nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒11‒26
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information nudges and self-control By Mariotti, Thomas; Schweizer, Nikolaus; Szech, Nora; von Wangenheim, Jonas
  2. Countering the Winner’s Curse: Optimal Auction Design in a Common Value Model By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  3. Bounded Rationality And Learning: A Framwork and A Robustness Result* By Aislinn Bohren; Daniel Hauser
  4. The Secret Behind The Tortoise and the Hare: Information Design in Contests By Alejandro Melo Ponce
  5. Dynamic Information Acquisition from Multiple Sources By Annie Liang; Xiaosheng Mu; Vasilis Syrgkanis
  6. Variation margins, fire sales, and information-constrained optimality By Biais, Bruno; Heider, Florian; Hoerova, Marie
  7. Overabundant Information and Learning Traps By Annie Liang; Xiaosheng Mu
  8. Seemingly Exploitative Contracts By Pei-Cheng Yu
  9. Partially-Honest Nash Implementation: A Full Characterization By Lombardi, Michele; Yoshihara, Naoki
  10. Fads and imperfect information By Nicholas Janetos
  11. Choosing in a Large World: The Role of Focal Points as a Mindshaping Device By Lauren Larrouy; Guilhem Lecouteux
  12. Bad news turned good: reversal under censorship By Aleksei Smirnov; Egor Starkov
  13. The Limits of Meritocracy By John Morgan; Justin Tumlinson; Felix J Vardy

  1. By: Mariotti, Thomas; Schweizer, Nikolaus; Szech, Nora; von Wangenheim, Jonas
    Abstract: We study the optimal design of information nudges for present-biased consumers who have to make sequential consumption decisions without exact prior knowledge of their long-term consequences. For arbitrary distributions of risk, there exists a consumer-optimal information nudge that is of cutoff type, recommending consumption or abstinence according to the magnitude of the risk. Under a stronger bias for the present, the target group receiving a credible signal to abstain must be tightened. We compare this nudge with those favored by a health authority or a lobbyist. When some consumers are more strongly present-biased than others, a traffic-light nudge is optimal.
    Keywords: Information Design,Information Nudges,Present-Biased Preferences,Self-Control
    JEL: C73 D82
    Date: 2018
  2. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We characterize revenue maximizing mechanisms in a common value environment where the value of the object is equal to the highest of bidders’ independent signals. The optimal mechanism exhibits either neutral selection, wherein the object is randomly allocated at a price that all bidders are willing to pay, or advantageous selection, wherein the object is allocated with higher probability to bidders with lower signals. If neutral selection is optimal, then the object is sold with probability one by a deterministic posted price. If advantageous selection is optimal, the object is sold with probability less than one at a random price. By contrast, standard auctions that allocate to the bidder with the highest signal (e.g., the ?rst-price, second-price or English auctions) deliver lower revenue because of the adverse selection generated by the allocation rule: if a bidder wins the good, then he revises his expectation of its value downward. We further show that the posted price mechanism is optimal among those mechanisms that always allocate the good. A su?icient condition for the posted price to be optimal among all mechanisms is that there is at least one potential bidder who is omitted from the auction. Our qualitative results extend to more general common value environments where adverse selection is high.
    Keywords: Optimal auction, Common values, Maximum game, Posted price, Revenue equivalence, Adverse selection, Neutral selection, Advantageous selection
    JEL: C72 D44 D82 D83
    Date: 2018–11
  3. By: Aislinn Bohren (Department of Economics, University of Pennsylvania); Daniel Hauser (Department of Economics, Aalto University)
    Abstract: We explore model misspecification in an observational learning framework. Individuals learn from private and public signals and the actions 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' payoffs. We establish that the correctly specified model is robust in that agents with approximately correct models almost surely learn the true state asymptotically. We develop a simple criterion to identify the asymptotic learning outcomes that arise when misspecification is more severe. Depending on the nature of the misspecification, learning may be correct, incorrect or beliefs may not converge. Different types may asymptotically disagree, despite observing the same sequence of information. This framework captures behavioral biases such as confirmation bias, false consensus effect, partisan bias and correlation neglect, as well as models of inference such as level-k and cognitive hierarchy.
    Keywords: Social learning, model misspecification, bounded rationality
    JEL: D82 D83
    Date: 2017–05–01
  4. By: Alejandro Melo Ponce
    Abstract: I analyze the optimal information disclosure problem under commitment of a "contest designer" in a class of binary action contests with incomplete information about the abilities of the players. If the contest designer wants to incentivize the players to play in equilibrium a particular strategy profile, she can design an information disclosure rule, formally a stochastic communication mechanism, to which she will commit and then use to "talk" with the players. The main tool to carry out the analysis is the concept of Bayes Correlated Equilibrium recently introduced in the literature. I find that the optimal information disclosure rules involves private information revelation (manipulation), which is also cost-effective for the designer. Furthermore, the optimal disclosure rule involves asymmetric and in most cases correlated signals that convey only partial information about the abilities of the players.
    JEL: C72 C79 D44 D82 D83
    Date: 2018–11–20
  5. By: Annie Liang (Department of Economics, University of Pennsylvania); Xiaosheng Mu (Department of Economics, Harvard University); Vasilis Syrgkanis (Microsoft Research, New England)
    Abstract: Consider a decision-maker who dynamically acquires Gaussian signals that are related by a completely flexible correlation structure. Such a setting describes information acquisition from news sources with correlated biases, as well as aggregation of complementary information from specialized sources. We study the optimal sequence of information acquisitions. Generically, myopic signal acquisitions turn out to be optimal at sufficiently late periods, and in classes of informational environments that we describe, they are optimal from period 1. These results hold independently of the decision problem and its (endogenous or exogenous) timing. We apply these results to characterize dynamic information acquisition in games.
