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on Microeconomics |
| By: | Akira Okada (Kyoto University) |
| Abstract: | While the theory of incomplete contracts has contributed greatly to our understanding many topics such as the nature and financial struc- ture of the firm, its rigorous foundation has been debated. Maskin and Tirole (1999) show that the usual "observable but not verifiable" as- sumption is not sufficient for the incomplete contract to be optimal, provided that parties can commit themselves not to renegotiate. We show that the assumption is not necessary, either. In sequential bar- gaining where parties can write a contract contingent on (ex post) veri- fiable variables, an equilibrium contract turns out to be a null contract (the ex post Nash bargaining solution). A key to our result is endoge- nous revealing of private information during contract negotiations. The possibility of renegotiations is irrelevant. |
| Keywords: | incomplete contract; ex post Nash bargaining solution; information revealing; sequential bargaining; verifiability |
| JEL: | C72 C78 D82 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:982&r=mic |
| By: | Matthew Ellman; Sjaak Hurkens |
| Abstract: | Strausz (2017) claims that crowdfunding implements the optimal mechanism design outcome in an environment with entrepreneurial moral hazard and private cost information. Unfortunately, his analysis, solution and claim depend critically on imposing an untenable condition (29) that he had explicitly discarded from his weak feasibility concept.1 This condition is essentially equivalent to ex post participation. We explain why it is inconsistent to assume consumers can opt out after learning the entrepreneur's cost structure in a model of fraud. We then study weak feasibility without the corresponding ex post participation constraint. We provide a simple example of a crowdfunding design that raises profit and welfare by tolerating some fraud risk. This shows how cross-subsidizing between cost states relaxes the most restrictive moral hazard constraints and generates better outcomes. We then characterize the optimal mechanism in the case of one consumer and two cost states. In general, this must hide information, including prices, from consumers. So crowdfunding cannot implement these optima. |
| Keywords: | crowfunding, Mechanism Design, moral hazard, private information |
| JEL: | C72 D42 D81 D82 D86 L12 L26 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1012&r=mic |
| By: | Victor H. Aguiar; Roberto Serrano |
| Abstract: | We present a new notion of cardinal revealed preference that exploits the expenditure information in classical consumer theory environments with finite data. We propose a new behavioral axiom, Acyclic Enticement (AE), that requires the acyclicity of the cardinal revealed-preference relation. AE is logically independent from the Weak Axiom of Revealed Preference (WARP). We show that the Generalized Axiom of Revealed Preference (GARP), which characterizes the standard rational consumer, is logically equivalent to AE and WARP. We propose a new notion of rationalization by means of a price-dependent utility function that characterizes AE, which in particular is suitable for welfare analysis. We also propose a consistency condition for preference functions that is equivalent to WARP. We use our axiomatic decomposition to show, in experimental and scanner consumer-panel data sets, that AE explains the majority of the predictive success of GARP. Moreover, AE taken alone is superior in predictive success to both WARP and GARP. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2018-3&r=mic |
| By: | Dertwinkel-Kalt, Markus; Wenzel, Tobias |
| Abstract: | This paper develops a theory of focusing and framing in an intertemporal context with risky choices. We provide a selection criterion between existing theories of fo- cusing by allowing a decision maker to choose her frame such that her attention is either drawn to salient events associated with an option or to the expected utilities an option yields in different time periods. Our key assumption is that a decision maker can choose her frame in a self-serving manner. We predict that the selected frame induces overoptimistic actions in the sense that subjects underrate downside risk but overrate upside risk and accordingly reveal overoptimistic choices. Hence, our theory can explain phenomena such as excessive harmful consumption (smoking, unhealthy diet) and risky investments (entrepreneurship, lotteries, gambling) in one coherent framework. Notably, overoptimistic actions are not universal, but have plausible limits. We characterize under which situations overoptimistic actions are most likely to occur and under which circumstances choices should be rational or even pessimistic. |
| Keywords: | Focusing,Salience,Framing,Overoptimism |
| JEL: | D03 D11 D90 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:279&r=mic |
| By: | Krishna Dasaratha; Benjamin Golub; Nir Hak |
| Abstract: | Bayesian agents learn about a moving target, such as a commodity price, using private signals and their network neighbors' estimates. The weights agents place on these sources of information are endogenously determined by the precisions and correlations of the sources; the weights, in turn, determine future correlations. We study stationary equilibria-ones in which all of these quantities are constant over time. Equilibria in linear updating rules always exist, yielding a Bayesian learning model as tractable as the commonly-used DeGroot heuristic. Equilibria and the comparative statics of learning outcomes can be readily computed even in large networks. Substantively, we identify pervasive inefficiencies in Bayesian learning. In any stationary equilibrium where agents put positive weights on neighbors' actions, learning is Pareto inefficient in a generic network: agents rationally overuse social information and underuse their private signals. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1801.02042&r=mic |
