nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒12‒17
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Learning from Failures: Optimal Contract for Experimentation and Production By Fahad Khalil; Jacques Lawarree; Alexander Rodivilov
  2. Patterns of Competition with Captive Customers By Armstrong, Mark; Vickers, John
  3. Categorization and cooperation across games By Marco LiCalzi; Roland Muhlenbernd
  4. Dynamic Random Utility By Mira Frick; Ryota Iijima; Tomasz Strzalecki
  5. Optimal robust allocation of private goods By Kiho Yoon
  6. Optimal Dynamic Auctions are Virtual Welfare Maximizers By Vahab Mirrokni; Renato Paes Leme; Pingzhong Tang; Song Zuo
  7. Aiming for the Goal: Contribution Dynamics of Crowdfunding By Joyee Deb; Aniko Oery; Kevin R. Williams
  8. Strategically Simple Mechanisms By Tilman Borgers; Jiangtao Li
  9. Costly Information Intermediation as a Natural Monopoly By Monte, Daniel; Pinheiro, Roberto
  10. The existence of the Miyazaki-Wilson-Spence equilibrium with continuous type distributions By Gemmo, Irina; Kubitza, Christian; Rothschild, Casey G.
  11. Variable Competence and Collective Performance: Unanimity vs. Simple Majority Rule By BAHARAD, Eyal; BEN-YASHAR, Ruth; NITZAN, Shmuel
  12. Cooperation Between Emotional Players By Andersson, Lina
  13. A Game of Martingales By Mark Whitmeyer
  14. Membership Mechanism By Seung Han Yoo
  15. General Distorted Input Ratios in Vertical Relationships By Martin Peitz; Dongsoo Shin
  16. Epistemic Foundations for Set-algebraic Representations of Knowledge By Satoshi Fukuda
  17. Value of a Clear Desk: Sequencing Decisions when Decision Capacity is Limited By Anthony Heyes; Sandeep Kapur
  18. Population-adjusted egalitarianism By Stéphane Zuber
  19. Mixed duopolies with advance production By Balogh, Tamás László; Tasnádi, Attila

  1. By: Fahad Khalil; Jacques Lawarree; Alexander Rodivilov
    Abstract: Before embarking on a project, a principal must often rely on an agent to learn about its profitability. We model this learning as a two-armed bandit problem and highlight the interaction between learning (experimentation) and production. We derive the optimal contract for both experimentation and production when the agent has private information about his efficiency in experimentation. This private information in the experimentation stage generates asymmetric information in the production stage even though there was no disagreement about the profitability of the project at the outset. The degree of asymmetric information is endogenously determined by the length of the experimentation stage. An optimal contract uses the length of experimentation, the production scale, and the timing of payments to screen the agents. Due to the presence of an optimal production decision after experimentation, we find over-experimentation to be optimal. The asymmetric information generated during experimentation makes over-production optimal. An efficient type is rewarded early since he is more likely to succeed in experimenting, while an inefficient type is rewarded at the very end of the experimentation stage. This result is robust to the introduction of ex post moral hazard.
    Keywords: information gathering, optimal contracts, strategic experimentation
    JEL: D82 D83 D86
    Date: 2018
  2. By: Armstrong, Mark; Vickers, John
    Abstract: We study mixed-strategy equilibrium pricing in oligopoly settings where consumers vary in the set of suppliers they consider for their purchase---some being captive to a particular firm, some consider two particular firms, and so on. In the case of "nested reach" we find equilibria, unlike those in more standard models, in which firms are ranked in terms of the prices they might charge. We characterize equilibria in the three-firm case, and contrast them with equilibria in the parallel model with capacity constraints. A theme of the analysis is how patterns of consumer interaction with firms matter for competitive outcomes.
    Keywords: Oligopoly, Bertrand competition, Bertrand-Edgeworth competition, Consideration sets, Mixed strategies
    JEL: C72 D43 D83 L1 L15
    Date: 2018–12–03
  3. By: Marco LiCalzi (Dept. of Management, Università Ca' Foscari Venice); Roland Muhlenbernd (Dept. of Management, Università Ca' Foscari Venice)
    Abstract: We study a model where agents face a continuum of two-player games and categorize them into a finite number of situations to make sense of their complex environment. Each agent can cooperate or defect, conditional on the perceived category. Agents may not share the same categorization. The games are fully ordered by one parameter, interpreted as the temptation to break joint cooperation by defecting. We prove that in equilibrium agents must share the same categorization. Most equilibria achieve less cooperation than it would be possible if agents could fully discriminate games. All the equilibira are evolutionary stable, but the only stochastically stable profile leads to defection everywhere, destroying all opportunities for cooperation. We then study agents' social learning when they imitate successful players over similar games, but lack any information about the categorization of other players. We show how imitation leads to a shared categorization that achieves higher cooperation than under full discrimination.
