nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒01‒07
twenty-two papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Non-Existence of Representative Agents By Jackson, Matthew O.; Yariv, Leeat
  2. Criminal Networks, Market Externalities and Optimal Leniency By Giovanni Immordino; Salvatore Piccolo; Paolo Roberti
  3. Manipulated Electorates and Information Aggregation By Mehmet Ekmekci; Stephan Lauermann
  4. Horizontal Mergers and Innovation in Concentrated Industries By Hollenbeck, Brett
  5. Incentivizing the Dynamic Workforce: Learning Contracts in the Gig-Economy By Alon Cohen; Moran Koren; Argyrios Deligkas
  6. Liability for third-party harm when harm-inflicting consumers are present biased By Friehe, Tim; Rössler, Christoph; Dong, Xiaoge
  7. Complementary Monopolies with Asymmetric Information By Didier Laussel; Joana Resende
  8. Timing of entry with heterogeneous firms By Smirnov, Vladimir; Wait, Andrew; Xu, Rong
  9. Communication and Commitment with Constraints By Raghul Venkatesh
  10. Representing Unawareness on State Spaces By Satoshi Fukuda
  11. A folk theorem in infinitely repeated prisoner's dilemma with small observation cost By Hino, Yoshifumi
  12. Identity, Beliefs, and Political Conflict By Gennaioli, Nicola; Tabellini, Guido
  13. Sunspots in Global Games: Theory and Experiment By Heinemann, Frank; Moradi, Homayoon
  14. The cost of information By Luciano Pomatto; Philipp Strack; Omer Tamuz
  15. Can Partial Horizontal Ownership Lessen Competition More Than a Monopoly? By Duarte Brito; Ricardo Ribeiro; Helder Vasconcelos
  16. The Cultural Transmission of Trust and Trustworthiness By Akira Okada
  17. Streaming Platform and Strategic Recommendation Bias By Marc Bourreau; Germain Gaudin
  18. M Equilibrium: A dual theory of beliefs and choices in games By Jacob K. Goeree; Philippos Louis
  19. Same Sex Marriage, The Great Equalizer By Parakhonyak, Alexey; Popov, Sergey V
  20. Dictatorship versus manipulability By Bednay, Dezső; Moskalenko, Anna; Tasnádi, Attila
  21. Blockchain Economics By Joseph Abadi; Markus Brunnermeier
  22. Identity Politics and Trade Policy By Gene M. Grossman; Elhanan Helpman

  1. By: Jackson, Matthew O.; Yariv, Leeat
    Abstract: We characterize environments in which there exists a representative agent: an agent who inherits the structure of preferences of the population that she represents. The existence of such a representative agent imposes strong restrictions on individual utility functions, requiring them to be linear in the allocation and additively separable in any parameter that characterizes agents' preferences (e.g., a risk aversion parameter, a discount factor, etc.). Commonly used classes of utility functions (exponentially discounted utility functions, CRRA or CARA utility functions, logarithmic functions, etc.) do not admit a representative agent.
    Keywords: Collective Decisions; Preference Aggregation; Representative Agents; Revealed Preference
    JEL: D03 D11 D71 D72 E24
    Date: 2018–12
  2. By: Giovanni Immordino (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università di Bergamo and CSEF); Paolo Roberti (Università di Bergamo)
    Abstract: We analyze the relationship between competition and self-reporting incentives within a criminal network formed by a supplier of an illegal good and two dealers distributing the good to final consumers. The Legislator designs a leniency program to deter crime. We show that the comparison between the optimal amnesty with competition and monopoly in the dealership market depends on the strength of the externalities between dealers at the reporting stage. While in monopoly a leniency program is al- ways feasible, the opposite may happen with competition. This impossibility result is more relevant when the demand for the illegal product is large, when the market is neither too competitive nor too concentrated and when dealers know too much about each other. Moreover, in contrast to monopoly, the policy does not necessarily increase welfare in a competitive environment.
    Keywords: Accomplice-witnesses, Criminal Organizations, Leniency, Whistle-Blower
    Date: 2018–12–14
  3. By: Mehmet Ekmekci; Stephan Lauermann
    Abstract: We study the aggregation of dispersed information in elections in which turnout may depend on the state. State-dependent turnout may arise from the actions of a biased and informed "election organizer." Voters are symmetric ex ante and prefer policy a in state α and policy b in state β, but the organizer prefers policy a regardless of the state. Each recruited voter observes a private signal about the unknown state but does not learn the turnout. First, we characterize how the outcomes of large elections depend on the turnout pattern across states. In contrast to existing results for large elections, there are equilibria in which information aggregation fails whenever there is an asymmetry in turnout; information aggregation is only guaranteed in all equilibria if turnout is state independent. Second, when the turnout is the result of costly voter recruitment by a biased organizer, the organizer can ensure that its favorite policy a is implemented with high probability independent of the state as the voter recruitment cost vanishes. Moreover, information aggregation will fail in all equilibria. The critical observation is that a vote is more likely to be pivotal for the decision if turnout is smaller, leading to a systematic bias of the decision toward the low-turnout state.
