nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒09‒17
twenty-two papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. What situation is this? Coarse cognition and behavior over a space of games. By Robert Gibbons; Marco LiCalzi; Massimo Warglien
  2. Strategy-proofness in the Large By Eduardo M. Azevedo; Eric Budish
  3. The Value of Transparency in Dynamic Contracting with Entry By Gülen Karakoç; Marco Pagnozzi; Salvatore Piccolo
  4. Informative Advertising in a Monopoly with Network Externalities By Azamat Valei
  5. Electoral Contests with Dynamic Campaign Contributions By Andrea Mattozzi; Fabio Michelucci
  6. Ambiguity and the Centipede Game: Strategic Uncertainty in Multi-Stage Games By Eichberger, Jürgen; Grant, Simon; Kelsey, David
  7. Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs By Matthias Fahn; Nicolas Klein
  8. Mixed Duopoly: Differential Game Approach By Koichi Futagami; Toshihiro Matsumura; Kizuku Takao
  9. Upstream horizontal mergers and vertical integration By Ioannis N. Pinopoulos
  10. Interim Self-Stable Decision Rules By Daeyoung Jeong; Semin Kim
  11. Engineering Crises: Favoritism and Strategic Fiscal Indiscipline By Gilles Saint-Paul; Davide Ticchi; Andrea Vindigni
  12. The optimal choice of internal decision-making structures in a network industry By Tsuyoshi Toshimitsu
  13. On Single-peaked Domains and Min-max Rules By Achuthankutty, Gopakumar; Roy, Souvik
  14. Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers By Calzolari, Giacomo; Felli, Leonardo; Koenen, Johannes; Spagnolo, Giancarlo; Stahl, Konrad
  15. Moral hazard, optimal healthcare-seeking behavior, and competitive equilibrium. By Malakhov, Sergey
  16. Walrasian equilibrium as limit of competitive equilibria without divisible goods By Michael Florig; Jorge Rivera
  17. Limited Cross-retaliation and Lengthy Delays in International Dispute Settlement By Richard Chisik; Chuyi Fang;
  18. The Wisdom of the Crowd in Dynamic Economies By Pietro Dindo; Filippo Massari
  19. Rationally Biased Learning By Michel De Lara
  20. Decision Theory with a Hilbert Space as Possibility Space By Eichberger, Jürgen; Pirner, Hans Jürgen
  21. The effect of horizontal mergers, when firms compete in prices and investments By Massimo Motta; Emanuele Tarantino
  22. Monopoly without a monopolist : An economic analysis of the bitcoin payment system By Huberman, Gur; Leshno, Jacob D.; Moallemi, Ciamac

  1. By: Robert Gibbons (Massachusetts Institute of Technology); Marco LiCalzi (Dept. of Management, Università Ca' Foscari Venice); Massimo Warglien (Dept. of Management, Università Ca' Foscari Venice)
    Abstract: We study strategic interaction between agents who distill the complex world around them into simpler situations. Assuming agents share the same cognitive frame, we show how the frame affects equilibrium outcomes. In one-shot and repeated interactions, the frame causes agents to be either better or worse off than if they could perceive the environment in full detail: it creates a fog of cooperation or a fog of conflict. In repeated interaction, the frame is as important as agentsÕ patience in determining the set of equilibria: for a fixed discount factor, when all agents coordinate on what they perceive as the best equilibrium, there remain significant performance differences across dyads with different frames. Finally, we analyze some tensions between incremental versus radical changes in the cognitive frame.
    Keywords: categorization, frame, mental model, small world, culture, leadership.
    JEL: C79 D01 D23 L14 M14
    Date: 2017–09
  2. By: Eduardo M. Azevedo; Eric Budish
    Abstract: We propose a criterion of approximate incentive compatibility, strategy-proofness in the large (SP-L), and argue that it is a useful second-best to exact strategy-proofness (SP) for market design. Conceptually, SP-L requires that an agent who regards a mechanism’s “prices” as exogenous to her report – be they traditional prices as in an auction mechanism, or price-like statistics in an assignment or matching mechanism – has a dominant strategy to report truthfully. Mathematically, SP-L weakens SP in two ways: (i) truth-telling is required to be approximately optimal (within epsilon in a large enough market) rather than exactly optimal, and (ii) incentive compatibility is evaluated ex interim, with respect to all full-support i.i.d. probability distributions of play, rather than ex post with respect to all possible realizations of play. This places SP-L in between the traditional notion of approximate strategy-proofness, which evaluates incentives to manipulate ex post, and the traditional notion of approximate Bayes-Nash incentive compatibility, which evaluates incentives to manipulate ex interim with respect to the single common-knowledge probability distribution associated with Bayes-Nash equilibrium.
