nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒07‒02
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Mechanisms with Referrals: VCG Mechanisms and Multilevel Mechanisms By Joosung Lee
  2. The Myopic Stable Set for Social Environments By Thomas Demuynck; Jean-Jacques Herings; Riccardo D. Saulle; Christian Seel
  3. Comparative Advertising: The role of prices By Baumann, Stuart
  4. Moral Hazard and Horizontal Information By Anastasios Papanastasiou
  5. Dynamic Random Utility By Mira Frick; Ryota Iijima; Tomasz Strzalecki
  6. It's Good to be Bad. A Model of Low Quality Dominance in a Full Information Consumer Search Market By Stuart Baumann; Margaryta Klymak
  7. Strategic corporate social responsibility By Planer-Friedrich, Lisa; Sahm, Marco
  8. Information Design In Coalition Formation Games By Sareh Vosooghi
  9. Strategic vote trading under complete information By Dimitrios Xefteris; Nicholas Ziros
  10. Aggregation of Bayesian preferences: Unanimity vs Monotonicity By Federica Ceron; Vassili Vergopoulos
  11. Dynamical selection of Nash equilibria using Experience Weighted Attraction Learning: emergence of heterogeneous mixed equilibria By Robin Nicole; Peter Sollich
  12. Contesting an International Trade Agreement By Matthew T. Cole; James Lake; Ben Zissimos
  13. Good Politicians' Distorted Incentives By Margherita Negri
  14. Dynamic privatization policy By Sato, Susumu; Matsumura, Toshihiro
  15. Contested Persuasion By Stergios Skaperdas; Samarth Vaidya

  1. By: Joosung Lee (Business School, University of Edinburgh)
    Abstract: We study mechanisms for environments in which only some of the agents are directly connected to a mechanism designer and the other agents can participate in a mechanism only through the connected agents' referrals. In such environments, the mechanism designer and agents may have different interest in varying participants so that agents strategically manipulate their preference as well as their network connection to avoid competition or congestion; while the mechanism designer wants to elicit the agents' private information about both preferences and network connections. As a benchmark for an efficient mechanism, we re-define a VCG mechanism. It is incentive compatible and individually rational, but it generically runs a deficit as it requires too much compensation for referrals. Alternatively as a budget-surplus mechanism, we introduce a multilevel mechanism, in which each agent is compensated by the agents who would not be able to participate without her referrals. Under a multilevel mechanism, we show that fully referring one's acquaintances is a dominant strategy and agents have no incentive to under-report their preference if the social welfare is submodular.
    Keywords: Mechanism Design, Referral Program, Reward Scheme, VCG Mechanism, Multilevel Mechanism, Incentive Compatibility, Budget Feasibility
    JEL: D82 D71 C72
    Date: 2017–06
  2. By: Thomas Demuynck (Ecares, Université Libre de Bruxelles); Jean-Jacques Herings (Department of Economics, Maastricht University); Riccardo D. Saulle (Department of Economics, Maastricht University); Christian Seel (Department of Economics, Maastricht University)
    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: 2017–06
  3. By: Baumann, Stuart
    Abstract: In markets where firms sell similar goods to their competitors, firms may be able to free-ride off the costly price signalling of competitor firms by engaging in price comparative advertising. As the goods are similar, consumers can reason that if one good is high quality (revealed through price signalling) then so is the other. This paper models this phenomenon and finds that in equilibrium there will be firms price signalling as well as freeriding firms that signal through price comparative advertising. Welfare is strictly higher in markets where advertising firms are active relative to pure price signalling markets. In some cases advertising markets can be even more efficient than full information markets as advertisers surrender market power to avoid costly price signalling.
    Keywords: Comparative advertising, Price Signalling
    JEL: D82 D83 M37
    Date: 2017–06–25
  4. By: Anastasios Papanastasiou
    Abstract: This paper examines a moral hazard problem where the principal observes a location signal of the agent's unobserved effort. When the agent incurs costlier effort the demand for the agent's services is ex-ante more spread out over a location measure of demand. If location outcomes are informative about the agents action and verifiable, the principal can improve efficiency by contracting on such information. The introduction of location information suggests that the optimal contract that maximizes expected market size can be locally decreasing in sales when small-market location outcomes are a strong signal of high effort.
    JEL: D82 D86
    Date: 2017–06–27
  5. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Tomasz Strzalecki (Harvard University)
    Abstract: Under dynamic random utility, an agent (or population of agents) solves a dynamic decision problem subject to evolving private information. We analyze the fully general and non-parametric model, axiomatically characterizing the implied dynamic stochastic choice behavior. A key new feature relative to static or i.i.d. versions of the model is that when private information displays serial correlation, choices appear history dependent: different sequences of past choices reflect different private information of the agent, and hence typically lead to different distributions of current choices. Our axiomatization imposes discipline on the form of history dependence that can arise under arbitrary serial correlation. Dynamic stochastic choice data lets us distinguish central models that coincide in static domains, in particular private information in the form of utility shocks vs. learning, and to study inherently dynamic phenomena such as choice persistence. We relate our model to specifications of utility shocks widely used in empirical work, highlighting new modeling tradeoffs in the dynamic discrete choice literature. Finally, we extend our characterization to allow past consumption to directly affect the agent’s utility process, accommodating models of habit formation and experimentation.
