneses" (KUJ) preferences and care about how their pay compares to that of others, relative performance evaluation also increases agents' perceived risk. We show that when a single principal (or social planner) can commit to a public contract, the optimal contract hedges the risk of the agent's relative wage without sacrificing efficiency. While output is unchanged, however, hedging makes the contracts appear inefficient in the sense that performance is inadequately benchmarked. We also show that when there are multiple principals, or the principal is unable to commit, efficiency is undermined. In particular, KUJ effects induce agents to be more productive, but average wages increase even more, reducing firm profits. We also show that if the principal cannot commit not to privately renegotiate contracts, then wages and effort are increased when KUJ effects are weak, but are reduced, enhancing efficiency, when KUJ effects are sufficiently strong. Finally, public disclosure of contracts across firms can cause output to collapse. |
| Keywords: | contract; Joneses; manager; pay performance; relative |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11538&r=mic |
| By: | Orlov, Dmitry (University of Rochester); Skrzypacz, Andrzej (Stanford University); Zryumov, Pavel (University of PA) |
| Abstract: | We study a Bayesian persuasion game in the context of real options. The Sender (firm) chooses signals to reveal to the Receiver (regulator) each period but has no long-term commitment power. The Receiver chooses when to exercise the option, affecting welfare of both parties. When the Sender favors late exercise relative to the Receiver but their disagreement is small, in the unique equilibrium information is disclosed discretely with a delay and the Receiver sometimes ex-post regrets waiting too long. When disagreement is large, the Sender, instead of acquiring information once and fully, pipets good information over time. These results shed light on the post-market surveillance practices of medical drugs and instruments by the FDA, and the role of pharmaceutical companies in keeping marginally beneficial drugs in the market. When the Sender favors early exercise, the lack of commitment not to persuade in the future leads to unraveling, in equilibrium all information is disclosed immediately. In sharp contrast to static environments, the ability to persuade might hurt the Sender. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3406&r=mic |
| By: | Seung Han Yoo (Department of Economics, Korea University, Seoul, Republic of Korea) |
| Abstract: | This paper generalizes the canonical feature of signaling models that signaling costs are negatively correlated with productive capabilities. A worker has two characteristics - signaling cost (low/high) and productive capability (low/high) - each combination of which can be realized with positive probability. The main results identify one key condition to guarantee the existence of a unique (partially) separating equilibrium. This finding has new implications for the role of education or a pre-signaling stage that induces the condition to hold. |
| Keywords: | Two correlated characteristics, Signaling |
| JEL: | C72 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:1605&r=mic |
| By: | Jean-Michel Benkert; Igor Letina |
| Abstract: | This paper considers the optimal design of dynamic research contests when the buyer can set time-dependent prizes. We derive the buyer-optimal contest and show that it entails an increasing prize schedule. Remarkably, this allows the buyer to implement a global stopping rule. In particular, the optimal contest attains the first-best. More generally, we show that global stopping rules can be implemented robustly and compare them to individual stopping rules which have been analyzed in the existing literature. We conclude by discussing policy implications of our findings and highlight that global stopping rules combine the best aspects of innovation races and research tournaments. |
| Keywords: | Innovation, contests, dynamic tournaments, global stopping rule, breakthroughs, R&D |
| JEL: | O32 D02 L19 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:235&r=mic |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | We explore the impact of private information in sealed-bid first-price auctions. For a given symmetric and arbitrarily correlated prior distribution over values, we characterize the lowest winning-bid distribution that can arise across all information structures and equilibria. The information and equilibrium attaining this minimum leave bidders indifferent between their equilibrium bids and all higher bids. Our results provide lower bounds for bids and revenue with asymmetric distributions over values. We also report further characterizations of revenue and bidder surplus including upper bounds on revenue. Our work has implications for the identification of value distributions from data on winning bids and for the informationally robust comparison of alternative bidding mechanisms. |
