nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒02‒04
38 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Optimal Delegation Under Unknown Bias: The Role of Concavity By Tanner, Noam
  2. Dynamic Expert Incentives: Complementarity and Substitutability in Information Acquisition By Tsz-Ning Wong; Lily Ling Yang
  3. Skewed Information Transmission By Francesc Dilmé
  4. Linear voting rules By Hans Peter Grüner; Thomas Tröger
  5. Monotone Global Games By Eric J. Hoffmann; Tarun Sabarwal
  6. Repetition and cooperation: A model of finitely repeated games with objective ambiguity By Demeze-Jouatsa, Ghislain-Herman
  7. Strategic cautiousness as an expression of robustness to ambiguity By Gabriel Ziegler; Peio Zuazo-Garin
  8. Sweet Lemons: Mitigating Collusion in Organizations By Colin von Negenborn; Martin Pollrich
  9. Full surplus extraction in mechanism design with information disclosure By Daniel Kraehmer;
  10. A Theory of Auctions with Endogenous Valuations By Benny Moldovanu; Alex Gershkov; Philipp Strack
  11. A complete folk theorem for finitely repeated games By Demeze-Jouatsa, Ghislain-Herman
  12. Dynamic Consistency in Incomplete Information Games with Multiple Priors By Pahlke, Marieke
  13. Consumer Search with and without Tracking By Marcel Preuss
  14. Relational Communication By Anton Kolotilin; Hongyi Li
  15. Conditional Optimal Stopping: A Time-Inconsistent Optimization By Marcel Nutz; Yuchong Zhang
  16. English versus Vickrey auctions with loss averse bidders By von Wangenheim, Jonas
  17. An Aggregative Games Approach to Merger Analysis in Multiproduct-Firm Oligopoly By Volker Nocke; Nicolas Schutz
  18. Managing Competition on a Two-Sided Platform By Paul Belleflamme; Martin Peitz
  19. Relevant Decision Problems and Value of Information By Lily Ling Yang
  20. Assigning an unpleasant task without payment By Susanne Goldlücke; Thomas Tröger
  21. Deception and Competition in Search Markets By Tobias Gamp; Daniel Kraehmer
  22. Toward a coherent policy on cartel damages By Jens-Uwe Franck; Martin peitz
  23. Equilibria under Knightian Price Uncertainty By Beißner, Patrick; Riedel, Frank
  24. Two Stage 2 × 2 Games With Strategic Substitutes and Strategic Heterogeneity By Tarun Sabarwal; Hao VuXuan
  25. On the convexity of preferences in decisions and games under (quasi-)convex/concave imprecise probability correspondences By Giuseppe De Marco
  26. Auctions with selective entry By Gentry, Matthew; Li, Tong; Lu, Jingfeng
  27. Platform Competition: Who Benefits from Multihoming? By Paul Belleflamme; Martin Peitz
  28. Cheap talk, monitoring and collusion By David Spector
  29. Dynamically Consistent α-Maxmin Expected Utility By Beißner, Patrick; Lin, Qian; Riedel, Frank
  30. Do Coalitions Matter in Designing Institutions? By Korpela, Ville; Lombardi, Michele; Vartiainen, Hannu
  31. RPS(1) Preferences By Misha Perepelitsa
  32. Epistemic Game Theory without Types Structures: An Application to Psychological Games By Pierpaolo Battigalli; Roberto Corrao; Federico Sanna
  33. Collusion with intertemporal price dispersion By de Roos, Nicholas; Smirnov, Vladimir
  34. The Fine Print in Smart Contracts By Joshua S. Gans
  35. Regret Theory and Salience Theory: Total Strangers, Distant Relatives or Close Cousins? By Fabian Herweg; Daniel Müller
  36. Asymmetric Yardstick Competition: Traditional Procurement versus Public-Private Partnerships By Giuseppe Di Liddo; Annalisa Vinella
  37. Noisy Memory and Over-Reaction to News By Rava Azeredo da Silveira; Michael Woodford
  38. How to Set Budget Caps for Competitive Grants By Alessandro De Chiara; Elisabetta Iossa

  1. By: Tanner, Noam (Federal Reserve Bank of Boston)
    Abstract: A principal is uncertain of an agent's preferences and cannot provide monetary transfers. The principal, however, does control the discretion granted to the agent. In this paper, we provide a simple characterization of when it is optimal for the principal to screen by offering different terms of discretion to the agent. When the principal's utility is sufficiently concave, it is optimal for the principal to pool and to offer all agents the same discretion. Thus, for any number of agents and any distribution over agent preferences, the optimal contract is simple: the principal sets a cap and forbids actions above this cap (interval delegation). For less concave preferences, it is optimal for the principal to screen. The principal benefits by providing agents a choice between interval delegation and gap delegation, which allows for more extreme actions but prohibits intermediate actions. Moreover, we provide new intuition for the optimality of interval delegation when the principal knows the agent's preferences: the payoff distributions generated by sets containing gaps are mean-preserving spreads of those generated by intervals.
