nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒11‒27
24 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Multiple Contracting in Insurance Markets By Attar, Andrea; Mariotti, Thomas; Salanié, François
  2. Subjective Contingencies and Limited Bayesian Updating By Stefania Minardi; Andrei Savochkin
  3. The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents By Llobet, Gerard; Padilla, Atilano Jorge
  4. Delegating relational contracts to corruptible intermediarie By Marta Troya-Martinez; Liam Wren-Lewis
  5. The Tree that Hides the Forest: A Note on Revealed Preference By João V. Ferreira
  6. Promotional allowances By Lømo, Teis Lunde; Ulsaker, Simen Aardal
  7. Efficiency and Adverse Selection: On the Desirability of Mutual Contracts By V. Chari
  8. Optimal Illusion of Control and Related Perception Biases By Olivier Gossner; Jakub Steiner
  9. Robust Social Decisions By Eric Danan; Thibault Gajdos; Brian Hill; Jean-Marc Tallon
  10. Strategic Voting in Multi-Winner Elections with Approval Balloting: A Theory for Large Electorates By Jean-François Laslier; Karine Van Der Straeten
  11. Mutual rankings By Gabrielle Demange
  12. A Homeomorphism Theorem for the Universal Type Space with the Uniform Weak Topology By Martin Hellwig
  14. Networks formation to assist decision making By David Goldbaum
  15. Optimal Ownership of Public Goods in the Presence of Transaction Costs By Müller, Daniel; Schmitz, Patrick W.
  16. Risk Sharing in an Adverse Selection Model By Raymond Deneckere; André De Palma; Luc Leruth
  17. Conformity and Influence By David Goldbaum
  18. Multilateral Trade Bargaining and Dominant Strategies By Kyle Bagwell; Robert W. Staiger
  19. Why Mixed Qualities May Not Survive at Equilibrium: The Case of Vertical Product Differentiation By Georgi Burlakov
  20. Divergent behavior in markets with idiosyncratic private information By David Goldbaum
  21. Optimal Contracts for Research Agents By Yaping Shan
  22. Experimentation and Learning-by-Doing By Safronov, M.
  23. A note on health insurance under ex post moral hazard By Pierre Picard
  24. Complementarity without Superadditivity By Steven Berry; Philip Haile; Mark Israel; Michael Katz

  1. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We study insurance markets in which privately informed consumers can purchase coverage from several insurers. Under adverse selection, multiple contracting severely restricts feasible trades. Indeed, only one budget-balanced allocation is implementable by an entry-proof tariff, and each layer of coverage must be fairly priced given the consumer types who purchase it. This allocation is the unique equilibrium outcome of a game in which cross-subsidies between contracts are prohibited. Equilibrium contracts exhibit quantity discounts and negative correlation between risk and coverage. Public intervention should target insurers' strategic behavior, while consumers can be left free to choose their preferred amount of coverage.
    Keywords: Adverse Selection; Insurance Markets; Multiple Contracting
    JEL: D43 D82 D86
    Date: 2016–11
  2. By: Stefania Minardi (Economics and Decision Sciences Department, HEC Paris); Andrei Savochkin (New Economic School (NES))
    Abstract: We depart from Savage’s (1954) common state space assumption and introduce a model that allows for a subjective understanding of uncertainty. Within the revealed preference paradigm, we uniquely identify the agent’s subjective state space via her preferences conditional on incoming information. According to our representation, the agent’s subjective contingencies are coarser than the analyst’s states; she uses an additively separable utility with respect to her set of contingencies; and she adopts an updating rule that follows the Bayesian spirit but is limited by her perception of uncertainty. We illustrate our theory with an application to the Confirmatory Bias.
    Date: 2016–10
  3. By: Llobet, Gerard; Padilla, Atilano Jorge
    Abstract: It has been commonly argued that the decision of a large number of inventors to license complementary patents necessary for the development of a product leads to excessively large royalties. This well-known Cournot-complements or royalty-stacking effect would hurt efficiency and downstream competition. In this paper we show that when we consider patent litigation and introduce heterogeneity in the portfolio of different firms these results change substantially due to what we denote the Inverse Cournot effect. We show that the lower the total royalty that a downstream producer pays, the lower the royalty that patent holders restricted by the threat of litigation of downstream producers will charge. This effect generates a moderation force in the royalty that unconstrained large patent holders will charge that may overturn some of the standard predictions in the literature. Interestingly, though, this effect can be less relevant when all patent portfolios are weak making royalty stacking more important.
