nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒02‒25
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Counterfactuals with Latent Information By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  2. Games with Money and Status: How Best to Incentivize Work By Pradeep Dubey; John Geanakoplos
  3. Sequential Formation of Alliances in Survival Contests By Hideo Konishi; Chen-Yu Pan
  4. Elite Collective Agency and the State By Korkut Alp Erturk
  5. A Functional Approach to Revealed Preference By Mikhail Freer; Cesar Martinelli
  6. It's not my Fault! Self-Confidence and Experimentation By Nina Hestermann; Yves Le Yaouanq
  7. Organizing Competition for the Market By Iossa, Elisabetta; Rey, Patrick; Waterson, Michael
  8. Termination Fees and Contract Design in Public-Private Partnerships By Marco Buso; Cesare Dosi; Michele Moretto
  9. Behavioral Players in a Game By Suehyun Kwon
  10. Partial Language Competence By Hagenbach, Jeanne; Koessler, Frédéric
  11. Organizations with Power-Hungry Agents By Dessein, Wouter; Holden, Richard
  12. Informed-Principal Problem in Mechanisms with Limited Commitment By Suehyun Kwon
  13. How Does Asymmetric Information Create Market Incompleteness? By Anne Eyraud-Loisel
  14. Organizational Capital, Corporate Leadership, and Firm Dynamics By Dessein, Wouter; Prat, Andrea
  15. Elicitation of ambiguous beliefs with mixing bets By Patrick Schmidt
  16. Optimal Privacy-Constrained Mechanisms By Eilat, Ran; Eliaz, Kfir; Mu, Xiaosheng
  17. Experimentation, Learning, and Preemption By Hoppe-Wewetzer, Heidrun C.; Katsenos, Georgios; Ozdenoren, Emre
  18. Existence of solutions to principal-agent problems under general preferences and non-compact allocation space By Guillaume Carlier; Kelvin Shuangjian Zhang
  19. The lattice structure of preference comparison By Gregorio Curello; Ludvig Sinander

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We describe a methodology for making counterfactual predictions when the information held by strategic agents is a latent parameter. The analyst observes behavior which is rationalized by a Bayesian model in which agents maximize expected utility, given partial and differential information about payoff-relevant states of the world. A counterfactual prediction is desired about behavior in another strategic setting, under the hypothesis that the distribution of and agents’ information about the state are held fixed. When the data and the desired counterfactual prediction pertain to environments with finitely many states, players, and actions, there is a finite dimensional description of the sharp counterfactual prediction, even though the latent parameter, the type space, is infinite dimensional.
    Keywords: Counterfactuals, Bayes correlated equilibrium, Information structure, Type space, Linear program
    JEL: C72 D44 D82 D83
    Date: 2019–02
  2. By: Pradeep Dubey (SUNY); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We consider the Rothschild-Stiglitz model of insurance but without the exclusivity constraint. It turns out that there always exists a unique equilibrium, in which the reliable and unreliable consumers take out a primary insurance up to its quantity limit, and the unreliable take out further secondary insurance at a higher premium. We provide a simple proof of this result (extended to multiple types of consumers) with the hope that it may be pedagogically useful.
    Keywords: Non-exclusive insurance, Free entry, Adverse selection, Primary-secondary insurance
    JEL: D43 D82 D86
    Date: 2019–02
  3. By: Hideo Konishi (Boston College); Chen-Yu Pan (Wuhan University)
    Abstract: We consider a sequential formation of alliances à la Bloch (1996) and Okada (1996) followed by a two-stage contest in which alliances first compete with each other, and then the members in the winning alliance compete again for an indivisible prize. In contrast to Konishi and Pan (2019) which adopted an open-membership game as the alliance formation process, alliances are allowed to limit their memberships (excludable alliances). We show that if members' efforts are strongly complementary to each other, there will be exactly two asymmetric alliances the larger alliance is formed first and then the rest of the players form the smaller one. This result contrasts with the one under open membership, where moderate complementarity is necessary to support a two-alliance structure. It is also in stark contrast with Bloch et al. (2006), where they show that a grand coalition is formed in the same game if the prize is divisible and a binding contract is possible to avoid further conflicts after an alliance wins the prize.
