nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒02‒26
twenty-six papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Supervising Relational Contracts By Troya Martinez, Marta; Wren-Lewis, Liam
  2. Peer Monitoring, Ostracism and the Internalization of Social Norms By Rohan Dutta; David K Levine; Salvatore Modica
  3. Dual Auctions for Assigning Winners and Compensating Losers By John Wooders; Matt Van Essen
  4. Persuasion with Correlation Neglect: Media Power via Correlation of News Content By Levy, Gilat; Moreno de Barreda, Inés; Razin, Ronny
  5. The Right Type of Legislator: A Theory of Taxation and Representation By Andrea Mattozzi; Erik Snowberg
  6. Strategic Default in Financial Networks By Nizar Allouch; Maya Jalloul
  7. Delegation of Regulation* By Nilssen, Tore; Kundu, Tapas
  8. On the merger paradox and asymmetric product differentiation By Tsuyoshi Toshimitsu; Tetsuya Nakajima
  9. Common Ownership, Competition, and Top Management Incentives By Antón, Miguel; Ederer, Florian; Gine, Mireia; Schmalz, Martin
  10. Multi-Battle n-Player Dynamic Contests By Anbarci, Nejat; Cingiz, Kutay; Ismail, Mehmet
  11. Decisions under Risk Dispersion and Skewness By Bayrak, Oben K.; Hey, John D.
  12. Media, fake news, and debunking By Ngo Van Long; Martin Richardson; Frank Stahler
  13. Random social choice functions for single-peaked domains on trees By Peters, Hans; Roy, Souvik; Sadhukhan, Soumyarup
  14. Excluding Compromise: Negotiating Only With Polarized Interests By Richard van Weelden
  15. Human Judgment and AI Pricing By Ajay K. Agrawal; Joshua S. Gans; Avi Goldfarb
  16. Incentives for Motivated Experts in a Partnership By Ting Liu; Ching-to Albert Ma; Henry Y. Mak
  17. Voting in Hiring Committees: Which "Almost" Rule Is Optimal? By Baharad, Eyal; Danziger, Leif
  18. Platform Price Parity Clauses with Direct Sales By BjØrn Olav Johansen; Thibaud Vergé
  19. Informative Cheap Talk in Elections By Richard van Weelden
  20. Efficient Partnership Formation In Networks By Bloch, Francis; Dutta, Bhaskar; Manea, Mihai
  21. Empowerment and the Dark Side of Delegation By Kräkel, Matthias
  22. Self-implementation of social choice correspondences in strong Equilibrium By Peleg, Bezalel; Peters, Hans
  23. Reputation Effects and Incumbency (Dis)Advantage By Richard van Weelden
  24. Bertrand Competition with Asymmetric Costs: A Solution in Pure Strategies By Demuynck, Thomas; Herings, P. Jean-Jacques; Saulle, Riccardo D.; Seel, Christian
  25. Bait and Ditch: Consumer Naiveté and Salesforce Incentives By Herweg, Fabian; Rosato, Antonio
  26. The Past, Present, and Future of Economics: A Celebration of the 125-Year Anniversary of the JPE and of Chicago Economics By Ufuk Akcigit; Fernando Alvarez; Stephane Bonhomme; George M Constantinides; Douglas W Diamond; Eugene F Fama; David W Galenson; Michael Greenstone; Lars Peter Hansen; Uhlig Harald; James J Heckman; Ali Hortacsu; Emir Kamenica; Greg Kaplan; Anil K Kashyap; Steven Levitt; John List; Robert E Lucas Jr.; Magne Mogstad; Roger Myerson; Derek Neal; Canice Prendergast; Raghuram G Rajan; Philip J Reny; Azeem M Shaikh; Robert Shimer; Hugo F Sonnenschein; Nancy L Stokey; Richard H Thaler; Robert H Topel; Robert Vishny; Luigi Zingales

  1. By: Troya Martinez, Marta; Wren-Lewis, Liam
    Abstract: Relational contracts are often studied as being between a principal and agent, such as an employer and an employee. But what happens when the relationship is managed by a supervisor, such as a manager? We develop a theory of supervised relational contracts and show that relational side payments between the supervisor and agent change the equilibrium contract in important ways. First, side payments facilitate the supervisor's commitment, potentially enabling levels of effort the principal could not achieve directly. Second, more valuable relationships may sustain more collusion, and hence produce less effort. We also analyze how the principal should bound the supervisor's discretion, and show that the principal benefits from entrusting a relationship to a supervisor when relational contracts are difficult.
