nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒02‒19
twenty-two papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Secret contracting in multilateral relations By Patrick Rey; Thibaud Vergé
  2. Naiveté About Temptation and Self-Control: Foundations for Naive Quasi-Hyperbolic Discounting By David S. Ahn; Ryota Iijima; Todd Sarver
  3. Dynamic Communication with Biased Senders By Margaria, Chiara; Smolin, Alex
  4. Voluntary disclosure in unfair contests By Christian Ewerhart; Julia Grünseis
  5. Product Differentiation with Multiple Qualities By Francesca Barigozzi; Ching-to Albert Ma
  6. Bayesian persuasion with heterogeneous priors By Alonso, Ricardo; Câmara, Odilon
  7. Sion's minimax theorem and Nash equilibrium of symmetric multi-person zero-sum game By Satoh, Atsuhiro; Tanaka, Yasuhito
  8. On the Firms’ Decision to Hire Academic Scientists By Catalina Martínez; Sarah Parlane
  9. Strategic Default in Financial Networks By Nizar Allouch; Maya Jalloul
  10. Dynamic Evaluation Design By Smolin, Alex
  11. Optimal Illusion of Control and Related Perception Biases By Olivier Gossner; Jakub Steiner
  12. Informal Delegation and Training By Emre Ekinci; Nikos Theodoropoulos
  13. Signals Sell: Product Lines when Consumers Differ Both in Taste for Quality and Image Concern By Friedrichsen, Jana
  14. An instrumental approach to the value of information By Michel De Lara; Olivier Gossner
  15. Robust policy schemes for R&D games with asymmetric information By Anton Bondarev
  16. Compulsory insurance and voluntary self-insurance: substitutes or complements? A matter of risk attitudes By François Pannequin; Anne Corcos
  17. Saving and Dissaving with Hyperbolic Discounting By Dan Cao; Iván Werning
  18. Disclosure and Pricing of Attributes By Smolin, Alex
  19. Prediction, Judgment and Complexity By Ajay K. Agrawal; Joshua S. Gans; Avi Goldfarb
  20. Number of bidders and the winner’s curse By Ronald Peeters; Anastas P. Tenev
  21. Assigning an unpleasant task without payment By Susanne Goldlücke; Thomas Tröger
  22. Guilt and participation By Amrish Patel; Alec Smith

  1. By: Patrick Rey (Toulouse School of Economics, University Toulouse Capitole); Thibaud Vergé (CREST; ENSAE)
    Abstract: We develop a general but tractable framework of multilateral vertical contracting between upstream and downstream ?firms, without any restriction on tariffs, and yet taking into account their impact on downstream competition. In equilibrium, tariffs are cost-based and replicate the outcome of a multi-brand oligopoly, a fi?nding in line with the analysis of a recent merger. To illustrate its versatility, we use this framework to analyze the effect of vertical restraints (resale price maintenance and retail price parity clauses) and of alternative business models (resale vs. agency). Finally, we extend the framework so as to endogenize the market structure.
    Keywords: Bilateral contracting; vertical relationships; agency; resale price maintenance;price parity clauses
    JEL: L13 L42 D43 K21
    Date: 2017–07–17
  2. By: David S. Ahn (University of California, Berkeley); Ryota Iijima (Cowles Foundation, Yale University); Todd Sarver (Duke University)
    Abstract: We introduce and characterize a recursive model of dynamic choice that accommodates naivete about present bias. While recursive representations are important for tractable analysis of in nite-horizon problems, the commonly-used Strotz model of time inconsistency presents well-known technical difficulties in extensions to dynamic environments. Our model incorporates costly self-control in the sense of Gul and Pesendorfer (2001) to overcome these hurdles. The important novel condition is an axiom for naivete. We first introduce appropriate definitions of absolute and comparative naivete for a simple two-period model, and explore their implications for the costly self-control model. We then develop suitable extensions of these definitions to in nite-horizon environments. Incorporating the definition of absolute naivete as an axiom, we characterize a recursive representation of naive quasi-hyperbolic discounting with self-control for an individual who is jointly overoptimistic about her present-bias factor and her ability to resist instant gratification. We also study the implications of our proposed comparison of naivete for this recursive representation and uncover new restrictions on the present-bias and self-control parameters that characterize comparative naivete. Finally, we discuss the subtleties that preclude more general notions of naivete, and illuminate the impossibility of a definition that simultaneously accommodates both random choice and costly self-control.
