nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒11‒20
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. You are judged by the company you keep : reputation leverage in vertically related markets By Choi, Jay Pil; Peitz, Martin
  2. A Leverage Theory of Tying in Two-Sided Markets By CHOI, Jay Pil; JEON, Doh-Shin
  3. Optimal Long-Term Contracting with Learning By He, Zhiguo; Wei, Bin; Yu, Jianfeng; Gao, Feng
  4. A Theory of Delegated Contracting By Gick, Wolfgang
  5. On the Direction of Innovation By Francesco Squintani; Hugo A. Hopenhayn
  6. Interacting Information Cascades: On the Movement of Conventions Between Groups By James C.D. Fisher; John Wooders
  7. Platforms and network effects By Belleflamme, Paul; Peitz, Martin
  8. Price Discrimination with Loss Averse Consumers By Jong-Hee Hahn; Jinwoo Kim; Sang-Hyun Kim; Jihong Lee
  9. Afriat in the Lab By Jan Heufer; Paul van Bruggen
  10. Inducing Herding with Capacity Constraints By Alexei Parakhonyak; Nick Vikander
  11. Selling out or going public? A real options signaling approach By Michi Nishihara
  12. Tough Middlemen By guido menzio; Gregor Jarosch; Maryam Farboodi
  13. The single-peaked domain revisited: A simple global characterization By Puppe, Clemens
  14. ¡°Small, yet Beautiful": Reconsidering the Optimal Design of Multi-winner Contests By Subhasish M. Chowdhury; Sang-Hyun Kim
  15. Collective Choice in Dynamic Public Good Provision By Bowen, T. Renee; Georgiadis, George; Lambert, Nicolas
  16. The Optimal Allocation of Punishments in Tullock Contests By Sela, Aner

  1. By: Choi, Jay Pil; Peitz, Martin
    Abstract: This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream firm. The supplier`s adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality vis-à-vis the supplier. The supplier may enter the market by initially renting the downstream firm`s reputation. The downstream firm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs.
    Keywords: Adverse Selection , Certification Intermediaries , Incumbency Advantage , Experience Goods , Outsourcing , Branding , Barriers to Entry
    JEL: D4 L12 L4 L43 L51 L52
    Date: 2016
  2. By: CHOI, Jay Pil; JEON, Doh-Shin
    Abstract: Motivated by the recent antitrust investigations concerning Google, we develop a leverage theory of tying in two-sided markets. In a setting where the "one monopoly profit result" holds otherwise, we uncover a new channel through which tying allows a monopolistic firm in one market to credibly leverage its monopoly power to another competing market if the latter is two-sided. In the presence of the nonnegative price constraint, tying provides a mechanism to circumvent the constraint in the tied product market without inviting an aggressive response by the rival firm. We identify conditions under which tying in two-sided markets is promotable and explore its welfare implications. In addition, we show that our model can be applied more widely to any markets in which sales to consumers in one market can generate additional revenues that cannot be competed away due to non-negative price constraints.
    Keywords: Tying, Leverage of monopoly power, Two-sided markets, Zero pricing,, Non-negative pricing constraint
    JEL: D4 L1 L5
    Date: 2016–11
  3. By: He, Zhiguo (University of Chicago); Wei, Bin (Federal Reserve Bank of Atlanta); Yu, Jianfeng (University of Minnesota); Gao, Feng (Tsinghua University)
    Abstract: We introduce uncertainty into Holmstrom and Milgrom (1987) to study optimal long-term contracting with learning. In a dynamic relationship, the agent's shirking not only reduces current performance but also increases the agent's information rent due to the persistent belief manipulation effect. We characterize the optimal contract using the dynamic programming technique in which information rent is the unique state variable. In the optimal contract, the optimal effort is front-loaded and decreases stochastically over time. Furthermore, the optimal contract exhibits an option-like feature in that incentives increase after good performance. Implications about managerial incentives and asset management compensations are discussed.
    Keywords: executive compensation; moral hazard; Bayesian learning; hidden information; belief manipulation; private savings; continuous time; stock options
    JEL: D8 D86 M12
    Date: 2016–11–01
  4. By: Gick, Wolfgang (Research Institute of Industrial Economics (IFN))
    Abstract: Delegated contracting describes a widely observable agency mode where a top principal, who has no direct access to a productive downstream agent, hires an intermediary to forward a sub-contract with specified output targets and payments. The principal makes the payment to the intermediary contingent on production taking place; the intermediary is protected by limited liability and paid a bonus. I characterize the optimal grand-contract with a continuum of agent types by using optimal control techniques with a scrap value function. Delegation proofness is reached through paying the intermediary what she could obtain by deviating. This rent is shown to be convex and increasing in the contracting space. There is internal verification of the ex-post state to reach compliance. The principal uses cutoff structures instead of additional output distortions. A leftbound incentive alignment principle between principal and intermediary applies. The paper so delivers a general analysis of the loss of control in vertical hierarchies.
