nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒01‒29
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Model of Biased Intermediation By Cornière (de), Alexandre; Taylor, Greg
  2. A Model of Protests, Revolution, and Information By Salvador Barberà; Matthew O. Jackson
  3. Information advantage in common-value classic Tullock contests By Shitovitz, Benyamin; Selay, A.; Moreno, Diego; Haimanko, Ori; Einy, Ezra; Aiche, A.
  4. Scalable games: modelling games of incomplete information By Eccles, Peter; Wenger, Nora
  5. Mission Drift in Microcredit and Microfinance Institution Incentives By Sara Biancini; David Ettinger; Baptiste Venet
  6. Mechanism Design when players' Preferences and information coincide By Dubra, Juan; Caffera, Marcelo; Figueroa, Nicolás
  7. Strategy Revision Opportunities and Collusion By Matthew Embrey; Friederike Mengel; Ronald Peeters
  8. The Myopic Stable Set for Social Environments By Demuynck, Thomas; Herings, P. Jean-Jacques; Saulle, Riccardo; Seel, Christian
  9. Information within coalitions: risk and ambiguity. By Moreno-García, Emma; Torres-Martínez, Juan Pablo
  10. On measuring welfare changes when varieties are endogenous By Behrens, Kristian; Kanemoto, Yoshitsugu; Murata, Yasusada
  11. Reserve Prices in Auctions with Entry when the Seller in Risk Averse By Wooders, John; Moreno, Diego
  12. License and entry strategies for outside innovator in duopoly By Hattori, Masahiko; Tanaka, Yasuhito
  13. The Likelihood of a Condorcet Winner in the Logrolling Setting By Gehrlein, William; Le Breton, Michel; Lepelley, Dominique
  14. Bank monitoring incentives under moral hazard and adverse selection By Nicol\'as Hern\'andez Santib\'a\~nez; Dylan Possama\"i; Chao Zhou
  15. Pledgeability, Industry Liquidity, and Financing Cycles By Douglas W. Diamond; Yunzhi Hu; Raghuram G. Rajan
  16. Habit formation and the Pareto-efficient provision of public goods By Aronsson, Thomas; Schöb, Ronnie
  17. Reasonable doubt revisited By Tsakas, Elias
  18. A New Approach to Free Entry Markets in Mixed Oligopolies: Welfare Implications By Lee, Sang-Ho; Matsumura, Toshihiro; Sato, Susumu

  1. By: Cornière (de), Alexandre; Taylor, Greg
    Abstract: This paper studies situations in which some consumers rely on a potentially biased intermediary to choose among downstream firms. We introduce the notion that firms' and consumers' payoffs can be congruent or conflicting, and show that this has important implications for the effects of bias. Under congruence, the firm towards which the intermediary is biased invests more than its rival and consumers can be better-off than under no bias. Under conflict, bias hurts consumers and the favored firm charges higher prices. We study various oft-proposed policies for dealing with a biased intermediary and show that the efficacy of each intervention depends strongly on whether the environment exhibits congruence or conflict. We discuss how the model relates to recent issues in online markets.
    Keywords: intermediary, bias, regulation.
    JEL: D21 L15 L40
    Date: 2017–01
  2. By: Salvador Barberà; Matthew O. Jackson
    Abstract: A revolt or protest succeeds only if sufficient people participate. We study how potential participants’ ability to coordinate is affected by their information. We dis- tinguish four phenomena that affect whether information either encourages or inhibits protests and revolutions: (i) Unraveling: When agents learn about each others’ types, some are discouraged by meeting partisans of the status quo. This can unravel, as even confident agents realize that enough supporters will be discouraged to preclude a successful revolution. (ii) Homophily: Learning someone else’s type under homophily is less informative since that individual is more likely to be similar to the learner. This can lead people to be less confident of a revolution, but can also stop potential unraveling. (iii) Extremism: Meeting other protestors, and seeing pilot demonstrations or outcomes in similar countries, reveal not only how much support for change exists, but also from which constituencies it emerges. This can undercut a revolution if factions differ sufficiently in their preferred changes. (iv) Counter Demonstrations: partisans for the status quo can hold counter-demonstrations to signal their strength. We also discuss why holding mass demonstrations before a revolution may provide better signals of peoples willingness to actively participate than other less costly forms of communication (e.g., via social media), and how governments use redistribution and propaganda to avoid a revolution.
