nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒09‒10
23 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Laws and Authority By George J. Mailath; Stephen Morris; Andrew Postlewaite
  2. Costly Pretrial Agreements By Anderlini, Luca; Felli, Leonardo; Immordino, Giovanni
  3. Promoting a Reputation for Quality By Daniel Hauser
  4. Auctions with Limited Commitment By Qingmin Liu; Konrad Mierendorff; Xianwen Shi; Weijie Zhong
  5. Using Persistence to Generate Incentives in a Dynamic Moral Hazard Problem By Aislinn Bohren
  6. Group-Shift and the Consensus Effect, Second Version By David Dillenberger; Colin Raymond
  7. Security Design in Opaque Markets: The Role of Exclusivity and Commitment By Victoria Vanasco
  8. Voting on Multiple Issues: What to Put on the Ballot? By Alex Gershkov; Benny Moldovanu; Xianwen Shi
  9. Hunting with two bullets: moral hazard with a second chance By Paulo Fagandini
  10. Equilibrium in Incomplete Markets with Numeraire Assets and Differential Information: An Existence Proof By Lionel DE BOISDEFFRE
  11. Mechanism Design with News Utility By Jetlir Duraj
  12. Repeated Delegation By Elliot Lipnowski; Joao Ramos
  13. EFFICIENT PARTNERSHIP FORMATION IN NETWORKS By Bloch, Francis; Dutta, Bhaskar; Manea, Mihai
  14. Inference of Preference Heterogeneity from Choice Data By Annie Liang
  15. Wealth and the principal-agent matching By Paulo Fagandini
  16. Quadratic Games By Nicolas S. Lambert; Giorgio Martini; Michael Ostrovsky
  17. Multidimensional Private Information, Market Structure and Insurance Markets By Hanming Fang; Zenan Wu
  18. Free (Ad)vice By Matthew Mitchell
  19. An intertemporal model of growing awareness By Viero, Marie-Louise
  20. Characterizing Envy-Free, Strategy Proof, and Monotonic Mechanisms in Queueing Problem By Youngsub Chun; Duygu Yengin
  21. Some Simple Economics of Patent Protection for Complex Technologies By Denicolò, Vincenzo; Zanchettin, Piercarlo
  22. Collective Myopia and Habit By George-Marios Angeletos; Zhen Huo
  23. Risk Aversion and Double Marginalization By Soheil Ghili; Matthew Schmitt

  1. By: George J. Mailath (Department of Economics, University of Pennsylvania); Stephen Morris (Department of Economics, Princeton University); Andrew Postlewaite (University of Pennsylvania)
    Abstract: A law prohibiting a particular behavior does not directly change the payoff to an individual should he engage in the prohibited behavior. Rather, any change in the individual’s payoff, should he engage in the prohibited behavior, is a consequence of changes in other peoples’ behavior. If laws do not directly change payoffs, they are “cheap talk,” and can only affect behavior because people have coordinated beliefs about the effects of the law. Beginning from this point of view, we provide definitions of authority in a variety of problems, and investigate how and when individuals can have, gain, and lose authority.
    Date: 2016–11–08
  2. By: Anderlini, Luca; Felli, Leonardo; Immordino, Giovanni
    Abstract: Settling a legal dispute involves some costs that the parties have to incur ex-ante, for the pretrial negotiation and possible agreement to become feasible. Even in a full information world, if the distribution of these costs is sufficiently mismatched with the distribution of the parties' bargaining powers, a pretrial agreement may never be reached even though actual Court litigation is overall wasteful. Our results shed light on two key issues. First, a Plaintiff may initiate a law suit even though the parties fully anticipate that it will be settled out of Court. Second, the "likelihood" that a given law suit goes to trial is unaffected by how trial costs are distributed among the litigants. The choice of fee-shifting rule can only affect whether the Plaintiff files a law suit in the first place. It does not affect whether it is settled before trial or litigated in Court.
