nep-mic New Economics Papers
on Microeconomics
Issue of 2017‒11‒26
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Competing Mechanisms with Limited Commitment By Suehyun Kwon
  2. Information in Tullock contest By Shitovitz, Benyamin; Selay, A.; Moreno Ruiz, Diego; Haimanko, Ori; Einy ., Ezra; Aiche, A.
  3. General Equilibrium with Contracts By Suehyun Kwon
  4. Nondictatorial Arrovian Social Welfare Functions, Simple Majority Rule and Integer Programming By Francesca Busetto; Giulio Codognato; Simone Tonin
  5. Information Aggregation in Dynamic Markets with Adverse Selection By Vladimir Asriyan
  6. Buyer-optimal learning and monopoly pricing By Roesler, Anne-Katrin; Szentes, Balázs
  7. Multiplier effect and comparative statics in global games of regime change By Szkup, Michal
  8. SIGNALING IN CONTESTS By Tomer Ifergane; Aner Sela
  9. The Political Economy of Heterogeneity and Conflict By Enrico Spolaore; Romain Wacziarg
  10. Segmentation versus agglomeration : competition between platforms with competitive sellers By Karle, Heiko; Peitz, Martin; Reisinger, Markus
  11. Optimally Vague Contracts and the Law By Giacomo Ponzetto; Nicola Gennaioli
  12. Until Taxes Do Us Part: Tax Penalties or Bonuses and the Marriage Decision By Barigozzi, Francesca; Cremer, Helmuth; Roeder, Kerstin
  13. Extensions of the Shapley value for Environments with Externalities By Inés Macho-Stadler; David Pérez-Castrillo; David Wettstein
  14. Long-Run Market Configurations in a Dynamic Quality-Ladder Model with Externalities By Mario Samano; Marc Santugini
  15. An Equilibrium Search Model of Fire Sales By Brennan Platt; Nuray Akin

  1. By: Suehyun Kwon
    Abstract: This paper studies competing mechanisms with limited commitment over infinite horizon. Between a mechanism and the agent, there is perfect monitoring, but each mechanism can have arbitrary signals about the interaction between other mechanisms and the agent. I show that if the agent’s type is common knowledge, any individually rational payoffs can be sustained in a perfect Bayesian equilibrium. If the agent’s type is his private information, Pareto frontier of mechanisms’ payoffs can be obtained by repeating the static optimal screening every period; in particular, price posting with the static optimal price is the optimal mechanism. The complete information case is a strong form of folk theorem while the incomplete information case shows that folk theorem breaks down with private information even as the discount factor goes to one. Results hold with any finite number of mechanisms, any discount factor and any monitoring technology including private monitoring.
    Keywords: competing mechanisms, limited commitment, private monitoring, price posting, folk theorem
    Date: 2016
  2. By: Shitovitz, Benyamin; Selay, A.; Moreno Ruiz, Diego; Haimanko, Ori; Einy ., Ezra; Aiche, A.
    Abstract: We study the effect of changes of players' information on the equilibrium efforts and payoffs of Tullock contests in which the common value of the prize is uncertain. When the diseconomies of scale in exerting effort increase at a large (small) rate, in contests with symmetric information expected effort decreases (increases) as players become better informed, while in two-player contests with asymmetric information a player with information advantage exerts less (more) effort, in expectation, than his opponent. In classic Tullock contests with symmetric information the equilibrium expected effort and pay off are invariant to the information available to the players. And when information is asymmetric, a player's information advantage is rewarded. Moreover, in two-player contests, while both players exert the same expected effort regardless of their information, expected effort is smaller when one player has information advantage than when both players have the same information.Interestingly, the player with information advantage wins the prize less frequently than his opponent.
    Keywords: Tullock contests; Common-value; Asymmetric information; Information advantage
    JEL: D82 D44 C72
    Date: 2017–11–01
  3. By: Suehyun Kwon
    Abstract: This paper studies general equilibrium when workers in the economy are also consumers of final goods. Once a firm and a worker are matched, there is a standard moral hazard problem. However, the firm’s profit depends on the price of the good the worker produces, and the price is determined by the total supply and demand in the economy. The worker’s expected utility also depends on the number of units they consume and therefore depends on the price of the good. I characterize the set of equilibria and show that there is a unique equilibrium level of worker’s outside option to price ratio. When the government changes minimum wage, the outside option for workers change through limited liability. In any equilibrium, the price responds proportionally to the change in minimum wage; the incentivized effort, the expected outcome, consumption and the expected utility of workers all remain exactly the same, and only the prices change as a result.
