nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒11‒05
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Cost-Benefit Analysis in Reasoning By Larbi Alaoui; Antonio Penta
  2. Attention-driven demand for bonus contracts By Dertwinkel-Kalt, Markus; Köster, Mats; Peiseler, Florian
  3. An Entry Game with Learning and Market Competition By Chia-Hui Chen; Junichiro Ishida; Arijit Mukherjee
  4. The Politics of Attention By Li Hu; Anqi Li
  5. Court-Appointed Experts and Accuracy in Adversarial Litigation By Chulyoung Kim; Paul S. Koh
  6. Completeness and Transitivity of Preferences on Mixture Sets By Tsogbadral Galaabaatar; M. Ali Khan; Metin Uyan{\i}k
  7. A Functional Approach to Revealed Preference By Mikhail Freer; Cesar Martinelli
  8. Intermediation in a directed search model By Kultti, Klaus; Takalo, Tuomas; Vähämaa, Oskari
  9. Beyond Grim: Punishment Norms in the Theory of Cooperation By Gabriele Camera; Alessandro Gioffré
  10. Lock-in through passive connections By Cui, Zhiwei; Weidenholzer, Simon
  11. Sorting in Iterated Incumbency Contests By Nöldeke, Georg; Häfner, Samuel
  12. Gift cards or vouchers as a collusive device By Kim, Jeong-yoo; Park, Jihoon
  13. A Representation Theorem for General Revealed Preference By Mikhail Freer; Cesar Martinelli
  14. Revealed Preference Analysis with Framing Effects By Jacob Goldin; Daniel Reck
  15. Does moral play equilibrate? By Bomze, Immanuel; Schachinger, Werner; Weibull, Jorgen
  16. Coordination in Global Games with Heterogeneous Agents By Serrano-Padial, Ricardo
  17. Expected Utility Preferences versus Prospect Theory Preferences in Bargaining By Khan, Abhimanyu
  18. Differentiated durable goods monopoly: a robust Coase conjecture By Nava, Francesco; Schiraldi, Pasquale

  1. By: Larbi Alaoui; Antonio Penta
    Abstract: When an individual thinks about a problem, his decision to reason further may involve a tradeoff between cognitive costs and a notion of value. But it is not obvious that this is always the case, and the value of reasoning is not well-defined. This paper analyzes the primitive properties of the reasoning process that must hold for the decision to stop thinking to be represented by a cost-benefit analysis. We find that the properties that characterize the cost-benefit representation are weak and intuitive, suggesting that such a representation is justified for a large class of problems. We then provide additional properties that give more structure to the value of reasoning function, including ‘value of information’ and ‘maximum gain’ representations. We show how our model applies to a variety of settings, including contexts involving sequential heuristics in choice, response time, reasoning in games and research. Our model can also be used to understand economically relevant patterns of behavior for which the cost-benefit approach does not seem to hold. These include choking under pressure and (over)thinking aversion.
    Keywords: cognition and incentives, Choice theory, reasoning, fact-free learning, sequential heuristics
    JEL: D01 D03 D80 D83
    Date: 2018–10
  2. By: Dertwinkel-Kalt, Markus; Köster, Mats; Peiseler, Florian
    Abstract: In many markets supply contracts include a series of small, regular payments made by consumers and a single, large bonus that consumers receive at some point during the contractual period. But, if for instance its production costs exceed its value to consumers, such a bonus creates inefficiencies. We offer a novel explanation for the frequent occurrence of bonus contracts, which builds on a model of attentional focusing. Our main result identifies market conditions under which bonus contracts should be observed: while a monopolist pays a bonus to consumers, if at all, only for low-value goods, firms standing in competition always - i.e., independent of the consumers' valuation - offer bonus contracts. Thus, competition does not eliminate but rather exacerbates inefficiencies arising from contracting with focused agents. Common contract schemes in markets for electricity, telephony, and bank accounts are consistent with our model, but cannot be reconciled with alternative approaches such as models on consumption smoothing, (quasi-)hyperbolic discounting, or switching costs.
