nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒07‒22
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Competing Models By Jose Luis Montiel Olea; Pietro Ortoleva; Mallesh M Pai; Andrea Prat
  2. A Model of Presidential Debates By Doron Klunover; John Morgan
  3. The Ownership of Data By Sand-Zantman, Wilfried; Dosis, Anastasios
  4. A Theory on Media Bias and Elections By Junze Sun; Arthur Schram; Randolph Sloof
  5. Mixed Signals: Investment Distortions with Adverse Selection By R. Matthew Darst; Ehraz Refayet
  6. On the Likelihood of the Borda Effect: The Overall Probabilities for General Weighted Scoring Rules and Scoring Runoff Rules By Eric Kamwa
  7. The Condorcet Efficiency of the Preference Approval Voting and the Probability of Selecting the Condorcet Loser By Eric Kamwa
  8. Local Search Markets and External Competition By Legros, Patrick; Stahl, Konrad O
  9. Audi Alteram Partem: An Experiment on Selective Exposure to Information By Salvatore Nunnari; Giovanni Montari
  10. Experimentation in Dynamic R&D Competition By Dosis, Anastasios; Muthoo, Abhinay
  11. Rent extraction with securities plus cash By Liu, Tingjun; Bernhardt, Dan
  12. On the Strategic Benefits of Diversity By Martin Kaae Jensen
  13. When do co-located firms selling identical products thrive? By Bernhardt, Dan; Constantinou, Evangelos; Shadmehr, Mehdi
  14. Dynamic regulation revisited: Signal dampening, experimentation and the ratchet effect By Jeitschko, Thomas D.; Withers, John A.

  1. By: Jose Luis Montiel Olea; Pietro Ortoleva; Mallesh M Pai; Andrea Prat
    Abstract: Different agents compete to predict a variable of interest related to a set of covariates via an unknown data generating process. All agents are Bayesian, but may consider different subsets of covariates to make their prediction. After observing a common dataset, who has the highest confidence in her predictive ability? We characterize it and show that it crucially depends on the size of the dataset. With small data, typically it is an agent using a model that is `small-dimensional,' in the sense of considering fewer covariates than the true data generating process. With big data, it is instead typically `large-dimensional,' possibly using more variables than the true model. These features are reminiscent of model selection techniques used in statistics and machine learning. However, here model selection does not emerge normatively, but positively as the outcome of competition between standard Bayesian decision makers. The theory is applied to auctions of assets where bidders observe the same information but hold different priors.
    Date: 2019–07
  2. By: Doron Klunover; John Morgan
    Abstract: Presidential debates are thought to provide an important public good by revealing information on candidates to voters. However, this may not always be the case. We consider an endogenous model of presidential debates in which an incumbent and a contender (who is privately informed about her own quality) publicly announce whether they are willing to participate in a public debate, after taking into account that a voter's choice of candidate depends on her beliefs regarding the candidates' qualities and on the state of nature. Surprisingly, it is found that in equilibrium a debate occurs or does not occur independently of the contender's quality or the sequence of the candidates' announcements to participate and therefore the announcements are uninformative.
    Date: 2019–07
  3. By: Sand-Zantman, Wilfried; Dosis, Anastasios
    Abstract: We study the effects of property rights over the use of data on market outcomes. For this, we consider a model in which a monopolistic firm offers a service to a set of heterogeneous users. Usage generates valuable data but data extraction entails a privacy cost to users. We show that both the firm and users prefer the users (the firm) to own the rights for low (high) values of data. We further discuss the robustness of our results by allowing more contracting possibilities to the data owner. We show that the main trade-off between the two ownership regimes is robust to these extensions.
    Keywords: Ownership; Data; Imperfect Competition; Privacy
    JEL: D82 D83 D86 L12 L19 L49
    Date: 2019–07–17
  4. By: Junze Sun (Amsterdam School of Economics); Arthur Schram (Amsterdam School of Economics); Randolph Sloof (Amsterdam School of Economics)
    Abstract: We develop a tractable theory to study the impact of biased media on election outcomes, voter turnout and welfare. News released by media allows voters to infer the relative appeal of the two candidates, and the closeness of elections. In large elections, the former determines the election outcome, whereas the latter drives voter turnout. With a single media outlet, a rise in media bias affects the election outcome in a non-monotonic way, and reduces voter welfare by decreasing the probability of electing the efficient candidate and increasing aggregate turnout costs. Introducing extra media outlets can systematically shift the election outcome and voter turnout in either direction, but it weakly improves voter welfare. The impact of other ways to strengthen media competition – such as increased polarization and prevention of collusion – critically depends on whether media have commitment power; if not, they can worsen information transmission and voter welfare.
