nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒03‒05
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Strategy-proof multi-object allocation: Ex-post revenue maximization with no wastage By Tomoya Kazumura; Debasis Mishra; Shigehiro Serizawa
  2. Cheap talk by multiple speakers in the presence of network externalities By Chung, Jeahan; Kim, Jeong-Yoo
  3. Supplier Encroachment and Consumer Welfare: Upstream Firm’s Opportunism and Multichannel Distribution By Cong Pan;
  4. Serial Priority in Project Allocation: A Characterisation By Madhav Raghavan
  5. Naive Learning in Social Networks with Random Communication By Bernd (B.) Heidergott; Jia-Ping Huang; Ines (I.) Lindner
  6. Representations of Political Power Structures by Strategically Stable Game Forms: A Survey By Bezalel Peleg; Ron Holzman
  7. Assigning an unpleasant task without payment By Goldlücke, Susanne; Tröger, Thomas
  8. Voting in Hiring Committees: Which "Almost" Rule is Optimal? By Eyal Baharad; Leif Danziger
  9. Strategically Simple Mechanisms By Tilman Börgers; Jiangtao Li
  10. Adverse Selection with Heterogeneously Informed Agents By Mohammad Davoodalhosseini
  11. The median rule in judgement aggregation By Nehring, Klaus; Pivato, Marcus
  12. A theory of autocratic transition: Prerequisites to self-enforcing democracy By Apolte, Thomas
  13. A Theory of Social Finance By Simon Cornée; Marc Jegers; Ariane Szafarz
  14. Majority Vote on Educational Standards By Robert Schwager
  15. Rationality and Asset Prices under Belief Heterogeneity By Daniele Giachini
  16. Bargaining and Hold-up: The Role of Arbitration. By Yannick Gabuthy; Abhinay Muthoo
  17. Why Delegate? Comparing Direct and Representative Democracy By Guadalupe Correa-Lopera
  18. Disagreement and Security Design By Ortner, Juan; Schmalz, Martin

  1. By: Tomoya Kazumura; Debasis Mishra; Shigehiro Serizawa
    Abstract: A seller is selling multiple objects to a set of agents. Each agent can buy at most one object and his utility over consumption bundles (i.e., (object,transfer) pairs) need not be quasilinear. The seller considers the following desiderata for her (allocation) rule, which she terms desirable: (1) strategy-proofness, (2) ex-post individual rationality, (3) equal treatment of equals, (4) no wastage (every object is allocated to some agent). The minimum Walrasian equilibrium price (MWEP) rule is desirable. We show that at each preference profile, the MWEP rule generates more revenue for the seller than any desirable rule satisfying no subsidy. Our result works for quasilinear domain, where the MWEP rule is the VCG rule, and for various non-quasilinear domains, some of which incorporate positive income effect of agents. We can relax no subsidy to no bankruptcy in our result for certain domains with positive income effect.
    Date: 2017–10
  2. By: Chung, Jeahan; Kim, Jeong-Yoo
    Abstract: The authors develop a model of cheap talk with multiple speakers in the presence of network externalities so that their utility functions are increasing in the network size. They first show that if there is no noise in private information that each sender receives, the full information is revealed by the harshest cross-checking strategies, that is, strategies to punish the senders unless their messages exactly coincide. Then, the authors show that with even a small noise cross-checking strategies cannot induce full revelation if utility functions of senders are linear in the network size, while full revelation is possible if utility functions are strictly concave. They find a sufficient condition for the existence of a fully revealing equilibrium which is supported by the cross-checking strategy with a positive confidence interval independent of each sender's private information.
    Keywords: cheap talk,cross-checking strategy,fully revealing equilibrium,network externality,word-of-mouth communication
    JEL: C7 D8
    Date: 2018
  3. By: Cong Pan;
    Abstract: I revisit supplier encroachment under the framework of a two-part tariff contract. When a monopoly manufacturer supplies competing retailers and each retailer’s contracting process is unobservable to the rival, the retailer’s lack of knowledge vis-à-vis its rival’s contract may undermine the manufacturer’s commitment power, which prevents the manufacturer from achieving optimal profit. I demonstrate that when the manufacturer directly supplies the resale market, it can use the direct channel as a commitment tool and thus restore its market power. Even though the manufacturer’s encroachment creates more competitors in the resale market, the resultant higher wholesale prices aggravate double marginalization, which may reduce consumer welfare. This result holds even when the manufacturer is very efficient in direct selling.
