nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒10‒29
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Optimal Tournaments By Drugov, Mikhail; Ryvkin, Dmitry
  2. Referential Revealed Preference Theory By Hassan Nosratabadi
  3. Adaptive Learning in Weighted Network Games By Bayer, Péter; Herings, P. Jean-Jacques; Peeters, Ronald; Thuijsman, Frank
  4. Interconnection and Prioritization By Baake, Pio; Sudaric, Slobodan
  5. Regulating False Discloure By Janssen, Maarten
  6. The Economics of Vendor Bids By Onur A. Koska; Ilke Onur; Frank Stähler
  7. The Timing of Choice-Enhancing Policies By Murooka, Takeshi; Schwarz, Marco
  8. Procurement with Unforeseen Contingencies By Herweg, Fabian; Schmidt, Klaus M.
  9. Transparency is overrated: communicating in a coordination game with private information By Cabrales, Antonio; Drouvelis, Michalis; Gurguc, Zeynep; Ray, Indrajit
  10. Attention Manipulation and Information Overload By Petra Persson
  11. Sentiment, liquidity and asset prices By Vladimir Asriyan; William Fuchs; Brett Green
  12. Uninformed buyers and market efficiency By Maier, Carl G.; Marencak, Michal
  13. Ethical Voting in Multicandidate Elections By Bouton, Laurent; Ogden, Benjamin
  14. Repeat Voting: Two-Vote May Lead More People To Vote By Sergiu Hart
  15. Delegation of Regulation By Tapas Kundu; Tore Nilssen
  16. English versus Vickrey Auctions with Loss Averse Bidders By von Wangenheim, Jonas
  17. WARP Decompositions By Hassan Nosratabadi
  18. Bureaucratic Identity and the Shape of Public Policy: A Game Theoretic Analysis By Naseer, Shaheen; Heine, Klaus

  1. By: Drugov, Mikhail; Ryvkin, Dmitry
    Abstract: We study the optimal allocation of prizes and comparative statics of multi-prize rank-order tournaments. For a principal allocating a fixed budget, we show that the winner-take-all (WTA) prize schedule is optimal when the distribution of noise has an increasing failure rate (IFR). For noise distributions with unimodal failure rates the optimal prize allocation moves closer to WTA as the noise distribution becomes smaller in the convex transform order. We also identify a natural ordering of prize schedules by how closely they approximate the WTA schedule and show that for log-concave noise distributions the equilibrium effort is monotone in this order. The impact of noise intensity on equilibrium effort is captured by the dispersive order.
    Keywords: comparative statics; convex transform order; dispersive order; failure rate; optimal allocation of prizes; tournament; unimodality
    JEL: C72 D72 D82
    Date: 2017–10
  2. By: Hassan Nosratabadi (Rutgers, The State University Of New Jersey)
    Abstract: References can influence choice. One of the well-studied cases is when a decoy is added to the menu. However small in magnitude, decoy effect violates the weak axiom of revealed preferences (WARP). In order to explain the small deviation from the classical revealed preference theory, I decompose WARP into independent axioms in order to only remove the ones which are inconsistent with the this effect. This minimal deviation produces the referential revealed preference theory that keeps the strong predictive power offered in the classical theory while explaining the referential effect.
    Keywords: Reference-Dependent Choice, Reference Preferences, Decoy Effect, Attraction Effect, WARP Decomposition
    JEL: D11 D81
    Date: 2017–10–20
  3. By: Bayer, Péter (General Economics 1 (Micro)); Herings, P. Jean-Jacques (General Economics 1 (Micro)); Peeters, Ronald (General Economics 1 (Micro)); Thuijsman, Frank (DKE Scientific staff)
    Abstract: This paper studies adaptive learning in the class of weighted network games. This class of games includes applications like research and development within interlinked firms, crime within social networks, the economics of pollution, and defense expenditures within allied nations. We show that for every weighted network game, the set of pure Nash equilibria is non-empty and, generically, finite. Pairs of players are shown to have jointly profitable deviations from interior Nash equilibria. If all interaction weights are either non-negative or non-positive, then Nash equilibria are Pareto inefficient. We show that quite general learning processes converge to a Nash equilibrium of a weighted network game if every player updates with some regularity.
    Keywords: Networks, Learning, Public Goods, Potential Games
    JEL: C72 D74 D83 D85 H41
    Date: 2017–10–24
  4. By: Baake, Pio; Sudaric, Slobodan
    Abstract: We analyze pricing and competition under paid prioritization within a model of interconnected internet service providers (ISPs), heterogeneous content providers (CPs) and heterogeneous consumers. We show that prioritization is welfare superior to a regime without prioritization (network neutrality) but yields lower incentives for investment in network capacities. As ISPs price discriminate between on-net and off-net CPs, their bottleneck property is propagated and competition for consumers increases resulting in a potential prisoner's dilemma when deciding whether to offer prioritization. We show that peering for prioritized traffic emerges as a collusive outcome and present off-net prices as a further collusive instrument.