| Keywords: | First price auction, Information structure, Bayes correlated equilibrium, Private values, Interdependent values, Common values, Revenue, Surplus, Welfare bounds, Reserve price |
| JEL: | C72 D44 D82 D83 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2018r3&r=mic |
| By: | Bowen, T. Renee (Stanford University); Georgiadis, George (Northwestern University); Lambert, Nicolas S. (Stanford University) |
| Abstract: | Two heterogeneous agents exert effort over time to complete a project and collectively decide its scope. A larger scope requires greater cumulative effort and delivers higher benefits upon completion. To study the scope under collective choice, we derive the agents' preferences over scopes. The efficient agent prefers a smaller scope, and preferences are time-inconsistent: as the project progresses, the efficient agent's preferred scope shrinks, whereas the inefficient agent's preferred scope expands. In equilibrium without commitment, the effcient agent obtains his ideal project scope with either agent as dictator and under unanimity. In this sense, the efficient agent always has real authority. |
| JEL: | C73 D70 D78 H41 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3346&r=mic |
| By: | Marinovic, Ivan (Stanford University); Skrzypacz, Andrzej (Stanford University); Varas, Felipe (Duke University) |
| Abstract: | We study firm's incentives to invest and build reputation for quality, when quality can be certified at a cost. We consider two types of equilibria: one in which certification decisions are made based on firm's reputation and the second in which they are made based on the time since last certification. We show that reputation-based certification has a very limited effect on incentives to invest in quality, so that in equilibrium the firm invests only its reputation is the lowest. We also show that the firm in this case suffers from an over-certification trap in which the benefits of reputation are dissipated by excessive certification. These problems can be avoided with time-based certification, which can allow first-best investment in quality for sufficiently small certification cost, despite investment being unobservable. We also show that the optimal certification duration results in the firm certifying when its reputation is high. |
| JEL: | C73 D82 D83 D84 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3371&r=mic |
| By: | Eso, Peter (University of Oxford); Wallace, Chris (University of Leicester) |
| Abstract: | In a simple trading game the buyer and seller have repeated opportunities to acquire and disclose hard (verifiable) evidence about the value of the tradable good. The parties disclose individually favourable information but conceal signals which are beneficial to the other side. In a leading case of interest with a finite horizon and sufficiently patient players, the equilibrium is characterized by a period of skimming (in which the seller makes offers acceptable only to informed buyers) concluded by a single settling period in which agreement is reached for sure. The length of delay until agreement and the corresponding efficiency loss are decreasing in the time horizon and in the abilities of the trading parties to identify the good’s value, but increasing in impatience. An arbitrarily long time horizon can generate either immediate agreement or no trade between uninformed parties. |
| Keywords: | Persuasion ; trading games ; bargaining ; hard evidence ; information disclosure ; skimming ; settling ; delay JEL classification numbers: C78 ; D82 ; D83 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:24&r=mic |
| By: | Blake Allison (Department of Economics, Emory University); Adib Bagh (Department of Economics and Mathematics, University of Kentucky); Jason Lepore (Department of Economics, California Polytechnic State University) |
| Abstract: | We provide a sufficient condition for a game with discontinuous payoffs to be weakly reciprocally upper semi-continuous in mixed strategies. This condition is imposed on the individual payoffs and not on their sum, and it can be readily verified in a large class of games even when the sum of payoffs in such games is not upper semi-continuous. We apply our result to establish the existence of mixed strategy equilibria in probabilistic voting competitions when candidates have heterogenous beliefs about the distribution of the voters. |
| Keywords: | Better reply security, extended games, Weak reciprocal upper semi-continuity, Nash equilibria, Probabilistic voting models. |
| JEL: | C63 C72 D72 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:cpl:wpaper:1608&r=mic |
| By: | Hebert, Benjamin (Harvard University) |
| Abstract: | Why are debt securities so common? I show that debt securities minimize the welfare losses from the moral hazards of excessive risk-taking and lax effort. For any security design, the variance of the security payoff is a statistic that summarizes these welfare losses. Debt securities have the least variance, among all limited liability securities with the same expected value. The optimality of debt is exact in my benchmark model, and holds approximately in a wide range of models. I study both static and dynamic security design problems, and show that these two types of problems are equivalent. The models I develop are motivated by moral hazard in mortgage lending, where securitization may have induced lax screening of potential borrowers and lending to excessively risky borrowers. My results also apply to corporate finance and other principal-agent problems. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3455&r=mic |
