nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒09‒03
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Inattention and Belief Polarization By Kristoffer Nimark
  2. The Rationale for Motions in the Design of Adjudication By Steven Shavell
  3. Precision May Harm: The Comparative Statics of Imprecise Judgement By Sean Horan; Paola Manzini; Marco Mariotti
  4. Narratives, Imperatives, and Moral Reasoning By Benabou, Roland; Falk, Armin; Tirole, Jean
  5. Cases and Scenarios in Decisions Under Uncertainty By Gilboa, Itzhak; Minardi, Stefania; Samuelson, Larry
  6. Characterization, Existence, and Pareto Optimality in Insurance Markets with Asymmetric Information with Endogenous and Asymmetric Disclosures: Revisiting Rothschild-Stiglitz By Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
  7. Mechanism Design with Costly Verification and Limited Punishments, Third Version By Yunan Li
  8. Mechanism Design with Financially Constrained Agents and Costly Verification* By Yunan Li
  9. Efficient Mechanisms with Information Acquisition By Yunan Li
  10. Low Reserve Prices in Auctions By Audrey Hu; Steven Matthews; Liang Zou
  11. Life Insurance and Life Settlement Markets with Overconfident Policyholders By Hanming Fang; Zenan Wu
  12. Risk Sharing Under Limited Commitment and Private Information By Nicolas Caramp; Juan Passadore
  13. Non-Altruistic Equilibria By Ohnishi, Kazuhiro
  14. Collective Reputation in Online Platforms and Private Quality Standards By McCluskey, Jill J.; Winfree, Jason A.
  15. Intermediation as Rent Extraction By Maryam Farboodi; Gregor Jarosch; Guido Menzio
  16. Problems of Commitment in Arming and War: How Insecurity and Destruction Matter By Michelle R. Garfinkel; Constantinos Syropoulos
  17. Can First-Order Stochastic Dominance Constrain Risk Attitudes? By Christian Tarsney

  1. By: Kristoffer Nimark (Cornell University)
    Abstract: Disagreement persists over issues that have objective truths. In the presence of increasing amounts of data, such disagreement should vanish, but it is nonetheless observable. This paper studies persistent disagreement in a model where Bayesian rational agents learn about an unobserved state through noisy signals. We show that agents (i) choose signal structures that are more likely to reinforce their prior beliefs and (ii) choose signal precisions that are inversely related to the precision of their prior beliefs. We call the former the confirmation effect and the latter the complacency effect. The complacency effect may lead agents to stop updating their beliefs entirely, leading to permanent disagreement among agents about the true state of nature. Taken together, the confirmation and complacency effect imply that the beliefs of ex ante identical agents over time tend to cluster in two distinct groups near the boundaries of the belief space. The complacency effect is stronger and more general when information cost is proportional to channel capacity, compared to when it is proportional to reduction in entropy. We argue that in some settings, it may be more natural to model the cost of attention as proportional to channel capacity, rather than the common practice of specifying information cost as proportional to entropy reduction.
    Date: 2018
  2. By: Steven Shavell
    Abstract: The conduct of adjudication is often influenced by motions––requests made by litigants to modify the course of adjudication. The question studied in this article is why adjudication is designed so as to permit the use of motions. The answer developed is that litigants will naturally know a great deal about their specific matter, whereas a court will ordinarily know little except to the degree that the court has already invested effort to appreciate it. By giving litigants the right to bring motions, the judicial system leads litigants to efficiently provide information to courts that is relevant to the adjudicative process.
    JEL: D02 D8 K40 K41
    Date: 2018–06
  3. By: Sean Horan (University of Montreal; CIREQ); Paola Manzini (Department of Economics, University of Sussex, Brighton, UK; IZA); Marco Mariotti (Queen Mary University of London)
    Abstract: We consider an agent whose information about the objects of choice is imperfect in two respects: first, their values are perceived with error; and, second, the realised values cannot be discriminated with absolute precision. Reasons for imprecise discrimination include limitations in sensory perception, memory function, or the technology that experts use to communicate with decision-makers. We study the effect of increasing precision on the quality of decision-making. When values are perceived without error, more precision is unambiguously beneficial. We show that this ceases to be true when values are perceived with error. As a practical implication, our results establish conditions where it is counter-productive for an expert to use a finer signalling scheme to communicate with a decision-maker.
