nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒10‒29
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. An axiomatic foundation of entropic preferences under Knightian uncertainty By Baumgärtner, Stefan; Engler, John-Oliver
  2. The Rational Core of Preference Relations By Simone Cerreia-Vioglio; Efe A. Ok
  3. Strictly sincere best responses under approval voting and arbitrary preferences By Carlos Alós-Ferrer; Johannes Buckenmaier
  4. Designing Communication Hierarchies By Migrow, Dimitri
  5. Collusion and Antitrust Enforcement in Advertising-Selling Platforms By Konstantinos Charistos
  6. Salience and Online Sales: The Role of Brand Image Concerns By Dertwinkel-Kalt, Markus; Köster, Mats
  7. Voter Turnout with Peer Punishment By David K Levine; Andrea Mattozzi
  8. Probabilistic opinion pooling generalized. Part two: The premise-based approach By Franz Dietrich; Christian List
  9. Partially-honest Nash implementation: a full characterization By Michele Lombardi; Naoki Yoshihara
  10. Communicating Subjective Evaluations By Lang, Matthias
  11. Equilibrium selection in interdependent value auctions By Elnaz Bajoori; Dries Vermeulen
  12. On the allocation of evidence among cartelists under a leniency program By Konstantinos Charistos
  13. Discriminating Against Captive Customers By Mark Armstrong; John Vickers
  14. The Race to the Base By Bernhardt, Dan; Buisseret, Peter; Hidir, Sinem
  15. Financial Contracting with Enforcement Externalities By Drozd, Lukasz A.; Serrano-Padial, Ricardo
  16. Optimal size of majoritarian committees under persuasion By Saptarshi Ghosh; Peter Postl; Jaideep Roy
  17. An Explicit Representation for Disappointment Aversion and Other Betweenness Preferences By Simone Cerreia-Vioglio; David Dillenberger; Pietro Ortoleva

  1. By: Baumgärtner, Stefan; Engler, John-Oliver
    Abstract: Decision-making about economy-environment systems is often characterized by deep uncertainties. We provide an axiomatic foundation of preferences over lotteries with known payoffs over known states of nature and unknown probabilities of these outcomes (“Knightian uncertainty"). We elaborate the fundamental idea that preferences over Knightian lotteries can be represented by an entropy function (sensu Lieb and Yngvason 1999) of these lotteries. Based on nine axioms on the preference relation and three assumptions on the set of lotteries, we show that there uniquely (up to linear-affine transformations) exists an additive and extensive real-valued function (\entropy function") that represents uncertainty preferences. It represents non-satiation and (constant) uncertainty aversion. As a concrete functional form, we propose a one-parameter function based on Rényi's (1961) generalized entropy. We show that the parameter captures the degree of uncertainty aversion. We illustrate our preference function with a simple decision problem and relate it to other decision rules under Knightian uncertainty (maximin, maximax, Hurwicz, Laplacian expected utility, minimum regret).
    Keywords: axiomatic foundation,entropy,Knightian uncertainty,non-expected utility,preferences,Rényi-function
    JEL: D81 H30
    Date: 2018
  2. By: Simone Cerreia-Vioglio; Efe A. Ok
    Abstract: We consider revealed preference relations over risky (or uncertain) prospects, and allow them to be nontransitive and/or fail the classical Independence Axiom. We identify the rational part of any such preference relation as its largest transitive subrelation that satis fies the Independence Axiom and that exhibits some coherence with the original relation. It is shown that this subrelation, which we call the rational core of the given revealed preference, exists in general, and under fairly mild conditions, it is continuous. We obtain various representation theorems for the rational core, and decompose it into other core concepts for preferences. These theoretical results are applied to compute the rational cores of a number of well-known preference models (such as Fishburns SSB model, justi fiable preferences, and variational and multiplier modes of rationalizable preferences). As for applications, we use the rational core operator to develop a theory of risk aversion for nontransitive nonexpected utility modals (which may not even be complete). Finally, we show that, under a basic monotonicity hypothesis, the Preference Reversal Phenomenon cannot arise from the rational core of ones preferences. JEL Classifi cation: D11, D81. Keywords: Transitive core, affine core, nontransitive nonexpected utility, justi fiable preferences, comparative risk aversion, preference reversal phenomenon.
