nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒09‒24
twenty-two papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Privacy Protection and Consumer Retention By Jullien, Bruno; Lefouili, Yassine; Riordan, Michael
  2. You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets By Jay Pil Choi; Martin Peitz
  3. Horizontal Mergers Between Multi-Sided Platforms: Insights from Cournot Competition By Correia da silva, Joao; Jullien, Bruno; Lefouili, Yassine; Pinho, Joana
  4. Whom to Lobby? Targeting in Political Networks By Thomas Groll; Anja Prummer
  5. Multi-candidate Political Competition and the Industrial Organization of Politics By Seror, Avner; Verdier, Thierry
  6. Competitive Differential Pricing By Yongmin Chen; Jianpei Li; Marius Schwartz
  7. Dynamic Legislative Policy Making under Adverse Selection By Vincent Anesi
  8. Nash Equilibria in the Response Strategy of Correlated Games By A. D. Correia; H. T. C. Stoof
  9. Implementation without Expected Utility: Ex-Post Verifiability By Hitoshi Matsushima
  10. Equality of When? By Giorgos Galanis; Roberto Veneziani
  11. Policy Experimentation, Redistribution and Voting Rules By Vincent Anesi; T Renee Bowen
  12. Insecure Property Rights and the Missing Middle By Aram Grigoryan; Mattias Polborn
  13. Centralized Course Allocation By Triossi, Matteo; Romero Medina, Antonio
  14. A Non-Bayesian Theory of State-Dependent Utility By Hill, Brian
  15. Costly Pre-Trial Agreements By Luca Anderlini; Leonardo Felli; Giovanni Immordino
  16. Rationalizability of Menu Preferences By Christopher J. Tyson
  17. Should We Discount the Welfare of Future Generations? Ramsey and Suppes versus Koopmans and Arrow By Chichilnisky, Graciela; Hammond, Peter J.; Stern, Nicholas
  18. Multicandidate Elections: Optimal Collateralized Contracts By Dan Cao; Roger Lagunoff
  19. A Theory of Small Campaign Contributions By Laurent Bouton; Micael Castanheira; Allan Drazen
  20. Only time will tell: A theory of deferred compensation By Hoffmann, Florian; Inderst, Roman; Opp, Marcus M.
  21. Valuation Monotonicity, Fairness and Stability in Assignment Problems By Rene (J.R.) van den Brink; Marina Nunez; Francisco Robles
  22. Optimal fund menus By Cvitanic, Jaksa; Hugonnier, Julien

  1. By: Jullien, Bruno; Lefouili, Yassine; Riordan, Michael
    Abstract: A website monetizes information it collects about its customers by charging third parties for targeted access to them. Allowing for third parties who are well-intentioned, a nuisance, or even malicious, the resulting consumer experiences might be good, bad, or neutral. As consumers learn from experience, the website especially risks losing those customers who suffer a bad experience. Customer retention thus motivates the website to be cautious about monetization, or to spend resources to screen third parties. We study the website's equilibrium privacy policy, its welfare properties, competition in the market for information, and the elusiveness of reliable welfare-improving regulations
    Keywords: Privacy Policy; Consumer Retention; Personal Data; Regulation
    JEL: D83 L15 L51
    Date: 2018–08
  2. By: Jay Pil Choi; Martin Peitz
    Abstract: This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream firm. The supplier’s adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality with the supplier. The supplier may enter the market by initially renting the downstream firm’s reputation. The downstream firm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs–this constitutes a novel theory of downstream barriers to entry.
    Keywords: Adverse Selection, Certification Intermediary, Incumbency Advantage, Barriers to Entry, Outsourcing, Branding
    JEL: D4 L12 L4 L43 L51 L52
    Date: 2018–09
  3. By: Correia da silva, Joao; Jullien, Bruno; Lefouili, Yassine; Pinho, Joana
    Abstract: This paper discusses the literature on horizontal mergers between multi-sided platforms and argues that the Cournot model can provide useful insights into the welfare effects of such mergers. To illustrate those insights, we develop a simple model in which two-sided platforms offer a homogeneous service and compete à la Cournot, and derive the effects of "average-marginal-cost-preserving" mergers on consumers on both sides of the market. We conclude with a discussion of several research avenues that could be explored to understand better the impact of horizontal mergers between multi-sided platforms.
