nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒11‒12
28 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Facilitating the Search for Partners on Matching Platforms: Restricting Agents' Actions By Kanoria, Yash; Saban, Daniela
  2. Using Cheap Talk to Polarize or Unify a Group of Decision Makers By Daeyoung Jeong
  3. Delegating performance evaluation By Igor Letina; Shuo Liu; Nick Netzer
  4. Self-Allocation in Contests By Axel Bernergard; Karl Wärneryd
  5. Contracting with Word-of-Mouth Management By Yuichiro Kamada; Aniko Ory
  6. Regulation of Charlatans in High-Skill Professions By Berk, Jonathan B.; van Binsbergen, Jules H.
  7. Strategic Teaching and Learning in Games By Burkhard Schipper
  8. Negative consumer value and loss leading By Caprice, Stéphane; Shekhar, Shiva
  9. Opinion Dynamics via Search Engines (and other Algorithmic Gatekeepers) By Fabrizio Germano; Francesco Sobbrio
  10. Political Awareness, Microtargeting of Voters, and Negative Electoral Campaigning By Burkhard Schipper; Hee Yeul Woo
  11. Qualitative analysis of common belief of rationality in strategic-form games By Giacomo Bonanno; Elias Tsakas
  12. Kuhn's Theorem for Extensive Games with Unawareness By Burkhard Schipper
  13. Equilibrium Theory of Banks' Capital Structure By Douglas Gale; Piero Gottardi
  14. Politically Feasible Reforms of Non-Linear Tax Systems By Felix Bierbrauer; Pierre C. Boyer
  15. When should bidders learn reserve prices? By Onur A. Koska; Frank Stähler
  16. Dream Teams and the Apollo Effect By Alex Gershkov; Paul Schweinzer
  17. Public Goods and Public Bads By Wolfgang Buchholz; Richard Cornes; Dirk Rübbelke
  18. Patent Breadth in an International Setting By Eric Bond; Benjamin Zissimos
  19. A Simple Model of Mergers and Innovation By Giulio Federico; Gregor Langus; Tommaso M. Valletti
  20. Disguising Lies - Image Concerns and Partial Lying in Cheating Games By Kiryl Khalmetski; Dirk Sliwka
  21. Comprehensive Rationalizability By Aviad Heifetz; Martin Meier; Burkhard Schipper
  22. Multiproduct Intermediaries and Optimal Product Range By Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong
  23. Mechanics of Linear Quadratic Gaussian Rational Inattention Tracking Problems By Chad Fulton
  24. The Political Economy of Liberal Democracy By Sharun Mukand; Dani Rodrik
  25. Travel time variability and rational inattention By Mogens Fosgerau; Gege Jiang
  26. Common Ownership, Competition, and Top Management Incentives By Miguel Antón; Florian Ederer; Mireia Giné; Martin Schmalz
  27. Upstream Partnerships among Competitors when Size Matters By Øystein Foros; Hans Jarle Kind
  28. Vertical Licensing, Input Pricing, and Entry By Elpiniki Bakaouka; Chrysovalantou Milliou

  1. By: Kanoria, Yash (Stanford University); Saban, Daniela (Stanford University)
    Abstract: Two-sided matching platforms, such as those for labor, accommodation, dating, and taxi hailing, can control and optimize over many aspects of the search for partners. To understand how the search for partners should be designed, we consider a dynamic two-sided search model with strategic agents who must spend a cost to discover their value for each potential partner. We find that in many settings, the platform can mitigate wasteful search effort by restricting what agents can see/do. Surprisingly, simple restrictions can improve social welfare even when screening costs are small, and agents on each side are ex-ante homogeneous. In asymmetric markets where agents on one side have a tendency to be more selective (due to smaller screening costs or greater market power), the platform should force the more selective side of the market to reach out first, by explicitly disallowing the less selective side from doing so. This allows the agents on the less selective side to exercise more choice in equilibrium. When agents are vertically differentiated, the platform can significantly improve welfare even in the limit of vanishing screening costs, by forcing one side of the market to propose and by hiding quality information. Furthermore, a Pareto improvement in welfare is possible in this limit.
