nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒04‒02
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Prizes versus Contracts as Incentives for Innovation By Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick
  2. Belief-Free Rationalizability and Informational Robustness By Dirk Bergemann; Stephen Morris
  3. Communication Games with Optional Verification By Simon Schopohl
  4. Myopia and Discounting By Gabaix, Xavier; Laibson, David
  5. Competing first-price and second-price auctions By J.M.J. Delnoij; K.J.M. De Jaegher
  6. Contractual design in agency problems with non-monotonic cost and correlated information By Daniel Danau; Annalisa Vinella
  7. Intimidation: Linking Negotiation and Conflict By Sambuddha Ghosh; Gabriele Gratton; Caixia Shen
  8. Formation of coalition structures as a non-cooperative game By Dmitry Levando
  9. Probabilistic opinion pooling generalized. Part one: General agendas By Franz Dietrich; Christian List
  10. Regulatory Holidays and Optimal Network Expansion By Willems, Bert; Zwart, Gijsbert
  11. Equilibrium Arrival Times to Queues: The Case of Last-Come First-Serve Preemptive-Resume By Breinbjerg, Jesper; Østerdal, Lars Peter
  12. Inequality, redistribution and cultural integration in the Welfare State By Bisin, Alberto; Verdier, Thierry
  13. Collusion, Managerial incentives and antitrust fines. By Florence THEPOT; Jacques THEPOT
  14. An Evolutionary Approach to International Environmental Agreements with Full Participation By Hsiao-Chi Chen; Shi-Miin Liu
  15. Should Platforms be Allowed to Charge Ad Valorem Fees? By Wang, Zhu; Wright, Julian

  1. By: Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick
    Abstract: Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea effciently. If research efforts are unverifiable and implementation costs are private information, a trade-ooff arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator in contract allocation when the value of innovation is below that threshold. A monetary prize is employed as an additional incentive but only when the value of innovation is suffciently high.
    Keywords: Contract rights; Inducement Prizes; innovation; Procurement and R&D.
    JEL: D44 D82 H57 O31 O38 O39
    Date: 2017–03
  2. By: Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: Fixing a game with uncertain payoffs, information design identifies the information structure and equilibrium that maximizes the payoff of an information designer. We show how this perspective unifies existing work, including that on communication in games (Myerson (1991)), Bayesian persuasion (Kamenica and Gentzkow (2011)) and some of our own recent work. Information design has a literal interpretation, under which there is a real information designer who can commit to the choice of the best information structure (from her perspective) for a set of participants in a game. We emphasize a metaphorical interpretation, under which the information design problem is used by the analyst to characterize play in the game under many different information structures.
    Keywords: Information design, Bayesian persuasion, correlated equilibrium, incomplete information, robust predictions, information structure
    JEL: C72 D82 D83
    Date: 2017–03
  3. By: Simon Schopohl (EDEEM - Université Paris 1 - EDEEM - European Doctorate in Economics Erasmus Mundus, Universität Bielefeld (GERMANY), CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UCL - Université Catholique de Louvain)
    Abstract: We consider a Sender-Receiver game in which the Sender can choose between sending a cheap-talk message, which is costless, but also not verified and a costly verified message. While the Sender knows the true state of the world, the Receiver does not have this information, but has to choose an action depending on the message he receives. The action then yields to some utility for Sender and Receiver. We only make a few assumptions about the utility functions of both players, so situations may arise where the Sender's preferences are such that she sends a message trying to convince the Receiver about a certain state of the world, which is not the true one. In a finite setting we state conditons for full revelation, i.e. when the Receiver always learns the truth. Furthermore we describe the player's behavior if only partial revelation is possible. For a continuous setting we show that additional conditions have to hold and that these do not hold for “smooth” preferences and utility, e.g. in the classic example of quadratic loss utilities.
    Keywords: cheap-talk,communicaation,costly disclosure,full revelation,increasing differences,Sender-Receiver game,verifiable information
    Date: 2017–01
  4. By: Gabaix, Xavier; Laibson, David
    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+at). 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.
    Keywords: Behavioral economics; discounting; myopia
    JEL: D03 D14 E03 E23
    Date: 2017–03
  5. By: J.M.J. Delnoij; K.J.M. De Jaegher
    Abstract: This paper theoretically investigates which auctions competing sellers select when they can choose between first-price and second-price auctions, and when risk averse bidders endogenously enter one of the auctions. We first consider bidders’ entry decisions between exogenously given auctions, and find that there exists a symmetric entry equilibrium that is characterized by a mixed strategy, which depends on the bidders’ degree of absolute risk aversion. In a next step, we endogenize the sellers’ choice of auctions. We show that competing sellers have a dominant strategy to select first-price auctions if bidders exhibit nondecreasing absolute risk aversion. If bidders exhibit decreasing absolute risk aversion, however, other equilibria exist in which sellers select second-price auctions as well.
