nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒03‒05
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Incentive Contracting Under Ambiguity Aversion By Qi Liu; Lei Lu; Bo Sun
  2. Sequential Equilibrium without Rational Expectations of Prices: an Existence Proof By Lionel de BOISDEFFRE
  3. A Bandit Model of Two-Dimensional Uncertainty -- Rationalizing Mindsets By Deimen, Inga; Wirtz, Julia
  4. Contests on Networks By David Michael Rietzke; Alexander Matros
  5. An Economic Theory of Religious Belief By Strulik, Holger
  6. Preferences and Decision Support in Competitive Bidding By Fugger, Nicolas; Rasch, Alexander; Zeppenfeld, Christopher
  7. Money and Status: How Best to Incentivize Work By Pradeep Dubey; John Geanakoplos
  8. How Effective Are Advertising Bans? On the Demand for Quality in Two-Sided Media Markets By Sahm, Marco; Greiner, Tanja
  9. Competition, Patent Protection, and Innovation in an Endogenous Market Structure By Suzuki, Keishun
  10. Opinion dynamics via search engines (and other algorithmic gatekeepers) By Fabrizio Germano; Francesco Sobbrio
  11. Advance-purchase financing of projects with few buyers By Sahm, Marco
  12. Exclusionary Practices in Two-Sided Markets: The Effect of Radius Clauses on Competition between Shopping Centers By Götz, Georg; Brühn, Tim
  13. Lexicographic Choice under Variable Capacity Constraints By Battal Dogan; Serhat Dogan; Kemal Yildiz

  1. By: Qi Liu; Lei Lu; Bo Sun
    Abstract: This paper studies a principal-agent model in which the information on future firm performance is ambiguous and the agent is averse to ambiguity. We show that if firm risk is ambiguous, while stocks always induce the agent to perceive a high risk, options can induce him to perceive a low risk. As a result, options can be less costly in incentivizing the agent than stocks in the presence of ambiguity. In addition, we show that providing the agent with more incentives would induce the agent to perceive a higher risk, and there is a discontinuous jump in the compensation cost as incentives increase, which makes the principal reluctant to reset contracts frequently when underlying fundamentals change. Thus, compensation contracts exhibit an inertia property. Lastly, the model sheds some light on the use of relative performance evaluation, and provides a rationale for the puzzle of pay-for-luck in the presence of ambiguity.
    Keywords: Ambiguity ; Executive compensation ; Options ; Relative performance evaluation
    JEL: G30 J33
    Date: 2017–02
  2. By: Lionel de BOISDEFFRE
    Abstract: We consider a pure exchange economy, where consumers may exchange commodities, on spot markets, and securities, on purely financial markets, and be asymmetrically informed. Agents have private characteristics, anticipations and beliefs, and no model to forecast prices. We show they face an incompressible uncertainty represented by a "minimum uncertainty set", which adds to the 'exogenous uncertainty' on tomorrow's state of nature, an 'endogenous uncertainty' on spot prices, which depend on agents' private beliefs. At equilibrium, all consumers expect the 'true' price in each realizable state as a possible outcome, and elect optimal strategies, ex ante, which clear on all markets, ex post. We show that equilibrium exists under standard conditions, as long as agents' prior anticipations, which may be refined from observing markets, embed the minimum uncertainty set.
    Keywords: sequential equilibrium, temporary equilibrium, perfect foresight, existence, rational expectations, financial markets, asymmetric information, arbitrage
    JEL: D52
    Date: 2017–02
  3. By: Deimen, Inga; Wirtz, Julia
    Abstract: We analyze a new type of bandit where an agent is confronted with two-dimensional uncertainty. The agent does not know whether ability or effort is required to succeed at a given task. Moreover, the agent does not know her own ability level. In each period, after deciding whether to exert effort or not, the agent observes a success or a failure and updates her beliefs about both the task and her ability accordingly. In contrast to a standard bandit model, the agent gains information even when she is not exerting effort. In this setting different agents react to failure in different ways; while some agents find it optimal to resign others prefer to increase their effort. We show that different effort costs and beliefs about the own ability and the production function together with Bayesian updating can explain the differences in behavior.
