nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒05‒07
25 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Showing Off or Laying Low? The Economics of Psych-outs By Philipp Denter; John Morgan; Dana (D.) Sisak
  2. Information Nudges and Self Control By Mariotti, Thomas; Schweizer, Nikolaus; Szech, Nora
  3. Waiting for my neighbors By Gordon, Sidartha; Henry, Emeric; Murto, Pauli
  4. Relational Incentive Contracts and Performance Measurement By Chi, Chang Koo; Olsen, Trond E.
  5. On the Optimal Use of Correlated Information in Contractual Design under Limited Liability By Daniel Danau; Annalisa Vinella
  6. Efficient Implementation with Interdependent Valuations and Maxmin Agents By Song, Yangwei
  7. Observations on Cooperation. By Yuval Heller; Erik Mohlin
  8. Subjective Contingencies and Limited Bayesian Updating By Minardi, Stefania; Savochkin, Andrei
  9. Instrument-Based vs. Target-Based Rules By Marina Halac; Pierre Yared
  10. Deterministic versus Stochastic Contracts in a Dynamic Principal-Agent Model By Mettral, Thomas
  11. Social Media Networks, Fake News, and Polarization By Marina Azzimonti; Marcos Fernandes
  12. Full surplus extraction in mechanism design with information disclosure By Daniel Kraehmer;
  13. The Political Economy of Ideas: On Ideas Versus Interests in Policymaking By Sharun Mukand; Dani Rodrik
  14. Incentives for Research Agents and Performance-vested Equity-based Compensation By Yaping Shan
  15. Of Restarts and Shutdowns: Dynamic Contracts with Unequal Discounting By Krasikov, Ilia; Lamba, Rohit; Mettral, Thomas
  16. Reference Dependence and Choice Overload By Deb, Joyee; Zhou, Jidong
  17. Optimal Supervisory Architecture and Financial Integration in a Banking Union By Colliard, Jean-Edouard
  18. The Biases of Others: Projection Equilibrium in an Agency Setting By Danz, David; Madarász, Kristóf; Wang, Stephanie
  19. Bayesian Decision Theory and Stochastic Independence By Mongin, Philippe
  20. Equilibrium in the symmetric Hirshleifer contest: uniqueness and characterization By Christian Ewerhart; Guang-Zhen Sun
  21. Pricing and Diffusion of Durables with Network Externalities By Hattori, Keisuke; Zennyo, Yusuke
  22. Endogenous interlocking directorates By Maria Rosa, Battaggion; Vittoria, Cerasi;
  23. Social Clubs and Social Networks By Fershtman, Chaim; Persitz, Dotan
  24. The Effect of Ideological Positions on Job Market Interaction. By Gil S. Epstein; Anat Alexandron-Lavon; Renana Lindner Pomerantz
  25. A Model of Search with Price Discrimination By Fabra, Natalia

  1. By: Philipp Denter (Universidad Carlos III de Madrid); John Morgan (University of California, Berkeley); Dana (D.) Sisak (Erasmus University Rotterdam)
    Abstract: We study situations where a new entrant with privately known talent competes with an incumbent whose talent is common knowledge. Competition takes the form of a rank-order tournament. Prior to the competition, the newbie can "show off," i.e., send a talent revealing costly signal. We find that incentives to show off can go in either direction---more talented types may wish to mimic less talented ones or the reverse, depending on the newbie's talent distribution compared to the one of the incumbent. In equilibrium though, showing off occurs only when the newbie is exceptionally talented compared to the incumbent. Surprisingly, showing off occurs to the benefit of both parties; the newbie benefits for obvious reasons, the incumbent by economizing on wasted effort when overmatched. We use our findings to study the broader consequences of showing off, which is discouraged in many cultures through implicit social norms. We show that norms against showing off raise total effort but worsen talent selection, and are thus appropriate only when effort is society's main concern.