    Keywords: Attention,Focusing,Bonus Contracts
    JEL: D91 D18 D40 L10
    Date: 2018
  3. By: Chia-Hui Chen; Junichiro Ishida; Arijit Mukherjee
    Abstract: This paper provides a dynamic game of market entry to illustrate entry dynamics in an uncertain market environment. Our model features both private learning about the market condition and market competition, which give rise to the first-mover and second-mover advantages in a unified framework. We characterize symmetric Markov perfect equilibria and identify a necessary and sufficient condition for the first-mover advantage to dominate, which elucidates when and under what conditions a firm becomes a pioneer, an early follower or a late entrant. We also derive equilibrium payoff bounds to show that pioneering entry is generally payoff-enhancing, even though it is driven by preemption motives, and discuss efficiency properties of entry dynamics.
    Date: 2018–10
  4. By: Li Hu; Anqi Li
    Abstract: We develop an equilibrium theory of attention and politics. In a spatial model of electoral competition where candidates have varying policy preferences, we examine what kinds of political behaviors capture voter's limited attention and how this concern in turn affects political outcomes. Following the seminal work of Downs (1957), we assume that voters are rationally inattentive and can process information about candidates' random policies at a cost proportional to entropy reduction as in Sims (1998) and Sims (2003). Two salient patterns emerge in equilibrium as we increase the attention cost or garble the news technology: first, arousing and attracting voter's attention becomes harder; second, doing so leads the varying types of the candidates to adopt extreme and exaggerated policy and issue positions. We supplement our analysis with historical accounts, and discuss its relevance in the new era featured with greater media choices and distractions, as well as the rise of partisan media and fake news.
    Date: 2018–10
  5. By: Chulyoung Kim (Yonsei University); Paul S. Koh (Columbia University)
    Abstract: Concerned about evidence distortion arising due to litigants' strong incentive to misrep- resent information provided to fact-finders, legal scholars and commentators have long suggested that courts appoint their own advisors for neutral information regarding dis- putes. This paper examines the litigants' problem of losing incentive to provide informa- tion when judges seek the advice of court-appointed experts. Within a standard litigation game framework, we find that assigning court-appointed experts involves a trade-off: al- though such experts help judges obtain more information overall, thereby reducing the number of errors during trials, they weaken litigants' incentive to supply expert informa- tion, thus undermining the adversarial nature of the current American legal system.
    Keywords: litigation game; court-appointed expert; persuasion game; evidence distortion.
    JEL: C72 D82 K41
    Date: 2018–10
  6. By: Tsogbadral Galaabaatar; M. Ali Khan; Metin Uyan{\i}k
    Abstract: In this paper, we show that the presence of the Archimedean and the mixture-continuity properties of a binary relation, both empirically non-falsifiable in principle, foreclose the possibility of consistency (transitivity) without decisiveness (completeness), or decisiveness without consistency, or in the presence of a weak consistency condition, neither. The basic result can be sharpened when specialized from the context of a generalized mixture set to that of a mixture set in the sense of Herstein-Milnor (1953). We relate the results to the antecedent literature, and view them as part of an investigation into the interplay of the structure of the choice space and the behavioral assumptions on the binary relation defined on it; the ES research program due to Eilenberg (1941) and Sonnenschein (1965), and one to which Schmeidler (1971) is an especially influential contribution.
    Date: 2018–10
  7. By: Mikhail Freer; Cesar Martinelli
    Abstract: We develop a systematic, functional approach to revealed preference tests based on completing preferences. Our approach is based on the notion of sequential closure, which generalizes the notion of transitive closure. We show that revealed preference tests developed for various decision theories can be seen as special cases of our approach. We also illustrate the approach constructing revealed preference tests for theories of decision under uncertainty whose revealed preference implications had not been studied before.
    Keywords: Revealed preferences, preference extensions, independence, gambling independence, congruence
    Date: 2018–10
  8. By: Kultti, Klaus; Takalo, Tuomas; Vähämaa, Oskari
    Abstract: We study the ability of competitive coordination service platforms (such as auction sites and real estate agents) to facilitate trade in a directed search model where buyers have unit demands and each seller only has one good to sell. The sellers’ capacity constraint leads to a coordination problem as in a symmetric equilibrium without intermediation some sellers receive multiple buyers while some are left without any customers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. We find that roughly 20 percent of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are roughly 25 percent lower than in the economy without intermediation.
