nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒08‒26
23 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Using Models to Persuade By Joshua Schwartzstein; Adi Sunderam
  2. Nonlinear Pricing with Average-Price Bias By Martimort, David; Stole, Lars
  3. On Selecting the Right Agent By de Clippel, Geoffroy; Eliaz, Kfir; Fershtman, Daniel; Rozen, Kareen
  4. Progressive Participation By Dirk Bergemann; Philipp Strack
  5. Optimal similarity judgments in intertemporal choice (and beyond) By Fabrizio Adriani; Silvia Sonderegger
  6. The Social Costs of Side Trading By Attar, Andrea; Mariotti, Thomas; Salanié, François
  7. Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership By Schmitz, Patrick W.
  8. Information Design with Agency By Bizzotto, Jacopo; Perez-Richet, Eduardo; Vigier, Adrien
  9. Influence model of evasive decision makers By Khalid, Asma; Beg, Ismat
  10. Fairness and efficiency for probabilistic allocations with endowments By Federico Echenique; Antonio Miralles; Jun Zhang
  11. Sharing a Government By Jaume Ventura
  12. A Dynamic Game with Interaction between Kantian Players and Nashian Players By Ngo Van Long
  13. Moral Hazard and the Property Rights Approach to the Theory of the Firm By Schmitz, Patrick W.
  14. Serial Dictatorship Mechanisms with Reservation Prices By Bettina Klaus; Alexandru Nichifor
  15. The Impact of Product Qualities on Downstream Bundling in a Distribution Channel By Angelika Endres; Joachim Heinzel
  16. Ties By Federico Revelli; Tsung-Sheng Tsai
  17. Revelation Principle with Persistent Correlated Types: Impossibility Result By Suehyun Kwon
  18. A model of discrete choice based on reinforcement learning under short-term memory By Misha Perepelitsa
  19. Mergers on Networks By Dubovik, Andrei
  20. Strict Incentives and Strategic Uncertainty By Hans Carlsson; Philipp Christoph Wichardt
  21. Expert Captured Democracies By Archishman Chakraborty; Parikshit Ghosh; Jaideep Roy
  22. Probabilistic Verification in Mechanism Design By Ian Ball; Deniz Kattwinkel
  23. Social Media and Polarization By Campbell, Arthur; Leister, Matthew; Zenou, Yves

  1. By: Joshua Schwartzstein; Adi Sunderam
    Abstract: We present a framework for analyzing “model persuasion.” Persuaders influence receivers’ beliefs by proposing models (likelihood functions) that specify how to organize past data (e.g., on investment performance) to make predictions (e.g., about future returns). Receivers are assumed to find models more compelling when they better explain the data, fixing receivers’ prior beliefs over states of the world. A key tradeoff facing persuaders is that models that better fit the data induce less movement in receivers’ beliefs. Model persuasion sometimes makes the receiver worse off than he would be in the absence of persuasion. Even when the receiver is exposed to the true model, the wrong model often wins because it better fits the past. The receiver is most misled by persuasion when there is a lot of data that is open to interpretation and exhibits randomness, as this gives the persuader “wiggle room” to highlight false patterns. With multiple persuaders, competition pushes towards models that provide overly good fits, which tend to neutralize the data by leading receivers to view it as unsurprising. With multiple receivers, a persuader is more effective when he can send tailored, private messages than a menu of public messages. We illustrate with examples from finance, business, politics, and law.
    JEL: G11 L15 M3
    Date: 2019–07
  2. By: Martimort, David; Stole, Lars
    Abstract: Empirical evidence suggests that consumers facing complex nonlinear pricing often make choices based on average (not marginal) prices. Given such behavior, we characterize a monopolist's optimal nonlinear price schedule. In contrast to the textbook setting, nonlinear prices designed for ``average-price bias'' distort consumption downward for consumers at the top, may produce efficient consumption for consumers at the bottom, and typically feature quantity premia rather than quantity discounts. These properties arise because the bias replaces consumer information rents with curvature rents. Whether or not a monopolist prefers consumers with average-price bias depends upon underlying preferences and costs.
