nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒08‒20
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Relational Communication By Anton Kolotilin; Hongyi
  2. Dynamically Consistent Preferences Under Imprecise Probabilistic Information By Frank Riedel; Jean-Marc Tallon; Vassili Vergopoulos
  3. A Model of Imperfect Competition under Adverse Selection By Hector Chade
  4. Dynamic Random Subjective Expected Utility By Jetlir Duraj
  5. Collective Mistakes: Intuition Aggregation for a Trick Question under Strategic Voting By Tajika, Tomoya
  6. Optimal Mechanism Design with Resale: An Ex-Ante Price Default Model By Weiye Cheny
  7. "Games of Love and Hate" By Debraj Ray; Rajiv Vohra
  8. Bundling Incentives in (Many-to-Many) Matching with Contracts By Jonathan Ma; Scott Duke Kominers
  9. Optimal Cross-Licensing Arrangements: Collusion versus Entry Deterrence By Jay Pil Choi; Heiko Gerlach
  10. Vertical Mergers in Platform Markets By Jérôme Pouyet; Thomas Trégouët
  11. Narratives, Imperatives, and Moral Reasoning By Bénabou, Roland; Falk, Armin; Tirole, Jean
  12. A Theory of Multihoming in Rideshare Competition By Kevin A. Bryan; Joshua S. Gans
  13. Implementing the Median By Matías Núñez; Carlos Pimienta; Dimitrios Xefteris
  14. Second-Order Induction: Uniqueness and Complexity By Argenziano, Rossella; Gilboa, Itzhak
  15. Technology spillovers and outside options in a bilateral duopoly By Noriaki Matsushima; Laixun Zhao
  16. A Theory of Equality Before the Law By Daron Acemoglu; Alexander Wolitzky
  17. Why Do Large Investors Disclose Their Information? By Ying Liu
  18. States and Eventualities: How to Understand Savage Without Anyone Being Hanged By Gilboa, Itzhak; Minardi, Stefania; Samuelson, Larry; Schmeidler, David

  1. By: Anton Kolotilin (School of Economics, UNSW Business School); Hongyi (School of Economics, UNSW Business School)
    Abstract: We study a communication game between an informed sender and an uninformed receiver with repeated interactions and voluntary transfers. Transfers motivate the receiver’s decision-making and signal the sender’s information. Although full separation can always be supported in equilibrium, partial or complete pooling is optimal if the receiver’s decision-making is too responsive to information. In this case, the receiver’s decision-making is disciplined by pooling extreme states, where she is most tempted to defect. In characterizing optimal equilibria, we establish new results on monotone persuasion.
    Keywords: strategic communication, monotone persuasion, relational contracts
    JEL: C73 D82 D83
    Date: 2018–07
  2. By: Frank Riedel (UJ - University of Johannesburg, Bauhaus-Universität Weimar); Jean-Marc Tallon (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Vassili Vergopoulos (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper extends decision theory under imprecise probabilistic information to dynamic settings. We explore the relationship between the given objective probabilistic information, an agent's subjective multiple priors, and updating. Dynamic consistency implies rectangular sets of priors at the subjective level. As the objective probabilistic information need not be consistent with rectangularity at the subjective level, agents might select priors outside the objective probabilistic information while respecting the support of the given set of priors. Under suitable additional axioms, the subjective set of priors belongs to the rectangular hull of the objective probabilistic information.
