nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒02‒05
sixteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Commitment vs. Flexibility with Costly Verification By Halac, Marina; Yared, Pierre
  2. Buyer Group and Buyer Power When Sellers Compete By Jeon, Doh-Shin; Menicucci, Domenico
  3. Equilibria in Bottleneck Games By Ryo Kawasaki; Hideo Konishi; Junki Yukawa
  4. On strategy-proofness and single-peakedness: median-voting over intervals By Protopapas, Panos
  5. Meetings and Mechanisms By Cai, Xiaoming; Gautier, Pieter A.; Wolthoff, Ronald
  6. Reconciliating Relational Contracting and Hold-up: A Model of Repeated Negotiations By Goldl�cke, Susanne; Kranz, Sebastian
  7. Optimal procurement of a credence good under limited liability By Bester, Helmut; Yaofu, Ouyang
  8. Starting Small to Communicate By Alp Atakan; Levent Kockesen; Elif Kubilay
  9. The Simple Economics of White Elephants By Ganuza Fernandez, Juan Jose; Llobet, Gerard
  10. Privacy and Platform Competition By Dimakopoulos, Philipp; Sudaric, Slobodan
  11. Experimenting with Career Concerns By Halac, Marina; Kremer, Ilan
  12. Fake News By Grunewald, Andreas; Kräkel, Matthias
  13. Wisdom of the Crowd? Information Aggregation and Electoral Incentives By Prato, Carlo; Wolton, Stephane
  14. A Welfare Criterion with Endogenous Welfare Weights for Belief Disagreement Models By Jeong-Ho Kim; Byung-Cheol Kim
  15. Friends or Foes? Optimal Incentives for Reciprocal Agents By Luca Livio
  16. Optimal Short-Termism By Hackbarth, Dirk; Rivera, Alejandro; Wong, Tak-Yuen

  1. By: Halac, Marina; Yared, Pierre
    Abstract: A principal faces an agent who is better informed but biased towards higher actions. She can verify the agent's information and specify his permissible actions. We show that if the verification cost is small enough, a threshold with an escape clause (TEC) is optimal: the agent is allowed to choose any action below a threshold or request verification and the efficient action if sufficiently constrained. For higher costs, however, the principal may require verification only for intermediate actions, dividing the delegation set. TEC is always optimal if the principal cannot commit to inefficient allocations following the verification decision and result.
    Keywords: costly verification; escape clause; optimal delegation
    JEL: D02 D82
    Date: 2018–01
  2. By: Jeon, Doh-Shin; Menicucci, Domenico
    Abstract: We study how buyer group affects buyer power when sellers compete with non-linear tariffs and buyers operate in separate markets. In the baseline model of two symmetric sellers and two symmetric buyers, we characterize the set of equilibria under buyer group, the set without buyer group and compare both. We find that the interval of each buyer's equilibrium payoffs without buyer group is a strict subset of the interval under buyer group if each seller's cost function is strictly convex, whereas the two intervals are identical if the cost function is concave. Our result implies that buyer group has no effect when the cost function is concave. When it is strictly convex, buyer group strictly reduces the buyers' payoff as long as, under buyer group, we select the Pareto-dominant equilibrium in terms of the sellers' payoffs. We extend this result to asymmetric settings with an arbitrary number of buyers.
    Keywords: Buyer Group; Buyer Power; Common Agency; Competition in Non-linear Tariffs; Discriminatory Offers
    JEL: D4 K21 L41 L82
    Date: 2017–12
  3. By: Ryo Kawasaki; Hideo Konishi (Boston College); Junki Yukawa
    Abstract: This paper introduces a bottleneck game with finite sets of commuters and departing time slots as an extension of congestion games by Milchtaich (1996). After characterizing Nash equilibrium of the game, we provide sufficient conditions for which the equivalence between Nash and strong equilibria holds. Somewhat surprisingly, unlike in congestion games, a Nash equilibrium in pure strategies may often fail to exist, even when players are homogeneous. In contrast, when there is a continuum of atomless players, the existence of a Nash equilibrium and the equivalence between the set of Nash and strong equilibria hold as in congestion games (Konishi, Le Breton, and Weber, 1997a).
    Keywords: congestion game, bottleneck model, Nash equlibrium, strong equilibrium, equivalence, existence
    JEL: C72 R41
    Date: 2018–01–20
  4. By: Protopapas, Panos
    Abstract: We study solutions that choose an interval of alternatives when agents have single-peaked preferences. Similar to Klaus and Storcken (2002), we ordinally extend these preferences over intervals. Loosely speaking, we extend the results of Moulin (1980) to our setting and show that the results of Ching (1997) cannot always be similarly extended. Our main results are the following. First, strategy-proofness and peaks-onliness characterize the class of generalized median solutions. Second, although peaks-onliness cannot be replaced by the "weaker" property of continuity in our first result -as is the case in Ching (1997)- this equivalence is achieved when voter-sovereignty is also required. Finally, if preferences are symmetric and single-peaked, strategy-proofness and voter-sovereignty characterize the class of efficient generalized median solutions.
