nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒09‒23
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. The Evolutionary Stability of Optimism, Pessimism, and Complete Ignorance By Burkhard C. Schipper
  2. Overcoming Contractual Incompleteness: The Role of Guiding Principles By David Frydlinger; Oliver D. Hart
  3. Disagreement and Informal Delegation in Organizations By Emre Ekinci; Nikolaos Theodoropoulos
  4. "Mechanism Design with General Ex-Ante Investments" By Hitoshi Matsushima; Shunya Noda
  5. The Only Dance in Town: Unique Equilibrium in a Generalized Model of Price Competition By Johannes Johnen; David Ronayne
  6. Optimal Regulation without Commitment: Reputation and Incentives By Alessandro Dovis; Rishabh Kirpalani
  7. Information, Market Power and Price Volatility By Dirk Bergemann; Tibor Heumann; Stephen Morris
  8. Patterns of Competition with Captive Customers By Mark Armstrong; John Vickers
  9. Moving Forward vs. Inflicting Costs in a Random-Walk Model of War By Nakao, Keisuke
  10. Contribution to a Public Good under Subjective Uncertainty By Anwesha Banerjee; Nicolas Gravel
  11. A folk theorem in infinitely repeated prisoner's dilemma with small observation cost By Hino, Yoshifumi
  12. Is the preference of the majority representative? By Mihir Bhattacharya; Nicolas Gravel
  13. Fake Sales: A Dynamic Pricing Perspective By Garrett, Daniel F.

  1. By: Burkhard C. Schipper (Department of Economics, University of California Davis)
    Abstract: We provide an evolutionary foundation to evidence that in some situations humans maintain either optimistic or pessimistic attitudes towards uncertainty and are ignorant to relevant aspects of the environment. Players in strategic games face Knightian uncertainty about opponents' actions and maximize individually their Choquet expected utility with respect to neo-additive capacities (Chateauneuf, Eichberger, and Grant, 2007) allowing for both an optimistic or pessimistic attitude towards uncertainty as well as ignorance to strategic dependencies. An optimist (resp. pessimist) overweights good (resp. bad) outcomes. A complete ignorant never reacts to opponents' changes of actions. With qualifications we show that in finite populations optimistic (resp. pessimistic) complete ignorance is evolutionary stable and yields a strategic advantage in submodular (resp. supermodular) games with aggregate externalities. Moreover, this evolutionary stable preference leads to Walrasian behavior in these classes of games.
    Keywords: ambiguity, Knightian uncertainty, Choquet expected utility, neo-additive capacity, Hurwicz criterion, Maximin, Minimax, supermodularity, aggregative games, monotone comparative statics, playing the field, evolution of preferences
    JEL: C72 C73 D01 D43 D81 L13
    Date: 2019–09–17
  2. By: David Frydlinger; Oliver D. Hart
    Abstract: We consider a buyer and seller who contract over a service. The contract encourages investment and provides a reference point for the transaction. In normal times the contract works well. But with some probability an abnormal state occurs and the service must be modified. The parties expect each other to behave “reasonably”, but given self-serving biases their views of reasonableness may not coincide, leading to aggrievement and deadweight losses. The adoption by the parties of guiding principles such as loyalty and equity in their contract can help. We provide supporting evidence in the form of case studies and interviews.
    JEL: D23 D86 K12
    Date: 2019–09
  3. By: Emre Ekinci; Nikolaos Theodoropoulos
    Abstract: To investigate delegation decisions within organizations, we develop a principal-agent model in which the principal can only informally delegate authority to the agent and the parties openly disagree with each other in the sense of differing prior beliefs about the optimal course of action. Our main analysis shows that the degree of disagreement determines what kind of delegation policy the principal can commit to and this, in turn, alters the agent's effort for information acquisition. In an extension, we consider the principal's incentives to provide the agent with training, which reduces the cost of acquiring information. The analysis reveals that training provision is higher under delegation and that training facilitates delegation. We use a cross section of matched employer-employee data to examine the extent to which the empirical implications of this extension are consistent with data.