    Date: 2017–07
  2. By: Daeyoung Jeong (Economic Research Institute, Bank of Korea)
    Abstract: We develop a model of strategic information transmission from an outside expert with informational superiority to a group of people who make a decision by voting on a proposal. An outside expert who observes the qualities of a proposal sends a cheap talk message to decision makers with limited information. A simple cheap talk strategy of the expert can be surprisingly effective in persuading decision makers by polarizing or unifying their opinions. When there is a significant informational gap, decision makers vote in the expert's interest by focusing only on the expert's message, even though they know she has her own bias.
    Keywords: Cheap Talk, Voting, Polarization
    JEL: D71 D72 D78 D82 D83
    Date: 2017–06–28
  3. By: Igor Letina; Shuo Liu; Nick Netzer
    Abstract: We study optimal incentive contracts with multiple agents when performance evaluation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of the bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer’s potential leniency bias. The optimal effort profile can be uniquely implemented by an all-pay auction with a cap, and it can also be implemented by a nested Tullock contest. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.
    Keywords: Performance evaluation, delegation, optimality of contests
    JEL: D02 D82 M52
    Date: 2017–10
  4. By: Axel Bernergard; Karl Wärneryd
    Abstract: We consider contestants who must choose exactly one contest, out of several, to participate in. We show that when the contest technology is of a certain type, or when the number of contestants is large, a self-allocation equilibrium, i.e., one where no contestant would wish to change his choice of contest, results in the allocation of players to contests that maximizes aggregate equilibrium effort. For a class of oligopoly models that are equivalent to contests, this implies output maximization.
    Keywords: contests, self-allocation, effort maximization, quantity competition
    JEL: C72 D43 D44 D72 D74 L13
    Date: 2017
  5. By: Yuichiro Kamada (Haas School of Business, University of California Berkeley); Aniko Ory (Cowles Foundation, Yale University)
    Abstract: We incorporate word of mouth (WoM) in a classic Maskin-Riley contracting problem, allowing for referral rewards to senders of WoM. Current customers’ incentives to engage in WoM can affect the contracting problem of a firm in the presence of positive externalities of users. We fully characterize the optimal contract scheme and provide comparative statics. In particular, we show that offering a free contract is optimal only if the fraction of premium users in the population is small. The reason is that by offering a free product, the firm can incentivize senders to talk by increasing expected externalities that they receive and this is effective only if there are many free users. This result is consistent with the observation that companies that successfully offer freemium contracts oftentimes have a high percentage of free users.
    Keywords: Word-of-mouth, referral rewards, freemium, contract theory
    JEL: D82 L21 M3
    Date: 2016–07
  6. By: Berk, Jonathan B. (Stanford University); van Binsbergen, Jules H. (University of PA)
    Abstract: We study a market for a skill that is in short supply and high demand, where the presence of charlatans (professionals who sell a service that they do not deliver on) is an equilibrium outcome. We use this model to evaluate the belief that reducing the number of charlatans through regulation increases consumer surplus. We show that this belief is false: both information disclosure as well as setting standards reduces consumer surplus. Although both standards and disclosure drive charlatans out of the market, consumers are worse off because of the resulting reduction in competition amongst producers. Producers, on the other hand, strictly benefit from the regulation, implying that the regulation we observe in these markets likely derives from producer interests. The model provides insights into the parameters that drive the cross-sectional variation in charlatans across professions. Professions with weak trade groups, skills in larger supply, shorter training periods and less informative signals regarding the professional's skill, are more likely to feature charlatans. We conclude that the number of charlatans in equilibrium is positively related to the value added of that profession to consumers.