    Keywords: average-price bias; curvature rents; Nonlinear Pricing; price discrimination
    JEL: D82
    Date: 2019–07
  3. By: de Clippel, Geoffroy; Eliaz, Kfir; Fershtman, Daniel; Rozen, Kareen
    Abstract: Each period, a principal must assign one of two agents to some task. Profit is stochastically higher when the agent is qualified for the task. The principal cannot observe qualification. Her only decision is which of the two agents to assign, if any, given the public history of selections and profits. She cannot commit to any rule. While she maximizes expected discounted profits, each agent maximizes his expected discounted selection probabilities. We fully characterize when the principal's first-best payoff is attainable in equilibrium, and identify a simple strategy profile achieving this first-best whenever feasible. We propose a new refinement for dynamic mechanisms (without transfers) where the designer is a player, under which we show the principal's next-best, when the first-best is unachievable, is the one-shot Nash. We show how our analysis extends to variations on the game accommodating more agents, caring about one's own performance, cheap talk and losses.
    Keywords: dynamic allocation; mechanism design without commitment; mechanism design without transfers
    Date: 2019–07
  4. By: Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Cowles Foundation, Yale University)
    Abstract: A single seller faces a sequence of buyers with unit demand. The buyers are forward-looking and long-lived but vanish (and are replaced) at a constant rate. The arrival time and the valuation is private information of each buyer and unobservable to the seller. Any incentive-compatible mechanism has to induce truth-telling about the arrival time and the evolution of the valuation. We derive the optimal stationary mechanism, characterize its qualitative structure and derive a closed-form solution. As the arrival time is private information, the agent can choose the time at which he reports his arrival. The truth-telling constraint regarding the arrival time can be represented as an optimal stopping problem. The stopping time determines the time at which the agent decides to participate in the mechanism. The resulting value function of each agent can not be too convex and has to be continuously differentiable everywhere, reflecting the option value of delaying participation. The optimal mechanism thus induces progressive participation by each agent: he participates either immediately or at a future random time.
    Keywords: Dynamic Mechanism Design, Observable Arrival, Unobservable Arrival, Repeated Sales, Interim Incentive Constraints, Interim Participation Constraints, Stopping Problem, Option Value, Progressive Participation
    JEL: D44 D82 D83
    Date: 2019–08
  5. By: Fabrizio Adriani (University of Leicester); Silvia Sonderegger (University of Nottingham)
    Abstract: We use a simple cost-benefit analysis to derive optimal similarity judgments - addressing the question: when should we expect a decision maker to distinguish between different time periods or different prizes? Our key premise is that cognitive resources are costly and are to be deployed only where they really matter. We show that this simple insight can explain a number of observed anomalies, such as: (i) time preference reversal, (ii) magnitude effects, (iii) interval length effects. For each of these phenomena, our approach allows to identify the direction of the bias relative to the benchmark case where cognitive resources are costless. Finally, we show that, when applied to choice under risk, the same insights predict anomalies such as the ratio and certainty effects, and rationalize Rabin's risk aversion paradox. This suggests that the theory may provide a parsimonious explanation of behavioral anomalies in different contexts.
    Keywords: Similarity judgments, Intertemporal Choice, Rational Inattention, Choice Under Risk
    Date: 2019–06
  6. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    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: 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; Second-Best Allocations; Side Trading
    JEL: D43 D82 D86
    Date: 2019–07
  7. By: Schmitz, Patrick W.
    Abstract: The property rights approach to the theory of the firm is the most prominent application of the incomplete contracting paradigm. A central conclusion of the standard model says that joint ownership is suboptimal. In this note, we analyze a modified version of the standard model that is tailored to the organization of R&D activities, where one of the parties is wealth-constrained and protected by limited liability. It turns out that joint ownership can be optimal, since it avoids wasteful rent-seeking activities when limited liability rents are necessary to induce high effort. Our results are in line with the fact that R&D activities are often conducted in research joint ventures.
