nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒03‒26
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The role of domain restrictions in mechanism design: ex post incentive compatibility and Pareto efficiency By Salvador Barberà; Dolors Berga; Bernardo Moreno
  2. Persuading Perceval; Information Provision in a Sequential Search Setting By Mark Whitmeyer
  3. Denial and Alarmism in Collective Action Problems By Manuel Foerster; Joel (J.J.) van der Weele
  4. Private Information and the Commitment Value of Unobservable Investment By Luigi Brighi; Marcello D'Amato
  5. Proxy wars By Konyukhovskiy, Pavel V.; Grigoriadis, Theocharis
  6. Sequential Search Auctions with a Deadline By JOOSUNG LEE; DANIEL Z. LI
  7. Subjective Probability Does Not Exist By Asad Zaman
  8. On the Political Economy of Income Taxation By Berliant, Marcus; Gouveia, Miguel
  9. Disagreement and Optimal Security Design By Juan M. Ortner; Martin C. Schmalz
  10. The probability to reach an agreement as a foundation for axiomatic bargaining By Lorenzo Bastianello; Marco LiCalzi
  11. Self-Regulating Artificial General Intelligence By Joshua S. Gans
  12. Auctions with Limited Liability through Default or Resale By Marco Pagnozzi; Krista J. Saral
  13. Distrust in Experts and the Origins of Disagreement By Alice Hsiaw; Ing-Haw Cheng
  14. Output and R&D subsidies in a mixed oligopoly By Lee, Sang-Ho; Tomaru, Yoshihiro
  15. Competitive Personalized Pricing By Zhijun Chen; Chongwoo Choe; Noriaki Matsushima
  16. Implementation by vote-buying mechanisms By Jon X. Eguia; Dimitrios Xefteris
  17. Prediction and Identification in Two-Sided Markets By Andre Boik
  18. Crowdfunding with overenthusiastic investors : a global game model By Damien Besancenot; Radu Vranceanu
  19. Dynkin games with Poisson random intervention times By Gechun Liang; Haodong Sun

  1. By: Salvador Barberà; Dolors Berga; Bernardo Moreno
    Abstract: Abstract: The possibility of designing efficient, ex-post incentive compatible, single valued direct mechanisms crucially depends on the domain of types and preferences on which they are defined. In a general framework that allows for interdependent types, we identify two relevant classes of domains. For the class of those that we call knit, we show that only the constant mechanisms can be ex post (or even interim) incentive compatible. We then propose a concept of ex post group incentive compatibility that implies Pareto efficiency on the range of mechanisms, and show that this strong condition will be implied by standard ex post incentive compatibility in our second class of domains, that we call partially knit. That opens the door to identify environments in which good incentives are not at odds with efficiency. In the particular case of private values, our results provide conditions under which individual and strong group strategy-proofness become equivalent. We provide examples of voting, matching, and auction mechanisms to which our theorems apply.
    Keywords: mechanisms, ex post incentive compatibility, ex post group incentive compatibility, strategy-proofness, strong group strategy-proofness, knit domains, respectfulness
    JEL: C78 D71 D78
    Date: 2018–03
  2. By: Mark Whitmeyer
    Abstract: This paper modifies the classic Weitzman search problem by granting the items (boxes) to be searched agency. In this zero-sum game, each box commits to a signal structure in order to maximize the chance that it is selected by the searcher at the completion of his search. There is a common, symmetric binary prior on the distribution of prizes within the boxes. If there are no search frictions, then the problem reduces to the one examined in Hulko and Whitmeyer (2017). On the other hand, with search frictions, if the expected value of the prize is sufficiently high, there is a symmetric equilibrium in pure strategies; but if it is too low, then there is no such pure strategy equilibrium. Remarkably, it is always beneficial to the searcher to have a slight search cost. This is in sharp contrast to the famous Diamond paradox. Instead, in this model, a small search cost leads to the Perfect Competition level of information provision
    Date: 2018–02
  3. By: Manuel Foerster (University of Hamburg); Joel (J.J.) van der Weele (Universiteit van Amsterdam)
    Abstract: We analyze communication about the social returns to investment in a public good. We model two agents who have private information about these returns as well as their own taste for cooperation, or social preferences. Before deciding to contribute or not, each agent submits an unverifiable report about the returns to the other agent. We show that even if the public good benefits both agents, there are incentives to misrepresent information. First, others’ willingness to cooperate generates an incentive for “alarmism”, the exaggeration of social returns in order to opportunistically induce more investment. Second, if people also want to be perceived as cooperators, a “justification motive” arises for low contributors. As a result, equilibrium communication features “denial” about the returns, depressing contributions. We illustrate the model in the context of institutional inertia and the climate change debate.