    Keywords: Costly Negotiations; Court Litigation; Pretrial Agreements
    JEL: C79 D23 D86 K12 K13
    Date: 2018–07
  3. By: Daniel Hauser (Department of Economics, Aalto University)
    Abstract: I consider a model in which a firm invests in both product quality and in a costly signaling technology, and the firm's reputation is the market's belief that its quality is high. The firm influences the rate at which consumers receive information about quality: the firm can either promote, which increases the arrival rate of signals when quality is high, or censor, which decreases the arrival rate of signals when quality is low. I study how the firm's incentives to build quality and signal depend on its reputation and current quality. The firm's ability to promote or censor plays a key role in the structure of equilibria. Promotion and investment in quality are complements: the firm has stronger incentives to build quality when the promotion level is high. Costly promotion can, however, reduce the firm's incentive to build quality; this effect persists even as the cost of building quality approaches zero. Censorship and investment in quality are substitutes. The ability to censor can destroy a firm's incentives to invest in quality, because it can reduce information about poor quality products.
    Keywords: Reputation, Advertising, Promotion, Censorship, Dynamic Games
    JEL: C73 D82 D83 D84
    Date: 2016–09–29
  4. By: Qingmin Liu; Konrad Mierendorff; Xianwen Shi; Weijie Zhong
    Abstract: We study the role of limited commitment in a standard auction environment. In each period, the seller can commit to an auction with a reserve price but not to future reserve prices. We characterize the set of equilibrium profits attainable for the seller as the period length vanishes. An immediate sale by efficient auction is optimal when there are at least three buyers. For many natural distributions two buyers is enough. Otherwise, we give conditions under which the maximal profit is attained through continuously declining reserve prices.
    Keywords: Auctions, Limited Commitment, Mechanism Design, Coase Conjecture
    JEL: D42 D44 D82
    Date: 2018–09–05
  5. By: Aislinn Bohren (Department of Economics, University of Pennsylvania)
    Abstract: This paper studies how persistence can be used to create incentives in a continuous-time stochastic game in which a long-run player interacts with a sequence of short-run players. Observation of the long-run player's actions are distorted by a Brownian motion and the actions of both players impact future payoffs through a state variable. For example, a firm or worker provides customers with a product, and the quality of this product depends on both current and past investment choices by the firm. I derive general conditions under which a Markov equilibrium emerges as the unique perfect public equilibrium, and characterize the equilibrium payoff and actions in this equilibrium, for any discount rate. I develop an application of persistent product quality to illustrate how persistence creates effective intertemporal incentives in a setting where traditional channels fail, and explore how the structure of persistence impacts equilibrium behavior. This demonstrates the power of the continuous-time setting to deliver sharp insights and a tractable equilibrium characterization for a rich class of dynamic games.
    Keywords: Continuous Time Games, Stochastic Games
    JEL: C73 L1
    Date: 2016–10–15
  6. By: David Dillenberger (Department of Economics, University of Pennsylvania); Colin Raymond (Department of Economics, Amherst University)
    Abstract: Individuals often tend to conform to the choices of others in group decisions, compared to choices made in isolation, giving rise to phenomena such as group polarization and the bandwagon effect. We show that this behavior, which we term the consensus effect, is equivalent to a well-known violation of expected utility, namely strict quasi-convexity of preferences. In contrast to the equilibrium outcome when individuals are expected utility maximizers, quasi-convexity of preferences imply that group decisions may fail to properly aggregate preferences and strictly Pareto-dominated equilibria may arise. Moreover, these problems become more severe as the size of the group grows.
