nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒01‒29
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Price of Discovering Your Needs Online By E. Carroni; L. Ferrari; S. Righi
  2. A two-dimensional control problem arising from dynamic contracting theory By Décamps, Jean-Paul; Villeneuve, Stéphane
  3. Linear voting rules By Hans Peter Grüner; Thomas Tröger
  4. Characterizing Assumption of Rationality by Incomplete Information By Shuige Liu
  5. Tying the Politicians’ Hands: The Optimal Limits to Representative Democracy By Didier Laussel
  6. Saving and Dissaving with Hyperbolic Discounting By Ivan Werning; Dan Cao
  7. Natural Instability of Equilibrium Prices By Dmitry Levando; Maxim Sakharov
  8. Mergers, investments and demand expansion By Bourreau, Marc; Jullien, Bruno
  9. On supply function competition in a mixed oligopoly By Gutiérrez-Hita, Carlos; Vicente-Pérez, José
  10. Competing Sales Channels By David Ronayne; Greg Taylor
  11. Taxes and Turnout By Felix Bierbrauer; Aleh Tsyvinski; Nicolas D. Werquin
  12. Symmetric vs asymmetric equilibria and stochastic stability in a dynamic game of legislative lobbying By Raouf Boucekkine; Fabien Prieur; Benteng Zou
  13. Patent Protection, Optimal Licensing, and Innovation with Endogenous Entry By Suzuki, Keishun
  14. Optimal dividend policies with random profitability By Mete Soner, H.; Reppen, Max; Rochet, Jean-Charles
  15. Nonlinear incentives and advisor bias By Jun Honda; Roman Inderst

  1. By: E. Carroni; L. Ferrari; S. Righi
    Abstract: Thanks to new digital technologies, web users are continuously targeted by offers that potentially fit their interests even if they are not actively looking for a product. Does this matching always promote transactions with high social value? We consider a model in which web users with state-contingent preferences are targeted by relevant banners. We characterize the optimal strategy of a seller who, in addition to the price of the offered good, designs a banner. We show that, in equilibrium, there is a positive relationship between the price of the offered good and the accuracy of the banner sent to users. Then, we consider the strategic decision of a Platform that attracts sellers because of its targeting abilities and we underline that a reduction in seller's costs may translate into less informative banners and lower prices, fueling purchases of goods that rational individuals may regret due to the persuasive nature of banners.
    JEL: D80 D82 D83 L10 M37
    Date: 2018–01
  2. By: Décamps, Jean-Paul; Villeneuve, Stéphane
    Abstract: We study a corporate finance dynamic contracting model in which the firm's growth rate fluctuates and is impacted by the unobservable effort exercised by the manager. We show that the principal's problem takes the form of a two-dimensional Markovian control problem. We prove regularity properties of the value function that are instrumental in the construction of the optimal contract that implements full effort, which we derive explicitly. These regularity results appear in some recent economic studies but with heuristic proofs that do not clarify the importance of the regularity of the value function at the boundaries.
    Keywords: Principal-agent problem; two-dimensional control problem; regularity properties
    JEL: G30
    Date: 2018–01
  3. By: Hans Peter Grüner; Thomas Tröger
    Abstract: How should a society choose between two social alternatives if participation in the decision process is voluntary and costly and monetary transfers are not feasible? Considering symmetric voters with private valuations, we show that it is utilitarian-optimal to use a linear voting rule: votes get alternativedependent weights, and a default obtains if the weighted sum of votes stays below some threshold. Standard quorum rules are not optimal. We develop a perturbation method to characterize equilibria in the case of small participation costs and show that leaving participation voluntary increases welfare for linear rules that are optimal under compulsory participation.
    Keywords: Network effects, two-sided markets, platform competition, competitive bottleneck, multihoming
    JEL: D43 L13 L86
    Date: 2018–01
  4. By: Shuige Liu
    Abstract: We characterize common assumption of rationality of 2-person games within an incomplete information framework. We use the lexicographic model with incomplete information and show that a belief hierarchy expresses common assumption of rationality within a complete information framework if and only if there is a belief hierarchy within the corresponding incomplete information framework that expresses common full belief in caution, rationality, every good choice is supported, and prior belief in the original utility functions.