    Keywords: cheap talk; cooperation; image concerns; information aggregation; public goods
    JEL: C72 D64 D82 D83 D91
    Date: 2018–03–07
  4. By: Luigi Brighi; Marcello D'Amato
    Abstract: The commitment value of unobservable investment with cost-reducing effects is examined in an entry model where the incumbent is privately informed about his costs of production. We show that when the price signals incumbent’s costs, unobservable investment can not have any commitment value and the limit price does not limit entry. By contrast, if the price does not reveal costs, which is the more likely outcome, unobservable investment has a magnified value of commitment and a less aggressive limit price deters profitable entry.
    Keywords: Commitment, entry deterrence, limit pricing, signaling
    JEL: D24 D82 L12 L41
    Date: 2018–02
  5. By: Konyukhovskiy, Pavel V.; Grigoriadis, Theocharis
    Abstract: Proxy wars are a key pattern of political conflict and interstate competition. Rather than resorting to direct conflicts, which are costly and entail a higher level of uncertainty, governments may opt for proxy wars, which may last longer, but are less costly and render them more immune to exogenous shocks. We start with the modeling of a direct war with two players where a static equilibrium may be neither realizable nor sustainable in the long run. Then, we offer a model of proxy war where the proposed equilibria are realizable, but not always sustainable in the long run. The consolidation level of the double principal-agent relationship predicts the continuation of conflict and thus the emergence of peace.
    Keywords: non-cooperative games,principal-agent models,proxy conflicts
    JEL: C72 D72 D74 P51
    Date: 2018
  6. By: JOOSUNG LEE (University of Edinburgh); DANIEL Z. LI (Durham Business School)
    Abstract: seller wants to allocate an indivisible product among a number of potential buyers by a finite deadline, and to contact a buyer, she needs to pay a positive search cost. We investigate the optimal mechanism for this problem, and show that its outcomes can be implemented by a sequence of second-price auctions. The optimal sequential search auction is characterized by declining reserve prices and increasing search intensities (sample sizes) over time, and the monotonicity results are robust in both cases of short-lived and long-lived bidders. When bidders are long-lived the optimal reserve prices demonstrate a one-step-ahead property, and our results generalize the well-known results in sequential search problems (Weitzman, 1979). We further examine an efficient search mechanism, and show that it is featured by both lower reserve prices and search intensities than an optimal search mechanism.
    Keywords: sequential search, search mechanism, auction, deadline, sample size, reserve prices
    JEL: D44 D82 D83
    Date: 2018–03
  7. By: Asad Zaman (Pakistan Institute of Development Economics, Islamabad)
    Abstract: We show that the rationality arguments used to establish the existence of subjective probabilities depend essentially on the identification of acting-as-ifyou-believe and actually believing. We show that these two ideas, the pretense of knowledge about probabilities, and actual knowledge about probabilities, can easily be distinguished outside the restricted context of choice over special types of lotteries. When making choices over Savage-type lotteries, rational agents will act as if they know their subjective probabilities for uncertain events, but they will reveal their ignorance in other decision making contexts. This means that subjective probabilities cannot be assumed to exist, except when there is objective warrant for them.
    JEL: B40 C11
    Date: 2017
  8. By: Berliant, Marcus; Gouveia, Miguel
    Abstract: The literatures dealing with voting, optimal income taxation, and implementation are integrated here to address the problem of voting over income taxes. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget. Even though the space of alternatives is infinite dimensional, conditions on tax requirements such that a majority rule equilibrium exists are found. Finally, conditions are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.
