nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒03‒18
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Limited Cognitive Ability and Selective Information Processing By Leung, B. T. K.
  2. Narratives, Imperatives, and Moral Reasoning By Roland Bénabou; Armin Falk; Jean Tirole
  3. Supermodular correspondences and comparison of multi-prior beliefs By Pawel Dziewulski; John K. H. Quah
  4. A prospect-theory model of voter turnout By Oliver Herrmann; Richard Jong-A-Pin; Lambert Schoonbeek
  5. Coalition Formation in Legislative Bargaining By Marco Battaglini
  6. Price competition with uncertain quality and cost By Sander Heinsalu
  7. Attention-driven demand for bonus contracts By Markus Dertwinkel-Kalt; Mats Köster; Florian Peiseler
  8. Parallel axiomatizations of weighted and multiweighted Shapley values, random order values, and the Harsanyi set By Besner, Manfred
  9. Designing organizations in volatile markets By Shuo Liu; Dimitri Migrow
  10. Tournament Rewards and Heavy Tails By Mikhail Drugov; Dmitry Ryvkin
  11. Demand and equilibrium with inferior and Giffen behaviors By Le Van, Cuong; Pham, Ngoc-Sang
  12. Welfare Effects of Certification under Latent Adverse Selection By Creane, Anthony; Jeitschko, Thomas; Sim, Kyoungbo
  13. Superstars in two-sided markets: exclusives or not? By Elias Carroni; Leonardo Madio; Shiva Shekhar
  14. Using multiple reference levels in Multi-Criteria Decision aid: The Generalized-Additive Independence model and the Choquet integral approaches By Christophe Labreuche; Michel Grabisch
  15. Bertrand-Edgeworth duopoly with a socially concerned firm By Nagy, Balázs; Tasnádi, Attila
  16. Generalised Random Categorisation Rules By Matthew Ryan
  17. The Curse of Knowledge: Having Access to Customer Information Can Reduce Monopoly Profit By Didier Laussel; Ngo Van Long; Joana Resende
  18. Optimal Information Acquisition and Consumption Under Habit Formation Preference By Yue Yang; Xiang Yu
  19. Demand Cycles and Heterogeneous Conformity Preferences By Baumann, L.
  20. Stackelberg Independence By Toomas Hinnosaar
  21. The shape of luck and competition in tournaments By Mikhail Drugov; Dmitry Ryvkin

  1. By: Leung, B. T. K.
    Abstract: This paper studies the information processing behavior of a decision maker (DM) who can only process a subset of all the information he receives: before taking an action, the DM receives sequentially a number of signals and decides whether to process or ignore each of them as it is received. The model generates an information processing behavior consistent with that documented in the psychological literature: first, the DM chooses to process signals that are strong; second, his processing strategy exhibits confirmation bias if he has a strong prior belief; third, he tends to process signals that suggest favorable outcomes (wishful thinking). As an application I analyze how the Internet and the induced change in information availability affects the processing behavior of the DM. I show that providing more/better information to the DM could strengthen his confirming bias.
    Keywords: limited ability, information overload, information avoidance, confirmation bias, wishful thinking, polarization
    JEL: D83 D90
    Date: 2018–12–06
  2. By: Roland Bénabou; Armin Falk; Jean Tirole
    Abstract: By downplaying externalities, magnifying the cost of moral behavior, or suggesting not being pivotal, exculpatory narratives can allow individuals to maintain a positive image when in fact acting in a morally questionable way. Conversely, responsibilizing narratives can help sustain better social norms. We investigate when narratives emerge from a principal or the actor himself, how they are interpreted and transmitted by others, and when they spread virally. We then turn to how narratives compete with imperatives (general moral rules or precepts) as alternative modes of communication to persuade agents to behave in desirable ways.
