nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒11‒19
24 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Social Learning with Model Misspeciification: A Framework and a Robustness Result By Aislinn Bohren; Daniel Hauser
  2. Long-Term Employment Relations When Agents are Present Biased By Englmaier, Florian; Fahn, Matthias; Schwarz, Marco
  3. Using Persistence to Generate Incentives in a Dynamic Moral Hazard Problem By Aislinn Bohren
  4. Delegating decisions to organizations By Petros G. Sekeris; Dimitrios Xefteris
  5. A Very Robust Auction Mechanism By Richard McLean; Andrew Postlewaite
  6. Should Straw Polls be Banned? By S. Nageeb Ali; Aislinn Bohren
  7. Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability By Henry, Emeric; Loseto, Marco; Ottaviani, Marco
  8. Uncertainty and Robustness of Surplus Extraction By Giuseppe Lopomo; Luca Rigotti; Chris Shannon
  9. The Simple Economics of White Elephants By Juan-José Ganuza; Gerard Llobet
  10. Fake Persuasion By Glazer, Jacob; Herrera, Helios; Perry, Motty
  11. Overabundant Information and Learning Traps By Annie Liang; Xiaosheng Mu
  12. One-sided learning about one fs own type in a two-sided search model: The case of n types of agents By Akiko Maruyama
  13. On the characterization of quasi-perfect equilibria By Nicola, Gatti; Mario, Gilli; Alberto, Marchesi;
  14. Flexible Information Acquisition in Large Coordination Games By Rigos, Alexandros
  15. Creative Class Competition and Innovation in the Absence of Patent Protection By Batabyal, Amitrajeet
  16. The Feedback Effect in Two-Sided Markets with Bilateral Investments By Moldovanu, Benny
  17. A Theory of Auctions with Endogenous Valuations By Moldovanu, Benny
  18. Mechanism Design with Limited Commitment By Laura Doval; Vasiliki Skreta
  19. The Effectiveness of Leniency Programs when Firms choose the Degree of Collusion By Emons, Winand
  20. Behavioral Inattention By Gabaix, Xavier
  21. Revealed Preference Analysis with Framing Effects By Goldin, Jacob; Reck, Daniel
  22. Social Norms in Networks By Ushchev, Philip; Zenou, Yves
  23. Continuity of Utility Maximization under Weak Convergence By Erhan Bayraktar; Yan Dolinsky; Jia Guo
  24. An Explicit Representation for Disappointment Aversion and Other Betweenness Preferences By Simone Cerreia-Vioglio; David Dillenberger; Pietro Ortoleva

  1. By: Aislinn Bohren (Department of Economics, University of Pennsylvania); Daniel Hauser (Department of Economics, Aalto University)
    Abstract: We explore how model misspecification affects long-run learning in a sequential social learning setting. Individuals learn from diverse sources, including private signals, public signals and the actions and outcomes of others. An agent's type specifies her model of the world. Misspecified types have incorrect beliefs about the signal distribution, how other agents draw inference and/or others' preferences. Our main result is a simple criterion to characterize long-run learning outcomes that is straightforward to derive from the primitives of the misspecification. Depending on the nature of the misspecification, we show that learning may be correct, incorrect or beliefs may not converge. Multiple degenerate limit beliefs may arise and agents may asymptotically disagree, despite observing the same sequence of information. We also establish that the correctly specified model is robust - agents with approximately correct models almost surely learn the true state. We close with a demonstration of how our framework can capture three broad categories of model misspecification: strategic misspecification, such as level-k and cognitive hierarchy, signal misspecification, such as partisan bias, and preference misspecification from social perception biases, such as the false consensus effect and pluralistic ignorance. For each case, we illustrate how to calculate the set of asymptotic learning outcomes and derive comparative statics for how this set changes with the parameters of the misspecification.
    Keywords: Social learning, model misspecification, bounded rationality
    Date: 2018–07–01
  2. By: Englmaier, Florian; Fahn, Matthias; Schwarz, Marco
    Abstract: We analyze how agents' present bias affects optimal contracting in an infinite-horizon employment setting. The principal maximizes profits by offering a menu of contracts to naive agents: a "virtual" contract - which agents plan to choose in the future - and a "real" contract which they end up choosing. This virtual contract motivates the agent and allows the principal to keep the agent below his outside option. Moreover, under limited liability, implemented effort can be inefficiently high. With a finite time horizon, the degree of exploitation of agents decreases over the life-cycle. While the baseline model abstracts from moral hazard, we show that the result persists also when allowing for non-contractible effort.
