nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒04‒15
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Networks in Conflict: A Variational Inequality Approach By Xu, Jin; Zenou, Yves; Zhou, Junjie
  2. Monotone Contracts By Daniel Bird; Alexander Frug
  3. Quadratic voting with multiple alternatives By Eguia, Jon; Immorlica, Nicole; Ligett, Katrina; Weyl, Glen; Xefteris, Dimitrios
  4. One Dynamic Game for Two Veblenian Ideas. Income Redistribution is Pareto-Improving in the Presence of Social Concerns By Frédéric Gavrel
  5. Optimal Fund Menus By Jaksa Cvitanic; Julien Hugonnier
  6. Shadow links By FOERSTER Manuel,; MAULEON Ana,; VANNETELBOSCH Vincent,
  7. Dynamic IC and dynamic programming By Suehyun Kwon
  8. Endogenous vertical segmentation in a Cournot oligopoly By BELLEFLAMME Paul,; FORLIN Valeria,
  9. Only time will tell: A theory of deferred compensation By Inderst, Roman; Opp, Marcus
  10. Regulation and altruism By Izabela Jelovac; Samuel Nzale
  11. Strict Fairness of Equilibria in Mixed and Asymmetric Information Economies By Chiara Donnini; Maria Laura Pesce
  12. Equilibrium of a production economy with non-compact attainable allocations set By Senda Ounaies; Jean-Marc Bonnisseau; Souhail Chebbi
  13. Regulating Cancellation Rights with Consumer Experimentation By Hoffmann, Florian; Inderst, Roman
  14. Public-Private Competition in Regulated Markets By Ziad R. Ghandour
  15. Perfect Quasi-Perfect Equilibrium By Blume, Larry; Meier, Martin
  16. Optimal Prosocial Nudging By Carlsson, Fredrik; Johansson-Stenman, Olof
  17. Dispersed Behavior and Perceptions in Assortative Societies By Mira Frick; Ryota Iijima; Yuhta Ishii
  18. Oligopoly Price Discrimination: The Role of Inventory Controls By James D. Dana Jr.; Kevin R. Williams

  1. By: Xu, Jin; Zenou, Yves; Zhou, Junjie
    Abstract: We study a very general contest game in which players exert efforts in multiple battles. The conflict structure, which represents who participates in which battlefield, is arbitrary and can be represented by a hypergraph. We show, under mild conditions on the cost function and contest technology, that the set of pure strategy Nash equilibria is nonempty and convex, and provide equivalent characterizations using techniques from Variational Inequality (VI). We demonstrate that the strong monotonicity of the cost function always implies the uniqueness of Nash equilibrium regardless of the conflict structure. We also perform an extensive comparative statics analysis with respect to the parameters of the model and discuss several applications of our model. Our general model incorporates many existing models of single or multi-battle contests as special cases when the conflict network and/or the cost function take particular forms.
    Keywords: Contests; network games; variational inequality
    JEL: C72 D74 D85
    Date: 2019–04
  2. By: Daniel Bird; Alexander Frug
    Abstract: A common feature of dynamic interactions is that the environment in which they occur typically changes, perhaps stochastically, over time. We consider a general fluctuating contracting environment with symmetric information, and identify a systematic effect of the fluctuations in the environment on optimal contracts. We develop a notion of a separable activity that corresponds to a large class of contractual components, and provide a tight condition under which these components manifest a form of seniority: any change that occurs in these components over time, under an optimal contract, favors the agent. We illustrate how our results can be applied in various economic settings.
    Keywords: dynamic contracting, stochastic opportunities
    JEL: D86
    Date: 2019–04
  3. By: Eguia, Jon (Michigan State University, Department of Economics); Immorlica, Nicole (Microsoft); Ligett, Katrina (Hebrew University); Weyl, Glen (Microsoft and Princeton); Xefteris, Dimitrios (University Cyprus)
    Abstract: Consider the following collective choice problem: a society of budget-constrained agents faces multiple alternatives and wants to reach an e¢ cient decision (i.e. to Nash implement the utilitarian maximum). In this paper, we propose a budget-balanced vote-buying mechanism for this setting: for each alternative, every voter can cast any number of votes, x, in support or against it, by transferring an amount x2 to the rest of the voters; and the outcome is determined by the net vote totals. We prove that as the society grows large, in every equilibrium of the mechanism, each agent's transfer converges to zero, and the probability that the mechanism chooses the socially efficient outcome converges to one.
