nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒01‒08
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Commitment vs. Flexibility with Costly Verification By Marina Halac; Pierre Yared
  2. Secret contracting in multilateral relations By Rey, Patrick; Verge, T.
  3. Career Concerns and Policy Intransigence - A Dynamic Signalling Model By Caroline D. Thomas
  4. Some Simple Economics of the Blockchain By Christian Catalini; Joshua S. Gans
  5. Epistemically robust strategy subsets By Asheim, Geir; Voorneveld, Mark; Weibull, Jörgen W.
  6. Optimal Licensing of Non-Drastic and (Super-)Drastic Innovations: The Case of the Inside Patent Holder By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  7. Existence of monotone equilibrium in first price auctions with private risk aversion and private initial wealth By Matthew Gentry; Tong Li; Jingfeng Lu
  8. Religious Co-option in Autocracy: A Theory Inspired by History By Auriol, Emmanuelle; PLATTEAU, Jean Philippe
  9. Malice in the Rubinstein bargaining game By Guha, Brishti
  10. Public versus Secret Voting in Committees By Andrea Mattozzi; Marcos Y. Nakaguma
  11. The Effect of Observability on the Noncontractible Investment of a Regulated Firm By Saglam, Ismail
  12. Another model of sales. Price discrimination in a differentiated duopoly market By Mehlum, Halvor
  13. Market Selection and the Information Content of Prices By Atakan, Alp Enver; Ekmekci, Mehmet
  14. Unequal power and the dynamics of rivalry By Mehlum, Halvor; Moene, Kalle
  15. Whom to Lobby? Targeting in Political Networks By Thomas Groll; Anja Prummer
  16. A Theory of Bundling Advertisements in Media Markets By Kevin M. Murphy; Ignacio Palacios-Huerta

  1. By: Marina Halac; Pierre Yared
    Abstract: We introduce costly verification into a general delegation framework. A principal faces an agent who is better informed about the efficient action but biased towards higher actions. An audit verifies the agent’s information, but is costly. The principal chooses a permissible action set as a function of the audit decision and result. We show that if the audit cost is small enough, a threshold with an escape clause (TEC) is optimal: the agent can select any action up to a threshold, or request audit and the efficient action if the threshold is sufficiently binding. For higher audit costs, the principal may instead prefer auditing only intermediate actions. However, if the principal cannot commit to inefficient allocations following the audit decision and result, TEC is always optimal. Our results provide a theoretical foundation for the use of TEC in practice, including in capital budgeting in organizations, fiscal policy, and consumption-savings problems.
    JEL: D02 D82 D86 E02
    Date: 2016–12
  2. By: Rey, Patrick; Verge, T.
    Abstract: We develop a flexible and tractable framework of (secret) vertical contracting between multiple upstream suppliers and downstream retailers. This framework does not put any restriction on the tari¤s that can be negotiated, and yet does take account of the impact of these tariffs on downstream firms'behavior. We show that equilibrium tariffs must be cost-based; as a result, retail prices are the same as with a multi-brand oligopoly. Interestingly, this finding is in line with the empirical analysis of a recent Norwegian merger. We then use this flexible framework to endogenize market structure as well as to analyze the e¤ects of various vertical restraints, such as resale price maintenance and retail price parity clauses. Finally, we show that our framework also applies to the agency relationships that characterize most online platforms.
    Keywords: Bilateral contracting, vertical relationships, agency, resale price maintenance, price parity clauses.
