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on Microeconomics |
| By: | Chia-Hui Chen; Junichiro Ishida |
| Abstract: | We consider an environment in which a principal hires an agent and evaluates his productivity over time in an ongoing relationship. The problem is embedded in a continuous-time model with both hidden action and hidden information, where the principal must induce the agent to exert effort to facilitate her learning process. The value of committing to a deadline is examined in this environment, and factors which make the deadline more profitable are identified. Our framework generates a unique recursive equilibrium structure under no commitment which can be exploited to obtain a full characterization of equilibrium. The analysis allows us to evaluate the exact value of commitment for any given set of parameters and provides insight into when it is beneficial to commit to an evaluation deadline at the outset of a relationship. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1015&r=mic |
| By: | Chia-Hui Chen; Junichiro Ishida |
| Abstract: | A standard incomplete-information war of attrition is extended to incorporate experimentation and private learning. We obtain a characterization of all equilibria in this extended setup and use this setup to illuminate a tradeoff between short-run and long-run gains of experimentation. The extension yields qualitative impacts on the strategic nature of the problem. The option value of experimentation serves as a credible commitment device to stay in the game, which is instrumental in inducing the other player to concede earlier. As a direct consequence, there may be an equilibrium in which the strictly less efficient player can get the better end of the deal, implying that slow learning can be a blessing in this type of competition. Our analysis gives insight into why an apparently inferior technology often survives in many standards competitions and more broadly offers implications for technology adoption and industry dynamics. We also show that there is a non-degenerate set of parameters that can support the Pareto-efficient allocation as an equilibrium outcome whereas it is never possible in the standard setup. Creation-Date: 2017-10 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1014&r=mic |
| By: | Jay Pil Choi; Christodoulos Stefanadis |
| Abstract: | We present a potentially benign naked exclusion mechanism that can be applied to sequential innovation; a non-patentable original innovation by the incumbent supplier fosters derivative innovation by rivals. In the absence of an appropriate legal framework, the original innovator’s equilibrium exclusivity contracts block subsequent efficient entry even if there is (leader-follower) competition in the contracting phase. However, the legal framework may maximize social welfare by imposing a ban on upfront lumps-sum payments in exclusivity contracts (by all suppliers) combined with an outright ban on exclusivity contracts by the derivative innovator. The former ban precludes the exclusion of socially beneficial derivative innovation by causing the incumbent supplier to resort to accommodation, rather than to pure exclusion, strategies. The latter ban complements the former by preventing inefficient or excessive derivative innovation. |
| Keywords: | exclusivity, entry, fixed cost, lump-sum payment, sequential innovation |
| JEL: | L42 D43 D45 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6412&r=mic |
| By: | Christoph Laica; Arne Lauber; Marco Sahm |
| Abstract: | We examine the fairness and intensity of sequential round-robin tournaments with multiple prizes. With three symmetric players and two prizes, the tournament is completely fair if and only if the second prize is valued half of the first prize, regardless of whether matches are organized as Tullock contests or as allpay auctions. For second prizes different from half of the first prize, three-player tournaments with matches organized as Tullock contests are usually fairer than tournaments with matches organized as all-pay auctions. However, unless the second prize is very small, they are less intense in the sense that players exert less ex-ante expected aggregate effort per unit of prize money. Moreover, we specify how the relative size of the second prize influences the extent and the direction of discrimination as well as the intensity of three-player tournaments. Finally, we show that there is no prize structure for which sequential round-robin tournaments with four symmetric players are completely fair in general. |
| Keywords: | round-robin tournament, multiple prizes, fairness, intensity, Tullock contest, all-pay auction |
| JEL: | C72 D72 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6685&r=mic |
| By: | Izabela Jelovac (University of Lyon, CNRS, GATE Lyon Saint-Etienne); Samuel Kembou Nzale (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille) |
| Abstract: | We study optimal contracts in a regulator-agent setting with joint production, altruistic and selfish agents, and uneasy outcome measurement. Such a setting represents sectors of activities such as education and health care provision. The agents and the regulator jointly produce an outcome for which they all care to some extent that is varying from agent to agent. Some agents, the altruistic ones, care more than the regulator does while others, the selfish agents, care less. Moral hazard is present due to the agent’s effort that is not contractible. Adverse selection is present too since the regulator cannot a priori distinguish between altruistic and selfish agents. Contracts consist of a simple transfer from the regulator to the agents together with the regulator’s input in the joint production. We show that a screening contract is not optimal when we face both moral hazard and adverse selection. |