    Keywords: Naive, Sophisticated, Self-control, Quasi-hyperbolic discounting
    JEL: D11 D91
    Date: 2017–08
  3. By: Margaria, Chiara; Smolin, Alex
    Abstract: We study dynamic games in which senders with state-independent payoffs communicate to a single receiver. Senders’ private information evolves according to an aperiodic and irreducible Markov chain. We prove an analog of a folk theorem—that any feasible and individually rational payoff can be approximated in a perfect Bayesian equilibrium if players are sufficiently patient. In particular, there are equilibria in which the receiver makes perfectly informed decisions in almost every period, even if no informative communication can be sustained in the stage game. We conclude that repeated interaction can overcome strategic limits of communication.
    Keywords: Bayesian games, repeated games, communication, folk theorem
    JEL: C72 C73 D82 D83
    Date: 2017–10
  4. By: Christian Ewerhart; Julia Grünseis
    Abstract: This paper studies incentives for the interim voluntary disclosure of verifiable information in probabilistic all-pay contests. Considered are unfair contests, i.e., contests in which, subject to activity conditions, one player (the favorite) is interim always more likely to win than the other player (the underdog). A condition is identified that ensures that a given contest is unfair regardless of disclosure decisions. Under this condition, full revelation is the unique perfect Bayesian equilibrium outcome of the contest with pre-play communication. This is so because the weakest type of the underdog will try to moderate the favorite, while the strongest type of the favorite will try to discourage the underdog - so that the contest unravels. We also show that self-disclosure may, with positive probability, provoke unintended reactions, i.e., "dominant" or "defiant" behavior. Moreover, while individually rational for the marginal type, the unraveling may be strictly Pareto inferior from an ex-ante perspective. Our main conclusion is just the opposite of the corresponding finding for the deterministic all-pay auction. The proofs employ lattice-theoretic methods and an improved version of Jensen's inequality.
    Keywords: Unfair contests, incomplete information, self-disclosure, unraveling, strategic complements and substitutes, dominance and defiance
    JEL: C72 D74 D82 J71
    Date: 2018–02
  5. By: Francesca Barigozzi (Department of Economics, University of Bologna); Ching-to Albert Ma (Boston University)
    Abstract: We study subgame-perfect equilibria of the classical quality-price, multistage game of vertical product differentiation. Each firm can choose the levels of an arbitrary number of qualities. Consumers' valuations are drawn from independent and general distributions. The unit cost of production is increasing and convex in qualities. We characterize equilibrium prices, and the effects of qualities on the rival's equilibrium price in the general model. We present necessary and sufficient conditions for equilibrium differentiation in any of the qualities.
    Keywords: multidimensional product differentiation, quality and price competition
    JEL: D43 L13
    Date: 2017–11
  6. By: Alonso, Ricardo; Câmara, Odilon
    Abstract: In a world in which rational individuals may hold different prior beliefs, a sender can influence the behavior of a receiver by controlling the informativeness of an experiment (public signal). We characterize the set of distributions of posterior beliefs that can be induced by an experiment, and provide necessary and sufficient conditions for a sender to benefit from persuasion. We then provide sufficient conditions for the sender to benefit from persuasion for almost every pair of prior beliefs, even when there is no value of persuasion under a common prior. Our main condition is that the receiver's action depends on his beliefs only through his expectation of some random variable.
    Keywords: persuasion; strategic experimentation; heterogeneous priors
    JEL: D72 D83 M31
    Date: 2016–09–01
  7. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: About a symmetric multi-person zero-sum game we will show the following results. 1. Sion's minimax theorem plus the coincidence of the maximin strategy and the minimax strategy are proved by the existence of a symmetric Nash equilibrium. 2. The existence of a symmetric Nash equilibrium is proved by Sion's minimax theorem plus the coincidence of the maximin strategy and the minimax strategy. Thus, they are equivalent. If a zero-sum game is asymmetric, maximin strategies and minimax strategies of players do not correspond to Nash equilibrium strategies. If it is symmetric, the maximin strategies and the minimax strategies constitute a Nash equilibrium. However, with only the minimax theorem there may exist an asymmetric equilibrium in a symmetric multi-person zero-sum game.
