nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒05‒28
eight papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Relational Contracting, Negotiation, and External Enforcement By Miller, David; Olsen, Trond E.; Watson, Joel
  2. Group Targeting under Networked Synergies By Mohamed Belhaj; Frédéric Deroïan
  3. Strict Fairness of Equilibria in Mixed and Asymmetric Information Economies By Chiara Donnini; Maria Laura Pesce
  4. On the Likelihood of the Borda Effect: The Overall Probabilities for General Weighted Scoring Rules and Scoring Runoff Rules By Eric Kamwa
  5. Condorcet Efficiency of the Preference Approval Voting and the Probability of Selecting the Condorcet Loser By Eric Kamwa
  6. Elusive Beliefs: Why Uncertainty Leads to Stochastic Choice and Errors By Irenaeus Wolff; Dominik Bauer
  7. Unobserved Heterogeneity in Auctions under Restricted Stochastic Dominance By Yao Luo
  8. Deception and Competition in Search Markets By Tobias Gamp; Daniel Kraehmer

  1. By: Miller, David (Dept. of Economics, University of Michigan); Olsen, Trond E. (Dept. of Business and Management Science, Norwegian School of Economics); Watson, Joel (Dept. of Economics, University of California, San Diego)
    Abstract: We study relational contracting and renegotiation in environments with external enforcement of long-term contractual arrangements. An external, long-term contract governs the stage games the contracting parties will play in the future (depending on verifiable stage-game outcomes) until they renegotiate. In a contractual equilibrium, the parties choose their individual actions rationally, they jointly optimize when selecting a contract, and they take advantage of their relative bargaining power. Our main result is that in a wide variety of settings, in each period of a contractual equilibrium the parties agree to a semi-stationary external contract, with stationary terms for all future periods but special terms for the current period. In each period the parties renegotiate to this same external contract, effectively adjusting the terms only for the current period. For example, in a simple principal-agent model with a choice of costly monitoring technology, the optimal contract specifies mild monitoring for the current period but intense monitoring for future periods. Because the parties renegotiate in each new period, intense monitoring arises only off the equilibrium path after a failed renegotiation.
    Keywords: Relational contracts; negotiation; external enforcement
    JEL: D00 D20 D21 D80 D86
    Date: 2018–05–18
  2. By: Mohamed Belhaj (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Frédéric Deroïan (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: A principal targets agents organized in a network of local complementarities, in order to increase the sum of agents' effort. We consider bilateral public contracts à la Segal (1999). The paper shows that the synergies between contracting and non-contracting agents deeply impact optimal contracts: they can lead the principal to contract with a subset of the agents, and to refrain from contracting with central agents.
    Keywords: multi-agent contracting, Network, synergies, aggregate effort, optimal group targeting
    JEL: C72 D85
    Date: 2018–05
  3. By: Chiara Donnini (Università di Napoli Parthenope); Maria Laura Pesce (Università di Napoli Federico II)
    Abstract: We investigate the fairness property of equal-division competitive market equilibria (CME) in asymmetric information economies with a space of agents that may contain non-negligible (large) traders. We first propose an extension to our framework of the notion of strict fairness due to Zhou (1992). We prove that once agents are asymmetrically informed, any equal-division CME allocation is strictly fair, but a strictly fair allocation might not be supported by an equilibrium price. Then, we investigate the role of large traders and we provide two sufficient conditions under which, in the case of complete information economies, a redistribution of resources is strictly fair if and only if it results from a competitive mechanism.
    Keywords: Asymmetric information, mixed markets, strict fairness, competitive equilibrium.
    JEL: D43 D60 D82
    Date: 2018–05–23
  4. By: Eric Kamwa (LC2S - Laboratoire Caribéen de Sciences Sociales - UAG - Université des Antilles et de la Guyane)
    Abstract: The Borda Effect, first introduced by Colman and Poutney (1978), occurs in a preference aggregation process using the Plurality rule if given the (unique) winner there is at least one loser that is preferred to the winner by a majority of the electorate. Colman and Poutney (1978) distinguished two forms of the Borda Effect:-the Weak Borda Effect describing a situation under which the unique winner of the Plurality rule is majority dominated by only one loser; and-the Strong Borda Effect under which the Plurality winner is majority dominated by each of the losers. The Strong Borda Effect is well documented in the literature as the Strong Borda Paradox. Colman and Poutney (1978) showed that the probability of the Weak Borda Effect is not negligible; they only focused on the Plurality rule. In this note, we extend the work of Colman and Poutney (1978) by providing in three-candidate elections, the representations for the limiting probabilities of the (Weak) Borda Effect for the whole family of the scoring rules and scoring runoff rules. We highlight that there is a relation between the (Weak) Borda Effect and the Condorcet efficiency. We perform our analysis under the Impartial Culture and the Impartial Anonymous Culture which are two well-known assumptions often used for such a study.
