nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒07‒09
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Vagueness of Language: Indeterminacy under Two-Dimensional State Uncertainty By Saori CHIBA
  2. Tullock Contests Reward Information Advantages By Shitovitz, Benyamin; Selay, A.; Moreno Ruiz, Diego; Haimanko, Ori; Einy, Ezra; Aiche, A.
  3. Efficient Liability in Expert Markets By Chen, Yongmin; Li, Jianpei; Zhang, Jin
  4. Pricing Long-Lived Securities in Dynamic Endowment Economies By Jerry Tsai; Jessica A. Wachter
  5. Vague lies and lax standards of proof: On the law and economics of advice By Mikhail Drugov; Marta Troya-Martinez
  6. A New model of mergers and innovation By Piuli Roy Chowdhury
  7. Implementation by vote-buying mechanisms By Eguia, Jon; Xefteris, Dimitrios
  8. Using Rules-of-Thumb: A Note on Sophisticated vs. Simple Mixing in Two-Player Randomly Matched Games By Christian Alcocer; Thomas D. Jeitschko; Thomas D. Jeitschko
  9. Are We Better-off for Working Hard? By Xue-Zhong He; Lei Shi; Marco Tolotti
  10. Using multiple reference levels in Multi-Criteria Decision Aid: the Generalized-Additive Independence model and the Choquet integral approaches By Christophe Labreuche; Michel Grabisch
  11. Advertising Economics Under Uncertainty: An Alternative Approach By James P. Gander
  12. Tactical Extremism By Jon X. Eguia; Francesco Giovannoni
  13. Decentralized Terrorism and Social Identity By Eswaran, Mukesh

  1. By: Saori CHIBA
    Abstract: We study indeterminacy of indicative meanings (disagreements about meanings of messages among players), a kind of language vagueness examined in Blume and Board (2013). They, using a cheap talk model in which the state distribution and the players’ language competence were ex-ante uncertain, demonstrated that this vagueness occurs as the equilibrium language. We expand the work of Blume and Board by using a model between an uninformed decision maker and an informed agent in which the state-distribution and the state are both exante uncertain. We show that this two-dimensional uncertainty also leads to indeterminacy of indicative meanings, that is, to a set of conditions in which an agent with different perceptions of state-distribution intentionally uses the same symbol for the different extents of information on the state. Our vagueness can lead to welfare improvement.
    Keywords: Information. Language. State-Uncertainty. Vagueness.
    JEL: D82 D83 M14
  2. By: Shitovitz, Benyamin; Selay, A.; Moreno Ruiz, Diego; Haimanko, Ori; Einy, Ezra; Aiche, A.
    Abstract: In Tullock contests in which the common value of the prize is uncertain, information advantages are rewarded: if a player i has better information about the value than some other player j, then the payoff of i is greater or equal to the payoff of j, regardless of the information of the other players.
    Keywords: Information Advantage; Common Value; Tullock Contests
    JEL: D82 D44 C72
    Date: 2018–06–28
  3. By: Chen, Yongmin; Li, Jianpei; Zhang, Jin
    Abstract: We study the design of efficient liability in expert markets. An expert may misbehave in two ways: prescribing the "wrong" treatment for a consumer's problem, or failing to exert proper effort to diagnose the problem. We show that under a range of liabilities, the expert will choose the efficient treatment based on his information if the price margins for alternative treatments are close enough. Moreover, a well-designed liability rule motivates the expert to also exert diagnosis effort efficiently. The efficient liability is facilitated by certain restriction on equilibrium prices; unfettered competition between experts, while maximizing consumer surplus, may undermine efficiency.
    Keywords: Credence goods, experts, liability, diagnosis effort, undertreatment, overtreatment
    JEL: D82 I18 K13 L23
    Date: 2018–06–03
  4. By: Jerry Tsai; Jessica A. Wachter
    Abstract: We solve for asset prices in a general affine representative-agent economy with isoelastic recursive utility and rare events. Our novel solution method is exact in two special cases: no preference for early resolution of uncertainty and elasticity of intertemporal substitution equal to one. Our results clarify model properties governed by the elasticity of intertemporal substitution, by risk aversion, and by the preference for early resolution of uncertainty. Finally, we show in a general setting that the linear relation between normal-times covariances and expected returns need not hold in a model with rare events.