    Keywords: Social choice, strategy proofness, single peaked preferences, choice correspondences, voting, median solutions
    JEL: D71
    Date: 2018–01–15
  5. By: Cai, Xiaoming; Gautier, Pieter A.; Wolthoff, Ronald
    Abstract: We analyze a market in which sellers compete for heterogeneous buyers by posting mechanisms. A general meeting technology governs how buyers and sellers meet. We introduce a one-to-one transformation of this meeting technology that helps to clarify and extend many of the existing results in the literature, which has focused on two special cases: urn-ball and bilateral meetings. We show that the optimal mechanism for sellers is to post auctions combined with a reserve price equal to their own valuation and an appropriate fee (or subsidy) which is paid by (or to) all buyers meeting the seller. Even when there are externalities in the meeting process, the equilibrium is efficient. Finally, we analyze the sorting patterns between heterogeneous buyers and sellers and show under which conditions high-value sellers attract more high-value buyers in expectation.
    Keywords: competing mechanisms; matching function; meeting technology; search frictions
    JEL: C78 D44 D83
    Date: 2017–12
  6. By: Goldl�cke, Susanne; Kranz, Sebastian
    Abstract: We propose a unified framework to study relational contracting and hold-up problems in infinite horizon stochastic games with monetary transfers. Starting from the observation that the common formulation of relational contracts as Pareto-optimal public perfect equilibria is in stark contrast to fundamental assumptions of hold-up models, we develop a model in which relational contracts are repeatedly negotiated in a relationship. New negotiations take place with positive probability each period and treat previous informal agreements as bygones. The concept nests relational contracting and hold-up models as opposite corner cases. Allowing for intermediate cases sheds light on many plausible trade-offs that do not arise in these corner cases.
    Keywords: hold-up; negotiations; relational contracting; Stochastic Games
    JEL: C73 C78 D23 L14
    Date: 2017–12
  7. By: Bester, Helmut; Yaofu, Ouyang
    Abstract: This paper analyzes the optimal contract for a consumer to procure a credence good from an expert when (i) the expert might misrepresent his private information about the consumer's need, (ii) the expert might not choose the requested service since his choice of treatment is non-observable, and (iii) limited liability of the expert precludes imposing penalty payments on him. We characterize payments under the optimal contract and show that, compared with the first-best, these induce inefficient undertreatment. We further show that separating diagnosis and treatment increases consumer surplus. Whether it decreases or increases the likelihood of undertreatment, however, depends on the accuracy of the expert's information.
    Keywords: credence goods,non-observable treatments,hidden information,moral hazard,limited liability
    JEL: D82 D83 D86 I11
    Date: 2017
  8. By: Alp Atakan (Koc University, QueenMary Univ. of London); Levent Kockesen (Koc University); Elif Kubilay (Institute for Social and Economic Research, University of Essex)
    Abstract: We analyze a repeated cheap-talk game in which the receiver is privately informed about the conflict of interest between herself and the sender and either the sender or the receiver controls the stakes involved in their relationship. We focus on payoff-dominant equilibria that satisfy a Markovian property and show that if the potential conflict of interest is large, then the stakes increase over time, i.e., “starting small” is the unique equilibrium arrangement. In each period, the receiver plays the sender’s ideal action with positive probability and the sender provides full information as long as he has always observed his ideal actions in the past. We also show that as the potential conflict of interest increases, the extent to which the stakes are back-loaded increases, i.e., stakes are initially smaller but grow faster.
    Keywords: Communication, Cheap Talk, Reputation, Repeated Games, Career Path, Gradualism, Starting Small.
    JEL: D82 D83 D23
    Date: 2018–01
  9. By: Ganuza Fernandez, Juan Jose; Llobet, Gerard
    Abstract: This paper shows that the concession model discourages firms from acquiring information about the future profitability of a project. Uniformed contractors carry out good and bad projects because they are profitable in expected terms even though it would have been optimal to invest in screening them out according to their value. White elephants are identified as avoidable negative net present-value projects that are nevertheless undertaken. Institutional arrangements that limit the losses that firms can bear exacerbate this distortion. We characterize the optimal concession contract, which fosters the acquisition of information and achieves the first best by conditioning the duration of the concession to the realization of the demand and includes payments for not carrying out some projects.
    Keywords: Concession contracts; flexible-term concessions; Information Acquisition
    JEL: D82 D86 H21 L51
    Date: 2018–01
  10. By: Dimakopoulos, Philipp (Humboldt University Berlin); Sudaric, Slobodan (Humboldt University Berlin)
    Abstract: We analyze platform competition where user data is collected to improve adtargeting. Considering that users incur privacy costs, we show that the equilibrium level of data provision is distorted and can be inefficiently high or low: if overall competition is weak or if targeting benefits are low, too much private data is collected, and vice-versa. Further, we find that softer competition on either market side leads to more data collection, which implies substitutability between competition policy measures on both market sides. Moreover, if platforms engage in two-sided pricing, data provision is efficient.
