nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒08‒13
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Emergence of Weak, Despotic and Inclusive States By Daron Acemoglu; James A. Robinson
  2. Cardinal Utility Representation Separating Ambiguous Beliefs and Utility By Mayumi Horie
  3. Contracting with long-term consequences By Vasama, Suvi
  4. Round-Robin Tournaments with Limited Resources By Dmitry Dagaev; Andrey Zubanov
  5. On moral hazard and persistent private information By Vasama, Suvi
  6. Rationally Inattentive Behavior: Characterizing and Generalizing Shannon Entropy By Andrew Caplin; Mark Dean; John Leahy
  7. Entry in Beauty-Contest Games By Sanchez Villalba, Miguel; Martinez Gorricho, Silvia
  8. Competition and Networks of Collaboration By Roketskiy, Nikita
  9. The Strategic Industry Supply Curve By Flavio M. Menezes; John Quiggin
  10. Optimal Learning and Ellsberg's Urns By Larry G. Epstein; Shaolin Ji
  11. How Borda voting rule can respect Arrow IIA and avoid Cloning manipulation By DOMBOU T., Dany R.
  12. Doping in teams: A simple decision theoretic model By Dilger, Alexander
  13. Strategic Sample Selection By Di Tillio, Alfredo; Ottaviani, Marco; Sorensen, Peter Norman
  14. Government Financing of R&D: A Mechanism Design Approach By Lach, Saul; Neeman, Zvika; Schankerman, Mark

  1. By: Daron Acemoglu; James A. Robinson
    Abstract: Societies under similar geographic and economic conditions and subject to similar external influences nonetheless develop very different types of states. At one extreme are weak states with little capacity and ability to regulate economic or social relations. At the other are despotic states which dominate civil society. Yet there are others which are locked into an ongoing competition with civil society and it is these, not the despotic ones, that develop the greatest capacity. We develop a dynamic contest model of the potential competition between state (controlled by a ruler or a group of elites) and civil society (representing non-elite citizens), where both players can invest to increase their power. The model leads to different types of steady states depending on initial conditions. One type of steady state, corresponding to a weak state, emerges when civil society is strong relative to the state (e.g., having developed social norms limiting political hierarchy). Another type of steady state, corresponding to a despotic state, originates from initial conditions where the state is powerful and civil society is weak. A third type of steady state, which we refer to as an inclusive state, emerges when state and civil society are more evenly matched. In this case, each party has greater incentives to invest to keep up with the other, and this leads to the most powerful and capable type of state, while simultaneously incentivizing civil society to be equally powerful as well. Our framework highlights that comparative statics with respect to structural factors such as geography, economic conditions or external threats, are conditional — in the sense that depending on initial conditions they can shift a society into or out of the basin of attraction of the inclusive state.
    JEL: H4 H7 P16
    Date: 2017–08
  2. By: Mayumi Horie (Hiroshima University of Economics)
    Abstract: This paper proposes the weaker axioms which admit a cardinal utility representation under ambiguity separating ambiguous beliefs and utility over consequences in a purely subjective setting. The representation is obtained in an implicit form, which corresponds to the disappointment aversion utility (Gul, 1991) with respect to a nonadditive measure in place of a probability measure. It includes all the properties of cardinality, ambiguity aversion, reference dependency, gain/loss asymmetry, and the distortion in probability evaluations. It enables us to capture varying attitude toward ambiguity such as the subjective common ratio e?ect and to explain Machina?s examples (2009, 2014) in the simplest way.
    Keywords: isometry, implicit representation, biseparable preference, rank dependent utility, disappointment aversion, common ratio effect
    JEL: D81
    Date: 2017–04
  3. By: Vasama, Suvi
    Abstract: I examine optimal managerial compensation and turnover policy in a principal-agent model in which the firm output is serially correlated over time. The model captures a learning-by-doing feature: higher effort by the manager increases the quality of the match between the firm and the manager in the future. The optimal incentive scheme entails an inefficiently high turnover rate in the early stages of the employment relationship. The optimal turnover probability depends on the past performance and the likelihood of turnover decreases gradually with superior performance. Following weak performance, the contract implements a permanently inefficient turnover rate. With correlated outcome, a permanent inefficiency is needed to save on information rents to the agent, even when the agent does not have persistent private information.
