nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒01‒21
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Wisdom of a Confused Crowd:Model-Based Inference By George J. Mailath; Larry Samuelson
  2. Creating platforms by hosting rivals By Hagiu, Andrei; Jullien, Bruno; Wright, Julian
  3. Causality: a decision theoretic approach By Pablo Schenone
  4. Salience and Skewness Preferences By Markus Dertwinkel-Kalt; Mats Köster
  5. Optimal Ownership of Public Goods in the Presence of Transaction Costs By Müller, Daniel; Schmitz, Patrick W.
  6. Endogenous Beliefs and Institutional Structure in Competitive Equilibrium with Adverse Selection By Gerald D. Jaynes
  7. Misinterpreting Others and the Fragility of Social Learning By Mira Frick; Ryota Iijima; Yuhta Ishii
  8. Contract design with limited commitment By Gretschko, Vitali; Wambach, Achim
  9. Relational Communication By Anton Kolotilin; Hongyi
  10. Pollution Claim Settlements Reconsidered: Hidden Information and Bounded Payments By Goldlücke, Susanne; Schmitz, Patrick W.
  11. Carrots and Sticks: Optimal Contracting with Skewness Preference and Ambiguity Aversion By Joaquín Gómez Miñambres; Mark Schneider
  12. The Olson conjecture for discrete public goods By Nöldeke, Georg; Peña, Jorge
  13. Generalizing mechanism design theory to a case where agents' types are adjustable By Wu, Haoyang
  14. Do transfer pricing rules distort R&D investment decisions? By Bornemann, Tobias
  15. Incomplete Contracts, Shared Ownership, and Investment Incentives By Schmitz, Patrick W.
  16. Learning and Selfconfirming Equilibria in Network Games By Pierpaolo Battigalli; Fabrizio Panebianco; Paolo Pin
  17. Organizational Equilibrium with Capital By Marco Bassetto; Zhen Huo; José-Víctor Ríos-Rull
  18. Selling Complementary Goods: Information and Products By Suehyun Kwon
  19. Strategies under strategic uncertainty By Mass, Helene
  20. Dynamic Vertical Foreclosure By Chiara Fumagalli; Massimo Motta

  1. By: George J. Mailath (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, Yale University)
    Abstract: “Crowds” are often regarded as “wiser” than individuals, and prediction markets are often regarded as effective methods for harnessing this wisdom. If the agents in prediction markets are Bayesians who share a common model and prior belief, then the no-trade theorem implies that we should see no trade in the market. But if the agents in the market are not Bayesians who share a common model and prior belief, then it is no longer obvious that the market outcome aggregates or conveys information. In this paper, we examine a stylized prediction market comprised of Bayesian agents whose inferences are based on different models of the underlying environment. We explore a basic tension—the differences in models that give rise to the possibility of trade generally preclude the possibility of perfect information aggregation.
    Keywords: Wisdom of the Crowd, Information aggregation, Common prior, NonBayesian updating
    Date: 2019–01–16
  2. By: Hagiu, Andrei; Jullien, Bruno; Wright, Julian
    Abstract: We explore conditions under which a multiproduct firm can profitably turn itself into a platform by "hosting rivals", i.e. by inviting rivals to sell products or services on top of its core product. Hosting eliminates the additional shopping costs to consumers of buying a specialist rival's competing version of the multiproduct firm's non-core product. On the one hand, this makes it easier for the rival to compete on the non-core product. On the other hand, hosting turns the rival from a pure competitor into a complementor: the value added by its product now helps raise consumer demand for the multi-product firm's core product. As a result, hosting can be both unilaterally profitable for the multi-product firm and jointly profitable for both firms.
    JEL: D4 L1 L5
    Date: 2018–11
  3. By: Pablo Schenone
    Abstract: We propose a decision-theoretic model akin to Savage (1972) that is useful for defining causal effects. Within this framework, we define what it means for a decision maker (DM) to act as if the relation between the two variables is causal. Next, we provide axioms on preferences and show that these axioms are equivalent to the existence of a (unique) Directed Acyclic Graph (DAG) that represents the DM's preference. The notion of representation has two components: the graph factorizes the conditional independence properties of the DM's subjective beliefs, and arrows point from cause to effect. Finally, we explore the connection between our representation and models used in the statistical causality literature (for example, Pearl (1995)).
