nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒10‒07
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Learning under Diverse World Views: Model-Based Inference By George J. Mailath; Larry Samuelson
  2. Too Much Data: Prices and Inefficiencies in Data Markets By Daron Acemoglu; Ali Makhdoumi; Azarakhsh Malekian; Asuman Ozdaglar
  3. Isolating Limited Liability as a Financial Friction By Jesse Perla; Carolin Pflueger; Michal Szkup
  4. To Brush or Not to Brush: Product Rankings, Customer Search, and Fake Orders By Chen Jin; Luyi Yang; Kartik Hosanagar
  5. Exclusive Data, Price Manipulation and Market Leadership By Yiquan Gu; Leonardo Madio; Carlo Reggiani
  6. A Dynamic Theory of Lending Standards By Michael Fishman; Jonathan Parker; Ludwig Straub
  7. Taxes and Turnout By Felix Bierbrauer; Aleh Tsyvinski; Nicolas WERQUIN
  8. Propaganda, Conspiracy Theories, and Accountability in Fragile Democracies By Anqi Li; Davin Raiha; Kenneth W. Shotts
  9. Mission Drift in microcredit and Microfinance Institution Incentives By Sara Biancini; David Ettinger; Baptiste Venet
  10. The first fundamental theorem of welfare in a general equilibrium evolutionary setting By Ahmad, Naimzada; Marina, Pireddu
  11. Targeted Search in Matching Markets By Anton Cheremukhin; Antonella Tutino; Paulina Restrepo-Echavarria
  12. Existence of trembling hand perfect and sequential equilibrium in games with stochastic timing of moves By Sofia Moroni
  13. Price Competition Online: Platforms vs. Branded Websites By Oksana Loginova
  14. On Incentive Compatibility in Dynamic Mechanism Design With Exit Option in a Markovian Environment By Tao Zhang; Quanyan Zhu
  15. Information diffusion in networks with the Bayesian Peer Influence heuristic By Levy, Gilat; Razin, Ronny
  16. Collusion, price dispersion, and fringe competition By de Roos, Nicolas; Smirnov, Vladimir
  17. Non-linear revenue evaluation in oligopoly By Alex Dickson; Ian A. MacKenzie; Petros G. Sekeris
  18. Nonrivalry and the Economics of Data By Charles I. Jones; Christopher Tonetti
  19. Populism, the Backlash against Ruling Politicians and the Possible Malfunctioning of Representative Democracy By Mario, Gilli; Elena, Manzoni;
  20. Undiscounted Bandit Games By Godfrey Keller; Sven Rady
  21. The converse envelope theorem By Ludvig Sinander

  1. By: George J. Mailath (Dept. of Economics, University of Pennsylvania); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: People reason about uncertainty with deliberately incomplete models, including only the most relevant variables. How do people hampered by different, incomplete views of the world learn from each other? We introduce a model of “model-based inference.” Model-based reasoners partition an otherwise hopelessly complex state space into a manageable model. We nd that unless the differences in agents’ models are trivial, interactions will often not lead agents to have common beliefs, and indeed the correct-model belief will typically lie outside the convex hull of the agents’ beliefs. However, if the agents’ models have enough in common, then interacting will lead agents to similar beliefs, even if their models also exhibit some bizarre idiosyncrasies and their information is widely dispersed.
    Keywords: Wisdom of the Crowd, Information aggregation, Common prior, NonBayesian updating
    JEL: D8
    Date: 2019–01
  2. By: Daron Acemoglu; Ali Makhdoumi; Azarakhsh Malekian; Asuman Ozdaglar
    Abstract: When a user shares her data with an online platform, she typically reveals relevant information about other users. We model a data market in the presence of this type of externality in a setup where one or multiple platforms estimate a user’s type with data they acquire from all users and (some) users value their privacy. We demonstrate that the data externalities depress the price of data because once a user’s information is leaked by others, she has less reason to protect her data and privacy. These depressed prices lead to excessive data sharing. We characterize conditions under which shutting down data markets improves (utilitarian) welfare. Competition between platforms does not redress the problem of excessively low price for data and too much data sharing, and may further reduce welfare. We propose a scheme based on mediated data-sharing that improves efficiency.
    JEL: D62 D83 L86
    Date: 2019–09
  3. By: Jesse Perla (University of British Columbia); Carolin Pflueger (University of British Columbia); Michal Szkup (University of British Columbia)
    Abstract: We investigate how a presence of limited liabilities distorts firms’ investment decisions. We consider a simple model where firm owners are protected by limited liabilities and have to decide how much to invest as well as how to finance their investment. In contrast to earlier work, we find that, depending on the firm’s fundamentals, limited liabilities can lead to either under- or over-investment; and discuss when over-investment is more likely to occur. We then characterize condition under which over-investment happens and provide intuition for why it occurs. We also investigate how our results depend on the type of claims issued by the firm and their relative priority. Finally, we provide empirical evidence consistent with predictions of our model.