    Date: 2018
  3. By: Carlos Alós-Ferrer; Johannes Buckenmaier
    Abstract: Approval voting allows voters to support as many candidates as they wish. One advantage of the method is that voters have weak or no incentives to vote insincerely. However, the exact meaning of this statement depends on how the voters' preferences over candidates are extended to sets. We show that, under a combination of standard, well-established assumptions on the extended preferences, voters will always have a strictly sincere best response (that is, a best response ballot such that every approved candidate is strictly preferred to every disapproved one) given the ballots of other voters. The result holds for arbitrary preferences over candidates, allowing for indifferences but covering the extreme cases of dichotomous or strict preferences. As a corollary, we show that the classical strategy-proofness result for the case of dichotomous preferences on alternatives (Brams and Fishburn, 1978) holds for a larger class of preferences on sets than originally assumed.
    Keywords: Approval voting, manipulation, preferences among sets, strict sincerity
    JEL: C72 D71 D72
    Date: 2018–10
  4. By: Migrow, Dimitri (University of Calgary)
    Abstract: A manager aims to elicit employees’ information by designing a hierarchical communication network. She decides who communicates with whom, and in which order, where communication takes the form of “cheap talk” (Crawford and Sobel, 1982) and the information structure is beta-binomial. The optimal network is shaped by two competing forces: an intermediation force that calls for grouping employees together and an uncertainty force that favours separating them. The manager optimally divides employees into groups of similar bias. Under simple conditions on biases and a uniform prior, the optimal network features a single intermediary who communicates directly to the manager JEL classification numbers: C72 ;D82 ; D83
    Keywords: organizational design ; strategic communication ; informationaggregation
    Date: 2018
  5. By: Konstantinos Charistos (Department of Economics, University of Macedonia)
    Abstract: This paper underlines the impact of indirect network externalities on the effectiveness of antitrust enforcement to deter collusion between advertising-selling platforms. Since two-sided collusion is less likely to be sustained as consumers (e.g. readers/viewers) become more ad-avoiders while the opposite is true for one-sided collusion, firms may be induced to semi-collude (collude on advertising while competing for consumers) instead of colluding on both sides. When firms semi-collude on advertising and consumers are neutral towards advertisements, the imposition of fines based on the illegal gain of the colluding side (one-sided fines) enhances cartel deterrence compared to fines based on the total illegal profits (two-sided fines).
    Keywords: Antitrust enforcement, Collusion, Media markets.
    JEL: K21 L12 L41
    Date: 2018–10
  6. By: Dertwinkel-Kalt, Markus; Köster, Mats
    Abstract: We provide a novel intuition for the observation that many brand manufacturers have restricted their retailers' ability to resell brand products online. Our approach builds on models of salience according to which price disparities across distribution channels guide a consumer's attention toward prices and lower her appreciation for quality. Thus, absent vertical restraints, one out of two distortions – a quality or a participation distortion – can arise in equilibrium. The quality distortion occurs if the manufacturer provides either an inefficiently low quality under price salience or an inefficiently high quality in order to prevent price salience. The participation distortion arises as offline sales might be entirely abandoned in order to prevent prices from becoming salient. Both distortions are ruled out if vertical restraints are imposed. As opposed to the current EU legislation that considers a range of vertical restraints as being hardcore restrictions of competition, we show that these constraints can be socially desirable if salience effects are taken into account.