    Date: 2018–01
  5. By: Didier Laussel (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: We study the optimal delegation problem which arises between the median voter (writer of the constitution) and the (future) incumbent politician when not only the state of the world and but also the politician’s type (preferred policy) are the policy-maker’s private information. We show that it is optimal to tie the hands of the politician by imposing him/her both a policy floor and a policy cap and delegating him/her the policy choice only in between. The delegation interval is shown to be the smaller the greater is the uncertainty about the politician’s type. These results apply outside the specific problem to which our model is applied here.
    Keywords: representative democracy, optimal delegation, political uncertainty
    JEL: D82 H10
    Date: 2018–01
  6. By: Ivan Werning (MIT); Dan Cao (Georgetown University)
    Abstract: We study Markov equilibria in the standard time-inconsistent hyperbolic discounting model set in discrete-time. We provide simple conditions under which all Markov equilibria feature saving or dissaving globally, for all wealth levels. Moreover, we show that whether the agent saves or dissaves depends on comparing the interest rate to a threshold made up of impatience parameters only. Our results provide a prediction for behavior that is robust across Markov equilibria and illustrate a well- behaved side of the model. As a corollary, we overturn indeterminacy concerns in Krusell and Smith (2003), showing that the constructions offered there are not Markov equilibria in the standard hyperbolic model. Indeed, our results can be interpreted as establishing that, whether or not the equilibrium is unique, qualitative savings behavior is uniquely determined. Similar results are likely to obtain in other dynamic games, such as in political economy models of public debt.
    Date: 2017
  7. By: Dmitry Levando (National Research University Higher School of Economics, Moscow, Russia); Maxim Sakharov (Bauman Mstu, Moscow, Russia)
    Abstract: We develop a theory of market fluctuations caused by strategic trade with complete information and without outside shocks. The constructed general equilibrium duopoly is a strategic market game with infinite strategies and multiple mixed strategies equilibria. First order conditions (FOC) of the game are the ill-posed problems (Hadamard, 1909), but every equilibrium mixed strategy can be only approximated. This imposes restrictions on convergence of common beliefs of players about actions of each other, existence of rational expectations and a price discovery property of the market, although the market is informationally efficient (Fama, 1970). We suggest a modification of Tikhonov regularization to construct pseudo-solutions. All endogenous variables of the model are exposed to unremovable instabilities, ‘natural instabilities’, specific to parameters of a chosen approximation. Our result is also related to existence of common knowledge, sun-spot equilibrium, and noise trade.
    Keywords: Strategic market games, ill-posed problems, common knowledge, rational expectations, efficient market, price fluctuations
    JEL: C68 C61 C72 D59 E31 E32 G14
    Date: 2018
  8. By: Bourreau, Marc; Jullien, Bruno
    Abstract: In this paper, we study the impact of a merger to monopoly on prices and investments. Two single-product firms compete in prices and coverage for a new technology. In equilibrium, one firm covers a larger territory than its competitor with the new technology, leading to singleproduct and multi-product zones, and sets a higher uniform price. If the firms merge, the merged entity can set different prices and coverage for the two products. We find that the merger raises prices and total coverage, but reduces the coverage of the multi-product zone. We also show that the merger can increase total welfare and consumer welfare.
    Keywords: horizontal mergers; investments; competition
    JEL: D43 L13 L40
    Date: 2017–12
  9. By: Gutiérrez-Hita, Carlos; Vicente-Pérez, José
    Abstract: In this paper we present a mixed duopoly model of supply function competition under uncertainty with product differentiation. We find that, regardless the nature of product heterogeneity, the best response of the private firm always arises as strategic complement. Contrary to this, state-owned firm's best response arises either as strategic complement or substitute depending on the product heterogeneity. As a result of the ex post realization of the demand uncertainty, different equilibria are reached.
    Keywords: Supply Function Equilibria; Mixed oligopoly; Differentiated products.
    JEL: D43 H42 L13
    Date: 2018–01–07
  10. By: David Ronayne; Greg Taylor
    Abstract: Abstract We study strategic interactions in a market where producers sell to consumers directly as well as via a competitive channel (CC) such as an online marketplace or price comparison website. We show how the size of the competitive channel can influence market outcomes. Equilibrium falls into one of two regimes: either the CC charges low commission and accommodates producers, or it charges high commission and faces strong competition from producers' direct sales channel. Seemingly procompetitive developments that increase the number of prices consumers check can raise prices and reduce consumer surplus. We also use the model to study an active policy issue concerning which channels should be allowed to utilize data about consumers' past purchases.