    Keywords: Dynamic stochastic choice, Random utility, History dependence, Serially correlated utilities, Consumption persistence, Learning
    JEL: D81 D83 D90
    Date: 2017–06
  6. By: Stuart Baumann; Margaryta Klymak
    Abstract: This paper examines a consumer search market exhibiting vertically differentiated firms, heterogeneous consumers and endogenous consumer market entry. In an asymmetric information setting high and low quality firms make equal sales and profit in this market. Conversely when there is full information, search frictions induce an unravelling mechanism that leads to a unique re ned equilibrium where all consumers approach low quality firms and high quality firms make no sales or profit. This presents a rationale for why low quality firms may disclose their quality and high quality firms may not even when disclosure is costless.
    Keywords: Consumer Search, Quality Disclosure
    JEL: D82 D83 L15
  7. By: Planer-Friedrich, Lisa; Sahm, Marco
    Abstract: We examine the strategic use of Corporate Social Responsibility (CSR) in imperfectly competitive markets. The level of CSR determines the weight a firm puts on consumer surplus in its objective function before it decides upon supply. First, we consider symmetric Cournot competition and show that the endogenous level of CSR is positive for any given number of firms. However, positive CSR levels imply smaller equilibrium profits. Second, we find that an incumbent monopolist can use CSR as an entry deterrent. Both results indicate that CSR may increase market concentration. Third, we consider heterogeneous firms and show that asymmetric costs imply asymmetric CSR levels.
    Keywords: Corporate Social Responsibility,Market Concentration,Cournot Competition,Entry Deterrence,Strategic Delegation,Evolutionary Stability
    JEL: D42 D43 L12 L13 L21 L22
    Date: 2017
  8. By: Sareh Vosooghi (University of Oxford)
    Abstract: I examine a setting, where an information sender conducts research into a payoff-relevant state variable, and releases information to agents, who consider joining a coalition. The agents' actions can cause harm by contributing to a public bad. The sender, who has commitment power, by designing an information mechanism (a set of signals and a probability distribution over them), maximises his payoff, which depends on the action taken by the agents, and the state variable. I show that the coalition size, as a function of beliefs of agents, is an endogenous variable, induced by the information sender. The optimal information mechanism from the general set of public information mechanisms, in coalition formation games is derived. I also apply the results to International Environmental Agreements (IEAs), where a central authority, as an information sender, attempts to reduce the global level of greenhouse gases (GHG) by communication of information on social cost of GHG.
    Keywords: Coalition Formation, Learning, Information Persuasion, International Environmental Agreements
    JEL: D83 D70 C72 Q54
    Date: 2017–06
  9. By: Dimitrios Xefteris; Nicholas Ziros
    Abstract: We study two-party elections considering that: a) prior to the voting stage voters are free to trade votes for money according to the rules of the Shapley-Shubik strategic market games; and b) voters' preferences -both ordinal rankings and cardinal intensities- are public information. While under plurality rule no trade occurs, under a power-sharing system (voters' utilities are proportionally increasing in the vote share of their favorite party) full trade is always an equilibrium (two voters -the strongest supporter of each party- buy the votes of all others). Notably, this equilibrium implements proportional justice with respect to the two buyers: the ratio of the parties' vote shares is equal to the ratio of the preference intensities of the two most opposing voters.
    Keywords: Vote trading; Complete information; Strategic market games; Power sharing; Proportional justice.
    JEL: C72 D72 P16
    Date: 2017–06
  10. By: Federica Ceron (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Vassili Vergopoulos (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: This article reconsiders the issue of Bayesian aggregation by pointing at a conflict that may arise between two logically independent dominance criteria, Pareto dominance and statewise dominance, that are commonly imposed on social preferences. We propose a weaker dominance axiom that restricts statewise dominance to Pareto dominant alternatives and Pareto dominance to statewise dominant alternatives. The associated aggregation rule is a convex combination of two components., the first being a weighted sum of the individuals' subjective expected utility (SEU) functional, the second being a social SEU functional, with associated social utility function and social belief. Such representation establishes the existence of a trade off between adherence to the Pareto principle and compliance with statewise dominance. We then investigate what are the consequences of adding to our assumptions either of the two dominance criteria in their full force and obtain that each of them is equivalent to discarding the other, unless there is essentially a common prior probability.
    Abstract: Cet article étudie l'agrégation des préférences Bayesiennes en examinant un conflit potentiel entre deux critères de dominance communément imposés sur les préférences sociales, la dominance de Pareto et la dominance stochastique. Il propose une notion de dominance plus faible qui contraint la validité de la dominance stochastique à des alternatives dominantes au sens de Pareto, ou, de manière équivalente, celle du principe de Pareto à des alternatives dominantes au sens stochastique. La règle d'agrégation qui en résulte est une combinaison convexe de deux composantes, une somme pondérée des fonctionnelles individuelles et l'espérance d'utilité sociale. Cette règle établit l'existence d'un arbitrage entre adhérence au principe de Pareto et conformité à la dominance stochastique.
