nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒01‒15
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Optimal Delegation of Sequential Decisions: The Role of Communication and Reputation By Alp Atakan; Levent Kockesen; Elif Kubilay
  2. Market Power and Welfare in Asymmetric Divisible Good Auctions By Manzano, Carolina; Vives, Xavier
  3. The Enforcement of Mandatory Disclosure Rules By Matthias Dahm; Paula Gonzalez; Nicolas Porteiro
  4. Perturbed Utility and General Equilibrium Analysis By Wei Ma
  5. Asymmetric Power and Market Failure: Power Hazard in Exchange By Korkut Erturk
  6. Intermediaries and Consumer Search By Chen, Yongmin; Zhang, Tianle
  7. All-Pay Auctions with Ties By Alan Gelder; Dan Kovenock; Brian Roberson
  8. Nash equilibrium with discontinuous utility functions: Reny's approach extended By Kukushkin, Nikolai S.
  9. A Risk-Neutral Equilibrium Leading to Uncertain Volatility Pricing By Johannes Muhle-Karbe; Marcel Nutz
  10. Strategy proofness and unanimity in many-to-one matching markets By Diss, Mostapha; Doghmi, Ahmed; Tlidi, Abdelmonaim
  11. Learning to trust, learning to be trustworthy By Berger, Ulrich
  12. Equilibria in a Japanese-English Auction with Discrete Bid Levels for the Wallet Game By Ray, Indrajit; Gonçalves, Ricardo
  13. Intermediary Search for Suppliers in Procurement Auctions By Honda, Jun
  14. Hidden Stochastic Games and Limit Equilibrium Payoffs By Renault, Jérôme; Ziliotto, Bruno
  15. Asymmetric information in the regulation of the access to markets By Ghislandi, Simone; Kuhn, Michael
  16. On measuring welfare changes when varieties are endogenous By Kristian Behrens; Yoshitsugu Kanemoto; Yasusada Murata
  17. Information suppression by teams and violations of the Brady rule By Andrew F. Daughety; Jennifer F. Reinganum
  18. Higher-Order Risk Measure and (Higher-Order) Stochastic Dominance By Niu, Cuizhen; Wong, Wing-Keung; Xu, Qunfang
  19. Zero-Sum Revision Games By Gensbittel, Fabien; Lovo, Stefano; Renault, Jérôme; Tomala, Tristan
  20. Optimal Dynamic Information Provision By Renault, Jérôme; Solan, Eilon; Vieille, Nicolas

  1. By: Alp Atakan (Koc University); Levent Kockesen (Koc University); Elif Kubilay (Bocconi University)
    Abstract: We analyze delegation of a set of decisions over time by an informed principal to a potentially biased agent. Each period the principal observes a state of the world and sends a “cheap-talk” message to the agent, who is privately informed about her bias. We focus on principal-optimal equilibria that satisfy a Markovian property and show that if the potential bias is large, then the principal assigns less important decisions in the beginning and increases the importance of decisions towards the end. In the beginning of their relationship, the biased agent acts exactly in accordance with the principal’s preferences, while towards the end, she starts playing her own favorite action with positive probability and gradually builds up her reputation. Principal provides full information in every period as long as he has always observed his favorite actions in the past. If we interpret the evolution of the importance of decisions over time as the career path of an agent, this finding fits the casual observation that an agent’s career usually progresses by making more and more important decisions and provides a novel explanation for why this is optimal. We also show that the bigger the potential conflict of interest, the lower the initial rank and the faster the promotion.
    Keywords: Delegation, Communication, Cheap Talk, Reputation, Career Path, Gradualism, Starting Small.
    JEL: D82 D83 D23
    Date: 2017–01
  2. By: Manzano, Carolina; Vives, Xavier
    Abstract: We analyze a divisible good uniform-price auction that features two groups each with a finite number of identical bidders. Equilibrium is unique, and the relative market power of a group increases with the precision of its private information but declines with its transaction costs. In line with empirical evidence, we find that an increase in transaction costs and/or a decrease in the precision of a bidding group's information induces a strategic response from the other group, which thereafter attenuates its response to both private information and prices. A "stronger" bidding group -which has more precise private information, faces lower transaction costs, and is more oligopsonistic- has more market power and so will behave competitively only if it receives a higher per capita subsidy rate. When the strong group values the asset no less than the weak group, the expected deadweight loss increases with the quantity auctioned and also with the degree of payoff asymmetries. Market power and the deadweight loss may be negatively associated.
