
on Microeconomics 
By:  Shingo Ishiguro (Graduate School of Economics, Osaka University); Yosuke Yasuda (Graduate School of Economics, Osaka University) 
Abstract:  In this paper we investigate a wide class of principalagent problems with moral hazard and target budgets. The latter requires that the principal fixes a total budget for the wages paid to agents regardless of their outputs realized ex post. Target budgets are relevant not just because they are exogenous institutional constraints in some cases, but they can also endogenously arise in other cases, especially when agents f performances are not verifiable and thus the principal needs subjective evaluations. Although target budgets impose an additional constraint, we show the irrelevance theorem that the principal is never worse off using target budgets when there are at least two riskneutral agents. Even when all agents are risk averse, we also show that the similar irrelevance result asymptotically holds if the number of agents is sufficiently large. Furthermore, we characterize optimal contracts when the target budget becomes a tight constraint so that the irrelevance result cannot be applied. 
Keywords:  Moral Hazard, Multiple Agents, Subjective Evaluation, Target Budgets; Moral Hazard, Multiple Agents, Subjective Evaluation, Target Budgets 
JEL:  D82 D86 
Date:  2018–02 
URL:  http://d.repec.org/n?u=RePEc:osk:wpaper:1803&r=mic 
By:  Décamps, JeanPaul; 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 twodimensional 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:  Principalagent problem; twodimensional control problem; regularity properties 
JEL:  G30 
Date:  2018–01 
URL:  http://d.repec.org/n?u=RePEc:ide:wpaper:32396&r=mic 
By:  Mete Soner, H.; Reppen, Max; Rochet, JeanCharles 
Abstract:  We study an optimal dividend problem under a bankruptcy constraint. Firms face a tradeoff 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. 
Keywords:  Financial intermediation; capital accumulation; banking crisis; macroeconomic shocks; business cycles; bustboom cycles; managing recoveries 
Date:  2018–01 
URL:  http://d.repec.org/n?u=RePEc:ide:wpaper:32400&r=mic 
By:  Olivier Gossner (CREST; CNRS; Ecole polytechnique; Université ParisSaclay; London School of Economics); Christoph Kuzmics (University of Graz) 
Abstract:  A decision maker (DM) makes choices from different sets of alternatives. The DM is initially ignorant of the payoff associated to each alternative, and learns these payoffs only after a large number of choices have been made. We show that, in the presence of an outside option once payoffs are learned, the optimal choice rule from sets of alternatives is one that is as if the DM had strict preferences over all alternatives. Under this model, the DM has preferences for preferences while being ignorant of what preferences are “right”. 
Keywords:  consistency, rationality, weak axiom of revealed preferences, strict preference 
JEL:  C73 D01 D11 
Date:  2017–12–31 
URL:  http://d.repec.org/n?u=RePEc:crs:wpaper:201752&r=mic 
By:  Gordon M. Myers (Simon Fraser University) 
Abstract:  A Faculty chooses a level of costly effort in generating revenue for the university. The revenue is deployed in the pursuit of academic excellence in research and teaching. The effort is not observable by the central Administration and the amount of revenue generated from given level of effort is uncertain. The Administration and Faculties are assumed risk averse. I show that when effort is observable, or there is no uncertainty, or the Faculty is not risk averse, pure Responsibility Center Budgeting (RCB) is efficient and optimal from the perspective of the Administration. The intuition for this is provided by pure RCB solving the incentive problem and leading to the right effort level by making the Faculty the residual claimant. Once the Faculty is risk averse I show partial RCB is optimal. A problem with pure RCB is that the Faculty holds all the revenue risk. Partial RCB then provides a balance between providing the right incentives to the Faculty and the Administration providing partial insurance to the Faculty. In my simple model I show that we move further away from pure RCB, the more uncertain the environment, the more risk averse the Faculty, and the less risk averse the Administration. 