    Keywords: imprecision aversion,multiple priors,Imprecise information,dynamic consistency
    Date: 2017–04
  3. By: Hector Chade (Arizona State University)
    Abstract: This paper develops and analyzes a model of imperfect competition under adverse selection with private values among a finite set of heterogeneous principals (henceforth firms) for (a large number of) heterogeneous agents (henceforth workers). Firms differ in the technology that translates the effort of a worker into revenues for the firm, and we assume that firms are ordered by a single crossing property between effort and the type of technology (better firms have a higher marginal revenue from effort). In turn, workers differ in ability, which determines their disutility of effort. Firms compete with each other by offering menus consisting of wage-effort pairs (contracts), one for each type of worker. Alternative, one can think of firms offering effort-utility pairs for each type. After observing the menus, workers self-select by choosing the best contract for them. Although we cast the model as a labor market, it is straightforward to change the notation and think about it in terms of firms that produce goods of different qualities for different consumers. Instead of a revenue function there will be a cost function, instead of a wage a payment from consumers to firms, instead of worker's ability a consumer's value for quality, and instead of disutility of effort a utility for quality. The analysis reveals that instead of the standard efficiency vs. information rents trade off, the relevant one when there is imperfect competition among firms under adverse selection is efficiency vs. information rents plus market coverage trade off, since changing the menu offered not only affects efficiency and the information rents given to the workers hired but also affects the measure of workers targeted by a firm. We show that a pure strategy Nash equilibrium (PSNE) exists in this modified game (which is in turn a PSNE of the original game), and that in equilibrium the market segments into contiguous intervals, with each firm hiring only workers whose types belong to a given interval, with better firms targeting better interval of worker types and thus having better workforce composition. In equilibrium, the worst firm (in the single-crossing order defined above) distorts effort provision upward for all the types it serves, while the best distort it downward. All other firms exhibit both types of distortions: downward distortions for the lower types they serve, and upward distortions beyond an interior efficient type. Interestingly, the equilibrium effort function exhibits jumps at transition points between firms. In the firms-customers interpretation, this asserts that quality provided in equilibrium on the entire spectrum of the market will exhibit gaps, a potentially testable implication. Regarding curvature properties of the equilibrium menus, we show that it exhibits `quantity discounts' in the following sense: the wage per unit of effort is decreasing in the amount of effort induced in each worker hired by the firm (a similar interpretation holds for the other applications mentioned above regarding firms and customers).
    Date: 2018
  4. By: Jetlir Duraj
    Abstract: Dynamic Random Subjective Expected Utility (DR-SEU) allows to model choice data observed from an agent or a population of agents whose beliefs about objective payoff-relevant states and tastes can both evolve stochastically. Our observable, the augmented Stochastic Choice Function (aSCF) allows, in contrast to previous work in decision theory, for a direct test of whether the agent's beliefs reflect the true data-generating process conditional on their private information as well as identification of the possibly incorrect beliefs. We give an axiomatic characterization of when an agent satisfies the model, both in a static as well as in a dynamic setting. We look at the case when the agent has correct beliefs about the evolution of objective states as well as at the case when her beliefs are incorrect but unforeseen contingencies are impossible. We also distinguish two subvariants of the dynamic model which coincide in the static setting: Evolving SEU, where a sophisticated agent's utility evolves according to a Bellman equation and Gradual Learning, where the agent is learning about her taste. We prove easy and natural comparative statics results on the degree of belief incorrectness as well as on the speed of learning about taste. Auxiliary results contained in the online appendix extend previous decision theory work in the menu choice and stochastic choice literature from a technical as well as a conceptual perspective.
    Date: 2018–08
  5. By: Tajika, Tomoya
    Abstract: We consider a situation in which voters collectively answer a binary question. Each voter obtains an intuition about the answer to the question, but whether the question is intuitive or counterintuitive is not known to any voter. If each voter receives an independent signal on whether the question is intuitive or not, the majority rule under sincere voting correctly aggregates the intuitions with a large electorate; however, it is not an equilibrium. We show that in a unique pure-strategy equilibrium with a large electorate, majority voting makes an incorrect decision with a probability that can be sufficiently close to 1.
    Keywords: Information aggregation, inefficiency, counterintuitive question, strategic voting
    JEL: C72 D72
    Date: 2018–07
  6. By: Weiye Cheny (Graduate School of Economics, Osaka University)
    Abstract: This paper investigates the optimal ex-ante price mechanism design of selling a single indivisible object in a market that comprises one public risky buyer and one regular risky buyer under unlimited or limited liability where resale is allowed. First, we propose an endogenous liquidation rule requiring that the public buyer acquires the object in the liquidation stage. Next, we design an optimal bankruptcy transfer to prevent the buyer's strategic default. On the basis of this liquidation rule, the optimal ex-ante price mechanism is designed to achieve the seller's upper bound revenue under unlimited and limited liability when resale cannot be prohibited prior to the liquidation stage. Comparing the two mechanisms, the results illustrate that the effect on the seller's behavior and that revenue over the liability and information change in each case. In other words, (i) when faced with limited liability buyers, the regular buyer will obtain the object in the initial market, whereas they will become the loser under the unlimited liability case; (ii) the seller's expected revenue under unlimited liability is weakly higher than that under limited liability; and (iii) when faced with the risky buyer, the seller prefers the buyer's resale behavior and is averse to the speculator only under the limited liability case.
