nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒07‒29
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Rationalizability, Observability and Common Knowledge By Antonio Penta; Peio Zuazo-Garin
  2. Boolean Representations of Preferences under Ambiguity By Mira Frick; Ryota Iijima; Yves Le Yaouanq
  3. A Model of Weighted Network Formation By Baumann, L.
  4. Efficient Sequential Screening By Boaz Zik
  5. Tying the Politicians’ Hands: The Optimal Limits to Representative Democracy By Didier Laussel; Ngo Van Long
  6. Price Competition in a Vertizontally Differentiated Duopoly By Bos, Iwan; Peeters, Ronald
  7. Poisson voting games: proportional rule By Francesco De Sinopoli; Claudia Meroni
  8. Information acquisition, price informativeness, and welfare By Rahi, Rohit; Zigrand, Jean-Pierre
  9. Experimentation in Dynamic R&D Competition By Dosis, Anastasios; Muthoo, Abhinay
  10. Time consistency and time invariance in collective intertemporal choice By Millner, Antony; Heal, Geoffrey
  11. Your Failure is My Opportunity - Eff ects of Elimination in Contests By Mendel, Moritz; Pieroth, Ferdinand; Seel, Christian
  12. Technological change, campaign spending and polarization By Pau Balart; Agustin Casas; Orestis Troumpounis
  13. Residual Deterrence By Garrett, Daniel F.; Dilmé, Francesc
  14. Dynamic Rationally Inattentive Discrete Choice: A Posterior-Based Approach By Jianjun Miao; Hao Xing
  15. Daunou’s Voting Method By Salvador Barberà; Walter Bossert; Kataro Suzumura
  16. Information Design in Blockchain: A Role of Trusted Intermediaries By Hitoshi Matsushima
  17. Contract Design with Costly Convex Self-Control By Yusufcan Masatlioglu; Daisuke Nakajima; Emre Ozdenoren
  18. Multivariate Rational Inattention By Jianjun Miao; Jieran Wu; Eric Young

  1. By: Antonio Penta; Peio Zuazo-Garin
    Abstract: We study the strategic impact of players' higher order uncertainty over the observability of actions in general two-player games. More specifically, we consider the space of all belief hierarchies generated by the uncertainty over whether the game will be played as a static game or with perfect information. Over this space, we characterize the correspondence of a solution concept which represents the behavioral implications of Rationality and Common Belief in Rationality (RCBR), where `rationality' is understood as sequential whenever a player moves second. We show that such a correspondence is generically single-valued, and that its structure supports a robust refinement of rationalizability, which often has very sharp implications. For instance: (i) in a class of games which includes both zero-sum games with a pure equilibrium and coordination games with a unique efficient equilibrium, RCBR generically ensures efficient equilibrium outcomes; (ii) in a class of games which also includes other well-known families of coordination games, RCBR generically selects components of the Stackelberg pro les; (iii) if common knowledge is maintained that player 2's action is not observable (e.g., because 1 is commonly known to move earlier, etc.), in a class of games which includes of all the above RCBR generically selects the equilibrium of the static game most favorable to player 1.
    Keywords: eductive coordination, extensive form uncertainty, first-mover advantage, Krpes hypothesis, higher order beliefs, Rationalizability, robustness, Stackelberg selections
    JEL: C70 C71 C72 D82 D83
    Date: 2019–07
  2. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yves Le Yaouanq (Ludwig-Maximilians-Universität, Munich)
    Abstract: We propose a class of multiple-prior representations of preferences under ambiguity where the belief the decision-maker (DM) uses to evaluate an uncertain prospect is the outcome of a game played by two conflicting forces, Pessimism and Optimism. The model does not restrict the sign of the DM’s ambiguity attitude, and we show that it provides a uni?ed framework through which to characterize di?erent degrees of ambiguity aversion, as well as to represent context-dependent negative and positive ambiguity attitudes documented in experiments. We prove that our baseline representation, Boolean expected utility (BEU), yields a novel representation of the class of invariant biseparable preferences (Ghirardato, Maccheroni, and Marinacci, 2004), which drops uncertainty aversion from maxmin expected utility (Gilboa and Schmeidler, 1989), while extensions of BEU allow for more general departures from independence.