Keywords:  University Governance, Decentralization, Responsibility Center Budgeting 
Date:  2018–01 
URL:  http://d.repec.org/n?u=RePEc:sfu:sfudps:dp1801&r=mic 
By:  Frédéric Gavrel (CREM  Centre de recherche en économie et management  UNICAEN  Université de Caen Normandie  NU  Normandie Université  UR1  Université de Rennes 1  CNRS  Centre National de la Recherche Scientifique); Thérèse Rebière (LIRSA  Laboratoire Interdisciplinaire de Recherche en Sciences de l'Action  CNAM  Conservatoire National des Arts et Métiers [CNAM], Institute for the Study of Labor (IZA) Bonn) 
Abstract:  This paper provides an analysis of the social consequences of people seeking to get ahead of the Smiths. All individuals attempt to reach a higher rank than the Smiths, including the Smiths themselves. This attitude gives rise to an equilibrium in which all individuals have equal utilities but unequal (gross) incomes. Due to a ratrace effect, individuals devote too much energy to climbing the social scale.However, laissezfaire equilibrium is an equalutility constrained social optimum. Conversely, a utilitarian social planner would not choose utility equality. Unexpectedly, this social ambition theory fairly well accounts for empirical intermediate wage inequality. 
Keywords:  Efficiency ,Inequalities,Wellbeing,Getting ahead of the Smiths,Social interactions 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:halshs01242504&r=mic 
By:  Saglam, Ismail 
Abstract:  In this paper we borrow from Ciarreta and GutierrezHita (2012) a duopolistic industry structure with cost asymmetry and demand uncertainty, and using this structure we build a bargaining model to study the division of collusion profits obtained from the joint selection of supply functions under the possibility of side payments. In our model, we consider potential disagreement points obtained from the noncooperative equilibrium of either the quantity competition or the supply function competition, and potential bargaining solutions splitting the gains from agreement either equally or proportionally according to the relative disagreement payoffs of the duopolists. Given any of these disagreement points and any of these bargaining solutions, we find that each duopolist has always incentive to join a collusive agreement. On the other hand, irrespective of whether the bargaining solution splits the gains from agreement equally or proportionally respecting the relative disagreement payoffs, the more efficient firm (the less efficient firm) in the cartel always obtains a higher agreement payoff when the disagreement point is obtained from the equilibrium of supply function competition (quantity competition). Given the studied disagreement points and bargaining solutions, we also find that bargaining over collusion profits always makes the more efficient firm worse off and the less efficient firm better off in comparison to a collusive agreement equalizing the marginal costs of these two firms. 
Keywords:  Duopoly; collusion; bargaining; Cournot competition; supply function competition; uncertainty 
JEL:  D43 L13 
Date:  2018–01–21 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:84007&r=mic 
By:  CabonDhersin MarieLaure (Université de Rouen Normandie ; CREAM); Drouhin Nicolas (Ecole Normale Supérieure ParisSaclay) 
Abstract:  We propose a general model of oligopoly with firms relying on a two factor production function. In a first stage, firms choose a certain fixed factor level (capacity). In the second stage, firms compete on price, and adjust the variable factor to satisfy all the demand. When the factors are substitutable, the capacity constraint is "soft", implying a convex cost function in the second stage. We show that there is a unique equilibrium prediction in pure strategies, whatever the returns to scale, characterized by a price that increases with the number of firms up to a threshold. The main propositions are established under the general assumption that the production function is quasiconcave but the paper provides a general methodology allowing the model to be solved numerically for special parametrical forms. 
Keywords:  price competition, tacit collusion, convex cost, capacity constraint, limit pricing strategy, returns to scale 
JEL:  L13 D43 
Date:  2017–12–13 
URL:  http://d.repec.org/n?u=RePEc:crs:wpaper:201756&r=mic 
By:  Mohamed Belhaj (AixMarseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Frédéric Deroïan (InSHSCNRS and AixMarseille Univ., CNRS, EHESS, Centrale Marseille, AMSE) 
Abstract:  We consider a network game with local complementarities. A policymaker, aiming at minimizing or maximizing aggregate effort, contracts with a single agent on the network to trade effort change against transfer. The policymaker has to find the best agent and the optimal contract to offer. Our study shows that for all utilities with linear bestresponses, it only takes two statistics about the position of each agent on the network to identify the key player: the Bonacich centrality and a weighted measure of the number of closed walks originating from the agent. We also characterize key players under linear quadratic utilities for various contractual arrangements. 
Keywords:  key player, Network, Linear Interaction, incentives, contract, limited budget 
JEL:  C72 D85 
Date:  2018–02 
URL:  http://d.repec.org/n?u=RePEc:aim:wpaimx:1804&r=mic 
By:  Beker, Pablo F. (Department of Economics, University of Warwick); Cuevas, Conrado (Department of Economics, University of Warwick) 
Abstract:  We study the value of public information in a stochastic exchange economy where agents trade assets to reallocate risk and mandatory (retirement) savings imposes a lower bound on the market value of some agents' holdings of a nancial asset. Since equilibrium prices depend on the agents' beliefs about the states of nature, the arrival of information shifts the agents' mandatory savings constraints. We show that the arrival of public information can generate an exante Pareto improvement relative to an uninformative equilibrium even when expost improvements are not possible. 