    Keywords: Dynamic Contracting; employment relations; present bias
    JEL: D03 D21 J31 M52
    Date: 2018–10
  3. By: Aislinn Bohren (Department of Economics, University of Pennsylvania)
    Abstract: I study how the persistence of past choices can be used to create incentives in a continuous time stochastic game in which a large player, such as a ï¬ rm, interacts with a sequence of short-run players, such as customers. The long-run player faces moral hazard and her past actions are imperfectly observed – they are distorted by a Brownian motion. Persistence refers to the fact that actions impact a payoffrelevant state variable, e.g. the quality of a product depends on both current and past investment choices. I obtain a characterization of actions and payoffs in Markov Perfect Equilibria (MPE), for a ï¬ xed discount rate. I show that the perfect public equilibrium (PPE) payoff set is the convex hull of the MPE payoff set. Finally, I derive sufficient conditions for a MPE to be the unique PPE. Persistence creates effective intertemporal incentives to overcome moral hazard in settings where traditional channels fail. Several applications illustrate how the structure of persistence impacts the strength of these incentives.
    Keywords: Continuous Time Games, Stochastic Games, Moral Hazard
    JEL: C73 L1
    Date: 2018–04–01
  4. By: Petros G. Sekeris; Dimitrios Xefteris
    Abstract: In strategic environments, a principal may increase her payoffs when she delegates decisions to an agent with exogenously or endogenously (e.g. via a contract) diverse preferences. We show that a principal can also increase her payoffs by delegating decisions to an organization of agents -i.e. to a group of rational individuals who interact according to a specified set of rules- even when the agents' preferences are identical to those of the principal. Arguably, this provides novel intuition regarding the contemporary structure of firms in several oligopolistic markets, where decision making is decentralized and the interests of agents and firm owners are, broadly speaking, aligned.
    Keywords: delegation; organizations; decentralization; efficiency
    JEL: D71 D72
    Date: 2018–11
  5. By: Richard McLean (Department of Economics, Rutgers University); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: A single unit of a good is to be sold by auction to one of many potential buyers. There are two equally likely states of the world. Potential buyers receive noisy signals of the state of the world. The accuracies of buyers ’signals may di¤er. A buyer’s valuation is the sum of a common value component that depends on the state and an idiosyncratic private value component independent of the state. The seller knows nothing about the accuracies of the signals or about buyers’ beliefs about the accuracies. It is common knowledge among buyers that the accuracies of the signals are conditionally independent and uniformly bounded below 1 and above 1=2, and nothing more. We demonstrate a modifi…ed second price auction that has the property that, for any " > 0; the seller’s expected revenue will be within " of the highest buyer expected value when the number of buyers is sufficiently large and buyers make undominated bids.
    Date: 2018–01–16
  6. By: S. Nageeb Ali (Department of Economics, Penn State University); Aislinn Bohren (Department of Economics, University of Pennsylvania)
    Abstract: A Principal appoints a committee of partially informed experts to choose a policy. The experts' preferences are aligned with each other but conflict with hers. We study whether she gains from banning committee members from communicating or "deliberating" before voting. Our main result is that if the committee plays its preferred equilibrium and the Principal must use a threshold voting rule, then she does not gain from banning deliberation. We show using examples how she can gain if she can choose the equilibrium played by the committee, or use a non-anonymous or non-monotone social choice rule.
    Keywords: Information Aggregation, Committees, Deliberation, Collusion
    JEL: D7 D8
    Date: 2018–09–20
  7. By: Henry, Emeric; Loseto, Marco; Ottaviani, Marco
    Abstract: Dynamic adoption policies of activities with uncertain returns are characterized by three key decisions: in the ex ante experimentation phase, the decisions when to abandon experimentation and when to introduce to market; in the ex post learning phase, the decision when to withdraw following the accumulation of bad news. In a tractable continuous-time model, we study the optimal mix of the three instruments regulators employ to align the private incentives of firms: ex ante approval regulation, ex post withdrawal regulation, and liability. Our results can rationalize the array of regulatory environments observed across applications ranging from product safety to patent protection. We also consider costly lying and show that the social planner can be better off when the firm privately observes research results.