    JEL: C72 C78 D44 D82
    Date: 2017–09
  3. By: Gülen Karakoç (Università di Milano Bicocca); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università di Bergamo and CSEF)
    Abstract: A manufacturer designs a dynamic contract with a retailer who is privately informed about demand and faces competition by an integrated entrant in a second period. Since the entrant only observes demand after entry and demand is correlated across periods, information about past demand affects the entrant’s production. We analyze the incentives of the incumbent players to share information with the entrant and show that the retailer benefits from transparency, but the manufacturer does not. Contrary to what intuition suggests, transparency with an integrated entrant harms consumers. When the entrant is not an integrated firm, whether transparency benefits consumers depends on the degree of demand persistency.
    Keywords: Dynamic Adverse Selection, Entry, Information Sharing, Transparency, Vertical Contracting
    JEL: D40 D82 D83 L11
    Date: 2017–09–02
  4. By: Azamat Valei
    Abstract: This paper studies the incentives for a monopolistic firm producing a good with network externalities to advertise when consumers face imperfect infor- mation and therefore must search to realize their actual willingness to pay for the good. A firm may disclose market information through advertising if it finds it beneficial. The results suggest that advertising is more likely in the case of a negative network effect and less likely with a positive network effect. When a monopolist faces a strong network externality, it chooses to support the maximum possible network and charge a price equal to the value of the externality. Finally, depending on the value of the search cost and type of network externality, a monopolist may use different advertising content: no information, price information only, product characteristics, or both price and product characteristics. Specifically, if all consumers have the same search cost, as the search cost grows the firm must include more informa- tion in the advertising content, while as the network externality changes from negative to positive, the firm reduces the content. In contrast, if consumers di¤er in their search costs, the firm tends to provide more information as the externality changes from negative to positive.
    Keywords: advertising; search; network effects; consumption externality; band- wagon; snob effect; monopoly; industrial organization;
    JEL: D42 D83 D85 L12
    Date: 2017–06
  5. By: Andrea Mattozzi; Fabio Michelucci
    Abstract: We study a two-period dynamic principal agent model in which two agents with different unobservable abilities compete in a contest for a single prize. A risk-neutral principal can affect the outcome of the contest by dividing a given budget between agents in each period and her net payoff depends on the rela- tive share of the budget given to the winner of the contest. We analyze two settings that differ by the presence/absence of moral hazard. The results we derive are consistent with stylized facts regarding the dynamics of US campaign contributions.
    Keywords: dynamic games; contests; experimentation; lobbies; campaign contributions
    JEL: D72 D78 C72 C73
    Date: 2017–08
  6. By: Eichberger, Jürgen; Grant, Simon; Kelsey, David
    Abstract: We propose a solution concept for a class of extensive form games with ambiguity. Specifically we consider multi-stage games. Players have CEU preferences. The associated ambiguous beliefs are revised by Generalized Bayesian Updating. We assume individuals take account of possible changes in their preferences by using consistent planning. We show that if there is ambiguity in the centipede game it is possible to sustain 'cooperation' for many periods as part of a consistent-planning equilibrium under ambiguity. In a non-cooperative bargaining game we show that ambiguity may be a cause of delay in bargaining.
    Date: 2017–09–11
  7. By: Matthias Fahn (Department of Economics, Johannes Kepler University Linz, Austria); Nicolas Klein
    Abstract: We analyze a relational contracting problem, in which the principal has private information about the future value of the relationship. In order to reduce bonus payments, the principal is tempted to claim that the value of the future relationship is lower than it actually is. To induce truth-telling, the optimal relational contract may introduce distortions after a bad report. For some levels of the discount factor, output is reduced by more than would be sequentially optimal. This distortion is attenuated over time even if prospects remain bad. Our model thus provides an alternative explanation for indirect short-run costs of downsizing.