    Keywords: media bias, voting, Poisson games, media competition, commitment
    JEL: D72 D82 D83
    Date: 2019–07–16
  5. By: R. Matthew Darst; Ehraz Refayet
    Abstract: We study how adverse selection distorts equilibrium investment allocations in a Walrasian credit market with two-sided heterogeneity. Representative investor and partial equilibrium economies are special cases where investment allocations are distorted above perfect information allocations. By contrast, the general setting features a pecuniary externality that leads to trade and investment allocations below perfect information levels. The degree of heterogeneity between informed agents' type governs the direction of the distortion. Moreover, contracts that complete markets dampen the impact of pecuniary externalities and change equilibrium distortions. Implications for empirical design in credit market studies and financial stability are discussed.
    Keywords: Asymmetric Information ; Cost Of Capital ; Credit Default Swaps ; Investment ; Pecuniary Externality ; Signalling
    JEL: D82 E44 G32 D52 D53
    Date: 2019–06–21
  6. By: Eric Kamwa (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles)
    Abstract: The Borda Effect, first introduced by Colman and Poutney (1978), occurs in a preference aggregation process using the Plurality rule if given the (unique) winner there is at least one loser that is preferred to the winner by a majority of the electorate. Colman and Poutney (1978) distinguished two forms of the Borda Effect:-the Weak Borda Effect describing a situation under which the unique winner of the Plurality rule is majority dominated by only one loser; and-the Strong Borda Effect under which the Plurality winner is majority dominated by each of the losers. The Strong Borda Effect is well documented in the literature as the Strong Borda Paradox. Colman and Poutney (1978) showed that the probability of the Weak Borda Effect is not negligible; they only focused on the Plurality rule. In this note, we extend the work of Colman and Poutney (1978) by providing in three-candidate elections, the representations for the limiting probabilities of the (Weak) Borda Effect for the whole family of the scoring rules and scoring runoff rules. We highlight that there is a relation between the (Weak) Borda Effect and the Condorcet efficiency. We perform our analysis under the Impartial Culture and the Impartial Anonymous Culture which are two well-known assumptions often used for such a study.
    Date: 2019–06
  7. By: Eric Kamwa (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles)
    Abstract: Under Approval Voting (AV), each voter just distinguishes the candidates he approves of from those appearing as unacceptable. The Preference Approval Voting (PAV) is a hybrid version of the approval voting first introduced by Brams and Sanver (2009). Under PAV, each voter ranks all the candidates and then indicates the ones he approves. In this paper, we provide analytical representations for the probability that PAV elects the Condorcet winner when she exists in three-candidate elections with large electorates. We also provide analytical representations for the probability that PAV elects the Condorcet loser. We perform our analysis by assuming the assumption of the Extended Impartial Culture. This analysis allows us to measure at which extend, PAV performs better than AV both on the propensity of electing the Condorcet loser and on that of the non-election of the Condorcet loser.
    Keywords: Probability,Condorcet,Extended Impartial Culture,Ranking,Approval Voting
    Date: 2019
  8. By: Legros, Patrick; Stahl, Konrad O
    Abstract: Increased competition tends to benefit all buyers with increasing product variety and de- creasing prices. However, if local and external market channels compete for the same class of products, increased competition from the external market crowds out local variety. Under local monopoly, local buyer surplus co-moves with external buyer surplus. Under local free entry oligopoly, buyer surplus is U-shaped. If buyer surplus in the external market is low, local surplus is better provided by local oligopoly, but moves against external surplus; if it is high, local and external surplus co-move, and local surplus is better provided by local monopoly.
    Keywords: Global Competition; Monopoly; oligopoly; search
    JEL: D83 L12 L13 L81
    Date: 2019–05
  9. By: Salvatore Nunnari; Giovanni Montari
    Abstract: This paper presents a model of selective exposure to information and an experiment to test its predictions. An agent interested in learning about an uncertain state of the world can acquire information from one of two sources which have opposite biases: when informed on the state, they report it truthfully; when uninformed, they report their favorite state. When sources have the same reliability, a Bayesian agent is better off seeking confirmatory information. On the other hand, it is optimal to seek contradictory information if and only if the source biased against the prior is sufficiently more reliable. We test these predictions with an online experiment. When sources are symmetrically reliable, subjects are more likely to seek confirmatory information but they listen to the other side too frequently. When sources are asymmetrically reliable, subjects are more likely to consult the more reliable source even when prior beliefs are strongly unbalanced and listening to the less reliable source is more informative. Moreover, subjects follow contradictory advice sub-optimally; are too trusting of information in line with a source bias; and too skeptic of information misaligned with a source bias. Our experiment suggests that biases in information processing and simple heuristics - e.g., listen to the more reliable source - are important drivers of the endogenous acquisition of information. Keywords: Choice under Uncertainty, Information Acquisition, Bayesian Updating, Selective Exposure, Con rmation Bias, Limited Attention, Online Experiment JEL Codes: C91, D81, D83, D91
    Date: 2019
  10. By: Dosis, Anastasios (ESSEC Business School and THEMA); Muthoo, Abhinay (University of Warwick,)
    Abstract: We study a two-stage, winner-takes-all, R&D race, in which, at the outset, firms are uncertain regarding the viability of the project. Learning through experimentation introduces a bilateral (dynamic) feedback mechanism. For relatively low-value products,theequilibriumstoppingtimecoincideswiththesociallyefficientstoppingtime althoughfirmsmightexperimentexcessivelyinequilibrium;forrelativelyhigh-value products,firmsmightreduceexperimentationandstopratherprematurelyduetothe fundamental free-riding effect. Perhaps surprisingly, a decrease in the value of the product can spur experimentation.