    Date: 2019–02
  3. By: Pawel Dziewulski (Department of Economics, University of Sussex, Brighton, UK); John K. H. Quah (Department of Economics, John Hopkins University and Department of Economics, National University of Singapore)
    Abstract: Economic decisions often involve maximising an objective whose value is itself the outcome of another optimisation problem. This decision structure arises in multi-output production and choice under uncertainty with multi-prior beliefs. To analyse comparative statics in these models, we introduce a theory of Supermodular correspondences. In particular, we employ this theory to generalise the notion of first order stochastic dominance to multi-prior beliefs, allowing us to characterise conditions under which greater optimism leads to higher action.
    Keywords: monotone comparative statics, supermodularity, correspondences, stochastic dominance, multi-output production, ambiguity, dynamic programming
    JEL: C61 D21 D24
    Date: 2019–02
  4. By: Oliver Herrmann; Richard Jong-A-Pin; Lambert Schoonbeek
    Abstract: We incorporate prospect-theory preferences in a game-theoretic model to study voter turnout. We show that voter turnout is heavily affected by agents having subjective reference points with respect to the vote or abstain decision and their subjective probability weighting in the decision-making process. Using empirically based parameter values, we show that our model has lower prediction error than other game-theoretic models with standard expected-utility preferences. We also find that our model maintains desirable comparative statics effects and leads to higher turnout predictions in larger electorates.
    Keywords: voting behavior, Downsian paradox, prospect-theory preferences
    JEL: D72
    Date: 2019
  5. By: Marco Battaglini (Cornell University and EIEF)
    Abstract: We propose a new model of legislative bargaining in which coalitions have different values, reflecting the fact that the policies they can pursue are constrained by the identity of the coalition members. In the model, a formateur picks a coalition and negotiates for the allocation of the surplus it is expected to generate. The formateur is free to change coalitions to seek better deals with other coalitions, but she may lose her status if bargaining breaks down, in which case a new formateur is chosen. We show that as the delay between offers goes to zero, the equilibrium allocation converges to a generalized version of a Nash Bargaining Solution in which — in contrast to the standard solution — the coalition is endogenous and determined by the relative coalitional values. A form of the hold-up problem specific to these bargaining games may lead to significant inefficiencies in the selection of the equilibrium coalition. We use the equilibrium characterization of the distortions to study the role of the head of state in avoiding (or containing) distortions. We also show that the model helps rationalizing well known empirical facts that are in conflict with the predictions of standard non-cooperative models of bargaining: the absence of significant (or even positive) premia in ministerial allocations for formateurs and their parties;the occurrence of supermajorities;and delays in reaching agreements.
    Date: 2019
  6. By: Sander Heinsalu
    Abstract: Consumers in many markets are uncertain about firms' qualities and costs, so buy based on both the price and the quality inferred from it. Optimal pricing depends on consumer heterogeneity only when firms with higher quality have higher costs, regardless of whether costs and qualities are private or public. If better quality firms have lower costs, then good quality is sold cheaper than bad under private costs and qualities, but not under public. However, if higher quality is costlier, then price weakly increases in quality under both informational environments, but with asymmetric information, full separation cannot occur.
    Date: 2019–03
  7. By: Markus Dertwinkel-Kalt; Mats Köster; Florian Peiseler
    Abstract: In many markets supply contracts include a series of small, regular payments made by consumers and a single, large bonus that consumers receive at some point during the contractual period. But, if for instance its production costs exceed its value to consumers, such a bonus creates inefficiencies. We offer a novel explanation for the frequent occurrence of bonus contracts, which builds on a model of attentional focusing. Our main result identifies market conditions under which bonus contracts should be observed: while a monopolist pays a bonus to consumers - if at all - only for low-value goods, firms standing in competition always - i.e., independent of the consumers’ valuation - offer bonus contracts. Thus, competition does not eliminate but rather exacerbates inefficiencies arising from contracting with focused agents. Common contract schemes in markets for electricity, telephony, and bank accounts are consistent with our model, but cannot be reconciled with alternative approaches such as models on consumption smoothing, (quasi-)hyperbolic discounting, or switching costs.