    Keywords: Delegated contracting; Vertical hierarchies; Internal verification; Adverse selection; Limited liability; Cutoff structures; Leftbound incentive alignment
    JEL: D23 D73 L51
    Date: 2016–10–26
  5. By: Francesco Squintani (University of Warwick); Hugo A. Hopenhayn (University of California Los Angeles)
    Abstract: Research on the efficiency of innovation markets is usually concerned on whether the level of R&D firm investment is socially optimal. Instead, this paper studies whether R&D resources are employed optimally across research areas. Under weak assumptions, we find that competitive equilibrium innovative efforts are biased excessively into high returns areas. This form of market inefficiency is a novel result, and would take place even if innovators' profits coincided with the social value of innovations. We first demonstrate it in a simple, fundamental model. Then we embed our analysis in a canonical dynamic framework directly comparable with extant R&D models, and precisely identify the features of R&D competition that lead to the market failure we identify.
    Date: 2016
  6. By: James C.D. Fisher (Department of Economics, University of Arizona); John Wooders (Economics Discipline Group, University of Technology, Sydney)
    Abstract: When a decision maker is a member of multiple social groups, her actions may cause information to spill overfrom one group to another. We study the nature of these spillovers in an observational learning game where two groups interact via a common player, and where conventions emerge when players follow the decisions of the members of their own groups rather than their own private information. We show that: (i) if a convention develops in one group but not the other group, then the convention spills over via the common player; (ii) when conventions disagree, then the common players decision breaks the convention in one group; and (iii) when no conventions have developed, then the common players decision triggers conventions on the same action in both groups. We also nd that information spillovers may reduce welfare.
    Date: 2015–01–16
  7. By: Belleflamme, Paul; Peitz, Martin
    Abstract: In many markets, user benefits depend on participation and usage decisions of other users giving rise to network effects. Intermediaries manage these network effects and thus act as platforms that bring users together. This paper reviews key findings from the literature on network effects and two-sided platforms. It lays out the basic models of monopoly platforms and platform competition, and elaborates on some routes taken by recent research.
    Keywords: Network effects , digital platforms , two-sided markets , tipping , platform competition , intermediation , pricing , imperfect competition
    JEL: D43 L13 L86
    Date: 2016
  8. By: Jong-Hee Hahn (Yonsei University); Jinwoo Kim (Seoul National University); Sang-Hyun Kim (University of East Anglia); Jihong Lee (Seoul National University)
    Abstract: This paper proposes a theory of price discrimination based on consumer loss aver- sion. A seller offers a menu of bundles before a consumer learns his willingness to pay, and the consumer experiences gain-loss utility with reference to his prior (rational) ex- pectations about contingent consumption. With binary consumer types, the seller fnds it optimal to abandon screening under an intermediate range of loss aversion if the low willingness-to-pay consumer is suffciently likely. We also identify suffcient conditions under which partial or full pooling dominates screening with a continuum of types. Our predictions are consistent with several observed practices of price discrimination.
    Keywords: Reference-dependent preferences, loss aversion, price discrimination, per- sonal equilibrium, preferred personal equilibrium.
    JEL: D03 D42 D82 D86 L11
    Date: 2016–11
  9. By: Jan Heufer (Erasmus University Rotterdam, The Netherlands); Paul van Bruggen (Erasmus University Rotterdam, The Netherlands)
    Abstract: Varian (1988) showed that the utility maximization hypothesis cannot be falsified when only a subset of goods is observed. We show that this result does not hold under the assumptions that unobserved prices and expenditures remain constant. These assumptions are naturally satisfied in laboratory settings where the world outside the lab remains unchanged during the experiment. Hence for so-called induced budget experiments the Generalized Axiom of Revealed Preference is a necessary and sufficient condition for utility maximization in general, not just in the lab. Lab experiments are therefore a valid tool to put the utility maximization hypothesis to the test.
    Keywords: Afriat's Theorem; Experimental Economics; GARP; Revealed Preference; Utility Maximization
    JEL: C14 C91 D11 D12
    Date: 2016–11–10
  10. By: Alexei Parakhonyak; Nick Vikander
    Abstract: This paper shows that a rm may benefit from restricting capacity so as to trigger herding behavior from consumers, in situations where such behavior is otherwise unlikely. We consider a setting with social learning, where consumers observe sales from previous cohorts and update beliefs about product quality before making their purchase. A capacity constraint directly limits sales but also results in coarser information: upon observing a sellout, consumers attach positive probability to all levels of demand that exceed the constraint. The resulting discrete jump in beliefs following a sellout benefits the firm, and can make it optimal to restrict capacity.