    Keywords: Intellectual Property; Patent Licensing; Patent Pools; R&D Investment; Standard Setting Organizations
    JEL: L15 L24 O31 O34
    Date: 2016–11
  4. By: Marta Troya-Martinez (NES - New Economics School - New Economics School); Liam Wren-Lewis (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: This article explores the link between productive relational contracts and corruption. Responsibility for a contract is delegated to a supervisor who cares about both production and kickbacks paid by the agent, neither of which are explicitly contractible. We characterize the optimal supervisor-agent relational contract and show that the relationship between joint surplus, kickbacks and production is nonmonotonic. Delegation may benefit the principal when relational contracting is difficult by easing the time inconsistency problem of paying incentive payments. For the principal, the optimal supervisor has incentives that are partially, but not completely, aligned with her own.
    Keywords: Relational contracts,delegation,corruption
    Date: 2016–09
  5. By: João V. Ferreira (Aix-Marseille University (Aix-Marseille School of Economics), CNRS, & EHESS)
    Abstract: The common interpretation given to choice behavior that satisfies the traditional revealed preference axioms is that it results from the maximization of a single preference. We show that choice data alone does not enable one to rule out the possibility that the choice behavior that satisfies the revealed preference axioms is instead the result of the aggregation of a collection of distinct preferences. In particular, we show that any ordering is observationally equivalent to a majoritarian aggregation of a collection of distinct dichotomous orderings. We also show that any ordering is observationally equivalent to a Borda’s aggregation of a collection of distinct linear orderings.
    Keywords: Revealed preference theory, Rationalization, Dichotomous preferences, Aggregation rules, Choice data
    JEL: B4 D01 D71
    Date: 2016–10
  6. By: Lømo, Teis Lunde (Department of Economics, University of Bergen); Ulsaker, Simen Aardal (Department of Economics, Norwegian School of Economics)
    Abstract: We study a setting of repeated trade between an upstream manufacturer and two downstream retailers that can exert valuable but noncontractible sales effort. Our focus is the manufacturer’s use of relational contracts with discretionary promotional allowances – payments that reward retailers for effort provision. We show that such contracts enable a sufficiently patient manufacturer to, in equilibrium, provide retailers with the correct incentives and extract the maximal industry profit in every period, and that this outcome cannot be replicated with formal two-part tariffs. These results have implications for the policy treatment of lump-sum payments from manufacturers to retailers, as well as for resale price maintenance.
    Keywords: Vertical restraints; Retail services; Repeated games; Relational contracts; Competition policy
    JEL: C73 L14 L42 L81
    Date: 2016–10–07
  7. By: V. Chari (Federal Reserve Bank of Minneapolis)
    Abstract: Abstract We study competitive equilibria in economies with adverse selection. In our model, a large population of agents contracts with a finite set of firms. Firms compete over privately informed agents by offering non-linear and endogenous contracts. These contracts are allowed to depend on the composition of agents that trade with one firm. In an insurance context, this is equivalent to mutualization of insurance contracts whereby each insuree's contract depends on the distribution of other insurees' claims. Our main result is that when such contracts are allowed, a competitive equilibrium always exists, is efficient and unique. We show this result for a variety of environments (the insurance market a la Rothschild and Stiglitz (1976), Spence's signaling model, Bester's loan market model, among others) and for one-dimensional distributions of private information among agents. Our result sheds light on optimal regulation of markets with adverse selection specially that of health insurance markets. It suggests that rather than using traditional tools such as mandates and regulation of contract characteristics, government must monitor insurance companies and enforce the mutualization of contracts whereby firms share the losses and gains from claims with all the insurers.
    Date: 2016
  8. By: Olivier Gossner; Jakub Steiner
    Abstract: We study perception biases arising under second-best perception strategies. An agent correctly observes a parameter that is payoff-relevant in many decision problems that she encounters in her environment but is unable to retain all the information until her decision. A designer of the decision process chooses a perception strategy that determines the distribution of the perception errors. If some information loss is unavoidable due to cognition constraints, then (under additional conditions) the optimal perception strategy exhibits the illusion of control, overconfidence, and optimism.