| By: | Sebastián Cea-Echenique (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Juan Pablo Torres-Martínez (Department of Economics, Faculty of Economics and Business - University of Chile [Santiago]) |
| Abstract: | In a competitive model where agents are subject to endogenous trading constraints, we make the access to financial trade dependent on prices and consumption decisions. Our framework is compatible with the existence of both credit market segmentation and market exclusion. In this context, we show equilibrium existence in two scenarios. In the first one, individuals can fully hedge the payments of segmented financial contracts by trading unsegmented assets. In the second one, it is assumed that agents may compensate with increments in present demand the losses of well-being generated by reductions of future consumption. |
| Keywords: | Incomplete Markets,General Equilibrium,Endogenous Trading Constraints |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01373471&r=mic |
| By: | Stéphane Zuber (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics) |
| Abstract: | This paper studies the extension of Harsanyi's theorem (Harsanyi, 1995) in a framework involving uncertainty. It seeks to extend the aggregation result to a wide class of Monotonic Bernoullian and Archimedean preferences (Cerreia-Vioglio et al., 2011) that subsumes many models of choice under uncertainty proposed in the literature. An impossibility result is obtained, unless we are in the specific framework where all individuals and the decision-maker are subjective expected utility maximizers sharing the same beliefs. This implies that non-expected utility preferences cannot be aggregated consistently. |
| Keywords: | Subjective expected utility,Harsanyi's theorem,Pareto principle,Monotonic Bernoullian and Archimedean preferences |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01224145&r=mic |
| By: | Vincenzo Platino (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Elena L. Del Mercato (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 consider a general equilibrium model of a private ownership economy with consumption and production externalities. The choices of all agents (households and firms) may affect utility functions and production technologies. The equilibrium notion blends Arrow-Debreu with Nash, that is, agents (households and firms) maximize their goals by taking as given both commodity prices and choices of every other agent in the economy. We provide an example showing that under standard assumptions, such economies may have infinitely many equilibria. We present our model with firms' endowments following Geanakoplos, Magill, Quinzii and Drèze (1990). Firms' endowments consist of amounts of commodities held by the firms to generate receipts from sales of initially-held stocks of commodities and claims from debts, subsidies and taxes expressible in terms of them. We prove that almost all economies are regular in the space of endowments of households and firms. |
| Keywords: | regular economies,competitive equilibrium à la Nash,externalities,private ownership economies |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01162039&r=mic |
| By: | Francisco Robles (Universitat de Barcelona) |
| Abstract: | We consider a market with only one seller and many buyers. The seller owns several indivisible objects on sale. Each buyer can receive many objects and has a gross-substitutes valuation for every package of objects. The gross-substitutes condition guarantees the non-emptiness of the core of the market (Ausubel and Milgrom, 2002). Moreover, the Vickrey outcome (Vickrey, 1961) of the market leads to a core payoff in which each buyer gets his maximum core payoff. The aim of this paper is to analyze the following mechanism. Simultaneously, each buyer requests a package by announcing how much he would pay for it. After all buyers' requests, the seller decides the final assignment of packages and the prices. If a buyer gets a package of objects, it must be his request or an allocation at least as good as his request. The subgame perfect equilibrium outcomes of the mechanism correspond to the Vickrey outcome of the market.. |
| Keywords: | assignment model, mechanism, implementation, Vickrey outcome. |
| JEL: | C71 C72 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ewp:wpaper:353web&r=mic |
| By: | Duffie, Darrell (Stanford University); Qiao, Lei (National University of Singapore); Sun, Yeneng (National University of Singapore) |