    Keywords: Ambiguity, Multiple priors, Dual-self models
    JEL: D81
    Date: 2019–06
  3. By: Baumann, L.
    Abstract: The paper proposes a game of weighted network formation in which each agent has a limited resource to form links of possibly different intensities with other agents and to use for private purposes. We show that every equilibrium is either “reciprocal” or “non-reciprocal”. In a reciprocal equilibrium, any two agents invest equally in the link between them. In a non-reciprocal equilibrium, agents are partitioned into “concentrated” and “diversified” agents and a concentrated agent is only linked to diversified agents and vice versa. For every link, the concentrated agent invests more in the link than the diversified agent. The unweighted relationship graph of an equilibrium, in which two agents are linked if they both invest positively in each other, uniquely predicts the equilibrium values of each agent's network investment and utility level, as well as the ratio of any two agents' investments in each other. We show that equilibria are not pairwise stable and not efficient due to the positive externalities of investing in a link.
    Keywords: weighted networks, network formation, link-specific investment
    JEL: D85 L14 Z13 C72
    Date: 2019–07–01
  4. By: Boaz Zik
    Abstract: A seller of an item faces a potential buyer whose valuation depends on multiple private signals. When there are informational externalities and the buyer's private signals arrive all at once efficient implementation is impossible. We show that if the buyer's private signals arrive over time in a particular order then the seller can implement efficiency even in the presence of informational externalities.
    Keywords: Efficient mechanisms; Sequential screening; Interdependent valuations; Multidimensional information; Informational externalities
    JEL: D61 D62 D82
    Date: 2019–07
  5. By: Didier Laussel; Ngo Van Long
    Abstract: The citizen-candidate models of democracy assume that politicians have their own preferences that are not fully revealed at the time of elections. We study the optimal delegation problem which arises between the median voter (the writer of the constitution) and the (future) incumbent politician under the assumption that not only the state of the world and but also the politician's type (preferred policy) are the policy-maker's private information. We show that it is optimal to tie the hands of the politician by imposing both a policy floor and a policy cap and delegating him/her the policy choice only in between the cap and the floor. We establish two uncertainty principles: (a) the state-uncertainty principle, which states that the greater is the uncertainty about the state of the world, the wider is the delegation interval, and (b) the bias-uncertainty principle, which states that the greater is the uncertainty about political bias, the smaller is the delegation interval. Les récents modèles de la démocratie supposent que les hommes politiques ont leurs propres préférences qui ne sont pas pleinement révélées au moment des élections. Nous étudions le problème de délégation optimale qui se pose entre le votant médian (l'auteur de la constitution) et le (futur) politicien sous l’hypothèse que non seulement l'état du monde mais aussi le type de politicien sont des informations privées. Nous montrons qu'il est optimal de lier les mains du politicien en lui imposant à la fois un plancher et un plafond, et en lui déléguant le choix politique seulement entre le plafond et le plancher. Nous établissons deux principes d’incertitude : (a) le principe d’incertitude des états, selon lequel plus l’incertitude sur l’état du monde est grande, plus l’intervalle de délégation est large, et (b) le principe d’incertitude sur les biais, qui exige que l'intervalle de délégation soit une fonction décroissante de l’incertitude sur le type du politicien.
    Keywords: Representative Democracy,Optimal Delegation,Political Uncertainty,Policy Caps,Policy Floors,Citizen Candidates, Démocratie représentative,Délégation optimale,Incertitude politique,Plafonds de politique,Planchers de politique,Candidats citoyens
    JEL: D82 H10
    Date: 2019–07–19
  6. By: Bos, Iwan (Organisation and Strategy); Peeters, Ronald (university of otago, dunedin)
    Abstract: This paper analyzes price competition in a duopoly market in which products are both horizontally and vertically differentiated. Firms offer a basic and a premium product to buyers, some of whom are brand loyal. We establish the existence of a unique and symmetric Nash pricing equilibrium. Equilibrium prices are increasing in the degree of horizontal differentiation and the amount of brand loyal customers. The equilibrium price of the basic (premium) good is decreasing (increasing) in the quality difference and profits can increase in costs when this difference is high enough. If the pricing decision is taken at the product (division) level, then there is again a unique (and symmetric) Nash equilibrium. Equilibrium prices and profits are lower than in the centralized case and demand for the basic product is higher when the quality difference is sufficiently large. Welfare is unambiguously lower with decentralized pricing.