    Keywords: Voting; Income taxation; Public good
    JEL: D72 D82 H21 H41
    Date: 2018–02–07
  9. By: Juan M. Ortner; Martin C. Schmalz
    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: disagreement, security design, optimism, overconfidence, pooling, behavioral finance
    JEL: G30 G32 D84 D86
    Date: 2018
  10. By: Lorenzo Bastianello (LEMMA Universite Paris 2 Pantheon-Assas); Marco LiCalzi (Dept. of Management, Università Ca' Foscari Venice)
    Abstract: We revisit the Nash bargaining model and axiomatize a procedural solution that maximizes the probability of successful bargaining. This probability-based approach nests both the standard and the ordinal Nash solution, and yet need not assume that bargainers have preferences over lotteries or that choice sets are convex. We consider both mediator-assisted bargaining and standard unassisted bargaining. We solve a long-standing puzzle and offer a natural interpretation of the product operator underlying the Nash solution. We characterize other known solution concepts, including the egalitarian and the utilitarian solutions.
    Keywords: cooperative bargaining, mediation, arbitration, benchmarking, copulas.
    JEL: C78 D81 D74
    Date: 2018–03
  11. By: Joshua S. Gans
    Abstract: This paper examines the paperclip apocalypse concern for artificial general intelligence. This arises when a superintelligent AI with a simple goal (ie., producing paperclips) accumulates power so that all resources are devoted towards that goal and are unavailable for any other use. Conditions are provided under which a paper apocalypse can arise but the model also shows that, under certain architectures for recursive self-improvement of AIs, that a paperclip AI may refrain from allowing power capabilities to be developed. The reason is that such developments pose the same control problem for the AI as they do for humans (over AIs) and hence, threaten to deprive it of resources for its primary goal.
    JEL: C72 D02
    Date: 2018–02
  12. By: Marco Pagnozzi (Università di Napoli Federico II and CSEF); Krista J. Saral (Webster University Geneva and CNRS, GATE Lyon St Etienne)
    Abstract: If bidders are uncertain about their value when they participate in an auction, they may overbid and suffer ex-post losses. Limited liability mitigates these losses, and may result in more aggressive bidding and higher seller revenue, but also in an inefficient allocation. Using a combination of theory and experiment, we analyze three different forms of liability in second-price auctions: full liability, limited liability by default with varying penalties, and resale-based limited liability. With a default penalty, bids are higher than under full liability, but final revenue and efficiency are lower due to the frequency of default. Auctions with resale result in the highest revenue and allocative efficiency, and are as effective as a low default penalty in alleviating bidders’ losses. Hence, allowing resale as a form of limited liability may be preferred by both bidders and sellers over other liability rules.
    Keywords: Auctions, Limited Liability, Default, Resale, Experimental Economics
    JEL: D44 C90
    Date: 2018–03–10
  13. By: Alice Hsiaw (Brandeis University); Ing-Haw Cheng (Brandeis University)
    Abstract: Disagreement about the state of the world and expert credibility often go together in areas such as economics, climate change, and medicine. We argue this occurs because individuals make a mistake we call pre-screening when determining how much weight give an expert's signals. A pre-screener mistakes credibility as a primitive of the model and uses the signals to learn about credibility before forming posterior beliefs. Pre-screening predicts that disagreement about credibility is correlated with disagreement about the state. Furthermore: 1) Differing first impressions about credibility create persistent disagreement about the state; 2) Encountering experts in different order generates disagreement; and 3) Confirmation bias, overconfidence, and their opposites endogenously arise. These effects arise even when individuals share common priors, information, and learning errors, providing a theory of the origins of disagreement.
    Keywords: disagreement, polarization, learning, expectations, experts
    Date: 2016–10
  14. By: Lee, Sang-Ho; Tomaru, Yoshihiro
    Abstract: We analyze an oligopoly where public and private firms compete in quantity and R&D. Using general functions, we show that an output subsidy and an R&D tax can achieve the first-best allocation. Moreover, the degree of privatization does not influence the optimal output subsidy but does influence the optimal R&D tax.