| Abstract: | We demonstrate the existence of a continuum of agents conducting directed random searches for counterparties, and characterize the implications. Our results provide the first probabilistic foundation for static and dynamic directed random search (including the matching function approach) that is commonly used in the search-based models of financial markets, monetary theory, and labor economics. The agents' types are shown to be independent discrete-time Markov processes that incorporate the effects of random mutation, random matching with match-induced type changes, and with the potential for enduring partnerships that may have randomly timed break-ups. The multi-period cross-sectional distribution of types is shown to be deterministic via the exact law of large numbers. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3359&r=mic |
| By: | Hiroki Nishimura (Department of Economics, University of California Riverside); Efe A. Ok; John K.-H. Quah |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201614&r=mic |
| By: | Bertomeu, Jeremy (Baruch College, CUNY); Marinovic, Ivan (Stanford University) |
| Abstract: | We study optimal disclosure via two competing communication channels; hard information whose value has been verified and soft disclosures such as forecasts, unaudited statements and press releases. We show that certain soft disclosures may contain as much information as hard disclosures, and we establish that: (a) exclusive reliance on soft disclosures tends to convey bad news, (b) credibility is greater when unfavorable information is reported and (c) misreporting is more likely when soft information is issued jointly with hard information. We also show that a soft report that is seemingly unbiased in expectation need not indicate truthful reporting. We demonstrate that mandatory disclosure of hard information reduces the transmission of soft information, and that the aggregation of hard with soft information will turn all information soft. |
| JEL: | D72 D82 D83 G20 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3318&r=mic |
| By: | Zemin(Zachary) Zhong (Haas School of Business, UC Berkeley, Berkeley, CA 94720, USA) |
| Abstract: | Major online platforms such as Amazon and eBay have invested significantly in search technologies to direct consumer searches to relevant products. These technologies lead to targeted search, implying consumers are visiting more relevant sellers first. For example, consumers may directly enter their desirable attributes into search queries, and the platform will retrieve relevant sellers accordingly. The platform may also let consumers refine the search outcomes by various criteria. This study characterizes the role of targeted search, and examines how targeted search affects market equilibrium and platform design. I model targeted search in a differentiated market with many firms where consumers search sequentially for the best product match. Within this setup, I endogenize the search design by allowing the platform to choose the precision of targeted search and the revenue model contract. One of the central results of the analysis is how targeted search affects equilibrium prices. I find its impact on price is not monotonic. When targeting is not too precise, targeted search lowers the equilibrium price. It makes sellers more similar and intensifies price competition, despite the fact that all consumers face sellers with better fit. However, once the targeting becomes sufficiently precise, the equilibrium price increases, because highly targeted search discourages active consumer search and gives sellers monopoly power. Furthermore, I consider two major platform revenue models, commission and promoted slots, with consumer search. The platform, by providing targeted search with precision up to the aforementioned limit, can extract more consumer surplus through higher commission rates, because targeted search improves consumer surplus by lowering search cost, increasing fit, and lowering price. With targeted search up to the limit, the platform can also extract more surplus from sellers by offering promoted slots, because sellers can use promoted slots to better target consumers. However, once targeted search becomes too precise, the market will face a price hike, hurting the platform revenue in both models. Therefore, I find that in both revenue models, the platform may want to limit the precision of targeted search even if improving it is costless, with or without consumer entry. Using a unique dataset from Taobao, I find suggestive evidences that are consistent with the model predictions. |
| Keywords: | Consumer Search; Platform; e-Commerce |
| JEL: | D22 L81 M31 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1603&r=mic |
| By: | Yong Chao (College of Business, University of Louisville, Louisville, KY USA 40292); Lin Liu (College of Business Administration, University of Central Florida, Orlando, FL USA 32816); Dongyuan Zhan (School of Management, University College London, London, UK E14 5AA) |