    Keywords: D74, D72, D71, D83, C72
    Date: 2017–01
  3. By: Shitovitz, Benyamin; Selay, A.; Moreno, Diego; Haimanko, Ori; Einy, Ezra; Aiche, A.
    Abstract: We show that in a common-value classic Tullock contests with incomplete information a player's information advantage is rewarded. Interestingly, in two-player contests both players exert the same expected effort. We characterize the equilibrium of two-player contests in which a player has information advantage, and show that this player exerts a larger effort and wins the price with a larger probability the larger is the realized value of the prize, although he wins the prize less frequently than his opponent. In addition, we find that players may exert more effort in a Tullock contest than in an all-pay auction.
    Keywords: Tullock contests; Common-value; Asymmetric information; Information advantage
    JEL: D82 D44 C72
    Date: 2016–11
  4. By: Eccles, Peter (Universidad Carlos III de Madrid); Wenger, Nora (Bank of England)
    Abstract: We provide conditions to allow modelling situations of asymmetric information in a tractable manner. In addition, we show a novel relationship between certain games of asymmetric information and corresponding games of symmetric information. This framework establishes links between certain games separately studied in the literature. The class of games considered is defined by scalable preference relations and a scalable information structure. We show that this framework can be used to solve asymmetric contests and auctions with loss aversion.
    Keywords: Asymmetric information; linear equilibria; global games
    JEL: D44 D82
    Date: 2017–01–20
  5. By: Sara Biancini (Universite de Caen Normandie, CREM); David Ettinger (Universite Paris Dauphine, PSL, LEDa and CEREMADE); Baptiste Venet (
    Abstract: We analyze the relationship between Micro nance Institutions (MFIs) and external donors, with the aim of contributing to the debate on \mission drift" in micro nance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Bor- rowers can be (very) poor or wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effort to identify the more valuable projects and to choose the right share of poorer borrowers (the optimal level of poor outreach). We rst concentrate on hidden action. We show that asymmetric information can distort the share of very poor borrowers reached by loans, thus increasing mission drift. We then concentrate on hidden types, assuming that MFIs are characterized by unobservable heterogeneity on the cost of effort. In this case, asymmetric information does not necessarily increase the mission drift. The incentive compatible contracts push efficient MFIs to serve a higher share of poorer borrowers, while less efficient ones decrease their poor outreach.
    Keywords: Microfinance, Donors, Poverty, Screening.
    JEL: O12 O16 G21
    Date: 2017–01
  6. By: Dubra, Juan; Caffera, Marcelo; Figueroa, Nicolás
    Abstract: It is well known that when players have private information, vis a vis the designer, and their preferences coincide it is hard to implement the socially desirable outcome. We show that with arbitrarily small fines and arbitrarily noisy inspections, the social choice correspondence can be fully implemented (truth telling is the unique Nash equilibrium).
    Keywords: Nash Equilibrium; Mechanism Design; Truth Telling
    JEL: D70 Q50
    Date: 2016–12–02
  7. By: Matthew Embrey (University of Sussex); Friederike Mengel (University of Essex and Maastricht University); Ronald Peeters (Maastricht University)
    Abstract: This paper studies whether and how strategy revision opportunities affect levels of collusion in indefinitely repeated two-player games. Consistent with standard theory, we find that such opportunities do not affect strategy choices, or collusion levels, if the game is of strategic substitutes. In contrast, there is a strong and positive effect for games of strategic complements. Revision opportunities lead to more collusion. We discuss alternative explanations for this result.