    Keywords: Aggregation of Preferences, Choice Shifts in Groups, Consensus Effect, Non-Expected Utility, Quasi-Convex Preferences
    JEL: D71 D81
    Date: 2016–09–30
  7. By: Victoria Vanasco (Stanford University)
    Abstract: We study the problem of a seller with private information about her asset quality who can design securities backed by her asset cashflows to raise funds from investors in non-exclusive markets. When markets are non-exclusive, bilateral contracts between the seller and a particular investor cannot be made contingent on the contracts traded with other investors. This feature is natural in an opaque marketplace or in a dynamic environment where commitment is limited. We show that in such an environment full separation of seller types cannot be obtained. In any equilibrium, all seller types issue the same debt contract. While high-quality types retain the remaining cashflows on their balance sheet, low-quality sellers tranche their cash flows and sell the debt contract (senior tranche) and the remaining cashflows (junior tranche) separately to different investors. The model can rationalize the practice of tranching securities, and it generates new empirical predictions on the relation between the types of securities sold in markets and the quality of their underlying assets.
    Date: 2018
  8. By: Alex Gershkov; Benny Moldovanu; Xianwen Shi
    Abstract: We study a multi-dimensional collective decision problem under incomplete information. Agents have Euclidean preferences and vote by simple majority on each issue (dimension), yielding the coordinate-wise median. Judicious rotations of the orthogonal axes -- the issues that are voted upon -- lead to welfare improvements. If the agents' types are drawn from a distribution with independent marginals then, under weak conditions, voting on the original issues is not optimal. If the marginals are identical (but not necessarily independent), then voting first on the total sum and next on the differences is often welfare superior to voting on the original issues. We also provide various lower bounds on incentive efficiency: in particular, if agents' types are drawn from a log-concave density with I.I.D. marginals, a second-best voting mechanism attains at least 88% of the first-best efficiency. Finally, we generalize our method and some of our insights to preferences derived from distance functions based on inner products.
    Keywords: Multidimensional Voting, Mechanism Design, Rotation, Strategy-Proof Mechanisms, Budgeting Procedure
    JEL: D82 D72 D78
    Date: 2018–09–05
  9. By: Paulo Fagandini
    Abstract: I study the moral hazard problem where an agent can create an extra instance of effort and potentially improve bad realizations of the outcome before the principal observes it. The agent cannot hide the outcome of his effort, but just the way he achieved it. Findings are that both, principal and agent, value the option of improving the outcome in case of a bad realization if doing so is cheap. I also find that contracted effort is not always decreasing in its cost. I also study the situation in which, if the principal can impose short deadlines and eliminate the agent's extra chance, under a broad range of scenarios, the principal will do so when the parameters make agency costs sufficiently high. Finally, if the creation of the extra instance can cause a punishment for the principal, and if that punishment is sufficiently big, the principal will avoid writing contracts that incentive effort only on the extra chance. JEL codes: D82, D86
    Keywords: moral hazard, asymmetric information, contract theory, second chance
    Date: 2018
  10. By: Lionel DE BOISDEFFRE
    Abstract: The paper extends to asymmetric information Geanakoplos-Polemarchakis' (1986) existence theorem for incomplete financial markets with numeraire assets. It builds on a generic existence property of equilibria with real assets and differential information, and applies an asymptotic argument. It presents a two-period pure-exchange economy, with an ex ante uncertainty over the state of nature to be revealed at the second period. Asymmetric information is represented by private sets of states, that each agent is correctly informed to contain the realizable states. Consumers exchange commodities, on spot markets, and securities, on financial markets, which pay off in the same bundle of goods, conditionally on the state of nature to be revealed. Consumers have ordered smooth preferences over consumptions and a perfect foresight of future prices, along Radner (1972). With a different technique of proof, the paper also extends to numeraire assets De Boisdeffre's (2007) existence theorem for nominal assets, which characterizes existence by a no-arbitrage condition.