    JEL: C73 D83 D80
    Date: 2016
  4. By: David Michael Rietzke; Alexander Matros
    Abstract: We develop a model of contests on networks. Each player is "connected" to a set of contests, and exerts a single effort to increase the probability of winning each contest to which she is connected. We characterize equilibria under both the Tullock and all-pay auction contest success functions (CSFs), and show that many well-known results from the contest literature can be obtained by varying the structure of the network. We also obtain a new exclusion result: We show that, under both CSFs, equilibrium total effort may be higher when one player is excluded from the network. This finding contrasts the existing literature, which limits findings of this sort to the all-pay auction CSF. Our framework has a broad range of applications, including research and development, advertising, and research funding.
    Keywords: Network Games, Contests, Bipartite Graph, Tullock Contest, All-pay Auction
    JEL: C72 D70 D85
    Date: 2017
  5. By: Strulik, Holger
    Abstract: In this paper I consider how individuals allocate their time between church attendance (and other religious activities) and secular leisure activities. Moreover individuals use a cognitive style, which is either intuitive-believing or reflective-analytical. I assume that the full benefit from religious activities is achieved by intuitive believers. The model predicts that, ceteris paribus, wealthier individuals and individuals with higher cognitive ability are more likely to abandon the intuitive-believing cognitive style. They may continue to attend church but do so less frequently than intuitive believers. In general equilibrium, there exists a locally stable steady state where believing and frequent church attendance is widespread across the social strata. A sufficiently large negative shock (e.g. the Enlightenment, repeal of Sunday shopping laws), however, initiates the gradual secularization of society.
    JEL: N30 D11 Z12
    Date: 2016
  6. By: Fugger, Nicolas; Rasch, Alexander; Zeppenfeld, Christopher
    Abstract: We examine bidding behavior in first-price sealed-bid and Dutch auctions, which are strategically equivalent under standard preferences. We investigate whether the empirical breakdown of this equivalence is due to (non-standard) preferences or due to the different complexity of the two formats, i.e., a different level of mathematical or individual sophistication. First, we elicit measures of individual preferences and secondly manipulate the degree of complexity by offering various levels of decision support. Our results show that the equivalence of the two auction formats only breaks down in the absence of decision support. This indicates that the empirical breakdown is caused by differing complexity between the two formats rather than non-standard preferences.
    JEL: D44 D81 D47
    Date: 2016
  7. By: Pradeep Dubey (SUNY); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: Status is greatly valued in the real world, yet it has not received much attention from economic theorists. We examine how the owner of a firm can best combine money and status to get her employees to work hard for the least total cost. We find that she should motivate workers of low skill mostly by status and high skill mostly by money. Moreover, she should do so by using a small number of titles and wage levels. This often results in star wages to the elite performers and, more generally, in wage jumps for small increases in productivity. By analogy, the governance of a society should pay special attention to the status concerns of ordinary citizens, which may often be accomplished by reinforcing suitable social norms.
    Keywords: Status, Incentives, Wages
    JEL: C70 I20 I30
    Date: 2017–02
  8. By: Sahm, Marco; Greiner, Tanja
    Abstract: We study a two-sided markets model of two competing television broadcasters that offer content of differentiated quality to ad-averse consumers and advertising space to firms. As all consumers prefer high over low quality content, competition for viewers is vertical. By contrast, competition for advertisers is horizontal, taking into account the firms' targeted advertising motive. Analyzing the impact of both, the strength of mutual externalities and advertisement regulation policies, we find the following results: First, broadcasters' profits increase and welfare decreases in the viewers' nuisance costs of advertising. Second, welfare may decrease in the effectiveness of informative advertisement, too. Third, an advertising ban on the high quality medium reduces its viewer market share and thereby the equilibrium reception of high quality content.
    JEL: L13 L82 L51
    Date: 2016
  9. By: Suzuki, Keishun
    Abstract: This study revisits the relationship between competition and innovation by incorporating an endogenous market structure (EMS) in a dynamic general equilibrium model. We consider that both innovative and non-innovative followers engage in Cournot competition with free entry. A competition-enhancing policy, which reduces entry cost, can stimulate the entry of innovative followers when the entry cost is high. However, when the entry cost is sufficiently low, the entry of non-innovative followers crowd-out innovative followers from the market. As a result, there is a non-monotonic relationship (inverted-V shape) between competition and innovation. Furthermore, we show that, while strengthening patent protection positively affects innovation when competition is sufficiently intense, the effect may be negative under milder competition. This suggests that a competition policy could complement a patent policy.
