nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒07‒15
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Preferences under ignorance By Gossner, Olivier; Kuzmics, Christoph
  2. Self-Fulfilling Crises and Central Bank Communication By Raphael Galvão; Felipe Shalders
  3. A solution to the two-person implementation problem By Jean-François Laslier; Matias Nunez; M Remzi Sanver
  4. Collective Actions: a Network Approach By Tiziano Distefano; Pietro Guarnieri
  5. Informed Principal Problems in Bilateral Trading By Takeshi Nishimura
  6. Reputation Concerns in Risky Experimentation By Chia-Hui Chen; Junichiro Ishida; Wing Suen
  7. The Social Costs of Side Trading By Andrea Attar; Thomas Mariotti; François Salanié
  8. Political Economy of Transparency By Raphael Galvão
  9. "Partial Ex-Post Verifiability and Unique Implementation of Social Choice Functions" By Hitoshi Matsushima
  10. Delegation of Regulation By Tapas Kundu; Tore Nilssen
  11. On the optimality of the yardstick regulation in the presence of dynamic interaction By Bisceglia, Michele; Cellini, Roberto; Grilli, Luca
  12. Integration and Competition for Innovations in Science-Based Industries By Tapas Kundu; Seongwuk Moon
  13. Costly auction entry, royalty payments, and the optimality of asymmetric designs By Bernhardt, Dan; Liu, Tingjun; Sogo, Takeharu
  14. Positive and Negative Campaigning in Primary and General Elections By Bernhardt, Dan; Ghosh, Meenakshi
  15. Dynamically Stable Matching By Laura Doval
  16. "Epic Fail: How Below-Bid Pricing Backfires in Multiunit Auctions" By Sanna Laksá; Daniel Marszalec; Alexander Teytelboym
  17. On Being Inequality Averse: Measurement and Behavioral Characterization By Luciano Andreozzi
  18. "A Two-Stage Model of Assignment and Market" By Akihiko Matsui; Megumi Murakami
  19. "Behavioral Theory of Repeated Prisoner’s Dilemma: Generous Tit-For-Tat Strategy" By Hitoshi Matsushima

  1. By: Gossner, Olivier; Kuzmics, Christoph
    Abstract: A decision maker (DM) makes choices from different sets of alternatives. The DM is initially ignorant of the payoff associated with each alternative, and learns these payoffs only after a large number of choices have been made. We show that, in the presence of an outside option, once payoffs are learned, the optimal choice rule from sets of alternatives can be rationalized by a DM with strict preferences over all alternatives. Under this model, the DM has preferences for preferences while being ignorant of what preferences are “right”.
    Keywords: consistency; rationality; weak axiom of revealed preferences; strict preference
    JEL: C73 D01 D11
    Date: 2018–08–16
  2. By: Raphael Galvão (Universidad Alberto Hurtado); Felipe Shalders (FEA-USP)
    Abstract: This paper studies how much information a Central Bank should release to less informed private agents. Agents have dispersed information about the state of the economy, and their actions are strategic complements. Thus, the Central Bank’s public disclosure of information can generate an undesirable coordination among agents and self-fulfilling crises. We show that the Central Bank will choose an information structure that sends only two messages. We characterize the optimal information structure and prove that it retains the uniqueness equilibrium property of global games. We also show that, without the ability to commit to an information disclosure rule, the Central Bank could be worse o↵ by releasing public information.
    Date: 2019–03
  3. By: Jean-François Laslier (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Matias Nunez (CECO - Laboratoire d'économétrie de l'École polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique, CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz]); M Remzi Sanver (LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We propose a solution to the classical problem of Hurwicz and Schmeidler [1978] and Maskin [1999] according to which no Pareto efficient rule is Nash implementable. To this end, we consider implementation through mechanisms that are deterministic-in-equilibrium while lotteries are allowed off-equilibrium. We show that there are Pareto efficient rules which are implementable and that any such rule is implementable through some simple veto mechanism. Importantly , neither completeness nor transitivity of the preferences over lotteries are required to achieve implementation.
    Date: 2019–07
  4. By: Tiziano Distefano; Pietro Guarnieri
    Abstract: This paper contributes to the issue of collective action by advancing an epistemology of agency based on the idea that individuals' propensity to act (attitudes) depends on relevant features of their social context. To this purpose, we develop a network model that links the probability that an agent joins collective action to the characteristics of the social structure, which is, in turn, shaped by the activation of collective actions within it. Our underlying assumption is that preferences for collective action are not only an individual endowment, but crucially depend on collective processes, that affect preference formation and characterize rationality as ecological.