    Keywords: Delegation of authority; Differing priors
    JEL: L2 M0
    Date: 2019–09
  4. By: Hitoshi Matsushima (Graduate School of Economics, The University of Tokyo); Shunya Noda (Vancouver School of Economics, University of British Columbia)
    Abstract: We investigate the general mechanism design problems in which agents take ex-ante hidden actions (or investments) that influence state distribution. We show that the variety of action choices drastically shrinks the set of mechanisms that induce targeted actions in the sense that there is a one-to-one tradeoff between the dimensionality of action space and that of payment rules with which the targeted action profile is taken in an equilibrium. This result comprehends the observations made by previous works. When agents can take unilateral deviations to change the state distribution in various directions, we have equivalence properties with respect to ex-post payoffs, payments, and revenues. In particular, the pure-VCG mechanism, the simplest form of the canonical VCG mechanism, becomes the only mechanism that induces an efficient action profile. Contrarily, the popular pivot mechanism generically fails to induce efficient actions, even when the action space is one-dimensional.
    Date: 2019–09
  5. By: Johannes Johnen; David Ronayne
    Abstract: We study a canonical model of simultaneous price competition between firms that sell a homogeneous good to consumers who are characterized by the number of prices they are exogenously aware of. This setting subsumes many used in the literature over the past several decades. Our result shows that there is a unique equilibrium if and only if there exist some consumers who are aware of exactly two prices. The equilibrium we derive is in symmetric mixed strategies. Further¬more, when there are no consumers aware of exactly two prices, we show there is an uncountable-infinity of asymmetric equilibria in addition to the symmetric equilibrium. Our result shows that the paradigm generically produces a unique equilibrium; that the commonly-sought symmetric equilibrium is robust; and that the asymmetric equilibria are knife-edge phenomena.
    Keywords: price competition; price dispersion; unique equilibrium
    JEL: D43 L11
    Date: 2019–07–26
  6. By: Alessandro Dovis (University of Pennsylvania); Rishabh Kirpalani (University of Wisconsin)
    Abstract: We often observe regulators deviating from stated rules because they cannot resist the ex-post pressure to re-optimize. Examples include the regulation of financial firms (bailouts), fiscal rules, and currency boards. This paper studies the optimal design of regulation in a dynamic model when there is a time inconsistency problem and uncertainty about whether a regulator can commit to follow the rule ex-post. A regulator can either be a commitment type who can always commit to enforce regulation or an optimizing type who sequentially decides whether to enforce or not. This type is unobservable to private agents who learn who about it through the actions of the regulator. Higher beliefs that the regulator is the commitment type (the regulator’s reputation) helps promote good behavior by private agents. Consequently, we show that in a large class of economies, uncertainty about the type of the regulator helps provide incentives to private agents and thus allows for the implementation of good outcomes. Therefore, learning the type of the regulator can be costly. If the initial reputation is not too high, the optimal regulation is the strictest regulation that is incentive compatible for the optimizing type. We show that reputational considerations imply that the optimal regulation is more lenient than the one that would arise in a static environment. We study two applications of this framework. First, we study the design of the optimal inflation target in a dynamic Barro-Gordon model. Second, we study the design of optimal bailout policies when there is an underlying moral hazard problem and social costs associated with default. Contrary to conventional wisdom, we show that bailouts along the equilibrium path are necessary to discipline future risk-taking of financial firms.
    Date: 2019
  7. By: Dirk Bergemann (Cowles Foundation, Yale University); Tibor Heumann (Dept. of Economics, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We consider demand function competition with a ï¬ nite number of agents and private information. We show that any degree of market power can arise in the unique equilibrium under an information structure that is arbitrarily close to complete information. In particular, regardless of the number of agents and the correlation of payoff shocks, market power may be arbitrarily close to zero (so we obtain the competitive outcome) or arbitrarily large (so there is no trade in equilibrium). By contrast, price volatility is always less than the variance of the aggregate shock across all information structures.
    Keywords: Demand Function Competition, Supply Function Competition, Price Impact, Market Power, Incomplete Information, Price Volatility
    JEL: C72 D43 D44 D83 G12
    Date: 2019–09
  8. By: Mark Armstrong; John Vickers
    Abstract: We study mixed-strategy equilibrium pricing in oligopoly settings where con-sumers vary in the set of suppliers they consider for their purchase-some being captive to a particular firm, some consider two particular firms, and so on. In the case of "nested reach" we find equilibria, unlike those in more standard models, in which firms are ranked in terms of the prices they might charge. We character-ize equilibria in the three-firm case, and contrast them with equilibria in the parallel model with capacity constraints. A theme of the analysis is how patterns of consumer interaction with firms matter for competitive outcomes.