    Keywords: attention, focusing, bonus contracts
    JEL: D91 D18 D40 L10
    Date: 2019
  8. By: Besner, Manfred
    Abstract: We present new axiomatic characterizations of five classes of TU-values, the classes of the weighted, positively weighted, and multiweighted Shapley values, random order values, and the Harsanyi set. The axiomatizations are given in parallel, i.e., they differ only in one axiom. In conjunction with marginality, a new property, called coalitional differential dependence, is the key that allows us to dispense with additivity. In addition, we propose new axiomatizations of the above five classes, in which, in part new, different versions of monotonicity, associated with the strong monotonicity in Young (1985), are decisive.
    Keywords: Cooperative game; Marginality; Strong monotonicity; Coalitional differential dependence; Weighted Shapley values · Harsanyi set
    JEL: C7 C71
    Date: 2019–03–15
  9. By: Shuo Liu; Dimitri Migrow
    Abstract: Multinational and multiproduct firms often experience uncertainty in the relative return of conducting activities in different markets due to, for example, exchange rate volatility or the changing prospects of different products. We study how a multi-divisional organization should optimally allocate decision-making authority to its managerial members when operating in such volatile markets. To be able to adapt its decisions to local conditions, the organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if communication takes the form of verifiable disclosure, then centralized decision-making does not suffer from information asymmetry and it allows the headquarter of the organization to better cope with the inter-market uncertainty. However, a downside of centralization is that it can discourage information acquisition, and this negative effect is amplified by the need for coordinating the activities of different divisions. As a result, the optimality of decentralized decision-making can actually be driven by a large coordination motive.
    Keywords: Centralization, decentralization, volatile markets, coordinated adaptation, information acquisition, verifiable disclosure, costly exaggeration
    JEL: D82 M52
    Date: 2019–03
  10. By: Mikhail Drugov (New Economic School and CEPR); Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: Heavy-tailed fluctuations are common in many environments, such as sales of creative and innovative products or the financial sector. We study how the presence of heavy tails in the distribution of shocks affects the optimal allocation of prizes in rank-order tournaments. While a winner-take-all prize schedule maximizes aggregate effort for light-tailed shocks, prize sharing becomes optimal when shocks acquire heavy tails, increasingly so following a skewness order. Extreme prize sharing { rewarding all ranks but the very last { is optimal when shocks have a decreasing failure rate, such as power laws. Hence, under heavy-tailed uncertainty, typically associated with strong inequality in the distribution of gains, providing incentives and reducing inequality go hand in hand.
    Keywords: heavy tails, power law, tournament, optimal allocation of prizes, failure rate
    JEL: C72 D86 M52
    Date: 2018–10
  11. By: Le Van, Cuong; Pham, Ngoc-Sang
    Abstract: We introduce a class of differentiable, strictly increasing, strictly concave utility functions exhibiting an explicit demand of a good which may have Giffen behavior. We provide a necessary and sufficient condition (bases on prices and consumers’ preferences and income) under which this good is normal, inferior or Giffen good. Interestingly, with this utility, the equilibrium price of a good may increase in the aggregate supply for this good.
    Keywords: Inferior good, Giffen good, equilibrium price.
    JEL: D11 D51
    Date: 2019–03–12
  12. By: Creane, Anthony; Jeitschko, Thomas; Sim, Kyoungbo
    Abstract: Asymmetric information is a classic example of market failure that undermines the efficiency associated with perfectly competitive market outcomes: the “lemons” market. Credible certification, that substantiates unobservable characteristics of products that consumers value, is often considered a potential solution to such market failure. This paper examines welfare effects of certification in markets in which there is asymmetric information, but without an adverse selection problem. We analyze the market equilibrium when the certification technology becomes available and contrast this with the equilibrium without certification. We find that despite an improvement in allocative efficiency, overall welfare may decrease due to the possibility of certification when such certification is either costly or inaccurate. In fact, most of these results are not derived from the direct welfare cost of certification, but rather from certification’s effect on the market(s).
    Keywords: Credible certification, welfare-reducing certification, asymmetric information, adverse selection.