    Keywords: Sequential Equilibrium, Temporary Equilibrium, Perfect Foresight, Existence, Rational Expectations, Financial Markets, Asymmetric Information, Arbitrage
    Date: 2018–08
  11. By: Jetlir Duraj
    Abstract: News utility is the idea that the utility of an agent depends on changes in her beliefs over consumption and money. We introduce news utility into otherwise classical static Bayesian mechanism design models. We show that a key role is played by the timeline of the mechanism, i.e. whether there are delays between the announcement stage, the participation stage, the play stage and the realization stage of a mechanism. Depending on the timing, agents with news utility can experience two additional news utility effects: a surprise effect derived from comparing to pre-mechanism beliefs, as well as a realization effect derived from comparing post-play beliefs with the actual outcome of the mechanism. We look at two distinct mechanism design settings reflecting the two main strands of the classical literature. In the first model, a monopolist screens an agent according to the magnitude of her loss aversion. In the second model, we consider a general multi-agent Bayesian mechanism design setting where the uncertainty of each player stems from not knowing the intrinsic types of the other agents. We give applications to auctions and public good provision which illustrate how news utility changes classical results. For both models we characterize the optimal design of the timeline. A timeline featuring no delay between participation and play but a delay in realization is never optimal in either model. In the screening model the optimal timeline is one without delays. In auction settings, under fairly natural assumptions the optimal timeline has delays between all three stages of the mechanism.
    Date: 2018–08
  12. By: Elliot Lipnowski (University of Chicago); Joao Ramos (USC _ Marshall)
    Abstract: We study an ongoing relationship of delegated decision making. Facing a stream of projects to potentially finance, a principal must rely on an agent to assess the returns of different opportunities; the agent has lower standards, wishing to adopt every project. In equilibrium, the principal allows bad projects in the future to reward fiscal restraint by the agent today, but she cannot commit to reward the agent indefinitely. We fully characterize the equilibrium payoff set (at fixed discounting), showing that Pareto optimal equilibria can be implemented via a two-regime ‘Dynamic Capital Budget’. We show that, rather than backloaded rewards—a prevalent feature of dynamic agency models with greater commitment power—our Pareto optimal equilibria feature an inevitable loss of autonomy for the agent as time progresses. This transition toward conservatism speaks to the life cycle of an organization: as it matures, it generates lower revenue at a higher yield.
    Date: 2018
  13. By: Bloch, Francis; Dutta, Bhaskar; Manea, Mihai
    Abstract: We analyze the formation of partnerships in social networks. Players need favors at random times and ask their neighbors in the network to form exclusive long-term partnerships that guarantee reciprocal favor exchange. Refusing to provide a favor results in the automatic removal of the underlying link. When favors are costly, players agree to provide the first favor in a partnership only if they otherwise face the risk of eventual solitude. In equilibrium, the players essential for realizing every maximum matching can avoid this risk and enjoy higher payoffs than inessential players. Although the search for partners is decentralized and reflects local incentives, the strength of essential players drives efficient partnership formation in every network. When favors are costless, players enter partnerships at any opportunity and every maximal matching can emerge in equilibrium. In this case, efficiency is limited to special linking patterns: complete and complete bipartite networks, locally balanced bipartite networks with positive surplus, and factor-critical networks.
    Keywords: Financial Economics
    Date: 2018–02–02
  14. By: Annie Liang (Department of Economics, University of Pennsylvania)
    Abstract: Suppose that an analyst observes inconsistent choices from a decision maker. Can the analyst determine whether this inconsistency arises from choice error (imperfect maximization of a single preference) or from preference heterogeneity (deliberate maximization of multiple preferences)? I model choice data as generated from context-dependent preferences, where contexts vary across observations, and the decision maker errs with small probability in each observation. I show that (a) simultaneously minimizing the number of inferred preferences and the number of unexplained observations can exactly recover the correct number of preferences with high probability; (b) simultaneously minimizing the richness of the set of preferences and the number of unexplained observations can exactly recover the choice implications of the decision maker's true preferences with high probability. These results illustrate that selection of simple models, appropriately defined, is a useful approach for recovery of stable features of preference.