    Date: 2018–02
  4. By: Madhav Raghavan
    Abstract: We consider a model in which projects are to be assigned to agents based on their preferences, and where projects have capacities, i.e., can each be assigned to a minimum and maximum number of agents. The extreme cases of our model are the social choice model (the same project is assigned to all agents) and the house allocation model (each project is assigned to at most one agent). We show that, with general capacities,an allocation rule satis es strategy-proofness, group-non-bossiness, limited in uence, unanimity, and neutrality, if and only if it is a strong serial priority rule. A strong serial priority rule is a natural extension of a dictatorial rule (from the social choice model) and a serial priority rule (from the house allocation model). Our result thus provides a bridge between the characterisations in Gibbard (1973, \Manipulation of voting schemes: A general result", Econometrica, 41, 587-601), Satterthwaite (1975,Strategy-proofness and Arrow's Conditions: Existence and correspondence theorems for voting procedures and social welfare functions", Journal of Economic Theory, 10,187-216) and Svensson (1999, \Strategy-proof allocation of indivisible goods", Social Choice and Welfare, 16, 557-567).
    JEL: C78 D71
    Date: 2017–10
  5. By: Bernd (B.) Heidergott (VU Amsterdam, The Netherlands); Jia-Ping Huang (Shenzhen University, China); Ines (I.) Lindner (VU Amsterdam, The Netherlands)
    Abstract: We study social learning in a social network setting where agents receive independent noisy signals about the truth. Agents naïvely update beliefs by repeatedly taking weighted averages of neighbors' opinions. The weights are fixed in the sense of representing average frequency and intensity of social interaction. However, the way people communicate is random such that agents do not update their belief in exactly the same way at every point in time. We show that even if the social network does not privilege any agent in terms of influence, a large society almost always fails to converge to the truth. We conclude that wisdom of crowds is an illusive concept and bares the danger of mistaking consensus for truth.
    Keywords: Wisdom of crowds; social networks; information cascades; naive learning
    JEL: D83 D85 C63
    Date: 2018–02–28
  6. By: Bezalel Peleg; Ron Holzman
    Abstract: We survey the results on representations of committees and constitutions by game forms that possess some kind of equilibrium strategies for each profile of preferences of the players. The survey is restricted to discrete models, that is, we deal with finitely many players and alternatives. No prior knowledge of social choice is assumed: As far as definitions are concerned, the paper is self-contained. Section 2 supplies the necessary general tools for the rest of the paper. Each definition is followed by a simple (but nontrivial) example. In Section 3 we give a complete account of representations of committees (proper and monotonic simple games), by exactly and strongly consistent social choice functions. We start with Peleg's representations of weak games, and then provide a complete and detailed account of Holzman's solution of the representation problem for simple games without veto players. In Section 4 we deal with representations of constitutions by game forms. Following Gärdenfors we model a constitution by a monotonic and super additive effectivity function. We fully characterize the representations for three kinds of equilibrium: Nash equilibrium; acceptable equilibrium (Pareto optimal Nash equilibrium); and strong Nash equilibrium. We conclude in Section 5 with a report on two recent works on representations of constitutions under incomplete information.
    Date: 2018–02
  7. By: Goldlücke, Susanne; Tröger, Thomas
    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
  8. By: Eyal Baharad; Leif Danziger
    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
  9. By: Tilman Börgers; Jiangtao Li
    Abstract: We define and investigate a property of mechanisms that we call “strategic simplicity,” and that is meant to capture the idea that, in strategically simple mechanisms, strategic choices are easy. We define a mechanism to be strategically simple if strategic choices can be based on first-order beliefs about the other agents’ preferences alone, and there is no need for agents to form higher-order beliefs, because such beliefs are irrelevant to agents’ optimal choices. All dominant strategy mechanisms are strategically simple. But many more mechanisms are strategically simple. In particular, strategically simple mechanisms may be more flexible than dominant strategy mechanisms in the voting problem and the bilateral trade problem..