    JEL: C73 D82 D86
    Date: 2017–08–03
  4. By: Dmitry Dagaev (National Research University Higher School of Economics); Andrey Zubanov (National Research University Higher School of Economics)
    Abstract: We propose a theoretical model of a round-robin tournament with limited resources motivated by the fact that in a real-world round-robin sport tournament participating teams are sometimes forced to distribute their effort over an extended period. We assume that the participating teams have a limited amount of effort that must be distributed between all matches. We model the outcome of each match as a first-price sealed-bid auction. Results are aggregated after all matches are played with respect to the number of wins. The teams distribute their effort striving to maximize the expected payoff at tournament completion. For a three team tournament, we describe the set of all subgame perfect Nash equilibria in pure strategies. For tournaments with a relatively low first prize, we found two types of equilibria: ‘effort-saving’ and ‘burning out’, both leading to unequal payoffs. In contrast, for tournaments with a large first prize a limited budget of effort, in general, does not allow for the first or the last move advantage to be exploited.
    Keywords: contest, round-robin tournament, limited resources, first-price auction, first-mover advantage.
    JEL: C73 D44
    Date: 2017
  5. By: Vasama, Suvi
    Abstract: I examine a simple model of dynamic moral hazard in which the agent has persistent private information. I show that despite the complexity of the framework, the problem has a simple solution that can be found using standard methods. The incentives at the optimal contract can be captured using two state variables: the agent's continuation value and his information rent. The optimal contract uses a combination of nonnegative payments and inefficient liquidation threat to provide the agent incentives. In the beginning, the inefficient liquidation threat is severe, but the expected length of the relationship long, such that the agent's information rent is high. Over time, the information rent decays and continuation value increases as function of the past outcomes. Depending on the past performance, these two processes meet and liquidation at a fixed threshold becomes optimal. In particular, early weak performance leads to a permanent distortion that cannot be undone by performing well in the future.
    JEL: D82 D86
    Date: 2017–08–04
  6. By: Andrew Caplin; Mark Dean; John Leahy
    Abstract: We provide a full behavioral characterization of the standard Shannon model of rational inattention. The key axiom is "Invariance under Compression", which identifies this model as capturing an ideal form of attention-constrained choice. We introduce tractable generalizations that allow for many of the known behavioral violations from this ideal, including asymmetries and complementarities in learning, context effects, and low responsiveness to incentives. We provide an even more general method of recovering attention costs from behavioral data. The data set in which we characterize all behavioral patterns is "state dependent" stochastic choice data.
    JEL: D8 D83
    Date: 2017–08
  7. By: Sanchez Villalba, Miguel; Martinez Gorricho, Silvia
    Abstract: We study how voluntary participation in Beauty Contest Games (BCGs) affects the actions and payoffs of type-heterogenous players. In a BCG, players have two goals --one personal, the other social-- and so BCGs appropriately model relevant economic situations like participating in a social network, partaking in the coding of an open-source software, or the choice of research topics by academics, among others. Key in these and other cases is the concept of "social norm" that will emerge in the associated "community", and so people's entry choices will depend crucially on their expectations regarding not only how many but who (which types) will join in. We find that in equilibrium there is entry as long as the BCG is "attractive" and that there might be multiple equilibria, each indexed by its associated social norm. We also find that, when finite, there is an odd number of equilibria and that --if ordered based on the value of the associated social norm-- odd/even equilibria are stable/unstable. Further, for low attractiveness, equilibrium social norms are univocally associated with the extrema of the distribution of types in the economy, so that stable/unstable equilibria are linked to maxima/interior minima. We find that "universal" communities in which everybody joins the BCG (as implicitly assumed by the literature) only occur when the BCG is sufficiently attractive and the economy's average type is not extreme. In non-universal communities, social norms are affected by the attractiveness of the BCG and the functional form of the distribution of types in the economy (especifically, its skewness around extrema). Attractiveness affects both the size and the composition of the community. Thus, an increase in attractiveness could lead both to the entry of new members and to the exit of some others.
    Keywords: Beauty contest game, endogenous entry, social norms
    JEL: C7 L17 Z1
    Date: 2017
  8. By: Roketskiy, Nikita
    Abstract: I develop a model of collaboration between tournament participants in which agents collaborate in pairs, and an endogenous structure of collaboration is represented by a weighted network. The agents are forward-looking and capable of coordination. They value collaboration with others and higher tournament rankings. I use von Neumann-Morgenstern stable sets as a solution. I find stable networks in which agents collaborate only within exclusive groups. Both absence of intergroup collaboration and excessive intragroup collaboration lead to inefficiency. I provide a necessary and sufficient condition for the stability of efficient outcomes in winner-takes-all tournaments. I show that the use of transfers does not repair efficiency.