    Keywords: Optimal delegation; Sequential screening; Dynamic mechanism design; Non-transferable utility
    JEL: D02 D20 D82 D86
    Date: 2018–03–30
  2. By: Tsz-Ning Wong; Lily Ling Yang
    Abstract: We consider a model of dynamic expertise, in which two experts with the same bias exert efforts over time to discover the state of the world and are able to send verifiable messages about the discovery to a decision maker. We propose a definition of strategic complementarity and substitutability in this setting and find that the experts' information acquisition decisions are always substitutes when the experts are homogeneous, but sometimes complements when the experts are heterogeneous.
    Keywords: Information Acquisition; Persuasion; Voluntary Disclosure; Free-riding
    JEL: D82 D83
    Date: 2018–06
  3. By: Francesc Dilmé
    Abstract: This paper analyzes strategic information transition between skewed agents. More concretely, we study the Crawford and Sobel (1982) setting in the case where agents are not biased, but they differ on the relative importance they put on avoiding "upward" or "downward" mistakes. We show that, even though the agents could fully communicate when the state of the world was perfectly observed by the sender, the information transmission is significantly imprecise in any equilibrium when there is a small noise in the observation. Hence, contrary to what was previous thought, a low objective misalignment is not sufficient for precise equilibrium communication.
    Keywords: Strategic Communication, Skewed Preferences
    JEL: C72 D82 D83
    Date: 2018–07
  4. By: Hans Peter Grüner; Thomas Tröger
    Abstract: How should a society choose between two social alternatives if participation in the decision process is voluntary and costly and monetary transfers are not feasible? Considering symmetric voters with private valuations, we show that it is utilitarian-optimal to use a linear voting rule: votes get alternativedependent weights, and a default obtains if the weighted sum of votes stays below some threshold. Standard quorum rules are not optimal. We develop a perturbation method to characterize equilibria in the case of small participation costs and show that leaving participation voluntary increases welfare for linear rules that are optimal under compulsory participation.
    JEL: D72 D82
    Date: 2018–01
  5. By: Eric J. Hoffmann (Department of Accounting, Economics and Finance, West Texas A&M University); Tarun Sabarwal (Department of Economics, The University of Kansas)
    Abstract: We extend the global games method to finite player, finite action, monotone games. These games include games with strategic complements, games with strategic substitutes, and arbitrary combinations of the two. Our result is based on common order properties present in both strategic complements and substitutes, the notion of p-dominance, and the use of dominance solvability as the solution concept. In addition to being closer to the original arguments in Carlsson and van Damme (1993), our approach requires fewer additional assumptions. In particular, we require only one dominance region, and no assumptions on state monotonicity, or aggregative structure, or overlapping dominance regions. As expected, the p-dominance condition becomes more restrictive as the number of players increases. In cases where the probabilistic burden in belief formation may be reduced, the p-dominance condition may be relaxed as well. We present some examples that are not covered by existing results.