    Keywords: stochastic choice; imprecise perception;
    JEL: D01
    Date: 2018–08
  4. By: Benabou, Roland (Princeton University); Falk, Armin (briq, University of Bonn); Tirole, Jean (IDEI)
    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: moral behavior, prosocial behavior, narratives, imperatives, justifications, rules, Kantian reasoning, deontology, consequentialism, utilitarianism, norms, organizations
    JEL: D62 D64 D78 D83 D85 D91 H41 K42 L14 Z13
    Date: 2018–07
  5. By: Gilboa, Itzhak; Minardi, Stefania; Samuelson, Larry
    Abstract: We offer a model that combines and generalizes case-based decision theory and expected utility maximization. It is based on the premise that an agent looks ahead and assesses possible future scenarios, but may not know how to evaluate their likelihood and may not be sure that the set of scenarios is exhaustive. Consequently, she also looks back at her memory for past cases, and makes decisions so as to maximize a combined function, taking into account both scenarios and cases. We allow for non-additive set functions, both over future scenarios and over past cases, to capture (i) incompletely specified or unforeseen scenarios, (ii) ambiguity, (iii) the absence of information about counterfactuals, and (iv) some forms of case-to-rule induction ("abduction") and statistical inference. We axiomatize this model. Learning in this model takes several forms, and, in particular, changes the relative weights of the two forms of reasoning.
    Keywords: Decisions Under Uncertainty; decision theory
    JEL: A10
    Date: 2017–03–17
  6. By: Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
    Abstract: We study the Rothschild-Stiglitz model of competitive insurance markets with endogenous information disclosure by both firms and consumers. We show that an equilibrium always exists, (even without the single crossing property), and characterize the unique equilibrium allocation. With two types of consumers the outcome is particularly simple, consisting of a pooling allocation which maximizes the well-being of the low risk individual (along the zero profit pooling line) plus a supplemental (undisclosed and nonexclusive) contract that brings the high risk individual to full insurance (at his own odds). We show that this outcome is extremely robust and Pareto efficient.
    JEL: D82 D83
    Date: 2018–06
  7. By: Yunan Li (Department of Economics and Finance, City University of Hong Kong)
    Abstract: A principal has to allocate a good among a number of agents, each of whom values the good. Each agent has private information about the principal's payoff if he receives the good. There are no monetary transfers. The principal can inspect agents' reports at a cost and penalize them, but the punishments are limited. I characterize an optimal mechanism featuring two thresholds. Agents whose values are below the lower threshold and above the upper threshold are pooled, respectively. If the number of agents is small, then the pooling area at the top of value distribution disappears. If the number of agents is large, then the two pooling areas meet and the optimal mechanism can be implemented via a shortlisting procedure.
    Keywords: Mechanism Design, Costly Verification, Limited Punishments
    JEL: D82
    Date: 2017–09–28
  8. By: Yunan Li (Department of Economics, City University of Hong Kong)
    Abstract: A principal wishes to distribute an indivisible good to a population of budget-constrained agents. Both valuation and budget are an agent’s private information. The principal can inspect an agent’s budget through a costly verification process and punish an agent who makes a false statement. I characterize the direct surplus-maximizing mechanism. This direct mechanism can be implemented by a two-stage mechanism in which agents only report their budgets. Specifically, all agents report their budgets in the first stage. The principal then provides budget dependent cash subsidies to agents and assigns the goods randomly (with uniform probability) at budget-dependent prices. In the second stage, a resale market opens, but is regulated with budget-dependent sales taxes. Agents who report low budgets receive more subsidies in their initial purchases (the first stage), face higher taxes in the resale market (the second stage) and are inspected randomly. This implementation exhibits some of the features of some welfare programs, such as Singapore’s housing and development board.
    Keywords: Mechanism Design, Budget Constraints, Efficiency, Costly Verification
    JEL: D45 D61 D82 H42
    Date: 2017–01–18
  9. By: Yunan Li (Department of Economics and Finance, City University of Hong Kong)
    Abstract: This paper studies the design of ex ante efficient mechanisms in situations where a single item is for sale, and agents have positively interdependent values and can covertly acquire information at a cost before participating in a mechanism. I find that when interdependency is low and/or the number of agents is large, the ex post efficient mechanism is also ex ante efficient. In cases of high interdependency and/or a small number of agents, ex ante efficient mechanisms discourage agents from acquiring excessive information by introducing randomization to the ex post efficient allocation rule in areas where the information’s precision increases most rapidly.