    Date: 2018–12
  4. By: Markus Dertwinkel-Kalt; Mats Köster
    Abstract: Whether people seek or avoid risks on gambling, insurance, asset, or labor markets crucially depends on the skewness of the underlying probability distribution. In fact, people typically seek positively skewed risks and avoid negatively skewed risks. We show that salience theory of choice under risk can explain this preference for positive skewness, because unlikely, but outstanding payoffs attract attention. In contrast to alternative models, however, salience theory predicts that choices under risk not only depend on the absolute skewness of the available options, but also on how skewed these options appear to be relative to each other. We exploit this fact to derive novel, experimentally testable predictions that are unique to the salience model and that we find support for in two laboratory experiments. We thereby argue that skewness preferences—typically attributed to cumulative prospect theory—are more naturally accommodated by salience theory.
    Keywords: salience theory, cumulative prospect theory, skewness preferences
    JEL: D81
    Date: 2018
  5. By: Müller, Daniel; Schmitz, Patrick W.
    Abstract: A non-governmental organization (NGO) can make a non-contractible investment to provide a public good. Only ownership can be specified ex ante, so ex post efficiency requires reaching an agreement with the government. Besley and Ghatak (2001) argue that the party with the larger valuation should be the owner. We show that when transaction costs have to be incurred before the bargaining stage can be reached, ownership by the government can be optimal even when the NGO has a larger valuation. Our finding also contrasts with the standard private-good setup where the investing party (i.e., the NGO) should always be the owner.
    Keywords: Transaction costs Public goods Property rights Bargaining Incomplete contracts
    JEL: C78 D23 D86 H41 L31
    Date: 2017
  6. By: Gerald D. Jaynes (Department of Economics, Yale University)
    Abstract: I model ?nancial markets that structure decision-making into discrete points separating contract o?ers, applications, and acceptance/denial decisions. Endogenous beliefs about applicants’ risk types emerge as the institutional process extracts private information allowing uninformed ?rms to infer risk qualities by comparing applications of many consumers. Endogenous beliefs and low-risk consumer behavior render truthful disclosure of transactions incentive compatible supporting a unique equilibrium robust to cream-skimming and cross-subsidizing deviations, even under Hellwig’s “secret” policy assumption. In equilibrium each type demands low-risk’s optimal pooling policy and high-risk supplement to full coverage at fair-price. Nonpassive consumers’ belief ?rms are sequentially rational necessary for equilibrium; lemon equilibrium with only high-risk insured possible.
    Keywords: Adverse selection, Sequential rationality, Screening, Signaling, Incentive compatibility, Insurance pooling
    JEL: D82 G22
    Date: 2018–12
  7. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yuhta Ishii (Centro de Investigación Económica, ITAM)
    Abstract: We study to what extent information aggregation in social learning environments is robust to slight misperceptions of others’ characteristics (e.g., tastes or risk attitudes). We consider a population of agents who obtain information about the state of the world both from initial private signals and by observing a random sample of other agents’ actions over time, where agents’ actions depend not only on their beliefs about the state but also on their idiosyncratic types. When agents are correct about the type distribution in the population, they learn the true state in the long run. By contrast, our first main result shows that even arbitrarily small amounts of misperception can generate extreme breakdowns of information aggregation, wherein the long run all agents incorrectly assign probability 1 to some fixed state of the world, regardless of the true underlying state. This stark discontinuous departure from the correctly specified benchmark motivates independent analysis of information aggregation under misperception. Our second main result shows that any misperception of the type distribution gives rise to a specific failure of information aggregation where agents’ long-run beliefs and behavior vary only coarsely with the state, and we provide systematic predictions for how the nature of misperception shapes these coarse long-run outcomes. Finally, we show that how sensitive information aggregation is to misperception depends on how rich agents’ payoff-relevant uncertainty is. A design implication is that information aggregation can be improved through interventions aimed at simplifying the agents’ learning environment.