    Keywords: Global games, strategic complements, strategic substitutes, monotone games, equilibrium selection
    JEL: C70 C72
    Date: 2018–12
  6. By: Demeze-Jouatsa, Ghislain-Herman (Center for Mathematical Economics, Bielefeld University)
    Abstract: In this paper, we present a model of finitely repeated games in which players can strategically make use of objective ambiguity. In each round of a finite rep- etition of a finite stage-game, in addition to the classic pure and mixed actions, players can employ objectively ambiguous actions by using imprecise probabilistic devices such as Ellsberg urns to conceal their intentions. We find that adding an infinitesimal level of ambiguity can be enough to approximate collusive payoffs via subgame perfect equi- librium strategies of the finitely repeated game. Our main theorem states that if each player has many continuation equilibrium payoffs in ambiguous actions, any feasible pay- off vector of the original stage-game that dominates the mixed strategy maxmin payoff vector is (ex-ante and ex-post) approachable by means of subgame perfect equilibrium strategies of the finitely repeated game with discounting. Our condition is also necessary.
    Keywords: Objective Ambiguity, Ambiguity Aversion, Finitely Repeated Games, Subgame Perfect Equilibrium, Ellsberg Urns, Ellsberg Strategies
    Date: 2018–08–13
  7. By: Gabriel Ziegler; Peio Zuazo-Garin
    Abstract: Economic predictions often hinge on two intuitive premises: agents rule out the possibility of others choosing unreasonable strategies (‘strategic reasoning’), and prefer strategies that hedge against unexpected behavior (‘cautiousness’). These two premises conflict and this undermines the compatibility of usual economic predictions with reasoning-based foundations. This paper proposes a new take on this classical tension by interpreting cautiousness as robustness to ambiguity. We formalize this via a model of incomplete preferences, where (i) each player’s strategic uncertainty is represented by a possibly non-singleton set of beliefs and (ii) a rational player chooses a strategy that is a best-reply to every belief in this set. We show that the interplay between these two features precludes the conflict between strategic reasoning and cautiousness and therefore solves the inclusion-exclusion problem raised by Samuelson (1992). Notably, our approach provides a simple foundation for the iterated elimination of weakly dominated strategies
    Keywords: Game theory, decision theory, ambiguity, Knightian uncertainty, incomplete preferences, Bayesian rationality, cautiousness, iterated admissibility
    JEL: C72 D82
    Date: 2019–01
  8. By: Colin von Negenborn; Martin Pollrich
    Abstract: This paper shows that the possibility of collusion between an agent and a supervisor imposes no restrictions on the set of implementable social choice functions (SCF) and associated payoff vectors. Any SCF and any payoff profile that are implementable if the supervisor’s information was public is also implementable when this information is private and collusion is possible. To implement a given SCF we propose a one-sided mechanism that endogenously creates private information for the supervisor vis-Ã -vis the agent, and conditions both players’ payoffs on this endogenous information. We show that in such a mechanism all collusive side-bargaining fails, similar to the trade failure in Akerlof’s (1970) car market and in models of bilateral trade.
    Keywords: Mechanism Design, Collusion, Asymmetric Information, Correlation
    JEL: D82 D83 L51
    Date: 2018–05
  9. By: Daniel Kraehmer;
    Abstract: I study mechanism design settings with quasi-linear utility where the principal can provide agents with additional private information about their valuations beyond the private information they hold at the outset. I demonstrate that the principal can design information and a mechanism so as to fully extract the complete information first-best surplus if agents’ ex ante information only affects their beliefs about, yet not their valuations. Otherwise, the result holds if each agent’s initial private beliefs satisfy a spanning condition.
    Keywords: information design, mechanism design, quasi-linear utility, rent extraction
    JEL: D82 H57
    Date: 2018–04
  10. By: Benny Moldovanu; Alex Gershkov; Philipp Strack
    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).
    Keywords: revenue maximization, endogenous values , investments, majorization
    JEL: D44
    Date: 2018–07
  11. By: Demeze-Jouatsa, Ghislain-Herman (Center for Mathematical Economics, Bielefeld University)
    Abstract: I analyze the set of pure strategy subgame perfect Nash equilibria of any finitely repeated game with complete information and perfect monitoring. The main result is a complete characterization of the limit set, as the time horizon increases, of the set of pure strategy subgame perfect Nash equilibrium payoff vectors of the finitely repeated game. The same method can be used to fully characterize the limit set of the set of pure strategy Nash equilibrium payoff vectors of any the finitely repeated game.