    Date: 2016–12
  3. By: Caroline D. Thomas (Department of Economics, The University of Texas at Austin)
    Abstract: A decision-maker might be reluctant to abandon her project when she is concerned both about social welfare and public beliefs about her ability. The decision-maker gets private information over time about whether the project will succeed or fail. Intuition suggests that in this setting the decision-maker will continue with the project for too long, both because persisting signals positive private information and in the hope of a last-minute success. I show, however, that efficiency can be achieved in equilibrium for many information structures. Surprisingly, increasing the informational asymmetry by improving the decision-maker's private information improves efficiency.Creation-Date: 2014-2
    JEL: C73 D82 P16
    Date: 2016–12
  4. By: Christian Catalini; Joshua S. Gans
    Abstract: We rely on economic theory to discuss how blockchain technology and cryptocurrencies will influence the rate and direction of innovation. We identify two key costs that are affected by distributed ledger technology: 1) the cost of verification; and 2) the cost of networking. Markets facilitate the voluntary exchange of goods and services between buyers and sellers. For an exchange to be executed, key attributes of a transaction need to be verified by the parties involved at multiple points in time. Blockchain technology, by allowing market participants to perform costless verification, lowers the costs of auditing transaction information, and allows new marketplaces to emerge. Furthermore, when a distributed ledger is combined with a native cryptographic token (as in Bitcoin), marketplaces can be bootstrapped without the need of traditional trusted intermediaries, lowering the cost of networking. This challenges existing revenue models and incumbents's market power, and opens opportunities for novel approaches to regulation, auctions and the provision of public goods, software, identity and reputation systems.
    JEL: D4 D47 O16 O3 O31 O32 O33 O34
    Date: 2016–12
  5. By: Asheim, Geir (Dept. of Economics, University of Oslo); Voorneveld, Mark (Department of Economics, Stockholm School of Economics,); Weibull, Jörgen W. (Department of Economics, Stockholm School of Economics)
    Abstract: We define a concept of epistemic robustness in the context of an epistemic model of a finite normal game where a player type corresponds to a belief over the profiles of opponent strategies and types. A Cartesian product X of pure strategy subsets is epistemically robust if there is a Cartesian product Y of player type subsets with X as the associated set of best reply profiles such that the set Yi contains all player types that believe with sufficient probability that the others are of types in Y-i and play best replies. This robustness concept provides epistemic foundations for set-valued generalizations of strict Nash equilibrium, applicable also to games without strict Nash equilibria. We relate our concept to closedness under rational behavior and thus to strategic stability and to the best reply property and thus to rationalizability.
    Keywords: Epistemic game theory; epistemic robustness; rationalizability; closedness under rational behavior; mutual p-belief
    JEL: C72 D83
    Date: 2016–11–01
  6. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Korea University, Seoul); Elmar G. Wolfstetter (Humboldt-University at Berlin and Korea University, Seoul)
    Abstract: We reconsider the inside innovators’ optimal licensing problem, assuming incomplete information and unit cost profiles that may or may not have the potential to propel a monopoly, taking into account restrictions concerning royalty rates and the use of exclusive licenses implied by antitrust rules. We analyze optimal licensing mechanisms using methods developed in the analysis of license auctions with downstream interaction. The optimal mechanism differs significantly from the mechanisms reported in the literature, which assumed complete information or particular cost profiles or probability distributions.
    Keywords: Innovation, licensing, optimal contracts, asymmetric information
    JEL: D21 D43 D44 D45
    Date: 2016
  7. By: Matthew Gentry; Tong Li; Jingfeng Lu
    Abstract: In this paper, we study the existence of monotone equilibrium in first price auctions where bidders have a three-dimensional private type, i.e. their private values, degrees of risk aversion and initial wealth. Bidders' utility functions belong to the class of constant relative risk aversion (CRRA) or constant absolute risk aversion (CARA). The bidders' types are independent across bidders, while a bidder's private value, initial wealth and degree of risk aversion are allowed to be correlated. We show that a monotone equilibrium always exists in a general setting allowing for asymmetric bidders. Moreover, with symmetric bidders, a symmetric monotone equilibrium strategy must exist. A bidder's equilibrium strategy increases with bidders' private values and degrees of risk aversion. When bidders have CRRA utility, equilibrium bids decrease with initial wealth; when bidders have CARA utility, equilibrium bids are invariant to initial wealth.