Date:  2018 
URL:  http://d.repec.org/n?u=RePEc:wrk:warwec:1152&r=mic 
By:  Jehiel, Philippe; Steiner, Jakub 
Abstract:  A proposed model of information processing generates a prediction about the constrainedoptimal stochastic choice that is robust to details of the feasible information structures. A decisionmaker processes payoffrelevant information until she reaches her cognitive constraint, at which point she either terminates the decisionmaking and chooses an action, or restarts the process. By conditioning the probability of termination on the information collected, she controls the correlation between the payoff state and her terminal action. The constrainedoptimal choice rule exhibits (i) confirmation bias, (ii) speedaccuracy complementarity, (iii) overweighting of rare events, and (iv) salience effect. 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:12546&r=mic 
By:  Mikl\'os R\'asonyi; Andrea MeirelesRodrigues 
Abstract:  We study the problem of maximising terminal utility for an agent facing model uncertainty, in a frictionless discretetime market consisting of one safe asset and finitely many risky assets. We show that an optimal investment strategy exists if the utility function, defined either over the positive real line or over the whole real line, is bounded from above. We also find that, when wealth is required to satisfy the nobankruptcy constraint, the boundedness assumption can be dropped provided that we impose a certain integrability condition, related to some strengthened form of noarbitrage. These results are obtained in an alternative framework for model uncertainty, where all possible dynamics of the stock prices are represented by a collection of stochastic processes on the same filtered probability space, rather than by a family of probability measures. 
Date:  2018–01 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1801.06860&r=mic 
By:  David Bartolini (OECD); Agnese Sacchi (Sapienza University of Rome (Italy); GEN (Spain)); Domenico Scalera (University of Sannio (Italy)); Alberto Zazzaro (University of Naples Federico II; CSEF & MoFiR (Italy)) 
Abstract:  Government accountability increases with voters' proximity to policymakers. Decentralization reforms implemented in many countries in the last twenty years are based on this principle. We present a political agency model that challenges this view and shows that the effects of increasing proximity may depend on the institutional context. In particular, the presence of rentseeking politicians and heterogeneity in voters' political awareness produce three distinct optimal levels of decentralization. Furthermore, optimal distance depends on the capacity of rentseeking incumbents to blur information available to voters. When the incumbent reacts to increasing proximity with more blurring activity, the optimal distance increases. Accordingly, less decentralization is preferable. 
Keywords:  government accountability, information, institutional distance, rentseeking, political awareness 
JEL:  D72 D82 D83 H40 
Date:  2018–01 
URL:  http://d.repec.org/n?u=RePEc:anc:wmofir:146&r=mic 
By:  Duan, Lian 
Abstract:  I discuss the optimal degree of privatization in a mixed oligopoly in which multiple public enterprises exist. I find that the optimal degree of privatization is increasing in the number of private firms n and independent of the number of public firms m. These results suggest that no matter how many public firms exist, an increase in the number of private firms would increase the optimal degree of privatization as long as all public firms are partially privatized at the same degree. 
Keywords:  Quantitysetting; Partial privatization; Mixed oligopoly 
JEL:  C72 H42 L13 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:82896&r=mic 
By:  Martin Ellison; Charles Brendon 
Abstract:  Abstract This paper proposes and characterises a new normative solution concept for Kydland and Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an alternative exists that is superior to it in a timeconsistent subdomain of the constraint set, or (b) an alternative exists that Paretodominates it over time. Policies may be timeconsistently undominated where timeconsistent optimality is not possible. We derive necessary and sufficient conditions for this to be true, and show that these are equivalent to a straightforward but significant change to the firstorder conditions that apply under Ramsey policy. Timeconsistently undominated policies are an order of magnitude simpler than Ramsey choice, whilst retaining normative appeal. This is illustrated across a range of examples. 
Keywords:  Time Consistency; Undominated Policy; Ramsey Policy 
JEL:  D02 E61 
Date:  2018–01–31 
URL:  http://d.repec.org/n?u=RePEc:oxf:wpaper:844&r=mic 