    Keywords: multi-person zero-sum game, Nash equilibrium,Sion's minimax theorem
    JEL: C72
    Date: 2018–02–13
  8. By: Catalina Martínez; Sarah Parlane
    Abstract: This paper provides a theoretical rationale for private investment in basic research. It explains the decision by some firms to hire scientists who have an intrinsic motivation to pursue academic research and allow them to do so while they also dedicate time to the firm’s applied agenda. We show that this decision maximizes firms’ profits in a context where basic and applied research activities are not strong substitutes and the opportunity cost, associated with deterring scientists from remaining in academia, is sufficiently low. Allowing scientists to pursue an academic agenda facilitates participation. When scientists are privately informed about their ’taste for science’, the contract requires that the more academically driven scientists dedicate greater attention to their personal agenda to satisfy incentive compatibility. When the reservation utility is weakly correlated with the scientist’s academic inclination, this restriction has no impact and the first best contract remains optimal. But as the correlation increases, the firms tend to select less academically driven scientists. Under-investment in basic research is not triggered by the need to reduce informational rents which are non-existent as scientists face countervailing incentives. Instead it arises from the need to curb the increased cost of efforts.
    Keywords: Contract theory; Intrinsic motivation; Adverse selection; Countervailing incentives
    JEL: D82 D86 J31 J33 M31
    Date: 2018–01
  9. By: Nizar Allouch; Maya Jalloul
    Abstract: This paper investigates a model of strategic interactions in financial networks, where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents’ payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Next, we develop an algorithm to find all Nash equilibria that relies on the financial network structure. Finally, we explore some policy implications to achieve efficient coordination.
    Keywords: systemic risk; default; financial networks; coordination games; central clearing counterparty; financial regulation
    JEL: C72 D53 D85 G21 G28 G33
    Date: 2017–12
  10. By: Smolin, Alex
    Abstract: A principal owns a firm, hires an agent of uncertain productivity, and designs a dynamic policy for evaluating his performance. The agent observes ongoing evaluations and decides when to quit. While not quitting, the agent is paid a wage proportional to his perceived productivity; the principal claims the residual performance. After quitting, the agent secures a fixed safe payoff. I show that equilibrium evaluation policies are Pareto efficient and leave no rents to the agent. In a minimally informative equilibrium, for a broad class of performance technologies, the agent’s wage deterministically grows with tenure.
    Keywords: evaluation, information design, career concerns, bandit experimentation, downward wage rigidity, up-or-out
    JEL: C72 D82 D83 M52
    Date: 2017–10
  11. By: Olivier Gossner (CREST; CNRS; Ecole polytechnique; Université Paris-Saclay; London School of Economics); Jakub Steiner (University of Edinburgh; Cerge-Ei)
    Abstract: We study perception biases arising under second-best perception strategies. An agent correctly observes a parameter that is payoff-relevant in many decision problems that she encounters in her environment but is unable to retain all the information until her decision. A designer of the decision process chooses a perception strategy that determines the distribution of the perception errors. If some information loss is unavoidable due to cognition constraints, then (under additional conditions) the optimal perception strategy exhibits the illusion of control, overconfidence, and optimism.
    Date: 2017–10–16
  12. By: Emre Ekinci; Nikos Theodoropoulos
    Abstract: This paper investigates the relationship between the firm’s incentives to provide training and to delegate authority. We consider a principal-agent model in which the firm is not able to commit to delegation contractually and the conflict of interest between the firm and the worker arises both because the latter is biased towards certain decisions and because players interpret information differently (i.e., they have differences of opinion). Our theoretical analysis consists of two parts. First, we examine the equilibrium behavior when the degree of incongruence between the firm and the worker is public information. Second, we analyze the equilibrium behavior when the firm is privately informed about its type wherein the type refers to the level of differences in opinion between the firm and the worker. This exercise shows the extent to which the firm can use training provision to convey its private information to the worker, thereby committing not to retract the agent’s authority it initially granted. In our empirical analysis, we use a cross section of matched employer-employee data of British establishments to examine the extent to which the model’s predictions are supported by data.