    JEL: C72 D43 D83 L15
    Date: 2018–12–05
  9. By: Nakao, Keisuke
    Abstract: How do belligerents choose and change their military strategies during war? How do these strategies shape war? To address these questions, we develop a random-walk model of war, where two belligerents fight over "forts" across periods. The random walk represents a battlefront, which moves as the war evolves, resulting in the occupation of more forts for the winning side and less forts for the losing side. Unlike existing models, ours allows the belligerents to choose an action out of moving forward, inflicting costs, and surrender in every battle. We found that equilibrium strategies are monotonic with respect to the walk---a belligerent will punish its opponent if it is sufficiently advantageous and surrender if it is too disadvantageous. Accordingly, the punishment strategy can function to shorten the war. Moreover, a severer punishment tends to make the war even shorter.
    Keywords: gambler's ruin, military strategy, random walk
    JEL: C73 D74 F51
    Date: 2019
  10. By: Anwesha Banerjee (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.); Nicolas Gravel (Centre de Sciences Humaines, 2, Dr APJ Abdul Kalam Road, 11 0011 Delhi, India. & Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: This paper examines how voluntary contributions to a public good are affected by the contributors' heterogeneity in beliefs about the uncertain impact of their contributions. It assumes that contributors have Savagian preferences that are represented by a two-state-dependent expected utility function and different beliefs about the benefit that will result from the sum of their contributions. We establish general comparative statics results regarding the effect of specific changes in the distribution of beliefs on the (unique) Nash equilibrium provision of the public good, under certain conditions imposed on the preferences. We specifically show that the equilibrium public good provision is increasing with respect to both first and second order stochastic dominance changes in the distribution of beliefs. Hence, increasing the contributors' optimism about the uncertain benefit of their contributions increases aggregate public good provision provision, as does any homogenization of these beliefs around their mean.
    Keywords: voluntary provision, public good, uncertainty, beliefs, optimism, consensus
    JEL: C72 H41
    Date: 2019–09
  11. By: Hino, Yoshifumi
    Abstract: We consider an infinitely repeated prisoner's dilemma under costly monitoring. If a player observes his opponent, then he pays an observation cost and knows the action chosen by his opponent. If a player does not observe his opponent, he cannot obtain any information about his opponent's action. Furthermore, no player can statistically identify the observational decision of his opponent. We prove efficiency without any signals. Then, we extend the idea with a public randomization device and we present a folk theorem for a sufficiently small observation cost when players are sufficiently patient.
    Keywords: Costly observation; Efficiency; Folk theorem; Prisoner's dilemma
    JEL: C72 C73 D82
    Date: 2018–12–10
  12. By: Mihir Bhattacharya (Department of Economics, Ashoka University); Nicolas Gravel (Centre de Sciences Humaines, 2, Dr APJ Abdul Kalam Road, 11 0011 Delhi, India & Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: Given a profile of preferences on a set of alternatives, a majoritarian relation is a complete binary relation that agrees with the strict preference of a strict majority of these preferences whenever such strict strict majority is observed. We show that a majoritarian relation is, among all conceivable binary relations, the most representative of the profile of preferences from which it emanates. We define "the most representative" to mean "the closest in the aggregate". This requires a definition of what it means for a pair of preferences to be closer to each other then another. We assume that this definition takes the form of a distance function defined over the set of all conceivable preferences. We identify a necessary and sufficient condition for such a distance to be minimized by a majoritarian relation. This condition requires the distance to be additive with respect to a plausible notion of compromise between preferences. The well-known Kemeny distance between preferences does satisfy this property. We also provide a characterization of the class of distances satisfying this property as numerical representations of a primitive qualitative proximity relation between preferences.
    Keywords: preferences, majority, dissimilarity, distance, aggregation
    JEL: D71 D72
    Date: 2019–09
  13. By: Garrett, Daniel F.
    Abstract: Some sellers display high "regular" prices, but mark down these prices the vast majority of the time, advertising the good as "on sale" or "discounted". This note suggests a framework for understanding the practice, emphasizing the role of buyer uncertainty about their future valuations for the good. We argue that so-called "regular" prices set buyers' expectations regarding future prices, expectations that need not be tethered to the prices actually set. By manipulating upwards buyers' expectations of future prices, the seller can increase demand for the good at the current "sale" price, increasing profits
    Keywords: fake sales, dynamic pricing, value uncertainty
    JEL: D82 L12
    Date: 2019–09

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