nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒04‒30
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Relational Incentive Contracts and Performance Measurement. By Chi, Chang Koo; Olsen, Trond E.
  2. Bayesian Persuasion with Costly Information Acquisition By Ludmila Matyskova
  3. Learning While Setting Precedents By Chen, Ying; Eraslan, Hulya
  4. Dispersed Behavior and Perceptions in Assortative Societies By Mira Frick; Ryota Iijima; Yuhta Ishii
  5. Subjective expected utility with topological constraints By Pivato, Marcus; Vergopoulos, Vassili
  6. Excessive Search By Miao, Chun-Hui
  7. Equilibrium Effort in Games with Homogeneous Production Functions and Homogeneous Valuation By Walter Ferrarese
  8. Beliefs and consumer search in a vertical industry By Maarten Janssen; Sandro Shelegia
  9. Farsighted Rationality By Karos, Dominik; Kasper, Laura
  10. Information Gatekeeping and Media Bias By Eraslan, Hulya; Ozerturk, Saltuk
  11. On Lawyer Compensation When Appeals Are Possible. By Christian At; Tim Friehe; Yannick Gabuthy
  12. Approval Voting and Shapley Ranking By Pierre Dehez; Victor Ginsburgh
  13. Information Flows, the Accuracy of Opinions, and Crashes in a Dynamic Network By Phillip Monin; Richard Bookstaber
  14. Non-Exclusive Insurance with Free Entry: A Pedagogical Note By Pradeep Dubey; John Geanakoplos
  15. Investment and Market Structure in Common Agency Games By Guillem Roig

  1. By: Chi, Chang Koo (Dept. of Economics, Norwegian School of Economics and Business Administration); Olsen, Trond E. (Department of Business and Management Science)
    Abstract: This paper analyzes relational contracts under moral hazard. We first show that if the available information (signal) about effort satisfies a generalized monotone likelihood ratio property, then irrespective of whether the first-order approach (FOA) is valid or not, the optimal bonus scheme takes a simple form. The scheme rewards the agent a fixed bonus if his performance index exceeds a threshold, like the FOA contract of Levin (2003), but the threshold can be set differently. We next derive a sufficient and necessary condition for non-verifiable information to improve a relational contract. Our new informativeness criterion sheds light on the nature of an ideal performance measure in relational contracting.
    Keywords: Relational contracts; non-verifiable performance measures; first-order approach; bonus scheme; informativeness criterions
    JEL: D80 D86 L14
    Date: 2018–04–20
  2. By: Ludmila Matyskova
    Abstract: A sender who chooses a signal to reveal to a receiver can often influence the receiver’s subsequent actions. Is persuasion more difficult when the receiver has her own sources of information? Does the receiver benefit from having additional information sources? We consider a Bayesian persuasion model extended to a receiver’s endogenous acquisition of information under an entropy-based cost commonly used in rational inattention. A sender’s optimal signal can be computed from standard Bayesian persuasion subject to an additional constraint: the receiver never gathers her own costly information. We further determine a finite set of the sender’s signals satisfying the additional constraint in which some optimal signal must be contained. The set is characterized by linear conditions using the receiver’s utility and information cost parameters. The new method is also applicable to a standard Bayesian persuasion model and can simplify, sometimes dramatically, the search for a sender’s optimal signal (as opposed to a standard concavification technique used to solve these models). We show that the ‘threat’ of additional learning weakly decreases the sender’s expected equilibrium payoff. However, the outcome can be worse not only for the sender, but also for the receiver.
    Keywords: Bayesian persuasion; rational inattention; costly information acquisition; information design;
    JEL: D72 D81 D82 D83
    Date: 2018–03
  3. By: Chen, Ying (Johns Hopkins University); Eraslan, Hulya (Rice University)
    Abstract: A decision maker (DM) must address a series of problems over time. Each period, a random case arises and the DM must make a yes-or-no decision, which we call a ruling. She is uncertain about the correct ruling until she conducts a costly investigation. A ruling establishes a precedent, which may be costly to violate in the future. We compare the DM's incentive to acquire information, the evolution of standards and the social welfare under two institutions: nonbinding precedent and binding precedent. Under nonbinding precedent, the DM is not required to follow previous rulings, but under binding precedent, she must follow previous rulings where applicable. We find that, compared to nonbinding precedent, the incentive for information acquisition is stronger under binding precedent in earlier periods when few precedents exist, but as more precedents are established over time, the incentive for information acquisition becomes weaker under binding precedent. Even though erroneous rulings may be perpetuated under binding precedent, social welfare can be higher because of the more intensive investigation conducted early on.
