nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒06‒25
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Time Preferences and Bargaining By Schweighofer-Kodritsch, Sebastian
  2. The Scope of Sequential Screening with Ex-Post Participation Constraints By Dirk Bergemann; Francisco Castro; Gabriel Weintraub
  3. Referential Revealed Preference Theory By Hassan Nosratabadi
  4. Belief revision generalized: a joint characterization of Bayes's and Jeffrey's rules By Franz Dietrich; Christian List; Richard Bradley
  5. Ambiguity aversion under maximum likelihood updating By Daniel Heyen
  6. Flexible contracts By Piero Gottardi; Jean-Marc Tallon; Paolo Ghirardato
  7. Optimal Illusion of Control and Related Perception Biases By Olivier Gossner; Jakub Steiner
  8. Bargaining with renegotiation in models with on-the-job search By Gottfries, A.
  9. Collusion and welfare in the case of a horizontally differentiated duopoly with network compatibility By Tsuyoshi Toshimitsu
  10. Intensity valence By Fabian Gouret; Stéphane Rossignol
  11. Partial Privatization and Subsidization in a Mixed Duopoly: R&D versus Output Subsidies By Lee, Sang-Ho; Muminov, Timur; Tomaru, Yoshihiro
  12. No bullying! A playful proof of Brouwer's fixed-point theorem By Petri, Henrik; Voorneveld, Mark
  13. Learning, Matching and Aggregation By Ed Hopkins
  14. Merger and Innovation Incentives in a Differentiated Industry By Kesavayuth, Dusanee; Lee, Sang-Ho; Zikos, Vasileios
  15. Proximal Approach in Selection of Subgame Perfect Nash Equilibria By Francesco Caruso; Maria Carmela Ceparano; Jacqueline Morgan
  16. Objective and subjective compliance: a norm-based explanation of 'moral wiggle room' By Kai Spiekermann; Arne Weiss
  17. Continuity and completeness of strongly independent preorders By David, McCarthy; Kalle, Mikkola
  18. Beetles: Biased Promotions and Persistence of False Belief By George Akerlof; Pascal Michaillat

  1. By: Schweighofer-Kodritsch, Sebastian (Humboldt University Berlin and WZB Berlin)
    Abstract: This paper presents an analysis of general time preferences in the canonical Rubinstein (1982) model of bargaining, allowing for arbitrarily history-dependent strategies. I derive a simple sufficient structure for optimal punishments and thereby fully characterize (i) the set of equilibrium outcomes for any given preference profile, and (ii) the set of preference profiles for which equilibrium is unique. Based on this characterization, I establish that a weak notion of present bias - implied, e.g., by any hyperbolic or quasi-hyperbolic discounting - is sufficient for equilibrium to be unique, stationary and efficient. Conversely, I demonstrate how certain violations of present bias give rise to multiple (non-stationary) equilibria that feature delayed agreement under gradually increasing offers.
    Keywords: time preferences; dynamic inconsistency; alternating offers; bargaining; optimal punishments; delay;
    JEL: C78 D03 D74
    Date: 2017–06–18
  2. By: Dirk Bergemann (Cowles Foundation, Yale University); Francisco Castro (Graduate School of Business, Columbia University); Gabriel Weintraub (Graduate School of Business, Stanford University)
    Abstract: We study the classic sequential screening problem under ex-post participation constraints. Thus the seller is required to satisfy buyers’ ex-post participation constraints. A leading example is the online display advertising market, in which publishers frequently cannot use up-front fees and instead use transaction-contingent fees. We establish when the optimal selling mechanism is static (buyers are not screened) or dynamic (buyers are screened), and obtain a full characterization of such contracts. We begin by analyzing our model within the leading case of exponential distributions with two types. We provide a necessary and sufficient condition for the optimality of the static contract. If the means of the two types are sufficiently close, then no screening is optimal. If they are sufficiently apart, then a dynamic contract becomes optimal. Importantly, the latter contract randomizes the low type buyer while giving a deterministic allocation to the high type. It also makes the low type worse-off and the high type better-off compared to the contract the seller would offer if he knew the buyer’s type. Our main result establishes a necessary and sufficient condition under which the static contract is optimal for general distributions. We show that when this condition fails, a dynamic contract that randomizes the low type buyer is optimal.
