nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒09‒03
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Dynamic Mechanism Design: An Introduction By Dirk Bergemann; Juuso Valimaki
  2. Simple Contracts under Observable and Hidden Actions By Bo Chen; Yu Chen; David Rietzke
  3. Information Acquisition and Credibility in Cheap Talk By Hidir, Sinem
  4. Uncertainty Averse Preferences and Changing Uncertainty Aversion By Xue, Jingyi
  5. Treading a Â…fine line: (Im)possibilities for Nash implementation with partially-honest individuals By Michele Lombardi; Naoki Yoshihara
  6. Natural implementation with semi-responsible agents in pure exchange economies By Michele Lombardi; Naoki Yoshihara
  7. Optimal Contracts with Reflection By Yuzhe Zhang; Borys Grochulski
  8. Common agency dilemma with information asymmetry in continuous time By Thibaut Mastrolia; Zhenjie Ren
  9. Financial Equilibrium with differential Information: a Theorem of generic Existence By Lionel DE BOISDEFFRE
  10. Asymmetric Awareness and Heterogeneous Agents By Antoine Dubus
  11. The swing voter's curse in social networks By Buechel, Berno; Mechtenberg, Lydia
  12. Firms' Costs, Profits, Entries, and Innovation under Optimal Privatization Policy By Haraguchi, Junichi; Matsumura, Toshihiro
  13. Meetings and Mechanisms By Xiaoming Cai; Pieter Gautier; Ronald Wolthoff
  14. Precautionary Saving with Changing Income Ambiguity By Kajii, Atsushi; Xue, Jingyi
  15. A concept of sincerity for combinatorial voting By Francesco De Sinopoli; Claudia Meroni
  16. Partially-honest Nash implementation: a full characterization By Lombardi, Michele; Yoshihara, Naoki
  17. Optimal Management of Transfers: an Odd Paradox By Bourguignon, François; Platteau, Jean-Philippe
  18. Accountability in Complex Procurement Tenders By Bernard Caillaud; Ariane Lambert-Mogiliansky

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Juuso Valimaki (Aalto School of Economics)
    Abstract: We provide an introduction into the recent developments of dynamic mechanism design with a primary focus on the quasilinear case. First, we describe socially optimal (or efficient) dynamic mechanisms. These mechanisms extend the well known Vickrey-Clark-Groves and D’Aspremont-Gérard-Varet mechanisms to a dynamic environment. Second, we discuss results on revenue optimal mechanism. We cover models of sequential screening and revenue maximizing auctions with dynamically changing bidder types. We also discuss models of information management where the mechanism designer can control (at least partially) the stochastic process governing the agent’s types. Third, we consider models with changing populations of agents over time. This allows us to address new issues relating to the properties of payment rules. After discussing related models with risk-averse agents, limited liability, and different performance criteria for the mechanisms, we conclude by discussing a number of open questions and challenges that remain for the theory of dynamic mechanism design.
    Keywords: Dynamic Mechanism Design, Sequential Screening, Dynamic Pivot Mechanism, Bandit Auctions, Information Management
    JEL: D44 D82 D83
    Date: 2017–08
  2. By: Bo Chen (Southern Methodist University, USA); Yu Chen (University of Graz, Austria); David Rietzke (Lancaster University, UK)
    Abstract: We consider a general framework for multitask moral hazard problems with observable and hidden actions. Ideally, the principal in our framework can design optimal contracts that depend on both observable (and verifiable) actions and realized outcomes. Given a mild assumption on the existence of a punishment scheme, we identify a general equivalence result, dubbed the "forcing principle", which states that every optimal contract in our framework is strategically equivalent to a simple forcing contract that is essentially outcome-contingent. The forcing contract only specifies an outcome-contingent reward scheme and an action profile, and the agent receives the outcome-contingent reward only if he follows the recommended observable actions (and is otherwise punished severely). The forcing principle has useful implications: It confers analytic advantage for the existence and computation of optimal contracts in our setting. It also highlights the importance of the existence of the punishment scheme in characterizing first-best benchmarks in moral hazard problems, which is typically ignored in the literature.