    Keywords: ad targeting; platform competition; privacy; user data;
    JEL: D43 L13 L40 L86
    Date: 2018–01–22
  11. By: Halac, Marina; Kremer, Ilan
    Abstract: A manager who learns privately about a project over time may want to delay quitting it if recognizing failure/lack of success hurts his reputation. In the banking industry, managers may want to roll over bad loans. How do distortions depend on expected project quality? What are the effects of releasing public information about quality? A key feature of banks is that they learn about project quality from bad news, i.e. a default. We show that in such an environment, distortions tend to increase with expected quality and imperfect information about quality. Results differ if managers instead learn from good news.
    Keywords: bad loans; banks; career concerns; Dynamic games; private learning; strategic experimentation
    JEL: C73 D83 G21
    Date: 2018–01
  12. By: Grunewald, Andreas (University of Bonn); Kräkel, Matthias (University of Bonn)
    Abstract: In the last decade, social media and the Internet have amplified the possibility to spread false information, a.k.a. fake news, which has become a serious threat to the credibility of politicians, organizations, and other decision makers. This paper proposes a framework for investigating the incentives to strategically spread fake news under different institutional configurations and payoff structures. In particular, we show under what conditions institutions that foster transparency in the media cause more fake news. Complementary, we study what kind of environments are particularly susceptible to the production of fake news.
    Keywords: campaigning, electoral competition, signal jamming, vertical product differentiation
    JEL: D72 D8 H0 L1
    Date: 2017–12
  13. By: Prato, Carlo; Wolton, Stephane
    Abstract: Elections have long been understood as a mean to encourage candidates to act in voters' interest as well as a way to aggregate dispersed information. This paper juxtaposes these two key features within a unified framework. As in models of electoral control, candidates compete for office by strategically proposing policy platforms. As in models of information aggregation, agents are not always informed about the policy which maximizes the electorate welfare. Candidates face a trade-off between acting in the electorate's best interest and maximizing their chance of being elected. We provide conditions under which electoral institutions encourage candidates' conformism---thereby stifling proper competition among ideas---and render information aggregation unfeasible in equilibrium. In extensions, we highlight that the new political failure we uncover cannot be fully resolved by liberalizing access to candidacy or reducing voter information.
    Keywords: Elections, Information Aggregation, Access to Candidacy, Restrictions to Candidacy
    JEL: D70 D72 D82 D83
    Date: 2017–11–11
  14. By: Jeong-Ho Kim; Byung-Cheol Kim
    Abstract: While belief disagreement models have played an important role in explaining bubbles, over-trading, and speculation, measuring social welfare in those models has been a challenge. This is because the social planner may not know the objective probabilities or whose subjective beliefs to elect under belief disagreements. We propose a novel welfare criterion that endogenously determines sensible welfare weights based on competitive equilibrium allocation as a benchmark. Applying it to several models with heterogeneous beliefs, we show how regulation in moderation, rather than tight control of the market, can be optimal even in the presence of heterogeneous beliefs.
    Date: 2018–01
  15. By: Luca Livio
    Abstract: Widely used performance-based contracts put (positive or negative) externalities on co-workers. These externalities have been proven to shape an organization’s working climate especially when workers exhibit social preferences. However, it is a priori unclear whether a more friendly or a more competitive working environment should be encouraged. In this paper I consider a theoretical model in which a self-interested principal has to motivate a set of agents. Agents are symmetric, potentially risk-averse and exhibit reciprocity concerns towards each other. The optimal incentive scheme is derived solving a psychological game with asymmetric information about effort choices. I show that the optimal incentive design depends on the interplay between the agents’ attitudes towards risks and their preferences for reciprocity. In particular, the optimal scheme implements (i) a relative performance compensation scheme which induces an exchange of unkindness if agents are relatively little risk averse and (ii) a joint performance compensation scheme which induces an exchange of kindness if agents are sufficiently risk averse. My findings can explain some puzzling empirical results.
    Keywords: Gift Exchange, Group Production, Incentives, Moral Hazard, Reciprocity, Team, Tournament
    Date: 2018–01
  16. By: Hackbarth, Dirk; Rivera, Alejandro; Wong, Tak-Yuen
    Abstract: This paper studies incentives in a dynamic contracting framework of a levered firm. In particular, the manager selects long-term and short-term efforts, while shareholders choose initially optimal leverage and ex-post optimal default policies. There are three results. First, shareholders trade off the benefits of short-termism (current cash flows) against the benefits of higher growth from long-term effort (future cash flows), but because shareholders only split the latter with bondholders, they find short-termism ex-post optimal. Second, bright (grim) growth prospects imply lower (higher) optimal levels of short-termism. Third, the endogenous default threshold rises with the substitutability of tasks and, for a positive correlation of shocks, the endogenous default threshold is hump-shaped in the volatility of permanent shocks, but increases monotonically with the volatility of transitory shocks. Finally, we quantify agency costs of short-term and long-term effort, cost of short-termism, effects of investor time horizons, credit spreads, and risk-shifting.
    Keywords: Capital Structure; Contracting; Multi-tasking
    JEL: D86 G13 G32 G33 J33
    Date: 2018–01

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