    JEL: D02 D23 D83
    Date: 2018–02
  4. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yuhta Ishii (Harvard University)
    Abstract: Motivated by the fact that people’s perceptions of their societies are routinely incorrect, we study the possibility and implications of misperception in social interactions. We focus on coordination games with assortative interactions, where agents with higher types (e.g., wealth, political attitudes) are more likely than lower types to interact with other high types. Assortativity creates scope for misperception, because what agents observe in their local interactions need not be representative of society as a whole. To model this, we define a tractable solution concept, “local perception equilibrium” (LPE), that describes possible behavior and perceptions when agents’ beliefs are derived only from their local interactions. We show that there is a unique form of misperception that can persist in any environment: This is assortativity neglect, where all agents believe the people they interact with to be a representative sample of society as a whole. Relative to the case with correct perceptions, assortativity neglect generates two mutually reinforcing departures: A “false consensus effect,” whereby agents’ perceptions of average characteristics in the population are increasing in their own type; and more “dispersed” behavior in society, which adversely affects welfare due to increased miscoordination. Finally, we propose a comparative notion of when one society is more assortative than another and show that more assortative societies are characterized precisely by greater action dispersion and a more severe false consensus effect, and as a result, greater assortativity has an ambiguous effect on welfare.
    Keywords: Local interactions, Assortativity, Misperception
    JEL: C70 D80 D85
    Date: 2018–04
  5. By: Pivato, Marcus; Vergopoulos, Vassili
    Abstract: In many decisions under uncertainty, there are technological constraints on the acts an agent can perform and on the events she can observe. To model this, we assume that the set S of possible states of the world and the set X of possible outcomes each have a topological structure. The only feasible acts are continuous functions from S to X, and the only observable events are regular open subsets of S. We axiomatically characterize Subjective Expected Utility (SEU) representations of conditional preferences over acts, involving a continuous utility function on X (unique up to positive affine transformations), and a unique Borel probability measure on S, along with an auxiliary apparatus called a "liminal structure", which describes the agent’s imperfect perception of events. We also give other SEU representations, which use residual probability charges or compactifications of the state space.
    Keywords: Subjective expected utility; topological space; technological feasibility; continuous utility; regular open set; Borel measure
    JEL: D81
    Date: 2018–04–08
  6. By: Miao, Chun-Hui
    Abstract: This paper nests "the contractors's game" in a simple consumer search model to study the impact of search cost in these markets. Under the assumption that the number of searches is private information, we find that, with a small search cost, there will be multiple search equilibria. Between the two price dispersion equilibria, only the Pareto-dominated one is stable. Moreover, in the stable equilibrium, (1) the expected equilibrium price decreases with the search cost of consumers; (2) consumers engage in excessive search that is detrimental to their own welfare, and (3) a decline in the search cost can leave consumers worse o¤, due to their lack of commitment. The model suggests the use of intermediaries as a commitment/coordination mechanism in such markets.
    Keywords: Bertrand competition, Contractors' game, Entry cost, Multiple equilibria, Search cost
    JEL: D40 L0
    Date: 2018–04–09
  7. By: Walter Ferrarese (University of Rome "Tor Vergata")
    Abstract: I focus on symmetric n-player games in which players exert effort to win part or all of a prize, whose value can either be exogenously given or endogenously determined. Under homogeneity assumptions on the functions mapping the vector of efforts into the part of the prize that each player receives and on the value of the prize, I derive an explicit solution for pure-strategy symmetric equilibria and show that such assumptions are sufficient to substantially simplify the derivation of the best response functions. I solve for equilibria in situations in which, not only relative efforts matter (homogeneity of degree zero), but efforts increase global production, the shares of global production and their value. The setup nests Malueg and Yates (2006), who study the implications of homogeneous contest success functions of degree zero in rent-seeking games.
    Keywords: Equilibrium effort, Homogeneous functions, Symmetric games.
    JEL: C70 D43 D72
    Date: 2018–04–26
  8. By: Maarten Janssen; Sandro Shelegia
    Abstract: This paper studies vertical relations in a search market. As the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers, their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices. The common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation. We show that in the vertical relations context, predictions based on this assumption are not robust in the sense that if consumers assign just a small probability to the event that the upstream manufacturer is responsible for the deviation, equilibrium predictions are qualitatively di erent. For the robust beliefs, the vertical model can explain a variety of observations, such as retail price rigidity (or, alternatively, low cost pass-through), non-monotonicity of retail prices in search costs, and (seemingly) collusive retail behavior. The model can be used to study a monopoly online platform that sells access to final consumers.
    Keywords: Vertical relations, consumer search, double marginalization, product differentiation, price rigidities
    JEL: D40 D83 L13
    Date: 2018–03
  9. By: Karos, Dominik (General Economics 1 (Micro)); Kasper, Laura (universitaat des saarlandes; saarland university)
    Abstract: Farsighted deviations are based on agents' abilities to compare the outcome of a farsighted deviation to the status quo. However, agents do not account for deviations by others in case they do not change the status quo; so, they are not fully farsighted. We use extended expectation functions to capture a coalition's belief about subsequent moves of other coalitions in both cases. We provide three stability and optimality axioms on coalition behavior and show that an expectation function satisfies these axioms if and only if it corresponds to an equilibrium of the abstract game that is stable with respect to coalitional deviations. We provide applications of our solution for games in characteristic function form and matching problems.