    Date: 2017–06
  7. By: Burkhard Schipper (Department of Economics, University of California Davis)
    Abstract: It is known that there are uncoupled learning heuristics leading to Nash equilibrium in all finite games. Why should players use such learning heuristics and where could they come from? We show that there is no uncoupled learning heuristic leading to Nash equilibrium in all finite games that a player has an incentive to adopt, that would be evolutionary stable or that could "learn itself". Rather, a player has an incentive to strategically teach such a learning opponent in order to secure at least the Stackelberg leader payoff. The impossibility result remains intact when restricted to the classes of generic games, two-player games, potential games, games with strategic complements or 2 x 2 games, in which learning is known to be "nice". More generally, it also applies to uncoupled learning heuristics leading to correlated equilibria, rationalizable outcomes, iterated admissible outcomes, or minimal curb sets. A possibility result restricted to "strategically trivial" games fails if some generic games outside this class are considered as well.
    Keywords: Learning in games, Interactive learning, Higher-order learning
    JEL: C72 C73
    Date: 2017–05–02
  8. By: Caprice, Stéphane; Shekhar, Shiva
    Abstract: Large retailers, competing with smaller stores that carry a narrower range, can exercise market power by pricing below cost some of their products. Below-cost pricing arises as an exploitative device rather than a predatory device (e.g., Chen and Rey, 2012). Unlike standard textbook models, we show that positive consumer value is not required in these frameworks. Large retailers can sell products offering consumers a negative value. We use our insight to revisit some classic issues in vertical relations.
    Keywords: multiproduct retailers,loss-leading,negative consumer value
    JEL: L13 L81
    Date: 2017
  9. By: Fabrizio Germano; Francesco Sobbrio
    Abstract: Ranking algorithms are the information gatekeepers of the Internet era. We develop a stylized framework to study the effects of ranking algorithms on opinion dynamics. We consider rankings that depend on popularity and on personalization. We find that popularity driven rankings can enhance asymptotic learning while personalized ones can both inhibit or enhance it, depending on whether individuals have common or private value preferences. We also find that ranking algorithms can contribute towards the diffusion of misinformation (e.g., “fake news†), since lower ex-ante accuracy of content of minority websites can actually increase their overall traffic share.
    Keywords: search engines, ranking algorithm, search behavior, opinion dynamics, information aggregation, asymptotic learning, misinformation, polarization, website traffic, fake news
    JEL: D83 L86
    Date: 2017
  10. By: Burkhard Schipper; Hee Yeul Woo (Department of Economics, University of California Davis)
    Abstract: We study the informational effectiveness of electoral campaigns. Voters may not think about all political issues and have incomplete information with regard to political positions of candidates. Nevertheless, we show that if candidates are allowed to microtarget voters with messages then election outcomes are as if voters have full awareness of political issues and complete information about candidate's political positions. Political competition is paramount for overcoming the voter's limited awareness of political issues but unnecessary for overcoming just uncertainty about candidates' political positions. Our positive results break down if microtargeting is not allowed or voters lack political reasoning abilities. Yet, in such cases, negative campaigning comes to rescue.
    Keywords: Electoral competition, campaign advertising, multidimensional policy space, microtargeting, dog-whistle politics, negative campaigning, persuasion games, unawareness
    JEL: C72 D72 D82 P16
    Date: 2017–05–02
  11. By: Giacomo Bonanno; Elias Tsakas (Department of Economics, University of California Davis)
    Abstract: We study common belief of rationality in strategic-form games with ordinal utilities, employing a model of qualitative beliefs. We characterize the three main solution concepts for such games, viz., Iterated Deletion of Strictly Dominated Strategies (IDSDS), Iterated Deletion of Boergers-dominated Strategies (IDBS) and Iterated Deletion of Inferior Strategy Profiles (IDIP), by means of gradually restrictive properties imposed on the models of qualitative beliefs. As a corollary, we prove that IDIP refines IDBS, which refines IDSDS.