    JEL: D4 D41 D8 L1
    Date: 2019–03–07
  13. By: Elias Carroni; Leonardo Madio; Shiva Shekhar
    Abstract: This article studies incentives for a premium provider (Superstar) to offer exclusive contracts to competing platforms mediating the interactions between consumers and firms. When platform competition is intense, more consumers subscribe to the platform hosting the Superstar exclusively. This mechanism is self-reinforcing as firms follow consumer decisions and (some) join exclusively the platform with the Superstar. Exclusivity always benefits firms and may benefit consumers. Moreover, when the Superstar is integrated with a platform, non-exclusivity becomes more likely than if the Superstar was independent. This analysis provides several implications for managers and policy makers operating in digital and traditional markets.
    Keywords: exclusive contracts, platforms, two-sided markets, ripple effect, content providers, market power
    JEL: L13 L22 L86
    Date: 2019
  14. By: Christophe Labreuche (UMP CNRS/THALES - Unité mixte de physique CNRS/Thalès - THALES - CNRS - Centre National de la Recherche Scientifique); Michel Grabisch (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In many Multi-Criteria Decision problems, one can construct with the decision maker several reference levels on the attributes such that some decision strategies are conditional on the comparison with these reference levels. The classical models (such as the Choquet integral) cannot represent these preferences. We are then interested in two models. The first one is the Choquet with respect to a p-ary capacity combined with utility functions, where the p-ary capacity is obtained from the reference levels. The second one is a specialization of the Generalized-Additive Independence (GAI) model, which is discretized to fit with the presence of reference levels. These two models share common properties (monotonicity, continuity, properly weighted,.. .), but differ on the interpolation means (Lovász extension for the Choquet integral, and multi-linear extension for the GAI model). A drawback of the use of the Choquet integral with respect to a p-ary capacity is that it cannot satisfy decision strategies in each domain bounded by two successive reference levels that are completely independent of one another. We show that this is not the case with the GAI model.
    Keywords: Generalized Additive Independence,Multiple criteria analysis
    Date: 2018–06
  15. By: Nagy, Balázs; Tasnádi, Attila
    Abstract: The government may regulate a market by obtaining partial ownership in a firm. This type of socially concerned firm behaves as a combined profit and social surplus maximizer. We investigate the presence of a socially concerned firm in the framework of a Bertrand-Edgeworth duopoly with capacity constraints. In particular, we determine the mixed-strategy equilibrium of this game and relate it to both the standard and the mixed versions of the Bertrand-Edgeworth game. In contrast to other results in the literature we find that full privatization is the socially best outcome, that is the optimal level of public ownership is equal to zero.
    Keywords: Bertrand-Edgeworth, mixed duopoly, semi-public firm, mixedstrategy equilibrium
    JEL: D43 L13
    Date: 2019–02–28
  16. By: Matthew Ryan (School of Economics, Auckland University of Technology)
    Abstract: Aguiar's (2017) random categorisation rule (RCR) describes random choice behaviour as the maximisation of a linear preference order over the intersection of a random consideration set with the set of available options. A key axiom in Aguiar's (2017) characterisation of the RCR is an acyclicity condition on a revealed preference relation derived from the random choice function. We show that this condition may be substantially weakened - to asymmetry of the revealed preference relation - without jeopardising the essence of the RCR representation. In our generalisation of the RCR, preferences may be ill-behaved on subsets of alternatives that are never considered together. While these pathologies in preference are masked by the decision-maker's selective attention to an particular choice problem, they may still be revealed by data across di§erent choice problems. Finally, we show that the generalised model remains within the random utility class.