    Keywords: Self-Control Problems, Teamwork, Relational Contracts.
    JEL: L22 L23
    Date: 2017–07
  8. By: Koichi Futagami (Osaka University); Toshihiro Matsumura (The University of Tokyo; Osaka University); Kizuku Takao (Aomori Public University)
    Abstract: Previous studies in differential games reveal that intertemporal strategic behaviors have an important role for various economic problems. However, most of their analyses are limited to cases where objective functions are identical among agents. In this paper, we characterize the open-loop Nash equilibrium and the Markov perfect Nash equilibrium of a mixed duopoly game where a fully or partially state-owned firm and a fully private rm compete in the quantities of homogeneous goods with sticky prices. We show that in the Markov perfect Nash equilibrium, an increase in the governments' share-holdings of the state-owned firm has a non-monotonic effect on the price, and in a wide range of parameter spaces, it increases the price. These results are derived from the interaction of an asymmetric structure of agents' objectives and inter-temporal strategic behaviors, which are in sharp contrast with those in the open-loop Nash equilibrium. We provide new implications for privatization policies in the presence of dynamic interactions, against the static analyses.
    Keywords: Mixed Duopoly, Open-loop Nash equilibrium, Markov Perfect Nash equilibrium
    JEL: C73 D43 L32
    Date: 2017–04
  9. By: Ioannis N. Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: We study upstream horizontal mergers when one of the merging parties is a vertically integrated firm. Under upstream cost symmetry and observable contracting, we demonstrate that such type of horizontal mergers always harm consumers through a vertical partial foreclosure effect. Under observable contracting but upstream asymmetric costs, we show that overall consumer surplus may increase due to the merger even though input prices increase and some consumers are worse of. Under upstream cost symmetry but unobservable contracting, we find that consumers may be better off as a result of the merger even in the absence of exogenous cost-synergies between the merging firms. In all cases under consideration, the merger is always profitable for the merging parties.
    Keywords: Vertical relations; vertical integration; horizontal mergers; consumer surplus.
    JEL: L11 L13 L41 L42
    Date: 2017–08
  10. By: Daeyoung Jeong (The Bank of Korea); Semin Kim (Yonsei University)
    Abstract: This study identi es a set of interim self-stable decision rules. In our model, individual voters encounter two separate decisions sequentially: (1) a decision on the change of a voting rule they are going to use later and (2) a decision on the nal voting outcome under the voting rule which has been decided from the prior procedure. A given decision rule is self-stable if any other possible rule does not get enough votes to replace the given rule under the given rule itself. We fully characterize the set of interim self-stable decision rules among weighted majority rules with given weights.
    Keywords: Weighted majority rules, decision rules, self-stability
    JEL: C72 D02 D72 D82
    Date: 2017–09
  11. By: Gilles Saint-Paul (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, PSE - Paris School of Economics, New York University Abu Dhabi); Davide Ticchi (Marche Polytechnic University); Andrea Vindigni (University of Genova)
    Abstract: If people understand that some macroeconomic policies are unsustainable, why would they vote for them in the .first place? We develop a political economy theory of the endogenous emergence of fiscal crises, based on the idea that the adjustment mechanism to a crisis favors some social groups, that may be induced ex-ante to vote in favor of policies that are more likely to lead to a crisis. People are entitled to a certain level of a publicly provided good, which may be rationed in times of crises. After voting on that level, society votes on the extend to which it will be financed by debt. Under bad enough macro shocks, a crisis arises: taxes are set at their maximum but despite that some agents do not get their entitlement. Some social groups do better in this rationing process than others. We show that public debt .which makes crises more likely .is higher, as is the probability of a crisis, the greater the level of favoritism. If the favored group is important enough to be pivotal when society votes on the entitlement level, favoritism also leads to greater public expenditure. We show that the favored group may strategically favor a weaker state in order to make crises more frequent. Finally, the decisive voter when choosing expenditure may be different from the one when voting on debt. In such a case, constitutional limits on debt may raise the utility of all the poor, relative to the equilibrium outcome absent such limits.