    Keywords: First-best Benchmark; Forcing Contract; Forcing Principle; Moral Hazard; Multitask; Observable Actions
    JEL: C61 C62 D82 D86
    Date: 2017–08
  3. By: Hidir, Sinem (University of Warwick)
    Abstract: This paper explores the interaction between uncertain bias and endogeneous information acquisition in strategic communication. I consider an expert who is privately informed about his bias as well as about whether he is informed, in addition can also engage in costly information acquisition. In this setup, information acquisition simultaneously serves the purposes of getting informed and increasing credibility before communicating through cheap talk to a decision maker. I define the signaling and the intrinsic value of information and find the conditions under which a separating equilibrium can arise, which is the most informative as well as the welfare maximizing equilibrium. I solve for equilibria as a function of cost of information acquisition and show that communication is most precise with an initially uninformed expert at an intermediary cost value. The overall welfare is non-monotone in cost, and it increases when cost increases to enable separation. When covert information acquisition is considered, there is a tradeoff between less wasteful investment versus less communication precision compared to the overt case.
    Keywords: information acquisition ; cheap talk ; communication ; signaling; credibility JEL classification numbers: D82 ; D83
    Date: 2017
  4. By: Xue, Jingyi (School of Economics, Singapore Management University)
    Abstract: This paper provides two equivalent representations for the general class of uncertainty averse preferences studied by Cerreia-Vioglio, Maccheroni, Marinacci and Montrucchio (2011). The two representations employ respectively two important extensions of Gilboa and Schmeidler (1989)’s maxmin decision rule. The first is a weighted maxmin representation with a non-constant weight used in mixing the minimum and maximum expected utilities. The second is a variant constraint representation which evaluates a prospect by the worst expected utility over a neighborhood of approximating priors where the size of the neighborhood depends on the prospect. The equivalent representations have advantage in several respects. In the second part of this paper, we study the wealth effect under ambiguity. We propose axioms on absolute and relative uncertainty aversion and derive the three representations for the uncertainty averse preferences displaying decreasing (increasing) absolute uncertainty aversion. The characterization result not only provides a model of relevant behavior under ambiguity, but also shows how the two alternative representations stand out in presenting the changing patterns of one’s uncertainty aversion.
    Keywords: Ambiguity; Uncertainty Averse Preferences; Weighted Maxmin Representation; Variant Constraint Representation; Decreasing Absolute Uncertainty Aversion; Increasing Relative Uncertainty Aversion; Wealth Effect
    JEL: D81
    Date: 2016–03–17
  5. By: Michele Lombardi (Adam Smith Business School, University of Glasgow); Naoki Yoshihara (Department of Economics, University of Massachusetts Amherst)
    Abstract: This paper investigates the robustness of Dutta and Sen’s (2012) Theorem 1 to weaker notions of truth-telling. An individual honesty standard is modeled as a subgroup of the society, including the individual herself, for which she feels truth-telling concerns. An individual i is honest when she states her true preferences as well as rankings (not necessarily complete) of outcomes that are consistent with the true preferences of individuals in her honesty standard. The paper o¤ers a necessary condition for Nash implementation, called partial-honesty monotonicity, and shows that in an independent domain of preferences that condition is equivalent to Maskin monotonicity.
    Keywords: Nash implementation, Partial-honesty, Non-connected honesty standards, Independent domain
    JEL: C72 D71 D82
    Date: 2017–08
  6. By: Michele Lombardi (Adam Smith Business School, University of Glasgow); Naoki Yoshihara (Department of Economics, University of Massachusetts Amherst)
    Abstract: We study Nash implementation by natural price-quantity mechanisms in pure exchange economies when agents have intrinsic preferences for responsibility. An agent has an intrinsic preference for responsibility if she cares about truth-telling that is in line with the goal of the mechanism designer besides her material well-being. A semi-responsible agent is an agent who, given what her opponents do, acts in an irresponsible manner when a responsible behavior poses obstacles to her material well-being. The class of efficient allocation rules that are Nash implementable is identified provided that there is at least one agent who is semi-responsible. The Walrasian rule is shown to belong to that class.