    Keywords: Finitely Repeated Games, Pure Strategy, Subgame Perfect Nash Equilibrium, Limit Perfect Folk Theorem, Discount Factor
    Date: 2018–08–13
  12. By: Pahlke, Marieke (Center for Mathematical Economics, Bielefeld University)
    Abstract: This paper generalizes the concept of Sequential Equilibrium to allow for ambiguous incomplete information about types or states. We characterize conditions that ensure existence of Sequential Equilibria under ambiguous incomplete information. Under these conditions players form subjective prior belief sets that satisfy a rectangularity condition which leads to dynamically consistent behavior. Furthermore, we give an example which shows that ambiguity can introduce new Sequential Equilibria.
    Keywords: sequential equilibrium, ambiguity, dynamic consistency, multiple priors, imprecise information
    Date: 2018–08–20
  13. By: Marcel Preuss
    Abstract: In this paper, I develop a tractable framework with sequential consumer search to address the effect of tracking on market outcomes. Tracking search histories is informative about consumers’ valuations because different consumer types have different stopping probabilities. With tracking, the unique equilibrium price path is increasing whereas without tracking, an average uniform price prevails. Welfare effects largely depend on how tracking affects consumers’ search persistence. For intermediate search costs, tracking based price discrimination exacerbates the holdup problem and leads to inefficiently low search persistence. For high search costs instead, tracking prevents a market breakdown as low prices conditional on short search histories secure consumers a positive surplus from search. Tracking prevails endogenously when consumers can dynamically opt out from tracking. This holds since disclosing their search history is always individually rational for consumers, irrespective of the overall effect on consumer surplus.
    Keywords: consumer search, privacy, dynamic price discrimination
    JEL: D11 D18 D83 L13 L86
    Date: 2018–05
  14. By: Anton Kolotilin; Hongyi Li
    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.
    Date: 2019–01
  15. By: Marcel Nutz; Yuchong Zhang
    Abstract: Inspired by recent work of P.-L. Lions on conditional optimal control, we introduce a problem of optimal stopping under bounded rationality: the objective is the expected payoff at the time of stopping, conditioned on another event. For instance, an agent may care only about states where she is still alive at the time of stopping, or a company may condition on not being bankrupt. We observe that conditional optimization is time-inconsistent due to the dynamic change of the conditioning probability and develop an equilibrium approach in the spirit of R. H. Strotz' work for sophisticated agents in discrete time. Equilibria are found to be essentially unique in the case of a finite time horizon whereas an infinite horizon gives rise to non-uniqueness and other interesting phenomena. We also introduce a theory which generalizes the classical Snell envelope approach for optimal stopping by considering a pair of processes with Snell-type properties.
    Date: 2019–01
  16. By: von Wangenheim, Jonas
    Abstract: Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectation-based loss aversion (Köszegi and Rabin (2006, 2009)) in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that - even with independent private values - the Vickrey auction yields strictly higher revenue than the English auction, violating the well known revenue equivalence. Thus, dynamic loss aversion offers a novel explanation for empirically observed differences between these auction formats.
    Keywords: Vickrey auction,English auction,expectation-based loss aversion,revenue equivalence,dynamic loss aversion,personal equilibrium
    JEL: D03 D44
    Date: 2019
  17. By: Volker Nocke; Nicolas Schutz
    Abstract: Using an aggregative games approach, we analyze horizontal mergers in a model of multiproduct-firm price competition with nested CES or nested logit demands. We show that the Herfindahl index provides an adequate measure of the welfare distortions introduced by market power, and that the induced change in the naively-computed Herfindahl index is a good approximation for the market power effect of a merger. We also provide conditions under which a merger raises consumer surplus, and conditions under which a myopic, consumer-surplus-based merger approval policy is dynamically optimal. Finally, we study the aggregate surplus and external effects of a merger.
    Date: 2018–06
  18. By: Paul Belleflamme; Martin Peitz
    Abstract: On many two-sided platforms, users on one side not only care about user participation and usage levels on the other side, but they also care about participation and usage of fellow users on the same side. Most prominent is the degree of seller competition on a platform catering to buyers and sellers. In this paper, we address how seller competition affects platform pricing, product variety, and the number of platforms that carry trade.