    Keywords: Showing Off; Contests; Norms
    JEL: D23 D83 M52
    Date: 2018–04–25
  2. By: Mariotti, Thomas; Schweizer, Nikolaus; Szech, Nora
    Abstract: A present-biased consumer has to make sequential consumption decisions under no commitment. Consumption is enjoyable in the short term but potentially harmful in the long term. The likelihood of harmful future consequences hinges on the consumer's type. While the distribution of types is common knowledge, the consumer's individual type is initially unknown. We study information design in this setting, varying how much a consumer learns about his type via an information nudge. We first consider a mechanism designer who is benevolent in the sense that his interests are aligned with the consumer's. We find that there always exists an optimal incentive-compatible persuasion mechanism that is of cutoff type, either recommending consumption or abstinence, and we provide a full characterization of this information nudge for an arbitrary distribution of types. Under a stronger bias for the present, the target group of the nudge who receives a credible signal to abstain must be tightened. We compare this information nudge with the optimal information structure if expected consumption should be minimized, and if it should be maximized. The first may be the goal of a health authority, whereas the latter may be preferred by a lobbyist.
    Keywords: Information Design; Information Nudge; Present-Biased Preferences; SelfControl
    JEL: C73 D82
    Date: 2018–04
  3. By: Gordon, Sidartha; Henry, Emeric; Murto, Pauli
    Abstract: We introduce a neighborhood structure in waiting games where the players decide when to``stop" (exit a market, adopt a technology). The payoff of stopping increases each time a neighbor stops. We show that the dynamic evolution of the network starkly depends on initial parameters and can take the form of either a shrinking network, where players at the edges stop first, or a fragmenting network where interior players stop first making the network split up in smaller ones over time. We find that, in addition to the coordination inefficiency standard in waiting games, the neighbourhood structure gives rise to two other inefficiencies, the first linked to the order of exit and the second to the final distribution of remaining nodes. We consider subsidy programs aimed at correcting these inefficiencies.
    Keywords: inefficiencies; networks; waiting games
    JEL: C73 D83 D85
    Date: 2018–03
  4. By: Chi, Chang Koo (Dept. of Economics, Norwegian School of Economics); Olsen, Trond E. (Dept. of Business and Management Science, Norwegian School of Economics)
    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: D00 D20 D21 D80 D86
    Date: 2018–04–30
  5. By: Daniel Danau; Annalisa Vinella
    Abstract: Riordan and Sappington (JET, 1988) show that in an agency relationship in which the agent’s type is correlated with a public ex post signal, the principal may attain first best (full surplus extraction and efficient output levels) if the agent is faced with a lottery such that each type is rewarded for one signal realization and punished equally for all the others. Gary-Bobo and Spiegel (RAND, 2006) show that this kind of lottery is most likely to be locally incentive compatible when the agent is protected by limited liability. In this paper, we investigate how the principal should construct the lottery to attain not only local but also global incentive compatibility. We first assess that the main issue with global incentive compatibility rests with intermediate types being potentially attractive reports to both lower and higher types. We then show that a lottery including three levels of profit (rather than only two) is optimal in that it is most likely to be globally incentive compatible under limited liability, if local incentive constraints are strictly satisfied. We identify conditions under which first best is implemented. In a setting with three types and three signals we also pin down the optimal distortions when those conditions are violated. We show that, if local incentive compatibility is not an issue but first best is beyond reach, then it is generally optimal to concede an information rent to one type only.
    Keywords: informative signals, limited liability, conditional probability, incentive compatibility, full-rank condition
    JEL: D82
    Date: 2018
  6. By: Song, Yangwei (Humboldt University Berlin)
    Abstract: We consider a single object allocation problem with multidimensional signals and interdependent valuations. When agents signals are statistically independent, Jehiel and Moldovanu show that efficient and Bayesian incentive compatible mechanisms generally do not exist. In this paper, we extend the standard model to accommodate maxmin agents and obtain necessary as well as sufficient conditions under which efficient allocations can be implemented. In particular, we derive a condition that quantifies the amount of ambiguity necessary for efficient implementation. We further show that under some natural assumptions on the preferences, this necessary amount of ambiguity becomes sufficient. Finally, we provide a definition of informational size such that given any nontrivial amount of ambiguity, efficient allocations can be implemented if agents are sufficiently informationally small.