    Keywords: general equilibrium, contracts, moral hazard, minimum wage
    Date: 2016
  4. By: Francesca Busetto (Universit`a degli Studi di Udine); Giulio Codognato (Universit`a degli Studi di Udine); Simone Tonin (Durham Business School)
    Abstract: In this paper, we use the linear programming approach to mechanism design, rst introduced by Sethuraman et al. (2003) and then systematized by Vohra (2011), to analyze nondictatorial Arrovian social welfare functions with and without ties. First, we provide a new and simpler proof of Theorem 2 in Kalai and Muller (1977), which characterizes the domains admitting nondictatorial Arrovian social welfare functions without ties. Then, we show that a domain containing an inseparable ordered pair admits nondictatorial Arrovian social welfare functions with ties, thereby strengthening a result previously obtained by Kalai and Ritz (1978). Finally, we propose a reformulation of the simple majority rule in the framework of integer programming with an odd or even number of agents. We use this reformulation to recast some celebrated theorems, proved by Arrow (1963), Sen (1966), and Inada (1969), which provide conditions guaranteeing that the simple majority rule is a nondictatorial Arrovian social welfare function.
    Keywords: Social Welfare Function, Simple Majority Rule, Integer Programming
    JEL: D71
    Date: 2017–11
  5. By: Vladimir Asriyan (CREi, UPF, and Barcelona GSE)
    Abstract: How effectively does a decentralized marketplace aggregate information that is dis-persed throughout the economy? We study this question in a dynamic setting, in which sellers have private information that is correlated with an unobservable aggregate state. We first characterize equilibria with an arbitrary (but finite) number of informed sellers. A common feature is that each seller’s trading behavior provides an informative and con-ditionally independent signal about the aggregate state. We then ask whether the state is revealed as the number of informed sellers goes to infinity. Perhaps surprisingly, the answer is no. We provide conditions under which the amount of information revealed is necessarily bounded and does not reveal the aggregate state. When these conditions are violated, there may be coexistence of equilibria that lead to full revelation with those that do not. We discuss the implications for policies meant to enhance information dissemination in markets.
    Date: 2017
  6. By: Roesler, Anne-Katrin; Szentes, Balázs
    Abstract: This paper analyzes a bilateral trade model where the buyer’s valuation for the object is uncertain and she observes only a signal about her valuation. The seller gives a take-it-or-leave-it offer to the buyer. Our goal is to characterize those signal structures which maximize the buyer’s expected payoff. We identify a buyer-optimal signal structure which generates (i) efficient trade and (ii) a unitelastic demand. Furthermore, we show that every other buyer-optimal signal structure yields the same outcome as the one we identify: in particular, the same price
    JEL: J1
    Date: 2017–07–01
  7. By: Szkup, Michal
    Abstract: This paper provides a general analysis of comparative statics results in global games. I show that the effect of a change in any parameter of the global game model can be decomposed into the direct effect, which captures the effect of a change in parameters when agents' beliefs are held constant, and the multiplier effect, which captures the role of adjustments in agents' beliefs. I characterize conditions under which the multiplier effect is strong and relate it to the strength of strategic complementarities and the publicity multiplier emphasized in earlier work. Finally, I use the above insights to identify when comparative statics can be deduced from the model's primitives, when they do not depend on the information structure, and when they coincide with predictions of the complete information model.
    Keywords: global games, comparative statics, multiplier effect, strategic complementarities, publicity multiplier
    JEL: D80
    Date: 2017–08
  8. By: Tomer Ifergane (BGU); Aner Sela (BGU)
    Keywords: Contests, signaling, asymmetric information, incomplete information
    JEL: C70 D72 D82 D44
    Date: 2017
  9. By: Enrico Spolaore; Romain Wacziarg
    Abstract: In this paper we present a conceptual framework linking cultural heterogeneity to inter-group conflict. When conflict is about control of public goods, more heterogeneous groups are expected to fight more with each other. In contrast, when conflict is about rival goods, more similar groups are more likely to engage in war with each other. We formalize these ideas within an analytical model and discuss recent empirical studies that are consistent with the model's implications.