| By: | Jaroslav Borovička; John Stachurski |
| Abstract: | We study existence, uniqueness and stability of solutions for a class of discrete time recursive utilities models. By combining two streams of the recent literature on recursive preferences - one that analyzes principal eigenvalues of valuation operators and another that exploits the theory of monotone concave operators - we obtain conditions that are both necessary and sufficient for existence and uniqueness. We also show that the natural iterative algorithm is convergent if and only if a solution exists. Consumption processes are allowed to be nonstationary. |
| JEL: | D81 G11 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24162&r=mic |
| By: | Guimaraes, Bernardo; Sheedy, Kevin D. |
| Abstract: | This paper presents a theory of political specialization in which some countries uphold the rule of law while others consciously choose not to do so, even though they are ex ante identical. This is borne out of two key insights: for incumbents in each country, (i) the first steps to the rule of law have the greatest private cost, and (ii) steps taken by some countries in the direction of the rule of law make it less attractive for others to follow the same path. The world equilibrium features a symbiotic relationship between despotic and rule-of-law economies: by producing technology-intensive goods that require protection of property rights, rule-of-law economies raise the relative price of natural resources and increase incentives for despotism in other countries; while the choice of despotism entails a positive externality because cheap oil makes the rule of law more attractive elsewhere in the world. |
| Keywords: | rule of law; power sharing; international trade; resource curse; development. |
| JEL: | D74 F43 P48 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:86164&r=mic |
| By: | Daron Acemoglu; Ali Makhdoumi; Azarakhsh Malekian; Asuman Ozdaglar |
| Abstract: | This paper develops a model of Bayesian learning from online reviews, and investigates the conditions for asymptotic learning of the quality of a product and the speed of learning under different rating systems. A rating system provides information about reviews left by previous customers. A sequence of potential customers decide whether to join the platform. After joining and observing the ratings of the product, and conditional on her ex ante valuation, a customer decides whether to purchase or not. If she purchases, the true quality of the product, her ex ante valuation, an ex post idiosyncratic preference term and the price of the product determine her overall satisfaction. Given the rating system of the platform, she decides to leave a review as a function of her overall satisfaction. We study learning dynamics under two classes of rating systems: full history, where customers see the full history of reviews, and summary statistics, where the platform reports some summary statistics of past reviews. In both cases, learning dynamics are complicated by a selection effect — the types of users who purchase the good and thus their overall satisfaction and reviews depend on the information that they have available at the time of their purchase. We provide conditions for asymptotic learning under both full history and summary statistics, and show how the selection effect becomes more difficult to correct for with summary statistics. Conditional on asymptotic learning, the speed (rate) of learning is always exponential and is governed by similar forces under both types of rating systems, though the exact rates differ. Using this characterization, we provide the rate of learning under several different types of rating systems. We show that providing more information does not always lead to faster learning, but strictly finer rating systems always do. We also illustrate how different rating systems, with the same distribution of preferences, can lead to very fast or very slow speeds of learning. |
| JEL: | C72 D83 L15 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24046&r=mic |
| By: | David Hirshleifer; Chong Huang; Siew Hong Teoh |
| Abstract: | Ambiguity aversion alone does not explain the market nonparticipation puzzle. We show that in a rational expectations equilibrium model with a fund offering the risk-adjusted market portfolio (RAMP), ambiguity averse investors hold the fund and an information-based portfolio, and thus participate in all asset markets, directly or indirectly. This result follows from a new separation theorem which states that an investor’s equilibrium portfolio can be decomposed into components, each matching the optimal portfolio based on only one information source (price versus private signal). Asset risk premia satisfy the CAPM with the fund as the pricing portfolio. |
| JEL: | F3 G11 G12 G14 G15 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24143&r=mic |
| By: | Akerlof, George; Michaillat, Pascal |