    Keywords: demand/supply schedule competition; electricity auctions; liquidity auctions; private information; Treasury auctions
    JEL: D44 D82 E58 G14
    Date: 2016–12
  3. By: Matthias Dahm (School of Economics, University of Nottingham); Paula Gonzalez (Universidad Pablo de Olavide, Department of Economics); Nicolas Porteiro (Universidad Pablo de Olavide, Department of Economics)
    Abstract: TThis paper examines the incentives of a firm to invest in information about the quality of its product and to disclose its findings. If the firm holds back information, it might be detected and fined. We show that optimal monitoring is determined by a trade-off. Stricter enforcement reduces the incentives for selective reporting but crowds out information search. Our model implies that (i) the probability of detection and the fine might be complements; (ii) the optimal monitoring policy does not necessarily eliminate selective reporting entirely; (iii) even when there is some selective reporting in equilibrium and more stringent monitoring is costless, increasing the probability of detection might not be beneficial; and (iv) when society values selectively reported information, the optimal fine might not be the largest possible fine.
    Keywords: strategic information transmission, distrust effect, confidence effect, monitoring, penalty, fine, sanction, detection probability
    Date: 2016
  4. By: Wei Ma (International Business School Suzhou, Xi'an Jiaotong-Liverpool University, China and Department of Economics, University of Pretoria, South Africa.)
    Abstract: We study general equilibrium theory of complete markets in an otherwise standard economy with each household having an additive perturbed utility function. Since this function represents a type of stochastic choice theory, the equilibrium of the corresponding economy is defined to be a price vector that makes its mean expected demand equal its mean endowment. We begin with a study of the economic meaning of this notion, by showing that at any given price vector, there always exists an economy with deterministic utilities whose mean demand is just the mean expected demand of our economy with additive perturbed utilities. We then show the existence of equilibrium, its Pareto inefficiency, and the upper hemi-continuity of the equilibrium set correspondence. Specializing to the case of regular economies, we finally demonstrate that almost every economy is regular and the equilibrium set correspondence in this regular case is continuous and locally constant.
    Keywords: General equilibrium, Stochastic choice, Regular economy
    Date: 2017–01
  5. By: Korkut Erturk
    Abstract: In simple textbook treatment of bilateral exchange traders end up on the contract curve such that the trading surplus is maximized regardless of any asymmetric bargaining power they might have. However, that need not be true when the terms of exchange are determined by uncooperative bargaining, for gains from trading will not reach its potential unless traders refrain from acting strategically. But, because power asymmetry creates quasi-rents that the more powerful player can capture, she might maximize her payoff when total gain from trading falls short of its potential. In other words, power asymmetry can make acting strategically tempting for the more powerful player, which however is socially costly. Using game theory the paper specifies profit maximizing strategic behavior under asymmetric power and considers its relevance for a more general conception of market exchange where traders bargain strategically. Two examples, involuntary unemployment and North’s theory of the state, are then discussed in light of the model developed.
    Keywords: Asymmetric Power, Rent Seeking, Uncooperative Games, Strategic Bargaining JEL Classification: A10, D70, C70, E02
    Date: 2016
  6. By: Chen, Yongmin; Zhang, Tianle
    Abstract: This paper discusses how intermediaries, such as a search engine and an online marketplace, may affect consumer search. We propose an analytical framework that encompasses several models of search for differentiated products, with a high-quality firm being more likely to offer a product that meets each consumer's need. An intermediary improves consumer search efficiency by providing a search platform on which positions are sold to high-quality firms through competitive bidding. While the intermediary may admit too many or too few firms to its platform, compared to what would maximize consumer surplus or total welfare, its presence can nevertheless benefit consumers and improve welfare. However, the intermediary may reduce search efficiency when firms are differentiated only horizontally, when they sell experience or credence goods, or when the intermediary is biased (possibly due to vertical integration).