    Keywords: Mergers; Multi-Sided Platforms; Cournot Competition
    JEL: D43 L41
    Date: 2018–08
  4. By: Thomas Groll (Columbia University); Anja Prummer (Queen Mary University of London)
    Abstract: We study lobbying in a setting in which decision-makers share resources in a network. Two opposing interest groups choose which decision-maker they want to target with their resource provision, and their decision depends on the decision-makers' ideologies as well as the network structure. We characterize the lobbying strategies in various network settings and show that a higher resource flow as well as homophily reinforce decision-makers' ideological bias. We highlight that competing lobbyists' efforts do not neutralize each other and their payoffs and competitive advantages depend on the networks they face. Our findings are consistent with empirically established lobbying activities.
    Keywords: Networks, Lobbying, Targeting, Flow of resources, Ideology, Centrality, Homophily, Colonel Blotto, Externalities
    JEL: D72 D78 D83 D85
    Date: 2016–12–22
  5. By: Seror, Avner; Verdier, Thierry
    Abstract: In this paper, we present a microfounded theory of multi-candidate political competition taking an "industrial organization" perspective of politics. The analytical framework is shown to be exible enough to address several applications on the topics of special interest politics, coalition formation in the legislature in proportional elections, and redistribution under alternative electoral rules.
    Keywords: Frechet distributions; Plurality; Probabilistic Voting Models; Proportionality; public policy; redistribution; runoff
    JEL: D71 D72 L11
    Date: 2018–08
  6. By: Yongmin Chen (Department of Economics, University of Colorado Boulder, USA); Jianpei Li (School of International Trade and Economics, University of International Business and Economics, China); Marius Schwartz (Department of Economics, Georgetown University, USA)
    Abstract: This paper analyzes welfare under differential versus uniform pricing across oligopoly makes that differ in costs of service. We establish necessary and sufficient conditions on demand properties—cross/own elasticities and curvature—for differential pricing by symmetric firms to raise aggregate consumer surplus, profit, and total welfare. The analysis reveals intuitively why differential pricing is generally beneficial though not always—including why profit can fall, unlike for monopoly—and why it is more beneficial than oligopoly third-degree price discrimination. When firms have asymmetric costs, however, differential pricing can reduce profit or consumer surplus even with ‘simple’ demands such as linear.
    Keywords: Differential Pricing, Price Discrimination, Demand Curvature, Cross-Price Elasticity, Pass-Through, Oligopoly
    JEL: D43 L13 L10
    Date: 2018–09–11
  7. By: Vincent Anesi (University of Nottingham, School of Economics)
    Abstract: This paper develops a dynamic model of legislative policy making with evolving, privately observed policy preferences. Our goal is to find conditions under which decision rules, which assign feasible policies based on the legislators' preferences, are sustainable in the long run. We show that under some mild conditions, every decision rule that would be implementable with monetary transfers can be approximately sustained in a perfect Bayesian equilibrium of the dynamic model. In this equilibrium, the legislators receive payoffs arbitrarily close to those they would obtain if they could commit ex ante to truthfully apply the decision rule in every period. An application of our result yields a dynamic issue-by-issue median voter theorem in the vein of Baron's (1996) for a spatial framework with incomplete information.
    Keywords: Committee voting, Information, Legislative bargaining, Sustainability
    Date: 2018–08
  8. By: A. D. Correia; H. T. C. Stoof
    Abstract: In nature and society problems arise when different interests are difficult to reconcile, which are modeled in game theory. While most applications assume uncorrelated games, a more detailed modeling is necessary to consider the correlations that influence the decisions of the players. The current theory for correlated games, however, enforces the players to obey the instructions from a third party or "correlation device" to reach equilibrium, but this cannot be achieved for all initial correlations. We extend here the existing framework of correlated games and find that there are other interesting and previously unknown Nash equilibria that make use of correlations to obtain the best payoff. This is achieved by allowing the players the freedom to follow or not to follow the suggestions of the correlation device. By assigning independent probabilities to follow every possible suggestion, the players engage in a response game that turns out to have a rich structure of Nash equilibria that goes beyond the correlated equilibrium and mixed-strategy solutions. We determine the Nash equilibria for all possible correlated Snowdrift games, which we find to be describable by Ising Models in thermal equilibrium. We believe that our approach paves the way to a study of correlations in games that uncovers the existence of interesting underlying interaction mechanisms, without compromising the independence of the players.