    Keywords: Voting, Information Aggregation
    JEL: C70 D80
    Date: 2019–01
  4. By: Hollenbeck, Brett
    Abstract: The relationship between mergers and the long run rate of innovation is an open question in antitrust economics. I develop a framework to examine this in a dynamic oligopoly model with endogenous investment, entry, exit and horizontal mergers. Firms produce vertically differentiated goods and may merge with rival firms to gain market power and potentially increase the quality of their product. I extend previous work on dynamic mergers by allowing for products differentiated on quality with competition in prices and an endogenous long run rate of innovation. In equilibrium, horizontal mergers are almost entirely harmful to consumers in the short run, but the prospect of a buyout creates a powerful incentive for firms to preemptively enter the industry and invest to make themselves an attractive merger partner. The result is significantly higher rate of innovation with mergers than without and significantly higher long-run consumer welfare as well. Further results explore the circumstances under which this result is likely to hold. In order for the long run increase in innovation to outweigh the short run harm to consumers caused by mergers, entry costs must be low, entrants and incumbents must both have the ability to innovate rapidly, and the degree of horizontal product differentiation must be low. Alternatively, when mergers can generate innovation directly by allowing firms to combine their products they typically benefit consumers in both the short run and long run.
    Keywords: Mergers, Antitrust, innovation, dynamic oligopoly
    JEL: L13 L40 O3
    Date: 2018–12–19
  5. By: Alon Cohen; Moran Koren; Argyrios Deligkas
    Abstract: In principal-agent models, a principal offers a contract to an agent to perform a certain task. The agent exerts a level of effort that maximizes her utility. The principal is oblivious to the agent's chosen level of effort, and conditions her wage only on possible outcomes. In this work, we consider a model in which the principal is unaware of the agent's utility and action space. She sequentially offers contracts to identical agents, and observes the resulting outcomes. We present an algorithm for learning the optimal contract under mild assumptions. We bound the number of samples needed for the principal obtain a contract that is within $\epsilon$ of her optimal net profit for every $\epsilon>0$.
    Date: 2018–11
  6. By: Friehe, Tim; Rössler, Christoph; Dong, Xiaoge
    Abstract: This paper analyzes the workings of liability when harm-in icting consumers are present biased and both product safety and consumer care in uence expected harm. We show that present bias introduces a rationale for shifting some losses onto the manufacturer, in stark contrast with the baseline scenario in which strict consumer liability induces socially optimal product safety and precaution levels. In addition, we establish that strict liability with contributory negligence may induce socially optimal product safety and precaution choices without aggravating the output level distortion.
    Keywords: Liability,Present Bias,Product Safety,Consumer Precaution
    JEL: D91 H23 K13
    Date: 2018
  7. By: Didier Laussel (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Joana Resende (Economics Department, University of Porto)
    Abstract: We investigate how asymmetric information on final demand affects strategic interaction between a downstream monopolist and a set of up-stream monopolists, who independently produce complementary inputs. We study an intrinsic private common agency game in which each supplier i independently proposes a pricing schedule contract to the assembler, specifying the supplier's payment as a function of the assembler's purchase of input i. We provide a necessary and sufficient equilibrium condition. A lot of equilibria satisfy this condition but there is a unique Pareto-undominated Nash equilibrium from the suppliers' point of view. In this equilibrium there are unavoidable efficiency losses due to excessively low sales of the good. However, suppliers may be able to limit these distortions by implicitly coordinating on an equilibrium with a rigid (positive) output in bad demand circumstances.