    Keywords: Corruption; delegation; Relational Contracts
    JEL: D73 D86 L14
    Date: 2018–01
  2. By: Rohan Dutta; David K Levine; Salvatore Modica
    Date: 2018–02–20
  3. By: John Wooders; Matt Van Essen (Department of Economics, Finance, and Legal Studies, University of Alabama)
    Abstract: We study the problem of allocating goods (or rights) and chores when participants have equal claim on a unit of the good or equal obligation to undertake a chore. We propose two dynamic auctions for solving problems of this type: a "goods" auction and a "chore" auction, which are duals of one another. Either auction can be used for allocating goods or chores by suitably deÖning a good or a chore. The auctions are efficient and payoff equivalent. We provide necessary and sufficient conditions for equilibrium for general utility functions for both auctions, and provide closed-form solutions when bidders are risk neutral and when they are CARA risk averse. The auctions have the same limit equilibrium bid function as bidders become infinitely risk averse. We show that the limit bid function is also the unique maxmin perfect strategy for both auctions.
    Date: 2018–01
  4. By: Levy, Gilat; Moreno de Barreda, Inés; Razin, Ronny
    Abstract: We model the power of media owners to bias readers' opinions. In particular we consider readers that have "correlation neglect", i.e., fail to understand that content across news outlets might be correlated. We study how a media owner who controls several outlets can take advantage of the readers' neglect. Specifically, we show that the owner can manipulate readers' beliefs even when readers understand the informativeness of news outlet by outlet. The optimal strategy of the owner is to negatively correlate good news and positively correlate bad news. The owner's power is increasing in the number of outlets she owns but is constrained by the limited attention of readers. Importantly, our analysis suggests several new insights about welfare in media markets. First, measures of media bias have to take into account the correlation between news outlets. Second, media-market competition curbs the ability of owners to bias readers' beliefs. In particular, we show that readers always benefit from breaking media conglomerates, even when all the new media owners share the same bias. Finally, we highlight a potential cost of media diversity. When readers have correlation neglect, diversity in the interests of owners might lower the informativeness of news content.
    Date: 2018–01
  5. By: Andrea Mattozzi; Erik Snowberg
    Abstract: We develop a theory of taxation and the distribution of government spending in a citizen-candidate model of legislatures. Individuals are heterogeneous in two dimensions: productive ability in the private sector and negotiating ability in politics. When these are positively correlated, rich voters always prefer a rich legislator, but poor voters face a trade-off. A rich legislator will secure more pork for the district, but will also prefer lower taxation than the poor voter. Our theory organizes a number of stylized facts across countries about taxation and redistribution, parties, and class representation in legislatures. We demonstrate that spending does not necessarily increase when the number of legislators increases, as the standard common-pool intuition suggests, and that many policies aimed at increasing descriptive representation may have the opposite effect.