    Keywords: Network effects, two-sided markets, platform competition, intermediation, pricing, imperfect competition
    JEL: D43 L13 L86
    Date: 2018–07
  19. By: Lily Ling Yang
    Abstract: In this paper, we employ a novel approach to study the value of information in games. A decision problem is relevant to another if the optimal decision rule of the former, when applied to the latter, is better than making a decision without any information in the latter. In a game, if the problem originally faced by a player is relevant to the problem induced by a change of the situation, the player benefits more from her own information after the change. Using the notion of relevance, we study the value of information in various games, even when a closed form solution is not available.
    Keywords: Value of information, Quadratic game, Global game, Persuasion game
    JEL: D81 D83
    Date: 2018–06
  20. By: Susanne Goldlücke; Thomas Tröger
    Abstract: How should a group of people decide to allocate a task that has to be done but is not adequately rewarded? This paper finds an optimal mechanism for the private provision of a public service in an environment without monetary transfers. All members of the group have the same cost of providing the service, but some individuals are better suited for the task than others. The optimal mechanism is a threshold rule that assigns the task randomly among volunteers if enough volunteers come forward, and otherwise assigns the task among the non-volunteers.
    Keywords: Volunteering; public good provision; mechanism design
    JEL: D82 D71 D62 H41
    Date: 2018–02
  21. By: Tobias Gamp; Daniel Kraehmer
    Abstract: We study the interplay between deception and consumer search in a search market where firms may deceive some naive consumers with inferior products that display hidden (bad) attributes. We derive an equilibrium in which both superior and inferior quality is offered and show that as search frictions vanish, superior goods are entirely driven out of the market. Deception harms sophisticated consumers, as it forces them to search longer to find a superior product. We argue that policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare. In contrast, reducing the number of naive consumers through transparency policies and education campaigns as well as a minimum quality standard can improve welfare.
    Keywords: Deceptive product, Inferior product, Naivete, Consumer Search
    JEL: D18 D21 D43 D83
    Date: 2018–05
  22. By: Jens-Uwe Franck; Martin peitz
    Abstract: The focus of cartel damages law is on the recovery of the cartel overcharge. Parties other than purchasers are often neglected, not only as a matter of judicial practice, but also due to legal restrictions. We argue that a narrow concept of standing—which excludes parties that supply either the cartel or the firms that purchase from the cartel with complementary product components—falls short of achieving effective antitrust enforcement and corrective justice in the best possible way. We provide a framework with two complementary products and show that under neither competition nor cartelization do the allocation and the distribution of surpluses depend on whether producers of complements purchase from the cartel or supply the cartel or the cartel’s customers. Thus, we argue that prima facie producers of complements should be treated alike, regardless of their position in the supply chain. Moreover, based on various factors that determine the enforcement effect of antitrust damages claims and their role as an instrument to achieve corrective justice, we show that a broad concept of standing is, indeed, the preferable legal solution. While its implementation would require a change in position by the U.S. federal courts, we submit that it would amount to a consistent completion of the legal framework within the E.U.
    Keywords: Cartel damages, antitrust standing, pass-on, suppliers, complementary goods
    JEL: K21
    Date: 2018–03
  23. By: Beißner, Patrick (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University)
    Abstract: We study economies in which agents face Knightian uncertainty about state prices. Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to Pareto inefficient allocations; the equilibria coincide with Arrow-Debreu equilibria only if the values of net trades are ambiguity-free in the mean. In economies without aggregate uncertainty, inefficiencies are generic. We introduce a constrained efficiency concept, uncertainty-neutral efficiency; equilibrium allocations under price uncertainty are efficient in this constrained sense. Arrow-Debreu equilibria turn out to be non-robust with respect to the introduction of Knightian uncertainty.