    Keywords: constant absolute risk aversion (CARA); constant relative risk aversion (CRRA); auction; initial wealth; monotone equilibrium
    JEL: C7 D7
    Date: 2015–11
  8. By: Auriol, Emmanuelle; PLATTEAU, Jean Philippe
    Abstract: The relationship between religion and politics is explored from a theoretical standpoint, assuming that religious clerics can be coopted by the ruler acting as an autocrat. The comparative effects of decentralized versus centralized religions on the optimal level of cooperation between the autocrat and the religious clerics, which itself impinges upon political stability, is analysed. The paper shows that the presence of a decentralized body of clerics makes autocratic regimes more unstable. It also shows that in time of stability, the level of reforms is larger with a centralized religion than with a decentralized one. When the autocrat in the decentralized case pushes more reforms than in the centralized one, he always does so at the cost of stability. Historical case studies are presented that serve to illustrate the main results.
    Keywords: Autocracy, instrumentalization of religion, centralized and decentralized religion, Islam, economic development, reforms
    JEL: D02 D72 N40 O57 P48 Z12
    Date: 2016–12
  9. By: Guha, Brishti
    Abstract: This is the first paper to incorporate malice into the Rubinstein alternating offers bargaining game. Initially, I examine outcomes with one-sided malice, allowing one of the bargaining players to be malicious in the sense that he obtains a positive payoff in every period in which the other player does not obtain any piece of the pie. This “malice payoff” is independent of whether the malicious player himself obtains the pie or not. I identify a unique SPNE of the bargaining game, and find that malice confers bargaining advantage; if the respondent is malicious, this can in some cases completely erode and even reverse first mover advantage. I then examine two-sided malice. I find that the proposer’s share when both players are malicious may either increase or decrease relative to the traditional Rubinstein shares. Even with two-sided malice, the proposer may end up with a lower share than the respondent. The results remain qualitatively similar under an alternative “continuous” formulation of malice. I contrast them with the case of envious preferences.
    Keywords: Malice, Rubinstein alternating offers game, disagreement.
    JEL: C7 C72
    Date: 2016–12–20
  10. By: Andrea Mattozzi; Marcos Y. Nakaguma
    Abstract: This paper studies a committee decision-making problem. Committee members are heterogeneous in their competence, they are biased towards one of the alternatives and career oriented, and they can choose whether to vote or abstain. The interaction between career concern and bias affects the voting behavior of members depending on transparency of individual votes. We show that transparency attenuates the pre-existing biases of competent members and exacerbates the biases of incompetent members. Public voting leads to better decisions when the magnitude of the bias is large, while secret voting performs better otherwise. We provide experimental evidence supporting our theoretical conclusions.
    Keywords: Committees; Voting, Career Concern; Transparency
    JEL: D72 C92 D71
    Date: 2016–11–28
  11. By: Saglam, Ismail
    Abstract: We study the effect of observability on the noncontractible investment of a regulated firm with private marginal cost information. We show that the observability reduces investment, pointing to the regulated firm's prevention of ratcheting. This result, which is in line with an earlier finding of Tirole (1986) obtained in a bargaining model of procurement with two-sided asymmetric information, reveals that 'underinvestment due to observability' is independent of whether only the investing firm or all of the parties affected by its investment decision have some private information.
    Keywords: Monopoly; Regulation; Investment; Observability; Asymmetric Information
    JEL: D82 L51 O32
    Date: 2017–01–03
  12. By: Mehlum, Halvor (Dept. of Economics, University of Oslo)
    Abstract: Using a model of horizontal differentiation where a variety dimension is added to Hotelling's (1929) "linear city" duopoly model, I show that even when costs and demand are symmetric, price discrimination may be an equilibrium phenomenon. In the model each customer have a preferred variety and a preferred firm. They have perfect information about all prices and may be induced to switch variety and firm given a sufficient price difference. Price discrimination equilibrium exists when a sufficient fraction of consumers are elastic both with respect to variety and firm.