    Keywords: partial decenstralisation; party alignment; accountability; intergovernmental transfers
    JEL: B41 D85 D83
    Date: 2019–07–01
  5. By: Takeshi Nishimura
    Abstract: We study informed principal problems in a bilateral trade environment where a seller and a buyer have private information about independent types affecting their interdependent valuations. The seller has full bargaining power to offer a mechanism. We prove both the existence of a D1 equilibrium and the uniqueness of the equilibrium interim payoff vector for the seller. The uniqueness result holds even if the refinement concept is weakened to the intuitive criterion under certain regularity conditions. The refined equilibrium payoff vectors for both players are characterized by the seller's best incentive-feasible allocation among those that are ex post incentive compatible and individually rational for the buyer. The allocation takes a simple format of (almost-)fixed prices if the virtual surplus is strictly increasing in the buyer's type. We show that the privacy of the seller's information causes undersupply of the good and reduces both players' interim payoffs.
    Date: 2019–06
  6. By: Chia-Hui Chen; Junichiro Ishida; Wing Suen
    Abstract: We develop a general model, with the exponential bandit as a special case, in which high-ability agents are more likely to achieve early success but also learn faster that their project is not promising. These counteracting effects give rise to a signaling model in which the single-crossing condition fails but a double-crossing property holds. We characterize the unique D1 equilibrium under double-crossing condition, and show that it tends to produce pooling. Ability to identify good projects and ability to execute a good project have different implications for the equilibrium allocation. Our model also incorporates public news, which generates dynamic distortions.
    Date: 2019–07
  7. By: Andrea Attar (CEIS & DEF University of Rome "Tor Vergata"); Thomas Mariotti (Toulouse School of Economics, CNRS); François Salanié (Toulouse School of Economics, INRA)
    Abstract: We study resource allocation under private information when the planner cannot prevent bilateral side trading between consumers and firms. Adverse selection and side trading severely restrict feasible trades, as each marginal quantity must be fairly priced given the consumer types who purchase it. The resulting social costs are twofold. First, second-best efficiency and robustness to side trading are in general irreconcilable requirements. Second, there actually exists a unique budget-feasible allocation robust to side trading, which deprives the planner from any capacity to redistribute resources between different types of consumers. We discuss the relevance of our results for insurance and financial markets.
    Keywords: Adverse Selection, Side Trading, Second-Best Allocations.
    JEL: D43 D82 D86
    Date: 2019–07–10
  8. By: Raphael Galvão (Universidad Alberto Hurtado)
    Abstract: This paper studies the effects of short-term reputation concerns on the public disclosure of information about the state of the economy. There are efficient and inefficient governments, and high productivity states are more likely under the ecient type. Governments know the state and make public reports with the objective to be perceived as ecient. Entrepreneurs use public information to make investment decisions and their actions are strategic complements. In equilibrium, the inecient type is optimistic: it sends false reports high productivity states with positive probability. This creates uncertainty for entrepreneurs: if the true state is high, productivity is underestimated; if the true state is low, productivity is overestimated. This bias reduces welfare in the high state, but there is a tradeo↵ in the low state: marginal entrepreneurs lose from overestimating productivity; all entrepreneurs receive complementarity gains from a higher aggregate investment. I show that when the trust in the government’s report is low, the inecient government can improve welfare in the low state by sending false reports that increase investment (a small economic boom). However, as the trust in the false reports rises, the bias in entrepreneurs’ beliefs becomes large and welfare decreases (there is too much investment).
    Date: 2018–08
  9. By: Hitoshi Matsushima (Faculty of Economics, The University of Tokyo)
    Abstract: This study investigates the unique implementation of a social choice function in iterative dominance in the ex-post term. We assume partial ex-post verifiability; that is, after determining an allocation, the central planner can only observe partial information about the state as verifiable. We demonstrate a condition of the state space, termed “full detection,†under which any social choice function is uniquely implementable even if the range of the players’ lies, which the ex-post verifiable information directly detects, is quite narrow. To prove this, we construct a dynamic mechanism according to which each player announces his (or her) private signal before the other players observe this signal at an earlier stage, and each player also announces the state at a later stage. In this construction, we can impose several severe restrictions, such as boundedness, permission of only tiny transfers off the equilibrium path, and no permission of transfers on the equilibrium path. This study does not assume either expected utility or quasi-linearity.