    JEL: D72 D78 H10 H23
    Date: 2018–02
  6. By: Nizar Allouch (University of Kent); Maya Jalloul (Queen Mary University of London)
    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: 2018–02–06
  7. By: Nilssen, Tore (Dept. of Economics, University of Oslo); Kundu, Tapas (Oslo Business School, Oslo and Akershus University College of Applied Sciences)
    Abstract: We develop a model to discuss a government's incentives to delegate to bureaucrats the regulation of an industry. The industry consists of a polluting firm with private information about its production technology. Implementing a transfer-based regulation policy requires the government to make use of a bureaucracy; this has a bureaucratic cost, as the bureaucracy diverts a fraction of the transfer. The government faces a trade-off in its delegation decision: bureaucrats have knowledge of the firms in the industry that the government does not have, but at the same time, they have other preferences than the government, so-called bureaucratic drift. We study how the bureaucratic drift and the bureaucratic cost interact to a affect the incentives to delegate. Furthermore, we discuss how partial delegation, i.e., delegation followed by laws and regulations that restrict bureaucratic discretion, increases the scope of delegation. We characterize the optimal delegation rule and show that, in equilibrium, three different regimes can arise that differ in the extent of bureaucratic discretion. Our analysis has implications for when and how a government should delegate its regulation of industry. We find that bureaucratic discretion reduces with bureaucratic drift but that, because of the nature of the regulation problem, the effect of increased uncertainty about the firm's technology on the bureaucratic discretion depends on how that uncertainty is reduced.
    Keywords: Bureaucracy; Delegation; Regulation
    JEL: D02 H10 L51
    Date: 2018–02–01
  8. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University); Tetsuya Nakajima (Faculty of Economics, Osaka City University)
    Abstract: Assuming asymmetric product differentiation, we reconsider the merger paradox in the cases of quantity-setting and price-setting games. We investigate whether emergence of the merger paradox depends on the degree of product differentiation of the outsider, irrespective of the mode of competition. In particular, being different from the result of Deneckere and Davidson (1985), we show that the merger paradox arises in the case of price-setting games if the degree of product differentiation of the outsider is sufficiently small.
    Keywords: merger paradox; quantity-setting game, price-setting game, asymmetric product differentiation
    JEL: D43 L12 L13 L41
    Date: 2018–02
  9. By: Antón, Miguel; Ederer, Florian; Gine, Mireia; Schmalz, Martin
    Abstract: We show theoretically and empirically that managers have steeper financial incentives to exert effort and reduce costs when an industry's firms are controlled by shareholders with concentrated stakes in the firm, and relatively few holdings in competitors. A side effect of steeper incentives is more aggressive competition. These findings inform a debate about the objective function of the firm.
    Keywords: CEO pay; Common ownership; Competition; corporate governance; management incentives
    JEL: D21 G30 G32 J31 J41
    Date: 2018–02
  10. By: Anbarci, Nejat; Cingiz, Kutay (General Economics 0 (Onderwijs)); Ismail, Mehmet (department of political economy, king's college london)
    Abstract: In presidential primaries, proportional campaign resource allocation to states with respect to their delegate numbers is a desirable concept. To study proportionality, we introduce a novel model for n-player multi-battle dynamic contests. We show that when players maximize their expected number of delegates there is a subgame perfect equilibrium in which players allocate their resources proportionally. However for at least 4 number of states and at least 2 delegates, when players maximize their probability of winning, there is always a distribution of delegates over the states such that population proportionality is not satisfied.
    Keywords: Presidential elections, dynamic contests, presedential primaries, population proportionality, multi-battle contests
    JEL: C73 D72
    Date: 2018–02–08
  11. By: Bayrak, Oben K. (CERE - the Center for Environmental and Resource Economics); Hey, John D. (CERE - the Center for Environmental and Resource Economics)
    Abstract: When people take decisions under risk, it is not only the expected utility that is important, but also the shape of the distribution of returns: clearly the dispersion is important, but also the skewness. For given mean and dispersion, decision‐makers treat positively and negatively skewed prospects differently. This paper presents a new behaviourally‐inspired model for decision making under risk, incorporating both dispersion and skewness. We run a horse‐race of this new model against seven other models of decision‐making under risk, and show that it outperforms many in terms of goodness of fit and, perhaps more importantly, predictive ability. It can incorporate the prominent anomalies of standard theory such as the Allais paradox, the valuation gap, and preference reversals.