    Keywords: abstract games, farsighted stability, expectation functions, coalition stable equilibrium
    JEL: C71 C72
    Date: 2018–04–26
  10. By: Eraslan, Hulya (Rice University); Ozerturk, Saltuk (Southern Methodist University)
    Abstract: We develop a model to study the political economy implications of information gatekeeping, i.e., a policy of granting access only to friendly media outlets and denying access to critical ones. While an incumbent prefers positive bias, granting access improves her re-election probability only if coverage is sufficiently credible in the eyes of the public. Information gatekeeping can induce a quid pro quo relationship: media provides coverage with positive bias in exchange of future access, thereby affecting electoral outcomes in favor of incompetent incumbents. The degree of access media enjoy increases with competence of incumbents over those issues under public focus.
    JEL: D72 D83 L82
    Date: 2017–12
  11. By: Christian At; Tim Friehe; Yannick Gabuthy
    Abstract: This paper describes how plaintiff should compensate lawyers, who choose unobservable effort, when litigation may proceed from the trial to the appeals court. We find that, when it is very likely that the defendant will appeal, transfers made to the lawyer only after an appeals court’s ruling are key instruments in incentivizing both trial and appeal court effort. Indeed, the lawyer may not receive any transfer after the trial court’s ruling. In contrast, when reaching the appeals stage is unlikely, a favorable trial court ruling triggers a positive transfer to the lawyer and first-best appeals effort. In our setup, the lawyer may receive a lower transfer after winning in both the trial and the appeals court as compared to the scenario in which the first-instance court ruled against the plaintiff and the appeals court reversed that ruling.
    Keywords: Litigation, Appeals, Moral hazard, Optimal contract.
    JEL: D82 K41
    Date: 2018
  12. By: Pierre Dehez; Victor Ginsburgh
    Abstract: Approval voting allows voters to list any number of candidates. Their scores are obtained by summing the votes cast in their favor. Fractional voting instead follows the One-person-onevote principle by endowing voters with a single vote that they may freely distribute among candidates. In this paper, we show that to be fair, such a ranking requires a uniform distribution. It corresponds to Shapley ranking that was introduced to rank wines as the Shapley value of a cooperative game with transferable utility. We analyze the properties of these "ranking games" and provide an axiomatic foundation to Shapley ranking. We also analyze Shapley ranking as a social welfare function and compare it to approval ranking.
    Date: 2018–04
  13. By: Phillip Monin (Office of Financial Research); Richard Bookstaber (University of California)
    Abstract: Markets coordinate the flow of information in the economy, aggregating it through the price mechanism. We develop a dynamic model of information transmission and aggregation in financial and other social networks in which continued membership in the network is contingent on the accuracy of opinions. Agents have opinions about a state of the world and form links to others in a directed fashion probabilistically. Agents update their opinions by averaging those of their connections, weighted by how long their connections have been in the system. Agents survive or die based on how far their opinions are from the true state. In contrast to the results in the extant literature on DeGroot learning, we show through simulations that for some parameterizations the model cycles stochastically between periods of high connectivity, in which agents arrive at a consensus opinion close to the state, and periods of low connectivity in which agents’ opinions are widely dispersed. We add varying degrees of homophily through a model parameter called tribal preference and find that crash frequency is decreasing in the degree of homophily. Our results suggest that the information aggregation function of markets can fail solely because of the dynamics of information flows, irrespective of shocks or news.
    Keywords: social networks, DeGroot learning, dynamic network formation, information transmission, nonlinear dynamical systems, crashes
    Date: 2017–03–02
  14. By: Pradeep Dubey; John Geanakoplos
    Abstract: We consider the Rothschild-Stiglitz model of insurance but without the exclusivity constraint. It turns out that there always exists a unique equilibrium, in which the reliable and unreliable consumers take out a primary insurance up to its quantity limit, and the unreliable take out further secondary insurance at a higher premium. We provide a simple proof of this result (extended to multiple types of consumers) with the hope that it may be pedagogically useful.
    Date: 2018
  15. By: Guillem Roig
    Abstract: I study the incentives of a common buyer to undertake cooperative investment with a group of suppliers providing a homogeneous input. In my model, investment is not directed to increase the gains from trade but to enhance the competitive pressure among suppliers. At the same time, however, investment may strengthen the bargaining position of suppliers. Which effect dominates depends on the intensity of competition in the trading game, which also determines the equilibrium distribution of investment. Then, the model reproduces different market structures, and a firm may have higher incentives to become active in markets where competition is expected to be vigorous.
    Keywords: Cooperative investment, Market structure, Competition, Bargaining position
    Date: 2018–04–01

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