    JEL: D43 D83 L11 M3
    Date: 2018–01–19
  11. By: Felix Bierbrauer; Aleh Tsyvinski; Nicolas D. Werquin
    Abstract: We develop a model of political competition with endogenous turnout and endogenous platforms. Parties face a trade-off between maximizing their base and getting their supporters out to vote. We study the implications of this framework for non-linear income taxation. In equilibrium, both parties propose the same tax policy. This equilibrium policy is a weighted combination of two terms, one reflecting the parties’ payoff from mobilizing their own supporters, one reflecting the payoff from demobilizing the supporters of the other party. The key determinant of the equilibrium policy is the distribution of the voters’ party attachments rather than their propensity to swing vote. Our analysis also provides a novel explanation for why even left-leaning parties may not propose high taxes on the rich.
    JEL: D72 D82 H21
    Date: 2017–12
  12. By: Raouf Boucekkine (Aix-Marseille University); Fabien Prieur (Paris-X Nanterre University); Benteng Zou (CREA, Université du Luxembourg)
    Abstract: We study a 2-players stochastic dynamic symmetric lobbying differential game. Players have opposite interests; at any date, each player invests in lobbying ac- tivities to alter the legislation in her own benefit. The payoffs are quadratic and uncertainty is driven by a Wiener process. We prove that while a symmetric Markov Perfect Equilibrium (MPE) always exists, an asymmetric MPE only emerges when uncertainty is large enough. In the latter case, the legislative state converges to a stationary invariant distribution. Interestingly enough, the implications for the rent dissipation problem are much more involved than in the deterministic coun- terpart: the symmetric MPE still yields a limited social cost while the asymmetric may yield significant losses. We also characterize the most likely asymptotic state, in particular regarding the level of uncertainty.
    Keywords: Political lobbying, symmetric versus asymmetric equilibrium, stochastic differential games, stochastic stability, social cost of lobbying
    JEL: D72 C73
    Date: 2018
  13. By: Suzuki, Keishun
    Abstract: How does patent policy affect innovation when patent licensing is crucial for firms? To address this question, the present paper incorporates voluntary patent licensing between an innovator and followers, which has been discussed in the literature of industrial organization, into a dynamic general equilibrium model. Unlike in existing studies, both the licensing fee and the number of licensees are endogenously determined by the innovator’s maximization and the free-entry condition. Using this model, we show that strong patent protection does not enhance innovation, economic growth, and welfare. Furthermore, the extended analysis provides a policy implication that the effect of patent policy depends on how difficult further innovation is without patent licensing of the current leading technology.
    Keywords: innovation, patent protection, optimal patent licensing, endogenous market structure.
    JEL: L24 O31 O34
    Date: 2017–11–15
  14. By: Mete Soner, H.; Reppen, Max; Rochet, Jean-Charles
    Abstract: We study an optimal dividend problem under a bankruptcy constraint. Firms face a trade-off between potential bankruptcy and extraction of profits. In contrast to previous works, general cash flow drifts, including Ornstein–Uhlenbeck and CIR processes, are considered. We provide rigorous proofs of continuity of the value function, whence dynamic programming, as well as uniqueness of the solution to the Hamilton–Jacobi–Bellman equation, and study its qualitative properties both analytically and numerically. The value function is thus given by a nonlinear PDE with a gradient constraint from below in one dimension. We find that the optimal strategy is both a barrier and a band strategy and that it includes voluntary liquidation in parts of the state space. Finally, we present and numerically study extensions of the model, including equity issuance and gambling for resurrection.
    Date: 2018–01
  15. By: Jun Honda; Roman Inderst
    Abstract: We analyze firms' competition to steer an advisor's recommendations through potentially non-linear incentives. Even when firms are symmetric, so that the overall size of compensation would not distort advice when incentives were linear, advice is biased when firms are allowed to make compensation non-linear, which they optimally do. Policies that target an advisor's liability are largely ineffective, as firms react to such increased liability by making incentives even steeper, increasing bonus payments while reducing the linear (commission) part at the same time. This observation may justify policymakers' direct interference with firms' compensation practice, as frequently observed notably in consumer finance.
    Keywords: Nonlinear Incentives, Advice, Consumer Protection, Financial Regulation.
    JEL: L51 M52
    Date: 2017–12

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