nep-mic New Economics Papers
on Microeconomics
Issue of 2016‒12‒11
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Complete Characterization of Equilibria in Common Agency Screening Games By David Martimort; Aggey Semenov; Lars Stole
  2. Rational Preference and Rationalizable Choice By S. Cerreia-Vioglio; A. Giarlotta; S. Greco; F. Maccheroni; M. Marinacci
  3. Biased contests for symmetric players By Drugov, Mikhail; Ryvkin, Dmitry
  4. Competitive Search with Ex-post Opportunism By Pedro Gomis-Porqueras; Benoit Julien; Liang Wang
  5. Optimal Contracts with Reflection By Grochulski, Borys; Zhang, Yuzhe
  6. Strategy proofness and unanimity in private good economies with single-peaked preferences By Diss, Mostapha; Doghmi, Ahmed; Tlidi, Abdelmonaim
  7. Fictitious play in networks By Christian Ewerhart; Kremena Valkanova
  8. A Theory Of Bayesian Groups By Dietrich, Franz
  9. Drugs, Showrooms and Financial Products: Competition and Regulation when Sellers Provide Expert Advice By David Bardey; Denis Gromb; David Martimort; Jérôme Pouyet
  10. Ambiguity and insurance: capital requirements and premiums By Simon Dietz; Oliver Walker
  11. Cheat or Perish? A Theory of Scientific Customs By Benoît LE MAUX; Sarah NECKER; Yvon ROCABOY
  12. Information Acquisition, Signaling and Learning in Duopoly By Thomas D. Jeitschko; Ting Liu; Tao Wang
  13. Guilt in Voting and Public Good Games By Dominik Rothenhaüsler; Nikolaus Schweizer; Nora Szech
  14. Another perspective on Borda's paradox By Mostapha Diss; Abdelmonaim Tlidi
  15. When should a winner take all, or pay some? Innovation and imitation incentives in a dynamic duopoly By Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
  16. Cournot oligopoly with randomly arriving producers By Pierre Bernhard; Marc Deschamps

  1. By: David Martimort (Paris School of Economics-EHESS); Aggey Semenov (Department of Economics, University of Ottawa); Lars Stole (University of Chicago, Booth School of Business)
    Abstract: We characterize the complete set of equilibrium allocations to intrinsic common agency screening games as the set of solutions to self-generating optimization programs. This analysis is performed both for continuous and discrete two-type models. These programs, in turn, can be thought of as maximization problems faced by a fictional surrogate principal with a simple set of incentive constraints that embed the non-cooperative behavior of principals in the underlying game. For the case of continuous types, we provide a complete characterization of equilibrium outcomes for regular environments by relying on techniques developed elsewhere for aggregate games and mechanism design problems with delegation. Those equilibria may be non-differentiable and/or exhibit discontinuities. Among those allocations, we stress the role the maximal equilibrium exhibits a n-fold distortion due to the principals' non-cooperative behavior. It is the unique equilibrium which is implemented by a tariff satisfying a biconjugacy requirement inherited from duality in convex analysis. This maximal equilibrium may not be the most preferred equilibrium allocation from the principals' point of view. We perform a similar analysis in the case of a discrete two-type model. We select within a large set of equilibria by imposing the same requirement of biconjugacy on equilibrium tariffs. Those outcomes are limits of equilibria exhibiting much bunching in nearby continuous type models which fail to be regular and require the use of ironing procedures.
    Keywords: Intrinsic common agency, aggregate games, mechanism design with delegation, duality, ironing procedures
    JEL: D82 D86
    Date: 2016
  2. By: S. Cerreia-Vioglio; A. Giarlotta; S. Greco; F. Maccheroni; M. Marinacci
    Abstract: We study a decision maker characterized by two binary relations. The fi rst reflects his judgments about well-being, his mental preferences. The second describes the decision makers choice behavior, his behavioral preferences, the ones that govern choice (see Rubin- stein and Salant, 2008a,b). Specifi cally, in the context of decision making under uncertainty, we propose axioms that may describe the rationality of these two relations. These axioms allow a joint representation by a single set of probabilities and a single utility function. It is mentally rational to prefer f over g if and only if the expected utility of f is at least as high as that of g for all probabilities in the set. It is behaviorally rationalizable to choose f over g if and only if the expected utility of f is at least as high as that of g for some probability in the set. In other words, mental and behavioral preferences admit, respectively, a representation à la Bewley (2002) and à la Lehrer and Teper (2011). Our results also provide foundation for a decision analysis procedure called robust ordinal regression and proposed by Greco, Mousseau, and Slowinski (2008).