    Keywords: Decision under Risk; Anomalies; Valuation Gap; Preference Reversals; Allais Paradox; Skewness; Dispersion; Preference Functionals; Experiments; Pairwise Choice; Expected Utility; Non‐Expected Utility; Stochastic Specifications
    JEL: D81
    Date: 2018–01–15
  12. By: Ngo Van Long; Martin Richardson; Frank Stahler
    Abstract: We construct a Hotelling-type model of two media providers, each of whom can issue fake and/or real news and each of whom can invest in the debunking of their rival's fake news. The model assumes that consumers have an innate preference for one provider or the other and value real news. However, that valuation varies according to their bias favoring one provider or the other. We demonstrate a unique subgame perfect Nash equilibrium in which only one firm issues fake news and we show, in this setting, that increased polarization of consumers - represented by a wider distribution - increases the prevalence of both fake news and debunking expenditures and is welfare reducing. We also show, interalia, that a stronger preference by consumers for their preferred provider lowers both fake news and debunking. Finally, we compare monopoly and duopoly market structures in terms of "fake news" provision and show that a public news provider can be welfare improving.
    Keywords: fake news, media, debunking
    JEL: D21 L15 L82
    Date: 2018–02
  13. By: Peters, Hans (QE / Mathematical economics and game the); Roy, Souvik (eru; economic research unit, indian statistical institute; isi); Sadhukhan, Soumyarup (eru; economic research unit, indian statistical institute; isi)
    Abstract: Finitely many agents have single-peaked preferences on a finite set of alternatives structured as a tree. Under a richness condition on the domain we characterize all unanimous and strategy-proof random social choice functions. These functions are uniquely determined by the values they assign to preference profiles where all peaks are on leafs of the tree.
    Keywords: random social choice function, single-peaked domain, trees, strategy-proofness
    JEL: D71
    Date: 2018–02–08
  14. By: Richard van Weelden
    Abstract: We consider an auction involving bidders who are “polarized.†There are three potentialbidders, a moderate, a leftist, and a rightist who are polarized in the sense thatnon-moderate bidders prefer the moderate to win the auction rather than the bidder onthe other side of the spectrum. The seller cannot commit to an optimal mechanism, butcan decide which bidders to allow to participate. While greater competition is generallythought to be beneficial for the seller, we identify conditions under which the seller canincrease her expected revenue by preventing the moderate bidder from participating. Byexcluding the moderate, the seller increases the willingness to pay of the polarized bidders.Rather than serving as a means of bringing about compromise, our analysis suggeststhat organized negotiations can serve instead to exacerbate conflict. While potentially revenueenhancing, excluding the moderate always makes the auction less efficient; in fact,the incentive to exclude moderates is greatest precisely when it is most harmful from awelfare perspective. We discuss applications of our model in economics and politics.
    Date: 2018–01
  15. By: Ajay K. Agrawal; Joshua S. Gans; Avi Goldfarb
    Abstract: Recent artificial intelligence advances can be seen as improvements in prediction. We examine how such predictions should be priced. We model two inputs into decisions: a prediction of the state and the payoff or utility from different actions in that state. The payoff is unknown, and can only be learned through experiencing a state. It is possible to learn that there is a dominant action across all states, in which case the prediction has little value. Therefore, if predictions cannot be credibly contracted upfront, the seller cannot extract the full value, and instead charges the same price to all buyers.
    JEL: D81 L12 O33
    Date: 2018–02
  16. By: Ting Liu; Ching-to Albert Ma; Henry Y. Mak
    Abstract: A Principal has a set of projects, each having different benefit potentials, and each requiring a basic technology from one of two experts and time inputs from both experts. Experts enjoy motivation utilities from production, but have private information of their own motivation preferences and project potentials. Technology and time-input choices are experts' private decisions. Experts form a Partnership, which designs a sharing rule and a gatekeeping protocol to determine experts' priority on technology choice. Using a linear cost-share contract that lets experts make minimum profits, the Principal implements the first best by delegating all decisions to the Partnership.
