nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒03‒26
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Rewarding Mediocrity? Optimal Regulation of R&D Markets with Reputation Concerns By Chia-Hui Chen; Junichiro Ishida
  2. Myopia and Discounting By Xavier Gabaix; David Laibson
  3. Uncertain acts in games By Riedel, Frank
  4. Mechanism Design when players´ preferences and information coincide By Marcelo Caffera; Juan Dubra; Nicolás Figueroa
  5. Information transmission in hierarchies By Schopohl, Simon
  6. Voter Turnout with Peer Punishment By David K Levine; Andrea Mattozzi
  7. Constrained Allocation of Projects to Heterogenous Workers with Preferences over Peers By Flip Klijn
  8. Formation of coalition structures as a non-cooperative game By Dmitry Levando
  9. Targeted campaign competition, loyal voters, and supermajorities By Pierre C. Boyer; Kai A. Konrad; Brian Roberson
  10. Revenue ranking of optimally biased contests: the case of two players By Christian Ewerhart
  11. Prudence and preference for flexibility gain By Daniel Danau
  12. Memory, Attention, and Choice By Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
  13. Preference Discovery By Jason Delaney; Sarah Jacobson; Thorsten Moenig
  14. Bubbly Markov Equilibria By Martin Barbie; Marten Hillebrand
  15. Bertrand Competition under Network Externalities By Masaki Aoyagi;
  16. Welfare as Simple(x) Equity Equivalents By Loïc Berger; Johannes Emmerling
  17. Solving a hold-up problem may harm all firms: downstream R&D and transport-price contracts By Kazuhiro Takauchi; Tomomichi Mizuno
  18. Private versus Social Incentives for Pharmaceutical Innovation By Inés Macho-Stadler; David Pérez-Castrillo; Paula González
  19. Competitive foreclosure By Jozsef Sakovics; Roberto Burguet
  20. When was Coase right? By Bergstrom, Ted

  1. By: Chia-Hui Chen; Junichiro Ishida
    Abstract: In this paper, we consider a dynamic signaling model of an R&D market in which a researcher can choose either a safe project (exploitation) or a risky project (exploration) at each instance. We argue that there are substantial efficiency gains from rewarding minor innovations above their social value and further that it is indeed superior to rewarding major innovations directly, even when those minor innovations are intrinsically valueless in themselves. When only major innovations are rewarded, the R&D market eventually shuts down due to a version of the lemons problem. Rewarding minor innovations is actually conducive to major innovations as it induces self-sorting among researchers, which is essential in providing time and resources necessary for more productive ones to take riskier but more ambitious approaches. This result draws clear contrast to the static counterpart where such a scheme can never be optimal. Our model also exhibits reputation dynamics which capture a pervasive view in academia that “no publications are better than a few mediocre publications” at an early stage of one's career.
    Date: 2017–03
  2. By: Xavier Gabaix; David Laibson
    Abstract: We assume that perfectly patient agents estimate the value of future events by generating noisy, unbiased simulations and combining those signals with priors to form posteriors. These posterior expectations exhibit as-if discounting: agents make choices as if they were maximizing a stream of known utils weighted by a discount function, D(t). This as-if discount function reflects the fact that estimated utils are a combination of signals and priors, so average expectations are optimally shaded toward the mean of the prior distribution, generating behavior that partially mimics the properties of classical time preferences. When the simulation noise has variance that is linear in the event's horizon, the as-if discount function is hyperbolic, D(t)=1/(1+a t). Our agents exhibit systematic preference reversals, but have no taste for commitment because they suffer from imperfect foresight, which is not a self-control problem. In our framework, agents that are more skilled at forecasting (e.g., those with more intelligence) exhibit less discounting. Agents with more domain-relevant experience exhibit less discounting. Older agents exhibit less discounting (except those with cognitive decline). Agents who are encouraged to spend more time thinking about an intertemporal tradeoff exhibit less discounting. Agents who are unable to think carefully about an intertemporal tradeoff – e.g., due to cognitive load – exhibit more discounting. In our framework, patience is highly unstable, fluctuating with the accuracy of forecasting.
    JEL: D03 D14 E03 E23
    Date: 2017–03
  3. By: Riedel, Frank (Center for Mathematical Economics, Bielefeld University)
    Abstract: This text reviews a recent approach to modeling "radically uncertain" behavior in strategic interactions. By rigorously rooting the approach in decision theory, we provide a foundation for applications of Knightian uncertainty in mechanism design, principal agent and moral hazard models. We discuss critical assessments and provide alternative interpretations of the new equilibria in terms of equilibrium in beliefs, and as a boundedly rational equilibrium in the sense of a population equilibrium. We also discuss the purification of equilibria in the spirit of Harsanyi.