    Keywords: Auctions, Entry decisions, Risk aversion
    Date: 2016–09
  6. By: Daniel Danau (Université de Caen Normandie); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro”)
    Abstract: We model an agency relationship in which the agent's cost is non-monotonic with respect to type and the type is correlated with a public ex-post signal. The principal can use lotteries to exploit the type-signal correlation within the limit of the agent's liability. We establish conditions for first-best implementation, highlighting two effects on contractual design. First, the structure of the optimal lottery varies across types and, for each type, it depends on whether the cost is U shaped or reverse U shaped with respect to type. Second, as compared to the case of monotonic cost, the design of incentive compatible lotteries is easier when the cost is U shaped, more difficult when the cost is reverse U shaped. The root of the second effect is that incentives are non-monotonic either below or above some interior types. The two effects involve that non-monotonicity is unfavorable to the principal when the cost is reverse U shaped. This conclusion is at odds with the wisdom, concerning settings without correlated information, that non-monotonicity, which triggers countervailing incentives, enhances contracting.
    Keywords: non-monotonic cost; countervailing incentives; correlated information; limited liability; first-best implementation
    JEL: D82
    Date: 2017–03
  7. By: Sambuddha Ghosh (Department of Economics, Boston university); Gabriele Gratton (School of Economics, UNSW Business School, UNSW); Caixia Shen (School of International Business Administration, Shanghai University of Finance and Economics)
    Abstract: A Challenger demands a resource from Defender. In each period, Challenger chooses whether to attack; if attacked, Defender chooses whether to concede the resource forever. Each player might be committed to fighting until victory. Before conflict begins, Defender can make finitely many offers; conflict begins if Challenger rejects all offers. In equilibrium, all offers except the last are unacceptable. Negotiation cannot eliminate conflict because a larger offer makes conflict increasingly attractive for Challenger. If negotiation fails, prolonged conflict can happen in equilibrium, even when uncertainty is vanishingly small. We provide comparative statics regarding the probability and length of conflict.
    Keywords: Intimidation, reputation, terrorism, negotiation, brinkmanship, costly war-of-attrition
    JEL: D74 D82
    Date: 2015–04
  8. By: Dmitry Levando (National Research University Higher School of Economics [Moscow], CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    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: Noncooperative games
    Date: 2017–02
  9. By: Franz Dietrich (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Christian List (LSE - London School of Economics and Political Science)
    Abstract: How can several individuals' probability assignments to some events be aggregated into a collective probability assignment? Classic results on this problem assume that the set of relevant events – the agenda – is a-algebra and is thus closed under disjunction (union) and conjunction (intersection). We drop this demanding assumption and explore probabilistic opinion pooling on general agendas. One might be interested in the probability of rain and that of an interest-rate increase, but not in the probability of rain or an interest-rate increase. We characterize linear pooling and neutral pooling for general agendas, with classic results as special cases for agendas that are algebras. As an illustrative application, we also consider probabilistic preference aggregation. Finally, we unify our results with existing results on binary judgment aggregation and Arrovian preference aggregation. We show that the same kinds of axioms (independence and consensus preservation) have radically different implications for different aggregation problems: linearity for probability aggregation and dictatorship for binary judgment or preference aggregation.
    Keywords: agenda characterizations, vague/fuzzy preferences,Probabilistic opinion pooling, judgment aggregation, subjective probability, probabilistic preferences, a unifed perspective on aggregation
    Date: 2017–03–14
  10. By: Willems, Bert (Tilburg University, TILEC); Zwart, Gijsbert (Tilburg University, TILEC)
    Abstract: We model the optimal regulation of continuous, irreversible, capacity expansion, in a model in which the regulated network firm has private information about its capacity costs, investments need to be financed out of the firm's cash flows from selling network access and demand is stochastic. If asymmetric information is large, the optimal mechanism consists of a regulatory holiday for low-cost firms, and a mark-up regime for higher-cost firms. With the regulatory holiday, a firm receives the full revenue of capacity sales, and expands capacity as if it were an unregulated monopolist. Under the mark-up regime, a firm receives only a fraction of the capacity revenues, and is obliged to expand capacity whenever the price for capacity reaches a threshold. The regulatory holiday is necessary to fund information rents to the most efficient firms, which invest relatively early, as direct investment subsidies are not feasible.