    Keywords: networks; tournaments
    JEL: C71 D85
    Date: 2017–07
  9. By: Flavio M. Menezes (School of Economics, The University of Queensland); John Quiggin (School of Economics, The University of Queensland)
    Abstract: In this paper we develop the concept of the strategic industry supply curve, representing the locus of Nash equilibrium outputs and prices arising from additive shocks to demand. We show that the standard analysis of partial equilibrium under perfect competition, including the graphical representa- tion of supply and demand due to Marshall, can be extended to encompass imperfectly competitive markets, including monopoly, Cournot and Bertrand oligopoly and competition in linear supply schedules. We then derive a uni- fied theory of cost pass-through and show that it satisfies the five principles of incidence set out by Weyl and Fabinger (2013).
    Keywords: industry supply; cost pass-through; oligopoly
    JEL: D4 L1
    Date: 2017–08–04
  10. By: Larry G. Epstein; Shaolin Ji
    Abstract: We consider the dynamics of learning under ambiguity when learning is costly and is chosen optimally. The setting is Ellsberg's two-urn thought experiment modified by allowing the agent to postpone her choice between bets so that she can learn about the composition of the ambiguous urn. Signals are modeled by a diffusion process whose drift is equal to the true bias of the ambiguous urn and they are observed at a constant cost per unit time. The resulting optimal stopping problem is solved and the effect of ambiguity on the extent of learning is determined. It is shown that rejection of learning opportunities can be optimal for an ambiguity averse agent even given a small cost.
    Date: 2017–08
  11. By: DOMBOU T., Dany R.
    Abstract: This paper proposes a new formulation of the Borda rule in order to deal with the problem of cloning manipulation. This new Borda voting specification will be named: Dynamic Borda Voting (DBV) and it satisfies Arrow's IIA condition. The calculations, propositions with proof and explanations are made to show the effectiveness of this method. From DBV, the paper presents a method to measure and quantify the magnitude of the shock due to change in irrelevant alternatives over a scale moving from 0 to 100.
    Keywords: Voting rules; Arrow IIA; Cloning manipulation;
    JEL: C6 D7 D8
    Date: 2017–07
  12. By: Dilger, Alexander
    Abstract: A simple decision theoretic model shows the doping incentives for a member of a professional sports team. Depending on the detection probability and the punishment, a sportsman dopes not at all, at a medium or at the maximal level. The whole team has a higher incentive than an individual team member that at least some of its members dope. That there are not many proven cases of doping in team sports could be because doping is less effective or because the incentives to cover it are higher than in individual sports.
    JEL: D81 D82 K42 L83
    Date: 2017
  13. By: Di Tillio, Alfredo; Ottaviani, Marco; Sorensen, Peter Norman
    Abstract: What is the impact of sample selection on the inference payoff of an evaluator testing a simple hypothesis based on the outcome of a location experiment? We show that anticipated selection locally reduces noise dispersion and thus increases informativeness if and only if the noise distribution is double logconvex, as with normal noise. The results are applied to the analysis of strategic sample selection by a biased researcher and extended to the case of uncertain and unanticipated selection. Our theoretical analysis offers applied research a new angle on the problem of selection in empirical studies, by characterizing when selective assignment based on untreated outcomes benefits or hurts the evaluator.
    Keywords: Comparison of experiments; Dispersion; Persuasion; Strategic selection; welfare
    JEL: C72 C90 D82 D83
    Date: 2017–08
  14. By: Lach, Saul; Neeman, Zvika; Schankerman, Mark
    Abstract: We study the design of a government loan program for risky R&D projects that generate positive externalities, undertaken by entrepreneurs in a competitive capital market environment. With adverse selection, the optimal contract requires a high interest rate but nearly zero co-financing by the entrepreneur. This contrasts sharply with observed policies, typified by a low interest rate and high co-finanacing requirement. When we add moral hazard (endogenous success), the optimal policy consists of a menu of at most two contracts, one with high interest/zero self-finanacing and a second with a lower interest but also a co-finanacing requirement. Calibrated simulations compare the optimal policy and observed program designs in terms of innovation and welfare.
    Keywords: additionality; entrepreneurship; government nance; innovation; mechanism design; R&D; start-ups
    JEL: D61 D82 O32 O38
    Date: 2017–08

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