    Keywords: Incomplete Contracts; joint ownership; limited liability; Property rights; rent seeking
    JEL: D23 D86 L24 L25 O32
    Date: 2019–07
  8. By: Bizzotto, Jacopo; Perez-Richet, Eduardo; Vigier, Adrien
    Abstract: We consider a general information design problem in which the task of producing information is delegated to an agent who can privately choose between the procedure designed by the principal and a default procedure. Procedures are constrained as to which messages they use, and possibly how they may be used. The principal can incentivize the agent via transfers conditioned on messages. This gives rise to a moral hazard problem in which the principal faces a trade-off between generating information that is persuasive in the continuation game, or generating information about the choice of the agent so as to lower the cost of agency. We provide a general methodology to solve such problems, and characterize an optimal procedure. We apply our results to information acquisition and persuasion examples.
    Keywords: Agency Cost; Information Acquisition; information design; moral hazard
    JEL: C72 D82
    Date: 2019–07
  9. By: Khalid, Asma; Beg, Ismat
    Abstract: The aim of this paper is to introduce the notion of truthfulness in an influence based decision making model. An expert may submit his opinions truthfully or he may dismantle the original situation by undermining the actual opinion, such a decision maker is called an evasive decision maker or an almost truthful decision maker in this paper. It is assumed that experts in the panel are dignified members hence even though they are not habitual liars, they are either "almost truthful" or evasive. To measure their degree of truthfulness, we use the information provided by them in the form of preference relations. We use this information to state the foundation of influence model of evasive decision makers. Finally, a ranking method is proposed to find best possible solutions.
    Keywords: Truthfulness; group decision making ; social influence networks; additive reciprocity
    JEL: C44 C61 C63 D7
    Date: 2018–11–20
  10. By: Federico Echenique; Antonio Miralles; Jun Zhang
    Abstract: We propose a notion of fairness for allocation problems in which different agents may have different endowments. Fairness is usually understood as the absence of envy, but when agents differ in endowments it is impossible to rule out envy without violating property rights. Instead we seek to rule out {\em justified envy}, defined as envy for which the remedy would not violate any agent's property rights. We show that fairness, meaning the absence of justified envy, can be achieved together with efficiency and individual rationality (respect for property rights). Our approach requires standard assumptions on agents' preferences, and is compatible with quantity constraints on allocations. The main application of our results is to school choice, where we can simultaneously achieve fairness, efficiency, and diversity-motivated quantity constraints.
    Date: 2019–08
  11. By: Jaume Ventura
    Abstract: This paper develops a simple theoretical framework to study a set of regions, each with its own regional government, who share a union or central government. These governments must decide whether to implement or discard a large number of projects that produce local benefits for the region that implements them, and externalities for the rest of the regions. Conflict or disagreement arises since different regions value projects differently. The classic assignment problem consists of deciding who decides these projects, either the union or the regional governments. It is well known that regional governments are insensitive to externalities. The key observation here is that the union government is insensitive to local benefits. Thus, each government maximizes only a piece of the value of projects, and disregards the other one. This observations leads to simple and clear rules for solving the assignment problem.
    JEL: D72 D79 F15 F55 H77
    Date: 2019–08
  12. By: Ngo Van Long
    Abstract: This paper defines the concept of feedback Kant-Nash equilibrium for a discrete-time model of resource exploitation by infinitely-lived Kantian and Nashian players, where we define Kantian agents as those who act in accordance with the categorical imperative. We revisit a well-known dynamic model of the tragedy of the commons and ask what would happen if not all agents are solely motivated by self interest. We establish that even without external punishment of violation of social norms, if a sufficiently large fraction of the population consists of Kantian agents, the tragedy of the commons can be substantially mitigated.
    Keywords: Kantian equilibrium, rule of behavior, categorical imperative
    JEL: C71 D62 D71
    Date: 2019
  13. By: Schmitz, Patrick W.
    Abstract: In the Grossman-Hart-Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. In this note, we bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties' disagreement payoffs).