    Keywords: Capacity Constraints, Herding, Informational Cascades
    JEL: D82 D83 L15
    Date: 2016–10–23
  11. By: Michi Nishihara (Graduate School of Economics, Osaka University)
    Abstract: We examine a dynamic model in which a firm chooses between selling out and going public under asymmetric information. We show that information asymmetry tends to change the firm fs policy from selling out to IPO. More precisely, a separating equilibrium can arise in which the good firm goes public while the bad firm follows the first-best sales policy because the good firm signals to market investors by doing an IPO. In order to separate itself from the bad firm, the good firm can choose an IPO timing that is earlier than the first-best IPO timing. This result is consistent with the empirical evidence that less profitable firms tend to sell out to a large firm rather than going public.
    Keywords: IPO; signaling; real options; asymmetric information; acquisition; earnout
    JEL: G31 G34 D82
    Date: 2016–11
  12. By: guido menzio; Gregor Jarosch (Stanford University); Maryam Farboodi (Princeton University)
    Abstract: We study a decentralized asset market in the spirit of Duffie, Petersen and Garleanu (2005). Agents are heterogeneous with respect to their valuation of the asset, and with respect to their bargaining ability. Specifically, a tough agent can make a take-it-or-leave it offer to soft agents and (with probability 1/2) to another tough agent. A soft agent makes (with probability 1/2) a take-it-or-leave-it offer to another soft-agent. In this environment, we show that tough agents become intermediaries, in the sense that a tough agent buys and sells the asset from a soft agent even when the two have the same valuation. We show that, in the presence of transaction costs, the non-fundamental trades carried out by tough agents are socially inefficient. We then show that, if tough agents cannot distinguish the identity of their trading partners, then intermediaries do not trade with each other even when they have different valuations. The unexecuted fundamental trades between tough agents are a second source of inefficiency. Finally, we show that—if agents can choose whether to pay a cost to become tough—the equilibrium involves mixing: a positive measure of agents is soft and a positive measure of agents is tough.
    Date: 2016
  13. By: Puppe, Clemens
    Abstract: It is proved that, among all restricted preference domains that guarantee consistency (i.e. transitivity) of pairwise majority voting, the single-peaked domain is the only minimally rich and connected domain that contains two completely reversed strict preference orders. It is argued that this result explains the predominant role of single-peakedness as a domain restriction in models of political economy and elsewhere. The main result has a number of corollaries, among them a dual characterization of the single-dipped do- main; it also implies that a single-crossing ('order-restricted') domain can be minimally rich only if it is a subdomain of a single-peaked domain. The conclusions are robust as the results apply both to domains of strict and of weak preference orders, respectively.
    Keywords: social choice,restricted domains,Condorcet domains,single-peakedness,single-dippedness,majority voting,single-crossing property
    JEL: D71 C72
    Date: 2016
  14. By: Subhasish M. Chowdhury (University of East Anglia); Sang-Hyun Kim (University of East Anglia)
    Abstract: We reconsider whether a grand multi-winner contest elicits more equilibrium e ort than a collection of sub-contests. Fu and Lu (2009) employ a sequential winner- selection mechanism and nd support for running a grand contest. We show that this result is completely reversed if a simultaneous winner-selection mechanism or a sequential loser-elimination mechanism is implemented. We then discuss the optimal allocation of players and prizes among sub-contests, and the case in which there is restriction in the number of sub-contests.
    Keywords: Contest design; Multiple winner; Group-size; Selection mechanism
    JEL: C72 D72 D74
    Date: 2016–11
  15. By: Bowen, T. Renee; Georgiadis, George; Lambert, Nicolas
    Abstract: Two heterogeneous agents contribute over time to a joint project, and collectively decide its scope. A larger scope requires greater cumulative effort and delivers higher benefits upon completion. We show that the efficient agent prefers a smaller scope, and preferences are time-inconsistent: as the project progresses, the efficient (inefficient) agent's preferred scope shrinks (expands). We characterize the equilibrium outcomes under dictatorship and unanimity, with and without commitment. We find that an agent's degree of efficiency is a key determinant of control over project scopes. From a welfare perspective, it may be desirable to allocate decision rights to the inefficient agent.
    Keywords: authority; collective choice; contribution games; free-riding; Public Goods
    JEL: C73 D70 D78 H41
    Date: 2016–11
  16. By: Sela, Aner
    Abstract: We study the role of punishments in Tullock contests with symmetric players. We first characterize the players' equilibrium strategies in a contest with either multiple identical prizes or multiple identical punishments (negative prizes). Given that a prize and a punishment have the same absolute value, we show that if the number of prizes is equal to the number of punishments and is lower (higher) than or equal to half the number of players, a designer who wishes to maximize the players' efforts will prefer to allocate punishments (prizes) over prizes (punishments). We also demonstrate that if the sum of the punishments is constrained, then in a contest without an exit option for the players, it is optimal for the designer who maximizes the players' efforts to allocate a single punishment that is equal to the punishment sum. However, in a contest with an exit option the optimal number of punishments depends on the value of the punishment sum and, in particular, the optimal number of punishments does not monotonically increase in the value of the punishment sum.
    Keywords: Tullock contests; prizes; punishments
    JEL: D72 D82
    Date: 2016–10

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