    Keywords: Qualitative likelihood relation, ordinal payoffs, common belief of rationality, iterative deletion procedures
    JEL: C7
    Date: 2017–05–12
  12. By: Burkhard Schipper (Department of Economics, University of California Davis)
    Abstract: We extend Kuhn's Theorem to extensive games with unawareness. This extension is not entirely obvious: First, extensive games with non-trivial unawareness involve a forest of partially ordered game trees rather than just one game tree. An information set at a history in one tree may consist of histories in a less expressive tree. Consequently, perfect recall takes a more complicated form as players may also become aware of new actions during the play. Second, strategies can only be partially an object of ex-ante choice in games with unawareness. Finally, histories that a player may expect to reach with a strategy profile may not be the histories that actually occur with this strategy profile, requiring us to define appropriate notions of equivalence of strategies.
    Keywords: perfect recall, mixed strategy, behavior strategy, unawareness.
    JEL: C72 D83
    Date: 2017–11–02
  13. By: Douglas Gale; Piero Gottardi
    Abstract: We study an environment where the capital structure of banks and firms are jointly determined in equilibrium, so as to balance the benefits of the provision of liquidity services by bank deposits with the costs of bankruptcy. The risk in the assets held by firms and banks is determined by the technology choices by firms and the portfolio diversification choices by banks. We show competitive equilibria are efficient and the equilibrium level of leverage in banks and firms depend on the nature of the shocks affecting firm productivities. When these shocks are co-monotonic, banks optimally choose a zero level of equity. Thus all equity should be in firms, where it does “double duty†.protecting both firms and banks from default. On the other hand, if productivity shocks have an idiosyncratic component, portfolio diversification by banks may be a more effective buffer against these shocks and, in these cases, it may be optimal for banks, as well as firms, to issue equity.
    Keywords: capital structure, banks, bankruptcy
    JEL: G33
    Date: 2017
  14. By: Felix Bierbrauer; Pierre C. Boyer
    Abstract: We present a conceptual framework for the analysis of politically feasible tax reforms. First, we prove a median voter theorem for monotonic reforms of non-linear tax systems. This yields a characterization of reforms that are preferred by a majority of individuals over the status quo and hence politically feasible. Second, we show that every Pareto-efficient tax systems is such that moving towards lower tax rates for below-median incomes and towards higher rates for above median incomes is politically feasible. Third, we develop a method for diagnosing whether a given tax system admits reforms that are welfare-improving and/ or politically feasible.
    Keywords: non-linear income taxation, tax reforms, political economy, welfare analysis
    JEL: C72 D72 D82 H21
    Date: 2017
  15. By: Onur A. Koska (Department of Economics, Middle East Technical University, Ankara, Turkey); Frank Stähler (School of Business and Economics, University of Tübingen, Tübingen, Germany; University of Adelaide, Adelaide, Australia; CESifo, Germany)
    Abstract: This paper discusses the role of reserve prices when the signal of each bidder is positively affiliated with the seller's signal. We distinguish three reserve price designs: a public reserve price, announced before the auction starts, a revealed reserve price, disclosed when a bid matches it, and a secret reserve price that is disclosed after the highest bid has been reached. We show that a public or a revealed reserve price are strategically equivalent, and we show that no seller will set a secret reserve price.
    Keywords: Auctions with affiliation, optimal reserve prices.
    JEL: D44
    Date: 2017–10
  16. By: Alex Gershkov; Paul Schweinzer
    Abstract: We model leadership selection, competition, and decision making in teams with heterogeneous membership composition. We show that if the choice of leadership in a team is imprecise or noisy—which may arguably be the case if appointment decisions are made by non-expert administrators—then it is not necessarily the case that the best individuals should be selected as team members. On the contrary, and in line with what has been called the “Apollo effect,†a “dream team†consisting of unambiguously higher performing individuals may perform worse in terms of team output than a group composed of lower performers. We characterize the properties of the leadership selection and production processes which lead to the Apollo effect and clarify when the opposite effect occurs in which supertalent performs better than comparatively less qualified groups.