    Date: 2016–09
  9. By: Eric Danan (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique); Thibault Gajdos (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - CNRS - Centre National de la Recherche Scientifique); Brian Hill (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS - Centre National de la Recherche Scientifique); Jean-Marc Tallon (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 propose and operationalize normative principles to guide social decisions when individuals potentially have imprecise and heterogeneous beliefs, in addition to conflicting tastes or interests. To do so we adapt the standard Pareto principle to those preference comparisons that are robust to belief imprecision and characterize social preferences that respect this robust principle. We also characterize a suitable restriction of this principle. The former principle provides stronger guidance when it can be satisfied; when it cannot, the latter always provides minimal guidance.
    Keywords: Unambiguous preferences,Pareto dominance,Prefer-ence aggregation,Social choice,Uncertainty
    Date: 2015–12–11
  10. By: Jean-François Laslier (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Karine Van Der Straeten (TSE - Toulouse School of Economics - Toulouse School of Economics, Institute advanced for advanced studies in Toulouse - Institute advanced for advanced studies in Toulouse)
    Abstract: We propose a theory of strategic voting in multi-winner elections with approval balloting: A fixed number M of candidates are to be elected; each voter votes for as many candidates as she wants; the M candidates with the most votes are elected. We assume that voter preferences are separable and that there exists a tiny probability that any vote might be misrecorded. Best responses involve voting by pairwise comparisons. Two candidates play a critical role: the weakest expected winner and the strongest expected loser. Expected winners are approved if and only if they are preferred to the strongest expected loser and expected losers are approved if and only if they are preferred to the weakest expected winner. At equilibrium, if any, a candidate is elected if and only if he is approved by at least half of the voters. With single-peaked preferences, an equilibrium always exists, in which the first M candidates according to the majority tournament relation are elected. The theory is tested on individual data from the 2011 Regional Government election in Zurich.
    Keywords: Approval Voting,Elections,Voting behavior
    Date: 2016–04
  11. By: Gabrielle Demange (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: This paper analyzes some ranking methods in two-sided settings through their axiomatization. In these settings, there are two sets (the sides) and each member of one side evaluates each member of the other side. Such settings with mutual evaluations abound, for instance between buyers and sellers, students and teachers, or individuals and clubs.
    Keywords: ranking,scores,two-sided,overlapping groups,mutual evaluation systems,bi-partite graph
    Date: 2016–07–31
  12. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: Kolmogorov’s extension theorem provides a natural mapping from the space of coherent hierarchies of an agent’s first-order, second-order, etc. beliefs to the space of probability measures over the exogenous parameters and the other agents' belief hierarchies. Mertens and Zamir (1985) showed that, if the spaces of belief hierarchies are endowed with the product topology, then this mapping is a homeomorphism. This paper shows that this mapping is also a homeomorphism if the spaces of belief hierarchies are endowed with the uniform weak topology of Chen et al. (2010) or the universal strategic topology of Dekel et al. (2006), both of which ensure that strategic behaviour exhibits desirable continuity properties.
    Keywords: incomplete information, universal type space, uniform weak topology, uniform strategic topology, homeomorphism theorem
    JEL: C70 C72
    Date: 2016–11
  13. 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); Rida Laraki (Ecole Polytechnique [Palaiseau])
    Abstract: This paper studies the existence of equilibrium solution concepts in a large class of economic models with discontinuous payoff functions. The issue is well understood for Nash equilibria, thanks to Reny's better-reply security condition (Reny (1999)), and its recent improvements (Barelli and Meneghel (2013); McLennan et al. (2011); Reny (2009, 2011)). We propose new approaches, related to Reny's work, and obtain tight conditions for the existence of approximate equilibria and of sharing rule solutions in pure and mixed strategies (Simon and Zame (1990)). As byproducts, we prove that many auction games with correlated types admit an approximate equilibrium, and that many competition models have a sharing rule solution.
    Keywords: timing games, strategic approximation,auctions,Discontinuous games, better-reply security, sharing rules,approximate equilibrium, Reny equilibrium
    Date: 2016
  14. By: David Goldbaum (Economics Discipline Group, University of Technology, Sydney)
    Abstract: This paper examines network formation among a connected population with a preference for conformity and leadership. Agents build stable personal relationships to achieve coordinated actions. The network serves as a repository of collective experiences so that cooperation can emerge from simple, myopic, self-serving adaptation to recent events despite the competing impulses of conformity and leadership and despite limiting individuals to only local information. Computational analysis reveals how behavioral tendencies impact network formation and identifies locally stable disequilibrium structures.