    Keywords: Approval Regulation; Experimentation; Liability; Withdrawal
    JEL: D18 D83 K13 K2 M38
    Date: 2018–10
  8. By: Giuseppe Lopomo; Luca Rigotti; Chris Shannon
    Abstract: This paper studies a robust version of the classic surplus extraction problem, in which the designer knows only that the beliefs of each type belong to some set, and designs mechanisms that are suitable for all possible beliefs in that set. We derive necessary and sufficient conditions for full extraction in this setting, and show that these are natural set-valued analogues of the classic convex independence condition identified by Cremer and McLean (1985, 1988). We show that full extraction is neither generically possible nor generically impossible, in contrast to the standard setting in which full extraction is generic. When full extraction fails, we show that natural additional conditions can restrict both the nature of the contracts a designer can offer and the surplus the designer can obtain.
    Date: 2018–11
  9. By: Juan-José Ganuza (Universitat Pompeu Fabra and Barcelona GSE); Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper shows that the concession model discourages firms from acquiring information about the future profitability of a project. Uniformed contractors carry out good and bad projects because they are profitable in expected terms even though it would have been optimal to invest in screening them out according to their value. White elephants are identified as avoidable negative net present-value projects that are nevertheless undertaken. Institutional arrangements that limit the losses that firms can bear exacerbate this distortion. We characterize the optimal concession contract which fosters the acquisition of information and achieves the first best by conditioning the duration of the concession to the realization of the demand and includes payments for not carrying out some projects.
    Keywords: Concession contracts, information acquisition, flexible-term concessions.
    JEL: D82 D86 H21 L51
    Date: 2017–01
  10. By: Glazer, Jacob; Herrera, Helios; Perry, Motty
    Abstract: We propose a model of product reviews with honest and fake reviews to study the value of information provided on platforms like TripAdvisor, Yelp, etc. In every period, a review is posted which is either honest, namely reveals the reviewer's true experience with the product/service, or fake, namely entirely fabricated in order to manipulate the public's beliefs. We establish that the equilibrium is unique and derive robust and interesting results about these markets. While fake agents are able to affect the public's beliefs in their preferred direction, aggregation of information takes place as long as some of the reviews are honest.
    Keywords: Sender-Receiver Games
    JEL: C72 D82 D83
    Date: 2018–10
  11. By: Annie Liang (Department of Economics, University of Pennsylvania); Xiaosheng Mu (Department of Economics, Harvard University)
    Abstract: We develop a model of learning from overabundant information: Agents have access to many sources of information, where observation of all sources is not necessary in order to learn the payoff-relevant unknown. Short-lived agents sequentially choose to acquire a signal realization from the best source for them. All signal realizations are public. Our main results characterize two starkly different possible long-run outcomes, and the conditions under which each obtains: (1) efficient information aggregation, where signal acquisitions eventually achieve the highest possible speed of learning; (2) “learning traps,†where the community gets stuck using an suboptimal set of sources and learns inefficiently slowly. A simple property of the correlation structure separates these two possibilities. In both regimes, we characterize which sources are observed in the long run and how often.
    Date: 2018–03–27
  12. By: Akiko Maruyama (Faculty of Economics, University of Marketing and Distribution Sciences, Tokyo, Japan)
    Abstract: This study analyzes a two-sided search model in which agents are vertically heterogeneous and agents on one side do not know their own type. Agents with imperfect self-knowledge update their beliefs based on the offers or rejections they receive from others. The results are as follows. An agent with imperfect self-knowledge lowers his or her reservation level if the agent receives a rejection that leads him or her to revise belief downward. However, an agent with imperfect self-knowledge does not raise his or her reservation level even if the agent receives an offer that leads him or her to revise his or her belief upward. As a result, an agent with imperfect self-knowledge has the highest reservation level when he or she has just entered the market; after that, a series of meetings gradually lowers his or her reservation level over the duration of the search.