    Keywords: efficient implementation; ambiguity aversion; multidimensional signal; interdependent valuation;
    JEL: D61 D82
    Date: 2018–04–23
  7. By: Yuval Heller (Bar-Ilan University); Erik Mohlin
    Abstract: We study environments in which agents are randomly matched to play a Prisoner’s Dilemma, and each player observes a few of the partner’s past actions against previous opponents. We depart from the existing related literature by allowing a small fraction of the population to be commitment types. The presence of committed agents destabilizes previously proposed mechanisms for sustaining cooperation. We present a novel intuitive combination of strategies that sustains cooperation in various environments. Moreover, we show that under an additional assumption of stationarity, this combination of strategies is essentially the unique mechanism to support full cooperation, and it is robust to various perturbations. Finally, we extend the results to a setup in which agents also observe actions played by past opponents against the current partner, and we characterize which observation structure is optimal for sustaining cooperation.
    Keywords: Community enforcement; indirect reciprocity; random matching; Prisoner’s Dilemma; image scoring.
    JEL: C72 C73 D83
    Date: 2017–12
  8. By: Minardi, Stefania; Savochkin, Andrei
    Abstract: We depart from Savage’s (1954) common state space assumption and introduce a model that allows for a subjective understanding of uncertainty. Within the revealed preference paradigm, we uniquely identify the agent’s subjective state space via her preferences conditional on incoming information. According to our representation, the agent’s subjective contingencies are coarser than the analyst’s states; she uses an additively separable utility with respect to her set of contingencies; and she adopts an updating rule that follows the Bayesian spirit but is limited by her perception of uncertainty. We illustrate our theory with an application to the Confirmatory Bias.
    Keywords: understanding of uncertainty; subjective state space; non-Bayesian updating
    JEL: D81
    Date: 2017–05–01
  9. By: Marina Halac; Pierre Yared
    Abstract: We develop a simple delegation model to study rules based on instruments vs. targets. A principal faces a better informed but biased agent and relies on joint punishments as incentives. Instrument-based rules condition incentives on the agent's observable action; target-based rules condition incentives on outcomes that depend on the agent's action and private information. In each class, an optimal rule takes a threshold form and imposes the worst punishment upon violation. Target-based rules dominate instrument-based rules if and only if the agent's information is sufficiently precise. An optimal hybrid rule relaxes the instrument threshold whenever the target threshold is satisfied.
    JEL: D02 D82 E58 E61
    Date: 2018–04
  10. By: Mettral, Thomas (HU Berlin)
    Abstract: I show that deterministic dynamic contracts between a principal and an agent are always at least as profitable to the principal as stochastic ones, if the so-called first-order approach in dynamic mechanism design is satisfied. The principal commits, while the agent\'s type evolution follows a Markov process. My results demonstrate, even when allowing for potential correlation of stochastic contracts across periods that the usual restriction in the literature to deterministic contracts is admissible, as long as the first-order approach is valid.
    Keywords: contract theory; principal-agent theory; dynamic contracting;
    JEL: D82 D86
    Date: 2018–04–24
  11. By: Marina Azzimonti; Marcos Fernandes
    Abstract: We study how the structure of social media networks and the presence of fake news might affect the degree of misinformation and polarization in a society. For that, we analyze a dynamic model of opinion exchange in which individuals have imperfect information about the true state of the world and are partially bounded rational. Key to the analysis is the presence of internet bots: agents in the network that do not follow other agents and are seeded with a constant flow of biased information. We characterize how the flow of opinions evolves over time and evaluate the determinants of long-run disagreement among individuals in the network. To that end, we create a large set of heterogeneous random graphs and simulate a long information exchange process to quantify how the bots’ ability to spread fake news and the number and degree of centrality of agents susceptible to them affect misinformation and polarization in the long-run.
