nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒04‒09
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information Design: A Unified Perspective By Dirk Bergemann; Stephen Morris
  2. Savage's Theorem Under Changing Awareness By Franz Dietrich
  3. Subjective expected utility with state-dependent but action/observation-independent preferences By DREZE Jean
  4. Tying the Politicians' Hands: The Optimal Limits to Representative Democracy By Didier Laussel
  5. Optimal Taxation with Behavioral Agents By Xavier Gabaix; Emmanuel Farhi
  6. Combinations of Different Length Contracts in a Multiperiod Model: Short, Medium and Long-term Contracts By Meg Adachi-Sato; Kazuya Kamiya
  7. Number of bidders and the winner’s curse By Ronald Peeters; Anastas P. Tenev
  8. Conflict and Competition over Multi-Issues By Osório, António (António Miguel)
  9. Stochastic Dynamic Utilities and Inter-Temporal Preferences By Marco Maggis
  10. Smart TWAP Trading in Continuous-Time Equilibria By Jin Hyuk Choi; Kasper Larsen; Duane J. Seppi
  11. Jury Theorems By Dietrich, Franz; Spiekermann, Kai
  12. Supplier encroachment and retailer effort By Noriaki Matsushima; Tomomichi Mizuno
  13. The Midpoint-Constrained Egalitarian Bargaining Solution By Karos, Dominik; Rachmilevitch, Shiran
  14. Mislearning from Censored Data: Gambler's Fallacy in a Search Problem By Kevin He
  15. Foundations for Intertemporal Choice By Ali al-Nowaihi; Sanjit Dhami
  16. Tax Evasion, Embezzlement and Public Good Provision By Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
  17. Horizontal Mergers and Product Innovation By Federico, Giulio; Langus, Gregor; Valletti, Tommaso
  18. Rethinking Nudge: Not One But Three Concepts By Mongin, Philippe; Cozic, Mikaël
  19. Edgeworth trading on networks By Daniele Cassese; Paolo Pin
  20. Allocation Mechanisms, Incentives, and Endemic Institutional Externalities By Hammond, Peter J

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: Given a game with uncertain payo?s, information design analyzes the extent to which the provision of information alone can influence the behavior of the players. Information design has a literal interpretation, under which there is a real information designer who can commit to the choice of the best information structure (from her perspective) for a set of participants in a game. We emphasize a metaphorical interpretation, under which the information design problem is used by the analyst to characterize play in the game under many di?erent information structures. We provide an introduction into the basic issues and insights of a rapidly growing literature in information design. We show how the literal and metaphorical interpretations of information design unify a large body of existing work, including that on communication in games (Myerson (1991)), Bayesian persuasion (Kamenica and Gentzkow (2011)) and some of our own recent work on robust predictions in games of incomplete information.
    Keywords: Information design, Bayesian persuasion, correlated equilibrium, incomplete information, robust predictions, information structure
    JEL: C72 D82 D83
    Date: 2017–03
  2. By: Franz Dietrich (PSE - Paris School of Economics, CNRS - Centre National de la Recherche Scientifique, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne)
    Abstract: This paper proposes a simple unified framework of choice under changing awareness, addressing both outcome awareness and (nature) state awareness, and both how fine and how exhaustive the awareness is. Six axioms characterize an (essentially unique) expected-utility rationalization of preferences, in which utilities and probabilities are revised according to three revision rules when awareness changes: (R1) utilities of unaffected outcomes are transformed affinely; (R2) probabilities of unaffected events are transformed proportionally; (R3) enough probabilities ‘objectively’ never change (they represent revealed objective risk). Savage's Theorem is a special case of the theorem, namely the special case of fixed awareness, in which our axioms reduce to Savage's axioms while R1 and R2 hold trivially and R3 reduces to Savage's requirement of atomless probabilities. Rule R2 parallels Karni and Viero's (2013) ‘reverse Bayesianism’ and Ahn and Ergin's (2010) ‘partition-dependence’. The theorem draws mathematically on Kopylov (2007), Niiniluoto (1972) and Wakker (1981).