    Keywords: complementary inputs, asymmetric information, private common agency games
    JEL: D82 L22
    Date: 2018–12
  8. By: Smirnov, Vladimir; Wait, Andrew; Xu, Rong
    Abstract: We examine entry in a market-entry timing model. Early entry allows a firm to enjoy a higher instantaneous post-entry pro t, while later entry has the benefi t of lower entry costs. In our model, firms can be asymmetric in terms of costs. Specifically, a more efficient rm enters with lower present value of costs. First, we show that entry order is always efficient in the duopoly game while in the triopoly model an efficient entry order could be violated. Moreover, one of the most notable results is that in the triopoly model we generate the necessary condition for an efficient order of entry. In addition, we explore how the rents earned by duopolists relative to a monopolist (the structure of pro ts in the market) impact the order of entry. These results would be useful for future empirical studies of market entry. Furthermore, our paper investigates the welfare implications of the entry in equilibrium by exploring the dynamics of the initial entry time in duopoly and triopoly markets. Previous studies found that the leader's time of entry is typically inefficiently too late. Our results show that unlike in the symmetric case, in the presence of asymmetric fi rms, fi rst entry is not necessarily inefficiently delayed, especially in markets with higher duopoly effects (which capture duopoly rents relative to those for a monopolist) and with fi rms that are more differentiated. This result implies that encouraging an extra fi rm to enter in an oligopolistic market could shorten the period consumers have to wait for new products, and potentially increase social welfare.
    Keywords: timing games; entry, leader; follower; process innovation; product innovation.
    Date: 2018–12
  9. By: Raghul Venkatesh (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: I study the role of communication and commitment between an informed and an uninformed agent. The two agents contribute to a joint project such that (i) the agents' actions are substitutable, and (ii) the actions are constrained. In the absence of commitment and when decision-making is simultaneous, there is full information revelation as long as constraints are not binding. The presence of binding constraints results in only partial revelation of information in equilibrium. The most informative equilibrium is strictly pareto dominant. When decisions are sequential, information revealed is unchanged but the actions of the agents change, resulting in higher welfare. Finally, I characterize the ex ante optimal commitment mechanism for the uninformed agent. Providing greater commitment power strictly raises welfare of both agents and leads to greater overall efficiency.
    Keywords: asymmetric information,cheap talk,commitment,strategic substitutes
    Date: 2018–12
  10. By: Satoshi Fukuda
    Abstract: I study unawareness by the lack of knowledge on a generalized state space. In order to understand and contrast properties of unawareness in a non-partitional standard state space model and a partitional generalized state space model, I provide a generalized framework that accommodates both models. I ask: when and how a generalized (in particular, standard) state space model has a sensible form of unawareness; and how unawareness relates to ignorance and possibility. First, unawareness can only take two forms: an agent is ignorant of knowing that she does not know an event; and the agent is ignorant of knowing an event. In either case, unawareness is also associated with the ignorance of the possibility of knowing an event. Second, the agent, who is unaware of an event, is ignorant (but not necessarily unaware) of being unaware of it. Third, the agent, facing infinitely many objects of knowledge, may know that there is an event of which she is unaware, while she cannot know that she is unaware of any particular event. Fourth, getting more information can cause the agent to become unaware of some event. Journal of Economic Literature Classification Numbers: C70, D83 Keywords:Unawareness; Awareness; Knowledge; State Space; Ignorance; Possibility
    Date: 2018
  11. By: Hino, Yoshifumi
    Abstract: We consider an infinitely repeated prisoner's dilemma under costly observation. If a player observes his opponent, then he pays an observation cost and knows the action chosen by his opponent. If a player does not observe his opponent, he cannot obtain any information about his opponent's action. Furthermore, no player can statistically identify the observational decision of his opponent. We prove an efficiency without any signals. Next, we consider a kind of delayed observations. Players decide their actions and observation decisions in the same period, but they choose observation decisions after they choose their actions. We introduce an interim public randomization instead of public randomization just before observation decision. We present a folk theorem with an interim public randomization device for a sufficiently small observation cost when players are sufficiently patient.
    Keywords: B to B business; Costly observation; Efficiency; Folk theorem; Prisoner's dilemma
    JEL: C72 C73 D82
    Date: 2018–12–10
  12. By: Gennaioli, Nicola; Tabellini, Guido
    Abstract: We present a theory of identity politics that builds on two ideas. First, voters identify with the social group whose interests are closest to theirs and that features the strongest policy conflict with outgroups. Second, identification causes voters to slant their beliefs toward the group's distinctive opinion. The theory yields two main implications: i) voters' beliefs are polarized and distorted along group boundaries; ii) economic shocks that induce new cleavages to emerge also bring about large changes in beliefs and preferences across many policy issues. In particular, exposure to globalization or cultural changes may induce voters to switch identities, dampening their demand for redistribution and exacerbating conflicts in other social dimensions. We show that survey evidence is consistent with these implications.