    Keywords: implementation; efficiency; mechanism design; quadratic voting; multiple alternatives
    JEL: D61 D71 D72
    Date: 2019–04–04
  4. By: Frédéric Gavrel (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In a status game, homogenous individuals first decide on their income (and on the effort necessary to that end) with the aim of Getting ahead of the Smiths (GAS). Next, they make use of a pure positional good to make incomes visible. Although the GAS hypothesis is ordinal, the signaling costs induce cardinal social concerns. The GAS hypothesis, translated into the pure pride concern, generates an equilibrium in which identical agents have unequal income levels. Because individuals decide on their income without taking into account its effect on the signaling costs of higher-ranked participants, this equilibrium is inefficient. Introducing a Pigovian tax to reduce conspicuous consumption generates a rat-race effect in the income-setting stage which neutralizes the effect of this tax on utilities. But a redistributive income tax, if coupled with an appropriate Pigovian tax on conspicuous consumption, increases all utilities.
    Keywords: Status game,Social concerns,Income inequalities,Conspicuous con- sumption,Income redistribution,Well-being,Efficiency
    Date: 2019–03–29
  5. By: Jaksa Cvitanic (California Institute of Technology - Division of the Humanities and Social Sciences); Julien Hugonnier (Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)
    Abstract: We study the optimal design of a menu of funds by a manager who is required to use linear pricing and does not observe the preferences of investors regarding one of the risky assets. The optimal menu involves bundling of assets and can be explicitly constructed from the solution to a calculus of variations problem that optimizes over the indirect utility that each type of investor receives. We provide a complete characterization of the optimal fund menu and show that the need to maintain incentive compatibility leads the manager to behave as a closet indexer by offering funds that are inefficiently tilted towards the asset which is not subject to the information friction.
    Keywords: Mutual fund menus, screening, linear pricing, closet indexing
    JEL: C62 C71 D42 D82 G11
    Date: 2018–07
  6. By: FOERSTER Manuel, (Universität Hamburg); MAULEON Ana, (Université Saint-Louis Bruxelles and CORE, UCLouvain); VANNETELBOSCH Vincent, (CORE, UCLouvain)
    Abstract: We propose a framework of network formation where players can form two types of links: public links are observed by everyone and shadow links are only observed by neighbors. We introduce a novel solution concept called rationalizable peer-confirming pairwise stability, which generalizes Jackson and Wolinsky (1996)’s pairwise stability notion to accommodate shadow links. We then study the case when public links and shadowlinks are perfect substitutes and relate our concept to pairwise stability. Finally, we consider two specific models and show how false beliefs about others’ behavior may lead to segregation in friendship networks with homophily, reducing social welfare.
    Keywords: network formation, peer-confirming beliefs, private information, rationalizability, shadow links, stability
    JEL: A14 C70 D82 D85
    Date: 2018–10–01
  7. By: Suehyun Kwon
    Abstract: This paper develops a dynamic programming method when the one-stage deviation principle in the sense of mechanism design literature doesn’t hold. The commonly used dynamic programming method is valid only if the one-stage deviation principle in the sense of mechanism design literature is satisfied; it doesn't hold in every model, and the one-stage deviation principle in the sense of repeated games does hold but requires the equilibrium strategy of every player off the equilibrium path and is impractical. The dynamic programming method developed in this paper requires transfinite induction, and therefore one needs to specify the stopping times for two dimensions.
    Keywords: dynamic programming, one-stage deviation, transfinite induction, stopping time
    Date: 2019
  8. By: BELLEFLAMME Paul, (CORE, UCLouvain); FORLIN Valeria, (CORE, UCLouvain and European Commission, DG Clima)
    Abstract: An arbitrary number of (ex ante symmetric) firms first choose whether to produce a high-quality or a low-quality product and then the quantity of product to put on the market. We establish the following results: (i) there exists competition within and across quality segments; (ii) firms may be better off producing the low quality if competition within this segment is sufficiently low; (iii) a firm's switch across qualities may benefit all the other firms; (iv) there exists a unique partition of the firms between the two quality segments; (v) if high quality has a larger cost-quality ratio, then the equilibrium exhibits vertical differentiation; (vi) there may be too much differentiation from the consumers' point of view.