| Abstract: | This paper develops a theory of promotion based on evaluations by the already promoted. The already-promoted show favoritism toward candidates with similar beliefs, just as beetles are more prone to eat the eggs of other species. With such egg-eating bias, false beliefs may not be eliminated by the promotion system. The main application is to scientific revolutions: when tenured scientists show favoritism toward tenure candidates with similar beliefs, science may not converge to the true paradigm. We extend the statistical concept of power to science: the power of the tenure test is the probability (absent any bias) of denying tenure to a scientist who adheres to the false paradigm, just as the power of any statistical test is the probability of rejecting a false null hypothesis. The power of the tenure test depends on the norms regarding the appropriate criteria to use in promotion and the empirical evidence available to apply these criteria. Economics and other social sciences are particularly at risk of capture by false paradigms because they have low power. Another application is to hierarchical organizations. |
| JEL: | I23 M51 Z13 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12514&r=mic |
| By: | Ottorino Chillemi (University of Padova); Stefano Galavotti (University of Padova); Benefetto Gui (Unviersity of Padova) |
| Abstract: | We study a contractual design problem between a seller and a buyer where some information correlated with the buyer's valuation is publicly observed ex-post and the allocation, but not payments, can be made contingent on it. Our analysis shows that, to maximize her profit, the seller should offer one contract in which the good is transferred to the buyer only if the ex-post signal turns out to be bad; this generates inefficient rationing: some buyers with low valuation are assigned the good more often than others with higher valuation. We show that, in contrast with previous results, the optimal contract may decrease social welfare relative to the case in which no signal is available (or it is not used). We apply our model to interpret two real-world situations: internet plans with bandwidth caps for mobile phones and promotion schemes in organizations with exogenously fixed wages. |
| Keywords: | rationing, ex-post information, mechanism design. |
| JEL: | D82 D86 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0214&r=mic |
| By: | Englmaier, Florian (LMU Munich); Fahn, Matthias (JKU Linz) |
| Abstract: | The corporate finance literature documents that managers tend to over-invest in their companies. A number of theoretical contributions have aimed at explaining this stylized fact, most of them focusing on a fundamental agency problem between shareholders and managers. The present paper shows that over-investments are not necessarily the (negative) consequence of agency problems between shareholders and managers, but instead might be a second-best optimal response to address problems of limited commitment and limited liquidity. If a firm has to rely on relational contracts to motivate its workforce, and if it faces a volatile environment, investments into general, non-relationship-specific, capital can increase the efficiency of a firm\'s labor relations. |
| Keywords: | relational contracts; corporate finance; capital investments; |
| JEL: | C73 D21 D86 G32 |
| Date: | 2018–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:62&r=mic |
| By: | N. Packham |
| Abstract: | In a continuous-time setting where a risk-averse agent controls the drift of an output process driven by a Brownian motion, optimal contracts are linear in the terminal output; this result is well-known in a setting with moral hazard and -under stronger assumptions - adverse selection. We show that this result continues to hold when in addition reservation utilities are type-dependent. This type of problem occurs in the study of optimal compensation problems involving competing principals. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1801.04080&r=mic |
| By: | Kinda Hachem (University of Chicago); Ana Babus (Chicago FED) |
| Abstract: | Standardized financial securities are frequently traded in over-the-counter markets. This is difficult to reconcile with the view that these markets exist to facilitate the trade of customized contracts. We build a model of financial innovation to explain why standardized securities can be traded in decentralized markets. In our set-up, each dealer designs a security which specifies a payoff for every state of the world. The dealer chooses the states in which the payoff is flat and the states in which the payoff is contingent on the realized state of the world. Investors choose which securities to trade, taking into account how their trades may impact the price of each security. The market structure in which a given security is traded is determined endogenously. We characterize which securities are traded in decentralized rather than centralized markets. We also study the effects of regulations that force all trade to take place in centralized markets. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1212&r=mic |
| By: | Maryam Farboodi; Gregor Jarosch; Guido Menzio |
| Abstract: | We propose a theory of intermediation as rent extraction, and explore its implications for the extent of intermediation, welfare and policy. A frictional asset market is populated by agents who are heterogeneous with respect to their bargaining skills, as some can commit to take-it-or-leave-it offers and others cannot. In equilibrium, agents with commitment power act as intermediaries and those without act as final users. Agents with commitment trade on behalf of agents without commitment to extract more rents from third parties. If agents can invest in a commitment technology, there are multiple equilibria differing in the fraction of intermediaries. Equilibria with more intermediaries have lower welfare and any equilibrium with intermediation is inefficient. Intermediation grows as trading frictions become small and during times when interest rates are low. A simple transaction tax can restore efficiency by eliminating any scope for bargaining. |