    JEL: G12
    Date: 2018–05
  5. By: Mikhail Drugov (New Economic School and CEPR); Marta Troya-Martinez (New Economic School and CEPR)
    Abstract: This paper analyses a persuasion game where a seller provides (un)biased and (im)precise advice and may be fined by an authority for misleading the buyers. In the equilibrium, biasing the advice and making it noisier are complements. The advice becomes both more biased and less precise with a stricter standard of proof employed by the authority, a larger share of credulous consumers, and a higher buyers' heterogeneity. The optimal policy of the authority is characterized in terms of a standard of proof and resources devoted to the investigation.
    Keywords: Advice, Persuasion, Legal Procedure, Consumer Protection
    JEL: D18 D8 K4 L1
    Date: 2018–06
  6. By: Piuli Roy Chowdhury (Indira Gandhi Institute of Development Research; Institute of Economic Growth)
    Abstract: This paper reexamines the impact of merger on innovation. Unlike as in Federico et al (2017), it considers the scenario where merged firms combine their research labs. It shows that, in equilibrium, each firm chooses a higher R&D effort after the merger, while industry effort may rise or fall due to the merger. Furthermore, it shows that given a sufficient condition, profits of the merged firm falls and consumer surplus rises in the post merger scenario. These results are in sharp contrast to the findings of Federico et al (2017).
    Keywords: Innovation, R&D, Mergers
    JEL: D43 G34 L40 O30
    Date: 2018–03
  7. By: Eguia, Jon (Michigan State University, Department of Economics); Xefteris, Dimitrios (University of Cyprus)
    Abstract: Simple majority voting does not allow preference intensities to be expressed, and hence fails to implement choice rules that take them into account. A vote-buying mechanism, instead, permits preference intensities to be revealed since each agent can buy any quantity of votes x to cast for an alternative of her choosing at a cost c(x) and the outcome is the most voted alternative. In the context of binary decisions, we characterize the class of choice rules implemented by vote-buying mechanisms. Rules in this class can assign any weight to preference intensities and to the number of supporters for each alternative.
    Keywords: implementation; mechanism design; vote-buying; social welfare; utilitarianism; quadratic voting
    JEL: D61 D71 D72
    Date: 2018–06–26
  8. By: Christian Alcocer; Thomas D. Jeitschko; Thomas D. Jeitschko
    Abstract: We postulate a new behavioral bias in how people play mixed strategies by proposing the existence of simple players who lack strategic depth; in a sense, they are the simplest possible agents that do not directly contradict the economic principle of utility maximization. We deÖne them as those who, when indi§erent between choices, follow a simple rule-of-thumb and assign a predetermined probability to each. We show that if they play 2 2 games, an equilibrium generally fails to exist. However, under random matching within populations with some proportion of simple players, equilibrium is restored and is indistinguishable from Nash equilibria in games with unrestricted strategy choices, as long as the percentage of simple mixers is small enough. As such, players are unable to take advantage of the presence of simple mixers, and simple mixers do no worse than more sophisticated players.
    Keywords: Behavioral, Bounded Rationality, Mixed Equilibria
    JEL: C72 D03 D83
    Date: 2018–01–23
  9. By: Xue-Zhong He (Finance Discipline Group, UTS Business School, University of Technology Sydney); Lei Shi (Macquarie University); Marco Tolotti (Ca' Foscari University of Venice)
    Abstract: When traders are uncertain on being informed and make effort to reduce their uncertainty, we would expect an improvement in both the welfare and price efficiency. By considering the disutility of the effort, we characterize the non-cooperative information game on traders' decision of making effort through a Nash equilibrium and asset price through a noisy rational expectation equilibrium. We show that making effort to be informed is harmful for social welfare. Also improving market efficiency is always at the cost of welfare reduction. Therefore, with the disutility of making effort to reduce the uncertainty on being informed, social welfare can be improved when traders make less effort, and more importantly, social welfare and price efficiency cannot be improved simultaneously.