    Keywords: Mechanism design Bankruptcy Endogenous bankruptcy recovery Resale
    JEL: D82 G33
    Date: 2018–07
  7. By: Debraj Ray; Rajiv Vohra
    Abstract: A game of love and hate is one in which a player’s payoff is a function of her own action and the payoffs of other players. For each action profile, the associated payoff profile solves an interdependent utility system, and if that solution is bounded and unique for every profile we call the game coherent. Coherent games generate a standard normal form. Our central theorem states that every Nash equilibrium of such a game is Pareto optimal, in sharp contrast to the general prevalence of inefficient equilibria in the presence of externalities. While externalities in our model are restricted to flow only through payoffs there are no other constraints: they could be positive or negative, or of varying sign. We further show that our coherence and continuity requirements are tight.
    Date: 2018
  8. By: Jonathan Ma (Harvard University); Scott Duke Kominers (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: In many-to-many matching with contracts, the way in which contracts are specified can affect the set of stable equilibrium outcomes. Consequently, agents may be incentivized to modify the set of contracts upfront. We consider one simple way in which agents may do so: unilateral bundling, in which a single agent links multiple contracts with the same counterparty together. We show that essentially no stable matching mechanism eliminates incentives for unilateral bundling. Moreover, we find that unilateral bundling can sometimes lead to Pareto improvement?and other times produces market power that makes one agent better off at the expense of others.
    Keywords: Matching with contracts; Contract design; Bundling-proofness; Substitutability
    JEL: C62 C78 D44
    Date: 2018–08
  9. By: Jay Pil Choi; Heiko Gerlach
    Abstract: This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism.
    Keywords: cross-licensing arrangements, patent litigation, collusion, entry deterrence
    JEL: D43 L13 O30
    Date: 2018
  10. By: Jérôme Pouyet (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Thomas Trégouët (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We analyze the competitive impact of vertical integration between a platform and a manufacturer when platforms provide operating systems for devices sold by manufacturers to customers, and, customers care about the applications developed for the operating systems. Two-sided network effects between customers and developers create strategic substitutability between manufacturers' prices. When it brings efficiency gains, vertical integration increases consumer surplus, is not profitable when network effects are strong, and, benefits the non-integrated manufacturer. When developers bear a cost to make their applications available on a platform, manufacturers boost the participation of developers by affiliating with the same platform. This creates some market power for the integrated firm and vertical integration then harms consumers, is always profitable, and, leads to foreclosure. Introducing developer fees highlights that not only the level, but also the structure of indirect network effects matter for the competitive analysis.
    Keywords: network effects,Vertical integration,two-sided markets
    Date: 2016–12
  11. By: Bénabou, Roland; Falk, Armin; Tirole, Jean
    Abstract: By downplaying externalities, magnifying the cost of moral behavior, or suggesting not being pivotal, exculpatory narratives can allow individuals to maintain a positive image when in fact acting in a morally questionable way. Conversely, responsibilizing narratives can help sustain better social norms. We investigate when narratives emerge from a principal or the actor himself, how they are interpreted and transmitted by others, and when they spread virally. We then turn to how narratives compete with imperatives (general moral rules or precepts) as alternative modes of communication to persuade agents to behave in desirable ways.
    Keywords: consequentialism; deontology; imperatives; moral behavior; narratives; norms; organizations; prosocial behavior; rules
    JEL: D62 D64 D78 D83 D85 D9 H4 K42 L14 Z13
    Date: 2018–07
  12. By: Kevin A. Bryan; Joshua S. Gans
    Abstract: We examine competition amongst ridesharing platforms where firms compete by choosing both the price of rides and the extent of idleness. Idleness means drivers who are compensated without picking up passengers, instead acting to reduce passenger wait time. We show that when consumers are the only agents who multihome, idleness falls compared with when they face a monopoly ridesharing platform. When drivers and consumers multihome, idleness further falls to zero as it involves costs for each platform that are appropriated, in part, by their rival. Interestingly, socially superior outcomes may involve monopoly or competition under various multihoming regimes, depending on the density of the city, and the relative costs of idleness versus consumer disutility of waiting.