    Keywords: Auctions, Mechanism Design, Information Acquisition, Efficiency
    JEL: C70 D44 D82 D86
    Date: 2017–06–23
  10. By: Audrey Hu (Department of Economics, City University of Hong Kong); Steven Matthews (Department of Economics, University of Pennsylvania); Liang Zou (Department of Economics, University of Amsterdam)
    Abstract: Received auction theory prescribes that a reserve price which maximizes expected profit should be no less than the seller's own value for the auctioned object. In contrast, a common empirical observation is that many auctions have reserve prices set below seller's values, even at zero. This paper revisits the theory to find a potential resolution of the puzzle for second-price auctions. The main result is that an optimal reserve price may be less than the seller's value if bidders are risk averse and have interdependent values. Moreover, the resulting outcome may be arbitrarily close to that of an auction that has no reserve price, an absolute auction.
    Keywords: reserve price, risk aversion, interdependent values, second-price auction
    JEL: D44 D82
    Date: 2017–03–13
  11. By: Hanming Fang (Department of Economics, University of Pennsylvania); Zenan Wu (Department of Economics, Peking University)
    Abstract: We analyze how the life settlement market - the secondary market for life insurance - may affect consumer welfare in a dynamic equilibrium model of life insurance with one-sided commitment and overconfident policyholders. As in Daily et al. (2008) and Fang and Kung (2010), policyholders may lapse their life insurance policies when they lose their bequest motives; but in our model the policyholders may underestimate their probability of losing their bequest motive, or be overconfident about their future mortality risks. For the case of overconfidence with respect to bequest motives, we show that in the absence of life settlement overconfident consumers may buy too much" reclassiffication risk insurance for later periods in the competitive equilibrium. In contrast, when consumers are overconfident about their future mortality rates in the sense that they put too high a subjective probability on the low-mortality state, the competitive equilibrium contract in the absence of life settlement exploits the consumer bias by offering them very high face amounts only in the low-mortality state. In both cases, life settlement market can impose a discipline on the extent to which overconfident consumers can be exploited by the primary insurers. We show that life settlement may increase the equilibrium consumer welfare of overconfident consumers when they are sufficiently vulnerable in the sense that they have a sufficiently large intertemporal elasticity of substitution of consumption.
    Keywords: life insurance, secondary market, overconfidence
    JEL: D03 D86 G22 L11
    Date: 2017–03–20
  12. By: Nicolas Caramp (UC Davis); Juan Passadore (Einaudi Institute for Economics and Fina)
    Abstract: What are the limits that private information and limited commitment impose on risk sharing? Previous literature considered both problems separately, or modeled the lack of commitment only as participation constraints. However, with private information, lack of commitment does not collapse to participation constraints and requires an extended notion. We argue that this narrow understanding of limited commitment is responsible for the difficulties to find a decentralization for the constrained efficient allocation, which rely on commitment of some parties or unreasonable off-the equilibrium beliefs. We propose a notion of limited commitment involving renegotiation-proofness of the contracts, which provides a more general notion of the lack of commitment in the presence of private information. We show that there can be risk sharing with ex-post efficient contracts, and we decentralize the constrained efficient allocation a la Alvarez & Jermann (2000), but with borrowing constraints that depend on the whole portfolio in all states. Finally, we derive implications for the optimal design of state-contingent sovereign debt, like GDP-linked government bonds.
    Date: 2018
  13. By: Ohnishi, Kazuhiro
    Abstract: Which choice will a player make if he can make one of two choices in which his own payoffs are equal, but his rival’s payoffs are not equal, i.e. one with a large payoff for his rival and the other with a small payoff for his rival? This paper introduces non-altruistic equilibria for normal form games and extensive form non-altruistic equilibria for extensive form games as equilibrium concepts of noncooperative games by discussing such a problem and examines the connections between their equilibrium concepts and Nash and subgame perfect equilibria that are important and frequently encountered equilibrium concepts.
    Keywords: Normal form game, extensive form game, non-altruistic equilibrium.