    Keywords: strategy revision opportunities, cooperation, repeated games, complements vs. substitutes
    JEL: C73 C92 D43
    Date: 2016–02
  8. By: Demuynck, Thomas (universite libre de bruxelles); Herings, P. Jean-Jacques (General Economics 1 (Micro)); Saulle, Riccardo (General Economics 1 (Micro)); Seel, Christian (General Economics 1 (Micro))
    Abstract: We introduce a new solution concept for models of coalition formation, called the myopic stable set. The myopic stable set is defined for a very general class of social environments and allows for an infinite state space. We show that the myopic stable set exists and is non-empty. Under minor continuity conditions, we also demonstrate uniqueness. Furthermore, the myopic stable set is a superset of the core and of the set of pure strategy Nash equilibria in noncooperative games. Additionally, the myopic stable set generalizes and unifies various results from more specific environments. In particular, the myopic stable set coincides with the coalition structure core in coalition function form games if the coalition structure core is non-empty; with the set of stable matchings in the standard one-to-one matching model; with the set of pairwise stable networks and closed cycles in models of network formation; and with the set of pure strategy Nash equilibria in finite supermodular games, finite potential games, and aggregative games. We illustrate the versatility of our concept by characterizing the myopic stable set in a model of Bertrand competition with asymmetric costs, for which the literature so far has not been able to fully characterize the set of all (mixed) Nash equilibria.
    Keywords: Social environments, group formation, stability, Nash equilibrium
    JEL: C70 C71
    Date: 2017
  9. By: Moreno-García, Emma; Torres-Martínez, Juan Pablo
    Abstract: We address economies with asymmetric information where agents are not perfectly aware about the informational structure for coalitions. Thus, we introduce solutions that we refer to as risky core and ambiguous core. We provide existence results and a variety of properties of these cooperative solutions.
    Keywords: Differential Information, risky core, ambiguous core
    JEL: C71 D51 D82
    Date: 2017–01
  10. By: Behrens, Kristian; Kanemoto, Yoshitsugu; Murata, Yasusada
    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.
    Keywords: monopolistic competition; welfare changes
    JEL: D60 L13
    Date: 2017–01
  11. By: Wooders, John; Moreno, Diego
    Abstract: We study optimal public and secret reserve prices for risk averse sellers in second price auctions with endogenous entry. We show that an optimal public reserve price rP (observed by buyers prior to making their entry decisions) is above the seller's cost, c, whereas the secret reserve price rS (observed by buyers only upon entering the auction) is below the revenue maximizing reserve price r0. Thus, risk aversion raises public reserve prices, but lowers secret reserve prices. Further, we show that an optimal public reserve price is smaller than the secret reserve price (i.e., rP
    Keywords: Risk Aversion; Public and secret reserve prices; Endogenous entry; Second-price auctions
    JEL: D44
    Date: 2016–12
  12. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: In Proposition 4 of Kamien and Tauman(1986), assuming linear demand and cost functions with fixed fee licensing it was argued that for the outside innovating firm under oligopoly when the number of firms is small (or very large), strategy to enter the market with license of its cost-reducing technology to the incumbent firm (entry with license strategy) is more profitable than strategy to license its technology to the incumbent firm without entering the market (license without entry strategy). However, their result depends on their definition of license fee, and it is inappropriate if the innovating firm can enter the market. If we adopt an alternative more appropriate definition based on the threat by entry of the innovating firm, license without entry strategy is more profitable in the case of linear demand and cost functions. Also we investigate the problem in the case of quadratic cost functions in which entry with license strategy may be optimal. Further we will show that the optimal strategies for the innovating firm when license fees are determined under the assumption that the licensor takes all benefit of new technology and its optimal strategies when license fees are determined according to Nash bargaining solution are the same.