    Date: 2018–08–16
  24. By: Tarun Sabarwal (Department of Economics, University of Kansas); Hao VuXuan (Department of Economics, The University of Kansas)
    Abstract: Feng and Sabarwal (2018) show that there is additional scope to study strategic complements in extensive form games, by investigating in detail the case of two stage, 2×2 games. We show the same for two stage, 2 × 2 games with strategic substitutes and with strategic heterogeneity. We characterize strategic substitutes and strategic heterogeneity in such games, and show that the set of each class of games has infinite Lebesgue measure. Our conditions are easy to apply and yield uncountably many examples of such games, indicating greater possibilities for the manifestation and study of these types of interactions. In contrast to the case for strategic complements, we show that generically, the set of subgame perfect Nash equilibria in both classes of games is totally unordered (no two equilibria are comparable). Consequently, with multiple equilibria, some nice features of strategic complements that depend on the complete lattice structure of the equilibrium set may not transfer to the case of strategic substitutes or strategic heterogeneity.
    Keywords: Strategic substitutes, strategic complements, strategic heterogeneity, two stage game, extensive form game
    JEL: C60 C70
    Date: 2018–12
  25. By: Giuseppe De Marco (Università di Napoli Parthenope and CSEF)
    Abstract: The Shafer and Sonnenshein convexity of preferences is a key property in game theory. Previous research has shown that, in case of decisions under uncertainty, the compliance with this property (jointly) depends on the concavity/convexity of the imprecise probabi- listic model with respect to the decision variable and on the attitudes towards imprecision of the decision maker. The present paper deepens the analysis by looking at set-valued imprecise probabilistic models that encompass sets of probability distributions and sets of almost desirable gambles. Moreover, it is shown that the required Shafer and Sonnenshein convexity property is obtained also in case the imprecise probability correspondences satisfy quasi-concavity/convexity with respect to the decision variable so that the set of admissible probabilistic models is significantly broadened. It is well known that sets of probability distributions and sets of almost desirable gambles are general models of representation of uncertainty that are connected to each other; moreover, they are both related to another model known as lower expectation. Therefore, the second part of this work explores the links between the (quasi-)concavity/convexity properties accross the three different models so as to understand to what extent the Shafer and Sonnenshein convexity results hold.
    Keywords: Convex preferences, Imprecise probabilities, quasi-concavity/convexity, set-valued maps
    Date: 2019–01–15
  26. By: Gentry, Matthew; Li, Tong; Lu, Jingfeng
    Abstract: We consider auctions with entry based on a general analytical framework we call the Arbitrarily Selective (AS) model. We characterize symmetric equilibrium in a broad class of standard auctions within this framework, in the process extending the classic revenue equivalence results of Myerson (1981), Riley and Samuelson (1981) and Levin and Smith (1994) to environments with endogenous and arbitrarily selective entry. We also explore the relationship between revenue maximization and efficiency, showing that a revenue maximizing seller will typically employ both higher-than-efficient reservation prices and higher-than-efficient entry fees.
    JEL: J1
    Date: 2017–09–01
  27. By: Paul Belleflamme; Martin Peitz
    Abstract: Competition between two-sided platforms is shaped by the possibility of multihoming. If initially both sides of platform singlehome, each platform provides users on one side exclusive access to its users on the other side. If then one side multihomes, platforms compete on the singlehoming side and exert monopoly power on the multihoming side. This paper explores the allocative effects of such a change from single- to multihoming. Our results challenge the conventional wisdom, according to which the possibility of multihoming hurts the side that can multihome, while benefiting the other side. This in not always true, as the opposite may happen or both sides may benefit.
    Keywords: Network effects, two-sided markets, platform competition, competitive bottleneck, multihoming
    JEL: D43 L13 L86
    Date: 2018–01
  28. By: David Spector (PSE - Paris School of Economics, CNRS - Centre National de la Recherche Scientifique)
    Abstract: Many collusive agreements involve the exchange of self-reported sales data between competitors, which use them to monitor compliance with a target market share allocation. Such communication may facilitate collusion even if it is unverifiable cheap talk and the underlying information becomes publicly available with a delay. The exchange of sales information may allow firms to implement incentive-compatible market share reallocation mechanisms after unexpected swings, limiting the recourse to price wars. Such communication may allow firms to earn profits that could not be earned in any collusive, symmetric pure-strategy equilibrium without communication.