    Date: 2018–09
  9. By: Hitoshi Matsushima (University of Tokyo)
    Abstract: This study investigates implementation of a social choice function with complete information, where we impose various restrictions such as boundedness, permission of only small transfers, and uniqueness of iterative dominance in strict terms. We assume that the state is ex-post verifiable after the determination of allocation. We show that with three or more players, any social choice function is uniquely and exactly implementable in iterative dominance. Importantly, this study does not assume either expected utility or quasi-linearity, even if we utilize the stochastic method of mechanism design explored by Abreu and Matsushima (1992, 1994).
    Date: 2018–09
  10. By: Giorgos Galanis (The University of Warwick); Roberto Veneziani (Queen Mary University of London)
    Abstract: This paper analyses the temporal unit of egalitarian concern. In the intertemporal context, the differences between egalitarian views can be appreciated not only in inequality analysis but also as regards the ideal egalitarian distribution to be established. In this paper, three intergenerational egalitarian principles (Complete Lives Egalitarianism, Corresponding Segments Egalitarianism and Simultaneous Segments Egalitarianism) are analysed and CSE is argued to be the appropriate egalitarian bench-mark. The relations between the three principles and other moral ideals, namely maximin and utilitarianism, are also analysed. It is proved that CLE and CSE are compatible with a concern for the worst off and, partially, with a utilitarian concern, while the adoption of SSE implies a worse trade-off between egalitarianism and the other moral ideals.
    Keywords: Time, Inequality, Intertemporal setting, Difference principle
    JEL: D63 C61
    Date: 2017–01–01
  11. By: Vincent Anesi (University of Nottingham, School of Economics); T Renee Bowen (University of California, San Diego and NBER)
    Abstract: We study conditions under which optimal policy experimentation can be implemented by a committee. We consider a dynamic bargaining game in which committee members choose to implement either a risky reform or a safe alternative with known returns each period. We find that when no redistribution is allowed the unique equilibrium outcome is generically inefficient. When committee members are allowed to redistribute resources (even arbitrarily small amounts), there always exists an equilibrium that supports optimal experimentation for any voting rule with no veto players. With veto players, however, optimal policy experimentation is possible only with a sufficient amount of redistribution. We conclude that veto rights are more of an obstacle to optimal policy experimentation than constraints on redistribution.
    Keywords: voting, redistribution, policy experimentation
    Date: 2018–09
  12. By: Aram Grigoryan; Mattias Polborn
    Abstract: We analyze a theoretical model in which entrepreneurs’ property rights are threatened by “raiders” who can challenge them to a contest for control of their firms. Entrepreneurs have heterogeneous productivity, and decide how much capital to invest before raiders decide whom to attack. In equilibrium, low productivity entrepreneurs are unaffected by the existence of raiders, while mid- and high-productivity entrepreneurs suffer. However, while raiders essentially act like a tax for the highest productivity entrepreneurs, the investment behavior of mid-productivity entrepreneurs who try to avoid an attack is more drastically affected. Our model provides a novel theoretical explanation for the “missing middle” observed in many countries with insecure property rights.
    Keywords: property rights, rent-seeking, corruption, missing middle
    Date: 2018
  13. By: Triossi, Matteo; Romero Medina, Antonio
    Abstract: We present the renegotiable acceptance mechanism in the context of the multi-unit assignment problem. This mechanism combines features of the immediate and deferred acceptance mechanisms and implements the set of stable matchings in both Nash and undominated Nash equilibria under substitutable priorities. In addition, we prove that under slot-specific priorities, the immediate acceptance mechanism also implements the set of stable matchings in Nash and undominated Nash equilibria. Finally, we present modifications of both mechanisms and show that we can dramatically reduce the complexity of the message space when preferences are responsive.
    Keywords: stability; multi-unit assignment; immediate acceptance; renegotiable acceptance
    JEL: D71 C78 C71
    Date: 2018–08
  14. By: Hill, Brian (HEC Paris - Economics & Decision Sciences; CNRS)
    Abstract: Many decision situations involve two or more of the following divergences from subjective expected utility: imprecision of beliefs (or ambiguity), imprecision of tastes (or multi-utility), and state dependence of utility. Examples include multi-attribute decisions under uncertainty, such as some climate decisions, where trade-offs across attributes may be state dependent. This paper proposes and characterises a model of uncertainty averse preferences that can simultaneously incorporate all three phenomena. The representation supports a principled separation of (imprecise) beliefs and (potentially state-dependent, imprecise) tastes, and we pinpoint the axiom that ensures such a separation. Moreover, the representation supports comparative statics of both beliefs and tastes, and is modular: it easily delivers special cases involving various combinations of the phenomena, as well as state-dependent multi-utility generalisations of popular ambiguity models.