    Keywords: team composition, leadership, mistakes
    JEL: C70 D70 J80
    Date: 2017
  17. By: Wolfgang Buchholz; Richard Cornes; Dirk Rübbelke
    Abstract: In many empirically relevant situations agents in different groups are affected by the provision of a public characteristic in divergent ways: While for one group it represents a public good, it is a public bad for another group. Applying Cornes’ and Hartley’s (2007) Aggregative Game Approach, we analyze a general model, in which such contentious public characteristics are present and are provided cooperatively. In particular, we establish neutrality results w.r.t. redistribution and growth of income, infer the effects of preference changes and coalition building and present a technology paradox. Finally, we compare the outcome of voluntary provision of the contentious public characteristic with the Pareto optimal solution highlighting a potential conflict between equity and efficiency in this case.
    Keywords: public goods, public bads, voluntary provision, neutrality
    JEL: C72 H41
    Date: 2017
  18. By: Eric Bond; Benjamin Zissimos
    Abstract: We examine the Nash equilibria of a game where two national governments set patent breadth strategically. Broader patents make R&D more attractive, but the effect on static efficiency is nonmonotonic. In a North.South model, where only the North can innovate, harmonization of patent breadth lowers welfare relative to the Nash equilibrium. When both countries can innovate, harmonization toward narrower patent breadth may raise world welfare.
    Keywords: coordination, innovation, patent breadth, patent race, R&D
    JEL: F02 F13 O30 O31 O32
    Date: 2017
  19. By: Giulio Federico; Gregor Langus; Tommaso M. Valletti
    Abstract: We analyze the impact of a merger on firms’ incentives to innovate. We show that the merging parties always decrease their innovation efforts post-merger while the outsiders to the merger respond by increasing their effort. A merger tends to reduce overall innovation. Consumers are always worse off after a merger. Our model calls into question the applicability of the “inverted-U†relationship between innovation and competition to a merger setting.
    Keywords: innovation, R&D, mergers
    JEL: D43 G34 L40 O30
    Date: 2017
  20. By: Kiryl Khalmetski; Dirk Sliwka
    Abstract: We study equilibrium reporting behavior in Fischbacher and Föllmi-Heusi (2013) type cheating games when agents have a fixed cost of lying and image concerns not to be perceived as a liar. We show that equilibria naturally arise in which agents with low costs of lying randomize among a set of the highest potential reports. Such equilibria induce a distribution of reports in line with observed experimental patterns. We also find that higher image concerns lead to an increase in the range of reported lies while the effect of the fixed cost of lying is the opposite.
    Keywords: cost of lying, image concerns, cheating game, truth-telling, deception
    JEL: D03 D82 D83 C72
    Date: 2017
  21. By: Aviad Heifetz; Martin Meier; Burkhard Schipper (Department of Economics, University of California Davis)
    Abstract: We present a new solution concept for strategic games called comprehensive rationalizability that embodies "common cautious belief in rationality" based on a sound epistemic characterization in a universal type space. It refines rationalizability, but it neither refines nor is refined by iterated admissibility. Nevertheless, it coincides with iterated admissibility in many relevant economic applications.
    Keywords: Common assumption of rationality, common belief in rationality, iterated admissibility, rationalizability, lexicographic belief systems
    JEL: C72
    Date: 2017–05–02
  22. By: Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong
    Abstract: This paper develops a framework for studying the optimal product range choice of a multiproduct intermediary when consumers demand multiple products. In the optimal product selection, the intermediary uses exclusively stocked high-value products to increase store traffic, and at the same time earns profit mainly from non-exclusively stocked products which are relatively cheap to buy from upstream suppliers. By doing this the intermediary can earn strictly positive profit, including in situations where it does not improve efficiency in selling products. A linkage between product selection and product demand features such as size and shape is established. It is also shown that relative to the social optimum, the intermediary tends to be too big and stock too many products exclusively.
    Keywords: intermediaries, product range, multiproduct demand, search, exclusive contracts
    JEL: D83 L42 L81
    Date: 2017–10
  23. By: Chad Fulton
    Abstract: This paper presents a general framework for constructing and solving the multivariate static linear quadratic Gaussian (LQG) rational inattention tracking problem. We interpret the nature of the solution and the implied action of the agent, and we construct representations that formalize how the agent processes data. We apply this infrastructure to the rational inattention price-setting problem, confirming the result that a conditional response to economics shocks is possible, but casting doubt on a common assumption made in the literature. We show that multiple equilibria and a social cost of increased attention can arise in these models. We consider the extension to the dynamic problem and provide an approximate solution method that achieves low approximation error for many applications found in the LQG rational inattention literature.