    Keywords: Sequential screening, Ex-post participation constraints, Static contract, Dynamic contract
    JEL: C72 D82 D83
    Date: 2017–06
  3. By: Hassan Nosratabadi (Rutgers University)
    Abstract: Reference-dependent choice behavior implies behavioral anomalies such as the so-called attraction effect, status quo bias, and endowment effect. This paper builds a new theory of revealed preference capturing preferences that depend on a reference point. The first main contribution of this work is a decomposition of the Weak Axiom of Revealed Preference (WARP) into three independent axioms. Referential revealed preference theory is then, naturally, constructed by only removing the WARP-rationales that are inconsistent with the data. This minimal deviation, in addition to explaining the mentioned behavioral anomalies, preserves the predictive power of the classical theory to the extent possible. Therefore, all sensible results are endogenously derived from the model. These results include: formation of references and reference preferences, the connection of the latter concept to the classical revealed preference, the nature of referential effects, and the characterization of choice. Interestingly, the notion of sequential rationalizability arises, endogenously, as a result in the referential revealed preference theory.
    Keywords: Reference-Dependent Choice, Reference Preferences, Attraction Effect, Status-Quo Bias
    JEL: D11 D81
    Date: 2017–06–19
  4. By: Franz Dietrich; Christian List; Richard Bradley
    Abstract: We present a general framework for representing belief-revision rules and use it to characterize Bayes's rule as a classical example and Jeffrey's rule as a non-classical one. In Jeffrey's rule, the input to a belief revision is not simply the information that some event has occurred, as in Bayes's rule, but a new assignment of probabilities to some events. Despite their differences, Bayes's and Jeffrey's rules can be characterized in terms of the same axioms: responsiveness, which requires that revised beliefs incorporate what has been learnt, and conservativeness, which requires that beliefs on which the learnt input is ‘silent’ do not change. To illustrate the use of non-Bayesian belief revision in economic theory, we sketch a simple decision-theoretic application.
    Keywords: Belief revision; subjective probability; Bayes's rule; Jeffrey's rule; axiomatic foundations; fine-grained versus coarse-grained beliefs; unawareness
    JEL: C73 D01 D80 D81 D83 D90
    Date: 2015–12–02
  5. By: Daniel Heyen
    Abstract: Maximum likelihood updating (MLU) is a well-known approach for extending static ambiguity sensitive preferences to dynamic set-ups. This paper develops an example in which MLU induces an ambiguity averse maxmin expected utility (MEU) decision-maker to (i) prefer a bet on an ambiguous over a risky urn and (ii) be more willing to bet on the ambiguous urn compared to an (ambiguity neutral) subjective expected utility (SEU) decision-maker. This is challenging since prior to observing (symmetric) draws from the urns, the MEU decision-maker (in line with the usual notion of ambiguity aversion) actually preferred the risky over the ambiguous bet and was less willing to bet on the ambiguous urn than the SEU decision-maker. The identified switch in betting preferences is not due to a violation of dynamic consistency or consequentialism. Rather, it results from MLU's selection of extreme priors, causing a violation of the stability of set-inclusion over the course of the updating process.
    Keywords: learning under ambiguity; maxmin expected utility; ambiguity aversion; maximum likelihood updating; dynamic decision making; belief dynamics
    JEL: D81 D83
    Date: 2017
  6. By: Piero Gottardi (European University Institute - Department of Economics); Jean-Marc Tallon (PSE - Paris School of Economics); Paolo Ghirardato (Collegio Carlo Alberto - Via Real Collegio 30)
    Abstract: This paper studies the costs and benefits of delegating decisions to superiorly informed agents, that is of adopting flexible contracts, relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice in two different environments, one with risk and one with ambiguity. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agent's degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties have imprecise probabilistic beliefs, the agent's degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts. JEL Classification: D86, D82, D81.
    Keywords: Multiple Priors,Imprecision Aversion,Flexibility,Delegation,Agency Costs
    Date: 2017–05
  7. By: Olivier Gossner; Jakub Steiner
    Abstract: We study perception biases arising under second-best perception strategies. An agent correctly observes a parameter that is payoff-relevant in many decision problems that she encounters in her environment but is unable to retain all the information until her decision. A designer of the decision process chooses a perception strategy that determines the distribution of the perception errors. If some information loss is unavoidable due to cognition constraints, then (under additional conditions) the optimal perception strategy exhibits the illusion of control, overconfidence, and optimism.
  8. By: Gottfries, A.
    Abstract: This paper analyzes a model of wage bargaining with on-the-job search. The model in Shimer (2006) is extended to include an opportunity of within-match wage renegotiation. This opportunity arrives at a Poisson rate. I show that once an opportunity for wage renegotiation is introduced there is a unique equilibrium wage distribution, in contrast to the indeterminacy found by Shimer. Furthermore, the model provides a natural bridge between the results of Shimer (2006) and Pissarides (1994). When the arrival rate of renegotiation opportunities tends to infinity, the equilibrium of the model converges to the equilibrium pay-offs found by Pissarides, and when the arrival rate converges to zero, the equilibrium in the model converges to one of the equilibria found by Shimer.