    Date: 2018–12
  13. By: Heinemann, Frank (TU Berlin); Moradi, Homayoon (WZB Berlin)
    Abstract: We solve and test experimentally a global-games model of speculative attacks where agents can choose whether to read, at a cost, a payoff irrelevant (sunspot) announcement. Assuming that subjects exogenously believe some others to follow sunspots, we provide conditions for a unique equilibrium where agents follow a sunspot announcement depending on the realization of an informative private signal. Although most groups converge to classical global-game strategies that neglect sunspots, we find that about one-third of groups are eventually coordinating on sunspots, which is inconsistent with the standard theory. In line with the assumption of subjects expecting others to follow sunspots, subjects overestimate the number of subjects who follow sunspots by about 100% on average. We conclude that in environments with high strategic uncertainty, payoff irrelevant signals can affect behavior even if they are costly to obtain and not expected to be publicly observed.
    Keywords: creditor coordination; global games speculative attack; sunspots;
    JEL: D82 F31 G12
    Date: 2018–12–27
  14. By: Luciano Pomatto; Philipp Strack; Omer Tamuz
    Abstract: We develop an axiomatic theory of costly information acquisition. Our axioms capture the idea of constant marginal costs in information production: the cost of generating two independent signals is the sum of their costs, and the cost of generating a signal with probability half equals half the cost of generating it deterministically. Together with a monotonicity and a continuity conditions, these axioms completely determine the cost of a signal up to a vector of parameters, one for each pair of states of nature. These parameters have a clear economic interpretation and determine the difficulty of distinguishing between different states. The resulting cost function, which we call log-likelihood ratio cost, is a linear combinations of the Kullback-Leibler divergences (i.e., the expected log-likelihood ratios) between the conditional signal distributions. We argue that this cost function is a versatile modeling tool, and that in various examples of information acquisition it leads to more realistic predictions than the approach based on Shannon entropy.
    Date: 2018–12
  15. By: Duarte Brito (Universidade Nova de Lisboa, Faculdade de Ciências e Tecnologia | Center for Advanced Studies in Management and Economics); Ricardo Ribeiro (Universidade Católica Portuguesa, Católica Porto Business School); Helder Vasconcelos (Universidade do Porto, Faculdade de Economia and Center for Economics and Finance)
    Abstract: In this paper we investigate the anti-competitive e¤ects of partial horizontal ownership in a setting where: (i) two cost-asymmetric ?rms compete à la Cournot; (ii) managers deal with eventual con?icting interests of the di¤erent shareholders by maximizing a weighted sum of rms?operating pro?ts; and (iii) weights result from the corporate control structure of the ?rm they run. Within this theoretical structure, we ?nd that if the manager of the more e¢ cient rm weights the operating pro?t of the (ine¢ cient) rival more than its own pro?t, then partial ownership can lessen competition more than a monopoly.
    Keywords: Partial Horizontal Ownership, Common-Ownership, Cross-Ownership, Full Joint Ownership, Duopoly, Cost Asymmetry
    JEL: L11 L12 L13 L41 L50
    Date: 2018–12
  16. By: Akira Okada (Kyoto University)
    Abstract: We consider the cultural transmission of trust and trustworthiness in a trust game with spatial matching a la Tabellini. Players are assumed to enjoy psychological benefits from good conducts. The equilibrium probability that an investor trusts a receiver is a monotonically decreasing function of social distance, and the one that the receiver behaves in a trustworthy manner is non-monotonic. Parents with imperfect empathy transmit their own values to their children through education, and the ratio of individuals with good values globally converges to a stationary point with heterogeneity if educational costs are sufficiently small. Trust and trustworthiness are infl uenced by institutions in different ways. A better "intermediate" enforcement crowds out trust and crowds in trustworthiness.
    Keywords: crowding effect, cultural transmission, random matching game, social distance, trust, trustworthiness
    JEL: C72 D02 D64 D91
    Date: 2018–09
  17. By: Marc Bourreau; Germain Gaudin
    Abstract: We consider a streaming platform which carries content from various upstream content providers. Participating customers face personalized recommendations from the platform and consume a mix of content originating from each provider. We analyze when the platform uses its personalized recommendation system to steer consumers from one content provider to another. We establish the conditions under which the recommendation system allows the platform to credibly threaten upstream providers to steer consumers away from their content in order to reduce their market power. We find that the streaming platform can increase its profit by reducing the royalty rate it pays to content providers through the use of a recommendation system which is strategically biased in favor of the cheaper content.