    Keywords: Incomplete Contracts; Investment incentives; moral hazard; Ownership rights; relationship specificity
    JEL: D23 D86 G34 L23 L24
    Date: 2019–07
  14. By: Bettina Klaus; Alexandru Nichifor
    Abstract: We propose a new set of mechanisms, which we call serial dictatorship mechanisms with individual reservation prices for the allocation of homogeneous indivisible objects, e.g., specialist clinic appointments. We show that a mechanism ' satis es minimal tradability,individual rationality, strategy-proofness, consistency, independence of unallocated objects, and non wasteful tie-breaking if and only if there exists a reservation price vector r and a priority ordering such that ' is a serial dictatorship mechanism with reservation prices based on r and . We obtain a second characterization by replacing individual rationality with non-imposition. In both our characterizations r, , and 'are all found simultaneously and endogenously from the properties. Finally, we illustrate how our model, mechanism, and results, capture the normative requirements governing the functioning of some real life markets and the mechanisms that these markets use.
    Keywords: serial dictatorship; individual reservation prices; strategy-proofness; consistency.
    JEL: C78 D71
    Date: 2019–08
  15. By: Angelika Endres (Paderborn University); Joachim Heinzel (Paderborn University)
    Abstract: We study the impact of exogenous product qualities on a downstream firm’s decision to bundle and the welfare effects of downstream bundling. We consider a distribution channel with two downstream firms and two price-setting monopolistic upstream producers. One upstream firm sells its good 1 exclusively to one downstream firm and the other upstream firm sells its good 2 to both downstream firms. The downstream firms compete in prices and the two-product downstream firm has the option to bundle its goods. We find that downstream bundling aggravates the problem of double marginalization in the channel, but reduces the intensity of downstream competition. Finally, bundling is profitable for the two-product downstream firm only when the quality of good 2 exceeds the quality of good 1. However, bundling is always profitable when the production process is controlled by the downstream industry. The impact on total welfare is ambiguous and depends on the distribution of market power in the channel and the quality levels of the goods.
    Keywords: channel conflicts; double marginalization; downstream bundling; leverage theory; quality differentiation
    JEL: D21 D61 L11 L15
    Date: 2019–08
  16. By: Federico Revelli; Tsung-Sheng Tsai
    Abstract: This paper investigates whether the rare occurrence of a local election ending in a tie or being decided by a single vote generates informational spill-overs on nearby localities’ subsequent elections. First, based on the pivotal-voter theory, we develop a model of costly instrumental voting in sequential elections with private information, where voters update their beliefs regarding the distribution of political preferences and the probability of their vote being decisive upon observing the outcomes in earlier elections, and decide whether to turn out to vote accordingly. Next, by exploiting over a hundred exact ties or one-vote-difference results in Italian mayoral elections during the past two decades and the quasi-experimental conditions created by the staggered municipal electoral calendar, we test the model’s empirical predictions and find a substantial impact on voter turnout rates of exposure for geographical reasons to spill-overs from the localities experiencing those bizarre electoral outcomes.
    Keywords: tied elections, voter turnout, information spill-over, salience
    JEL: D72 H71
    Date: 2019
  17. By: Suehyun Kwon
    Abstract: Abstract
    Keywords: mechanism design, limited commitment, revelation principle, informed-principal problem, persistence, correlated types
    JEL: D82
    Date: 2019
  18. By: Misha Perepelitsa
    Abstract: A family of models of individual discrete choice are constructed by means of statistical averaging of choices made by a subject in a reinforcement learning process, where the subject has short, k-term memory span. The choice probabilities in these models combine in a non-trivial, non-linear way the initial learning bias and the experience gained through learning. The properties of such models are discussed and, in particular, it is shown that probabilities deviate from Luce's Choice Axiom, even if the initial bias adheres to it. Moreover, we shown that the latter property is recovered as the memory span becomes large. Two applications in utility theory are considered. In the first, we use the discrete choice model to generate binary preference relation on simple lotteries. We show that the preferences violate transitivity and independence axioms of expected utility theory. Furthermore, we establish the dependence of the preferences on frames, with risk aversion for gains, and risk seeking for losses. Based on these findings we propose next a parametric model of choice based on the probability maximization principle, as a model for deviations from expected utility principle. To illustrate the approach we apply it to the classical problem of demand for insurance.