    JEL: L13 L51
    Date: 2018–07
  13. By: Matías Núñez (Universitè Paris-Dauphine, PSL Research University, CNRS, Lamsade); Carlos Pimienta (School of Economics, UNSW Business School); Dimitrios Xefteris (University of Cyprus, Department of Economics)
    Abstract: In the single-peaked domain, the median rules (Moulin, 1980) are of special interest. They are, essentially, the unique strategy-proof rules as well as the unique Nash implementable ones under complete information. We show that, under mild assumptions on admissible priors, they are also Bayes-Nash implementable by the means of ``detail-free'' mechanisms. That is, mechanisms that do not rely on the mechanism designer having detailed information about the priors that the agents hold. Furthermore, detail-free implementation of the median rules does not clash with truthful behavior. The provided mechanism is such that, in every equilibrium, all agents reveal their true peak with probability one.
    Keywords: Nash Implementation, Bayesian Implementation, Robust Implementation, Detail-free, Median rule, Strategy-proofness, Single-Peaked Preferences, Condorcet Winner.
    JEL: C9 D71 D78 H41
    Date: 2018–07
  14. By: Argenziano, Rossella; Gilboa, Itzhak
    Abstract: Agents make predictions based on similar past cases, while also learning the relative importance of various attributes in judging similarity. We ask whether the resulting "empirical similarity" is unique, and how easy it is to find it. We show that with many observations and few relevant variables, uniqueness holds. By contrast, when there are many variables relative to observations, non-uniqueness is the rule, and finding the best similarity function is computationally hard. The results are interpreted as providing conditions under which rational agents who have access to the same observations are likely to converge on the same predictions, and conditions under which they may entertain different probabilistic beliefs.
    Keywords: Empirical Similarity; Belief Formation
    JEL: A10
    Date: 2018–05–15
  15. By: Noriaki Matsushima; Laixun Zhao
    Abstract: This paper examines the role of outside options in a downstream duopoly with exclusive vertical relations as in the Japanese automobile industry. In our setup, the downstream firms have outside options, and two upstream firms with exclusive relations can engage in cost reducing investments. More interestingly, each upstream firm can choose whether to voluntarily generate technology spillovers to its rival. We show that better outside options of the downstream firms can induce voluntary technology spillovers in the upstream level, increasing the profits of all firms on the vertical chain.
    Date: 2018–08
  16. By: Daron Acemoglu; Alexander Wolitzky
    Abstract: We propose a model of the emergence of equality before the law. A society can support “effort” (“cooperation”, “pro-social behavior”) using the “carrot” of future cooperation or the “stick” of coercive punishment. Community enforcement relies only on the carrot and involves low coercion, low inequality, and low effort. A society in which the elite control the means of violence supplements the carrot with the stick, and involves high coercion, high inequality, and high effort. In this regime, elites are privileged: they are not subject to the same coercive punishments as non-elites. We show that it may be optimal—even from the viewpoint of the elite—to establish equality before the law, where all agents are subject to the same coercive punishments. The central mechanism is that equality before the law increases elites’ effort, which in turn encourages even higher effort from non-elites. Equality before the law combines high coercion and low inequality—in our baseline model, elites exert the same level of effort as non-elites. Factors that make the emergence of equality before the law more likely include limits on the extent of coercion, greater marginal returns to effort, increases in the size of the elite group, greater political power for non-elites, and under some additional conditions, lower economic inequality.
    JEL: C73 K10 P16 P51
    Date: 2018–06
  17. By: Ying Liu (University of Lausanne and Swiss Finance Institute)
    Abstract: Large investors often advertise private information at private talks or in the media. To analyse the incentives for information disclosure, I develop a two-period Kyle (1985) type model in which an informed short-horizon investor strategically discloses private information to enhance price efficiency. I show that information disclosure is optimal when the scope of private information is large and when the large investor has a high reputation. Short investment horizons induce information disclosure among investors and are beneficial for price efficiency. However, strategic information disclosure reduces trading before disclosure and harms price discovery.
    Keywords: Information Disclosure, Price Discovery, Asymmetric Information, Market Microstructure
    JEL: G12 G14
    Date: 2017–11
  18. By: Gilboa, Itzhak; Minardi, Stefania; Samuelson, Larry; Schmeidler, David
    Abstract: We discuss the notion of a state of the world in axiomatic decision theory, and argue that it should be viewed as an "eventuality" that is implicitly assumed to be independent of the process by which preferences are observed. The distinction between states, which are assumed to resolve all uncertainty, and eventualities suggests certain limitations on the axiomatic approach for defining and measuring mental concepts (such as belief ) by observed choices
    Keywords: axiomatic; decision; theory
    JEL: A10
    Date: 2018–05–15

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