    Date: 2017–12
  29. By: Beißner, Patrick (Center for Mathematical Economics, Bielefeld University); Lin, Qian (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University)
    Abstract: The α-maxmin model is a prominent example of preferences under Knightian uncertainty as it allows to distinguish ambiguity and ambiguity attitude. These preferences are dynamically inconsistent for nontrivial versions of α. In this paper, we derive a recursive, dynamically consistent version of the α-maxmin model. In the continuous-time limit, the resulting dynamic utility function can be represented as a convex mixture between worst and best case, but now at the local, infinitesimal level. We study the properties of the utility function and provide an Arrow- Pratt approximation of the static and dynamic certainty equivalent. We derive a consumption-based capital asset pricing formula and study the implications for derivative valuation under indifference pricing.
    Keywords: Dynamic consistency, α-maxmin expected utility, Knightian uncertainty, ambiguity attitude
    Date: 2018–08–16
  30. By: Korpela, Ville; Lombardi, Michele; Vartiainen, Hannu
    Abstract: In this paper, we re-examine the classical questions of implementation theory under complete information in a setting where coalitions are the fundamental behavioral units and the outcomes of their interactions are predicted by applying the solution concept of the core. The planner's exercise consists of designing a code of rights, which specifies the collection of coalitions that have the right to block one outcome by moving to another. A code of individual rights is a code of rights in which only unit coalitions may have blocking powers. We provide necessary and sufficient conditions for implementation (under core equilibria) by codes of rights as well as by codes of individual rights. We show that these two modes of implementation are not equivalent. This result is proven robust and extends to alternative notions of core, such as that of an externally stable core. Therefore, coalitions are shown to bring value added to institutional design. The characterization results address the limitations that restrict the relevance of existing implementation theory.
    Keywords: core; implementation; blocking powers
    JEL: C71 D70
    Date: 2019–01–10
  31. By: Misha Perepelitsa
    Abstract: We consider a model for decision making based on an adaptive, k-period, learning process where the priors are selected according to Von Neumann-Morgenstern expected utility principle. A preference relation between two prospects is introduced, defined by the condition which prospect is selected more often. We show that the new preferences have similarities with the preferences obtained by Kahneman and Tversky (1979) in the context of the prospect theory. Additionally, we establish that in the limit of large learning period, the new preferences coincide with the expected utility principle.
    Date: 2019–01
  32. By: Pierpaolo Battigalli; Roberto Corrao; Federico Sanna
    Abstract: We consider multi-stage games with incomplete information and observable actions, and we analyze strategic reasoning by means of epistemic events within a total state space made of all the pro les of behaviors (paths of play) and possibly incoherent in nite hierarchies of conditional beliefs. Thus, we do not rely on types structures, or similar epistemic models. Subjective rationality is de ned by the conjunction of coherence of belief hierarchies, rational planning, and consistency between plan and on-path behavior. Since consistent hierarchies uniquely induce beliefs about behavior and belief hierarchies of others, we can de ne rationality and common strong belief in rationality, and analyze their behavioral and low-order beliefs implications, which are characterized by strong rationalizability. Our approach allows to extend known techniques to the epistemic analysis of psychological games where the utilities of outcomes depend on beliefs of order k or lower. This covers almost all applications of psychological game theory. JEL Classification Numbers: C72, C73, D82. Keywords: Epistemic game theory, belief hierarchies, consistency, subjective rationality, strong rationalizability, psychological games.
    Date: 2019
  33. By: de Roos, Nicholas; Smirnov, Vladimir
    Abstract: We develop a theory of optimal collusive intertemporal price dispersion. Dispersion clouds consumer price awareness, encouraging firms to coordinate on dispersed prices. Our theory generates a collusive rationale for price cycles and sales. Patient firms can support optimal collusion at the monopoly price. For less patient firms, monopoly prices must be punctuated with fleeting sales. The most robust structure involves asymmetric price cycles resembling Edgeworth cycles. Low consumer attentiveness enhances the effectiveness of price dispersion by reducing the payoff to deviations involving price reductions. However, for sufficiently low attentiveness, price rises are also a concern, limiting the power of obfuscation.