    Date: 2019–08
  19. By: Dubovik, Andrei
    Abstract: I study mergers where each firm owns multiple shops across a country. Presently, the European Commission views every shop, together with the shops from its catchment area, as an isolated market. Such an approach is internally inconsistent. I show how to extend the European Commission's approach to consistently take overlaps in catchment areas into account. My model is a specialization of the existing network theory that is aimed to be feasible in real merger cases. As a demonstration, I study a past merger case and I find that neglecting overlaps in catchment areas can result in substantial biases.
    Keywords: mergers, networks, spatial competition, consumer demand
    JEL: D43 D85 L13 L14 L40
    Date: 2018–06–09
  20. By: Hans Carlsson; Philipp Christoph Wichardt
    Abstract: This paper proposes a comprehensive perspective on the question of self-enforcing solutions for normal form games. While this question has been widely discussed in the literature, the focus is usually either on strict incentives for players to stay within the proposed solution or on strategic uncertainty, i.e. robustness to trembles. The present approach combines both requirements in proposing the concept of robust sets, i.e. sets of strategy profiles which satisfy both strict incentives and robustness to strategic uncertainty. The result is a set valued solution, a variant of which is shown to exist for all finite normal form games.
    Keywords: game theory, self-enforcing solution, strict incentives, strategic uncertainty
    JEL: C72
    Date: 2019
  21. By: Archishman Chakraborty (Syms School of Business, Yeshiva University); Parikshit Ghosh (Department of Economics, Delhi School of Economics); Jaideep Roy (Department of Economics, University of Bath)
    Abstract: Does public cheap talk by a biased expert benefitt voters? The answer depends on the nature of democratic institutions and the extent of communication possibilities. Expert endorsements induce office-seeking parties to serve the expert’s interests, hurting voters. Expert advocacy makes policies respond to information, helping voters. Together, policy advocacy and partisan endorsements are often better than either alone. Their interaction creates a delegation benefit of indirect democracy. Voters may prefer this institution to one where policymaking is geared to serving the public interest. Direct expert capture of one party is another form of delegation and the best institution for voters.
    Keywords: experts, endorsements, advocacy, electoral competition, indirect democracy, cheap talk, intermediation, delegation.
    JEL: C72 D72 D82
    Date: 2019–08
  22. By: Ian Ball; Deniz Kattwinkel
    Abstract: We introduce a model of probabilistic verification in a mechanism design setting. The principal verifies the agent's claims with statistical tests. The agent's probability of passing each test depends on his type. In our framework, the revelation principle holds. We characterize whether each type has an associated test that best screens out all the other types. In that case, the testing technology can be represented in a tractable reduced form. In a quasilinear environment, we solve for the revenue-maximizing mechanism by introducing a new expression for the virtual value that encodes the effect of testing.
    Date: 2019–08
  23. By: Campbell, Arthur; Leister, Matthew; Zenou, Yves
    Abstract: Because of its impacts on democracy, there is an important debate on whether the recent trends towards greater use of social media increases or decreases (political) polarization. One challenge for understanding this issue is how social media affects the equilibrium prevalence of different types of media content. We address this issue by developing a model of a social media network where there are two types of news content: mass-market (mainstream news) and niche-market (biased or more "extreme" news) and two different types of individuals who have a preference for recommending one or other type of content. We find that social media will amplify the prevalence of mass-market content and may result in it being the only type of content consumed. Further, we find that greater connectivity and homophily in the social media network will concurrently increase the prevalence of the niche market content and polarization. We then study an extension where there are two lobbying agents that can and wish to influence the prevalence of each type of content. We find that the lobbying agent in favor of the niche content will invest more in lobbying activities. We also show that lobbying activity will tend to increase polarization, and that this effect is greatest in settings where polarization would be small absent of lobbying activity. Finally, we allow individuals to choose the degree of homophily amongst their connections and demonstrate that niche-market individuals exhibit greater homophily than the mass-market ones, and contribute more to polarization.
    Date: 2019–07

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