    Date: 2018–07
  3. By: DREZE Jean (CORE, Université catholique de Louvain)
    Abstract: Under state-dependent preferences, probabilities and units of scale of state-dependent utilities are not separately identified, in standard models: only their products matter to decisions. Separate identification has been studied under implicit actions (Drèze 1961, 1987) or under explicit actions and observations (Karni 2011, 2013). This paper complements both approaches and relates them, when conditional preferences for final outcomes are independent of actions and observations. That special case permits drastic technical simplification while remaining open to some natural extensions.
    Keywords: expected utility, state-dependent preferences, subjective probability
    JEL: D81
    Date: 2018–01–29
  4. By: Didier Laussel (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales)
    Abstract: We study the optimal delegation problem which arises between the median voter (writer of the constitution) and the (future) incumbent politician when not only the state of the world and but also the politician’s type (preferred policy) are the policy-maker’s private information. We show that it is optimal to tie the hands of the politician by imposing him/her both a policy floor and a policy cap and delegating him/her the policy choice only in between. The delegation interval is shown to be the smaller the greater is the uncertainty about the politician’s type. These results apply outside the specific problem to which our model is applied here.
    Keywords: representative democracy,optimal delegation,political uncertainty
    Date: 2018–01
  5. By: Xavier Gabaix (Harvard economics dpt); Emmanuel Farhi (Harvard University)
    Abstract: This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.
    Date: 2017
  6. By: Meg Adachi-Sato (School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology University); Kazuya Kamiya (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper develops a dynamic contracting model with verifi able and unverifi able outputs. We prove the following properties of equilibrium wage contracts, which are new to the literature: (i) combinations of dfferent length contracts can become equilibria, (ii) medium-term contracts can be included in the combinations, and (iii) equilibrium wage pro le dffers by the way different length contracts are combined. We also investigate a general mechanism, which includes menu and option contracts, and show that no mechanism can perform better than simple wage contracts in our environment. In short, above properties remain valid under general mechanisms.
    Keywords: Dffering length contracts, Unverifi able outputs, Unveri fiable investments, Unveri fiable ability, Holdup problems
    JEL: D86 J41 J31
    Date: 2018–03
  7. 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
  8. By: Osório, António (António Miguel)
    Abstract: Real life disputes, negotiations and competitive situations involve multi-issue considerations in which the final outcome depends on the aggregated effort over several dimensions. We consider two allocation systems, the I-system, in which each issue is disputed and award independently, and the A-system, in which all issues are aggregate in a single prize award. In the A-system, we propose a contest success function that aggregates the individuals multi-issue efforts in a single outcome. Among other results, we found that the A-system tends to induce higher total effort than the I-system. The model is also able to reproduce a large set of strategic behaviors. For instance, under decreasing returns to e¤ort, individuals maximize their payoffs by distributing e¤ort over all issues, while under increasing returns to effort, individuals focus on a single issue. Hybrid equilibria, in which one individual focus in a single issue while the other individual diversifies effort over all issues, may also emerge when individuals hold different returns to effort. Strategic behavior is simultaneously influenced by the weight of each issue on the final outcome and by comparative advantages. Throughout the manuscript, we link our results with strategic behavior observed in electoral competition, i.e., "issue ownership", "issue divergence/convergence" and "common value issues". We expect that our findings will help researchers and practitioners to better understand the process of endogenous selection of issues in competitive contexts and to provide guidance in the implementation of the optimal allocation mechanism. JEL: C72, D72, D74, D81. KEYWORDS: Contest success function, multi-issue competition, effort maximization, electoral competition.
    Keywords: Jocs no-cooperatius (Matemàtica), Gestió de conflictes, 33 - Economia,
    Date: 2018
  9. By: Marco Maggis
    Abstract: We propose an axiomatic approach which economically underpins the representation of dynamic preferences in terms of a stochastic utility function, sensitive to the information available to the decision maker. Our construction is recursive and based on inter-temporal preference relations, whose characterization is inpired by the original intuition given by Debreu's State Dependent Utilities (1960).
    Date: 2018–03
  10. By: Jin Hyuk Choi; Kasper Larsen; Duane J. Seppi
    Abstract: This paper presents a continuous-time equilibrium model of liquidity provision in a market with multiple strategic investors with intraday trading targets. We show analytically that there are infinitely many Nash equilibria. We solve for the welfare-maximizing equilibrium and the competitive equilibrium, and we illustrate that these equilibria are different. The model is easily computed numerically, and we provide a number of numerical illustrations.