    Keywords: vertizontal differentiation, pricing, multiproduct oligopoly
    JEL: D43 L13
    Date: 2019–06–20
  7. By: Francesco De Sinopoli (Department of Economics (University of Verona)); Claudia Meroni (Department of Economics (University of Verona))
    Abstract: We analyze strategic voting under pure proportional rule and two candidates, embedding the basic spatial model into the Poisson framework of population uncertainty. We prove that the Nash equilibrium exists and is unique. We show that it is characterized by a cutpoint in the policy space that is always located between the mean of the two candidates’ positions and the median of the distribution of voters’ types. We also show that, as the expected number of voters goes to infinity, the equilibrium converges to that of the complete information case.
    Keywords: Poisson games, strategic voting, proportional rule
    JEL: C72 D72
    Date: 2019–07
  8. By: Rahi, Rohit; Zigrand, Jean-Pierre
    Abstract: We consider the market for a risky asset with heterogeneous valuations. Private information that agents have about their own valuation is reflected in the equilibrium price. We study the learning externalities that arise in this setting, and in particular their implications for price informativeness and welfare. When private signals are noisy, so that agents rely more on the information conveyed by prices, discouraging information gathering may be Pareto improving. Complementarities in information acquisition can lead to multiple equilibria.
    Keywords: Heterogeneous valuations; information acquisition; learning externalities; welfare; ES/K002309/1
    JEL: D82 G14
    Date: 2018–07–23
  9. 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,the equilibrium stopping time coincides with the socially efficient stopping time although firms might experiment excessively inequilibrium; forrelatively high-value products, firms might reduce experimentation and stop rather prematurely due to the 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: C73 D83 O31 O32
    Date: 2019
  10. By: Millner, Antony; Heal, Geoffrey
    Abstract: Recent work on collective intertemporal choice suggests that non-dictatorial social preferences are generically time inconsistent. We argue that this claim conflates time consistency with two distinct properties of preferences: stationarity and time invariance. While time invariance and stationarity together imply time consistency, the converse does not hold. Although non-dictatorial social preferences cannot be stationary, they may be time consistent if time invariance is abandoned. If individuals are discounted utilitarians, revealed preference provides no guidance on whether social preferences should be time consistent or time invariant. Nevertheless, we argue that time invariant social preferences are often normatively and descriptively problematic.
    Keywords: collective decisions; intertemporal choice; time consistency; ES/K006576/1
    JEL: D60 D71 D90
    Date: 2018–07–01
  11. By: Mendel, Moritz (iza university of bonn); Pieroth, Ferdinand (maastricht univ, maastricht, netherlands); Seel, Christian (General Economics 1 (Micro))
    Abstract: In this paper, we consider a sequence of multi-prize all-pay auctions, where the contestants who exert the lowest e fforts in a round are eliminated. We analyze if and how the behavior of contestants is influenced by the possibility that strong rivals are eliminated along the way. The conditions under which behavior is not influenced are rather restrictive. For cases where these conditions are not met, we derive equilibria in a two-period model. We compare our equilibrium predictions to those of a static model and a two-stage contest where the sequential structure is not announced in the first round.
    Keywords: elimination contest, identity-dependent externality
    JEL: C72 D44
    Date: 2019–06–06
  12. By: Pau Balart; Agustin Casas; Orestis Troumpounis
    Abstract: We focus on changes in technology and campaign management to study the documented simultaneous increase in campaign spending and polarization. In our model, some voters are ideological while others are impressionable. If the distribution of voters between types is endogenous and depends on parties' platform choices, our results show that a) an increase in the effectiveness of electoral advertising or a decrease in the electorate's political awareness, surely increases polarization and may also increase campaign spending, while b) a decrease in the cost of advertising does not affect neither polarization nor spending.