    JEL: D82
    Date: 2018
  10. By: Mohammad Davoodalhosseini
    Abstract: A model of over-the-counter markets is proposed. Some asset buyers are informed in that they can identify high quality assets. Heterogeneous sellers with private information choose what type of buyers they want to trade with. When the measure of informed buyers is low, there exists a unique and stable equilibrium, and interestingly, price, trading volume and welfare typically decrease with more informed buyers. When the measure of informed buyers is intermediate, multiple equilibria arise, and price, trading volume and welfare may decrease or increase with more informed buyers, depending on the equilibrium being played. A switch from one equilibrium to another can lead to large drops in liquidity, price, trading volume and welfare, like a financial crisis. The measure of informed buyers is then endogenized by allowing buyers to invest in a technology that enables them to identify high quality assets. In this case, the model features endogenous strategic complementarity in acquiring the information technology. Multiple equilibria still exist, with different measures of informed buyers, but a scheme of tax/subsidy on information acquisition sometimes leads to the unique equilibrium.
    Keywords: Economic models, Financial markets, Financial stability, Financial system regulation and policies, Market structure and pricing
    JEL: D40 D82 D83 G01 G10 G20
    Date: 2018
  11. By: Nehring, Klaus; Pivato, Marcus
    Abstract: A judgement aggregation rule takes the views of a collection of voters over a set of interconected issues, and yields a logically consistent collective view. The median rule is a judgement aggregation rule that selects the logically consistent view which minimizes the average distance to the views of the voters (where the “distance” between two views is the number of issues on which they disagree). In the special case of preference aggregation, this is called the Kemeny rule. We show that, under appropriate regularity conditions, the median rule is the unique judgement aggregation rule which satisfies three axioms: Ensemble Supermajority Efficiency, Reinforcement, and Continuity. Our analysis covers aggregation problems in which different issues have different weights, and in which the consistency restrictions on input and output judgments may differ.
    Keywords: Judgement aggregation; majoritarian; reinforcement; consistency; median.
    JEL: D71
    Date: 2018–01–30
  12. By: Apolte, Thomas
    Abstract: This paper aims at contributing to a better understanding of the conditions of self-enforcing democracy by analyzing the recent wave of autocratic transitions. Based on a game-theoretic framework, we work out the conditions under which governments may induce the diverse public authorities to coordinate on extra-constitutional activities, eventually transforming the politico-institutional setting into one of autocratic rule. We find three empirically testable characteristics that promote this coordination process, namely: populism and public support, corruption, and a lack in the separation of powers. By contrast, low degrees of corruption and strongly separated powers can be viewed as prerequisites to self-enforcing democracy.
    JEL: D02 D72 D74 P48
    Date: 2018
  13. By: Simon Cornée (Univ Rennes, CREM, CNRS, UMR 6211, F-35000 Rennes, France, and CERMi); Marc Jegers (Vrije Universiteit Brussel (VUB), Department of Applied Economics, Belgium); Ariane Szafarz (Université Libre de Bruxelles (ULB), SBS-EM, CEB, and CERMi, Belgium)
    Abstract: Myriad different types of institutions are involved in social finance. This paper attempts to make sense of the diverse ways of operationalizing the delivery of funds by social financial institutions (SFIs). It explores the continuum of feasible SFIs, which range from foundations offering pure grants to social banks supplying soft loans. The in-between category includes “quasi-foundations” granting loans that require partial repayment only. In our model, the SFIs face information asymmetries and trade off costly social screening against social contributions, under the budget constraint that depends on the generosity of their funders. We characterize the SFIs’ optimal strategy and suggest that quasi-foundations can be efficient vehicles for social finance, especially when social screening costs are relatively low.