    Date: 2016
  3. By: Drugov, Mikhail; Ryvkin, Dmitry
    Abstract: In a biased contest, one of the players has an advantage in the winner determination process. We characterize a novel class of biased contest success functions pertaining to such contests and provide necessary and sufficient conditions for zero bias to be a critical point of arbitrary objectives satisfying certain symmetry restrictions. We, however, challenge the common wisdom that unbiased contests are always optimal when contestants are symmetric ex ante or even ex post. We show that contests with arbitrary favorites, i.e., biased contests of symmetric players, can be optimal in terms of various objectives such as expected aggregate effort, the probability to reveal the stronger player as the winner or expected effort of the winner.
    Keywords: Biased contest; Biased contest success function; Aggregate effort; Predictive power; Winner's effort
    JEL: C72 D63 D72 J71
    Date: 2016
  4. By: Pedro Gomis-Porqueras (Deakin University); Benoit Julien (UNSW Australia); Liang Wang (University of Hawaii Manoa)
    Abstract: We consider a frictional market where an element of the terms of trade (price or quantity) is posted ex-ante (before the matching process) while the other is determined ex-post. By doing so, sellers can then exploit their local monopoly power by adjusting prices or quantities once the local demand is realized. We find that when sellers can adjust quantities ex-post, there exists a unique symmetric equilibrium where an increase in the buyer-seller ratio leads to higher quantities and prices. When buyers instead can choose quantity ex-post, higher buyer-seller ratio leads to higher price but lower quantity. These equilibrium allocations are generically not constrained efficient, in terms of both intensive and extensive margins. When sellers post ex-ante quantities and adjust prices ex-post, a symmetric equilibrium exists where buyers obtain no surplus. The equilibrium allocation is also constrained inefficient. If buyers choose prices ex-post, there is no equilibrium when entry is costly. This paper highlights how sellers ability to commit ex-ante to certain elements of the terms of trade is crucial in generating constrained efficient allocations.
    Keywords: Competitive Search, Price Posting, Quantity Posting
    JEL: D40 L10
    Date: 2016–11
  5. By: Grochulski, Borys (Federal Reserve Bank of Richmond); Zhang, Yuzhe (Texas A&M University)
    Abstract: In this paper, we show that whenever the agent's outside option is nonzero, the optimal contract in the continuous-time principal-agent model of Sannikov (2008) is reflective at the lower bound. This means the agent is never terminated or retired after poor performance. Instead, the agent is asked to put zero effort temporarily, which brings his continuation value up. The agent is then asked to resume effort, and the contract continues. We show that a nonzero agent's outside option arises endogenously if the agent is allowed to quit and find a new firm (after a random search time of finite expected duration). In addition, we find new dynamics of the reflection at the lower bound. In the baseline model, the dynamics of the reflection are slow, as in Zhu (2013), i.e., the zero-action is used often. However, if the agent's disutility from the first unit of effort is zero, which is a standard Inada condition, or if his utility of consumption is unbounded below, the reflection becomes fast, i.e., the zero-effort action is used seldom.
    Date: 2016–12–01
  6. By: Diss, Mostapha; Doghmi, Ahmed; Tlidi, Abdelmonaim
    Abstract: In this paper we establish the link between strategy-proofness and unanimity in a domain of private good economies with single-peaked preferences. We introduce a new condition and we prove that if this new property together with the requirement of citizen sovereignty are held, a social choice function satisfies strategy-proofness if and only if it is unanimous. As an implication, we show that strategy-proofness and Maskin monotonicity become equivalent. We also give applications to implementation literature: We provide a full characterization for standard Nash implementation and partially honest Nash implementation and we determine a certain equivalence among these theories.
    Keywords: Strategy-proofness; Unanimity; Maskin monotonicity, Private goods economies; Single-peaked preferences.
    JEL: C7 C72 D7 D71
    Date: 2015–11–06
  7. By: Christian Ewerhart; Kremena Valkanova
    Abstract: This paper studies fictitious play in networks of noncooperative two-player games. We show that continuous-time fictitious play converges to Nash equilibrium provided that the overall game is zero-sum. Moreover, the rate of convergence is 1/T , regardless of the size of the network. In contrast, arbitrary n-player zero-sum games do not possess the fictitious-play property. As an extension, we consider networks in which each bilateral game is strategically zero-sum, a weighted potential game, or a two-by-two game. In those cases, convergence requires either a condition on bilateral payoffs or that the underlying network structure is acyclic. The results are shown to hold also for the discrete-time variant of fictitious play, which entails a generalization of Robinson's theorem to arbitrary zero-sum networks. Applications include security games, conflict networks, and decentralized wireless channel selection.