    Keywords: categorization, cooperation, evolutionary stability, learning by imitation, prisoners' dilemma, stag hunt
    JEL: C72 D91 C73 D83
    Date: 2018–11
  4. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Tomasz Strzalecki (Harvard University)
    Abstract: We provide an axiomatic analysis of dynamic random utility, characterizing the stochastic choice behavior of agents who solve dynamic decision problems by maximizing some stochastic process (U_t) of utilities. We show ?rst that even when (U_t) is arbitrary, dynamic random utility imposes new testable restrictions on how behavior across periods is related, over and above period-by-period analogs of the static random utility axioms: An important feature of dynamic random utility is that behavior may appear history dependent, because past choices reveal information about agents’ past utilities and (U_t) may be serially correlated; however, our key new axioms highlight that the model entails speci?c limits on the form of history dependence that can arise. Second, we show that when agents’ choices today influence their menu tomorrow (e.g., in consumption-savings or stopping problems), imposing natural Bayesian rationality axioms restricts the form of randomness that (U_t) can display. By contrast, a speci?cation of utility shocks that is widely used in empirical work violates these restrictions, leading to behavior that may display a negative option value and can produce biased parameter estimates. Finally, dynamic stochastic choice data allows us to characterize important special cases of random utility—in particular, learning and taste persistence—that on static domains are indistinguishable from the general model.
    Keywords: Dynamic stochastic choice, Random utility, History dependence, Serially correlated utilities, Consumption persistence, Learning
    JEL: D81 D83 D90
    Date: 2017–06
  5. By: Kiho Yoon (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We characterize the optimal robust mechanisms for the allocation of private objects, where robust mechanisms are those mechanisms that satisfy dominant strategy incentive compatibility, ex-post individual rationality, and ex-post no budget deficit, and optimal robust mechanisms are the ones that maximize the expected sum of players' payoffs among all robust mechanisms. With a certain assumption on the payoff of the lowest possible type, we provide a complete description of optimal robust mechanisms with any number of players and objects.
    Keywords: robust mechanism design, dominant strategy, budget balance, ex-post individual rationality
    JEL: C72 D82
    Date: 2018
  6. By: Vahab Mirrokni; Renato Paes Leme; Pingzhong Tang; Song Zuo
    Abstract: We are interested in the setting where a seller sells sequentially arriving items, one per period, via a dynamic auction. At the beginning of each period, each buyer draws a private valuation for the item to be sold in that period and this valuation is independent across buyers and periods. The auction can be dynamic in the sense that the auction at period $t$ can be conditional on the bids in that period and all previous periods, subject to certain appropriately defined incentive compatible and individually rational conditions. Perhaps not surprisingly, the revenue optimal dynamic auctions are computationally hard to find and existing literatures that aim to approximate the optimal auctions are all based on solving complex dynamic programs. It remains largely open on the structural interpretability of the optimal dynamic auctions. In this paper, we show that any optimal dynamic auction is a virtual welfare maximizer subject to some monotone allocation constraints. In particular, the explicit definition of the virtual value function above arises naturally from the primal-dual analysis by relaxing the monotone constraints. We further develop an ironing technique that gets rid of the monotone allocation constraints. Quite different from Myerson's ironing approach, our technique is more technically involved due to the interdependence of the virtual value functions across buyers. We nevertheless show that ironing can be done approximately and efficiently, which in turn leads to a Fully Polynomial Time Approximation Scheme of the optimal dynamic auction.
    Date: 2018–12
  7. By: Joyee Deb (Cowles Foundation, Yale University); Aniko Oery (Cowles Foundation, Yale University); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: We study reward-based crowdfunding campaigns, a new class of dynamic contribution games where consumption is exclusive. Two types of backers participate: buyers want to consume the product while donors just want the campaign to succeed. The key tension is one of coordination between buyers, instead of free-riding. Donors can alleviate this coordination risk. We analyze a dynamic model of crowdfunding and demonstrate that its predictions are consistent with high-frequency data collected from Kickstarter. We compare the Kickstarter mechanism to alternative platform designs and evaluate the value of dynamically arriving information. We extend the model to incorporate social learning about quality.
    Keywords: Crowdfunding, Contribution Games, Dynamic Models, Kickstarter
    JEL: C73 L26 M13
    Date: 2018–12
  8. By: Tilman Borgers; Jiangtao Li
    Abstract: We define and investigate a property of mechanisms that we call "strategic simplicity," and that is meant to capture the idea that, in strategically simple mechanisms, strategic choices require limited strategic sophistication. We define a mechanism to be strategically simple if choices can be based on first-order beliefs about the other agents' preferences and first-order certainty about the other agents' rationality alone, and there is no need for agents to form higher-order beliefs, because such beliefs are irrelevant to the optimal strategies. All dominant strategy mechanisms are strategically simple. But many more mechanisms are strategically simple. In particular, strategically simple mechanisms may be more flexible than dominant strategy mechanisms in the bilateral trade problem and the voting problem.