    Keywords: consumer search, intermediary, search engine, search platform, online marketplace, vertical differentiation
    JEL: D8 L1
    Date: 2016–12
  7. By: Alan Gelder (Institute for Defense Analyses); Dan Kovenock (Economic Science Institute, Chapman University); Brian Roberson (Department of Economics, Purdue University)
    Abstract: We study the two-player, complete information all-pay auction in which a tie ensues if neither player outbids the other by more than a given amount. In the event of a tie, each player receives an identical fraction of the winning prize. Thus players engage in two margins of competition: losing versus tying, and tying versus winning. Two pertinent parameters are the margin required for victory and the value of tying relative to winning. We fully characterize the set of Nash equilibria for the entire parameter space. For much of the parameter space, there is a unique Nash equilibrium which is also symmetric. Equilibria typically involve randomizing over multiple disjoint intervals, so that in essence players randomize between attempting to tie and attempting to win. In equilibrium, expected bids and payoffs are non-monotonic in both the margin required for victory and the relative value of tying.
    Keywords: All-pay auction, contest, tie, draws, bid differential
    JEL: C72 D44 D72 D74
    Date: 2016
  8. By: Kukushkin, Nikolai S.
    Abstract: Philip Reny's approach to games with discontinuous utility functions can work outside its original context. The existence of Nash equilibrium, as well as the possibility to approach an equilibrium with a finite individual improvement path, are established, under a condition slightly weaker than the better reply security, for three classes of strategic games: potential games, games with strategic complementarities, and aggregative games with appropriate monotonicity conditions.
    Keywords: better reply security; Nash equilibrium; potential game; game with strategic complementarities; aggregative game
    JEL: C72
    Date: 2016–12–28
  9. By: Johannes Muhle-Karbe; Marcel Nutz
    Abstract: We study the formation of derivative prices in equilibrium between risk-neutral agents with heterogeneous beliefs about the dynamics of the underlying. Under the condition that the derivative cannot be shorted, we prove the existence of a unique equilibrium price and show that it incorporates the speculative value of possibly reselling the derivative. This value typically leads to a bubble; that is, the price exceeds the autonomous valuation of any given agent. Mathematically, the equilibrium price operator is of the same nonlinear form that is obtained in single-agent settings with strong aversion against model uncertainty. Thus, our equilibrium leads to a novel interpretation of this price.
    Date: 2016–12
  10. By: Diss, Mostapha; Doghmi, Ahmed; Tlidi, Abdelmonaim
    Abstract: In this paper, we consider a standard model of many-to-one matching markets. First, we study the relation between strategy-proofness and unanimity under a certain requirement and we prove these two properties become equivalent. Second, we illustrate that this result has an immediate impact on the relation between strategy-proofness and Maskin monotonicity. Finally, we determine a close connexion between strategy-proofness and implementation literature. We provide under certain minimal requirements the foundation for reasoning the equivalence among dominant strategy implementation, standard Nash implementation, and partially honest Nash implementation.
    Keywords: Many-to-one matching markets; strategy-proofness; unanimity; Maskin monotonicity, implementation.
    JEL: C72 C78 D71
    Date: 2016–12–08
  11. By: Berger, Ulrich
    Abstract: Interpersonal trust is a one-sided social dilemma. Building on the binary trust game, we ask how trust and trustworthiness can evolve in a population where partners are matched randomly and agents sometimes act as trustors and sometimes as trustees. Trustors have the option to costly check a trustee's last action and to condition their behavior on the signal they receive. We show that the resulting population game admits two components of Nash equilibria. Nevertheless, the long-run outcome of an evolutionary social learning process modeled by the best response dynamics is unique. Even if unconditional distrust initially abounds, the trustors' checking option leads trustees to build a reputation for trustworthiness by honoring trust. This invites free-riders among the trustors who save the costs of checking and trust blindly, until it does no longer pay for trustees to behave in a trustworthy manner. This results in cyclical convergence to a mixed equilibrium with behavioral heterogeneity where suspicious checking and blind trusting coexist while unconditional distrust vanishes. (author's abstract)
    Keywords: trust game; evolutionary game theory; reputation; best response dynamics
    Date: 2016–01
  12. By: Ray, Indrajit (Cardiff Business School); Gonçalves, Ricardo (Católica Porto Business School)
    Abstract: We consider the set-up of a Japanese-English auction with exogenously fixed discrete bid levels for the wallet game with two bidders. We prove that bidding twice the signal - the equilibrium strategy with continuous bid levels - is never an equilibrium in this set up. We show that partition equilibria exist that may be separating or pooling. We illustrate some separating and pooling equilibria with two and three discrete bid levels; we also compare the revenues of the seller from these equilibria and thereby find the optimal bid levels in these cases.