| Keywords: | altruism, Moral Hazard, adverse selection, regulator-agent joint production |
| JEL: | D64 D86 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1737&r=mic |
| By: | Puppe, Clemens |
| Abstract: | It is proved that, among all restricted preference domains that guarantee consistency (i.e. transitivity) of pairwise majority voting, the single-peaked domain is the only minimally rich and connected domain that contains two completely reversed strict preference orders.This result has a number of corollaries, among other things it implies that a single-crossing (‘order-restricted’) domain can be minimally rich only if it is a subdomain of a single-peaked domain. |
| JEL: | D71 C72 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168068&r=mic |
| By: | Sara Biancini; David Ettinger; Baptiste Venet |
| Abstract: | We analyze the relationship between Microfinance Institutions (MFIs) and external donors, with the aim of contributing to the debate on “mission drift†in microfinance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Borrowers can be (very) poor or wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effort to identify the more valuable projects and to choose the right share of poorer borrowers (the optimal level of poor outreach). We first concentrate on hidden action. We show that asymmetric information can distort the share of very poor borrowers reached by loans, thus increasing mission drift. We then concentrate on hidden types, assuming that MFIs are characterized by unobservable heterogeneity on the cost of effort. In this case, asymmetric information does not necessarily increase the mission drift. The incentive compatible contracts push efficient MFIs to serve a higher share of poorer borrowers, while less efficient ones decrease their poor outreach. |
| Keywords: | microfinance, donors, poverty, screening |
| JEL: | O12 O16 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6332&r=mic |
| By: | Sela, Aner |
| Abstract: | We study an elimination tournament with four contestants, each of whom has either a high value of winning (a strong player) or a low value of winning (a weak player) and these values are common-knowledge. Each pair-wise match is modelled as an all-pay auction. The winners of the first stage (semifinal) compete in the second stage (final) for the first prize, while the losers of the first stage compete for the third prize. We examine whether or not the game for the third prize is profitable for the designer who wishes to maximize the total effort of the players. We demonstrate that if there are at least two strong players, there is always a seeding of the players such that the third place game is not profitable. On the other hand, if there are at least two weak players, then there is always a seeding of the players such that the third place game becomes profitable. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12348&r=mic |
| By: | Gretschko, Vitali; Wambach, Achim |
| Abstract: | We consider the problem of a principal who wishes to contract with a privately informed agent and is not able to commit to not renegotiating any outcome of any mechanism. We provide a general characterization of renegotiation-proof outcomes. We apply the solution to a setting with a continuous type space, private values and non-linear contracts. We find that the optimal renegotiation-proof outcomes for the principal are pooling outcomes and satisfy a “no-distortion-at-the-bottom” property. |
| JEL: | C72 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168269&r=mic |
| By: | Lisa Planer-Friedrich; Marco Sahm |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6506&r=mic |
| By: | Satoh, Atsuhiro; Tanaka, Yasuhito |
| Abstract: | We will show that Sion's minimax theorem is equivalent to the existence of Nash equilibrium in a symmetric multi-person zero-sum game. If a zero-sum game is asymmetric, maximin strategies and minimax strategies of players do not correspond to Nash equilibrium strategies. However, if it is symmetric, the maximin strategy and the minimax strategy constitute a Nash equilibrium. |
| Keywords: | multi-person zero-sum game, Nash equilibrium, Sion's minimax theorem. |
| JEL: | C72 |
| Date: | 2017–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82148&r=mic |
| By: | Wolfgang Buchholz; Dirk Rübbelke |
| Abstract: | In this paper, we show that progressivity (regressivity) of burden sharing in a Lindahl equilibrium is a direct consequence of gross complementarity (substitutability) between the private and the public good when the public good is taken as the numéraire. We, moreover, link the respective conditions for gross complementarity to the more familiar ones in which the private good serves as the numéraire. |
| Keywords: | Lindahl equilibrium, progressive (regressive) burden sharing, complements and substitutes |
| JEL: | D63 H23 H41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6704&r=mic |
| By: | Masatlioglu, Yusufcan; Nakajima, Daisuke; Ozdenoren, Emre |
| Abstract: | This paper provides a behavioral foundation for the willpower as limited cognitive resource model which bridges the standard utility maximization and the Strotz models. Using the agent's ex ante preferences and ex post choices, we derive a representation that captures key behavioral traits of willpower constrained decision making. We use the model to study the pricing problem of a profit maximizing monopolist who faces consumers with limited willpower. We show that the optimal contract often consists of three alternatives and the consumer's choices reflect a form of the "compromise effect" which is induced endogenously. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12354&r=mic |