    Keywords: electoral competition, campaign spending, impressionable voters, semiorder lexicographic preferences
    JEL: D72
    Date: 2019
  13. By: Garrett, Daniel F.; Dilmé, Francesc
    Abstract: Successes of law enforcement in apprehending offenders are often publicized events. Such events have been found to result in temporary reductions in offending, or “residual deterrence”. We provide a theory of residual deterrence which accounts for the incentives of both enforcement officials and potential offenders. We do so by introducing to a standard inspection framework costs that must be incurred to commence enforcement. Such costs in practice include hiring specialized staff, undertaking targeted research and coordinating personnel. We illustrate how our model can be used to address a number of policy questions regarding the optimal design of enforcement authorities.
    Keywords: deterrence; reputation; switching costs
    JEL: C73 K42
    Date: 2019–07–18
  14. By: Jianjun Miao (Boston University); Hao Xing (Boston University)
    Abstract: We adopt the posterior-based approach to study dynamic discrete choice problems with rational inattention. We show that the optimal solution for the Shannon entropy case is characterized by a system of equations that resembles the dynamic logit rule. We propose an efficient algorithm to solve this system and apply our model to explain phenomena such as status quo bias, confirmation bias, and belief polarization. We also study the dynamics of consideration sets. Unlike the choice-based approach, our approach applies to general uniformly posteriorseparable information cost functions. A key condition for our approach to work in dynamic models is the convexity of the difference between the discounted generalized entropy of the prior beliefs about the future states and the generalized entropy of the current posterior.
    Keywords: Rational Inattention, Endogenous Information Acquisition, Entropy, Dynamic Discrete Choice, Dynamic Programming
    JEL: D11 D81 D83
    Date: 2019–06
  15. By: Salvador Barberà; Walter Bossert; Kataro Suzumura
    Abstract: Pierre Daunou, a contemporary of Borda and Condorcet during the era of the French Revolution and active debates on alternative voting rules, proposed a method that chooses the strong Condorcet winner if there is one, otherwise eliminates Condorcet losers and uses plurality voting on the remaining alternatives. We axiomatically characterize his method which combines potentially conflicting criteria of majoritarianism by ordering them lexicographically. This contribution serves not just to remind ourselves that a 19th-century vintage may still retain excellent aroma and taste, but also to open up a novel way of applying potentially conflicting desiderata by accommodating them lexicographically.
    Keywords: voting rules, Daunou's method, Condorcet criterion
    JEL: D71 D72
    Date: 2019–07
  16. By: Hitoshi Matsushima (University of Tokyo)
    Abstract: This study clarifies that blockchain cannot replace the strategic value of trusted intermediaries, despite sufficient technological advancement for its implementation. Given the progress expected in the future, this study assumes that blockchain can implement various commitment devices for communication explored in the information design literature, without disclosing their details to anonymous record keepers. By considering revelation incentives explicitly, we show that substituting the verification task of players’ pre-owned private signals with a trusted intermediary can reduce transaction costs in liability, which cannot be achieved non-judicially by blockchain. Hence, trusted intermediaries play a significant role in executing information design through blockchain.
    Date: 2019–07
  17. By: Yusufcan Masatlioglu; Daisuke Nakajima; Emre Ozdenoren
    Abstract: In this note, we consider the pricing problem of a profit-maximizing monopolist who faces naive consumers with convex self-control preferences.
    Date: 2019–07
  18. By: Jianjun Miao (Boston University); Jieran Wu (Zhejiang University); Eric Young (University of Virginia)
    Abstract: We study optimal control problems in the multivariate linear-quadratic-Gaussian framework under rational inattention and show that the multivariate attention allocation problem can be reduced to a dynamic tracking problem in information theory. We propose a general solution method to solve this problem by using rate distortion functions and semidefinite programming and derive the optimal form and dimension of signals without strong prior restrictions. We provide generalized reverse water-filling solutions for some special cases. Applying our method to solve three multivariate economic models, we obtain some results qualitatively different from the literature.
    Keywords: Rational Rational Inattention, Endogenous Information Choice, Rate Distortion Function, Dynamic Tracking Problem, Optimal Control
    JEL: C61 D83 E21 E22 E31
    Date: 2018–12

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