    Keywords: Japanese-English auctions, wallet game, discrete bids, partitions, pooling equilibrium, separating equilibrium
    JEL: C72 D44
    Date: 2016
  13. By: Honda, Jun
    Abstract: In many procurement auctions, entrants determine whether to participate in auctions accounting for their roles of intermediaries who search for the best (or the cheapest) input suppliers. We build on a procurement auction model with entry, combining with intermediary search for suppliers. The novel feature is that costs of bidders are endogenously determined by suppliers who strategically charge input prices. We show the existence of an equilibrium with price dispersion for inputs, generating cost heterogeneity among bidders. Interestingly, the procurement cost may rise as the number of potential bidders increases. (author's abstract)
    Keywords: Information Frictions; Search; Procurement; Auction; Vertical Relations; Entry Deterrence; Price Dispersion
    Date: 2015–08
  14. By: Renault, Jérôme; Ziliotto, Bruno
    Abstract: We consider 2-player stochastic games with perfectly observed actions, and study the limit, as the discount factor goes to one, of the equilibrium payoffs set. In the usual setup where current states are observed by the players, we first show that the set of stationary equilibrium payoffs always converges. We then provide the first examples where the whole set of equilibrium payoffs diverges. The construction can be robust to perturbations of the payoffs, and to the introduction of normal-form correlation. Next we naturally introduce the more general model of hidden stochastic game, where the players publicly receive imperfect signals over current states. In this setup we present a last example where not only the limit set of equilibrium payoffs does not exist, but there is no converging selection of equilibrium payoffs. The example is symmetric and robust in many aspects, in particular to the introduction of extensive-form correlation or communication devices. No uniform equilibrium payoff exists, and the equilibrium set has full support for each discount factor and each initial state.
    Date: 2017–01
  15. By: Ghislandi, Simone; Kuhn, Michael
    Abstract: It is frequently argued that the high costs of clinical trials prior to the admission of new pharmaceuticals are stifling innovation. At the same time, regulation of the access to markets is often justified on the basis of consumers` inability to detect the true quality of a product. We examine these arguments from an information economic perspective by setting a framework where the incentives to invest in R&D are influenced by the information structure prevailing when the product is launched in the market at a later stage. In this setting, by changing the information structure, regulation (or the lack of) can thus indirectly affect R&D efforts. More formally, we construct a moral hazard - cum - adverse selection model in which a pharmaceutical firm exerts an unobservable effort towards developing an innovative (high quality) drug (moral hazard) and then announces the (unobservable) quality outcome to an uninformed regulator and/or consumers (adverse selection). We compare the outcomes in regard to innovation effort and expected welfare under two regimes: (i) regulation, where products undergo a clinical trial designed to ascertain product quality at the point of market access; and (ii) laissez-faire with free entry, where the revelation of quality is left to the market process. Results show that whether or not innovation is greater in the presence of entry regulation crucially depends on the efficacy of the trial in identifying (poor) quality, on the probability that unknown qualities are revealed in the market process, and on the preference and cost structure. The welfare ranking of the two regimes depends on the differential effort incentive and on the net welfare gain from implementing full information instantaneously. For example, in settings of vertical monopoly, vertical differentiation and horizontal differentiation with no variable cost of quality, entry regulation tends to be the preferred regime if the effort incentive under pooling is relatively low and profits do not count too much towards welfare. A complementary numerical Analysis shows how the outcomes vary with the market and cost structure. (authors' abstract)
    Keywords: adverse selection; (entry) regulation; moral hazard; pharmaceutical industry; R&D incentives
    Date: 2016–02
  16. By: Kristian Behrens (Universite du Quebec a Montreal); Yoshitsugu Kanemoto (National Graduate Institute for Policy Studies); Yasusada Murata (Nihon University Population Research Institute)
    Abstract: Extant studies take it for granted that there is a one-to-one mapping from a change in the equilibrium allocation to a change in welfare. We show that such a premise does not apply to fairly standard models of monopolistic competition. For any change in the equilibrium allocation, there exist an infinite number of possible welfare changes when the mass of varieties consumed differs between the two equilibria. Our results thus reveal a fundamental difficulty in measuring welfare changes when varieties are endogenous.