    Keywords: quality, differentiation, oligopolistic competition
    JEL: D43 L13 L25
    Date: 2019–03–06
  9. By: Inderst, Roman; Opp, Marcus
    Abstract: This paper provides a complete characterization of optimal contracts in principal-agent settings where the agent's action has persistent effects. We model generalinformation environments via the stochastic process of the likelihood-ratio. Themartingale property of this performance metric captures the information benefit ofdeferral. Costs of deferral may result from both the agent's relative impatience aswell as her consumption smoothing needs. If the relatively impatient agent is riskneutral, optimal contracts take a simple form in that they only reward maximalperformance for at most two payout dates. If the agent is additionally risk-averse,optimal contracts stipulate rewards for a larger selection of dates and performancestates: The performance hurdle to obtain the same level of compensation is in-creasing over time whereas the pay-performance sensitivity is declining. We derivetestable implications for the optimal duration of (executive) compensation and thematurity structure of claims in financial contracting settings.
    Keywords: Compensation design; duration of pay; Informativeness principle; moral hazard; Persistence; Principal-Agent Models
    JEL: D86
    Date: 2019–04
  10. By: Izabela Jelovac (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Samuel Nzale (AMU - Aix Marseille Université)
    Abstract: We study optimal contracts in a regulator-agent setting with joint production, altruistic and selfish agents, and uneasy outcome measurement. Such a setting represents sectors of activities such as education and health care provision. The agents and the regulator jointly produce an outcome for which they all care to some extent that is varying from agent to agent. Some agents, the altruistic ones, care more than the regulator does while others, the selfish agents, care less. Moral hazard is present due to the agent's effort that is not contractible. Adverse selection is present too since the regulator cannot a priori distinguish between altruistic and selfish agents. Contracts consist of a simple transfer from the regulator to the agents together with the regulator's input in the joint production. We show that a screening contract is not optimal when we face both moral hazard and adverse selection.
    Keywords: regulator-agent joint production,altruism,moral hazard,adverse selection
    Date: 2019
  11. By: Chiara Donnini (Università di Napoli Parthenope); Maria Laura Pesce (Università di Napoli Federico II)
    Abstract: We investigate the fairness property of equal-division competitive market equilibria (CME) in asymmetric information economies with a space of agents that may contain non-negligible (large) traders. We first propose an extension to our framework of the notion of strict fairness due to Zhou (1992). We prove that once agents are asymmetrically informed, any equal-division CME allocation is strictly fair, but a strictly fair allocation might not be supported by an equilibrium price. Then, we investigate the role of large traders and we provide two sufficient conditions under which, in the case of complete information economies, a redistribution of resources is strictly fair if and only if it results from a competitive mechanism.
    Keywords: Asymmetric information, mixed markets, strict fairness, competitive equilibrium.
    JEL: D43 D60 D82
    Date: 2019–04–08
  12. By: Senda Ounaies (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Jean-Marc Bonnisseau (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Souhail Chebbi (LEGI - Laboratoire d'Économie et de Gestion Industrielle [Tunis] - Ecole Polytechnique de Tunisie)
    Abstract: In this paper, we consider a production economy with an unbounded attainable set where the consumers may have non-complete non-transitive preferences. To get the existence of an equilibrium, we provide an asymptotic property on preferences for the attainable consumptions and we use a combination of the nonlinear optimization and fixed point theorems on truncated economies together with an asymptotic argument. We show that this condition holds true if the set of attainable allocations is compact or, when the preferences are representable by utility functions, if the set of attainable individually rational utility levels is compact. This assumption generalizes the CPP condition of [N. Allouch, An equilibrium existence result with short selling, J. Math. Econom. 37 2002, 2, 81–94] and covers the example of [F. H. Page, Jr., M. H. Wooders and P. K. Monteiro, Inconsequential arbitrage, J. Math. Econom. 34 2000, 4, 439–469] when the attainable utility levels set is not compact. So we extend the previous existence results with non-compact attainable sets in two ways by adding a production sector and considering general preferences.
    Keywords: nonlinear optimization,quasi-equilibrium,non-compact attainable allocations,Production economy
    Date: 2019–03–01
  13. By: Hoffmann, Florian; Inderst, Roman
    Abstract: Embedding consumer experimentation with a product or service into a market environment, we find that unregulated contracts induce too few returns or cancellations, as they do not internalize a pecuniary externality on other firms in the market. Forcing firms to let consumers learn longer by imposing a commonly observed statutory minimum cancellation or refund period is socially efficient only when firms appropriate much of the market surplus, while it backfires otherwise. Interestingly, cancellation rights are a poor predictor of competition, as in the unregulated outcome firms grant particularly generous rights when competition is neither too low nor too high.