    Keywords: R&D subsidy; Output subsidy; Mixed oligopoly; Partial privatization
    JEL: H2 L3
    Date: 2017–03–01
  15. By: Zhijun Chen; Chongwoo Choe; Noriaki Matsushima
    Abstract: We study a duopoly model where each firm chooses personalized prices for its targeted consumers, who can be active or passive in identity management. Active consumers can bypass price discrimination and have access to the price offered to non-targeted consumers, which passive consumers cannot. When all consumers are passive, personalized pricing leads to intense competition and total industry profit lower than that under the Hotelling equilibrium. But market is always fully covered. Active consumers raise the firm's cost of serving non-targeted consumers, which softens competition. When firms have sufficiently large and non-overlapping target segments, active consumers enable firms to extract full surplus from their targeted consumers through perfect price discrimination. With active consumers, firms also choose not to serve the entire market when the commonly non-targeted market segment is small. Thus active identity management can lead to lower consumer surplus and lower social welfare. We also discuss the regulatory implications for the use of consumer information by firms as well as the implications for management.
    Date: 2018–03
  16. By: Jon X. Eguia; Dimitrios Xefteris
    Abstract: A vote-buying mechanism is such that each agent buys a quantity of votes x to cast for an alternative of her choosing, at a cost c(x), and the outcome is determined by the total number of votes cast for each alternative. In the context of binary decisions, we prove that the choice rules that can be implemented by vote-buying mechanisms in large societies are parameterized by a positive parameter rho, which measures the importance of individual preference intensities on the social choice: The limit with rho= 0 is majority rule, rho = 1 is utilitarianism, and rho?8 is the Rawlsian maximin rule. We show that any vote-buying mechanism with limit cost elasticity (1 rho)/rho as x?0 implements the choice rule defined by rho. The utilitarian efficiency of quadratic voting (Lalley and Weyl, 2016) follows as a special case.
    Keywords: implementation; mechanism design; vote-buying; social welfare; utilitarianism; quadratic voting
    JEL: D72 D71 D61
    Date: 2018–03
  17. By: Andre Boik
    Abstract: I introduce a reduced form two-sided market model to study prediction and identification in two-sided markets. The model generates the hallmark features of two-sided markets: potentially below cost or even negative prices to one side of the market, and the “see-saw” or “waterbed” effect of a tendency for price movements across sides to be negatively correlated. I show that the standard “one-sided” model of complements is a special case of the two-sided model, and that it generates those same hallmark features of two-sided markets. The model of complements also performs well in predicting price effects even when the data is actually generated by the two-sided market model; the “wrong” model often delivers the right answers and can be used to estimate market power and pass through rates. I show that even a naive one-sided model that ignores any relationship across goods/sides can perform well when prices to one side of the market are censored at zero, a very common outcome in two-sided markets. The main cost to using a model of complements to estimate cross-group effects in a two-sided market is that it invites the use of invalid instruments. I show that these findings are consistent with the empirical regularities and identification strategies in the existing two-sided market and indirect network effects literatures. I conclude by discussing the general difficulty of separately identifying whether price differences across subgroups of users of a platform are driven by pricing of network effects or simple price discrimination based on price elasticity.
    Keywords: two-sided markets, complements, prediction, identification
    JEL: L00 L13
    Date: 2018
  18. By: Damien Besancenot (LIRAES - EA 4470 - Laboratoire Interdisciplinaire de Recherche Appliquée en Economie de la Santé - UPD5 - Université Paris Descartes - Paris 5); Radu Vranceanu (Essec Business School)
    Abstract: Crowdfunding platforms are providing funds to an increasing number of projects, among which many have a strong social/community impact. Under a all-or-nothing program, the success of the investment depends on the ability of a crowd of potential investors to put their funds into the project without an explicit coordination device. With heterogeneous information, such a problem can be analyzed as a typical global game. We assume that signals of at least some agents present a systematic positive bias, driven by positive emotions about projects with high social/community impact. The analysis reveals that if the number of such overenthusiastic persons is large enough, crowdfunding finance might support financially inefficient projects. We then analyze how a monopolistic platform optimally determines transaction fees and unveil the relationship between overenthusiasm and the profit of the platform.
    Keywords: Crowdfunding,Entrepreneurship,Global games,Overenthusiasm,Behavioral IO
    Date: 2018–02–22
  19. By: Gechun Liang; Haodong Sun
    Abstract: This paper introduces a new class of Dynkin games, where the two players are allowed to make their stopping decisions at a sequence of exogenous Poisson arrival times. The value function and the associated optimal stopping strategy are characterized by the solution of a backward stochastic differential equation. The paper further applies the model to study the optimal conversion and calling strategies of convertible bonds, and their asymptotics when the Poisson intensity goes to infinity.
    Date: 2018–03

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