    Date: 2018–12
  9. By: Monte, Daniel (São Paulo School of Economics, FGV); Pinheiro, Roberto (Federal Reserve Bank of Cleveland)
    Abstract: Many markets rely on information intermediation to sustain cooperation between large communities.We identify a key trade-off in costly information intermediation: intermediaries can create trust by incentivizing information exchange, but with too much information acquisition, intermediation becomes expensive, with a resulting high equilibrium default rate and a low fraction of agents buying this information. The particular pricing scheme and the competitive environment affect the direct and indirect costs of information transmission, represented by fees paid by consumers and the expected loss due to imperfect information, respectively. Moreover, we show that information trade has characteristics similar to a natural monopoly, where competition may be detrimental to efficiency either because of the duplication of direct costs or the slowing down of information spillovers. Finally, a social-welfare-maximizing policymaker optimally chooses a low information sampling frequency in order to maximize the number of partially informed agents. In other words, maximizing information spillovers, even at the cost of slow information accumulation, enhances welfare.
    Keywords: Costly Information trade; Market Structure; Natural Monopoly;
    JEL: D83 D85
    Date: 2018–12–07
  10. By: Gemmo, Irina; Kubitza, Christian; Rothschild, Casey G.
    Abstract: We prove the existence of an equilibrium in competitive markets with adverse selection in the sense of Miyazaki (1977), Wilson (1977), and Spence (1978) when the distribution of unobservable risk types is continuous. Our proof leverages the finite-type proof in Spence (1978) and a limiting argument akin to Hellwig (2007)'s study of optimal taxation.
    Keywords: asymmetric and private information,insurance market,adverse selection,equilibrium
    JEL: D82 G22 D41
    Date: 2018
  11. By: BAHARAD, Eyal; BEN-YASHAR, Ruth; NITZAN, Shmuel
    Abstract: Under the unanimity rule, a single voter may alter a decision that is unanimously accepted by all other voters. Under the simple majority rule, the impact of such a voter diminishes. This paper examines the marginal effect of competence on the collective performance – the likelihood of reaching a correct decision. It is shown that under the unanimity rule (simple majority rule), adding an incompetent voter to the group is inferior (superior) to giving up an existing competent voter. The negative impact of an incompetent voter cannot (can) always be balanced by adding a competent one when the decision mechanism is the unanimity (simple majority) rule. Moreover, improving a single voter's competence may have a greater effect on the collective performance under the simple majority rule relative to the unanimity rule.
    Keywords: Unanimity rule, simple majority rule, voters' competence, collective performance
    Date: 2018–11
  12. By: Andersson, Lina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper uses the framework of stochastic games to propose a model of emotions in repeated interactions. An emotional player, who transitions between different states of mind as a response to observed actions taken by the other player, can be in either a friendly, a neutral, or a hostile state of mind. The state of mind determines the player's psychological payoff that together with a material payoff constitutes his utility. In the friendly (hostile) state of mind the player has a positive (negative) concern for the other player's material payoffs. Emotions can both facilitate and obstruct cooperation in the repeated prisoners' dilemma game. If finitely repeated, then a traditional player (who cares only for own material payoffs) can have an incentive to manipulate an emotional player into a friendly state of mind for future gains. If infinitely repeated, then two emotional players may require less patience to sustain cooperation. However, emotions can also obstruct cooperation if the players are either unwilling to punisheach other, or become revengeful when punished.
    Keywords: Emotions; cooperation; repeated prisoners dilemma; stochastic games
    JEL: C73 D01 D91
    Date: 2018–12
  13. By: Mark Whitmeyer
    Abstract: We consider a two player dynamic game played over $T \leq \infty$ periods. In each period each player chooses any probability distribution with support on $[0, 1]$ with a given mean, where the mean is the realized value of the draw from the previous period. The player with the highest realization in the period achieves a payoff of $1$, and the other player, $0$; and each player seeks to maximize the discounted sum of his per-period payoffs over the whole time horizon. We solve for the unique subgame perfect equilibrium of this game, and establish properties of the equilibrium strategies and payoffs in the limit.
    Date: 2018–11
  14. By: Seung Han Yoo (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: This paper studies an environment in which a seller seeks to sell two different items to buyers. The seller designs a membership mechanism that assigns positive allocations to members only. Exploiting the restrictive set, the seller finds a revenue-maximizing incentive compatible mechanism. We first establish the optimal allocation rule for this membership mechanism given a regularity condition for a modified valuation distribution reflecting the set, which provides the existence of a member set and the optimal payment rule. The optimal allocation enables us to compare the membership with separate selling of the two items, suggesting conditions under which the membership dominates the separate selling: interplay between the number of bidders and the degree of the stochastic dominance of valuation distributions.