    Keywords: Salience,Online Sales,Antitrust,Vertical Restraints,Distribution Channels
    JEL: D21 K21 L42
    Date: 2018
  7. By: David K Levine; Andrea Mattozzi
    Date: 2018–10–20
  8. By: Franz Dietrich (PSE - Paris School of Economics, CNRS - Centre National de la Recherche Scientifique, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne); Christian List (LSE - London School of Economics and Political Science)
    Abstract: How can several individuals' probability functions on a given-algebra of events be aggregated into a collective probability function? Classic approaches to this problem usually require 'event-wise independence': the collective probability for each event should depend only on the individuals' probabilities for that event. In practice, however, some events may be 'basic' and others 'derivative', so that it makes sense first to aggregate the probabilities for the former and then to let these constrain the probabilities for the latter. We formalize this idea by introducing a 'premise-based' approach to probabilistic opinion pooling, and show that, under a variety of assumptions, it leads to linear or neutral opinion pooling on the 'premises'.
    Keywords: premise-based aggregation,subjective probability,Probabilistic opinion pooling,judgment aggregation
    Date: 2017–04
  9. By: Michele Lombardi (University of Glasgow); Naoki Yoshihara (School of Economics and Management, Kochi University of Technology)
    Abstract: A partially-honest individual is a person who follows the maxim, "Do not lie if you do not have to" to serve your material interest. By assuming that the mechanism designer knows that there is at least one partially-honest individual in a society of n 3 individuals, a social choice rule (SCR) that can be Nash implemented is termed partially-honestly Nash implementable. The paper offers a complete characterization of the n-person SCRs that are partially-honestly Nash implementable. It establishes a condition which is both necessary and sufficient for the partially-honest Nash implementation. If all individuals are partially-honest, then all SCRs that satisfy the property of unanimity are partially-honestly Nash implementable. The partially-honest Nash implementation of SCRs is examined in a variety of environments.
    Keywords: Nash implementation, pure strategy Nash equilibrium, partial-honesty, Condition μ
    JEL: C72 D71
    Date: 2018–10
  10. By: Lang, Matthias (LMU Munich)
    Abstract: Consider managers evaluating their employees\' performances. Should managers justify their subjective evaluations? Suppose a manager\'s evaluation is private information. Justifying her evaluation is costly but limits the principal\'s scope for distorting her evaluation of the employee. I show that the manager justifies her evaluation if and only if the employee\'s performance was poor. The justification assures the employee that the manager has not distorted the evaluation downwards. For good performance, however, the manager pays a constant high wage without justification. The empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels. This pattern was attributed to biased managers. I show that these effects occur in optimal contracts without any biased behavior.
    Keywords: communication; justification; subjective evaluation; centrality; leniency; disclosure;
    JEL: D82 D86 J41 M52
    Date: 2018–10–11
  11. By: Elnaz Bajoori (University of Bath); Dries Vermeulen
    Abstract: In second-price auctions with interdependent values, bidders do not necessarily have dominant strategies. Moreover, such auctions may have many equilibria. In order to rule out the less intuitive equilibria, we define the notion of distributional strictly perfect equilibrium (DSPE) for Bayesian games with infinite type and action spaces. This equilibrium is robust against arbitrary small perturbations of strategies. We apply DSPE to a class of symmetric second-price auctions with interdependent values and show that the efficient equilibrium defined by Milgrom \cite{Milgrom81} is a DSPE, while a class of less intuitive, inefficient, equilibria introduced by Birulin \cite{Birulin2003} is not.
    Date: 2017–12
  12. By: Konstantinos Charistos (Department of Economics, University of Macedonia)
    Abstract: The impact of leniency programs on cartelists’ decision to allocate the incriminating evidence is investigated. Firms are allowed to possess either exclusive or common pieces of cartel-related evidence. The cartel organization is able to allocate the incriminating evidence in an attempt to enhance the sustainability of the illicit agreement. Assuming that the Antitrust Authority (AA) provides incentives that induce confession, reporting is either partial or universal. It is shown that in the former case the cartel organization selects to split and equally share the evidence (each firm possesses only exclusive pieces) whereas in the latter case every firm may possess perfect evidence. Unless the conviction of an investigated cartel is unlikely, when the AA optimally anticipates the cartel’s ability to allocate the evidence, only partial information is obtained.