    Date: 2019–02
  10. By: Tapas Kundu (Oslo Business School, Oslo Akershus University College of Applied Sciences); Tore Nilssen (Oslo Business School, Oslo Akershus University College of Applied Sciences)
    Abstract: We develop a model to discuss a government’s incentives to delegate to bureaucrats the regulation of an industry. The industry consists of a polluting firm with private information about its production technology. Implementing a transfer-based regulation policy requires the government to make use of a bureaucracy; this has a bureaucratic cost, as the bureaucracy diverts a fraction of the transfer. The government faces a trade-off in its delegation decision: bureaucrats have knowledge of the firms in the industry that the government does not have, but at the same time, they have other preferences than the government, so-called bureaucratic drift. We study how the bureaucratic drift and the bureaucratic cost interact to affect the incentives to delegate. Furthermore, we discuss how partial delegation, i.e., delegation followed by laws and regulations that restrict bureaucratic discretion, increases the scope of delegation. We characterize the optimal delegation rule and show that, in equilibrium, three different regimes can arise that differ in the extent of bureaucratic discretion. Our analysis has implications for when and how a government should delegate its regulation of industry. We find that bureaucratic discretion reduces with bureaucratic drift but that, because of the nature of the regulation problem, the effect of increased uncertainty about the firm’s technology on the bureaucratic discretion depends on how that uncertainty is reduced.
    Keywords: Bureaucracy, Delegation, Regulation, Procurement
    JEL: D02 H10 L51
    Date: 2017–07–24
  11. By: Bisceglia, Michele; Cellini, Roberto; Grilli, Luca
    Abstract: This paper proposes a generalization of Shleifer's (1985) model of yardstick competition, to a dynamic framework. Specifically, we consider a differential game and we show that the yardstick mechanism is effective to replicate the first-best solution if players adopt open-loop behaviour rules and they are symmetric at the initial time; in the absence of initial symmetry, the social efficiency is reached only in the asymptotic steady state. On the contrary, if players adopt Markovian behaviour rules, then the yardstick pricing rule is not able to achieve the first-best solution along the equilibrium path of any Markov Perfect Nash Equilibrium.
    Keywords: Yardstick competition; Dynamic price regulation; Differential games.
    JEL: C73 L51
    Date: 2019–07–08
  12. By: Tapas Kundu (Oslo Business School, Oslo Akershus University College of Applied Sciences, School of Business and Economics, UiT the Arctic University of Norway); Seongwuk Moon (Sogang University Graduate School of Management of Technology)
    Abstract: We develop a model to understand how competition for innovation affects the organization of research activity and property-rights allocation in science-based industries. We consider a vertical production process with a division of labour between research and commercialization. We analyze firms’ incentive for integration in the presence of upstream competition for innovation. Integration adversely affects an integrated firm’s R&D investment and creates positive externality for the independent firms. For a sufficiently strong externality, a semiintegrated structure appears in equilibrium. The model can thus explain the coexistence of integrated and independent research firms and conforms to the evidence of R&D competition in science-based industries. Interestingly, a non-integrated arrangement can sometime appear in equilibrium even though a semi-integrated arrangement has higher innovation probability and aggregate industry payoff. This is because those who gain from integration cannot commit to compensate the losing parties at the contracting stage. We analyze the effects of resource constraints and inter-customer licensing on the industry structure and their implications for the competition for innovation.
    Keywords: R&D contest; Innovation, Vertical integration; Science-based Industry.
    JEL: L22 O31 O32
    Date: 2017–09–21
  13. By: Bernhardt, Dan (University of Illinois & University of Warwick); Liu, Tingjun (The University of Hong Kong); Sogo, Takeharu (Osaka University of Economics)
    Abstract: We analyze optimal auction mechanisms when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. With sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities. When bidders are ex-ante identical, higher royalty rates—which tie payments more closely to bidder valuations—increase the optimal degree of asymmetry in auction design, further raising revenues. When bidders differ ex-ante in entry costs, the seller favors the low cost entrant ; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. Higher royalty rates cause the seller to favor the weaker bidder by less, and the strong bidder by more.
    Keywords: Auctions with participation costs : Royalty payments ; Optimal auctions ; Asymmetric auctions ; Heterogeneous bidders
    JEL: D44 G3
    Date: 2019
  14. By: Bernhardt, Dan (University of Illinois & University of Warwick); Ghosh, Meenakshi (University of Illinois)
    Abstract: We analyze primary and general election campaigning. Positive campaigning builds a candidate’s reputation; negative campaigning damages a rival’s. Each primary candidate hopes to win the general election; but failing that, he wants his primary rival to win. We establish that general elections always feature more negative campaigning than positive, as long as reputations are easier to tear down than build up. In contrast, if the effects of primary campaigns strongly persist, primary elections always feature more positive campaigning than negative. This reflects that a primary winner benefits only from his positive primary campaigning in general elections, and negative campaigning by a rival hurts.