| JEL: | D40 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24171&r=mic |
| By: | Wolton, Stephane |
| Abstract: | Informational asymmetries have long been recognized as one of the causes of wasteful conflicts. Signaling has been found to be an effective tool for interested parties to truthfully communicate private information. Can signaling help reduce the risk of conflict? I study this question in a model in which a Sender sends a signal about his privately known cost of conflict, a Receiver makes an offer, and the Sender decides whether or not to start a conflict. I find that when the outcomes of a conflict do not depend on previous actions such as wars where the winner gains the disputed territory, signaling does not permit any information transmission. In turn, when the outcomes of a conflict depends on the Receiver's offer, signaling can help avoid war, but only under specific conditions. In all cases, the shadow of conflict looms large and renders signaling totally or relatively ineffective in preventing conflict. |
| Keywords: | war, plea bargain, lobbying, conflict, signaling, information |
| JEL: | D70 D74 D80 D83 |
| Date: | 2018–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83922&r=mic |
| By: | Fumagalli, Chiara; Motta, Massimo |
| Abstract: | This paper shows that vertical foreclosure can have a dynamic rationale. By refusing to supply an efficient downstream rival, a vertically integrated incumbent sacrifices current profits but can exclude the rival by depriving it of the critical profits (or sales) it needs to be successful. In turn, monopolising the downstream market may prevent the incumbent from losing its future profits because: (a) it allows the incumbent to extract rents from an efficient upstream rival if future upstream entry cannot be discouraged; or (b) it also deters future upstream entry by weakening competition for the input and reducing the post-entry profits of the prospective upstream competitor. |
| Keywords: | Exclusion; Inefficient foreclosure; Monopolisation; Refusal to supply |
| JEL: | K21 L41 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12498&r=mic |
| By: | Donaldson, Jason Roderick; Malenko, Nadya; Piacentino, Giorgia |
| Abstract: | We develop a dynamic model of board decision making. We show that directors may knowingly retain the policy they all think is the worst just because they fear they may disagree about what policy is best in the future-the fear of deadlock begets deadlock. Board diversity can exacerbate deadlock. Hence, shareholders may optimally appoint a biased director to avoid deadlock. On the other hand, the CEO may appoint unbiased directors, or even directors biased against him, to create deadlock and thereby entrench himself. Still, shareholders may optimally give the CEO some power to appoint directors. Our theory thus gives a new explanation for CEO entrenchment. It also gives a new perspective on director tenure, staggered boards, and short-termism. |
| Keywords: | CEO turnover; Corporate Boards; deadlock; director elections; entrenchment |
| JEL: | G34 M12 M14 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12503&r=mic |
| By: | Akira Okada (Kyoto University) |
| Abstract: | We present a non-cooperative sequential bargaining game for side payments contracting. Players voluntarily participate in negotiations. If any player does not participate, then renegotiation will take place in the next round, given an on-going contract. We show that if the stop- ping probability of negotiations is sufficiently small, then there exists an efficient Markov perfect equilibrium where all players immediately par- ticipate in negotiations and agree to the Nash bargaining solution. The efficiency result is strengthened by the asymptotically efficient one that in every Markov perfect equilibrium, all players participate in negotia- tions through a process of renegotiations in the long run with probability one. Finally, we illustrate international negotiations for climate change as an application of the result. |
| Keywords: | Coase theorem, contract, efficiency, externality, Nash bar- gaining solution, non-cooperative bargaining, side payments |
| JEL: | C71 C72 C78 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:983&r=mic |
| By: | Denicolò, Vincenzo; Polo, Michele |
| Abstract: | We show that in the model of Federico, Langus and Valletti (2017) [A simple model of mergers and innovation, Economics Letters, 157, 136-140] horizontal mergers may actually spur innovation by preventing duplication of R&D efforts. This possibility is more likely, the greater is the value of innovations, the less rapidly diminishing are the returns to R&D, and the more highly correlated are the R&D projects of different firms. Federico, Langus and Valletti (2017) do not obtain this result because they focus only on the case in which the merged firm spreads total R&D expenditure evenly across the individual research units of the merging firms -- a strategy which is optimal, however, only if the returns to R&D diminish sufficiently rapidly. |
| Keywords: | Horizontal mergers; Innovation |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12511&r=mic |