    Date: 2018–03
  11. By: Dietrich, Franz; Spiekermann, Kai
    Abstract: We give a review of jury theorems, including Condorcet's (1785) classic theorem and several later refinements and departures. The review comes with a critique of jury theorems from a social-epistemology perspective. We assess the plausibility of the theorems' conclusions and premises and the potential of jury theorems to serve as formal arguments for the 'wisdom of crowds'. In particular, we argue (i) that there is a fundamental tension between voters' independence and voters' competence, hence between the two premises of typical jury theorems; (ii) that the (asymptotic) conclusion that 'huge groups are infallible', reached by many jury theorems, is an artifact of unjustified premises; and (iii) that the (non-asymptotic) conclusion that 'larger groups are more reliable', also reached by many jury theorems, is not an artifact and should be regarded as the more adequate formal rendition of the 'wisdom of crowds'.
    Keywords: jury theorems, Condorcet jury theorem, social epistemology, wisdom of crowds
    JEL: C10 C12 D70 D71 D79 D82 D83 K0
    Date: 2016–07
  12. By: Noriaki Matsushima; Tomomichi Mizuno
    Abstract: We propose simple dual-channel models in which an upstream manufacturer trades with a downstream retailer that is able to engage in cost-reducing activities. When the manufacturer determines whether to encroach on the downstream market after observing the retailer's effort level, the threat of manufacturer encroachment can work as a disciplinary device to induce the retailer to aggressively engage in cost reductions, after which the manufacturer refrains from encroaching further on the downstream market. The disciplinary device is more likely to improve consumer welfare and social welfare, although the encroachment itself can harm social welfare.
    Date: 2018–03
  13. By: Karos, Dominik (General Economics 1 (Micro)); Rachmilevitch, Shiran (university of haifa)
    Abstract: A payoff allocation in a bargaining problem is midpoint dominant if each player obtains at least one n-th of her ideal payoff. The egalitarian solution of a bargaining problem may select a payoff configuration which is not midpoint dominant. We propose and characterize the solution which selects for each bargaining problem the feasible allocation that is closest to the egalitarian allocation, subject to being midpoint dominant. Our main axiom, midpoint monotonicity, is new to the literature; it imposes the standard monotonicity requirement whenever doing so does not result in selecting an allocation which is not midpoint dominant. In order to prove our main result we develop a general extension theorem for bargaining solutions that are order-preserving with respect to any order on the set of bargaining problems.
    Keywords: bargaining, egalitarianism, midpoint domination
    JEL: C71 C78 D61 D63
    Date: 2018–03–29
  14. By: Kevin He
    Abstract: In the context of a sequential search problem, I explore large-generations learning dynamics for agents who suffer from the "gambler's fallacy" - the statistical bias of anticipating too much regression to the mean for realizations of independent random events. Searchers are uncertain about search pool qualities of different periods but infer these fundamentals from search outcomes of the previous generation. Searchers' stopping decisions impose a censoring effect on the data of their successors, as the values they would have found in later periods had they kept searching remain unobserved. While innocuous for rational agents, this censoring effect interacts with the gambler's fallacy and creates a feedback loop between distorted stopping rules and pessimistic beliefs about search pool qualities of later periods. In general settings, the stopping rules used by different generations monotonically converge to a steady-state rule that stops searching earlier than optimal. In settings where true pool qualities increase over time - so there is option value in rejecting above-average early draws - learning is monotonically harmful and welfare strictly decreases across generations.
    Date: 2018–03
  15. By: Ali al-Nowaihi; Sanjit Dhami
    Abstract: We consider discounted-utility models with a reference stream of outcomes. We provide a common framework for the main empirically supported discount functions in terms of three underlying functions: The delay, speedup and generating functions. Each of the delay and speedup functions can be uniquely elicited from behavior and, hence, can be fitted to the data. These two functions determine whether the discount function is subadditive, additive or superadditive; and whether the discount function exhibits declining, constant or increasing impatience. The third function, the generating function, links the speedup function to the discount function. Our framework nests several important attribute-based models that are typically considered to be in a separate class. We also show that apparent intransitivities of time preferences can be accounted for by framing effects.