    JEL: C45 C63 D72 D8 D83 D85 D91
    Date: 2018–03
  12. By: Daniel Kraehmer;
    Abstract: I study mechanism design settings with quasi-linear utility where the principal can provide agents with additional private information about their valuations beyond the private information they hold at the outset. I demonstrate that the principal can design information and a mechanism so as to fully extract the complete information first-best surplus if agents’ ex ante information only affects their beliefs about, yet not their valuations. Otherwise, the result holds if each agent’s initial private beliefs satisfy a spanning condition.
    Keywords: information design, mechanism design, quasi-linear utility, rent extraction
    JEL: D82 H57
    Date: 2018–04
  13. By: Sharun Mukand; Dani Rodrik
    Abstract: We develop a conceptual framework to highlight the role of ideas as a catalyst for policy and institutional change. We make an explicit distinction between ideas and vested interests and show how they feed into each other. In doing so the paper integrates the Keynes-Hayek perspective on the importance of ideas with the currently more fashionable Stigler-Becker (interests only) approach to political economy. We distinguish between two kinds of ideational politics – the battle among different worldviews on the efficacy of policy (worldview politics) versus the politics of victimhood, pride and identity (identity politics). Political entrepreneurs discover identity and policy ‘memes’ (narratives, cues, framing) that shift beliefs about how the world works or a person’s belief of who he is (i.e. identity). Our framework identifies a complementarity between worldview politics and identity politics and illustrates how they may reinforce each other. In particular, an increase in identity polarization may be associated with a shift in views about how the world works. Furthermore, an increase in income inequality is likely to result in a greater incidence of ideational politics. Finally, we show how ideas may not just constrain, but also ‘bite’ the interests that helped propagate them in the first instance.
    JEL: D72 D78
    Date: 2018–03
  14. By: Yaping Shan (School of Economics, University of Adelaide)
    Abstract: This study examines an agency problem between a firm and its research employees in a continuous-time dynamic setting. As a solution to the problem, the study presents an optimal contract and discusses its implementation. In the implementation, a primary component of the agent's compensation is a risky security, and the principal lets the agent choose the consumption and effort levels subject to a sequence of minimum holding requirements. This implementation theoretically justifies the widespread use of performance-vested equity-based compensation by firms that rely on R&D.
    Keywords: Dynamic Contract, Repeated Moral Hazard, R&D, Performance-vesting Provisions,Private Saving
    JEL: D23 D82 D86 J33 L22 O32
    Date: 2017–12
  15. By: Krasikov, Ilia (Penn State University;); Lamba, Rohit (Penn State University); Mettral, Thomas (HU Berlin)
    Abstract: A large supplier (principal) contracts with a small firm (agent) to repeatedly provide working capital in return for payments. The total factor productivity of the agent is private and follows a Markov process. Moreover, the agent is less patient than the principal. We solve for the optimal contract in this environment. Distortions are pervasive and efficiency unattainable. The optimal contract is characterized by two key properties: restart and shutdown, which capture various aspects of contracts offered in the marketplace. The optimal distortions are completely pinned down by the number of low TFP shocks since the last high shock. Once a high shock arrives, the contract loses memory and repeats the same cycle, we call this endogenous resetting feature restart. If ex ante agency frictions are high, the principal commits to not serving the low type, we call this shutdown. The principal prefers a patient agent if the interim agency friction, as measured by the persistence of the private information is large, and she prefers an impatient agent if it is small. Finally, when global incentive constraints bind, we (i) provide the complete recursive solution, and (ii) characterize a simpler incentive compatible contract that is approximately optimal.
    Keywords: ;
    Date: 2018–04–24
  16. By: Deb, Joyee; Zhou, Jidong
    Abstract: This paper offers an explanation for choice overload based on reference-dependent preferences. Consumers construct an ideal object that combines the best attributes of all objects in their choice set, and use this as a reference point. When the choice set expands, it is more likely to find a better object, but meanwhile the reference point improves, which makes all existing objects appear worse. We characterize when the latter reference-dependence effect dominates such that choice overload arises. We also show that purchase probability can decrease with object complexity, measured by the number of attributes.