    Date: 2017–08–17
  6. By: Biais, Bruno; Heider, Florian; Hoerova, Marie
    Abstract: Protection buyers use derivatives to share risk with protection sellers, whose assets are only imperfectly pledgeable because of moral hazard. To mitigate moral hazard, privately optimal derivative contracts involve variation margins. When margins are called, protection sellers must liquidate some of their own assets. We analyse, in a general-equilibrium framework, whether this leads to inefficient fire sales. If investors buying in a fire sale interim can also trade ex ante with protection buyers, equilibrium is information-constrained efficient even though not all marginal rates of substitution are equalized. Otherwise, privately optimal margin calls are inefficiently high. To address this inefficiency, public policy should facilitate ex-ante contracting among all relevant counterparties.
    Keywords: constrained efficiency; fire sales; macro-prudential regulation; Pecuniary externalities; variation margins
    JEL: D62 D82 G13 G18
    Date: 2018–09
  7. By: Annie Liang (Department of Economics, University of Pennsylvania); Xiaosheng Mu (Department of Economics, Harvard University)
    Abstract: We study a model of sequential learning, where agents choose what kind of information to acquire from a large, fixed set of Gaussian signals with arbitrary correlation. In each period, a short-lived agent acquires a signal from this set of sources to maximize an individual objective. All signal realizations are public. We study the community's asymptotic speed of learning, and characterize the set of sources observed in the long run. A simple property of the correlation structure guarantees that the community learns as fast as possible, and moreover that a \best" set of sources is eventually observed. When the property fails, the community may get stuck in an inefficient set of sources and learn (arbitrarily) slowly. There is a specific, diverse set of possible final outcomes, which we characterize.
    Date: 2017–10–24
  8. By: Pei-Cheng Yu (School of Economics, UNSW Business School, UNSW Sydney)
    Abstract: This paper studies sequential price discrimination of sophisticated present-biased consumers in the credit market. The optimal contract utilizes present bias to improve screening by inducing certain consumers to over-consume and over-accumulate debt without the presence of naivete. This shows that the optimal contract can have seemingly exploitative features that cause certain consumers to experience ex-post welfare losses even when they are sophisticated. This has important policy implications. If the intention of firms is to screen and not exploit consumers, then financial regulations aimed at protecting consumers by eliminating seemingly exploitative features could introduce additional distortions. I also analyze the optimal contract for naive consumers. The main difference between contracts for sophisticated and naıve consumers is the lack of a commitment mechanism in exploitative contracts, while the presence of teaser rates, late fees or overdraft fees does not necessarily make contracts exploitative.
    Keywords: Credit contract, Financial regulations, Non-linear pricing, Present bias, Sequential screening
    JEL: D18 D82 D86 G28
    Date: 2018–10
  9. By: Lombardi, Michele; Yoshihara, Naoki
    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: Nicholas Janetos (Penn Wharton Budget Model)
    Abstract: A fad is something that is popular for a time, then unpopular. For example, in the 1960s tailï¬ ns on cars were popular, in the 1970s they were not. I study a model in which fads are driven through the channel of imperfect information. Some players have better information about past actions of other players, and all players have preferences for choosing the same actions as well-informed players. In equilibrium, better informed (high-type) players initially pool on a single action choice. Over time, the low-type players learn which action the high-type players are pooling on, and start to mimic them. Once a tipping point is reached, the high-type players switch to a dfferent action, and the process repeats. I explicitly compute equilibria for a speciï¬ c parameterization of the model. Low-type players display instrumental preferences for conformity, choosing actions which appear more popular, while high-type players sometimes coordinate on actions which appear unpopular. Improving the quality of information to low-type players does not improve their payoffs, but increases the rate at which high-type players switch between actions.
    Keywords: Fads, social norms
    JEL: D83
    Date: 2017–05–01
  11. By: Lauren Larrouy (Université Côte d'Azur; GREDEG CNRS); Guilhem Lecouteux (Université Côte d'Azur; GREDEG CNRS)
    Abstract: The aim of this paper is to offer a theory of coordination that considers the role of the context within which the individuals interact, and to develop a rigorous analysis of salience and focal points. This requires dealing with how agents choose in ‘large worlds’ (in Savage’s sense). We highlight the role of mindshaping in the formation of individual preferences and beliefs and show how social focal points can generate prior beliefs. We conclude by discussing normative implications of our analysis, since it suggests that agents are socially-embedded entities, whose preferences and beliefs are shaped by social dynamics and norms.
    Keywords: coordination, mindshaping, belief formation, preference formation, large world
    JEL: B41 C72 D81
    Date: 2018–11
  12. By: Aleksei Smirnov; Egor Starkov
    Abstract: Sellers often have the power to censor the reviews of their products. We explore the effect of these censorship policies in markets where some consumers are unaware of possible censorship. We find that if the share of such “naive” consumers is not too large, then rational consumers treat any bad review that is revealed in equilibrium as good news about product quality. This makes bad reviews worth revealing and allows the high-type seller to use them as a costly signal of his product’s quality to rational consumers.
    Keywords: Censorship, dynamic games, disclosure, moderated learning
    JEL: D82 D83 D90
    Date: 2018–11
  13. By: John Morgan; Justin Tumlinson; Felix J Vardy
    Abstract: We show that too much meritocracy, modeled as accuracy of performance ranking in contests, can be a bad thing: in contests with homogeneous agents, it reduces output and is Pareto inefficient. In contests with sufficiently heterogeneous agents, discouragement and complacency effects further reduce the benefits of meritocracy. Perfect meritocracy may be optimal only for intermediate levels of heterogeneity.
    Date: 2018–11–01

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