    Keywords: Knightian Uncertainty in Games, Strategic Ambiguity, Ellsberg Games, Purification
    Date: 2017–03–15
  4. By: Marcelo Caffera; Juan Dubra; Nicolás Figueroa
    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).
    Date: 2016
  5. By: Schopohl, Simon (Center for Mathematical Economics, Bielefeld University)
    Abstract: We analyze a game in which players with unique information are arranged in a hierarchy. In the lowest layer each player can decide in each of several rounds either to pass the information to his successor or to hold. While passing generates an immediate payoff according to the value of information, the player can also get an additional reward if he is the last player to pass. Facing this problem while discounting over time determines the player’s behavior. Once a successor has collected all information from his workers he starts to play the same game with his successor. We state conditions for different Subgame Perfect Nash Equilibria and analyse the time it takes each hierarchy to centralize the information. This allows us to compare different structures and state which structure centralizes fastest depending on the information distribution and other parameters. We show that the time the centralization takes is mostly affected by the least informed players.
    Keywords: communication network, dynamic network game, hierarchical structure, information transmission
    Date: 2017–03–14
  6. By: David K Levine; Andrea Mattozzi
    Date: 2017–03–22
  7. By: Flip Klijn
    Abstract: We study the problem of allocating projects to heterogenous workers. The simultaneous execution of multiple projects imposes constraints across project teams. Each worker has preferences over the combinations of projects in which he can potentially participate and his team members in any of these projects. We propose a revelation mechanism that is Pareto-efficient and group strategy-proof (Theorem 1). We also identify two preference domains on which the mechanism is strongly group strategy-proof (Theorem 2). Our results subsume results by Monte and Tumennasan (2013) and Kamiyama (2013).
    Keywords: matching; allocation; heterogenous agents; preferences over peers; efficiency; (group) strategy-proofness
    JEL: C78 D61 D78 I20
    Date: 2017–03
  8. By: Dmitry Levando (National Research University Higher School of Economics)
    Abstract: The paper defines a family of nested non-cooperative simultaneous finite games to study coalition structure formation with intra and inter-coalition externalities. Every game has two outcomes - an allocation of players over coalitions and a payoff profile for every player. Every game in the family has an equilibrium in mixed strategies. The equilibrium can generate more than one coalition with a presence of intra and inter group externalities. These properties make it different from the Shapley value, strong Nash, coalition-proof equilibrium, core, kernel, nucleolus. The paper demonstrates some applications: non-cooperative cooperation, Bayesian game, stochastic games and construction of a non-cooperative criterion of coalition structure stability for studying focal points. An example demonstrates that a payoff profile in the Prisoners' Dilemma is non-informative to deduce a cooperation of players
    Keywords: Non-cooperative Games
    JEL: C71 C72 C73
    Date: 2017–02
  9. By: Pierre C. Boyer (CREST, Ecole Polytechnique, Universit´e Paris-Saclay, Route de Saclay, 91128 Palaiseau, France); Kai A. Konrad (Max Planck Institute for Tax Law and Public Finance); Brian Roberson (Purdue University, Department of Economics, Krannert School of Management)
    Abstract: We consider campaign competition in which candidates compete for votes among a continuum of voters by engaging in persuasive efforts that are targetable. Each individual voter is persuaded by campaign effort and votes for the candidate who targets more persuasive effort to this voter. Each candidate chooses a level of total campaign effort and allocates their effort among the set of voters. We completely characterize equilibrium for the majoritarian objective game and compare that to the vote-share maximizing game. If the candidates are symmetric ex ante, both types of electoral competition dissipate the rents from office in expectation. However, the equilibria arising under the two electoral objectives qualitatively differ. In majoritarian elections, candidates randomize over their level of total campaign effort, which provides support for the puzzling phenomenon of the emergence of supermajorities in majoritarian systems. Vote-share maximization leads to an equilibrium in which both candidates make deterministic budget choices and reach a precise fifty-fifty split of vote shares. We also study how asymmetry between the candidates affects the equilibrium. If some share of the voters is loyal to one of the candidates, then both candidates expend the same expected efforts in equilibrium, but the advantaged candidate wins with higher probability for majoritarian voting or a higher share of voters for vote-share maximization.
    Keywords: Campaign competition; continuous General Lotto game; vote buying; flexible budgets; supermajorities, loyal voters.
    JEL: D72 D78 D82
    Date: 2017
  10. By: Christian Ewerhart
    Abstract: It is shown that the equilibrium in the asymmetric Tullock contest is unique for parameter values r ≤ 2. This allows proving a revenue ranking result saying that a revenue-maximizing designer capable of biasing the contest always prefers a contest technology with higher accuracy.