    Keywords: streaming platform, recommendation system, personalization, bias
    JEL: D40 L10 L50
    Date: 2018
  18. By: Jacob K. Goeree; Philippos Louis
    Abstract: We introduce a set-valued generalization of Nash equilibrium, called M equilibrium, which is based on ordinal monotonicity - players' choice probabilities are ranked the same as the expected payoffs based on their beliefs - and ordinal consistency - players' beliefs yield the same ranking of expected payoffs as their choices. Using results from semi-algebraic geometry, we prove there exist a finite number of M equilibria, each consisting of a finite number of connected components. Generically, M-equilibria can be "color coded" by their ranks in the sense that choices and beliefs belonging to the same M equilibrium have the same color. We show that colorable M equilibria are behaviorally stable, a concept that strengthens strategic stability. Furthermore, set-valued and parameter-free M equilibrium envelopes various parametric models based on fixed-points, including QRE as well as a new and computationally simpler class of models called {\mu} Equilibrium. We report the results of several experiments designed to contrast M equilibrium predictions with those of existing behavioral game-theory models. A first experiment considers five variations of an asymmetric-matching pennies game that leave the predictions of Nash, various versions of QRE, and level-k unaltered. However, observed choice frequencies differ substantially and significantly across games as do players' beliefs. Moreover, beliefs and choices are heterogeneous and beliefs do not match choices in any of the games. These findings contradict existing behavioral game-theory models but accord well with the unique M equilibrium. Follow up experiments employ 3 by 3 games with a unique pure-strategy Nash equilibrium and multiple M equilibria. The belief and choice data exhibit coordination problems that could not be anticipated through the lens of existing behavioral game-theory models.
    Date: 2018–11
  19. By: Parakhonyak, Alexey (University of Oxford); Popov, Sergey V (Cardiff Business School)
    Abstract: When limited to heterosexual marriage, agents of different genders are not guaranteed to harvest the same payoff even conditional on having the same type, even if all other factors, such as search costs or the distribution of partner types, are same across genders. If same-sex marriage is legalized and there is a positive mass of agents who find marriage with both sexes acceptable, then only symmetric equilibria survive in symmetric environments.
    Keywords: Text Search; marriage markets, matching, gender equality, same-sex marriage
    JEL: C78 D1
    Date: 2019–01
  20. By: Bednay, Dezső; Moskalenko, Anna; Tasnádi, Attila
    Abstract: The Gibbard-Satterthwaite (1973/75) theorem roughly states that we have to accept dictatorship or manipulability in case of at least three alternatives. A large strand of the literature estimates the degree of manipulability of social choice functions (e.g. Aleskerov and Kurbanov, 1999, Favardin et al., 2002, and Aleskerov et al., 2012), most of them employing the Nitzan-Kelly index of manipulability. We take a different approach and introduce a non-dictatorship index based on our recent work (Bednay et al., 2017), where we have analysed social choice functions based on their distances to the dictatorial rules. By employing computer simulations, we investigate the relationship between the manipulability and nondictatorship indices of some prominent social choice functions, putting them into a common framework.
    Keywords: voting rules, dictatorship, manipulability, manipulability index, dictatorship index
    JEL: D71
    Date: 2018–12–22
  21. By: Joseph Abadi; Markus Brunnermeier
    Abstract: When is record-keeping better arranged through a blockchain than through a traditional centralized intermediary? The ideal qualities of any record-keeping system are (i) correctness, (ii) decentralization, and (iii) cost efficiency. We point out a blockchain trilemma: no ledger can satisfy all three properties simultaneously. A centralized record-keeper extracts rents due to its monopoly on the ledger. Its franchise value dynamically incentivizes correct reporting. Blockchains drive down rents by allowing for free entry of record-keepers and portability of information to competing “forks.” Blockchains must, therefore, provide static incentives for correctness through computationally expensive proof-of-work algorithms and permit record-keepers to roll back history in order to undo fraudulent reports. While blockchains can keep track of ownership transfers, enforcement of possession rights is often better complemented by centralized record-keeping.
    JEL: D82 E42 G29
    Date: 2018–12
  22. By: Gene M. Grossman; Elhanan Helpman
    Abstract: We characterize trade policies that result from political competition when assessments of well-being include both material and psychosocial components. The material component reflects, as usual, satisfaction from consumption. Borrowing from social identity theory, we take the psychosocial component as combining the pride and self-esteem an individual draws from the status of groups with which she identifies and a dissonance cost she bears from identifying with those that are different from herself. In this framework, changes in social identification patterns that may result, for example, from increased income inequality or heightened racial and ethnic tensions, lead to pronounced changes in trade policy. We analyze the nature of these policy changes.
    JEL: D72 D91 F13
    Date: 2018–12

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