    Date: 2019–02
  17. By: Didier Laussel; Ngo Van Long; Joana Resende
    Abstract: We demonstrate the "curse of knowledge" when a monopolist can recognize different consumer groups through their purchase histories which are influenced by its dynamic pricing policies. Under the Markov-perfect equilibrium, after each commitment period, the firm offers a new introductory price so as to attract new customers. More and more market segments are added gradually. Eventually, the whole market is covered. Shortening the commitment period will result in a fall in profit. In contrast, a full-commitment monopolist would choose to stick to uniform pricing, achieving higher profit. Hence, the firm is better off by refraining from collecting customer information. Nous démontrons la "malédiction du savoir" lorsqu'un monopoleur peut reconnaître différents groupes de consommateurs à travers leurs historiques d'achat influencés par sa politique de prix dynamique. Sous l'équilibre de Markov-parfait, l'entreprise propose, après chaque période d'engagement, un nouveau prix de lancement afin d'attirer de nouveaux clients. De plus en plus de segments de marché sont ajoutés progressivement. Finalement, tout le marché est couvert. La réduction de la période d'engagement entraînera une baisse des bénéfices. En revanche, un monopoleur pleinement engagé choisirait de s'en tenir à un prix unique, réalisant des bénéfices plus élevés. Par conséquent, le monopoleur gagnerait plus de profit s’il pouvait s'engager de ne pas collecter des informations sur les clients.
    Keywords: Coasian Dynamics,Information Collection,Monopoly,Regulatory Policies, La dynamique coasienne,La collecte d’infomation,Monopole,Politiques réglementaires
    JEL: L12 L15
    Date: 2019–03–06
  18. By: Yue Yang; Xiang Yu
    Abstract: We consider a model of two-stage optimal decision making involving pure information learning beforehand and dynamic consumption afterwards: in stage-1 from initial time to a chosen stopping time, the individual investor has access to full market information and simply updates the underlying stock and mean-reverting drift processes by paying some information costs; in stage-2 starting from the chosen stopping time, the investor terminates the costly information acquisition while the public stock prices are still available and free. Therefore, during stage-2, the investor starts the investment and consumption based on previous full information and the dynamic partial observations after the stopping time. Moreover, the investor adopts the habit formation preference, in which the past consumption affects his current decisions. Mathematically speaking, we formulate a composite optimal starting and control problem, in which the exterior problem is to determine the best time to initiate the investment-consumption decisions and the interior problem becomes a finite time horizon stochastic control problem with partial information. The value function of the composite problem is characterized as the unique classical solution of some variational inequalities.
    Date: 2019–03
  19. By: Baumann, L.
    Abstract: The paper analyzes the dynamics of demand for three options when agents differ in their preferences for conformity. Each agent seeks to imitate others who are more individualistic and to distinguish herself from others who are more conformist, relative to herself. In each period, every agent chooses her utility-maximizing option given each agent's demand in the previous period. It is shown that for a large class of initial demand distributions, demand dynamics resemble fashion cycles: Total demand for each option over time is wave-like, and, when positively demanded, an option trickles through the entire population, from individualistic towards conformist agents.
    Keywords: fashion cycle, demand cycle, conformity, individuality, dynamics, distribution of demand
    JEL: C73 D11 D91 E21 E32 Z13
    Date: 2019–03–06
  20. By: Toomas Hinnosaar
    Abstract: The standard model of sequential capacity choices is the Stackelberg quantity leadership model with linear demand. I show that under the standard assumptions, leaders' actions are informative about market conditions and independent of leaders' beliefs about the arrivals of followers. However, this Stackelberg independence property relies on all standard assumptions being satisfied. It fails to hold whenever the demand function is non-linear, marginal cost is not constant, goods are differentiated, firms are non-identical, or there are any externalities. I show that small deviations from the linear demand assumption may make the leaders' choices completely uninformative.
    Date: 2019–03
  21. By: Mikhail Drugov (New Economic School and CEPR); Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: Tournaments are settings where agents' performance is determined jointly by effort and luck, and top performers are rewarded. We study the impact of the \shape of luck" { the details of the distribution of performance shocks { on incentives in tournaments. The focus is on the effect of competition, defined as the number of rivals an agent faces, which can be deterministic or stochastic. We show that individual and aggregate effort in tournaments are affected by an increase in competition in ways that depend critically on the shape of the density and failure (hazard) rate of shocks. When shocks have heavy tails, aggregate effort can decrease with stronger competition.
    Keywords: tournament, competition, heavy tails, stochastic number of players, unimodality, log-supermodularity, failure rate
    JEL: C72 D72 D82
    Date: 2019–01

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