    Keywords: Leader; Dynamic Network; Payoff interdependence; Social Interaction; Simulation
    JEL: D85 D71 C71
    Date: 2016–04–29
  15. By: Müller, Daniel; Schmitz, Patrick W.
    Abstract: A non-governmental organization (NGO) can make a non-contractible investment to provide a public good. Only ownership can be specified ex ante, so ex post efficiency requires reaching an agreement with the government. Besley and Ghatak (2001) argue that the party with the larger valuation should be the owner. We show that when transaction costs have to be incurred before the bargaining stage can be reached, ownership by the government can be optimal even when the NGO has a larger valuation. Our finding also contrasts with the standard private-good setup where the investing party (i.e., the NGO) should always be the owner.
    Keywords: Bargaining; Incomplete Contracts; Property rights; Public Goods; transaction costs
    JEL: C78 D23 D86 H41 L31
    Date: 2016–11
  16. By: Raymond Deneckere (University of Wisconsin-Madison [Madison]); André De Palma (CES, ENS Cachan, CNRS, Universite Paris-Saclay, 94235 Cachan, France); Luc Leruth (University of Liege, IMF Office in Europe - EUO)
    Abstract: We introduce risk aversion in a mixed moral hazard/adverse selection model. Under plausible assumptions, the effort level of the firm is distorted downward from the first best level of effort for both agent types. Thus, the traditional result of no distortion on the top does not hold with risk aversion. We also show that the effort level of the low-cost type may be distorted more than that of the high cost type. With an observable cost shock, an increase in exogenous risk may increase the effort level of the efficient firm and lower the expected cost of the project.
    Keywords: Incentives,Contract Theory,Risk-Sharing., Regulation
    Date: 2016–11–07
  17. By: David Goldbaum (Economics Discipline Group, University of Technology, Sydney)
    Abstract: To better understand trends, this paper models the behavior of decision-makers seeking conformity and in fluence in a connected population. Link formation is one-sided with information flowing from the target to the link's originator. A premium for leading ensures that a link's target benefits more from the link than its originator, and yet a leader serves the population by coordinating decisions. The desire for conformity drives the population to organize into a single hub with the leader at the center. Certain conditions support multiple leader structures as Nash as well. A strong desire to infl uence produces an equilibrium with an unlinked subpopulation.
    Keywords: Opinion leadership; Social networks; Conformity; Non-cooperative games
    JEL: C72 D83 D85
    Date: 2016–03–28
  18. By: Kyle Bagwell; Robert W. Staiger
    Abstract: Motivated by GATT bargaining behavior and renegotiation rules, we construct a three-country, two-good general-equilibrium model of trade and examine multilateral tariff bargaining under the constraints of non-discrimination and multilateral reciprocity. We allow for a general family of government preferences and identify bargaining outcomes that can be implemented using dominant strategy proposals for all countries. In the implementation, tariff proposals are followed by multilateral rebalancing, a sequence that is broadly consistent with observed patterns identified by Bagwell, Staiger and Yurukoglu (2016) in the bargaining records for the GATT Torquay Round. The resulting bargaining outcome is efficient relative to government preferences if and only if the initial tariff vectors position the initial world price at its "politically optimal" level. In symmetric settings, if the initial tariffs correspond to Nash tariffs, then the resulting bargaining outcome is efficient and ensures greater-than-Nash trade volumes and welfares for all countries. We also highlight relationships between our work and previous research that examines strategy-proof rationing rules in other economic settings.
    JEL: D71 F02 F13
    Date: 2016–11
  19. By: Georgi Burlakov
    Abstract: In the classical literature on vertical differentiation, goods are assumed to be single products each offered by a different firm and consumed separately one from another. This paper departs from the standard setup and explores the price competition in a vertically differentiated market where a firm's product is consumed not separately but in fixed one-to-one ratio with another complementary type of good supplied by a different producer. An optimal solution for market setting with two entrants of a type is proposed, to show that there could be an equilibrium at which the so-called "mixed-quality combinations", consisting of one high-quality good and one low-quality good each, remain unsold. For such an equilibrium to exist, it is suffcient the mixed-quality combinations to be at least as di erentiated from the best as from the worst combination which retains its positive market share. Thus, the mixed-quality exclusionary outcome appears as a further form in which the well-known maximum- differentiation principle could be implemented in a multi-market setting. It provides a new explanation of the self-selection bias in consumption observed in some industries for complementary goods.