    Date: 2018–11
  13. By: Nicola, Gatti; Mario, Gilli; Alberto, Marchesi;
    Abstract: Van Damme [1984] introduces the concept of quasi-perfect equilibrium, which refines sequential equilibrium as well as normal-form perfect equilibrium. It has been argued by Mertens [1995] that quasi-perfection is conceptually superior to extensive- form perfection, since quasi-perfection guarantees normal-form perfection, which for two-player games is equivalent to admissibility. On the other hand, while extensive-form perfect equilibria are defined as limit points of sequences of Nash equilibria of a general class of perturbed games in extensive form, till now, to the best of our knowledge, there is no characterization of quasi-perfect equilibria in terms of limit points of equilibria of perturbed games. The only known result is Lemma 1 by Miltersen and Sorensen [2010], showing that limit points of sequences of Nash equilibria of a particular class of perturbed games in sequence form are quasi-perfect equilibria of the original, unperturbed game in extensive form. However, as the authors point out, their main result only proves that a subset of the quasi-perfect equilibria can be obtained as limit points of equilibria of their class of perturbed games, and, thus, their paper provides no characterization of quasi-perfect equilibria in terms of perturbed games. The present paper fills this gap providing such characterization, showing that any quasi-perfect equilibrium can be obtained as limit point of a sequence of Nash equilibria of a certain class of perturbed games in sequence form, at least for the case of two-player games with nature. This result shows that the sequence form is not merely a computationally efficient representation, but it also captures game features that other forms are not able to effectively express.
    Keywords: Non-cooperative Game Theory, Extensive Games, Nash Equilibrium Refinements
    JEL: C70 C72
    Date: 2018–11–07
  14. By: Rigos, Alexandros (Department of Economics, Lund University)
    Abstract: This paper studies how large populations of rationally inattentive individuals acquire and use information about economic fundamentals when, along with the motive to accurately estimate the fundamental, they are driven by coordination motives. Information acquisition is costly but flexible: players design their information channel by determining the distribution of the signal that they receive and arbitrarily correlating it with the fundamental. Costs are linear in the reduction of Shannon entropy. Firstly, the classes of equilibria in which players use continuous strategies and equilibria without information acquisition are characterized. This is achieved without assuming a normal prior for the fundamental. Secondly, equilibria where the population-wide average action is an affine function of the fundamental exist only when the fundamental is normally distributed. This indicates that equilibrium tractability heavily depends on the normality assumption prevalent in existing literature. Finally, multiple equilibria occur under some parameter regions with high coordination motiv
    Keywords: Coordination games; Beauty-contest; Flexible information acquisition; Rational inattention; Non-normal prior
    JEL: C72 D83
    Date: 2018–11–07
  15. By: Batabyal, Amitrajeet
    Abstract: Recently, Batabyal and Yoo (2018) have analyzed Schumpeterian competition in a region that is creative a la Richard Florida and where the creative class is made up of existing and candidate entrepreneurs. These researchers assume that an existing entrepreneur has a fully enforced patent on the inputs or machines that he has produced. We dispense with this assumption and study a scenario in which there is no patent protection for the representative existing entrepreneur (REE). This REE can undertake two possible types of innovation at the same cost. The first (second) type of innovation is general (specific) and hence can (cannot) be copied by the so called candidate entrepreneurs. In this setting, we perform two tasks. First, we show that although the REE will never undertake the general innovation, he may undertake the specific innovation. Second, we point out that even though the general innovation is not undertaken, the value to the creative region from the general innovation exceeds that from the specific innovation.
    Keywords: Creative Class, General Innovation, Patent, Specific Innovation
    JEL: O31 R11
    Date: 2018–03–19
  16. By: Moldovanu, Benny
    Abstract: Agents in a finite two-sided market are matched assortatively, based on costly investments. Besides signaling privately known, complementary types, the investments also directly benefit the match partner. The bilateral external benefits induce a complex feedback cycle that amplifies the agents' signaling investments. Our main results quantify how the feedback effect depends on the numbers of competitors on both sides of the market. This yields detailed insights into the equilibria of two-sided matching contests with incomplete information, in particular for markets of small or intermediate size. It also allows us to shed some new light on the relationship between finite and continuum models of pre-match investment.
    Keywords: feedback effect; investment; Matching; signaling
    JEL: C78 D44 D82
    Date: 2018–10
  17. By: Moldovanu, Benny
    Abstract: We study the revenue maximizing allocation of m units among n symmetric agents that have unit demand and convex preferences over the probability of receiving an object. Such preferences are naturally induced by a game where the agents take costly actions that affect their values before participating in the mechanism. Both the uniform m + 1 price auction and the discriminatory pay-your-bid auction with reserve prices constitute symmetric revenue maximizing mechanisms. Contrasting the case with linear preferences, the optimal reserve price reacts to both demand and supply, i.e., it depends both on the number of objects m and on number of agents n. The main tool in our analysis is an integral inequality involving majorization, super-modularity and convexity due to Fan and Lorentz (1954).
