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

  1. Damned if You Do and Damned if You Don't: Two Masters By Rohan Dutta; David K Levine; Salvatore Modica
  2. Contract (re-)negotiation with private and common values By Gretschko, Vitali; Wambach, Achim
  3. On the Value of Persuasion by Experts By Alonso, Ricardo; Câmara, Odilon
  4. The problem of aggregating experts?' opinions to select the winner of a competition By Pablo Amorós
  5. Imitation perfection: A simple rule to prevent discrimination in procurement By Mass, Helene; Fugger, Nicolas; Gretschko, Vitali; Wambach, Achim
  6. A Pure Hedonic Theory of Utility and Status: Unhappy but Efficient Invidious Comparisons By Courty, Pascal; Engineer, Merwan
  7. Network Formation with Multigraphs and Strategic Complementarities By Sumit Joshi; Sudipta Sarangi; Ahmed Saber Mahmud
  8. An evolutionary analysis of bidding behaviour in fair division games By Werner Güth; Paul Pezanis-Christou
  9. Cascading Defections from Cooperation Triggered by Present-Biased Behaviors in the Commons By Persichina, Marco
  10. Preferences and decision support in competitive bidding By Fugger, Nicolas; Gillen, Philippe; Rasch, Alexander; Zeppenfeld, Christopher
  11. Choice on the simplex domain By Bossert, Walter; Peters, Hans
  12. Hierarchical Bank Supervision By Repullo, Rafael
  13. Commitment to norms and the formation of institutions By Pietro Guarnieri
  14. Analysis of Merger Control in A Network Products Market By Tsuyoshi Toshimitsu
  15. The Effect of Democratic Decision Making on Investment in Reputation By BEN-YASHAR, Ruth; KRAUSZ, Miriam; NITZAN, Shmuel

  1. By: Rohan Dutta; David K Levine; Salvatore Modica
    Date: 2017–12–05
  2. By: Gretschko, Vitali; Wambach, Achim
    Abstract: We analyze the contracting problem of a principal who faces an agent with private information and cannot commit to not renegotiating a chosen contract. We model this by allowing the principal to propose new contracts any number of times after observing the contract choice of the agent. We propose a characterization of renegotiation-proof states of this (re-)negotiation and show that those states are supported by a perfect Bayesian equilibrium of an infinite horizon game. The characterization of renegotiation-proof states provides a tool, which is both powerful and simple to use, for finding such states in specific environments. We proceed by applying the results to adverse selection environments with private and common values. We show that with private values and common values of the "Spence" type only, fully efficient and separating states can be renegotiation-proof. With common values of the "Rothschild-Stiglitz" type inefficient and (partial) pooling states may be renegotiation-proof.
    Keywords: principal-agent models,renegotiation,Coase-conjecture
    JEL: C73 C78 D82
    Date: 2017
  3. By: Alonso, Ricardo; Câmara, Odilon
    Abstract: We consider a persuasion model in which a sender influences the actions of a receiver by selecting an experiment (public signal) from a set of feasible experiments. We ask: does the sender benefit from becoming an expert - observing a private signal prior to her selection? We provide necessary and sufficient conditions for a sender to never gain by becoming informed. Our key condition (sequential redundancy) shows that the informativeness of public experiments can substitute for the sender's expertise. We then provide conditions for private information to strictly benefit or strictly hurt the sender. Expertise is beneficial when the sender values the ability to change her experimental choice according to her private information. When the sender does not gain from expertise, she is strictly hurt when different types cannot pool on an optimal experiment.
    Keywords: Bayesian persuasion; experts.; information design
    JEL: D83
    Date: 2017–12
  4. By: Pablo Amorós (Department of Economics, University of Málaga)
    Abstract: The honest opinions of a group of experts must be aggregated to determine the deserving winner of a competition. The aggregation procedure is majoritarian if, whenever a majority of experts honestly believe that a contestant is the best one, then that contestant is considered the deserving winner. The fact that an expert believes that a contestant is the best one does not necessarily imply that she wants this contestant to win as, for example, she might be biased in favor of some other contestant. Then, we have to design a mechanism that implements the deserving winner. We show that, if the aggregation procedure is majoritarian, such a mechanism exists only if the experts are totally impartial. This impossibility result is very strong as it does not depend on the equilibrium concept considered. Moreover, the result still holds if we replace majoritarianism by anonymity and other reasonable property called respect for the jury. The impossibility result is even stronger if we focus on Nash implementation: no majoritarian aggregation procedure can be Nash implemented even if the experts are totally impartial.