    Keywords: Nash equilibrium, Exchange economies, Intrinsic preferences for responsibility, Boundary problem, Price-quantity mechanism
    JEL: C72 D71
    Date: 2017–08
  7. By: Yuzhe Zhang (Texas A&M University); Borys Grochulski (Federal Reserve Bank of Richmond)
    Abstract: In this paper, we show that whenever the agent's outside option is nonzero, the optimal contract in the continuous-time principal-agent model of Sannikov (2008) is reflective at the lower bound. This means the agent is never terminated or retired after poor performance. Instead, the agent is asked to suspend effort temporarily, as in Zhu (2013), which brings the agent's continuation value up. The agent is then asked to resume effort, and the contract continues. We show that a nonzero agent's outside option arises endogenously if the agent is allowed to quit and find a new rm. In addition, we find new dynamics of the reflection at the lower bound. In the baseline model, the reflection is slow, as in Zhu (2013), i.e., effort is suspended often. However, if the agent's disutility from the first unit of effort is zero, which is a standard Inada condition, or if his utility of consumption is unbounded below, the reflection becomes fast, i.e., effort is suspended seldom.
    Date: 2017
  8. By: Thibaut Mastrolia (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique); Zhenjie Ren (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS - Centre National de la Recherche Scientifique - Université Paris-Dauphine)
    Abstract: In this paper, we consider a problem of contract theory in which several Principals hire a common Agent and we study the model in the continuous time setting. We show that optimal contracts should satisfy some equilibrium conditions and we reduce the optimisation problem of the Principals to a system of coupled Hamilton-Jacobi-Bellman (HJB) equations. Further, in a more specific linear-quadratic model where two interacting Principals hire one common Agent, we are able to calculate the optimal effort by the Agent for both Principals. In this continuous time model, we extend the result of Bernheim and Whinston (1986) in which the authors compare the optimal effort of the Agent in a non-cooperative Principals model and that in the aggregate model, and give the condition under which these two optimisations coincide.
    Keywords: Moral hazard models,common agency,system of HJB equations,BSDEs
    Date: 2017–06–07
  9. By: Lionel DE BOISDEFFRE
    Abstract: We propose a proof of generic existence of equilibrium in a pure exchange economy, where agents are typically asymmetrically informed, exchange commodities, on spot markets, and securities of all kinds, on incomplete financial markets. The proof does not use Grasmanians, nor differential topology (except Sard's theorem), but good algebraic properties of assets' payoffs, whose spans, generically, never collapse. Then, we show that an economy, where the payoff span cannot fall, admits an equilibrium. As a corollary, we prove the full existence of financial equilibrium for numeraire assets, extending Geanakoplos-Polemarchakis (1986) to the asymmetric information setting. The paper, which still retains Radner's (1972) standard perfect foresight assumption, is also a milestone to prove, in a companion article, the existence of sequential equilibrium when the classical rational expectation assumptions, along Radner (1972, 1979), are dropped jointly, that is, when agents have private characteristics and beliefs and no model to forecast prices.
    Keywords: Sequential equilibrium, Temporary equilibrium, Perfect foresight, Existence, Rational expectations, Financial markets, Asymmetric information, Arbitrage
    JEL: D52
    Date: 2017–08
  10. By: Antoine Dubus (Télécom ParisTech)
    Abstract: I consider the principal-agent model with asymmetric awareness and introduce heterogeneity of the agents on their aversion to effort. I discuss the optimal contract and market structure in a market with an aware principal and unaware agents. When the principal faces two types of agents, one being more effort-averse than the other, the contract he proposes either pools them, separates them, or excludes the more effort-averse agents of the market depending on their proportion. In a first-best world, all the agents remain unaware. In a second-best one, the principal increases the awareness of the agents, to a level which depends on the nature of the contract.