    JEL: C72
    Date: 2018–08–01
  14. By: McCluskey, Jill J.; Winfree, Jason A.
    Abstract: This article provides a conceptual framework to understand benets and costs of private minimum quality standards, increasing seller reputation or warranties when there is a collective reputation for online platforms. Our framework uses a dual reputation model where consumers have a quality expectation based on the reputation of the platform and the reputation of the seller. We also analyze the benets and costs of various types of fees associated with online platforms. We nd that the optimal fee structure may depend upon weighing quality concerns with market power concerns. The optimal quality standard may also depend upon the fee structure, as well as the level of compliance to that standard.
    Keywords: Demand and Price Analysis, Financial Economics
    Date: 2017–12–17
  15. By: Maryam Farboodi (Department of Economics, Princeton University); Gregor Jarosch (Department of Economics, Princeton University); Guido Menzio (Department of Economics, University of Pennsylvania)
    Abstract: This paper develops a theory of asset intermediation as a pure rent extraction activity. Agents meet bilaterally in a random fashion. Agents differ with respect to their valuation of the asset's dividends and with respect to their ability to commit to take-it-or-leave-it offers. In equilibrium, agents with commitment behave as intermediaries, while agents without commitment behave as end users. Agents with commitment intermediate the asset market only because they can extract more of the gains from trade when reselling or repurchasing the asset. We study the extent of intermediation as a rent extraction activity by examining the agent's decision to invest in a technology that gives them commitment. We find that multiple equilibria may emerge, with different levels of intermediation and with lower welfare in equilibria with more intermediation. We find that a decline in trading frictions leads to more intermediation and typically lower welfare, and so does a decline in the opportunity cost of acquiring commitment. A transaction tax can restore efficiency.
    Keywords: Intermediation, Rent extraction
    JEL: D11 D21 D43 E32
    Date: 2016–12–01
  16. By: Michelle R. Garfinkel (Department of Economics, University of California-Irvine); Constantinos Syropoulos (Department of Economics and International Business, Drexel University)
    Abstract: This paper analyzes a guns-versus-butter model in which two agents compete for control over an insecure portion of their combined output. They can resolve this dispute either peacefully through settlement or by military force through open conflict (war). Both types of conflict resolution depend on the agents' arming choices, but only war is destructive. We find that, insofar as entering into binding contracts on arms is not possible and agents must arm even under settlement to secure a bigger share of the contested output, the absence of long-term commitments need not be essential in understanding the outbreak of destructive war. Instead, the ability to make short-term commitments could induce war. More generally, our analysis highlights how the pattern of war's destructive effects, the degree of output insecurity and the initial distribution of resources matter for arming decisions and the choice between peace and war. We also explore the implications of transfers for peace.
    Keywords: Contested property rights; settlement mechanisms; destructive conflict; negotiation; armed peace
    JEL: D30 D74 F51
    Date: 2018–08
  17. By: Christian Tarsney
    Abstract: The principle that rational agents should maximize expectations is intuitively plausible with respect to many ordinary cases of decision-making under uncertainty. But it becomes increasingly implausible as we consider cases of more extreme, low-probability risk (like Pascal's Mugging), and intolerably paradoxical in cases like the St. Petersburg Lottery and the Pasadena Game. In this paper I show that, under certain assumptions, stochastic dominance reasoning can capture many of the plausible implications of expectational reasoning while avoiding its implausible implications. More specifically, when an agent starts from a condition of background uncertainty about the choiceworthiness of her options representable by a probability distribution over possible degrees of choiceworthiness with exponential or heavier tails and a sufficiently large scale parameter, many expectation-maximizing gambles that would not stochastically dominate their alternatives "in a vacuum" turn out to do so in virtue of that background uncertainty. Nonetheless, even under these conditions, stochastic dominance will generally not require agents to accept extreme gambles like Pascal's Mugging or the St. Petersburg Lottery. I argue that the sort of background uncertainty on which these results depend is appropriate for any agent who assigns normative weight to aggregative consequentialist considerations, i.e., who measures the choiceworthiness of an option in part by the total amount of value in the resulting world. At least for such agents, then, stochastic dominance offers a plausible general principle of choice under uncertainty that can explain more of the apparent rational constraints on such choices than has previously been recognized.
    Date: 2018–07

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