    Keywords: Political Economy,Fiscal Crises,Favoritism,Entitlements,Public Debt,In- equality,State Capacity
    Date: 2017–09
  12. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Focusing on the role of compatibility between products, we consider the choice of internal decision-making structures—i.e., centralization and decentralization—and its effect on welfare in a network industry where there are horizontally differentiated products associated with network externalities. We demonstrate that if the degree of a network externality is sufficiently large, it is socially optimal to choose decentralization. Furthermore, in the case of consumer ex post expectations, it is optimal for the firm’s owners to choose centralization. However, it is socially preferable given a particular condition.
    Keywords: internal decision-making; centralization; decentralization; network externality; compatibility; multiproduct monopoly
    JEL: D43 D62 L14 L15 L41
    Date: 2017–09
  13. By: Achuthankutty, Gopakumar; Roy, Souvik
    Abstract: We consider social choice problems where different agents can have different sets of admissible single-peaked preferences. We show every unanimous and strategy-proof social choice function on such domains satisfies Pareto property and tops-onlyness. Further, we characterize all domains on which (i) every unanimous and strategy-proof social choice function is a min-max rule, and (ii) every min-max rule is strategy-proof. As an application of our result, we obtain a characterization of the unanimous and strategy-proof social choice functions on maximal single-peaked domains (Moulin (1980), Weymark (2011)), minimally rich single-peaked domains (Peters et al. (2014)), maximal regular single-crossing domains (Saporiti (2009), Saporiti (2014)), and distance based single-peaked domains.
    Keywords: Strategy-proofness, single-peaked preferences, min-max rules, min-max domains, top-connectedness, Pareto property, tops-onlyness.
    JEL: D71 D82
    Date: 2017–09–15
  14. By: Calzolari, Giacomo; Felli, Leonardo; Koenen, Johannes; Spagnolo, Giancarlo; Stahl, Konrad
    Abstract: Using unique data from buyer-supplier relationships in the German automotive industry, we unveil a puzzle by which more trust in a relationship is associated with higher idiosyncratic investment, but also more competition. We develop a theoretical model of repeated procurement with non-contractible, buyer-specifi c investments rationalizing both observations. Against the idea that competition erodes rents needed to build trust and sustain relationships, we infer that trust and competition tend to go hand in hand. In our setting trust and rents from reduced supplier competition behave like substitutes, rather than complements as typically understood.
    Keywords: Competition; Hold-up Problem; Innovation; Management Practices; Procurement; Relational Contracts; Specific Investment; Supply Chains; Trust
    JEL: D22 D86 L22 L62
    Date: 2017–09
  15. By: Malakhov, Sergey
    Abstract: The theory of the optimal-consumption leisure choice under price dispersion describes the phenomenon of moral hazard as the customer’s reaction on unfair insurance policy. The unfair insurance offer does not equalize marginal costs of propensity to seek healthcare with marginal benefits on purchase. Under unfair insurance policy consumers increase ex post healthcare seeking activities and they optimize their consumption of medical services. The analysis of moral hazard results in the assumption that for an unfair offer there is an increase in the time horizon of the insurance policy that makes it fair and moral hazard becomes inefficient. The time horizon competition between insurance companies can eliminate moral hazard effect that clears the way to the competitive equilibrium.
    Keywords: moral hazard, health insurance, healthcare seeking behavior, optimal consumption-leisure choice
    JEL: D11 D83 I13
    Date: 2017–09–07
  16. By: Michael Florig; Jorge Rivera
    Abstract: This paper investigates the limit properties of a sequence of competitive outcomes existing for economies where all commodities are indivisible, as indivisibility vanishes. The nature of this limit depends on whether the “strong survival assumption” is assumed or not in the limit economy, a standard convex economy. If this condition holds, then the equilibrium sequence converges to a Walras equilibrium for the convex economy; otherwise it converges to a hierarchic equilibrium, a competitive outcome existing in this economy despite the fact that a Walras equilibrium might not exist.