    Keywords: mechanism design; aggregation of experts? opinions; jury
    JEL: C72 D71 D78
    Date: 2017–11
  5. By: Mass, Helene; Fugger, Nicolas; Gretschko, Vitali; Wambach, Achim
    Abstract: Procurement regulation aimed at curbing discrimination requires equal treatment of sellers. However, Deb and Pai (2017) show that such regulation imposes virtually no restrictions on the ability to discriminate. We propose a simple rule - imitation perfection - that restricts discrimination significantly. It ensures that in every equilibrium bidders with the same value distribution and the same valuation earn the same expected surplus. If all bidders are homogeneous, revenue and social surplus optimal auctions which are consistent with imitation perfection exist. For heterogeneous bidders however, it is incompatible with revenue and social surplus optimization. Thus, a trade-off between non-discrimination and optimality exists.
    Keywords: discrimination,symmetric auctions,procurement regulation
    JEL: D44 D73 D82 L13
    Date: 2017
  6. By: Courty, Pascal; Engineer, Merwan
    Abstract: We examine status preferences where agents compare their own utility relative to the utilities of others, in addition to valuing own consumption. The utility functions are, therefore, implicit functions of each other. As long as status utility comparisons are not too intense, they do not affect either the competitive equilibrium or the set of efficient allocations. However, status utility comparison may substantially reduce average utility and dramatically increase utility inequality. Equating utility with happiness operationalizes the theory and provides an explanation to the puzzle of why invidious comparisons can generate so much unhappiness without much inefficiency. Our theory has very different welfare and political economy implications from other status theories, even when reduced form representations appear observationally equivalent.
    Keywords: Conspicuous consumption; Happiness; inequality; rat race; reference group; Status; utility; welfare
    JEL: D10
    Date: 2017–12
  7. By: Sumit Joshi (George Washington University); Sudipta Sarangi (Virginia Tech); Ahmed Saber Mahmud (Johns Hopkins University)
    Abstract: Economic agents are typically connected to others in multiple network relationships, and the archi- tecture of one network could be shaped by connections in other networks. This paper examines the formation of one network when connections in a second network are inherited under two scenarios: (i) the inherited network is asymmetric allowing for a wide range of graphs called nested split graphs, and (ii) the inherited network is a symmetric type of network belonging to a subclass of regular graphs. Both the inherited and endogenously formed networks are interdependent because the respective actions in each are (weak) strategic complements. This property is su¢ cient to show that those who inherit high centrality will continue to have high centrality. Additionally, the network formed by the agents induces a coarser partition than the inherited network, suggesting the possibility of being able to improve network centrality, but only in a limited manner. Thus, our analysis explains preferential attachment and why inequality is often entrenched in society, how asymmetries in one network may be magniÖed or diminished in another, and what determines the identity of players occupying the various vertices of asymmetric equilibrium networks.
    Keywords: Network formation, multigraphs, strategic complementarities, Katz-Bonacich centrality, nested split graphs
    JEL: C72 D85
    Date: 2017
  8. By: Werner Güth (Max Planck Institute for Collective Goods (Bonn) and LUISS (Rome)); Paul Pezanis-Christou (School of Economics, University of Adelaide)
    Abstract: We justify risk neutral equilibrium bidding in commonly known fair division games with incomplete information and counterfactual considerations via (i) optimally responding to individual conjectural beliefs concerning other bidders' behavior, what avoids counterfactual bidding, and (ii) determining the evolutionarily stable conjectural beliefs when fitness is measured by expected payoffs, what does not require common knowledge. Compared to auctions, fair division games feature interactive bidding contests in closed groups due to sharing the sales price equally among bidders. We axiomatically justify the game forms of first- and second-price fair division games, the former (latter) being over-bidding (under-bidding) proof, and we provide a condition for evolutionarily stable bidding to coincide with equilibrium bidding irrespectively of the number of bidders.
    Date: 2017–10
  9. By: Persichina, Marco
    Abstract: This work shows that defective behaviors from the cooperative equilibrium in the management of common resources can be fueled and triggered by the presence of agents with myopic behaviors; a similar phenomenon is also possible with cooperative motivations. This paper demonstrates and discusses that the apparent and detectable decay of the cooperative choices in the dilemmas of common resources are not an exclusive and indisputable signal of an escalation in free-riding intentions, but can also be an outcome of the present-biased preferences and myopic behaviors of the cooperative agents. In fact, within the context populated by conditional cooperators with a heterogeneous myopic discount factor, in the absence of information about agents’ intentions, the present-biased preferences can trigger a strategy that directs the community to excessively increase its harvesting level, even in presence of the other-regarding motives. The behavior implemented by naïve agents, even if done with cooperative intent, can activate a dynamic of cascading defections from the cooperative strategy within the harvester group. Therefore, a lowering of the cooperative behaviors can also be the effect of the absence of coordination instruments in response to the cognitive bias that influences human behaviors.
    Keywords: Present bias, Commons, Cooperation, Cascading Defections, Naïve Agent.