    JEL: D4 L1
    Date: 2018–10–26
  9. By: Gabriele Camera; Alessandro Gioffré
    Abstract: The theory of repeated games asserts that, when past conduct is unobservable, patient individuals can attain the efficient outcome if cooperators suffer large losses to defectors, and react by forever defecting. This extreme "grim" punishment is, in fact, counterproductive when losses are small, as it prevents cooperation among patient players. Here we show how to resolve this non-existence problem. A class of moderate punishments exists, which support full cooperation independent of the size of losses to defectors. Our theory provides a rationale for the empirical observation that grim punishment is uncommon in laboratory studies of cooperation.
    Keywords: prisoner’s dilemma, random matching, social norms.
    JEL: E4 E5 C7
    Date: 2018
  10. By: Cui, Zhiwei; Weidenholzer, Simon
    Abstract: We consider a model of social coordination and network formation where agents decide on an action in a coordination game and on whom to establish costly links to. We study the role of passive connections; these are connections to a given agent that are supported by other agents. Such passive connections may inhibit agents from switching actions and links, as this may result in a loss of payoff received through them. When agents are constrained in the number of links they may support, this endogenously arising form of lock-in leads to mixed profiles, where different agents choose different actions, being included in the set of Nash equilibria. Depending on the precise parameters of the model, risk- dominant, payoff- dominant, or mixed profiles are stochastically stable. Thus, agents’ welfare may be lower as compared to the case where payoff is only received through active links. The network formed by agents plays a crucial role for the propagation of actions, it allows for a contagious spread of risk dominant actions and evolves as agents change their links and actions.
    Date: 2018–10–22
  11. By: Nöldeke, Georg; Häfner, Samuel
    Abstract: This paper analyzes incumbency contests in a large population setting. Incumbents repeatedly face different challengers, holding on to their positions until defeated in a contest. Defeated incumbents turn into challengers until they win a contest against an incumbent, thereby regaining an incumbency position. Individuals are heterogeneous as regards their payoffs from being incumbent. We consider steady-state equilibria and study how and to which extent individuals sort into the incumbency positions depending on their type. In particular, we identify sufficient conditions for positive sorting, meaning that types with higher incumbency payoffs are overrepresented among the incumbents, and show that negative rather than positive sorting may also arise in equilibrium when these conditions are violated. Further results show how incumbency rents, surplus, and sorting are affected by the frequency at which incumbency is contested.
    Keywords: Contests,Sorting,Incumbency Rents,Steady-State Equilibrium
    JEL: C72 D72 D74
    Date: 2018
  12. By: Kim, Jeong-yoo; Park, Jihoon
    Abstract: In this paper, the authors provide a rationale for why firms issue gift cards or vouchers. Mainly, issuing gift cards can be considered as a collusion-facilitating practice. A firm that issues gift cards can raise its price for several reasons. First, the discounted price by the face value of the gift card makes demands less elastic so that the resulting price will be higher. Second, it has the lock-in effect which makes price competition even less severe. Third, once a firm has sold its gift cards, selling a product to card holders does not increase its revenue, but only increases its cost. So the firm has an incentive to raise the price. Interestingly, the authors argue that the lock-in effect is not essential to the collusion-facilitating effect of gift cards in the sense that collusive prices can be sustained even when the two firms mutually honor their own gift cards, so that no lock-in effect exists. This is mainly because firms can still raise prices for the total proportions of consumers who face less elastic demands due to discounted prices. Despite the apparent additional cost of issuing gift cards, firms can benefit from issuing them if its collusive effect is higher than the increase in the cost.
    Keywords: Gift card,gift voucher,collusion-facilitating practice,lock-in effect,elasticity effect,cost-saving effect
    JEL: D43
    Date: 2018
  13. By: Mikhail Freer; Cesar Martinelli
    Abstract: We provide a representation theorem for revealed preference of an agent whose consumption set is contained in a general topological space (separable Hausdorff space). We use this result to construct a revealed preference test that applies to choice over infinite consumption streams and probability distribution spaces, among other cases of interest in economics. In particular, we construct a revealed preference test for best-responding behavior in strategic games.