    Date: 2016–12
  17. By: Andrew F. Daughety (Vanderbilt University); Jennifer F. Reinganum (Vanderbilt University)
    Abstract: We develop a model of individual prosecutors (and teams of prosecutors) and show how, in equilibrium, team-formation can lead to increased incentives to suppress evidence (relative to those faced by a lone prosecutor). Our model assumes that each individual prosecutor is characterized by a variable that captures that individual's level of tradeoff between a desire for career advancement (by winning a case) and a disutility for unjustly convicting an innocent defendant by suppressing exculpatory evidence. We assume a population of prosecutors that is heterogenous with respect to this tradeoff rate, and each individual's tradeoff rate is their own private information. A convicted defendant may later discover the exculpatory information; a judge will then void the conviction and may order an investigation. If the prosecutor is found to have violated the defendant's Brady rights (to exculpatory evidence), this results in penalizing the prosecutor. The payoff from winning a case is a public good (among the team members) while any penalties are private bads. The anticipated game between the prosecutors and the judge is the main focus of this paper. The decision to investigate a sole prosecutor, or a team of prosecutors, is determined endogenously. We show that the equilibrium assignment of roles within the team involves concentration of authority about suppressing/disclosing evidence.
    Keywords: Evidence suppression, prosecutorial misconduct, disclosure, team organization
    JEL: K0 D8
    Date: 2017–01–10
  18. By: Niu, Cuizhen; Wong, Wing-Keung; Xu, Qunfang
    Abstract: This paper extends the theory between Kappa ratio and stochastic dominance (SD) and risk-seeking SD (RSD) by establishing several relationships between first- and higher-order risk measures and (higher-order) SD and RSD. We first show the sufficient relationship between the (n+1)-order SD and the n-order Kappa ratio. We then find that, in general, the necessary relationship between SD/RSD and the Kappa ratio cannot be established. Thereafter, we find that when the variables being compared belong to the same location-scale family or the same linear combination of location-scale families, we can get the necessary relationships between the (n+1)-order SD with the n-order Kappa ratio when we impose some conditions on the means. Our findings enable academics and practitioners to draw better decision in their analysis.
    Keywords: Stochastic Dominance, Kappa ratio, Omega Ratio, Sortino ratio, mean-risk analysis, risk aversion, risk seeking
    JEL: C02 D81 G10
    Date: 2017–01–03
  19. By: Gensbittel, Fabien; Lovo, Stefano; Renault, Jérôme; Tomala, Tristan
    Abstract: In a zero-sum asynchronous revision game, players can revise their actions only at exogenous random times. Players’ revision times follow Poisson processes, independent across players. Payoffs are obtained only at the deadline by implementing the last prepared actions in the ‘component game’. The value of this game is called revision value. We characterize it as the unique solution of an ordinary differential equation and show it is continuous in all parameters of the model. We show that, as the duration of the game increases, the limit revision value does not depend on the initial position and is included between the min-max and max-min of the component game. We fully characterize the equilibrium in 2?2 games. When the component game minmax and maxmin differ, the revision game equilibrium paths have a wait-and-wrestle structure: far form the deadline, players stay put at sur-place action profile, close to the deadline, they take best responses to the action of the opponent.
    Keywords: Revision Games, Zero-sum Games, Deadline Effect.
    Date: 2017–01
  20. By: Renault, Jérôme; Solan, Eilon; Vieille, Nicolas
    Abstract: We study a dynamic model of information provision. A state of nature evolves according to a Markov chain. An advisor with commitment power decides how much information to provide to an uninformed decision maker, so as to influence his short-term decisions. We deal with a stylized class of situations, in which the decision maker has a risky action and a safe action, and the payoff to the advisor only depends on the action chosen by the decision maker. The greedy disclosure policy is the policy which, at each round, minimizes the amount of information being disclosed in that round, under the constraint that it maximizes the current payoff of the advisor. We prove that the greedy policy is optimal in many cases – but not always.
    Keywords: Dynamic information provision, optimal strategy, greedy algorithm,commitment.
    JEL: C72 C73
    Date: 2017–01

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