    Date: 2017–08
  17. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada); Chuyi Fang (Department of Economics, Ryerson University, Toronto, Canada);
    Abstract: We aim to provide a compelling explanation about why the World Trade Organi- zation (WTO) permits retaliation only after a lengthy delay and, furthermore, why it usually rejects requests for retaliation (or a reciprocal withdrawal of concessions) in other related international agreements. We take a dynamic mechanism design approach and compare the welfare effects between same and cross-sector retaliation with as well as without, delay. We show that the same-sector retaliation mechanism generates higher welfare and supports a higher self-enforcing level of cooperation than does the cross-sector retaliation mechanism. This result holds irrespective of whether there is a time lag between the initial violation and the corresponding retaliatory action. Furthermore, welfare is higher when retaliation is administered with a delay.
    Keywords: WTO, dispute settlement, trade agreements, cross-sector retaliation, reciprocity, dynamic mechanism design.
    Date: 2017–09
  18. By: Pietro Dindo (Department of Economics, University Of Venice Cà Foscari); Filippo Massari (Australian School of Business, University of New South Wales, Sydney, Australia)
    Abstract: The Wisdom of the Crowd applied to financial markets asserts that prices, an average of agents' beliefs, are more accurate than individual beliefs. However, a market selection argument implies that prices eventually reflect only the beliefs of the most accurate agent. In this paper, we show how to reconcile these alternative points of view. In markets in which agents naively learn from equilibrium prices, a dynamic Wisdom of the Crowd holds. Market participation increases agents' accuracy, and equilibrium prices are more accurate than the most accurate agent. If we replace naive learning with Bayes' rule, this positive result disappears.
    Keywords: Wisdom of the Crowd, Heterogeneous Beliefs, Market Selection Hypothesis, Naive Learning
    JEL: D53 D01 G1
    Date: 2017
  19. By: Michel De Lara (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - ENPC - École des Ponts ParisTech)
    Abstract: Are human perception and decision biases grounded in a form of rationality? You return to your camp after hunting or gathering. You see the grass moving. You do not know the probability that a snake is in the grass. Should you cross the grass — at the risk of being bitten by a snake — or make a long, hence costly, detour? Based on this storyline, we consider a rational decision maker maximizing expected discounted utility with learning. We show that his optimal behavior displays three biases: status quo, salience, overestimation of small probabilities. Biases can be the product of rational behavior.
    Keywords: status quo bias, salience bias, overestimation of small probabilities, optimal behavior
    Date: 2017–09–05
  20. By: Eichberger, Jürgen; Pirner, Hans Jürgen
    Abstract: In this paper, we propose an interpretation of the Hilbert space method used in quantum theory in the context of decision making under uncertainty. For a clear comparison we will stay as close as possible to the framework of SEU suggested by Savage (1954). We will use the Ellsberg (1961) paradox to illustrate the potential of our approach to deal with well-known paradoxa of decision theory.
    Keywords: Decision theory; uncertainty; Ellsberg paradox; quantum theory; Hilbert space; possibility space
    Date: 2017–09–11
  21. By: Massimo Motta; Emanuele Tarantino
    Abstract: It has been suggested that mergers, by increasing concentration, raise incentives to invest and hence are pro-competitive. To study the effects of mergers, we rewrite a game with simultaneous price and cost-reducing investment choices as one where firms only choose prices, and make use of aggregative game theory. We find no support for that claim: absent efficiency gains, the merger lowers total investments and consumer surplus. Only if it entails sufficient efficiency gains, will it be pro-competitive. We also show there exist classes of models for which the results obtained with cost-reducing investments are equivalent to those with quality-enhancing investments.
    Keywords: Horizontal mergers, innovation, investments, network-sharing agreements, competition.
    JEL: K22 D43 L13 L41
    Date: 2017–08
  22. By: Huberman, Gur; Leshno, Jacob D.; Moallemi, Ciamac
    Abstract: Owned by nobody and controlled by an almost immutable protocol the Bitcoin payment system is a platform with two main constituencies: users and profit seeking miners who maintain the system's infrastructure. The paper seeks to understand the economics of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed? What are the implications of changing parameters in the protocol? A simplified economic model that captures the system's properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system's limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.
    JEL: D40 D20 L10 L50
    Date: 2017–09–05

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