    Keywords: Duopoly; price discrimination
    JEL: D43
    Date: 2016–09–23
  13. By: Atakan, Alp Enver; Ekmekci, Mehmet
    Abstract: We study price formation in a large, common-value auction where buyers choose, based on their private information, between bidding in the auction and an outside option. The distribution of bidders participating in the auction is determined endogenously in equilib- rium. We first focus on an outside option whose value is state dependent and positively correlated with the common-value object on auction. If the outside option’s expected value is non-negative and its variance is positive, then information is not aggregated in the auction in any equilibrium. We then turn to a model where bidders choose to partic- ipate in one of two concurrently operating auction markets. The outside option for one auction is the equilibrium value of participating in the alternative auction, i.e., outside options are endogenously determined. If frictions lead to uncertain gains from trade in the first auction, then information is not aggregated in either market even if the second auction is frictionless. This is because the two auction markets serve as outside options with positive variance for each other. Our findings are driven by how bidders self-select across options: A large disparity in the payoff variance of the two options implies that optimistic bidders select the option with higher variance while pessimistic bidders select the option with lower variance. Our results suggest a novel mechanism through which market imperfections in one market can have widespread effects across all linked markets.
    Keywords: Auctions, Large markets, Information Aggregation.
    JEL: C7 D44 D83
    Date: 2016–12–12
  14. By: Mehlum, Halvor (Dept. of Economics, University of Oslo); Moene, Kalle (Dept. of Economics, University of Oslo)
    Abstract: By incorporating positional dynamics into a conflict model relevant to battlefields and politics, we show that the conditions that induce regime stability can also induce hard conflicts. We show that in contests with incumbent-challenger turnover, i) asymmetric power across groups and positions may magnify conflicts; ii) more severe conflicts can occur with lower turnover of incumbents; iii) power can be self-defeating, as cost advantages can reduce payoffs; and iv) double inequality across positions and groups can maximize the graveness of conflicts and the social waste of resources. The propositions in our paper are contrary to the standard implications of static conict models.
    Keywords: Contests; political stability; incumbency advantage; conflict and civil war
    JEL: C73 D72 D74
    Date: 2016–09–23
  15. By: Thomas Groll (Columbia University); Anja Prummer (Queen Mary University of London)
    Abstract: We study lobbying in a setting in which decision-makers share resources in a network. Two opposing interest groups choose which decision-maker they want to target with their resource provision, and their decision depends on the decision-makers' ideologies as well as the network structure. We characterize the lobbying strategies in various network settings and show that a higher resource flow as well as homophily reinforce decision-makers' ideological bias. We highlight that competing lobbyists' efforts do not neutralize each other and their payoffs and competitive advantages depend on the networks they face. Our findings are consistent with empirically established lobbying activities.
    Keywords: Networks, Lobbying, Targeting, Flow of resources, Ideology, Centrality, Homophily, Colonel Blotto, Externalities
    JEL: D72 D78 D83 D85
    Date: 2016–12
  16. By: Kevin M. Murphy; Ignacio Palacios-Huerta
    Abstract: Watching TV and other forms of media consumption represent, after sleeping and working, the main activity that adults perform in developed countries. We present a dynamic theory of commercial broadcasting where the media trade utility-raising goods (programs, information, and services) with audiences in exchange for their exposure to advertisements (utility-decreasing bads), and where goods are otherwise free to the audience except for their opportunity cost of time. Goods and bads are dynamically arranged, and as such traded in an intertemporal bundle. No monetary transfers take place between media and audiences, and this barter exchange is not contractually sustained. We study this dynamic problem in a model that captures the central characteristics of how commercial media markets operate. The model is rich enough to account for a variety of disparate evidence in television, radio, print media and the web.
    JEL: D11 D21 L21 L82
    Date: 2016–12

This nep-mic issue is ©2017 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.