    Date: 2019–04
  14. By: Ziad R. Ghandour (Department of Economics / NIPE, University of Minho)
    Abstract: We analyse the effect of competition on quality provision in mixed markets, such as healthcare and education, where public and private providers coexist. We draw two key assumptions about the public provider in such markets, namely in that it faces a regulated price and is (partly) motivated. We also explore the effects of changes in the state subsidy and co-payment fees. Our main contribution is that, under certain circumstances, more competition leads to lower average quality in equilibrium. Similarly, the effects of higher co-payment fees or larger state subsidies on average quality are also a priori ambiguous. These conclusions hold regardless of whether providers seek profit maximisation or the public provider has altruistic preferences. Furthermore, we characterise the incentives for the private provider to unilaterally relocate towards the public provider.
    Keywords: Mixed Duopoly, Competition, Quality Provision, Motivated Provider, State Subsidy, Co-payment Fees
    JEL: D4 L1 L2 L3
    Date: 2019
  15. By: Blume, Larry (Cornell University and Institute for Advanced Studies); Meier, Martin (University of Bath and Institute for Advanced Studies)
    Abstract: In strategic-form games Selten's (1975) perfect equilibria are admissible. This is not true for extensive-form perfection. Quasi-perfect equilibria solves this problem using Selten's (1975) trembles to introduce a refinement of Nash equilibrium wherein each player puts infinitesimal weight on other players's strategies, but not her own. One might be sure of oneself, while (infinitesimally) unsure of others. However, also quasi-perfection itself is not without problems, precisely because it ignores future infinitesimal uncertainties in one's own play. We introduce a refinement; perfect quasi-perfect equilibrium, to capture the best of both concepts. Our idea is to force each player to consider infinitesimal deviations in her own future play, but to make them so unlikely that they are infinitely less likely than the combined likelihood of deviations by all other players. Our refinement uses only strategies that are neither weakly dominated in the strategic form nor in the agent normal form.
    Date: 2019–03
  16. By: Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: While nudges are still mostly associated with affecting individual choices for their own long-run interest, i.e. dealing with internalities, they are increasingly used in order to reduce externalities, such as environmental consequences. While we are gaining increasing insights into when and how nudges work, much less attention has been given to the normative aspects of nudging as a policy instrument to deal with externalities. We investigate optimal prosocial nudging under a number of different settings in a world where a conventional Pigovian tax can be used to a varying extent. We find that nudges typically only play a limited role when optimal taxes can be implemented. What we denote encouraging moral nudges, i.e. nudges where people’s choices are affected by strengthening consumers’ moral norms for doing the right thing, are more likely to play a role even when the tax is optimal compared to purely cognitive nudges. In addition, if a nudge better can target the right consumers, then it might also be optimal to use even when an optimal tax can be implemented. We also present decision rules for the optimal size of a nudge when an optimal tax cannot be implemented.
    Keywords: nudge; environmental policy; behavior
    JEL: D90 H21 H23
    Date: 2019–04
  17. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yuhta Ishii (Harvard University)
    Abstract: We take an equilibrium-based approach to study the interplay between behavior and misperceptions in coordination games with assortative interactions. Our focus is assortativity neglect, where agents fail to take into account the extent of assortativity in society. We show, ?rst, that assortativity neglect ampli?es action dispersion, both in ?xed societies and by exacerbating the e?ect of social changes. Second, unlike other misperceptions, assortativity neglect is a misperception that agents can rationalize in any true environment. Finally, assortativity neglect provides a lens through which to understand how empirically documented misperceptions about distributions of population characteristics (e.g., income inequality) vary across societies.
    Keywords: Assortativity neglect, Coordination games, Self-confirming equilibrium, Misperception
    JEL: C70 D80 D85
    Date: 2018–04
  18. By: James D. Dana Jr. (Northwestern University); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: When ?rms ?rst choose capacity and then compete on prices in a series of advance-purchase markets, we show that strong competitive forces prevent firms from utilizing intertemporal price discrimination. We then enrich the model by allowing ?rms to use inventory controls, or sales limits assigned to individual prices. We show that ?rms will choose to set inventory controls in order to engage in intertemporal price discrimination, but only if demand becomes more inelastic over time. Thus, although typically viewed as a tool to manage demand uncertainty, we show that inventory controls can also facilitate price discrimination in oligopoly.
    Keywords: Capacity-pricing games, Intertemporal price discrimination, Oligopoly models, Inventory controls
    JEL: D21 D43 L13
    Date: 2018–06

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