    Keywords: Misspecification, Social learning, Information aggregation, Fragility
    JEL: C70 D80 D83
    Date: 2019–01
  8. By: Gretschko, Vitali; Wambach, Achim
    Abstract: We consider the problem of a principal who wishes to contract with a privately informed agent and is not able to commit to not renegotiating any mechanism. That is, we allow the principal, after observing the outcome of a mechanism to renegotiate the resulting contract without cost by proposing a new mechanism any number of times. We provide a general characterization of renegotiation-proof states of such a renegotiation. The proposed solution concept provides an effective and easy-to-use tool to analyze contracting problems with limited commitment. We apply the solution concept to a setting with a continuous type space, private values and non-linear contracts. We find that the optimal contracts for the principal are pooling and satisfy a "no-distortionat-the-bottom" property.
    Keywords: Principal-Agent models,renegotiation,commitment,Coase-conjecture
    JEL: C72 C73 C78 D82
    Date: 2018
  9. By: Anton Kolotilin (School of Economics, UNSW Business School); Hongyi (School of Economics, UNSW Business School)
    Abstract: We study a communication game between an informed sender and an uninformed receiver with repeated interactions and voluntary transfers. Transfers motivate the receiver's decision-making and signal the sender's information. Although full separation can always be supported in equilibrium, partial or complete pooling is optimal if the receiver's decision-making is highly responsive to information. In this case, the receiver's decision-making is disciplined by pooling extreme states, where she is most tempted to defect. In characterizing optimal equilibria, we establish new results on monotone persuasion.
    Keywords: strategic communication, monotone persuasion, relational contracts
    JEL: C73 D82 D83
    Date: 2019–01
  10. By: Goldlücke, Susanne; Schmitz, Patrick W.
    Abstract: A principal's production decision imposes a negative externality on an agent. The principal may be a pollution-generating firm, the agent may be a nearby town. The principal offers a contract to the agent, who has the right to be free of pollution. Then the agent privately learns the disutility of pollution. Finally, a production level and a transfer payment are implemented. Suppose there is an upper bound (possibly zero) on payments that the agent can make to the principal. In the second-best solution, there is underproduction for low cost types, while there is overproduction for high cost types. In contrast to standard adverse selection models of pollution claim settlements, there may thus be too much pollution compared to the first-best solution.
    Keywords: Coasian contracting; negative externalities; hidden information; limited liability; overproduction
    JEL: D23 D62 D82 D86 H23
    Date: 2018
  11. By: Joaquín Gómez Miñambres (Lafayette College); Mark Schneider (University of Alabama)
    Abstract: Employment contracts often have a three-tiered structure, offering a base salary, a bonus for high performance and a penalty for poor performance. None of the standard models in contract theory generate such a contract. We show that such coarse contracts are optimal in a model where the agent exhibits two of the most robust deviations from expected utility theory: skewness preference and ambiguity aversion. The analysis identifies conditions where the optimal contract is simple and both carrots and sticks are optimal. Our analysis has implications for performance evaluation, corporate compensation structure, prize-linked savings accounts, and the determinants of intrinsic motivation.
    Keywords: Contract theory; Skewness Preference; Ambiguity Aversion; Simple Contracts
    JEL: D9 D86
    Date: 2019
  12. By: Nöldeke, Georg; Peña, Jorge
    Abstract: We consider the private provision of a public good with non-refundable binary contributions. A fixed amount of the good is provided if and only if the number of contributors reaches an exogenous threshold. The threshold, the group size, and the identical cost of contributing to the public good are common knowledge. Our main result shows that the maximal probability of reaching the threshold (and thereby obtaining the public good) which can be supported in a symmetric equilibrium of this participation game is decreasing in group size. This generalizes a well-known result for the volunteer’s dilemma – in which the threshold is one – to arbitrary thresholds and thereby confirms a conjecture by Olson for the class of participation games under consideration. Further results characterize the limit when group size goes to infinity and provide conditions under which the expected number of contributors is decreasing or increasing in group size.