    Keywords: entry, license, duopoly, cost-reducing innovation, innovating firm, incumbent firm
    JEL: D43 L13
    Date: 2017–01–27
  13. By: Gehrlein, William; Le Breton, Michel; Lepelley, Dominique
    Abstract: The purpose of this note is to compute the probability of logrolling for three different probabilistic cultures. The primary finding is that the restriction of preferences to be in accord with the condition of separable preferences creates enough additional structure among voters' preference rankings to create an increase in the likelihood that a Condorcet winner will exist with both IC and IAC-based scenarios.
    Keywords: Condorcet, Separable preferences, Logrolling, Vote Trading.
    JEL: D71 D72
    Date: 2017–01
  14. By: Nicol\'as Hern\'andez Santib\'a\~nez; Dylan Possama\"i; Chao Zhou
    Abstract: In this paper, we extend the optimal securitization model of Pag\`es [41] and Possama\"i and Pag\`es [42] between an investor and a bank to a setting allowing both moral hazard and adverse selection. Following the recent approach to these problems of Cvitani\'c, Wan and Yang [12], we characterize explicitly and rigorously the so-called credible set of the continuation and temptation values of the bank, and obtain the value function of the investor as well as the optimal contracts through a recursive system of first-order variational inequalities with gradient constraints. We provide a detailed discussion of the properties of the optimal menu of contracts.
    Date: 2017–01
  15. By: Douglas W. Diamond; Yunzhi Hu; Raghuram G. Rajan
    Abstract: Why are downturns following prolonged episodes of high valuations of firms so severe and long? Why do firms promise high external payments when they anticipate high valuations, and underperform subsequently? In this paper, we propose a theory of financing cycles where the control rights to enforce claims in an asset price boom (rights to sell assets) differ from the control rights used in more normal times (rights over cash flows that we term “pledgeability”). Firm management’s limited incentive to enhance pledgeability in an asset price boom can have long-drawn adverse effects in a downturn, which may not be resolved by renegotiation. This can also explain why involuntary asset turnover and asset misallocation to outsiders are high in a downturn as well as why industry productivity falls. The paper highlights an adverse consequence of high anticipated liquidity, working through leverage, on the economy’s access to finance and productivity when that liquidity fails to materialize.
    JEL: E00 E02 E59 G20 G21 G31 G33
    Date: 2017–01
  16. By: Aronsson, Thomas; Schöb, Ronnie
    Abstract: This paper examines the implications of habit formation in private and public consumption for the Pareto-efficient provision of public goods, based on a two-period model with nonlinear taxation. If the public good supply is time-invariant, the presence of habit formation generally alters the standard rules for public good provision. In contrast, if the public good is a flow-variable such that the government directly decides on the level of the public good in each period, habit formation leads to a modification of the first best Samuelson condition only if the degrees of habituation differ for private and public consumption. Since habit formation affects the incentives to relax the self-selection constraint through public good provision, however, habituation alters the second-best analogue to the Samuelson condition also when the degrees of habituation in private and public consumption coincide.
    Keywords: public good provision,Samuelson condition,habit formation,optimal taxation
    JEL: D60 H21 H41
    Date: 2017
  17. By: Tsakas, Elias (General Economics 1 (Micro))
    JEL: D81 D83 K40 K41
    Date: 2016
  18. By: Lee, Sang-Ho; Matsumura, Toshihiro; Sato, Susumu
    Abstract: This study formulates a new model of mixed oligopolies in free entry markets. A state-owned public enterprise is established before the game, private enterprises enter the market, and then the government chooses the degree of privatization of the public enterprise (Entry-then-Privatization Model). We find that under general demand and cost functions, the timing of privatization does not affect consumer surplus or the output of each private firm, while it does affect the equilibrium degree of privatization, number of entering firms, and output of the public firm. The equilibrium degree of privatization is too high (low) for both domestic and world welfare if private firms are domestic (foreign).
    Keywords: timing of privatization, commitment, state-owned public enterprises; foreign competition
    JEL: H42 L13
    Date: 2017–01

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