    Date: 2018–05–05
  5. By: Eric Kamwa (LC2S - Laboratoire Caribéen de Sciences Sociales - UAG - Université des Antilles et de la Guyane)
    Abstract: Under Approval Voting (AV), each voter just distinguishes the candidates he approves of from those appearing as unacceptable. The Preference Approval Voting (PAV) is a hybrid version of the approval voting first introduced by Brams and Sanver (2009). Under PAV, each voter ranks all the candidates and then indicates the ones he approves. In this paper, we provide analytical representations for the probability that PAV elects the Condorcet winner when she exists in three-candidate elections with large electorates. We also provide analytical representations for the probability that PAV elects the Condorcet loser. We perform our analysis by assuming the assumption of the Extended Impartial Culture. Under this assumption, it comes that AV seems to perform better than PAV on electing the Condorcet winner and that in most of the cases, PAV seems to be less likely to elect the Condorcet loser than AV.
    Keywords: Approval Voting,Ranking,Condorcet,Extended Impartial Culture,Probability
    Date: 2018–05–05
  6. By: Irenaeus Wolff; Dominik Bauer
    Abstract: People often cannot assign a clear probability to an event but face uncertainty about their subjective probabilities. We model belief uncertainty by assuming that agents’ beliefs are characterized by a distribution over subjective-probability distributions that agents cannot access directly. Our model produces stochastic choice because each decision-relevant belief is but one realization out of the distribution over all possible beliefs. Our model predicts that when comparing unknown situations to routine choices, people will make more ex-ante suboptimal choices in unknown situations. The model also offers an explanation for experiment participants not playing a best-response to their stated beliefs: participants are uncertain what belief to report or base their decision on, and hence, act on momentaneous ‘belief realizations’. In an experiment, we exogenously manipulate participants’ belief uncertainty. We find support for both predictions. Low belief uncertainty leads to fewer errors and thus, higher earnings, even when controlling for the accuracy of participants’ beliefs. Second, under low belief uncertainty, observed best response rates are high and increasing in the amount of information we provide. Conversely, high belief uncertainty leads to lower consistency.
    Keywords: Stochastic choice, Belief-Action Consistency, Belief Elicitation, Discoordination Game
    Date: 2018
  7. By: Yao Luo
    Abstract: We study the identification of first-price auctions with nonseparable unobserved heterogeneity. In particular, we extend Hu, McAdams, and Shum (2013) by relaxing the first-order stochastic dominance condition. Instead, we assume restricted stochastic dominance relations among the value quantile functions and show that the same relations pass to the bid quantile functions. An ordered tree summarizes these relations and provides a total ordering. Relying on the proposed restricted stochastic dominance ordering, we extend a list of identification results in the empirical auction literature.
    Keywords: Restricted Stochastic Dominance, Unobserved Heterogeneity, Identification, Misclassification, Auction, Risk Aversion
    JEL: C14 D44
    Date: 2018–05–19
  8. By: Tobias Gamp; Daniel Kraehmer
    Abstract: We study the interplay between deception and consumer search in a search market where firms may deceive some naive consumers with inferior products that display hidden (bad) attributes. We derive an equilibrium in which both superior and inferior quality is offered and show that as search frictions vanish, superior goods are entirely driven out of the market. Deception harms sophisticated consumers, as it forces them to search longer to find a superior product. We argue that policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare. In contrast, reducing the number of naive consumers through transparency policies and education campaigns as well as a minimum quality standard can improve welfare.
    Keywords: Deceptive product, Inferior product, Naivete, Consumer Search
    JEL: D18 D21 D43 D83
    Date: 2018–05

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