    Keywords: complementary goods; vertical product differentiation; market foreclosure;
    JEL: L11 L13 L15
    Date: 2016–08
  20. By: David Goldbaum (Economics Discipline Group, University of Technology, Sydney)
    Abstract: Perpetually evolving divergent trading strategies is the natural consequence of a market with idiosyncratic private information. In the face of intrinsic uncertainty about other traders' strategies, participants resort to learning and adaptation to identify and exploit profitable trading opportunities. Model-consistent use of market-based information generally improves price performance but can inadvertently produce episodes of sudden mispricing. The paper examines the impact of trader's use of information and bounded rationality on price efficiency.
    Keywords: Heterogeneous Agents; Efficient Markets; Learning; Dynamics; Computational Economics
    JEL: G14 C62 D82
    Date: 2016–02–22
  21. By: Yaping Shan (School of Economics, University of Adelaide)
    Abstract: We study the agency problem between a firm and its research employees under several scenarios characterized by different R&D unit setups. In a multiagent dynamic contracting setting, we describe the precise pattern of the optimal contract. We illustrate that the optimal incentive regime is a function of how agents' efforts interact with one another; relative performance evaluation is used when their efforts are substitutes whereas joint performance evaluation is used when their efforts are complements. The optimal contract pattern provides a theoretical justification for the compensation policies used by firms that rely on R&D.
    Keywords: Dynamic Contract, Repeated Moral Hazard, Multiagent Incentive, R&D, Employee Compensation
    JEL: D23 D82 D86 J33 L22 O32
    Date: 2016–11
  22. By: Safronov, M.
    Abstract: I consider a multi-armed bandit problem, where by experimenting with any arm an agent not only learns its payoffs, but also due to learning-by-doing becomes experienced at that arm. Experience provides an additional payoffs to the agent. I study the interaction between the processes of experimentation, and learning-by-doing. The presence of learning-by-doing always reduces the agent's willingness to experiment, regardless of whether the agent is actually experienced at the arm she is currently pulling. Moreover, this effect is nonmonotone in the arrival rate of experience, and reaches maximum at intermediate arrival rates. The arms with extreme arrival rate of experience yield the highest payoff to the agent, making her pulling those arms first. This non-monotonicity result is extended to the case of collective experimentation with two agents, where equilibrium payoffs of the agents reach maximum at extreme arrival rates of experience. If the agent obtains experience by learning certain 'skills' at the arm, then the presence of experimentation effects which skills the agent learns first. If the process of learning-by-doing is deterministic, the agent learns the easier skills first; if the process is stochastic and memoryless, the agent learns the harder skills first.
    Date: 2016–11–25
  23. By: Pierre Picard (Ecole Polytechnique [Palaiseau])
    Abstract: In the linear coinsurance problem, examined first by Mossin (1968), a higher risk aversion with respect to wealth in the sense of Arrow-Pratt implies a higher optimal coinsurance rate. We show that this property does not hold for health insurance under ex post moral hazard, i.e., when illness severity cannot be observed by insurers and policyholders decide on their health expenditures. The optimal coinsurance rate trades off a risk sharing effect and an incentive effect, both related to risk aversion.
    Keywords: coinsurance, ex post moral hazard,Health Insurance
    Date: 2016–10–10
  24. By: Steven Berry; Philip Haile; Mark Israel; Michael Katz
    Abstract: The distinction between complements, substitutes, and independent goods is important in many contexts. It is well known that when consumers’ conditional indirect utilities for two goods are superadditive, the goods are gross complements. Generalizing insights in Gans and King (2006) and Gentzkow (2007), we show that superadditivity between one pair of goods can also introduce complementarity between competing pairs of goods. One implication is that lower prices can result from a merger between producers of goods that themselves offer no superadditivity.
    JEL: L13 L4
    Date: 2016–11

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