    Keywords: Fictitious play, networks, zero-sum games, conflicts, potential games, Miyasawa's theorem, Robinson's theorem
    JEL: C72 D83 D85
    Date: 2016–12
  8. By: Dietrich, Franz
    Abstract: A group is often construed as a single agent with its own probabilistic beliefs (credences), which are obtained by aggregating those of the individuals, for instance through averaging. In their celebrated contribution “Groupthink”, Russell et al. (2015) apply the Bayesian paradigm to groups by requiring group credences to undergo a Bayesian revision whenever new information is learnt, i.e., whenever the individual credences undergo a Bayesian revision based on this information. Bayesians should often strengthen this requirement by extending it to 'non-public' or even 'private' information (learnt by 'not all' or 'just one' individual), or to non-representable information (not corresponding to an event in the algebra on which credences are held). I propose a taxonomy of six kinds of 'group Bayesianism', which differ in the type of information for which Bayesian revision of group credences is required: public representable information, private representable information, public non-representable information, and so on. Six corresponding theorems establish exactly how individual credences must (not) be aggregated such that the resulting group credences obey group Bayesianism of any given type, respectively. Aggregating individual credences through averaging is never permitted. One of the theorems – the one concerned with public representable information – is essentially Russell et al.'s central result (with minor corrections).
    Keywords: probabilistic opinion pooling, Bayesian groups, geometric pooling, public information, private information, characterization theorems
    JEL: D7 D8
    Date: 2016–11
  9. By: David Bardey (Toulouse School of Economics, Universidad de Los Andes); Denis Gromb (HEC Paris - GROUPE HEC); David Martimort (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics); Jérôme Pouyet (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics)
    Abstract: We consider a market in which sellers can exert an information-gathering effort to advise buyers about which of two goods best fits their needs. Sellers may steer buyers towards the higher margin good. We show that for sellers to collect and reveal information, profits on both goods must be sufficiently close to each other, i.e., lie within an implementability cone, which competition or regulation may ensure. Instruments to do so vary with the context. Controlling market power while improving the quality of advice is more difficult when sellers have private information on the profitability of the goods.
    Keywords: Mis-Selling, Expertise, Retailing, Competition, Regulation, Asymmetric Information Keywords Mis-Selling, Asym- metric Information
    Date: 2016–11
  10. By: Simon Dietz; Oliver Walker
    Abstract: Many insurance contracts are contingent on events such as hurricanes, terrorist attacks or political upheavals, whose probabilities are ambiguous. This paper offers a theory to underpin the large body of empirical evidence showing that higher premiums are charged under ambiguity. We model a (re)insurer who maximises profit subject to a survival constraint that is sensitive to the range of estimates of the probability of ruin, as well as the insurer’s attitude towards this ambiguity. We characterise when one book of insurance is more ambiguous than another and general circumstances in which a more ambiguous book requires at least as large a capital holding. We subsequently derive several explicit formulae for the price of insurance contracts under ambiguity, each of which identifies the extra ambiguity load.
    Keywords: ambiguity; ambiguity aversion; ambiguity load; capital requirement; catastrophe risk; insolvency; insurance; more ambiguous; reinsurance; ruin; uncertainty; Solvency II
    JEL: D81 G22
    Date: 2016
  11. By: Benoît LE MAUX (CREM-CNRS and Condorcet Center, University of Rennes 1, France); Sarah NECKER (University of Freiburg, Walter-Eucken Institute, Deutschland); Yvon ROCABOY (CREM-CNRS and Condorcet Center, University of Rennes 1, France)
    Abstract: We develop a theory of the evolution of scientific misbehavior. Our empirical analysis of a survey of scientific misbehavior in economics suggests that researchers’ disutility from cheating varies with the expected fraction of colleagues who cheat. This observation is central to our theory. We develop a one-principal multi-agent framework in which a research institution aims to reward scientific productivity at minimum cost. As the social norm is determined endogenously, performance-related pay may not only increase cheating in the short run but can also make cheat-ing increasingly attractive in the long run. The optimal contract thus depends on the dynamics of scientific norms. The premium on scientific productivity should be higher when the transmission of scientific norms across generations is lower (low marginal peer pressure) or the principal cares little about the future (has a high discount rate). Under certain conditions, a greater probability of detection also increases the optimal productivity premium.