    Date: 2018–02
  13. By: Friedrichsen, Jana (Humboldt-Universität zu Berlin)
    Abstract: This paper analyzes optimal product lines when consumers differ both in their taste for quality and in their desire for social image. The market outcome features partial pooling and product differentiation that is not driven by heterogeneous valuations for quality but by image concerns. A typical monopoly outcome is a two-tier product line resembling a \"masstige\" strategy as observed in luxury goods markets. Products can have identical quality and differ only in price and image, thereby rationalizing quality-equivalent line extensions. Under competition, both average quality and market coverage are (weakly) higher but monopoly can yield higher welfare than competition.
    Keywords: image concern; conspicuous consumption; two-dimensional screening; nonlinear pricing;
    JEL: L12 L15 D11 D21 D82
    Date: 2018–02–08
  14. By: Michel De Lara (CERMICS, ENPC; Université Paris Est); Olivier Gossner (CREST; Ecole Polytechnique; London School of Economics)
    Abstract: We consider an agent who acquires information on a state of nature from an information structure before facing a decision problem. How much information is worth depends jointly on the decision problem and on the information structure. We represent the decision problem by the set of possible payoffs indexed by states of nature. We establish and exploit the duality between this set on one hand and the value of information function, which maps beliefs to expected payoffs under optimal actions at these beliefs, on the other. We then derive global estimates of the value of information of any information structure from local properties of the value function and of the set of optimal actions taken at the prior belief only.
    Date: 2017–10–25
  15. By: Anton Bondarev (University of Basel)
    Abstract: We consider an abstract setting of the differential r&d game, where participating firms are allowed for strategic behavior. We assume the information asymmetry across those firms and the government, which seeks to support newer technologies in a socially optimal manner. We develop a general theory of robust subsidies under such one-sided uncertainty and establish results on relative optimality, duration and size of different policy tools available to the government. It turns out that there might exist multiple sets of second-best robust policies, but there always exist a naturally induced ordering across such sets, implying the optimal choice of a policy exists for the government under different uncertainty levels.
    Keywords: technology lock-in, technological change, strategic interaction, uncertainty, robust policy sets, uncertainty thresholds, robust welfare improving policy, axiom of choice
    JEL: C02 C61 O31 O38
    Date: 2018
  16. By: François Pannequin (CREST; Ecole Normale Supérieure Paris-Saclay); Anne Corcos (CURAPP; Université de Picardie Jules Verne,)
    Abstract: Based on Ehrlich and Becker’s model (1972) on insurance and self-insurance substitutability, we study the effects of a compulsory partial insurance on self-insurance decisions of both risk-averters and (mixed) risk-lovers. We show that when insurance is compulsory, risk-averters adjust (by substituting) their self-insurance behavior to compensate for the level (too high or too low) of the compulsory coverage level. By contrast, even though they would refuse to invest in any voluntarily hedging scheme, (mixed) risk-lovers freely invest in self-insurance to complete a compulsory partial insurance coverage. Moreover, we prove that for a (mixed) risk-lover, an increase in the partial compulsory insurance coverage induces simultaneously a rise of the self-insurance marginal benefit and a decrease of its marginal cost. Therefore, while compulsory insurance and self-insurance are substitutes for risk-averters, they are complements for (mixed) risk-lovers. This last result brings an unexpected justification for compulsory insurance policies.