    Keywords: Tullock contest, Nash equilibrium, heterogeneous valuations, discrimination
    JEL: C72 D72 J71
    Date: 2017–03
  11. By: Daniel Danau (University of Caen Normandy, CREM-CAEN, UMR CNRS 6211, France)
    Abstract: Under the expected utility paradigm, prudence (u''' > 0) is usually associated with the amount of risk premium an individual requires in order to renounce to a certain current outcome in favour of an uncertain future outcome. A prudent individual requires a higher premium the lower her initial wealth. However, when the individual has to make a costly investment before obtaining the outcome, she may prefer to delay that investment. This translates into a preference for latter, not earlier outcome. Consequently, prudence cannot be associated with a risk premium. In this paper we show that, for an individual who prefers to delay the investment, prudence is actually associated with the economic bene t granted by that delay. Speci cally, a lower expected unit cost of acquiring the good is associated with a greater bene t of the investment delay if and only if u''' is high, and, with a uniform distribution, u''' > 0. We also show that the preference for facing a lower expected unit cost and/or a wider support of the unit cost increases with u'''. We describe two applications of this result, namely, sequential learning in the delegation of a task and timing of investment decisions under multiperiod uncertainty.
    Keywords: Prudence; Risk aversion; Sequential screening; Real Options
    JEL: D81
    Date: 2017–03
  12. By: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a theory in which the choice set cues a consumer to recall a norm, and surprise relative to the norm shapes his attention and choice. We model memory based on Kahana (2012), where past experiences that are more recent or more similar to the cue are recalled and crowd out others. We model surprise relative to the norm using our salience model of attention and choice. The model predicts unstable and inconsistent behavior in new contexts, because these are evaluated relative to past norms. Under some conditions, repeated experience causes norms to adapt, inducing stable – sometimes rational – behavior across different contexts. We test some of the model’s predictions using an expanded data set on rental decisions of movers between US cities first analyzed by Simonsohn and Loewenstein (2006).
    JEL: D03
    Date: 2017–03
  13. By: Jason Delaney (Georgia Gwinnett College); Sarah Jacobson (Williams College); Thorsten Moenig (Temple University)
    Abstract: We develop an axiomatic theory that integrates the discovered preference hypothesis into neoclassical microeconomic choice theory, making predictions amenable to empirical tests. Several regularities in economic literatures could be explained by a theory in which preferences must be discovered through experience. These include: choice reversals as seen in various contexts, instability as seen in risky choice, and errors that decline with repetition as seen in contingent valuation. With reasonable assumptions, we show that choices may appear unstable while preferences are being learned, and that unlearned preferences are associated with welfare loss. We also show that even after choices appear to stabilize, agents face the potential for continued welfare loss due to persistent mis-ranking because of selection bias in the feedback and learning process. The transitory welfare loss that occurs during the learning process decreases over time, with more common goods, and with more income. For large discrete items purchased a small number of times (like houses), this transitory welfare loss may continue the agent’s whole life. The long-run welfare loss caused by persistent mis-ranking is primarily determined by initial misperceptions of goods. In extensions, we demonstrate that imperfect memory of learned tastes and stochasticity in the consumption experiences may make preference learning harder, and that learning spillovers across goods and sophisticated agents who know they need to learn their preferences may or may not alleviate welfare loss.
    Keywords: discovered preferences, preference stability, learning, risk preferences
    JEL: D81 D83 D01 D03
    Date: 2017–03
  14. By: Martin Barbie (University of Cologne); Marten Hillebrand (Johannes Gutenberg University Mainz)
    Abstract: Bubbly Markov Equilibria (BME) are recursive equilibria on the natural state space which admit a non-trivial bubble. The present paper studies the existence and properties of BME in a general class of overlapping generations (OLG) economies with capital accumulation and stochastic production shocks. Using monotone methods, we develop a general approach to construct Markov equilibria and provide necessary and sufficient conditions for these equilibria to be bubbly. Our main result shows that a BME exists whenever the bubbleless equilibrium is Pareto inefficient either due to overaccumulation of capital or inefficient risksharing between generations.
    Keywords: Asset Bubbles, Stochastic OLG, Production, Markov Equilibria, Pareto Optimality.
    JEL: C62 D51 E32
    Date: 2017
  15. By: Masaki Aoyagi;
    Abstract: Two firms engage in price competition to attract buyers located on a network. The value of the good of either firm to any buyer depends on the number of neighbors on the network who adopt the same good. When the size of externalities increases linearly with the number of adoptions, we identify the set of price strategies that are consistent with an equilibrium in which one of the firms monopolizes the market. The set includes marginal cost pricing as well as bipartition pricing, which offers discounts to some buyers and charges markups to others. We show that marginal cost pricing fails to be an equilibrium under non-linear externalities but identify conditions for an equilibrium with bipartition pricing to be robust against perturbations in the externalities from linearity. The idea of bipartition pricing is then applied to the analysis of platform competition in a two-sided market under local and approximately linear externalities.