| Abstract: | This paper studies probabilistic selling with vertically differentiated products when firms compete and consumers anticipate the potential post-purchase regret raised by possibly obtaining the inferior products. Intuitively, anticipated regret hurts the attractiveness of probabilistic selling. However, we find that probabilistic selling can be more profitable, and more likely to arise with anticipated regret than without it. This is due to the ¡°reverse quality discrimination¡± (perceived quality of the random product becomes decreasing in consumer type at the competition margin), which increases the perceived differentiation, and may still maintain sufficient attractiveness of the random product for infra-marginal consumers. Meanwhile, it may hurt the competitor. |
| Keywords: | reverse quality discrimination, probabilistic selling, vertical differentiation, anticipated regret, competition |
| JEL: | L13 L15 M31 D03 D43 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1614&r=mic |
| By: | Martin J. Osborne; Jeffrey S. Rosenthal; Colin Stewart |
| Abstract: | A group of individuals with common interests has to choose a binary option whose desirability depends on an unknown binary state of the world. The individuals independently and privately observe a signal of the state. Each individual chooses whether to reveal her signal, at a cost. We show that if for all revelation choices of the individuals the option chosen by the group is optimal given the signals revealed and the set of individuals who do not reveal signals, then in a large group few signals are revealed, and these signals are extreme. The correct decision is taken with high probability in one state but with probability bounded away from one in the other. No anonymous decision-making mechanism without transfers does better. However, the first-best average payoff can be attained using transfers among agents, and approximately attained with a non-anonymous mechanism without transfers. |
| Keywords: | Information aggregation, costly reporting, collective decision-making |
| JEL: | D70 D81 D82 |
| Date: | 2016–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-565&r=mic |
| By: | Jovanovic, Boyan; Prat, Julien |
| Abstract: | This paper shows that endogenous cycles can arise when contracts between firms and their customers are incomplete and when products are experience goods. Then firms invest in the quality of their output in order to establish a good reputation. Cycles arise because investment in reputation causes self-fulfilling changes in the discount factor. Cycles are more likely to occur when information diffuses slowly and consumers exhibit high risk aversion. A rise in idiosyncratic uncertainty is of two kinds that work in opposite ways: Noise in observing effort is contractionary as it generally is in agency models. But a rise in the variance of the distribution of abilities is expansionary. A calibrated version produces realistic fluctuations in terms of peak-to-trough movements in consumption and the spacing of time between recessions. |
| Keywords: | Endogenous Fluctuations; Intangible Capital; reputation |
| JEL: | E22 E32 L14 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11543&r=mic |
| By: | Admati, Anat R. (Stanford University); DeMarzo, Peter M. (Stanford University); Hellwig, Martin F. (Max Planck Institute for Research on Collective Goods, Bonn); Pfleiderer, Paul (Stanford University) |
| Abstract: | This paper explores the dynamics of corporate leverage when funding decisions are made in the interests of shareholders. In the absence of prior commitments or regulations, shareholder-creditor conflicts give rise to a leverage ratchet effect, which induces shareholders to resist reductions while favoring increases in leverage even when total-value maximization calls for the opposite. Unlike inefficiencies based on asymmetric information, the leverage ratchet effect applies to all forms of leverage reduction, including earnings retentions and rights offerings. The leverage ratchet effect is present even in the absence of frictions other than the inability to write complete contracts. The effect creates an agency cost of debt that lowers the value of the leveraged firm. Standard frictions magnify the impact of the effect. In a dynamic context, since leverage becomes effectively irreversible, firms may limit leverage initially but then ratchet it up in response to shocks. The resulting leverage dynamics can produce outcomes that cannot be explained by simple tradeoff considerations. |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3435&r=mic |
| By: | Gardete, Pedro M. (Stanford University); Bart, Yakov (Northeastern University) |
| Abstract: | We consider a cheap-talk game in which the persuader is able to collect information about the receiver's preferences in order to tailor communication and induce a favorable action. We find that the sender prefers not to learn the receiver's preferences with certainty, but to remain in a state of partial willful ignorance. The receiver prefers complete privacy except when information is necessary to induce communication from the sender. Surprisingly, joint welfare is always maximized by the sender's first-best level of information acquisition. The implications of our results are discussed in the contexts of online advertising, sales, dating and job search. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3400&r=mic |