    Keywords: Revealed preference, representation theorem, preference extensions, equilibrium
    Date: 2018–10
  14. By: Jacob Goldin; Daniel Reck
    Abstract: In many settings, decision-makers' behavior is observed to vary based on seemingly arbitrary factors. Such framing effects cast doubt on the welfare conclusions drawn from revealed preference analysis. We relax the assumptions underlying that approach to accommodate settings in which framing effects are present. Plausible restrictions of varying strength permit either partial- or point-identification of preferences for the decision-makers who choose consistently across frames. Recovering population preferences requires understanding the empirical relationship between decision-makers’ preferences and their sensitivity to the frame. We develop tools for studying this relationship and illustrate them with data on automatic enrollment into pension plans.
    JEL: C1 D03 D60
    Date: 2018–10
  15. By: Bomze, Immanuel; Schachinger, Werner; Weibull, Jorgen
    Abstract: Some finite and symmetric two-player games have no (pure or mixed) symmetric Nash equilibrium when played by partly morally motivated players. The reason is that the "right thing to do" may be not to randomize. We analyze this issue both under complete information between equally moral players and under incomplete information between arbitrarily moral players. We provide necessary and sufficient conditions for the existence of equilibrium and illustrate the results with examples and counter-examples.
    Keywords: Nash equilibrium, morality, homo moralis, social preferences, incomplete information
    JEL: C72 D01 D64 D82 D91
    Date: 2018–10–16
  16. By: Serrano-Padial, Ricardo (Drexel University)
    Abstract: This paper studies equilibrium selection in large coordination games played by heterogeneous agents, such as models of bank runs, currency attacks or technology adoption. Player payoffs are affected by the average action and the player's type, as well as a global parameter reflecting economic fundamentals. I introduce the notion of ex ante risk dominance and show that it coincides with the global games selection in games with payoffs that are separable in average action and type. Ex ante risk dominance provides an economic interpretation behind the global games selection in terms of maximizing ex ante expected payoffs under pessimistic beliefs. I characterize the ex ante risk dominant equilibrium, pinning down the presence of tipping points in terms of economic fundamentals. I also show that payoff separability is needed for the global games selection to be uniform, that is, to be robust to changes in the distribution of signal noise.
    Keywords: global games; heterogeneity; risk dominance; uniform selection
    JEL: C72 D82 D84
    Date: 2018–10–03
  17. By: Khan, Abhimanyu
    Abstract: Are individuals always better off when their preferences can be represented by expected utility? I study this question in a bargaining game where individuals bargain over a pie of fixed size, and I contrast the share received in the long-run by expected utility maximisers with the share they would receive if their preferences were described by prospect theory preferences instead when, in either case, they bargain with expected utility maximisers. I present a necessary and sufficient condition for individuals to obtain a higher share of the pie if their preferences obey prospect theory rather than expected utility. I decompose the effect that the three features that characterise prospect theory preferences -- reference point dependence, loss-aversion and probability weighting -- have on the bargaining outcome, and show that loss-aversion does not have any effect on the outcome of the bargaining process, reference-point dependent preference confers an unambiguous advantage and probability weighting is unambiguously disadvantageous. This ties in with the main result outlined earlier: if the upward pull of reference point dependence is relatively stronger than the downward push of probability weighting, then individuals are better off with prospect theory preferences than with expected utility preferences, and vice-versa.
    Keywords: bargaining, expected utility prospect theory, reference point dependence, loss aversion, probability weighting
    JEL: C73 C78 D01 D81 D83
    Date: 2018–10–06
  18. By: Nava, Francesco; Schiraldi, Pasquale
    Abstract: The paper analyzes a durable goods monopoly problem in which multiple varieties can be sold. A robust Coase conjecture establishes that the market eventually clears, with profits exceeding static optimal market-clearing profits and converging to this lower bound in all stationary equilibria with instantaneous price revisions. Pricing need not be efficient, nor is it minimal (equal to the maximum of marginal cost and minimal value), and can lead to cross-subsidization. Conclusions nest both classical Coasian insights and modern Coasian failures. The option to scrap products does not affect results qualitatively, but delivers a novel motive for selling high cost products.
    Keywords: Coase conjecture; monopoly; product design; dynamic pricing
    JEL: J1
    Date: 2018–10–17

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