    Date: 2016–10–04
  15. By: Paulo Fagandini
    Abstract: I study the role the agent's wealth plays in the principal-agent matching with moral hazard and limited liability. I consider wealth and talent as the agent's type, and size as the firm's (principal's) type. Because utility is not perfectly transferable in this setup, I use generalized increasing differences and find that wealthier agents match with bigger firms, when talent is homogeneous among them, whereas for equally wealthy agents, more talented agents will match with bigger firms. I describe economic conditions over types such that pairs of higher types will write contracts in which the agent obtains more than the information rents, through a higher bonus, increasing the expected surplus. Finally, I provide an example in which wealth is distributed among agents in such a way that it reverses the standard result of positive assortative matching between talent and firm size. JEL codes: D86, D82, C78, J33, M12
    Keywords: moral hazard, asymmetric information, matching, non transferable utility
    Date: 2017
  16. By: Nicolas S. Lambert; Giorgio Martini; Michael Ostrovsky
    Abstract: We study general quadratic games with multidimensional actions, stochastic payoff interactions, and rich information structures. We first consider games with arbitrary finite information structures. In such games, we show that there generically exists a unique equilibrium. We then extend the result to games with infinite information structures, under an additional assumption of linearity of certain conditional expectations. In that case, there generically exists a unique linear equilibrium. In both cases, the equilibria can be explicitly characterized in compact closed form. We illustrate our results by studying information aggregation in large asymmetric Cournot markets and the effects of stochastic payoff interactions in beauty contests. Our results apply to general games with linear best responses, and also allow us to characterize the effects of small perturbations in arbitrary Bayesian games with finite information structures and smooth payoffs.
    JEL: C62 C72 D43 L13
    Date: 2018–08
  17. By: Hanming Fang (Department of Economics, University of Pennsylvania); Zenan Wu (Department of Economics, Peking University)
    Abstract: A large empirical literature found that the correlation between insurance purchase and ex post realization of risk is often statistically insignificant or negative. This is inconsistent with the predictions from the classic models of insurance a la Akerlof (1970), Pauly (1974) and Rothschild and Stiglitz (1976) where consumers have one-dimensional heterogeneity in their risk types. It is suggested that selection based on multidimensional private information, e.g., risk and risk preference types, may be able to explain the empirical findings. In this paper, we systematically investigate whether selection based on multidimensional private information in risk and risk preferences, can, under different market structures, result in a negative correlation in equilibrium between insurance coverage and ex post realization of risk. We show that if the insurance market is perfectly competitive, selection based on multidimensional private information does not result in negative correlation property in equilibrium, unless there is a sufficiently high loading factor. If the insurance market is monopolistic or imperfectly competitive, however, we show that it is possible to generate negative correlation property in equilibrium when risk and risk preference types are sufficiently negative dependent, a notion we formalize using the concept of copula. We also clarify the connections between some of the important concepts such as adverse/advantageous selection and positive/negative correlation property.
    Keywords: Asymmetric Information; Multidimensional Private Information; Adverse Selection; Advantageous Selection; Positive Correlation Property
    JEL: D82 G22 I11
    Date: 2016–10–18
  18. By: Matthew Mitchell (University of Toronto)
    Abstract: Consumers increasingly rely on intermediaries (“influencers”) to provide information about products, often because product choice is vast. Examples include blogs, Twitter endorsements, and search engine results. Such advice is typically not paid for directly by the consumer, but instead the benefit to the influencer comes from mixing advice and endorsement, often in a way that is unobservable to the follower. Giving enough good advice is necessary to keep followers, but there is a tension between the best advice and most revenue. This paper models such a dynamic relationship between such an influencer and their follower. The relationship between influencer and follower evolves between periods of less and more ads. The model can provide insight into stricter enforcement of policies like the FTCs mandate of disclosure on paid Twitter endorsements. If disclosure makes adds less valuable, it may be that superior policies to tweet-by-tweet disclosure might exist. For instance an opt-in policy that effectively deregulates influencers with good reputations.