    Date: 2019
  4. By: Chen Jin (National University of Singapore, School of Computing, Department of Information Systems and Analytics, 13 Computing Drive, Singapore 117417, Republic of Singapore); Luyi Yang (Johns Hopkins University, Carey Business School, 100 International Drive, Baltimore, MD, 21202, USA); Kartik Hosanagar (The University of Pennsylvania, the Wharton School, 3730 Walnut Street, 552 Jon M. Huntsman Hall, Philadelphia, PA, 19104, USA)
    Abstract: “Brushing"---the practice of online merchants placing fake orders of their own products to artificially inflate sales on e-commerce platforms---has recently received widespread public attention. On the one hand, brushing enables merchants to boost their rankings in search results, because products with higher sales volume are often ranked higher. On the other hand, rankings matter because search frictions faced by customers narrow their attention to only the few products that show up at the top. Thus, fake orders from brushing may affect customer choice. We build a stylized model to understand merchants’ strategic brushing behavior and its welfare implications. We consider two competing merchants selling substitutable products (one of high quality, the other of low quality) in an evolutionary sales-based ranking system that assigns a higher ranking to a product with higher sales. In principle, such an adaptive system improves customer welfare relative to a case in which products are randomly ranked, but it also triggers brushing as an unintended consequence. Since the high-quality merchant receives a favorable bias in the sales-based ranking, he mainly has a defensive brushing incentive, whereas the low-quality merchant mostly has an offensive brushing incentive. As a result, brushing is a double-edged sword for customers. It may lead customer welfare to be even lower than what it would be in a random-ranking system, but in some other cases, it can surprisingly improve customer welfare. If brushing is more difficult for merchants (e.g., due to tougher regulations), it may make customers worse off as it attenuates brushing by the high-quality merchant but induces the low-quality one to brush more aggressively. If search is easier for customers (e.g., due to improved search technologies), it can actually hurt them as it may disproportionately discourage the high-quality merchant from brushing.
    Keywords: search; rankings; brushing; fake; customer welfare
    Date: 2019–09
  5. By: Yiquan Gu; Leonardo Madio; Carlo Reggiani
    Abstract: The unprecedented access of firms to consumer level data not only facilitates more precisely targeted individual pricing but also alters firms’ strategic incentives. We show that exclusive access to a list of consumers can provide incentives for a firm to endogenously assume the price leader’s role, and so to strategically manipulate its rival’s price. Prices and profits are non-monotonic in the length of the consumer list. For an intermediate size, price leadership entails a semi-collusive outcome, characterized by supra-competitive prices and low consumer surplus. In contrast, for short or long lists of consumers, exclusive data availability intensifies market competition.
    Keywords: exclusive data, price leadership, personalized pricing, price discrimination
    JEL: D43 K21 L11 L13 L41 L86 M21 M31
    Date: 2019
  6. By: Michael Fishman (Northwestern University); Jonathan Parker (MIT); Ludwig Straub (Harvard)
    Abstract: We develop a dynamic model of credit markets in which both lending standards and the quality composition of the borrower pool are endogenous. Borrowers can be of high or low quality, and each lender privately decides on its lending standard. Lending standards are dynamic strategic complements: tighter screening worsens the future pool of borrowers, increasing the incentive to screen in the future. The market exhibits two steady states, one with loose and one with tight lending standards. Lending standards can inefficiently amplify and propagate temporary deteriorations in fundamentals. We discuss policies that improve on market outcomes, and pitfalls to avoid.
    Date: 2019
  7. By: Felix Bierbrauer (University of Cologne); Aleh Tsyvinski (Yale University); Nicolas WERQUIN (Toulouse School of Economics)
    Abstract: We develop a model of political competition with endogenous turnout and endogenous platforms. Parties face a trade-off between maximizing their base and getting their supporters out to vote. We study the implications of this framework for non-linear income taxation. In equilibrium, both parties propose the same tax policy. This equilibrium policy is a weighted combination of two terms, one reflecting the parties' payoff from mobilizing their own supporters, one reflecting the payoff from demobilizing the supporters of the other party. The key determinant of the equilibrium policy is the distribution of the voters' party attachments rather than their propensity to swing vote. Our analysis also provides a novel explanation for why even left-leaning parties may not propose high taxes on the rich.