    Keywords: rival goods, public goods, war, conflict, heterogeneity, cultural distance
    JEL: D74
    Date: 2016
  10. By: Karle, Heiko; Peitz, Martin; Reisinger, Markus
    Abstract: For many products, platforms enable sellers to transact with buyers. We show that the competitive conditions among sellers shape the market structure in platform industries. If product market competition is tough, sellers avoid competitors by joining different platforms. This allows platforms to sustain high fees and explains why, for example, in some online markets, several homogeneous platforms segment the market. Instead, if product market competition is soft, agglomeration on a single platform emerges, and platforms fight for the dominant position. These insights give rise to novel predictions. For instance, market concentration and fees are negatively correlated in platform industries, which inverts the standard logic of competition.
    Keywords: intermediation , two-sided markets , market structure , price competition , endogenous segmentation
    JEL: L13 D43
    Date: 2017
  11. By: Giacomo Ponzetto (CREI, U. Pompeu Fabra, IPEG, & Barcelona); Nicola Gennaioli (Bocconi University)
    Abstract: Many real-world contracts contain vague clauses despite the enforcement risk they entail. To study the causes and consequences of this phenomenon, we build a principal-agent model in which contracts can include vague clauses whose enforcement may be distorted by opportunistic litigants and biased judges. We find three results. First, the optimal contract is vague, even if courts are very imperfect. Second, the use of vague clauses is a public good: it promotes the evolution of precedents, so future contracts become more complete, incentives higher powered, and surplus larger. Third, as precedents evolve, vague contracts spread from sophisticated to unsophisticated parties, expanding market size. Our model sheds light on the evolution and diffusion of business-format franchising and equity finance.
    Date: 2017
  12. By: Barigozzi, Francesca (University of Bologna); Cremer, Helmuth (Toulouse School of Economics); Roeder, Kerstin (University of Augsburg)
    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. Specifically, 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 effectively make the marriage decision more efficient; it may increase the number of efficient marriages that otherwise may not be concluded.
    Keywords: marriage penalty, marriage bonus, proposal game, signaling
    JEL: J12 D82 H31
    Date: 2017–10
  13. By: Inés Macho-Stadler; David Pérez-Castrillo; David Wettstein
    Abstract: Shapley (1953a) formulates his proposal of a value for cooperative games with transferable utility in characteristic function form, that is, for games where the re- sources every group of players has available to distribute among its members only depend on the members of the group. However, the worth of a coalition of agents often depends on the organization of the rest of the players. The existence of exter- nalities is one of the key ingredients in most interesting economic, social, or political environments. Thrall and Lucas (1963) provide the first formal description of set- tings with externalities by introducing the games in partition function form. In this chapter, we present the extensions of the Shapley value to this larger set of games. The different approaches that lead to the Shapley value in characteristic function form games (axiomatic, marginalistic, potential, dividends, non-cooperative) provide alternative routes for addressing the question of the most suitable extension of the Shapley value for the set of games in partition function form.
    Keywords: shapley value, Externalities
    JEL: C71 D62
    Date: 2017–11
  14. By: Mario Samano; Marc Santugini
    Abstract: We analyze the type of market structures that arise in the long-run when quality externalities and asymmetric R&D capabilities exist in the context of a quality-ladder dynamic model. An example of such externalities is a patent release by the leading fi rm: an improvement of quality of this firm's good a ects the quality of the other fi rms' products. This externality can be thought of as an increase in compatibility in a network. We show that it is possible for this model to generate, in the long-run, multi-modal probability distributions over di fferent market structures from the same parameter values. In some cases, the lagging rm may even become the dominant fi rm depending on the degree of the externality. This may have implications for the estimation and simulation of this class of models.
    Keywords: Differentiated-good markets,Quality-ladder model,Externalities,Industry dynamics,Market structures,
    JEL: C61 C73 L13
    Date: 2017–11–15
  15. By: Brennan Platt (Brigham Young University); Nuray Akin (Ozyegin University, School of Business)
    Abstract: This paper presents a novel approach to the theory of fire sales, where an asset is sold for a price below its fundamental value. Specifically, we model the “urgency to sell” motivation that pushes some unlucky sellers in the market to become anxious (desperate) about liquidating their asset because failing to do so would cause them to incur a cost. Homogenous buyers strategically choose when to enter the market and what price to offer, knowing that some sellers are more motivated, but do not know the type of the seller they meet. We characterize equilibrium prices in this economy both in the steady state and on the transition path as the economy converges to a new steady state after a permanent demand shock. We find that prices oscillate, rather than monotonically converging to the steady state. Moreover, the dynamic behavior of prices indicate overshooting, where sometimes prices fall below their long run equilibrium value and rise above it, depending on the proportion of desperate to relaxed sellers as well as the number of buyers that would clear the market.
    Date: 2017

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