    Keywords: time discounting, framing effects, impatience, additivity, common difference effect, intransitive preferences
    JEL: C60 D91
    Date: 2018
  16. By: Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
    Abstract: This paper presents a model that links tax evasion, embezzlement, and the public good provision and suggests how they are interrelated. We characterize the conditions for three types of Nash equilibria: tax evasion, embezzlement, and efficient public good provision.
    Keywords: Tax evasion, Embezzlement, Corruption, Audits, Sanctions, Public goods
    JEL: H40 D83 D73
    Date: 2018
  17. By: Federico, Giulio; Langus, Gregor; Valletti, Tommaso
    Abstract: We set up a stylized oligopoly model of uncertain product innovation to analyze the effects of a merger on innovation incentives and on consumer surplus. The model incorporates two competitive channels for merger effects: the "price coordination" channel and the internalization of the "innovation externality". We solve the model numerically and find that price coordination between the two products of the merged firm tends to stimulate innovation, while internalization of the innovation externality depresses it. The latter effect is stronger in our simulations and, as a result, the merger leads to lower innovation incentives for the merged entity, absent cost efficiencies and knowledge spillovers. In our numerical analysis both overall innovation and consumer welfare fall after a merger.
    Keywords: Innovation; mergers; R&D
    JEL: D43 G34 L40 O30
    Date: 2018–02
  18. By: Mongin, Philippe; Cozic, Mikaël
    Abstract: Nudge is a concept of policy intervention that originates in Thaler and Sunstein's (2008) popular eponymous book. Following their own hints, we distinguish three properties of nudge interventions: they redirect individual choices by only slightly altering choice conditions (here nudge 1), they use rationality failures instrumentally (here nudge 2), and they alleviate the unfavourable effects of these failures (here nudge 3). We explore each property in semantic detail and show that no entailment relation holds between them. This calls into question the theoretical unity of nudge, as intended by Thaler and Sunstein and most followers. We eventually recommend pursuing each property separately, both in policy research and at the foundational level. We particularly emphasize the need of reconsidering the respective roles of decision theory and behavioural economics to delineate nudge 2 correctly. The paper differs from most of the literature in focusing on the definitional rather than the normative problems of nudge.
    Keywords: nudge; liberal paternalism; policy analysis; behavioural economics; decision theory; rationality; decision biases; Thaler and Sunstein; Kahneman and Tversky
    JEL: D03 D18 D70 K32 K39 M38
    Date: 2017–01–01
  19. By: Daniele Cassese; Paolo Pin
    Abstract: We define a class of pure exchange Edgeworth trading processes that under minimal assumptions converge to a stable set in the space of allocations, and characterise the Pareto set of these processes. Choosing a specific process belonging to this class, that we define fair trading, we analyse the trade dynamics between agents located on a weighted network. We determine the conditions under which there always exists a one-to-one map between the set of networks and the set of stable equilibria. This result is used to understand what is the effect of the network topology on the trade dynamics and on the final allocation. We find that the positions in the network affect the distribution of the utility gains, given the initial allocations
    Date: 2018–03
  20. By: Hammond, Peter J (Department of Economics, and CAGE (Competitive Advantage in the Global Economy), University of Warwick,)
    Abstract: Whether an economic agent's decision creates an externality often depends on the institutional context in which the decision was made. Indeed, in orthodox economics, a technological or exogenous externality occurs just in case one agent's economic welfare or production possibilities are directly affected by the market decisions of other agents. A pecuniary externality occurs just in case one consumer's economic welfare or producer's profit is affected indirectly by price changes caused by changes in other agents' decisions. Similarly, an institutional or endogenous externality may arise whenever allocations are determined by a mechanism that is not strategyproof for some agent. Then even a resource balance constraint creates an institutional externality except in special cases such as when no individual agent's action can affect market clearing prices - i.e., there are no pecuniary externalities.
    Keywords: Externalities ; pecuniary externalities ; strategyproof mechanisms ; institutional externalities
    JEL: D63 D70 D90 Q54 Q56
    Date: 2018

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