    Keywords: interconnection,investment,network neutrality,prioritization
    JEL: L13 L51 L96
    Date: 2017
  5. By: Janssen, Maarten
    Abstract: Firms can communicate private information about product quality through a combination of pricing and disclosure where disclosure may be deliberately false. We examine the effect of regulation that penalizes false disclosure by firms in a competitive setting. The cost of false disclosure influences the mix of direct, costly information provision and price signaling in the market, and thereby market outcomes. Regulation reduces prices and the consumption distortion associated with price signaling.
    JEL: L13 L15 D82 D43
    Date: 2017
  6. By: Onur A. Koska (Department of Economics, Middle East Technical University, Ankara, Turkey); Ilke Onur (School of Commerce, University of South Australia, Adelaide, Australia); Frank Stähler (School of Business and Economics, University of Tübingen, Tübingen, Germany; University of Adelaide, Adelaide, Australia; CESifo, Germany)
    Abstract: This study scrutinizes the implications of a vendor bid in an open ascending auction with a seller of an indivisible good and many potential buyers. The seller can set a reserve price, and both the seller and the bidders have private signals and interdependent values. We show that no strictly increasing reserve price function exists in the presence of a vendor bid. We also show that a vendor bid must be large enough to be credible, and thus vendor bids may not be used in equilibrium. The vendor will exercise her vendor bid option if and only if her private signal is large enough.
    Keywords: Vendor Bid; Interdependent Valuation; Open Ascending Auction
    JEL: D44
    Date: 2017–10
  7. By: Murooka, Takeshi (Osaka University); Schwarz, Marco (University of Innsbruck)
    Abstract: Recent studies investigate policies motivating consumers to make an active choice as a way to protect unsophisticated consumers. We analyze the optimal timing of such choice-enhancing policies when a firm can strategically react to them. In our model, a firm provides a contract with automatic renewal. We show that a policy intending to enhance consumers choices when they choose a contract can be detrimental to welfare. By contrast, a choice-enhancing policy at the time of contract renewal increases welfare more robustly. Our results highlight that policies should be targeted in timing to the actual choice inefficiency.
    Keywords: active choice; automatic renewal; automatic enrollment; procrastination; consumer naivete; present bias;
    JEL: D03 D18 D21 D40 L51
    Date: 2017–10–24
  8. By: Herweg, Fabian; Schmidt, Klaus M.
    Abstract: The procurement of complex projects is often plagued by large cost overruns. One important reason for these additional costs are flaws in the initial design. If the project is procured with a price-only auction, sellers who spotted some of the flaws have no incentive to reveal them early. Each seller prefers to conceal his information until he is awarded the contract and then renegotiate when he is in a bilateral monopoly position with the buyer. We show that this gives rise to three inefficiencies: inefficient renegotiation, inefficient production and inefficient design. We derive the welfare optimal direct mechanism that implements the efficient allocation at the lowest possible cost to the buyer. The direct mechanism, however, imposes strong assumptions on the buyer's prior knowledge of possible flaws and their payoff consequences. Therefore, we also propose an indirect mechanism that implements the same allocation but does not require any such prior knowledge. The optimal direct and indirect mechanisms separate the improvement of the design and the selection of the seller who produces the good.
    Keywords: Adaptation Costs; auctions; Behavioral Contract Theory; Design Flaws; Procurement; Renegotiation
    JEL: D44 D82 D83 H57
    Date: 2017–10
  9. By: Cabrales, Antonio; Drouvelis, Michalis; Gurguc, Zeynep; Ray, Indrajit
    Abstract: We consider an experiment with a version of the Battle of the Sexes game with two-sided private information, allowing a possible round of either one-way or two-way cheap talk before the game is played. We compare different treatments to study truthful revelation of information and subsequent payoffs from the game. We find that the players are overall truthful about their types in the cheap-talk phase in both one-way or two-way talk. Furthermore, the unique symmetric cheap-talk equilibrium in the two-way cheap talk game is played when they players fully reveal their information; however, they achieve higher payoffs in the game when the talk is one-way as the truthful reports facilitate desired coordination.
    Keywords: Battle of the Sexes; cheap talk; coordination; private information
    JEL: C72 C92 D83
    Date: 2017–10
  10. By: Petra Persson
    Abstract: Limits on consumer attention give firms incentives to manipulate prospective buyers’ allocation of attention. This paper models such attention manipulation and shows that it limits the ability of disclosure regulation to improve consumer welfare. Competitive information supply, from firms competing for attention, can reduce consumers’ knowledge by causing information overload. A single firm subjected to a disclosure mandate may deliberately induce such information overload to obfuscate financially relevant information, or engage in product complexification to bound consumers’ financial literacy. Thus, disclosure rules that would improve welfare for agents without attention limitations can prove ineffective for consumers with limited attention. Obfuscation suggests a role for rules that mandate not only the content but also the format of disclosure; however, even rules that mandate “easy-to-understand” formats can be ineffective against complexification, which may call for regulation of product design.