    JEL: C71 C73 D03 D90 Q20 Q29
    Date: 2016–07–20
  10. By: Fugger, Nicolas; Gillen, Philippe; Rasch, Alexander; Zeppenfeld, Christopher
    Abstract: We examine bidding behavior in first-price sealed-bid and Dutch auctions, which are strategically equivalent under standard preferences. We investigate whether the empirical breakdown of this equivalence is due to (non-standard) preferences or due to the different complexity of the two formats (i.e., a different level of mathematical/ individual sophistication needed to derive the optimal bidding strategy). We first elicit measures of individual preferences and then manipulate the degree of complexity by offering various levels of decision support. Our results show that the equivalence of the two auction formats only breaks down in the absence of decision support. This indicates that the empirical breakdown is caused by differing complexity between the two formats rather than non-standard preferences.
    Keywords: Auctions,Decision support system,Experiment,Loss aversion,Preferences
    JEL: D44 D81
    Date: 2017
  11. By: Bossert, Walter (centre interuniversitaire de recherche en economie quantitative (cireq)); Peters, Hans (QE / Mathematical economics and game the)
    Abstract: One unit of a good has to be divided among a group N of individuals who each are entitled to a minimal share and these shares sum up to less than one. The associated set of choice problems consists of the unit simplex and all its full-dimensional subsimplices with the same orientation. We characterize all choice rules that are independent of irrelevant alternatives, continuous, and monotonic. The resulting rules are what we refer to as N-path choice functions. If there are only three individuals, the monotonicity property can be weakened. We also consider the issue of rationalizability and show that, for the threeagent case, excluding cycles of length three in the revealed preference relation implies the strong axiom of revealed preference, that is, the exclusion of cycles of any length.
    Keywords: choice functions, simplex domain, rationalizability
    JEL: D11 D71
    Date: 2017–12–05
  12. By: Repullo, Rafael
    Abstract: This paper presents a model in which a central and a local supervisor contribute their efforts to obtain information on the solvency of a local bank, which is then used by the central supervisor to decide on its early liquidation. This hierarchical model is contrasted with the alternatives of decentralized and centralized supervision, where only the local or the central supervisor collects information and decides on liquidation. The local supervisor has a higher bias against liquidation (supervisory capture) and a lower cost of getting local information (proximity). Hierarchical supervision is the optimal institutional design when the bias of the local supervisor is high but not too high and the costs of getting local information from the center are low but not too low. With low (high) bias and high (low) cost it is better to concentrate all responsibilities in the local (central) supervisor.
    Keywords: bank liquidation; bank solvency; Centralized vs decentralized supervision; optimal institutional design.; strategic information acquisition; supervisory capture
    JEL: D02 G21 G23
    Date: 2017–12
  13. By: Pietro Guarnieri
    Abstract: The paper discusses Searle's description of institutions in terms of deontological constitutive rules and collective recognition. It aims at integrating Searlian conception of commitment with an epistemology of rule-following capable to illustrate processes of formation of institutions. Social ontology per se cannot account for the formation of constitutive rules. Actually, it requires taking as given the object of collective recognition, i.e. the specific content of status functions. The hypothesis of interactive intentionality is introduced to account for the commitment to status functions as the result of an interactive decision-making process concerning alternative constitutive definitions. This interactive process, by acting on the normative interpretation of decision contexts, frames relevance and salience criteria and grounds the formation of institutions. Interactive intentionality hypothesis offers the opportunity to make social-ontological approach based on commitment theoretically commensurable with social-scientific approach based on equilibria and self-enforcement.
    Keywords: institutions, rule-following, conflict, formation
    JEL: B15 B31 B40
    Date: 2017–01–01
  14. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Using a horizontally differentiated three-firm model, we consider horizontal merger and antitrust policy in a network products market, where we observe network externalities and compatibilities (interconnectivities) between products and services. In particular, if the degree of network compatibilities in the case of a merger is sufficiently larger than that of product substitutability, consumer surplus is larger than in the premerger case. Thus, the proposed merger is allowed by antitrust authorities based on the positive effect on consumer surplus. In this case, the merger is Pareto improving.
    Keywords: horizontal merger; antitrust policy; network externality; compatibility; consumer surplus standard; horizontally differentiated Cournot competition
    JEL: D43 K21 L12 L15 L41
    Date: 2017–11
  15. By: BEN-YASHAR, Ruth; KRAUSZ, Miriam; NITZAN, Shmuel
    Abstract: Students wish to increase the probability of being admitted to a prestigious school. Job candidates are interested in the probability of getting a desirable job. Defendants are concerned about the probability of being acquitted. In all such binary settings, the probability of the desirable outcome to individuals can be affected by their reputation. Applying a standard uncertain dichotomous choice benchmark setting, we focus on how the nature of the applied decision-making rule affects the individuals' incentive to invest in improvement of their reputation. Our main results establish that a democratic (non - democratic) decision-making system based on the simple majority (unanimity) rule ensures maximal (minimal) marginal productivity of reputation that increases (decreases) with the size of the decision-making committee.
    Keywords: decision making structure, investment in reputation
    JEL: D7
    Date: 2017–11

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