    Keywords: Uncertainty and effort; Nash equilibrium; endogenous information; asset pricing; efficiency; and social welfare
    JEL: G02 G12 G14
    Date: 2018–03–01
  10. By: Christophe Labreuche (Thales Research & Technology - Palaiseau); Michel Grabisch (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: In many Multi-Criteria Decision problems, one can construct with the decision maker several reference levels on the attributes such that some decision strategies are conditional on the comparison with these reference levels. The classical models (such as the Choquet integral) cannot represent these preferences. We are then interested in two models. The first one is the Choquet with respect to a p-ary capacity combined with utility functions, where the p-ary capacity is obtained from the reference levels. The second one is a specialization of the Generalized-Additive Independence (GAI) model, which is discretized to fit with the presence of reference levels. These two models share common properties (monotonicity, continuity, properly weighted, …), but differ on the interpolation means (Lovász extension for the Choquet integral, and multi-linear extension for the GAI model). A drawback of the use of the Choquet integral with respect to a p-ary capacity is that it cannot satisfy decision strategies in each domain bounded by two successive reference levels that are completely independent of one another. We show that this is not the case with the GAI model
    Keywords: Multiple criteria analysis; Generalized Additive Independence; Choquet integral; reference levels; interpolation
    Date: 2018–03
  11. By: James P. Gander
    Abstract: The purpose of this paper is to present an alternative approach to analyzing firm advertising under uncertainty. The approach considers the simultaneity (orduality) of two effects of advertising, one effect on the probability associated with the bundle of goods the typical buyer purchases and the other effect on the probability associated with the time the buyer spends in the store making the purchases. While bundle and time are well explored in the literature, our simultaneity approach to determine the optimum level (and type) of advertising results in implications that are not present in the literature. The novelty of this alternative approach is that it shows that there can be the possibility of an equivalent dual optimal advertising effect on the expected value of the bundle and the expected value of the time spent. The implications of such an equivalence (or lack thereof) for advertising decision making are then explored.
    Keywords: Advertising, Uncertainty, Bundle, Time Spent,Equivalence JEL Classification: 022, 024, 511, 541
    Date: 2018
  12. By: Jon X. Eguia; Francesco Giovannoni
    Abstract: We provide an instrumental theory of extreme campaign platforms. By adopting an extreme platform, a previously mainstream party with a relatively small probability of winning further reduces its chances. On the other hand, the party builds credibility as the one most capable of delivering an alternative to mainstream policies. The party gambles that if down the road voters become dissatisfied with the status quo and seek something different, the party will be there ready with a credible alternative. In essence, the party sacrifices the most immediate election to invest in greater future success. We call this phenomenon tactical extremism. We show under which conditions we expect tactical extremism to arise and we discuss its welfare implications.
    Date: 2018–06–28
  13. By: Eswaran, Mukesh
    Abstract: This paper offers a theory of decentralized, non-state-sponsored terrorism that is characteristic of contemporary reality, and that explains the rise of homegrown terrorism. We argue that the sense of social identity is a prime motivator of non-strategic terrorist activities, and we investigate its consequences and implications for defence against terrorism. Terrorist responses to perceived affronts to identity increase with altruism towards in-groups and with endogenous intensity of hate towards out-groups. We show that, while out-group spite is the more essential feature of identity pertinent to decentralized terrorism, the intensity of terrorist actions is magniï¬ ed by in-group altruism because it plays an important role in overcoming the potential free-riding of terrorists. This makes individual terrorist activities possible without coordination. We use our formulation to provide an alternative explanation for why counterterrorism measures often fail, and frequently can have a backlash effect of increasing terrorism. Our results point to the need for western democracies to reformulate their foreign policies to take account of the role these policies play in instigating contemporary terrorism.
    Keywords: social identity; decentralized terrorism; altruism; spite; us versus them
    JEL: D74 H56
    Date: 2018–06–06

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