    Keywords: Experimentation ; learning ; dynamic R&D competition ; inefficiency Jel Classification: C73 ; D83 ; O31 ; O32
    Date: 2019
  11. By: Liu, Tingjun (The University of Hong Kong); Bernhardt, Dan (University of Illinois & University of Warwick)
    Abstract: Auctions employing steeper securities generate greater revenues when bidders have equal opportunity costs. However, when opportunity costs rise sufficiently quickly with valuations, security bids decrease in NPV and steeper securities reduce seller revenues. We show that when such adverse selection obtains, using combinations of securities with differing steepness can generate higher revenues than using securities of the same steepness. We determine the optimal combination of cash plus equity; identify a novel way of implementing the optimal mechanism via decreasing royalty rates ; establish the robustness of the mechanism; and identify when auction designs combining cash with steeper-than-equity securities increase seller revenues.
    Date: 2019
  12. By: Martin Kaae Jensen (University of Surrey)
    Abstract: This paper studies the relationship between functional diversity and team performance. The main question is whether diversity may entail strategic benefits that enable diverse teams to outperform homogenous teams even if the homogenous teams are more skilled on average, or diversity entails a direct efficiency loss a la Benabou (1996). Both ability diversity and cognitive diversity (Johnson- Laird (1983), Page (2008)) are studied, and the paper also considers the role of Becker and Murphy (1992)-type coordination costs. In all cases, the main message is that effort adjustments set off by greater diversity may significantly change the outcome in comparison with an assessment based on the more familiar direct effects. For example, a diverse team may outperform a homogenous team even if the elasticity of substitution is positive and less capable individuals therefore “drag down” the more capable individuals productivities; and under the same condition, a “superstar” may outperform a cognitively diverse team even though a positive elasticity of substitution implies decreasing returns to talent in the sense of Rosen (1981). The paper discusses the implications of these findings for the general diversity debate, for optimal team selection, and for market salaries. The main insights, as well as the tools developed to reach those insights, are very general and extend to other contexts where diversity plays a role.
    JEL: C72 D40 D80 M10 Z13
    Date: 2019–07
  13. By: Bernhardt, Dan (University of Illinois & University of Warwick); Constantinou, Evangelos (University of Illinois); Shadmehr, Mehdi (University of Chicago and University of Calgary)
    Abstract: When consumers only see prices once they visit stores, and some consumers have time to comparison shop, co-location commits stores to compete and lower prices, which draws consumers away from isolated stores. Profits of co-located firms are a single-peaked function of the number of shoppers—co-located firms thrive when there are some shoppers, but not too many. When consumers know in advance whether they have time to shop, effects are enhanced: co-located stores may draw enough shoppers to drive the expected price paid by a non-shopper below that paid when consumers do not know if they will have time to shop
    Date: 2019
  14. By: Jeitschko, Thomas D.; Withers, John A.
    Abstract: Regulators and the firms they regulate interact repeatedly. Over the course of these interactions, the regulator collects data that contains information about the firm's idiosyncratic private characteristics. This paper studies the case in which the regulator uses information gleaned from past cost observations when designing the current period's contract. Cost observations are obscured in stochastic settings and so perfect inferences about underlying private information are not possible. However, the design of the regulatory contract affects how much information is gleaned. When learning more about the firm's type, the regulator increases expected second period welfare by reducing distortions tied to asymmetric information. In contrast, by learning less about the firm's type, the regulator reduces incentive payments in first period. The trade-off between the desire to be more informed and to reduce incentive payments leads to a contracting dynamic that aligns with anecdotal, experimental and empirical evidence of the ratchet effect.
    Keywords: Dynamic Contracts,Dynamic Agency,Ratchet Effect,Experimentation,Signal Dampening,Regulation
    JEL: D8 C73 L5
    Date: 2019

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