    Keywords: Mechanism design, Multidimensional screening, Auction
    Date: 2018
  15. By: Martin Peitz; Dongsoo Shin
    Abstract: A project leader sources an input from a supporter and combines it with an input produced in-house. The leader has private information about the project’s cost environment. We show that if the leader can commit to the in-house input level, the input ratio is distorted upward when the in-house input is not too costly—the in-house input is produced in excess and, thus, partly wasted. By contrast, without the leader’s commitment to the in-house input level, the input ratio is distorted downward when the in-house input is su¢ciently costly—the outsourced input is produced in excess and, thus, partly wasted
    Keywords: labor income tax; labor supply elasticity; general equilibrium; cross-country panel
    JEL: E21 E24 J21 J22
    Date: 2018–12
  16. By: Satoshi Fukuda
    Abstract: This paper formalizes an informal idea that an agent's knowledge is characterized by a collection of sets such as a -algebra within the framework of a state space model of knowledge. The formalization is based on the agent's logical and introspective abilities and on the underlying structure of the state space. The agent is logical and introspective about what she knows if and only if her knowledge is summarized by a collection of events with the property that, for any event, the collection has the maximal event included in the original event. When the underlying space is a measurable space, the collection becomes a -algebra if and only if the agent is additionally introspective about what she does not know. The paper characterizes why the agent's knowledge takes (or does not take) such a set algebra as a -algebra or a topology, depending on the agent's logical and introspective abilities and on the underlying environment. Journal of Economic Literature Classification Numbers: C70, D83 Keywords: Knowledge,Information, Set Algebra, -algebra, Introspection
    Date: 2018
  17. By: Anthony Heyes (University of Ottawa and University of Sussex); Sandeep Kapur (Birkbeck, University of London)
    Abstract: Postponing a decision may allow a better decision later. However, depending on what else comes up, there may never be a moment when it makes sense to come back to a postponed decision, leaving potential gains unrealized. We develop a model of an agent with limited decision-making capacity who faces a sequence of decisions that vary stochastically in their importance and improvability. In each period he can either act on the newly-arrived opportunity or return to one carried from earlier. The prospect of future congestion in decisions generates an incentive to make prompt decisions, to “keep a clear desk”. The strength of that imperative is: (1) increasing in the expected importance of future opportunities but decreasing in the dispersion of their importance; (2) decreasing in the expected improvability of future opportunities, but ambiguously influenced by the dispersion of that improvability. The analysis illuminates some decision practices that would otherwise be hard to rationalize. Multiple equilibria in some cases rationalize persistently different behaviour by two agents facing (almost) identical sequences of choices. The setting allows for a generalization of the concept of option value to congested decision environments and, by accounting for a plausible cost to postponement of action, offers a counter-force to the precautionary principle.
    Keywords: Dynamic decision-making, limited attention, organizational bandwidth; committees, precautionary principle, option value.
    Date: 2018–10
  18. By: Stéphane Zuber (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: Egalitarianism focuses on the well-being of the worst-off person. It has attracted a lot of attention in economic theory, for instance when dealing with the sustainable intertemporal allocation of resources. Economic theory has formalized egalitarianism through the Maximin and Leximin criteria, but it is not clear how they should be applied when population size may vary. In this paper, I present possible justifications of egalitarian-ism when considering populations with variable sizes. I then propose new versions of egalitarianism that encompass many views on how to trade-off population size and well-being. I discuss some implications of egalitarianism for optimal population size. I first describe how population ethical views affects population growth. In a model with natural resources, I then show that utilitarianism always recommend a larger population for low levels of resources, but that this conclusion may not hold true for larger levels.
    Keywords: Egalitarianism,Optimal population,Population ethics,Sustainable development,Renewable resources
    Date: 2018–11
  19. By: Balogh, Tamás László; Tasnádi, Attila
    Abstract: Production to order and production in advance have been compared in many frameworks. In this paper we investigate a production in advance version of the capacityconstrained Bertrand-Edgeworth mixed duopoly game and determine the solution of the respective timing game. We show that a pure-strategy (subgame-perfect) Nashequilibrium exists for all possible orderings of moves. It is pointed out that unlike the production-to-order case, the equilibrium of the timing game lies at simultaneous moves. An analysis of the public firm's impact on social surplus is also carried out. All the results are compared with those of the production-to order version of the respective game and with those of the mixed duopoly timing games.
    Keywords: Bertrand-Edgeworth, mixed duopoly, timing games
    JEL: D43 L13
    Date: 2018–11–30

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