    Date: 2017–03
  16. By: Loïc Berger (IESEG School of Management and Fondazione Eni Enrico Mattei (FEEM)); Johannes Emmerling (Fondazione Eni Enrico Mattei (FEEM) and Centro Euro-Mediterraneo sui Cambiamenti Climatici (CMCC))
    Abstract: Inequity plays a fundamental role in the evaluation of social welfare in many dimensions. We revisit the concept of inequity, whether across states of world (uncertainty), across individuals (inequality) and across generations (intergenerational equity), using a common framework generalizing the discounted expected utilitarianism approach. We propose a general measure of welfare as equity equivalents and develop the corresponding inequity index. We then allow for different degrees of inequity aversion across the three dimensions to span a simplex of possible inequity preferences and relate it to the recent literature on this topic. We show that the ordering of aggregation across the different dimensions matters for welfare evaluations and that many welfare-theoretical approaches developed in the literature may be seen as special cases of this general framework.
    Keywords: Utilitarianism, Inequality, Inequity Aversion, Risk Aversion, Intertemporal Welfare, Discounting
    JEL: D60 D63 D30
    Date: 2017–03
  17. By: Kazuhiro Takauchi (Faculty of Business and Commerce, Kansai University); Tomomichi Mizuno (Graduate School of Economics, Kobe University)
    Abstract: In vertical relations, by raising input price after downstream research and development (R&D) investment, upstream rms can extract the R&D bene t and have an incentive to set higher input price. As downstream rms underinvest for fear of this hold-up by upstream rms, outputs and input-demand shrink, and all rms become worse off. Previous literature emphasizes that a xed-price contract in which upstream rms rst commit themselves to input prices and downstream rms subsequently invest can resolve the hold-up problem and make all rms better off. By contrast, we show that in a vertical relation between rm-speci c carriers and exporters, the xed-price contract of transport price can make all rms worse off because an efficiency improvement in exporters intensi es inter-regional competition. We also discuss the robustness of the result.
    Keywords: Transport-price contracts; Downstream R&D; Firm-specific carrier; Hold-up problem
    JEL: L13 F12 O31 R40
    Date: 2017–03
  18. By: Inés Macho-Stadler; David Pérez-Castrillo; Paula González
    Abstract: We provide a theoretical framework to contribute to the current debate regarding the tendency of pharmaceutical companies to direct their R&D toward marketing products that are ?follow-on? drugs of already existing drugs, rather than toward the development of breakthrough drugs. We construct a model with a population of patients who can be treated with drugs that are horizontally and vertically differentiated. In addition to a pioneering drug, a new drug can be marketed as the result of an innovative process. We analyze physician prescription choices and the optimal pricing decision of an innovative ?firm. We also characterize the incentives of the innovative firm to conduct R&D activities, disentangling the quest for breakthrough drugs from the firm effort to develop follow-on drugs. Our results offer theoretical support for the conventional wisdom that pharmaceutical firms devote too many resources to conducting R&D activities that lead to incremental innovations.
    Keywords: pharmaceuticals, R&D activities, me-too drugs, breakthrough drugs, incremental innovation, radical innovation
    JEL: I11 I18 O31 H51
    Date: 2015–12
  19. By: Jozsef Sakovics; Roberto Burguet
    Abstract: We present a model where oligopolistic firms producing substitutes compete for inputs in a decentralized market. Input suppliers are capacity constrained (or produce under exclusivity). Compared to a price-taking input market, the incentive to foreclose downstream competitors not only leads to higher input prices, but it also results in a higher aggregate amount of input acquired. This novel feature mitigates the output reducing effect of downstream market power and may even restore e¢ ciency in the unique (input) market clearing equilibrium. Other equilibria where Örms endogenously coordinate on which suppliers to target result in excess input supply (involuntary unemployment, if input is labor) and even higher input prices. Our insights generalize to alternative vertical structures.
    Keywords: simultaneous auctions, targeted offers, vertical linkages, involuntary unemployment
    JEL: D43 L11 L13
    Date: 2017–02–15
  20. By: Bergstrom, Ted
    Abstract: This paper explores the conditions under which there is "Coasian independence" between the assignment of property right and efficient allocation of resources.
    Keywords: Social and Behavioral Sciences, Coase, Externalitie
    Date: 2017–03–20

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