    Keywords: Economics of Contract: Theory,Unawareness,Asymmetric and Private Information
    Date: 2017–05–11
  11. By: Buechel, Berno; Mechtenberg, Lydia
    Abstract: We study private communication in social networks prior to a majority vote on two alternative policies. Some (or all) agents receive a private imperfect signal about which policy is correct. They can, but need not, recommend a policy to their neighbors in the social network prior to the vote. We show theoretically and empirically that communication can undermine efficiency of the vote and hence reduce welfare in a common interest setting. Both efficiency and existence of fully informative equilibria in which vote recommendations are always truthfully given and followed hinge on the structure of the communication network. If some voters have distinctly larger audiences than others, their neighbors should not follow their vote recommendation; however, they may do so in equilibrium. We test the model in a lab experiment and find strong support for the comparative-statics and, more generally, for the importance of the network structure for voting behavior.
    Keywords: Strategic Voting; Social Networks; Swing Voter’s Curse; Information Aggregation
    JEL: D72 D83 D85 C91
    Date: 2017–07–10
  12. By: Haraguchi, Junichi; Matsumura, Toshihiro
    Abstract: We investigate how cost conditions of private firms affect optimal privatization policy and private firms' profits. We find that the optimal degree of privatization is decreasing with the costs of private firms unless the public firm is fully privatized in equilibrium. A cost reduction in a private firm increases the degree of privatization and benefits for all private firms. Therefore, each private firm's profit is increasing with its rival private firms' costs, which is in contrast to the result when the degree of privatization is given exogenously. This interesting property yields two important results. The profit of each private firm can increase with the number of private firms, and the positive externality of innovation accelerates private firms' R&D.
    Keywords: partial privatization, cost-reducing R&D, asymmetric private firms, constant marginal costs
    JEL: D43 H44 L33
    Date: 2017–08–22
  13. By: Xiaoming Cai; Pieter Gautier; Ronald Wolthoff
    Abstract: We analyze a market in which sellers compete for heterogeneous buyers by posting mechanisms. A general meeting technology governs how buyers and sellers meet. We introduce a one-to-one transformation of this meeting technology that helps to clarify and extend many of the existing results in the literature, which has focused on two special cases: urn-ball and bilateral meetings. We show that the optimal mechanism for sellers is to post auctions combined with a reserve price equal to their own valuation and an appropriate fee (or subsidy) which is paid by (or to) all buyers meeting the seller. Even when there are externalities in the meeting process, the equilibrium is efficient. Finally, we analyze the sorting patterns between heterogeneous buyers and sellers and show under which conditions high-value sellers attract more high-value buyers in expectation.
    Keywords: search frictions, matching function, meeting technology, competing mechanisms, heterogeneity
    JEL: C78 D44 D83
    Date: 2017–08–30
  14. By: Kajii, Atsushi (Kyoto University, Singapore Management University (Visiting Professor)); Xue, Jingyi (School of Economics, Singapore Management University)
    Abstract: We study a two-period saving model where the agent’s future income might be ambiguous. Our agent has a version of the smooth ambiguity decision criterion (Klibanoff, Marinacci and Mukerji (2005)), where the agent’s perception about ambiguity is described by a second-order belief over first-order risks. We model increasing ambiguity as a spreading-out of the second-order belief. We show that under a “Risk Comonotonicity” condition, our agent saves more when ambiguity in future income increases. We argue that the condition is indispensable for our result.