    Keywords: self-insurance; compulsory insurance; risk attitudes; risk-lovers
    JEL: D11 D86 G22 K32 L51
    Date: 2017–08–01
  17. By: Dan Cao; Iván Werning
    Abstract: Is the standard hyperbolic-discounting model capable of robust qualitative predictions for savings behavior? Despite results suggesting a negative answer, we provide a positive one. We give conditions under which all Markov equilibria display either saving at all wealth levels or dissaving at all wealth levels. Moreover, saving versus dissaving is determined by a simple condition comparing the interest rate to a threshold made up of impatience parameters only. Our robustness results illustrate a well-behaved side of the model and imply that qualitative behavior is determinate, dissipating indeterminacy concerns to the contrary (Krusell and Smith, 2003). We prove by construction that equilibria always exist and that multiplicity is present in some cases, highlighting that our robust predictions are not due to uniqueness. Similar results may be obtainable in related dynamic games, such as political economy models of public spending.
    JEL: D03 D7 E21
    Date: 2018–01
  18. By: Smolin, Alex
    Abstract: A monopolist seller owns an object that has several attributes. A buyer is privately informed about his tastes and uncertain about the attributes. The seller can disclose attribute information to the buyer in a form of a statistical experiment. The seller offers a menu of call options varying in upfront payments, experiments, and strike prices. I study revenue-maximizing menus and show that optimal experiments belong to a simple class of linear disclosures. I fully characterize an optimal menu for a class of single-minded buyers. Surprisingly, the menu is nondiscriminatory and can be implemented by a single partial disclosure followed by a posted price.
    Keywords: Attributes, Information Design, Mechanism Design, Private Disclosure, Call Options, Multidimensional Screening, Demand Transformation
    JEL: D42 D82 D83
    Date: 2017–10
  19. By: Ajay K. Agrawal; Joshua S. Gans; Avi Goldfarb
    Abstract: We interpret recent developments in the field of artificial intelligence (AI) as improvements in prediction technology. In this paper, we explore the consequences of improved prediction in decision-making. To do so, we adapt existing models of decision-making under uncertainty to account for the process of determining payoffs. We label this process of determining the payoffs ‘judgment.’ There is a risky action, whose payoff depends on the state, and a safe action with the same payoff in every state. Judgment is costly; for each potential state, it requires thought on what the payoff might be. Prediction and judgment are complements as long as judgment is not too difficult. We show that in complex environments with a large number of potential states, the effect of improvements in prediction on the importance of judgment depend a great deal on whether the improvements in prediction enable automated decision-making. We discuss the implications of improved prediction in the face of complexity for automation, contracts, and firm boundaries.
    JEL: D81 D86 O33
    Date: 2018–01
  20. By: Ronald Peeters (Department of Economics, University of Otago, New Zealand); Anastas P. Tenev (Department of Economics, Maastricht University)
    Abstract: Within an affiliated value auction setting, we study the relationship between the number of bidders and the winner’s curse in terms of its occurrence and its expected harm. From a design perspective, we find that both the number of bidders and the level of affiliation are instrumental when choosing an auction format and whether to encourage or discourage bidder participation.
    Keywords: Winner’s curse; number of bidders; affiliated value auctions
    JEL: D44 D82 H57
    Date: 2018–01
  21. By: Susanne Goldlücke; Thomas Tröger
    Abstract: How should a group of people decide to allocate a task that has to be done but is not adequately rewarded? This paper finds an optimal mechanism for the private provision of a public service in an environment without monetary transfers. All members of the group have the same cost of providing the service, but some individuals are better suited for the task than others. The optimal mechanism is a threshold rule that assigns the task randomly among volunteers if enough volunteers come forward, and otherwise assigns the task among the non-volunteers.
    Keywords: Volunteering; public good provision; mechanism design
    JEL: D82 D71 D62 H41
    Date: 2018–02
  22. By: Amrish Patel (University of East Anglia); Alec Smith (Virginia Tech University)
    Abstract: How does guilt affect participation in providing public goods? We characterise and analyse completely mixed symmetric equilibria (CMSE) in participation games where players are guilt averse. We find that relative to material preferences, guilt aversion can: facilitate the existence of CMSE; increase or decrease participation; and imply that group size has a non-monotonic effect on participation. Using our equilibrium characterisation we also re-analyse experimental data on participation games and find a low, but positive, guilt sensitivity parameter.
    Keywords: participation, threshold public good, volunteer's dilemma, psychological games, guilt aversion
    JEL: C72 H41
    Date: 2018–01–30

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