    Keywords: Rational inattention ; Information acquisition ; Signal extraction
    JEL: D81 D83 E31
    Date: 2017–11–03
  24. By: Sharun Mukand; Dani Rodrik
    Abstract: We distinguish between three sets of rights – property rights, political rights, and civil rights – and provide a taxonomy of political regimes. The distinctive nature of liberal democracy is that it protects civil rights (equality before the law for minorities) in addition to the other two. When democratic transitions are the product of a settlement between the elite (who care mostly about property rights) and the majority (who care mostly about political rights), they generically fail to produce liberal democracy. This is because the minority has neither the resources nor the numbers to make a contribution to the settlement. We develop a formal model to sharpen the contrast between electoral and liberal democracies and highlight circumstances under which liberal democracy can emerge. We show that liberal democracy requires quite special circumstances: mild levels of income inequality as well as weak identity cleavages. We provide some evidence consistent with this result, and also present a new classification of countries as electoral or liberal democracies.
    JEL: P48
    Date: 2017
  25. By: Mogens Fosgerau (Department of Economics, University of Copenhagen); Gege Jiang (Department of Economics, Hong Kong University of Science and Technology)
    Abstract: This paper sets up a rational inattention model for the choice of departure time for a traveler facing random travel time. The traveler chooses how much information to acquire about the travel time out-come before choosing departure time. This reduces the cost of travel time variability compared to models in which the information is exogenously fixed .
    Keywords: rational inattention; random travel time variability; value of reliability; discrete choice
    JEL: D1 D8 R4
    Date: 2017–09–26
  26. By: Miguel Antón (IESE Business School, Universidad de Navarra); Florian Ederer (Cowles Foundation, Yale University); Mireia Giné (IESE Business School, Universidad de Navarra); Martin Schmalz (University of Michigan)
    Abstract: We show theoretically and empirically that managers have steeper financial incentives to expend effort and reduce costs when an industry’s firms tend to be controlled by shareholders with concentrated stakes in the firm, and relatively few holdings in competitors. A side effect of steep incentives is more aggressive competition. These findings inform a debate about the objective function of the firm.
    JEL: D21 G30 G32 J31 J41
    Date: 2016–07
  27. By: Øystein Foros; Hans Jarle Kind
    Abstract: In several industries downstream competitors form upstream partnerships. An important rationale is that higher aggregate upstream volume might generate efficiencies that reduce both fixed and marginal costs. Our focus is on the latter. We show that if upstream marginal costs are decreasing in sales volume, then a partnership between downstream rivals will make them less aggressive. However, a partnership might nonetheless induce both partners and non-partners to charge lower prices. We also show that it might be better for two firms to form a partnership and compete downstream than to merge. Somewhat paradoxically, this is true if they compete fiercely in the downstream market with a third firm. The reason is that a merger is de facto a commitment to set higher prices. Under aggressive competition from the third firm, the members will not want to make such a commitment when upstream marginal costs are decreasing in output.
    Keywords: upstream partnership, imperfect competition, endogenous marginal costs
    JEL: D01
    Date: 2017
  28. By: Elpiniki Bakaouka; Chrysovalantou Milliou
    Abstract: We explore the incentives of a vertically integrated incumbent firm to license the production technology of its core input to an external firm, transforming the licensee into its input supplier. We find that the incumbent opts for licensing even when licensing also transforms the licensee into one of its direct competitors in the final products market. In fact, the licensee's entry into the final products market, although increases the competition and the cost that the licensor faces, it reinforces, instead of weakens, the licensing incentives. Furthermore, the licensee's entry augments the positive welfare implications of vertical licensing.
    Keywords: licensing, vertical relations, entry, two-part tariffs, outsourcing
    JEL: L22 L24 L13 L42 D45
    Date: 2017

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