    Keywords: Motivated Experts, Principal, Multiagent Incentives, Partnership, Gatekeeping, Sharing Rule
    JEL: D00 D02 D80 D83
    Date: 2017–10
  17. By: Baharad, Eyal (Bar-Ilan University); Danziger, Leif (Ben Gurion University)
    Abstract: We determine the scoring rule that is most likely to select a high-ability candidate. A major result is that neither the widely used plurality rule nor the inverse-plurality rule are ever optimal, and that the Borda rule is hardly ever optimal. Furthermore, we show that only the almost-plurality, the almost-inverse-plurality, and the almost-Borda rule can be optimal. Which of the "almost" rules is optimal depends on the likelihood that a candidate has high ability and how likely committee members are to correctly identify the abilities of the different candidates.
    Keywords: committee decisions, scoring rules, "almost" voting rules
    JEL: D71
    Date: 2018–01
  18. By: BjØrn Olav Johansen (Department of Economics, University of Bergen); Thibaud Vergé (CREST; ENSAE; Université Paris-Saclay; Norwegian School of Economics)
    Abstract: We analyze the effects of price parity clauses in a setting where competing sellers distribute their products directly as well as through competing platforms. These clauses prevent a seller from offering its product at a lower price on other platforms or through its own direct sales channel. We show that when we account for the sellers? participation constraints, price parity clauses do not always lead to higher commissions and ?final prices. Instead, we fi?nd that they may simultaneously bene?fit all the actors (platforms, sellers and consumers), even in the absence of traditional efficiency arguments.
    Date: 2016–09–01
  19. By: Richard van Weelden
    Abstract: Why do office-motivated politicians sometimes espouse views that are non-congruentwith their electorate’s? Can non-congruent statements convey any information about whata politician will do if elected, and if so, why would voters elect a politician who makessuch statements? Furthermore, can electoral campaigns also directly affect an elected official’sbehavior? We develop a model of credible “cheap talk†—costless and non-bindingcommunication—in elections. The foundation is an endogenous voter preference for apolitician who is known to be non-congruent over one whose congruence is sufficientlyuncertain. This preference arises because uncertainty about an elected official’s policypreferences generates policymaking distortions due to reputation/career concerns. Weshow that cheap talk can alter the electorate’s beliefs about a politician’s policy preferencesand thereby affect the elected official’s behavior. Informative cheap talk can increaseor decrease voter welfare, with a greater scope for welfare benefits when reputation concernsare more important.
    Date: 2017–01
  20. By: Bloch, Francis (Université Paris 1 and Paris School of Economics); Dutta, Bhaskar (University of Warwick and Ashoka University); Manea, Mihai (Stanford University)
    Abstract: We analyze the formation of partnerships in social networks. Players need favors at random times and ask their neighbors in the network to form exclusive long-term partnerships that guarantee reciprocal favor exchange. Refusing to provide a favor results in the automatic removal of the underlying link. When favors are costly, players agree to provide the first favor in a partnership only if they otherwise face the risk of eventual solitude. In equilibrium, the players essential for realizing every maximum matching can avoid this risk and enjoy higher payoffs than inessential players. Although the search for partners is decentralized and reflects local incentives, the strength of essential players drives efficient partnership formation in every network. When favors are costless, players enter partnerships at any opportunity and every maximal matching can emerge in equilibrium. In this case, efficiency is limited to special linking patterns : complete and complete bipartite networks, locally balanced bipartite networks with positive surplus, and factor-critical networks.