    Keywords: Primary ; general election ; negative and positive campaigning ; contest ; incumbent ; challenger
    JEL: D72
    Date: 2019
  15. By: Laura Doval
    Abstract: I introduce a stability notion, dynamic stability, for two-sided dynamic matching markets where (i) matching opportunities arrive over time, (ii) matching is one-to-one, and (iii) matching is irreversible. The definition addresses two conceptual issues. First, since not all agents are available to match at the same time, one needs to take a stance on which agents can form blocking pairs. Second, dynamic matching markets exhibit a form of externality that is not present in static markets: who is available to match in a given period depends not only on the arrivals into the economy, but also on who remains unmatched from previous periods. Dynamically stable matchings always exist. Dynamic stability is a necessary condition to ensure timely participation in the economy, by ensuring that agents do not strategically delay the time at which they are available to match.
    Date: 2019–06
  16. By: Sanna Laksá (University of Liverpool); Daniel Marszalec (Faculty of Economics, The University of Tokyo); Alexander Teytelboym (Department of Economics, St Catherine’s College, and the Institute for New Economic Thinking at the Oxford Martin School, University of Oxford)
    Abstract: Ascending (or second-price) and uniform-price multiunit auctions have appealing theoretical properties if bidders are symmetric and bid competitively. However, auction designers have long been skeptical about their use in practice. First, asymmetries due to value advantage in ascending (or second-price) auctions with a large common-value component can generate asymmetric equilibria with low revenues. Second, both ascending and uniform auctions are susceptible to collusion. Sequential ascending auctions make it especially easy to form and coordinate bidding rings. Third, uniform auctions are susceptible to low-price equilibria in which bidders can commit to coordinate on high bids for initial units and low bids for final, price-setting units in equilibrium what we call crank-handle bidding. All three of these patterns have been observed separately in certain settings among sophisticated and experienced bidders. We document what we believe is the first case of all three of these phenomena happening among the same, inexperienced bidders across related auctions for shing quota in Faroe Islands. Our findings indiciate that the under performance of ascending and uniform-price auctions are not just theoretical curiosities, but a pervasive phenomenon in practical auction design. We suggest straightforward improvements to auction design that could have mitigated these problems.
    Date: 2018–10
  17. By: Luciano Andreozzi
    Abstract: We extend Karni and Safra (2002a) axiomatic model of procedural jus- tice to provide a behavioral characterization of aversion to ex-post in- equality. Our characterization distinguishes ex-post inequality aversion from other ’social’ motives like altruism and is independent from atti- tudes towards risk. It allows for violations of the independence axiom to make room for ex-ante inequality aversion and, more generally, proce- dural justice. Our axiomatic model naturally lends itself to measure the strength of aversion to ex-post inequality.
    Keywords: Indirect inference; directional statistics; stable distribution; weighting matrix
    JEL: D63 D64 D81
    Date: 2019
  18. By: Akihiko Matsui (Faculty of Economics, The University of Tokyo); Megumi Murakami (Department of Economics, Northwestern University)
    Abstract: Centralized matching mechanisms and decentralized markets have been widely studied to allocate indivisible objects. However, they have been analyzed separately. The present paper proposes a new framework, by explicitly formulating a two-stage model where objects are allocated through a matching mechanism in the first stage and traded in the second stage market. In addition, one divisible good called money may or may not be available in the market. Every player demands at most one unit of object besides money. The players may face different priorities at each object type in the first stage. Each object type has a limited amount of capacity, called quota. Each player has a quasi-linear utility function. The present analysis sets forth the equivalence conditions under which stability and efficiency are attained in equilibrium.
    Date: 2019–01
  19. By: Hitoshi Matsushima (Faculty of Economics, The University of Tokyo)
    Abstract: This study investigates infinitely repeated games of a prisoner’s dilemma with additive separability in which the monitoring technology is imperfect and private. Behavioral incentives indicate that, in this setting, a player is not only motivated by pure self-interest but also by reciprocity. Players often become naïve and select an action unconsciously. By focusing on generous tit-for-tat strategies, we characterize a Nash equilibrium with behavioral incentives, termed behavioral equilibrium, in an accuracy-contingent manner. By eliminating the gap between theory and evidence, this study argues that reciprocity plays a substantial role in motivating a player to consciously make decisions.
    Date: 2019–02

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