    Keywords: Participation games; Private provision of public goods; Group-size effects; Olson conjecture
    Date: 2018–11
  13. By: Wu, Haoyang
    Abstract: In mechanism design theory, a designer would like to implement a desired social choice function which specifies her favorite outcome for each possible profile of all agents' types. Since the designer does not know each agent's private type, what she can do is to construct a mechanism and choose an outcome after observing a profile of agents' strategies. There is a dilemma in the sense that even if the designer is not satisfied with some outcome, she has to obey the mechanism designed by herself and announce this outcome. In this paper, we generalize the mechanism design theory to a case where the designer can take some action to actively adjust agents' private types, and yield a more favorite outcome. After defining a series of notions such as adjustable types, optimal adjustment cost and profitably Bayesian implementability, we propose that the traditional notion of Bayesian incentive compatibility does not hold in this generalized case. Finally, we construct a model to illustrate that the auctioneer can obtain an expected profit greater than what she obtains in the traditional optimal auction.
    Keywords: Mechanism design; Optimal auction; Bayesian Nash implementation.
    JEL: D71
    Date: 2018–12–24
  14. By: Bornemann, Tobias
    Abstract: This study analyzes the impact of transfer pricing on multinational enterprises' R&D investment decisions. Specifically, I examine the effects of two commonly used contract designs to exchange and develop intangible assets across group affiliates: licensing and cost sharing agreements. Whilst serving as a tool to allocate taxable income between group affiliates, the economic implications of licensing and cost sharing agreements differ. Whereas licensing agreements provide for a sharing rule on the intangible's profits, cost sharing agreements on the other hand provide a sharing rule on R&D development costs. This difference matters when firms simultaneously use internal transfer prices to allocate taxable income and provide local management with sufficient investment incentives. Using a multiple-agent, moral hazard investment framework I model a multinational firm with comparable group affiliates in two countries that delegates the R&D investment decision to a local risk and effort averse affiliate manager. The results suggest that the optimal contract not only depends on available tax benefits, but also on R&D investment and manager specific characteristics. A licensing agreement provides management with larger incentives to invest in R&D mitigating agency concerns associated with R&D. On the other hand, using a cost sharing agreement the firm can cater different risk preferences among managers potentially increasing investment. The arm's length principle however may distort an efficient allocation of R&D costs when using a cost sharing agreement.
    Keywords: transfer pricing,R&D investment,taxes
    JEL: H21 H25
    Date: 2018
  15. By: Schmitz, Patrick W.
    Abstract: Consider a partnership consisting of two symmetrically informed parties who may each own a share of an asset. It is ex post efficient that tomorrow the party with the larger valuation gets the asset. Yet, today the parties can make investments to enhance the asset's productivity. Contracts are incomplete, so today only the ownership structure can be specified, which may be renegotiated tomorrow. It turns out that shared ownership is often optimal. If the investments are embodied in the physical asset, it may be optimal that party B has a larger ownership share even when party A has a larger valuation and a better investment technology. When shared ownership is taken into account, joint ownership in the sense of bilateral veto power cannot be optimal, regardless of whether the investments are in human capital or in physical capital.