    Keywords: On-the-job search, Bargaining, Renegotiation, Wage contracts
    JEL: C78 J31 J41 J64
    Date: 2017–05–31
  9. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Based on a horizontally differentiated duopoly model with network externalities, in which we focus on the role of compatibility between the products, we consider the effect of collusion on social welfare. We demonstrate that collusion improves social welfare, compared to the case of noncooperative Cournot competition, if the level of compatibility between the products under collusion is sufficiently large, given that a network externality is strong. In this case, the collusion is sustainable.
    Keywords: collusion, network externality, compatibility, horizontally differentiated duopoly, welfare
    JEL: D43 D62 L13 L14 L15 L41
    Date: 2017–06
  10. By: Fabian Gouret; Stéphane Rossignol (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper studies a continuous one-dimensional spatial model of electoral competition with two office-motivated candidates differentiated by their “intensity” valence. All voters agree that one candidate will implement more intensively his announced policy than his opponent. However, and contrary to existing models, the intensity valence has a different impact on the utility of voters according to their position in the policy space. The assumption that voters have utility functions with intensity valence, an assumption which has been found to be grounded empirically, generates very different results than those obtained with traditional utility functions with additive valence. First, the candidate with low intensity valence is supported by voters whose ideal points are on both extremes of the policy space. Second, there exist pure strategy Nash equilibria in which the winner is the candidate with high intensity if the distribution of voters in the policy space is sufficiently homogeneous. On the contrary, if the distribution of voters in the policy space is very heterogeneous, there are pure strategy Nash equilibria in which the candidate with low intensity wins. For moderate heterogeneity of the distribution of voters, there is no pure strategy Nash equilibrium.
    Keywords: valence, voter’s utility functions, Downsian model, spatial voting.
    JEL: D72
    Date: 2016
  11. By: Lee, Sang-Ho; Muminov, Timur; Tomaru, Yoshihiro
    Abstract: This study investigates R&D and output subsidies in a mixed duopoly with partial privatization. We show that an output subsidy is welfare-superior to an R&D subsidy policy, but the government has a higher incentive to privatize the public firm under the output subsidy than the R&D subsidy. However, when the government uses the policy mix of R&D and output subsidies together, it can achieve the first-best allocation, in which the degree of privatization does not influence output subsidies but influences R&D subsidies.
    Keywords: Mixed duopoly; Partial privatization; R&D subsidy; Output subsidy
    JEL: H2 L1 L3
    Date: 2017–06–19
  12. By: Petri, Henrik (Department of Finance); Voorneveld, Mark (Dept. of Economics)
    Abstract: We give an elementary proof of Brouwer's fixed-point theorem. The only mathematical prerequisite is a version of the Bolzano-Weierstrass theorem: a sequence in a compact subset of n-dimensional Euclidean space has a convergent subsequence with a limit in that set. Our main tool is a `no-bullying' lemma for agents with preferences over indivisible goods. What does this lemma claim? Consider a finite number of children, each with a single indivisible good (a toy) and preferences over those toys. Let's say that a group of children, possibly after exchanging toys, could bully some poor kid if all group members find their own current toy better than the toy of this victim. The no-bullying lemma asserts that some group S of children can redistribute their toys among themselves in such a way that all members of S get their favorite toy from S, but they cannot bully anyone.
    Keywords: Brouwer; fixed point; indivisible goods; KKM lemma
    JEL: C62 C63 C69 D51
    Date: 2016–04–16
  13. By: Ed Hopkins
    Abstract: Fictitious play and "gradient" learning are examined in the context of a large population where agents are repeatedly randomly matched. We show that the aggregation of this learning behaviour can be qualitatively different from learning at the level of the individual. This aggregate dynamic belongs to the same class of simply defined dynamic as do several formulations of evolutionary dynamics. We obtain sufficient conditions for convergence and divergence which are valid for the whole class of dynamics. These results are therefore robust to most specifications of adaptive behaviour.
    Keywords: games, fictitious play, reinforcement learning, evolution
    JEL: C72 D83
  14. By: Kesavayuth, Dusanee; Lee, Sang-Ho; Zikos, Vasileios
    Abstract: In this paper, we consider a duopoly with product differentiation and examine the interaction between merger and innovation incentives. The analysis reveals that a merger tends to discourage innovation, unless the investment cost is sufficiently low. This result holds whether or not side payments between firms are allowed. When side payments are permitted, a bilateral merger-to-monopoly is always profitable, a standard result in the literature. When side payments are not permitted, however, we show that a merger is not profitable when the efficiency of the new technology is relatively high and the investment cost is below a particular level.