    JEL: D11 D14 D18 D83
    Date: 2017–09
  11. By: Vladimir Asriyan; William Fuchs; Brett Green
    Abstract: We study a dynamic market for durable assets, in which asset owners are privately informed about the quality of their assets and experience occasional productivity shocks that generate gains from trade. An important feature of our environment is that asset buyers must worry not only about the quality of assets they are buying, but also about the prices at which they can re-sell the assets in the future. We show that this interaction between adverse selection and resale concerns generates an inter-temporal coordination problem and gives rise to multiple self-fulfilling equilibria. We find that there is a rich set of sentiment driven equilibria, in which sunspots generate large fluctuations in asset prices, output and welfare, resembling what one may refer to as “bubbles.”
    Keywords: sentiment, adverse selection, liquidity, capital reallocation, Bubbles
    JEL: D82 E32 G12
    Date: 2017–10
  12. By: Maier, Carl G.; Marencak, Michal
    Abstract: Empirical evidence shows that low cost of signaling interest in offers can result in a significant number of inappropriate signals. This paper provides a theoretical explanation for this observation as an equilibrium outcome of a model with utility maximizing fully rational agents that decide to signal their interest without knowing whether the offer suits them or not. We show that falling transaction costs can decrease market efficiency and social welfare.
    JEL: C72 D83 E24
    Date: 2017
  13. By: Bouton, Laurent; Ogden, Benjamin
    Abstract: We study the behavior of ethical voters in multicandidate elections. We consider two common electoral rules: plurality and majority runoff. Our model delivers crisper predictions than those of the pivotal voter model. An equilibrium always exists, and is unique for a broad range of parameter values. There are two types of equilibria: (i) the sincere voting equilibrium (voters vote for their most-preferred candidate), and (ii) Duverger's Law equilibria (two candidates attract all the votes). These never coexist. We identify the features of an election that favor sincere voting. Consistent with evidence, incentives to vote sincerely are stronger under majority runoff.
    Keywords: Ethical Voting; Group-based Voting; Majority Runoff Rule; Multicandidate Elections; Plurality Rule
    JEL: C72 D72
    Date: 2017–10
  14. By: Sergiu Hart
    Abstract: A repeat voting procedure is proposed, whereby voting is carried out in two identical rounds. Every voter can vote in each round, the results of the first round are made public before the second round, and the final result is determined by adding up all the votes in both rounds. It is argued that this simple modification of election procedures may well increase voter participation and result in more accurate and representative outcomes.
    Date: 2017–10
  15. By: Tapas Kundu; Tore Nilssen
    Abstract: We develop a model to discuss a government’s incentives to delegate to bureaucrats the regulation of an industry. The industry consists of a polluting firm with private information about its production technology. Implementing a transfer-based regulation policy requires the government to make use of a bureaucracy; this has a bureaucratic cost, as the bureaucracy diverts a fraction of the transfer. The government faces a trade-off in its delegation decision: bureaucrats have knowledge of the firms in the industry that the government does not have, but at the same time, they have other preferences than the government, so-called bureaucratic drift. We study how the bureaucratic drift and the bureaucratic cost interact to affect the incentives to delegate. Furthermore, we discuss how partial delegation, i.e., delegation followed by laws and regulations that restrict bureaucratic discretion, increases the scope of delegation. We characterize the optimal delegation rule and show that, in equilibrium, three different regimes can arise that differ in the extent of bureaucratic discretion. Our analysis has implications for when and how a government should delegate its regulation of industry. We find that bureaucratic discretion reduces with bureaucratic drift but that, because of the nature of the regulation problem, the effect of increased uncertainty about the firm’s technology on the bureaucratic discretion depends on how that uncertainty is reduced.
    Keywords: bureaucracy, delegation, regulation, procurement
    JEL: D02 H10 L51
    Date: 2017
  16. By: von Wangenheim, Jonas (Humboldt University Berlin)
    Abstract: Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectation-based loss aversion (Köszegi and Rabin (2006, 2009)) in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that even with independent private values the Vickrey auction yields strictly higher revenue than the English auction, violating the well known revenue equivalence. Thus, dynamic loss aversion offers a novel explanation for empirically observed differences between these auction formats.
    Keywords: vickrey auction; english auction; expectation-based loss aversion; revenue equivalence; dynamic loss aversion; personal equilibrium;
    JEL: D03 D44
    Date: 2017–10–20
  17. By: Hassan Nosratabadi (Rutgers, The State University Of New Jersey)
    Abstract: The relation between Sen's decomposition of the weak axiom of revealed preferences (WARP), and WARP directional decomposition introduced in Nosratabadi (2017) is investigated. It is argued that the latter generalizes the former. A pairwise transitive WARP decomposition consistent with Sen's property a is given. It is also argued that the notion of referential DM can not be built upon Sen's properties.
    Keywords: The Weak Axiom of Revealed Preferences, WARP Decomposition
    JEL: D11 D81
    Date: 2017–10–20
  18. By: Naseer, Shaheen; Heine, Klaus
    Abstract: The paper proposes a theoretical framework to explain policy drift, when identity moderates the principle-agent relation between the legislator and the bureaucracy. Our model points to the subtle interaction between different administrative levels of bureaucracy and how this interaction shapes the structure and size of budgetary allocations. Conceptually we enrich the public choice tradition of modeling bureaucracies by insights which fall broadly into the study of organizational behavior.
    JEL: D73 H11
    Date: 2017

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