    Keywords: networks, ; partnerships, matchings ; efficiency ; decentralized markets ; favor exchange ; completely elementary networks ; locally balanced networks
    JEL: D85 C78
    Date: 2018
  21. By: Kräkel, Matthias (University of Bonn)
    Abstract: The existing delegation literature has focused on different preferences of principal and agent concerning project selection, which makes delegating authority costly for the principal. This paper shows that delegation has a cost even when the preferences of principal and agent are exogenously aligned. As application, the commitment effect of empowerment is considered, which has been addressed by the management and social psychology literature. In addition, it is shown that even in a setting without task commitment and other behavioral effects the principal might forgo delegation though being efficient.
    Keywords: commitment, delegation, limited liability, moral hazard, renegotiation
    JEL: D86 J33 J41 M5
    Date: 2018–01
  22. By: Peleg, Bezalel (federmann center for the study of rationality and the institute of mathematics, the hebrew university of jerusalem); Peters, Hans (QE / Mathematical economics and game the)
    Keywords: implementation, strong equilibrium, social choice correspondence
    JEL: C70 D71
    Date: 2018–02–08
  23. By: Richard van Weelden
    Abstract: We study dynamic models of electoral accountability. Politicians’ policy preferences are their private information, so officeholders act to influence the electorate’s beliefs—i.e., to build reputation—and improve their re-election prospects. The resulting behavior may be socially desirable (“good reputation effects†) or undesirable (“bad reputation effects†). When newly-elected officeholders face stronger reputation pressures than their established counterparts, good reputation effects give rise to incumbency disadvantage while bad reputation effects induce incumbency advantage, all else equal. We relate these results to empirical patterns on incumbency effects across democracies.
    Date: 2017–01
  24. By: Demuynck, Thomas (universite libre de bruxelles); Herings, P. Jean-Jacques (General Economics 1 (Micro)); Saulle, Riccardo D. (General Economics 1 (Micro)); Seel, Christian (General Economics 1 (Micro))
    Abstract: We consider two versions of a Bertrand duopoly with asymmetric costs and homogeneous goods. They differ in whether predatory pricing is allowed. For each version, we derive the Myopic Stable Set in pure strategies as introduced by Demuynck, Herings, Saulle, and Seel (2017). We contrast our prediction to the prediction of Nash Equilibrium in mixed strategies.
    Keywords: Bertrand Competition, Asymmetric Costs, Myopic Stable Set
    JEL: C70 C72 D43
    Date: 2018–02–08
  25. By: Herweg, Fabian; Rosato, Antonio
    Abstract: We analyze a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naive. The transparent retailer is an independent shop managed by its owner. The deceptive retailer belongs to a chain and is operated by a manager. The retailers sell an identical base product, but the deceptive one also offers an add-on. Rational consumers never consider buying the add-on, yet naive ones can be talked into buying it. By offering its store manager a contract that pushes him to never sell the base good without the add-on, the chain can induce an equilibrium in which both retailers obtain more-than-competitive profits. The equilibrium features market segmentation with the deceptive retailer targeting only naive consumers whereas the transparent retailer serves only rational ones. Welfare is not monotone in the fraction of naive consumers in the market. Hence, policy interventions designed to de-bias naive consumers might backfire.
    Keywords: Add-On Pricing; Bait and Switch; Consumer Naiveté; Incentive Contracts.
    JEL: D03 D18 D21 L13 M52
    Date: 2018–01
  26. By: Ufuk Akcigit; Fernando Alvarez; Stephane Bonhomme; George M Constantinides; Douglas W Diamond; Eugene F Fama; David W Galenson; Michael Greenstone; Lars Peter Hansen; Uhlig Harald; James J Heckman; Ali Hortacsu; Emir Kamenica; Greg Kaplan; Anil K Kashyap; Steven Levitt; John List; Robert E Lucas Jr.; Magne Mogstad; Roger Myerson; Derek Neal; Canice Prendergast; Raghuram G Rajan; Philip J Reny; Azeem M Shaikh; Robert Shimer; Hugo F Sonnenschein; Nancy L Stokey; Richard H Thaler; Robert H Topel; Robert Vishny; Luigi Zingales
    Date: 2017

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