    Keywords: Collusion; obfuscation; price dispersion.
    Date: 2019–01
  34. By: Joshua S. Gans
    Abstract: One of the purported benefits of blockchain technologies is the ability to house what have been termed ‘smart’ contracts. Such contracts are potentially self-executing depending on the state of information recorded on a blockchain ledger. This paper examines the capabilities of smart contracts from an economic perspective. It is demonstrated that by improving observability and reducing the costs of verification of contract obligation performance, the space of feasible contracts can be enlarged. Moreover, by providing commitments to various monetary payments, a blockchain can potentially create a foundation to house certain mechanisms that have been shown to overcome difficulties of contractual incompleteness. This is demonstrated using a simple international trade environment. Thus, even though smart contracts must respect the incentives of decision-makers in their obligations, they have the potential to use easily verifiable elements to create incentives to reduce hold-up and other contractual difficulties.
    JEL: D86 K12
    Date: 2019–01
  35. By: Fabian Herweg; Daniel Müller
    Abstract: Two non-expected-utility-theory approaches to model decision making under risk are regret theory (Loomes and Sugden, 1982; Bell, 1982) and salience theory (Bordalo, Gennaioli, and Shleifer, 2012). While the psychological underpinning of these two approaches is different, the models share the assumption that within-state comparisons of outcomes across choice options are a key determinant of choice behavior. We investigate the overlap between the two theories and show that salience theory is a special case of regret theory. Moreover, we trace out the relationship be- tween diminishing sensitivity of the salience function and concavity of the choiceless utility function with regard to behavioral implications.
    Keywords: choice under risk, regret theory, salience theory
    JEL: D81 D91
    Date: 2019
  36. By: Giuseppe Di Liddo; Annalisa Vinella
    Abstract: We investigate yardstick competition between local jurisdictions in which pure rent-seeking incumbents undertake an identical infrastructure project choosing be- tween two contractual arrangements with different financing profiles, namely traditional procurement (TP) and public-private partnership (PPP). We show that a mixed regime, in which TP is used in one jurisdiction and PPP in the other, is likely to arise when projects are mildly lucrative, and/or jurisdictions have a moderate fiscal capacity. We find that, in the mixed equilibrium, incumbents provide different levels of public services, face different probabilities of re-election, and obtain different rents. The adoption of different forms of project governance permits incumbents to disguise themselves and undermine voters' ability to assess their performances. Therefore, yardstick competition is hindered, even if jurisdictions display identical revenue capacities.
    Keywords: political yardstick competition, rent seeking, infrastructure projects, traditional procurement, public-private partnership
    JEL: D72 H77
    Date: 2019
  37. By: Rava Azeredo da Silveira; Michael Woodford
    Abstract: We propose a model of optimal decision making subject to a memory constraint. The constraint is a limit on the complexity of memory measured using Shannon’s mutual information, as in models of rational inattention; but our theory differs from that of Sims (2003) in not assuming costless memory of past cognitive states. We show that the model implies that both forecasts and actions will exhibit idiosyncratic random variation; that beliefs will fluctuate forever around the rational-expectations (perfect-memory) beliefs with a variance that does not fall to zero; and that more recent news will be given disproportionate weight. The model provides a simple explanation for a number of features of expectations in laboratory and field settings, most notably apparent over-reaction of both elicited forecasts and spending decisions to transitory fluctuations in economic time series.
    JEL: D91
    Date: 2019–01
  38. By: Alessandro De Chiara (Central European University); Elisabetta Iossa (DEF & CEIS,University of Rome "Tor Vergata")
    Abstract: We study how funding agencies should set budget caps for competitive grants. We show that budget caps influence the researchers' submission strategy and, in particular, whether they steer their project choice towards the agencies' favorite projects, and the level of funds they request. The welfare impact of alternative approaches depends on the level of competition, the cost of public funds and the social value of project implementation.
    Keywords: Competitive Grants, Procurement of Innovation, Project Choice, Research Funding, Research Tournament
    JEL: D8 O25 O30 O31 O38 L2
    Date: 2019–01–24

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