    Keywords: contest, alliance, coalition formation, complementarity
    JEL: D23 D72 D74
    Date: 2019–01–31
  4. By: Korkut Alp Erturk
    Abstract: The paper explores how elites can develop capacity for collective agency through coordination. Elites’ challenge is to simultaneously deter the state from abusing power while at the same time relying on it to discipline defectors in their midst. The basic insight holds that the credibility of the state’s threats depends on the cost of carrying them out, which elites can have control over if they can act in tandem. Elites can coordinate in being compliant when the ruler’s threats serve their collective interest which raises the threats’ credibility, while lowering that of those they dislike by their coordinated noncompliance making them costly to carry out.
    Keywords: elite collective agency, state power, coordination, credible threats, subgame imperfect equilibrium
    JEL: C72 D72 D02
    Date: 2019
  5. By: Mikhail Freer; Cesar Martinelli
    Abstract: We develop a systematic, functional approach to revealed preference tests based on completing preferences. Our approach is based on the notion of sequential closure, which generalizes the notion of transitive closure. We show that revealed preference tests developed for various decision theories can be seen as special cases of our approach. We also illustrate the approach constructing revealed preference tests for theories of decision under uncertainty whose revealed preference implications had not been studied before.
    Keywords: Revealed preferences, preference extensions, independence, gambling independence, congruence
    Date: 2018–10
  6. By: Nina Hestermann; Yves Le Yaouanq
    Abstract: We study the inference and experimentation problem of an agent in a situation where the outcomes depend on the individual’s intrinsic ability and on an external variable. We analyze the mistakes made by decision-makers who hold inaccurate prior beliefs about their ability. Overconfident individuals take too much credit for their successes and excessively blame external factors if they fail. They are too easily dissatisfied with their environment, which leads them to experiment in variable environments and revise their self-confidence over time. In contrast, underconfident decision-makers might be trapped in low-quality environments and incur perpetual utility losses.
    Keywords: learning, experimentation, overconfidence, attribution bias
    JEL: D83
    Date: 2019
  7. By: Iossa, Elisabetta; Rey, Patrick; Waterson, Michael
    Abstract: The paper studies competition for the market in a setting where incumbents (and, to a lesser extent, neighboring incumbents) benefit from a cost advantage. The paper first compares the outcome of staggered and synchronous tenders, before drawing the implications for market design. We find that the timing of tenders should depend on the likelihood of monopolization. When monopolization is expected, synchronous tendering is preferable, as it strengthens the pressure that entrants exercise on the monopolist. When instead other firms remain active, staggered tendering is preferable, as it maximizes the competitive pressure that comes from the other firms.
    Keywords: asymmetric auctions; Competition; Dynamic procurement; Incumbency Advantage; local monopoly; staggered contracts; synchronous contracts
    JEL: D44 H40 H57 L43 L51 R48
    Date: 2019–01
  8. By: Marco Buso (Interuniversity Centre for Public Economics (CRIEP) and Interdepartmental Centre G. Levi Cases for Energy, Economics and Technology, University of Padova); Cesare Dosi (Department of Economics and Management, University of Padova and Interuniversity Centre for Public Economics (CRIEP)); Michele Moretto (Department of Economics and Management, University of Padova)
    Abstract: We study the effects of granting an exit option that enables the private party to early terminate a PPP project if it turns out to be loss-making. In a continuous time setting with hidden information about stochastic operating profits, we show that a revenue-maximizing government can optimally trade-off direct subsidies for capital investment against the right of opting out the PPP. In particular, the exit option, acting as a risk-sharing device, can soften agency problems and increase the value-for-money of public spending, even while taking into account the budgetary resources needed to resume the project in the event of early termination by the contractor.