    Keywords: state-dependent utility; uncertainty aversion; multiple priors; ambiguity; imprecise tastes; multi-utility
    JEL: D81
    Date: 2018–05–22
  15. By: Luca Anderlini (Department of Economics, Georgetown University); Leonardo Felli (Department of Economics, London School of Economics); Giovanni Immordino (Dipartimento di Scienze Economiche e Statistiche, Università di Napoli Federico II)
    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 lawsuit even though the parties fully anticipate that it will be settled out of Court. Second, the "likelihood" that a given lawsuit ends up in Court 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 lawsuit in the first place. It does not affect whether it is settled before trial or litigated in Court.
    Keywords: Pre-Trial Agreements, Costly Negotiation, Court Litigation
    JEL: D23 D86 C79 K12 K13
    Date: 2018–09–12
  16. By: Christopher J. Tyson (Queen Mary University of London)
    Abstract: The class of preferences over opportunity sets ("menus") rationalizable by underlying preferences over the alternatives is characterized for the general case in which the dataset is unrestricted. In particular, both the universal set of alternatives and the domain of menus over which preferences are asserted by the decision maker are arbitrary. The key "Cover Dominance" axiom states that any menu strictly preferred to a collection of menus must be strictly preferred to any menu covered by the collection. The method of characterization relies upon transitivity of menu preferences, but completeness can be relaxed.
    Keywords: General domains, Opportunity sets, Revealed preference, Transitivity
    JEL: D01 D11
    Date: 2017–04–10
  17. By: Chichilnisky, Graciela (Columbia University); Hammond, Peter J. (Dept. of Economics and CAGE, University of Warwick); Stern, Nicholas (LSE)
    Abstract: Ramsey famously pronounced that discounting "future enjoyments" would be ethically indefensible. Suppes enunciated an equity criterion implying that all individuals' welfare should be treated equally. By contrast, Arrow (1999a, b) accepted, perhaps rather reluctantly, the logical force of Koopmans' argument that no satisfactory preference ordering on a sufficiently unrestricted domain of infinite utility streams satisfies equal treatment. In this paper, we first derive an equitable utilitarian objective based on a version of the Vickrey-Harsanyi original position, extended to allow a variable and uncertain population with no finite bound. Following the work of Chichilnisky and others on sustainability, slightly weakening the conditions of Koopmans and co-authors allows intergenerational equity to be satis ed. In fact, assuming that the expected total number of individuals who ever live is nite, and that each individual's utility is bounded both above and below, there is a coherent equitable objective based on expected total utility. Moreover, it implies the \extinction discounting rule" advocated by, inter alia, the Stern Review on climate change.
    Keywords: Discount rate ; utilitarianism ; consequentialization ; Vickrey-Harsanyi original position ; Suppes criterion ; optimal population ; average versus total utility ; intergenerational equity ; long-run discounting ; sustainable preferences ; extinction discounting rule JEL Classification: D63 ; D70 ; D90 ; Q54 ; Q56
    Date: 2018
  18. By: Dan Cao (Department of Economics, Georgetown University); Roger Lagunoff (Department of Economics, Georgetown University)
    Abstract: We examine the role of collateral in a dynamic model of optimal credit contracts in which a borrower values both housing and non-housing consumption. The borrower’s private information about his income is the only friction. An optimal contract is collateralized when in some state, some portion of the borrower’s net worth is forfeited to the lender. We show that optimal contracts are always collateralized. The total value of forfeited assets is decreasing in income, highlighting the role collateral as a deterrent to manipulation. Some assets, those that generate consumable services will necessarily be collateralized while others may not be. Endogenous default arises when the borrower’s initial wealth is low, as with subprime borrowers, and/or his future earnings are highly variable.