    Keywords: Precautionary Saving; Smooth Ambiguity; Increasing Ambiguity; Risk Comonotonicity; Informativeness
    JEL: D80 D81 D91 E21
    Date: 2016–06–06
  15. By: Francesco De Sinopoli (Department of Economics (University of Verona)); Claudia Meroni (Department of Economics (University of Verona))
    Abstract: A basic problem in voting theory is that all the strategy profiles in which nobody is pivotal are Nash equilibria. We study elections where voters decide simultaneously on several binary issues. We extend the concept of conditional sincerity introduced by Alesina and Rosenthal (1996) and propose an intuitive and simple criterion to refine equilibria in which players are not pivotal. This is shown to have a foundation in a refinement of perfection that takes into account the material voting procedure. We prove that in large elections the proposed solution is characterized through a weaker definition of Condorcet winner and always survives sophisticated voting.
    Keywords: Voting theory, multi-issue elections, strategic voting, perfect equilibrium.
    JEL: C72 D72
    Date: 2017–01
  16. By: Lombardi, Michele; Yoshihara, Naoki
    Abstract: A partially-honest individual is a person who follows the maxim, "Do not lie if you do not have to" to serve your material interest. By assuming that the mechanism designer knows that there is at least one partially-honest individual in a society of n ≥ 3 individuals, a social choice rule (SCR) that can be Nash implemented is termed partially-honestly Nash implementable. The paper offers a complete characterization of the n-person SCRs that are partially-honestly Nash implementable. It establishes a condition which is both necessary and sufficient for the partially-honest Nash implementation. If all individuals are partially-honest, then all SCRs that satisfy the property of unanimity are partially-honestly Nash implementable. The partially-honest Nash implementation of SCRs is examined in a variety of environments.
    Keywords: Nash implementation, pure strategy Nash equilibrium, partial-honesty, Condition μ*
    JEL: C72 D71
    Date: 2017–08
  17. By: Bourguignon, François; Platteau, Jean-Philippe
    Abstract: In this paper we consider transfers towards needy people but, unlike Atkinson, we assume that there exists a serious preference misalignment between the transfer maker and the beneficiary. The former wants to reduce the resulting discrepancy through monitoring the use of the transfer and imposing sanctions if the discrepancy proves too large. This external discipline combines with the internal discipline of the beneficiary, that is his/her willingness and ability to align with the transfer maker's objective. Besides the fact that costs of monitoring and sanctioning are explicitly taken into account, an original feature of our model is that the two types of discipline are made comparable: they can be summed up to obtain an aggregate discipline. We show that, paradoxically, an (exogenous) improvement of internal discipline may be over-compensated by a fall of external discipline. As a result, total discipline actually decreases and the discrepancy between the actual and the intended uses of the transfer increases instead of decreasing. This paradoxical outcome is obtained despite better preference alignment as cost savings are optimally implemented. Another consequence is that the relationship between internal and total disciplines may be non-monotonous.
    JEL: D02 D86 F35 O12
    Date: 2017–08
  18. By: Bernard Caillaud (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Ariane Lambert-Mogiliansky (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper addresses the issue of favoritism at the design stage of complex procurement auctions. A local community of citizens wants to procure a complex good or project and lacks the ability to translate its preferences into operational technical specifications. This task is delegated to a public officer who may collude with one of the firms at the design stage of the procurement auction in exchange of a bribe. Assuming that it is prohibitively costly to provide a justification for many aspects, we investigate two simple accountability mechanisms that ask the public officer to justify one aspect of the project, with the threat of being punished if he fails: a random challenge mechanism and an alert-based mechanism that requires justifying one aspect on which the rivals of the winning contractor send a red ag. Relying on losing contractors enables the community to deter favoritism significantly more easily than the random challenge procedure as it allows to use information that is shared by potential contractors in the industry. The level of penalty needed to fully deter corruption is lower, independent of the complexity of the project and depends on the degree of differentiation within the industry. Below this threshold, favoritism occurs in some states of nature and we characterize and compare the different equilibrium patterns of corruption under both mechanisms. A more elaborate example suggests that the alert-based mechanism tends to lead to more standard specifications of projects.
    Keywords: Procurement auctions,favoritism,accountability mechanism,D73, D82, H57
    Date: 2017–06

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