| By: | Christoph March; Marco Sahm |
| Abstract: | We investigate how individual risk preferences affect the likelihood of selecting the more able contestant within a two-player Tullock contest. Our theoretical model yields two main predictions: First, an increase in the risk aversion of a player worsens her odds unless she already has a sufficiently large advantage. Second, if the prize money is sufficiently large, a less able but less risk averse contestant can achieve an equal or even higher probability of winning than a more able but more risk averse opponent. In a laboratory experiment we confirm both, the non-monotonic impact and the compensating effect of risk aversion on winning probabilities. Our results suggest a novel explanation for the gender gap and the optimality of limited monetary incentives in selection contests. |
| Keywords: | selection contest, risk aversion, competitive balance, gender gap |
| JEL: | C72 D72 J31 K41 M51 M52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6587&r=mic |
| By: | Mitra, Manipushpak; Pal, Rupayan; Paul, Arindam; Sharada, P.M. |
| Abstract: | We consider a differentiated product duopoly where a regulated firm competes with a private firm. The instrument of regulation is the level of privatization. First, the regulator determines the level of privatization to maximize social welfare. Then both firms endogenously choose the mode of competition (that is, whether to compete in price or quantity). Finally, the two firms compete in the market. Under a very general demand specification, we show that when the products are imperfect substitutes (complements), there is co-existence of private and public (strictly partially privatized) firms. Moreover, in the second stage, the firms compete in prices. |
| Keywords: | Partially private firm, price (Bertrand) competition, quantity (Cournot) competition |
| JEL: | D4 L1 L2 |
| Date: | 2017–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:81802&r=mic |
| By: | F. Barigozzi; H. Cremer; K. Roeder |
| Abstract: | The tax regimes applied to couples in many countries including the US, France, and Germany imply either a marriage penalty or a marriage bonus. We study how they affect the decision to get married by considering two potential spouses who play a marriage proposal game. At the end of the game they may get married, live together without formal marriage, or split up. In this signaling game, proposing (or getting married) is costly but can indicate strong love. The striking property we obtain is that a marriage bonus may actually reduce the probability that a couple gets married. If the bonus is sufficiently large, the signaling mechanism breaks down, and only a pooling equilibrium in which fewer couples get married remains. Similarly, a marriage penalty may increase the marriage probability. Speciffically, the penalty may lead to a separating equilibrium with efficiency enhancing information transmission, which was otherwise not possible. Our results also imply that marriage decisions in the laissez-faire are not necessarily privately optimal. In some cases a bonus or a penalty may effiectively make the marriage decision more efficient; it may increase the number of efficient marriages that otherwise may not be concluded. |
| JEL: | J12 D82 H31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp1111&r=mic |
| By: | Jean-Marc Bourgeon; Pierre Picard |
| Abstract: | The standard economic analysis of the insured-insurer relationship under moral hazard postulates a simplistic setup that hardly explains the many features of an insurance contract. We extend this setup to include the situation that the insured was facing at the time of the accident and the circumstances of the loss. We show that if this information is costlessly observable, then it should be included in the contract to improve the risk sharing-incentive trade-off under moral hazard. However, in practice the insurer observes the circumstances of the loss only in particular cases - most of the time by performing a costly audit - and almost never the situation the insured was facing at the time of the accident. The resulting incompleteness of the contract opens the door to controversies and disputes that may lead to judicial procedures. We show how the law of insurance contracts should allow insurers to incentivize policyholders to exert an adequate level of effort, and, at the same time, to limit their propencity to nitpick. |
| Keywords: | insurance, moral hazard, incomplete contracts |
| JEL: | D82 D86 G22 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6669&r=mic |
| By: | Dertwinkel-Kalt, Markus; Köster, Mats |
| Abstract: | We show that models of stimulus-driven attention can account for skewness preferences. As unlikely, but outstanding payoffs attract attention, an agent exhibits a preference for right-skewed and an aversion toward left-skewed risks. We show that extreme predictions on skewness preferences by prospect theory can be ruled out for models of stimulus-driven attention. |
| JEL: | D81 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168303&r=mic |
| By: | Vives, Xavier; Yang, Liyan |
| Abstract: | We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, investors are boundedly rational and their interpretation of prices injects noise into the price, generating a source of endogenous noise trading. Compared to the standard rational expectations equilibrium, our setup features price momentum and yields higher return volatility and excessive trading volume. In an overall equilibrium, investors optimally choose sophistication levels by balancing the benefit of beating the market against the cost of acquiring sophistication. Investors tend to over-acquire sophistication. There can exist strategic complementarity in sophistication acquisition, leading to multiple equilibria. |