    Keywords: property rights, incomplete contracts, investment incentives, partnership dissolution, shared ownership
    JEL: C78 D23 D86 L24 O32
    Date: 2017
  16. By: Pierpaolo Battigalli; Fabrizio Panebianco; Paolo Pin
    Abstract: Consider a set of agents who play a network game repeatedly. Agents may not know the network. They may even be unaware that they are interacting with other agents in a network. Possibly, they just understand that their payoffs depend on an unknown state that in reality is an aggregate of the actions of their neighbors. Each time, every agent chooses an action that maximizes her subjective expected payoff and then updates her beliefs according to what she observes. In particular, we assume that each agent only observes her realized payoff. A steady state of such dynamic is a selfconfirming equilibrium given the assumed feedback. We characterize the structure of the set of selfconfirming equilibria in network games and we relate selfconfirming and Nash equilibria. Thus, we provide conditions on the network under which the Nash equilibrium concept has a learning foundation, despite the fact that agents may have incomplete information. In particular, we show that the choice of being active or inactive in a network is crucial to determine whether agents can make correct inferences about the payoff state and hence play the best reply to the truth in a selfconfirming equilibrium. We also study learning dynamics and show how agents can get stuck in non{Nash selfconfirming equilibria. In such dynamics, the set of inactive agents can only increase in time, because once an agent finds it optimal to be inactive, she gets no feedback about the payoff state, hence she does not change her beliefs and remains inactive. JEL classification codes: C72, D83, D85.
    Date: 2018
  17. By: Marco Bassetto; Zhen Huo; José-Víctor Ríos-Rull
    Abstract: This paper proposes a new equilibrium concept – organizational equilibrium – for models with state variables that have a time-inconsistency problem. The key elements of this equilibrium concept are: (1) agents are allowed to ignore the history and restart the equilibrium; (2) agents can wait for future agents to start the equilibrium. We apply this equilibrium concept to a quasi-geometric discounting growth model and to a problem of optimal dynamic fiscal policy. We find that the allocation gradually transits from that implied by its Markov perfect equilibrium towards that implied by the solution under commitment, but stopping short of the Ramsey outcome. The feature that the time inconsistency problem is resolved slowly over time rationalizes the notion that good will is valuable but has to be built gradually.
    JEL: C73 E61 E62
    Date: 2018–12
  18. By: Suehyun Kwon
    Abstract: This paper studies optimal mechanisms for selling complementary goods sequentially. The seller starts with private information, has limited commitment and offers in the first period a menu of information structures on the value of the second-period product. Fully revealing the seller type in the first period makes the second period a standard adverse selection problem, and fully revealing the buyer type in the first period makes the second period an information design problem. Among properties of equilibria, all types of seller must pool in every equilibrium if certain first-order stochastic dominance and independence conditions are satisfied.
    Keywords: information design, dynamic informed-principal problem, interdependent values, limited commitment, Myerson-Satterthwaite
    Date: 2018
  19. By: Mass, Helene
    Abstract: I investigate the decision problem of a player in a game of incomplete information who faces uncertainty about the other players' strategies. I propose a new decision criterion which works in two steps. First, I assume common knowledge of rationality and eliminate all strategies which are not rationalizable. Second, I apply the maximin expected utility criterion. Using this decision criterion, one can derive predictions about outcomes and recommendations for players facing strategic uncertainty. A bidder following this decision criterion in a first-price auction expects all other bidders to bid their highest rationalizable bid given their valuation. As a consequence, the bidder never expects to win against an equal or higher type and resorts to win against lower types with certainty.
    Keywords: Auctions,Incomplete Information,Informational Robustness,Rationalizability
    JEL: C72 D81 D82 D83
    Date: 2018
  20. By: Chiara Fumagalli (Università Bocconi, CSEF and CEPR); Massimo Motta (ICREA-Universitat Pompeu Fabra and Barcelona Graduate School of Economics)
    Abstract: This paper shows that vertical foreclosure can have a dynamic rationale. By refusing to supply an efficient downstream rival, a vertically integrated incumbent sacrifices current profits but can exclude the rival by depriving it of the critical profits it needs to be successful. In turn, monopolizing the downstream market may prevent the incumbent from losing most of its future profits because: (a) it allows the incumbent to extract more rents from an efficient upstream rival if future upstream entry cannot be discouraged; or (b) it also deters future upstream entry by weakening competition for the input and reducing the post-entry profits of the prospective upstream competitor.
    Keywords: Inefficient foreclosure, Refusal to supply, Scale economies, Exclusion, Monopolization
    JEL: K21 L41
    Date: 2019–01–14

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