    Keywords: egulatory holiday; real option value; asymmetric information; optimal contract
    Date: 2016
  11. By: Breinbjerg, Jesper (Department of Business and Economics); Østerdal, Lars Peter (Department of Economics)
    Abstract: We consider a non-cooperative queueing environment where a finite number of customers independently choose when to arrive at a queueing system that opens at a given point in time and serves customers on a last-come first-serve preemptive-resume (LCFS-PR) basis. Each customer has a service time requirement which is identically and independently distributed according to some general probability distribution, and they want to complete service as early as possible while minimizing the time spent in the queue. In this setting, we establish the existence of an arrival time strategy that constitutes a symmetric (mixed) Nash equilibrium, and show that there is at most one symmetric equilibrium. We provide a numerical method to compute this equilibrium and demonstrate by a numerical example that the social efficiency can be lower than the efficiency induced by a similar queueing system that serves customers on a first-come first-serve (FCFS) basis.
    Keywords: Queueing; strategic arrival times to a queue; non-cooperative games
    JEL: C72 D62 R41
    Date: 2017–03–17
  12. By: Bisin, Alberto; Verdier, Thierry
    Abstract: This paper constructs a simple theoretical political economy model to analyze the dynamic interactions between redistribution, public good provision and cultural integration of minority groups. Cultural differentiation erodes the support for general public good provision and vertical redistribution, reducing in turn the attractiveness of adoption of the mainstream culture by the minority groups. Our model shows the possibility for multiple politico-cultural steady state trajectories depending strongly on the initial degree of cultural differentiation in the society. An exogenous increase in income inequality is shown to increase the likelihood of multiple steady state trajectories. In a context with multiple minority groups, culltural fragmentation favors integration into the mainstream culture.
    Keywords: cultural integration; inequality; political economy; redistribution
    JEL: J13 J15 Z10
    Date: 2017–03
  13. By: Florence THEPOT (School of Law, University of Glasgow); Jacques THEPOT (LARGE Research Center, Université de Strasbourg)
    Abstract: Based on a duopoly price competition model, this paper argues that collusion on managerial incentive compensations may have the equivalent effects to collusion on prices. This paper also provides an analysis of the effect of different antitrust fines regimes in the context of a game between two companies each composed of two-level of decision making (the board of directors and the sales manager). The contribution of this paper is two-fold: it identifies" backstage arrangements" that may be used by companies in order to achieve monopoly pricing outcome without entering into explicit price-fixing practices. It also highlights the inefficiency of fining regimes based on sales when companies have a multi-layer decision-making structure
    Keywords: duopoly, antitrust law, governance. JEL classification : K21, L13, L41
    Date: 2017
  14. By: Hsiao-Chi Chen (National Taipei University); Shi-Miin Liu (National Taipei University)
    Abstract: Under two often employed imitation mechanisms, we show that an international environmental agreement with full participation can be the unique stochastically stable equilibrium if countries' efficiency of emission reductions is high. By contrast, if the efficiency of emission reduction is low, no agreement among countries to reduce emissions will be the unique stochastically stable equilibrium. We provide the convergence rates to these two equilibria as well. In addition, it is demonstrated that the equilibria are affected by different imitation rules and model's parameters, such as marginal benefits and costs of emission reduction and the number of participating countries.
    Keywords: evolutionary game, international environmental agreement, imitations, mutation, long run equilibrium, stochastically stable
    JEL: C73 Q54
    Date: 2017–03
  15. By: Wang, Zhu (Federal Reserve Bank of Richmond); Wright, Julian (National University of Singapore)
    Abstract: Many platforms that facilitate transactions between buyers and sellers charge ad valorem fees in which fees depend on the transaction price set by sellers. Given these platforms do not incur significant costs that vary with transaction prices, their use of ad valorem fees has raised controversies about the efficiency of this practice. In this paper, using a model that connects platforms' use of ad valorem fees to third-degree price discrimination, we evaluate the welfare consequences of banning such fees. We find the use of ad valorem fees generally increases welfare, including for calibrated versions of the model based on data from Amazon's marketplace and Visa's signature debit cards.
    Keywords: platforms; taxation; third-degree price discrimination
    JEL: D4 H2 L5
    Date: 2017–03–22

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