| Keywords: | asset prices; disagreement; Investor sophistication; multiplicity; noise trading; trading volume; welfare |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12360&r=mic |
| By: | Breu, Maximilian |
| Abstract: | With increasingly complex workplaces, agents face a multitude of different tasks. Contract theory predicts complex contracts, however, actual contracts are simpler. I resolve this puzzle through agents' limited attention which leads to an instinctive focus on tasks with high outcome variation. The limited attention results in the wrong allocation of effort. This provides an explanation of findings in field studies, when the reduction of additional incentives increases productivity. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168264&r=mic |
| By: | Ozdenoren, Emre; Rubanov, Oleg |
| Abstract: | We model a firm as a team production process subject to moral hazard and derive the optimal profit sharing scheme between productive workers and outside investors together with incentive contracts based on noisy performance signals. More productive agents with noisier performance signals are more likely to receive shares which can explain why managers are motivated by shares, and law or consulting firms form partnerships. A firm that grows by opening branches is held almost entirely by outside investors when its output noise grows faster than the number of branches. Otherwise, insiders hold substantial amount of a large firm's shares. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12355&r=mic |
| By: | Tilman Börgers; Yan-Min Choo |
| Abstract: | We consider the aggregation of individual agents’ von Neumann- Morgenstern preferences over lotteries into a social planner’s von Neumann-Morgenstern preference. We start from Harsanyi’s [18] axiomatization of utilitarianism, and ask under which conditions a social preference order that satisfies Harsanyi’s axiom uniquely reveals the planner’s marginal rates of substitution between the probabilities of any two agents’ most preferred alternatives, assuming that any increase/decrease in the probability of each agent’s most preferred alternative is accompanied by an equally sized decrease/increase in that agent’s least preferred alternative. We then introduce three axioms for these revealed marginal rates of substitution. The only welfare function that satisfies these three axioms is the relative utilitarian welfare function. This welfare function, that was introduced in Dhillon [9] and Dhillon and Mertens [11], normalizes all agents’ utility functions so that the lowest value is 0 and the highest value is 1, and then adds up the utility functions. Our three axioms are closely related to axioms that Dhillon and Mertens used to axiomatize relative utilitarianism. We simplify the axioms, provide a much simpler and more transparent derivation of the main result, and re-interpret the axioms as revealed preference axioms. |
| JEL: | D60 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6613&r=mic |
| By: | Joan Esteban; Sabine Flamand; Massimo Morelli; Dominic Rohner |
| Abstract: | This paper describes the repeated interaction between groups in a country as a repeated Stackelberg bargaining game, where conflict and secessions can happen on the equilibrium path due to commitment problems. If a group out of power is sufficiently small and their contribution to total surplus is not too large, then the group in power can always maintain peace with an agreeable surplus sharing offer every period. When there is a mismatch between relative size and relative surplus contribution of the minority group, conflict can occur. While in the static model secession can occur only as peaceful outcome, in the infinite horizon game with high discount factor conflict followed by secession can occur. We discuss our full characterization of equilibrium outcomes in light of the available empirical evidence. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:609&r=mic |
| By: | Kelvin Shuangjian Zhang |
| Abstract: | We generalize the approach of Carlier (2001) and provide an existence proof for the multidimensional screening problem with general nonlinear preferences. We first formulate the principal's problem as a maximization problem with $G$-convexity constraints, and then use $G$-convex analysis to prove existence. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1710.08549&r=mic |
| By: | Gokhan Guven; Eren Inci; Antonio Russo |
| Abstract: | We study a platform’s design of membership and transaction fees when sellers compete and buyers cannot observe the prices and features of goods without incurring search costs. The platform alleviates sellers’ competition by charging them transaction fees that increase with sales revenue, and extracts surplus via membership fees. It prices consumers’ membership below its cost to encourage their search. Examples include malls and online marketplaces. Most malls do not charge for parking while most lease contracts include percentage rents as well as fixed rents. Online marketplaces charge sellers for membership and per transaction while letting consumers access website for free. |
| Keywords: | consumer search, membership fees, retail agglomeration, transaction fees, two-sided platforms |
| JEL: | D21 D40 D83 L13 R33 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6660&r=mic |