    Keywords: Antitrust enforcement, Collusion, Leniency programs.
    JEL: K21 L12 L41
    Date: 2018–10
  13. By: Mark Armstrong; John Vickers
    Abstract: Mark Armstrong, John Vickers We analyze a market where some consumers only consider buying from a specific seller while other consumers choose the best deal from several sellers. When sellers are able to discriminate against their captive customers, we show that discrimination harms consumers in aggregate relative to the situation with uniform pricing when sellers are approximately symmetric, while the practice tends to benefit consumers in sufficiently asymmetric markets.
    JEL: D8 D43 L13
    Date: 2018–10–11
  14. By: Bernhardt, Dan (Department ofEconomics, University of Illinois and University of Warwick); Buisseret, Peter (Harris School of Public Policy, University of Chicago); Hidir, Sinem (Department of Economics, University of Warwick)
    Abstract: We study multi-district legislative elections between two office-seeking parties when the election pits a relatively strong party against a weaker party ; when each party faces uncertainty about how voter preferences will evolve during the campaign; and, when each party cares not only about winning a majority, but also about its share of seats in the event that it holds majority or minority status. When the initial imbalance favoring one party is small, each party targets the median voter in the median district, in pursuit of a majority. When the imbalance is moderate, the advantaged party continues to hold the centre-ground, but the disadvantaged party retreats to target its core supporters; it does so to fortify its minority share of seats in the likely event that it fails to secure a majority. Finally, when the imbalance is large, the advantaged party advances toward its opponent, raiding its moderate supporters in pursuit of an outsized majority.
    JEL: D72
    Date: 2018
  15. By: Drozd, Lukasz A. (Federal Reserve Bank of Philadelphia); Serrano-Padial, Ricardo (Drexel University)
    Abstract: We study the negative feedback loop between the aggregate default rate and the efficacy of enforcement in a model of debt-financed entrepreneurial activity. The novel feature of our model is that enforcement capacity is accumulated ex ante and thus subject to depletion ex post. We characterize the effect of shocks that deplete enforcement resources on the aggregate default rate and credit supply. In the model default decisions by entrepreneurs are strategic complements, leading to multiple equilibria. We propose a global game selection to overcome equilibrium indeterminacy and show how shocks that deplete enforcement capacity can lead to a spike in the aggregate default rate and trigger credit rationing.
    Keywords: contract enforcement; default spillovers; credit crunch; credit cycles; global games; heterogeneity
    JEL: C72 D82 D84 D86 G21 O16
    Date: 2018–10–18
  16. By: Saptarshi Ghosh (Shiv Nadar University); Peter Postl (University of Bath); Jaideep Roy (Deakin University)
    Abstract: We analyze the ‘optimal’ size of non-deliberating majoritarian committees with no conflict of interest among its members when committees can be persuaded by a biased and informed expert. We find that when this bias is small, the optimal size is one; when it is intermediate, the optimal size increases monotonically in the precision of members’ private information; when it is large this relation is non-monotonic. However the optimal committee-size never exceeds five. We also show that biased persuasion typically hurts a larger committee more severely. These results provide important implications on issues like universal enfranchisement, role of expert commentary in a democracy or size of governing boards in firms.
    Date: 2017–07–03
  17. By: Simone Cerreia-Vioglio; David Dillenberger; Pietro Ortoleva
    Abstract: One of the most well-known models of non-expected utility is Gul (1991)’s bmodel of Disappointment Aversion. This model, however, is defined implicitly, as the solution to a functional equation; its explicit utility representation is unknown, which may limit its applicability. We show that an explicit representation can be easily constructed, using solely the components of the implicit one. We also provide a more general result: an explicit representation for preferences in the Betweenness class that also satisfy Negative Certainty Independence (Dillenberger, 2010). JEL: D80, D81 KEYWORDS: Betweenness, Cautious Expected Utility, Disappointment Aversion, Utility representation.
    Date: 2018

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