    Keywords: Social Finance, Philanthropy, Foundations, Social Banks
    JEL: G21 D63 G24 H25
    Date: 2018–02
  14. By: Robert Schwager
    Abstract: The direct democratic choice of an examination standard, i.e., a performance level required to graduate, is evaluated against a utilitarian welfare function. It is shown that the median preferred standard is inefficiently low if the marginal cost of reaching a higher performance reacts more sensitively to ability for high than for low abilities, and if the right tail of the ability distribution is longer than the left tail. Moreover, a high number of agents who choose not to graduate may imply that the median preferred standard is inefficiently low even if these conditions fail.
    Keywords: examination, school, drop-outs, democracy, median voter
    JEL: I21 D72 I28
    Date: 2018
  15. By: Daniele Giachini
    Abstract: In this paper I study the relationship between rationality and asset prices when agents have heterogeneous and incorrect beliefs about future events. Using the fully rational pricing as a benchmark, I show that when agents behave according to the Subjective Generalized Kelly rule (Bottazzi et al., 2017), which is not optimal under agents' beliefs, the long-run pricing performance is at least as good as the one emerging from an economy where agents maximize their preferences under rational price expectations. Indeed, there exist generic cases in which expected long-run prices of the Subjective Generalized Kelly economy approximate better the rational pricing than those attained by the utility maximizers economy. Moreover in the limit of agents having a discount factor equal to one the prices of the Subjective Generalized Kelly economy converge to those of the fully rational economy. Hence the fact that agents use non-optimal (heuristic) decision rules may correct for biases in beliefs and, as a consequence, improve the pricing performance of the economy.
    Keywords: Belief Heterogeneity, Rationality, Investment Rules, Heuristics, Financial Markets, Asset Pricing
    Date: 2018–02–22
  16. By: Yannick Gabuthy; Abhinay Muthoo
    Abstract: This paper presents an “incomplete contracting” model of arbitration. A fundamental notion that underlies our analysis is that it is optimal (in terms of promoting productivity-enhancing, relationship-specific investments) to determine ex-ante – well before arbitration would actually be required (if at all) – whether or not parties would engage the services of an arbitrator in the eventuality that they fail to resolve any disputes by themselves. We embed this idea in a simple model of a long-term relationship between a firm and its workforce, in which they can make (non-contractible) investments, and then negotiate over the division of the resultant surplus, which, if previously agreed, occurs in the shadow of arbitration. We derive several results and insights concerning whether or not it is optimal for the parties to commit to call an arbitrator, in terms of arbitrator-preference and technological parameters.
    Keywords: Arbitration, Non-Contractible Investments, Hold-up, Bargaining.
    JEL: D74 J52 K41
    Date: 2018
  17. By: Guadalupe Correa-Lopera (Department of Economics, University of Málaga)
    Abstract: The growing demand for referendums challenges the traditional model of representative democracy. Why may voters prefer to decide by themselves (direct democracy) rather than delegate on their representatives (representative democracy)? We propose a model in which voters select either a policy or a representative under uncertainty over the socially correct policy. Under direct democracy, the policy selected by voters is implemented, while under representative democracy the elected representative decides the policy. We assume that representatives have informational advantage. Our main result shows that a society in which the majority of voters are selfish may prefer a system of political representation when they are strongly ideologically polarized. If, instead of ideological confrontation, there is consensus among these selfish voters, referendum is the preferred instrument for making decisions. Non-selfish societies, however, always prefer to delegate on better informed representatives.
    Keywords: Direct democracy; Representative democracy; Ideological electorate; Pragmatic electorate; Polarization; Information.
    JEL: D72 D82
    Date: 2018–01
  18. By: Ortner, Juan; Schmalz, Martin
    Abstract: We study optimal security design when the issuer and market participants agree to disagree about the characteristics of the asset to be securitized. We show that pooling assets can be optimal because it mitigates the effects of disagreement between issuer and investors, whereas tranching a cash-flow stream allows the issuer to exploit disagreement between investors. Interestingly, pooling and tranching can be complements. The optimality of debt with or without call provisions can be derived as a special case. In a model with multiple financing rounds, convertible securities naturally emerge to finance highly skewed ventures.
    Keywords: behavioral finance; disagreement; Optimism; overconfidence; pooling; security design; tranching
    JEL: D84 D86 G30 G32
    Date: 2018–01

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