    Keywords: Public Projects, Public-private Partnerships, Adverse Selection, Real Options, Investment Timing, Termination Fees
    JEL: D81 D82 D86 H54
    Date: 2018–12
  9. By: Suehyun Kwon
    Abstract: This paper points out issues with having behavioral players together with fully rational players in a game. One example of behavioral players is naive or sophisticated players; one can study higher-order beliefs when sophistication is the first-order belief, but the paper also considers alternative ways of modelling the type space and non-Bayesian updating. The paper shows that players must have heterogeneous priors and this type of heterogeneous priors cannot be justified by acquiring private information from the common prior. Furthermore, equilibrium definitions need to be modified for games with behavioral players.
    Keywords: naivete, misspecified beliefs, heterogeneous priors, higher-order beliefs, equilibrium definition, Harsanyi doctrine
    Date: 2019
  10. By: Hagenbach, Jeanne; Koessler, Frédéric
    Abstract: This paper proposes an equilibrium concept, Language-Based Expectation Equilibrium, which accounts for partial language understanding in sender-receiver cheap talk games. Each player has a privately known language competence representing all the messages that he understands. For the messages he does not understand, he has correct but coarse expectations about the equilibrium strategies of the other player. In general, a language-based expectation equilibrium outcome differs from Nash and communication equilibrium outcomes, but is always a Bayesian solution. Partial language competence of the sender rationalizes information transmission and lies in pure persuasion problems, and facilitates information transmission from a moderately biased sender.
    Keywords: analogy-based expectations; Bayesian solution; bounded rationality; cheap talk; Language
    JEL: C72 D82
    Date: 2019–01
  11. By: Dessein, Wouter; Holden, Richard
    Abstract: We analyze a model of hierarchies in organizations where neither decisions themselves nor the delegation of decisions are contractible, and where power-hungry agents derive a private benefit from making decisions. Two distinct agency problems arise and interact: Subordinates take more biased decisions (which favors adding more hierarchical layers), but uninformed superiors may fail to delegate (which favors removing layers). A designer may remove intermediate layers of the hierarchy (eliminate middle managers) or de-integrate an organization by removing top layers (eliminate top managers). We show that stronger preferences for power result in smaller, more de-integrated hierarchies. Our key insight is that hoarding of decision rights is especially severe at the top of the hierarchy.
    Keywords: delegation; Hierarchies; Organization Design; Preferences for Power
    JEL: D2 L2
    Date: 2019–02
  12. By: Suehyun Kwon
    Abstract: This paper studies mechanism design with limited commitment where agents have persistent correlated types over the infinite horizon. The mechanism designer now faces the informed-principal problem in addition to usual issues with i.i.d. types. With an infinite horizon and nondurable good, there is always an equilibrium where all types of mechanism designer (private information on the type distribution of agents) pool together, and the ex-ante optimality depends on the cost of agents’ gaming the system. The paper also shows sufficient conditions for ob-taining the full-commitment solution with limited commitment.
    Keywords: mechanism design, limited commitment, informed-principal problem, non-durable good, persistence, correlated types
    Date: 2019
  13. By: Anne Eyraud-Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)
    Abstract: The aim of this work is to show that incompleteness is due in general not only to a lack of assets, but also to a lack of information. In this paper we present a simple inuence model where the inuencial agent has access to additional information. This leads to the construction of two models, a complete model and an incomplete model where the only dierence is a dierence of information. This leads to a simple model of incomplete market where the number of assets is not the cause of incompleteness: incomplete information is the explanation. Keywords Information · asymmetric information · option pricing · martin-gales · insider trading · complete market · incomplete market AMS Classication (2000): 60H10, 60G44, 60H07, 60J75, 91G20, 91B70, 93E11. JEL Classication: C60,G11,G14.