    Keywords: optimal contract, asymmetric information, collateral, forfeiture, collateralized contract
    JEL: D82 D86 D53 D14 G21 G22
    Date: 2018–09–15
  19. By: Laurent Bouton (Department of Economics, Georgetown University); Micael Castanheira; Allan Drazen (Department of Economics, University of Maryland)
    Abstract: We propose a formal model of small campaign contributions driven by an electoral motive, that is, by the possible influence of contributions on the outcome of an election. Electoral considerations produce strategic interactions among contributors, even when each donor takes as given the actions of other donors. These interactions induce patterns of individual contributions that are in line with empirical findings in the literature. For instance, equilibrium contributions increase when the support for the two candidates is more equal --a “closeness effect”-- and relative contributions for the advantaged party are smaller than their underlying advantage --an “underdog effect”. We then study the impact of different forms of campaign finance laws. We show that caps affect small donors even if they are not directly capped, and that it may be optimal to combine caps with a progressive tax on contributions. We also indicate why our results may have implications for empirical studies of campaign contributions.
    Keywords: Campaign Donations, Campaign Finance Laws, Elections, Income Inequality
    JEL: D71 D72 H31
    Date: 2018–09–06
  20. By: Hoffmann, Florian; Inderst, Roman; Opp, Marcus M.
    Abstract: This paper provides a complete characterization of optimal contracts in principal-agent settings where the agent's action has persistent effects. We model general information environments via the stochastic process of the likelihood-ratio. The martingale property of this performance metric captures the information benefit of deferral. Costs of deferral may result from both the agent's relative impatience as well as her consumption smoothing needs. If the relatively impatient agent is risk neutral, optimal contracts take a simple form in that they only reward maximal performance for at most two payout dates. If the agent is additionally risk-averse, optimal contracts stipulate rewards for a larger selection of dates and performance states: The performance hurdle to obtain the same level of compensation is increasing over time whereas the pay-performance sensitivity is declining.
    Keywords: compensation design,duration of pay,moral hazard,persistence,principal-agent models,informativeness principle
    JEL: D86
    Date: 2018
  21. By: Rene (J.R.) van den Brink (VU Amsterdam); Marina Nunez (Universitat de Barcelona); Francisco Robles (Universidad Carlos III de Madrid)
    Abstract: In this paper, we investigate the possibility of having stable rules for two-sided markets with transferable utility, that satisfy some valuation monotonicity and fairness axioms. Valuation fairness requires that changing the valuation of a buyer for the object of a seller leads to equal changes in the payoffs of this buyer and seller. This is satisfied by the Shapley value, but is incompatible with stability. A main goal in this paper is to weaken valuation fairness in such a way that it is compatible with stability. It turns out that requiring equal changes only for buyers and sellers that are matched to each other before as well as after the change, is compatible with stability. In fact, we show that the only stable rule that satisfies weak valuation fairness is the well-known fair division rule which is obtained as the average of the buyers-optimal and the sellers-optimal payoff vectors. Our second goal is to characterize these two extreme rules by valuation monotonicity axioms. We show that the buyers-optimal (respectively sellers-optimal) stable rule is characterized as the only stable rule that satisfies buyer-valuation monotonicity which requires that a buyer cannot be better off by weakly decreasing his/her valuations for all objects, as long as he is assigned the same object as before (respectively object-valuation antimonotonicity which requires that a buyer cannot be worse off when all buyers weakly decrease their valuations for the object that is assigned to this specific buyer, as long as this buyer is assigned the same object as before). Finally, adding a consistency axiom, the two optimal rules are characterized in the general domain of allocation rules for two-sided assignment markets with a variable population.
    Keywords: assignment problems; stability; valuation monotonicity; valuation fairness; fair division rule; optimal rules
    JEL: C71 C78
    Date: 2018–07–19
  22. By: Cvitanic, Jaksa; Hugonnier, Julien
    Abstract: We study the optimal design of a menu of funds by a manager who is required to use linear pricing and does not observe the preferences of investors regarding one of the risky assets. The optimal menu involves bundling of assets and is explicitly constructed from the solution to a calculus of variations problem that optimizes over the indirect utilities that each type of investor receives. We show that the need to maintain incentive compatibility leads the manager to behave as a closet indexer by offering funds that are inefficiently tilted towards the asset not subject to the information friction.
    Keywords: closet indexing.; linear pricing; Mutual fund menus; screening
    JEL: C62 C71 D42 D82 G11
    Date: 2018–08

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