    Date: 2018
  19. By: Viero, Marie-Louise
    Abstract: This paper presents an intertemporal model of growing awareness. It provides a framework for analyzing problems with long time horizons in the presence of growing awareness and awareness of unawareness. The framework generalizes both the standard event-tree framework and the framework from Karni and Vier (2017) of awareness of unawareness. Axioms and a representation are provided along with a recursive formulation of intertemporal utility. This allows for tractable and consistent analysis of intertemporal problems with unawareness.
    Keywords: Financial Economics
    Date: 2017–09
  20. By: Youngsub Chun (Seoul National University); Duygu Yengin (School of Economics, University of Adelaide)
    Abstract: Given a group of agents, the queueing problem is concerned with finding the order in which to serve agents and the (positive, zero, or negative) monetary transfers they should receive. In this paper, we explore the central open questions in queueing problem. First, we characterize the class of strategy-proof and envy-free mechanisms. Note that no-envy implies queue-efficiency in the queueing problem. We also characterize the subclasses that generate bounded deficit or no-deficit. Then, we address the open questions regarding solidarity in the queueing problem and characterize the classes of queue-efficient and strategy-proof mechanisms which satisfy respectively (i) cost monotonicity and (ii) population/slot monotonicity. Finally, we prove that among the envy-free and strategy-proof mechanisms, the only ones that satisfy either cost monotonicity or population monotonicity are an extension of the Pivotal/Reward-based Pivotal mechanisms.
    Keywords: Queueing problem; no-envy; queue-efficiency; strategy-proofness; population monotonicity; slot monotonicity; population solidarity; cost monotonicity; VCG mechanisms; Pivotal mechanisms; Reward-based Pivotal mechanism; Symmetrically Balanced VCG mechanism
    JEL: C72 D63 D71 D82
    Date: 2018–02
  21. By: Denicolò, Vincenzo; Zanchettin, Piercarlo
    Abstract: We analyze patent protection when innovative technologies are "complex" in that they involve sequential and complementary innovations. We argue that complexity affects the classic Nordhaus trade-off between innovation and static monopoly distortions. We parametrize the degree of sequentiality and that of complementarity and show that the optimal level of patent protection increases with both. We also address the issue of the optimal division of profit among different innovators.
    Keywords: Complementarity; Division of profit; Elasticity of the supply of inventions; Patent design; Sequential innovation
    JEL: O30 O40
    Date: 2018–07
  22. By: George-Marios Angeletos (M.I.T.); Zhen Huo (Yale University)
    Abstract: We characterize the equilibrium dynamics of a class of linear, incomplete-information models that feature forward-looking behavior, recurring shocks, slow learning, and rich higher-order uncertainty. We present an observational equivalence result that recasts this dynamics as that of representative-agent model featuring two distortions: extra discounting of the future; and anchoring of the current outcome to the past outcome, as in models with habit or adjustment costs. This provides a unified micro-foundation of various bells and whistles that the literature has used in order to match salient features of the macroeconomic time series. Furthermore, the as-if distortions are predicted to be more pronounced at the macro level than at the micro level, helping explain the disconnect between micro and macro estimates of consumption habit. We finally illustrate the quantitative potential of our insights in the context of inflation.
    Date: 2018
  23. By: Soheil Ghili (Cowles Foundation, Yale University); Matthew Schmitt (UCLA)
    Abstract: In vertical markets, eliminating double marginalization with a two-part tariff may not be possible due to downstream firms' risk aversion. When demand is uncertain, contracts with large fixed fees expose the downstream rm to more risk than contracts that are more reliant on variable fees. In equilibrium, contracts may thus rely on variable fees, giving rise to double marginalization. Counterintuitively, we show that increased demand risk or risk aversion can actually mitigate double marginalization. We also characterize several sufficient conditions under which increased risk or risk aversion does exacerbate double marginalization. We conclude with an application to merger analysis.
    Keywords: Risk Aversion, Double Marginalization, Vertical Markets
    Date: 2018–08

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