    Keywords: Economics of Science, Contract Theory, Scientific Misbehavior, Social Norms
    JEL: A11 A13 K42
    Date: 2016–12
  12. By: Thomas D. Jeitschko; Ting Liu; Tao Wang
    Date: 2016
  13. By: Dominik Rothenhaüsler (Seminar for Statistics, ETH Zurich); Nikolaus Schweizer (Department of Econometrics and OR, Tilburg University); Nora Szech (Karlsruher Institut für Technologie)
    Abstract: This paper analyzes how moral costs affect individual support of morally difficult group decisions. We study a threshold public good game with moral costs. Motivated by recent empirical findings, we assume that these costs are heterogeneous and consist of three parts. The first one is a standard cost term. The second, shared guilt, decreases in the number of supporters. The third hinges on the notion of being pivotal. We analyze equilibrium predictions, isolate the causal effects of guilt sharing, and compare results to standard utilitarian and nonconsequentialist approaches. As interventions, we study information release, feedback, and fostering individual moral standards.
    Keywords: moral decision making, committee decisions, diffusion of responsibility, Shared guilt, being pivotal, division of labor, institutions and morals
    JEL: D02 D03 D23 D63 D82
    Date: 2016–11
  14. By: Mostapha Diss (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - UCBL - Université Claude Bernard Lyon 1 - UL2 - Université Lumière - Lyon 2 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - ENS Lyon - École normale supérieure - Lyon); Abdelmonaim Tlidi (ENSA Marrakech - École nationale des sciences appliquées de Marrakech)
    Abstract: This paper presents the conditions required for a profile in order to never exhibit either the strong or the strict Borda paradoxes under all weighted scoring rules in three-candidate elections. The main particularity of our paper is that all the conclusions are extracted from the differences of votes between candidates in pairwise majority elections. This way allows us to answer new questions and provide an organized knowledge of the conditions under which a given profile never shows one of the two paradoxes. Abstract This paper presents the conditions required for a profile in order to never exhibit either the strong or the strict Borda paradoxes under all weighted scoring rules in three-candidate elections. The main particularity of our paper is that all the conclusions are extracted from the differences of votes between candidates in pairwise majority elections. This way allows us to answer new questions and provide an organized knowledge of the conditions under which a given profile never shows one of the two paradoxes.
    Keywords: Voting, Geometry, Borda's Paradox, Condorcet Pairwise Procedure, Borda, Plurality, Negative Plurality,Weighted Scoring Rules
    Date: 2016
  15. By: Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
    Abstract: We develop a model of investment in duopoly with asymmetric costs of innovating and imitating and endogenous firm roles. Dynamic competition involves either attrition or preemption, the former being likelier with high demand growth and uncertainty. Industry value is maximized when firms neither stall nor hasten entry, and we show that social welfare has local maxima in both the attrition and preemption ranges. In all cases the socially optimal cost of imitation is positive. Attrition is optimal if consumer surplus rises sufficiently under duopoly, whereas with static business-stealing, preemption is optimal if discounting is important enough. Finally we discuss endogenous entry barriers and contracting, finding that firms are more likely to rely on secrecy and patents at low imitation costs and that simple licensing schemes are welfare improving.
    Keywords: Dynamic oligopoly; Knowledge spillover; Real options
    JEL: G31 L13 O33
    Date: 2016–12
  16. By: Pierre Bernhard (Université Côte d’Azur, INRIA); Marc Deschamps (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: Cournot model of oligopoly appears as a central model of strategic interaction between competing firms both from a theoretical and applied perspective (e.g antitrust). As such it is an essential tool in the economics toolbox and always a stimulus. Although there is a huge and deep literature on it and as far as we know, we think that there is a ”mouse hole” wich has not already been studied: Cournot oligopoly with randomly arriving producers. In a companion paper [Bernhard and Deschamps, 2016b] we have proposed a rather general model of a discrete dynamic decision process where producers arrive as a Bernoulli random process and we have given some examples relating to oligopoly theory (Cournot, Stackelberg, cartel). In this paper we study Cournot oligopoly with random entry in discrete (Bernoulli) and continuous (Poisson) time, whether time horizon is finite or infinite. Moreover we consider here constant and variable probability of entry or density of arrivals. In this framework, we are able to provide algorithmes answering four classical questions: 1/ what is the expected profit for a firm inside the Cournot oligopoly at the beginning of the game?, 2/ How do individual quantities evolve?, 3/ How do market quantities evolve?, and 4/ How does market price evolve?
    Keywords: Cournot market structure, Bernoulli process of entry, Poisson density of arrivals, Dynamic Programming.
    JEL: C72 C61 L13
    Date: 2016–11

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