    Date: 2018–10
  18. By: Laura Doval; Vasiliki Skreta
    Abstract: We develop a tool akin to the revelation principle for mechanism design with limited commitment. We identify a canonical class of mechanisms rich enough to replicate the payoffs of any equilibrium in a mechanism-selection game between an uninformed designer and a privately informed agent. A cornerstone of our methodology is the idea that a mechanism should encode not only the rules that determine the allocation, but also the information the designer obtains from the interaction with the agent. Therefore, how much the designer learns, which is the key tension in design with limited commitment, becomes an explicit part of the design. We show how this insight can be used to transform the designer's problem into a constrained optimization one: To the usual truthtelling and participation constraints, one must add the designer's sequential rationality constraint.
    Date: 2018–11
  19. By: Emons, Winand
    Abstract: An antitrust authority deters collusion using fines and a leniency program. It chooses the probability of an investigation. Firms pick the degree of collusion: The more they collude, the higher are profits, but so is the probability of detection. Firms thus trade-off higher profits against higher expected fines. If firms are sufficiently patient, leniency is ineffective; it may even increase collusion. Increasing the probability of an investigation at low levels does not increase deterrence. Increasing the probability of an investigation at high levels reduces collusion, yet never completely.
    Keywords: Antitrust; cartels; deterrence; Leniency
    JEL: D43 K21 K42 L40
    Date: 2018–10
  20. By: Gabaix, Xavier
    Abstract: Inattention is a central, unifying theme for much of behavioral economics. It permeates such disparate fields as microeconomics, macroeconomics, finance, public economics, and industrial organization. It enables us to think in a rather consistent way about behavioral biases, speculate about their origins, and trace out their implications for market outcomes. This survey first discusses the most basic models of attention, using a fairly unified framework. Then, it discusses the methods used to measure attention, which present a number of challenges on which a great deal of progress has been achieved, although much more work needs to be done. It then examines the various theories of attention, both behavioral and more Bayesian. It finally discusses some applications. For instance, inattention offers a way to write a behavioral version of basic microeconomics, as in consumer theory and Arrow-Debreu. A last section is devoted to open questions in the attention literature. This chapter is a pedagogical guide to the literature on attention. Derivations are self-contained.
    Date: 2018–10
  21. By: Goldin, Jacob; Reck, Daniel
    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 understand- ing 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.
    Keywords: Behavioral economics; behavioral welfare analysis; framing effects; revealed preferences
    JEL: C10 D60 I30
    Date: 2018–10
  22. By: Ushchev, Philip; Zenou, Yves
    Abstract: Although the linear-in-means model is the workhorse model in empirical work on peer effects, its theoretical properties are understudied. In this paper, we investigate how social norms affect individual effort, aggregate Although the linear-in-means model is the workhorse model in empirical work on effort, and welfare. While individual productivity always positively affects own effort and utility, we show that taste for conformity has an ambiguous effect on individual outcomes and depends on whether an individual is above or below her own social norm. Equilibria are usually inefficient and, to restore the first best, the planner subsidizes (taxes) agents whose neighbors make efforts above (below) the social norms in equilibrium. Thus, provision of more subsidies to more central agents is not necessarily efficient.
    Keywords: networks; Social norms; welfare
    JEL: D85 J15 Z13
    Date: 2018–10
  23. By: Erhan Bayraktar; Yan Dolinsky; Jia Guo
    Abstract: In this paper we find sufficient conditions for the continuity of the utility maximization problem from terminal wealth under convergence in distribution of the underlying processes. We provide several examples which illustrate that without these conditions, we cannot generally expect continuity to hold. Finally, we apply our continuity results to numerical computations of the shortfall risk in the Heston model.
    Date: 2018–11
  24. By: Simone Cerreia-Vioglio (Department of Decision Sciences, Bocconi University); David Dillenberger (Department of Economics, University of Pennsylvania); Pietro Ortoleva (Department of Economics, Princeton University)
    Abstract: One of the most well-known models of non-expected utility is Gul (1991)’s model 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).
    Keywords: Betweenness, Cautious Expected Utility, Disappointment Aversion, Utility representation
    JEL: D80 D81
    Date: 2018–09–01

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