    Keywords: choice overload, reference dependence, loss aversion
    JEL: D11 D9 M30
    Date: 2018
  17. By: Colliard, Jean-Edouard
    Abstract: Both in the United States and in the Euro Area, bank supervision is the joint responsibility of local and central supervisors. I study a model in which local supervisors do not internalize as many externalities as a central supervisor. Local supervisors are more lenient, but banks also have weaker incentives to hide information from them. These two forces can make a joint supervisory architecture optimal, with more weight put on centralized supervision when cross-border externalities are larger. Conversely, more centralized supervision endogenously encourages banks to integrate more cross-border. Due to this complementarity, the economy can be trapped in an equilibrium with both too little central supervision and too little financial integration, when a superior equilibrium would be achievable.
    Keywords: banking union; bank supervision; financial integration
    JEL: G21 G28 L51
    Date: 2017–09–01
  18. By: Danz, David; Madarász, Kristóf; Wang, Stephanie
    Abstract: We study strategic reasoning and the beliefs people form about the beliefs of others in the presence of private information. We find that while people naively project and think others have the same information as they do, they also anticipate the analogous projection of their differentially-informed opponents onto them. In turn, the typical person explicitly thinks that others form systematically biased beliefs. Specifically, our paper directly tests the model of projection equilibrium, Madarasz (2014, revised 2016), which posits a parsimonious one-to-one relationship between the partial extent to which a player projects and forms biased beliefs about the beliefs others,?, and the partial extent to which she anticipates but underestimate the same systematic bias in others' beliefs of her beliefs,?²². We find that the distribution of the partial extent to which players project onto others and the distribution of the partial extent to which they anticipate others' projection onto them is remarkably consistent with the tight link implied by the model.
    JEL: C9 D2 D8 D9
    Date: 2018–04
  19. By: Mongin, Philippe
    Abstract: Stochastic independence has a complex status in probability theory. It is not part of the definition of a probability measure, but it is nonetheless an essential property for the mathematical development of this theory. Bayesian decision theorists such as Savage can be criticized for being silent about stochastic independence. From their current preference axioms, they can derive no more than the definitional properties of a probability measure. In a new framework of twofold uncertainty, we introduce preference axioms that entail not only these definitional properties, but also the stochastic independence of the two sources of uncertainty. This goes some way towards filling a curious lacuna in Bayesian decision theory.
    Keywords: Stochastic Independence; Probabilistic Independence; Bayesian Decision Theory; Savage
    JEL: D81 D89
    Date: 2017–11–01
  20. By: Christian Ewerhart; Guang-Zhen Sun
    Abstract: The symmetric two-player Hirshleifer (1989) contest is shown to admit a unique equilibrium. The support of the equilibrium strategy is finite and includes, in particular, the zero expenditure level. We also establish a lower bound for the cardinality of the support and an upper bound for the undissipated rent.
    Keywords: Contests, mixed-strategy equilibrium, rent dissipation, uniqueness
    JEL: C72 D72 D74
    Date: 2018–04
  21. By: Hattori, Keisuke; Zennyo, Yusuke
    Abstract: This paper considers the optimal pricing and diffusion of a durable good that exhibits positive network externalities, when consumers are heterogeneous with respect to their expectations about future network sizes. We consider the existence of naive consumers, as well as of sophisticated consumers who have fulfilled expectations about future network sizes. At the time of purchase, naive consumers presume that the current network size will continue over future periods. We find that the firm charges the sequential-diffusion pricing that makes sophisticated consumers function as early adopters, unless consumers quickly become bored with using the goods and/or unless the firm heavily discounts its future profits. In addition, we show that naive consumers may enjoy a greater surplus than do sophisticated consumers, implying that the firm benefits when more consumers are sophisticated. We also compare the profitability of three possible pricing strategies with different commitment powers: fixed, responsive, and pre-announced pricing.