    Keywords: Merger, R&D, innovation, differentiated products
    JEL: D21 L13 L41 O31
    Date: 2017–06–21
  15. By: Francesco Caruso (Università di Napoli Federico II); Maria Carmela Ceparano (Università di Napoli Federico II); Jacqueline Morgan (Università di Napoli Federico II and CSEF)
    Abstract: In one-leader one-follower two-stage games, multiplicity of Subgame Perfect Nash Equilibria (henceforth SPNE) arises when the optimal reaction of the follower to any choice of the leader is not always unique, i.e. when the best reply correspondence of the follower is not a single-valued map. This paper concerns a new selection method for SPNE which makes use of a sequence of games designed using a proximal point algorithm, well-known optimization technique related to the so-called Moreau-Yosida regularization (Moreau 1965, Martinet 1972, Rockafellar 1976, Parikh and Boyd 2014 and references therein). Any game of the obtained sequence is a classical Stackelberg game (Von Stack- elberg 1952), i.e. a one-leader one-follower two-stage game where the best reply correspondence of the follower is single-valued. This mechanism selection is in line with a previous one based on Tikhonov regularization, in Morgan and Patrone (2006), but using the class of proximal point algorithms has a twofold advantage: on the one hand, it can provide improvements in numerical implementations and, on the other hand, it has a clear interpretation: the follower payoff function is modified subtracting a term that can represent a physical and behavioural cost to move (Attouch and Soubeyran 2009). The constructive method and its effectiveness are illustrated and existence results for the selection are provided under mild assumptions on data, together with connections with other possible selection methods.
    Keywords: Non-cooperative game; Stackelberg game; bilevel optimization problem; subgame perfect Nash equilibrium; selection.
    Date: 2017–04–21
  16. By: Kai Spiekermann; Arne Weiss
    Abstract: We propose a cognitive-dissonance model of norm compliance to identify conditions for selfishly biased information acquisition. The model distinguishes between: (i) objective norm compliers, for whom the right action is a function of the state of the world; (ii) subjective norm compliers, for whom it is a function of their belief. The former seek as much information as possible; the latter acquire only information that lowers, in expected terms, normative demands. The source of 'moral wiggle room' is not belief manipulation, but the coarseness of normative prescriptions under conditions of uncertainty. In a novel experimental setup, we find evidence for such strategic information uptake. Our results suggest that attempts to change behavior by subjecting individuals to norms can lead to biased information acquisition instead of compliance.
    Keywords: norm compliance; uncertainty; experiment; self-serving biases; strategic learning; dictator game
    JEL: C91 D63 D83
    Date: 2016–03
  17. By: David, McCarthy; Kalle, Mikkola
    Abstract: A strongly independent preorder on a possibly infinite dimensional convex set that satisfies two of the following conditions must satisfy the third: (i) the Archimedean continuity condition; (ii) mixture continuity; and (iii) comparability under the preorder is an equivalence relation. In addition, if the preorder is nontrivial (has nonempty asymmetric part) and satisfies two of the following conditions, it must satisfy the third: (i') a modest strengthening of the Archimedean condition; (ii) mixture continuity; and (iii') completeness. Applications to decision making under conditions of risk and uncertainty are provided.
    Keywords: Continuity Completeness Archimedean Strong independence Expected utility
    JEL: D81
    Date: 2017–06–17
  18. By: George Akerlof; Pascal Michaillat
    Abstract: This paper develops a theory of promotion based on evaluations by the already promoted. The already promoted show some favoritism toward candidates for promotion with similar beliefs, just as beetles are more prone to eat the eggs of other species. With such egg-eating bias, false beliefs may not be eliminated by the promotion system. Our main application is to scientific revolutions: when tenured scientists show favoritism toward candidates for tenure with similar beliefs, science may not converge to the true paradigm. We extend the statistical concept of power to science: the power of the tenure test is the probability (absent any bias) of denying tenure to a scientist who adheres to the false paradigm, just as the power of any statistical test is the probability of rejecting a false null hypothesis. The power of the tenure test depends on the norms regarding the appropriate criteria to use in promotion and the empirical evidence available to apply these criteria. We find that the scientific fields at risk of being captured by false paradigms are those with low power. Another application is to hierarchical organizations: egg-eating bias can result in the capture of the top of organizations by the wrong-minded.
    JEL: I23 M51 Z13
    Date: 2017–06

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