    Keywords: Pareto dominance,Monotonicity,Preference aggregation,Social choice,Subjective expected utility,Dominance de Pareto,monotonicité,agrégation des préférences,choix social,utilité espérée subjective
    Date: 2017–05
  11. By: Robin Nicole; Peter Sollich
    Abstract: We study the distribution of strategies in a large game that models how agents choose among different double auction markets. We classify the possible mean field Nash equilibria, which include potentially segregated states where an agent population can split into subpopulations adopting different strategies. As the game is aggregative, the actual equilibrium strategy distributions remain undetermined, however. We therefore compare with the results of Experience-Weighted Attraction (EWA) learning, which at long times leads to Nash equilibria in the appropriate limits of large intensity of choice, low noise (long agent memory) and perfect imputation of missing scores (fictitious play). The learning dynamics breaks the indeterminacy of the Nash equilibria. Non-trivially, depending on how the relevant limits are taken, more than one type of equilibrium can be selected. These include the standard homogeneous mixed and heterogeneous pure states, but also \emph{heterogeneous mixed} states where different agents play different strategies that are not all pure. The analysis of the EWA learning involves Fokker-Planck modeling combined with large deviation methods. The theoretical results are confirmed by multi-agent simulations.
    Date: 2017–06
  12. By: Matthew T. Cole (Department of Economics, California Polytechnic State University); James Lake (Department of Economics, Southern Methodist University); Ben Zissimos (Department of Economics, University of Exeter)
    Abstract: After governments sign an international trade agreement (TA), each government must ratify the TA. Often, this ratification process is lengthy and the outcome highly uncertain. We model a two-country TA where, unlike prior literature, pro-trade and anti-trade interest groups in each country recognize that (i) TA implementation requires ratification by both governments and (ii) they cannot condition contributions on their government's ratification decision. In this new class of contests, which we call 'parallel contests', we show that (i) anti- and pro-trade lobbies lobby in equilibrium, (ii) the probability of TA ratification lends itself to intuitive and tractable comparative statics, and (iii) the protection embodied in negotiated TA tariffs reflects a tension between the liberalizing force of lobbying and inherently protectionist government preferences.
    Keywords: Contests, Trade Agreements, Lobbying
    JEL: F02 F12 F13 D44 D72
    Date: 2017
  13. By: Margherita Negri (School of Economics and Finance, University of St Andrews)
    Abstract: I construct a political agency model that provides a new explanation for sub-optimal policy making decisions by incumbents. I show that electoral incentives can induce politicians to address less relevant issues, disregarding more important ones. Issue importance is defined in terms of the utility voters would receive if the issue was solved. Contrary to existing literature, sub-optimal policy making occurs even when voters are perfectly informed about issues’ characteristics and politicians are policy oriented. I provide an explanation that relies on the negative correlation between issue importance and probability of solving it: for a given effort exerted by incumbents, less relevant issues guarantee higher probability of success. In equilibrium, voters cannot commit to re-elect the incumbent if and only if the most important issue was solved. This is because solving the easy issue also constitutes a positive signal about incumbents’ type. Whenever re-election is sufficiently valuable, then, politicians will choose to address less relevant and easier issues.
    Keywords: political agency, elections, incumbent behavior, politicians’ incentives
    JEL: D02 D72 D78
    Date: 2017–05–06
  14. By: Sato, Susumu; Matsumura, Toshihiro
    Abstract: This study formulates a two-period model in which the government privatizes a state-owned public firm over multiple periods. We introduce the shadow cost of public funding (i.e., the excess burden of taxation). The government is concerned about both the total surplus and the revenue obtained from the privatization of the public firm. We find that the government may or may not increase the degree of privatization over time depending on the competitiveness of the product market and nationality of private competitors. The government increases the degree of privatization over time if the product market is competitive and the foreign ownership share in private firms is low. Although it adjusts its privatization policy over time, this harms welfare. In addition, this distortion in the ex-post incentive leads to too low a degree of privatization in the first period.
    Keywords: timing of privatization, commitment, state-owned public enterprise; foreign competition
    JEL: H42 L33
    Date: 2017–06–23
  15. By: Stergios Skaperdas (Department of Economics, University of California-Irvine); Samarth Vaidya (School of Accounting, Economics and Finance, Deakin University University)
    Abstract: We show how contest and rent-seeking functions can be thought of as persuasion functions that can be derived in a Bayesian setting. Two contestants (such as lobbyists or politicians) produce evidence for a decision-maker (such as an agency head or a voter) who has prior beliefs and possibly other biases and engages in Bayesian updating. The probability of each contestant winning depends on the resources and organization of the contestant, on the biases of the decision-maker, on the truth as well as on other factors. We discuss how this approach can be applied to lobbying government at its three branches (legislative, executive, and judicial, the latter in terms of litigation); political campaigning; general policy formulation and advocacy in the wider media; and ideological struggles.
    Keywords: Contests; Lobbying; Rent-seeking
    JEL: D72 D73 D78 H50
    Date: 2016–05

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