    Keywords: durable good; network externalities; diffusion process; consumer naivete
    JEL: D21 D42 L12 L14
    Date: 2018–04–15
  22. By: Maria Rosa, Battaggion; Vittoria, Cerasi;
    Abstract: The present paper analyzes the choice to place an executive in the board of the rival company, within a duopoly where firms with hidden marginal costs of production compete in the product market. Interlocking directorates may emerge as an equilibrium outcome whenever firms gain by exchanging information about their private costs. We show that a unilateral interlocking arises when firms have different degrees of efficiency and the direction of this interlock is affected by the degree of substitutability in the product market. Bilateral interlocking occurs only between similar firms, that is when equally inefficient firms sell substitute products or when equally efficient firms sell complement products. The equilibrium outcome is always welfare increasing for consumers.
    Keywords: Oligopoly, Firm Organization and Market Structure, Executives
    JEL: L22 M12
    Date: 2018–05–01
  23. By: Fershtman, Chaim; Persitz, Dotan
    Abstract: We present a strategic network formation model which is based on membership in clubs. Agents choose a set of clubs with which they wish to be affiliated. The set of all club memberships (an environment) induces a weighted network in which two agents are directly connected if they are members of the same club. Two agents may also be indirectly connected using the multiple memberships of third parties. Agents gain from their position in the induced network and pay membership fees. Thus, both clubs and the network are formed simultaneously. Using two specifications of the weighting function we introduce two models based upon congestion - one, the club congestion model wherein the weight of each link depends upon the size of the smallest shared club and the other, the individual congestion model wherein each link's weight depends on the number of affiliations maintained by the two agents. In the club congestion model we focus on the trade-off between the size of the club, depreciation due to indirect connections and membership fees. In the individual congestion model the Grand Club environment is the unique efficient environment. However, a coordination failure arises due to the wide externalities incurred by the formation of new affiliations. We believe that this framework may serve as a basis for an empirical examination of the role of linking platforms in shaping real-life social networks.
    Date: 2018–04
  24. By: Gil S. Epstein (Bar-Ilan University); Anat Alexandron-Lavon; Renana Lindner Pomerantz
    Abstract: Reporters and editors may not have the same ideology. When an editor wants to employ a new reporter with a different ideology, they have to negotiate the price of moving from their own to the other's ideology. We focus on the job market for reporters, where the agents negotiate over the ideological position to be reported and wage. We adopt a spatial model in which each agent suffers a utility loss as the agreed-upon position moves away from his/her favored one. Equilibrium determines a threshold ideological gap for a match to be formed. Our analysis generates a natural separation between extreme, mildly extreme and moderate ideologies. Furthermore, we find that agents that hold extreme ideologies compromise less than moderates. This formulation may be applied to other situations in which agents involve monetary and non-monetary considerations, especially a preference for similarity.
    Keywords: Media, Job Market, Ideological Position
    JEL: J32 J44
    Date: 2017–11
  25. By: Fabra, Natalia
    Abstract: We introduce heterogeneity in buyers' size into a model of simultaneous search. Buyers' differences in their willigness to search give rise to price discrimination, even if their valuations for the good are equal. We shed light on three related questions: (i) what is the relationship between prices and buyers' size? (ii) what are the effects of reducing search costs?, and (iii) who benefits and who is hurt by price discrimination? The answers critically depend on the elasticity of the search cost distribution. Interestingly, for normally distributed search costs, (i) there is an inverted U-shape relationship between prices and buyers' size, (ii) when search costs go down, the prices charged to small buyers do not fall as much as those charged to the large ones (and can even go up), and (iii) price discrimination benefits small and large buyers, at the expense of the medium-size buyers.
    Keywords: bid solicitation; price discrimination; search
    Date: 2018–03

This nep-mic issue is ©2018 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.