    Keywords: Competition, Patent Protection, Innovation, Endogenous Market Structure
    JEL: O30 O40
    Date: 2017–02–25
  10. By: Fabrizio Germano; Francesco Sobbrio
    Abstract: This paper presents a stylized model to evaluate the effects of a search engine’s ranking algorithm on opinion dynamics and asymptotic learning. We focus on three key components of the ranking algorithm, namely, the initial ranking of websites, the updating of the ranking as a function of the popularity of the different websites, and the possibility to personalize search results according to users’ characteristics. At the same time, we consider two empirically grounded assumptions on individuals’ online search behavior, namely, the presence of a search cost and of a preference for like-minded websites. We then study how the ranking algorithm interacts with the individuals’ search behavior to determine the ranking of websites and the evolution of individuals’ opinions. We first show how several empirical regularities concerning the pattern of website traffic can be explained by the interaction of the search engine’s algorithm with the individuals’ search cost (rich get richer dynamic, concentration at the top) and with the preference for like-minded websites (long-tail in the distribution of website traffic). At the same time, fewer websites reporting a minority opinion might increase the ranking of those websites and consequently the overall probability of individuals accessing any one of them than if there were more (advantage of the fewer). As a consequence, a lower ex-ante accuracy of websites’ content might actually enhance asymptotic learning. Finally, when considering personalization of search results we see that it may lead to belief polarization and inhibit asymptotic learning.
    Keywords: Search Engines, Ranking Algorithm, Search Behavior, Opinion Dynamics, Information Aggregation, Asymptotic Learning, Misinformation, Polarization, Websites Traffic.
    JEL: D83 L86
    Date: 2016–12
  11. By: Sahm, Marco
    Abstract: I investigate a simple model of advance-purchase contracts as a mode of financing costly projects. An entrepreneur has to meet some capital requirement in order to start production and sell the related good to a limited number of potential buyers who are privately informed about their willingness to pay. I find that advance-purchase arrangements enable more costly projects to be financed than traditional funding sources. The entrepreneur uses advance-purchase surcharges as a price discrimination device. However, the discriminatory power is limited by the problem of free-riding, which is exacerbated as the number of potential buyers increases.
    Keywords: pre-ordering,price discrimination,excludable public goods,monopolistic provision,crowdfunding,innovation and R&D
    JEL: D42 G32 H41 L12 L26 O31
    Date: 2016
  12. By: Götz, Georg; Brühn, Tim
    Abstract: This paper analyzes exclusionary conduct of platforms in two-sided markets. Motivated by recent antitrust cases against shopping centers introducing radius restrictions on their tenants, we provide a discussion of the likely positive and normative effects of exclusivity clauses, which prevent tenants from opening outlets in other shopping centers covered by the clause. In a standard two-sided market model, we analyze the incentives of an incumbent shopping center to introduce exclusivity clauses when faced by entry of a rival shopping center. We show that exclusivity agreements are especially profitable and detrimental to social welfare if competition is intense between the two shopping centers. We argue that the focus of courts on market definition is misplaced in markets determined by competitive bottlenecks.
    JEL: D43 D62 L13
    Date: 2016
  13. By: Battal Dogan; Serhat Dogan; Kemal Yildiz
    Abstract: A (capacity-constrained) choice problem consists of a set of alternatives and a capacity. A (capacity-constrained) choice rule, at each choice problem, chooses from the alternatives without exceeding the capacity. A choice rule is lexicographic if there exists a list of priority orderings over potential alternatives such that at each choice problem, the set of chosen alternatives is obtainable by choosing the highest ranked alternative according to the fi rst priority ordering, then choosing the highest ranked alternative among the remaining alternatives according to the second priority ordering, and proceeding similarly until the capacity is full or no alternative is left. Lexicographic choice rules have been useful in designing allocation mechanisms for school choice to achieve diversity. We provide a characterization of lexicographic choice rules. We discuss some implications for the Boston school choice system. We also provide a characterization of deferred acceptance mechanisms that operate based on a lexicographic choice structure.
    Keywords: Choice rules; lexicographic choice; deferred acceptance; diversity
    JEL: C78 D47 D78
    Date: 2017–02

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