    Keywords: Insider trading,martin-gales,Information,asymmetric information,option pricing,complete market ·,incomplete market
    Date: 2019
  14. By: Dessein, Wouter; Prat, Andrea
    Abstract: We argue that economists have studied the role of management from three perspectives: contingency theory (CT), an organization-centric empirical approach (OC), and a leader-centric empirical approach (LC). To reconcile these three perspectives, we augment a standard dynamic firm model with organizational capital, an intangible, slow-moving, productive asset that can only be produced with the direct input of the firm's leadership and that is subject to an agency problem. We characterize the steady state of an economy with imperfect governance, and show that it rationalizes key findings of CT, OC, and LC, as well as generating a number of new predictions on performance, management practices, CEO behavior, CEO compensation, and governance.
    Keywords: CEO; Management; Organizational Capital
    JEL: L22
    Date: 2019–02
  15. By: Patrick Schmidt
    Abstract: I consider the elicitation of ambiguous beliefs about an event. I introduce a mechanism that allows to identify an interval of probabilities (representing ambiguity perception) for several classes of ambiguity averse preferences. The agent reveals her preference for mixing binarized bets on the uncertain event and its complement under varying betting odds. Under ambiguity aversion, mixing is informative about the interval of beliefs. In particular, the mechanism allows to distinguish ambiguous beliefs from point beliefs, and identifies the belief interval for maxmin preferences. For ambiguity averse smooth second order and variational preferences, the mechanism reveals inner bounds for the belief interval, which are sharp under additional assumptions.
    Date: 2019–02
  16. By: Eilat, Ran; Eliaz, Kfir; Mu, Xiaosheng
    Abstract: Modern information technologies make it possible to store, analyze and trade unprecedented amounts of detailed information about individuals. This has led to public discussions on whether individuals' privacy should be better protected by restricting the amount or the precision of information that is collected by commercial institutions on its participants. We contribute to this discussion by proposing a Bayesian approach to measure loss of privacy and applying it to the design of optimal mechanisms. Specifically, we define the loss of privacy associated with a mechanism as the difference between the designer's prior and posterior beliefs about an agent's type, where this difference is calculated using Kullback-Leibler divergence, and where the change in beliefs is triggered by actions taken by the agent in the mechanism. We consider both ex-ante (the expected difference in beliefs over all type realizations cannot exceed some threshold k) and ex-post (for every realized type, the maximal difference in beliefs cannot exceed some threshold k) measures of privacy loss. Using these notions we study the properties of optimal privacy-constrained mechanisms and the relation between welfare/profits and privacy levels.
    Keywords: Mechanism-Design; privacy
    Date: 2019–02
  17. By: Hoppe-Wewetzer, Heidrun C.; Katsenos, Georgios; Ozdenoren, Emre
    Abstract: This paper offers a model of experimentation and learning with uncertain outcomes as suggested by Arrow (1969). Investigating a two-player stopping game, we show that competition leads to less experimentation, which extends existing results for preemption games to the context of experimentation with uncertain outcomes. Furthermore, we inquire about the extent of experimentation under two information settings: when the researchers share information about the outcomes of their experiments and when they do not share such information. We discover that the sharing of information can generate more experimentation and higher value for a relatively wide range of parameters. We trace this finding to the stronger ability to coordinate on the information obtained through experimentation when it is shared. Our model allows to shed light on recent criticism of the current scientific system.
    JEL: D83 O31
    Date: 2019–01
  18. By: Guillaume Carlier; Kelvin Shuangjian Zhang
    Abstract: We give an existence result for the principal-agent problem with adverse selection under general preferences and non-compact allocation space. The result is mainly based on the fact that the principal can always improve a feasible contract by another one which makes larger profit than the outside option from any type of agent. We also treat the case of type-dependent budget constraints.
    Date: 2019–02
  19. By: Gregorio Curello; Ludvig Sinander
    Abstract: Most comparisons of preferences have the structure of single-crossing dominance. We examine the lattice structure of single-crossing dominance, proving characterisation, existence and uniqueness results for minimum upper bounds of arbitrary sets of preferences. We apply these theorems to monotone comparative statics, ambiguity- and risk-aversion, social choice, and politically correct discourse.
    Date: 2019–02

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