    Date: 2019
  8. By: Anqi Li; Davin Raiha; Kenneth W. Shotts
    Abstract: We develop a model of electoral selection and accountability in the presence of mainstream and alternative media outlets. In addition to standard high and low competence types, the incumbent may be an aspiring autocrat, who controls the mainstream media and will cause substantial harm if not removed from office. Alternative media can help voters identify and remove aspiring autocrats and can enable voters to focus on honest mainstream media assessments of incumbents' competence. But malicious alternative media that peddle false conspiracy theories about the incumbent and the mainstream media can induce voters to mistakenly remove nonautocratic incumbents, which in turn demotivates incumbent effort and undermines accountability. The alternative media is most dangerous when it is sufficiently credible that voters pay attention to it, but sufficiently likely to be malicious that it undermines accountability.
    Date: 2019–09
  9. By: Sara Biancini (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique); David Ettinger (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Baptiste Venet (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: We analyze the relationship between Microfinance Institutions (MFIs) and external donors, withthe aim of contributing to the debate on "mission drift" in microfinance. We assume that boththe donor and the MFI are pro-poor, possibly at different extents. Borrowers can be (very) pooror wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effortto identify the more valuable projects and to choose the right share of poorer borrowers (theoptimal level of poor outreach). We first concentrate on hidden action. We show thatasymmetric information can distort the share of very poor borrowers reached by loans, thusincreasing mission drift. We then concentrate on hidden types, assuming that MFIs arecharacterized by unobservable heterogeneity on the cost of effort. In this case, asymmetricinformation does not necessarily increase the mission drift. The incentive compatible contractspush efficient MFIs to serve a higher share of poorer borrowers, while less efficient onesdecrease their poor outreach.
    Keywords: microfinance,donors,poverty,screening
    Date: 2019–09–23
  10. By: Ahmad, Naimzada; Marina, Pireddu
    Abstract: In the present note we prove the first fundamental theorem of welfare economics, according to which all equilibrium allocations are Pareto optimal, for the standard pure exchange model with shares. In this context the social interaction among agents enters the definition of equilibrium only through the market clearing conditions, but it does not affect the agents’ maximization problem. We show that the first fundamental theorem of welfare holds true also when introducing stationary equilibria in relation to a share updating mechanism.
    Keywords: general equilibrium; stationary equilibria; Pareto optimality.
    Date: 2019–06–26
  11. By: Anton Cheremukhin (Federal Reserve Bank of Dallas); Antonella Tutino (Federal Reserve Bank of Dallas); Paulina Restrepo-Echavarria (Federal Reserve Bank of St Louis and Was)
    Abstract: We propose a parsimonious matching model where people's choice of whom to meet endogenizes the degree of randomness in matching. The analysis highlights the interaction between a productive motive, driven by the surplus attainable in a match, and a strategic motive, driven by reciprocity of interest of potential matches. We find that the interaction between these two motives differs with preferences|vertical versus horizontal|and that this interaction implies that preferences estimated using our model can look markedly different from those estimated using a model where the degree of randomness is not endogenous. We illustrate these results using data on the U.S. marriage market and finish by showing that the model can rationalize the finding of aspirational dating.
    Date: 2019
  12. By: Sofia Moroni
    Abstract: We consider continuous time games in which players have stochastic opportunitiesto move before a deadline. In this paper we define notions of trembling handand sequential equilibrium and show that both types of equilibria exist in a large classof such games that may feature incomplete and imperfect information. These gamesmodel realistic non-stationary dynamic situations in which players do not know exactlywhen they or their opponents will be able to move. In the complete informationcase we establish existence of a Markov Perfect equilibrium.
    Date: 2019–01
  13. By: Oksana Loginova (Department of Economics, University of Missouri)
    Abstract: The focus of this theoretical study is price competition when some firms operate their own branded websites while others sell their products through an online platform, such as Amazon Marketplace. On one hand, selling through Amazon expands a firm's reach to more customers, but on the other, starting a website can help the firm to increase the perceived value of its product, that is, to build brand equity. In the short run the composition of firms is fixed, whereas in the long run each firm chooses between Amazon and its own website. I derive the equilibrium prices and profits, analyze the firms' behavior in the long run, and compare the equilibrium outcome with the social optimum. Comparative statics analysis reveals some interesting results. For example, I find that the number of firms that choose Amazon may go down in response to an increase in the total number of firms. A pure-strategy Nash equilibrium may not exist; I show that price dispersion among the firms of the same type is more likely in less concentrated markets and/or when the increase in the perceived value of the product is relatively small.
    Keywords: pricing, competition, platforms, online marketplace, Amazon, brand equity
    JEL: C72 D43 L11 L13 M31
    Date: 2019–09–20
  14. By: Tao Zhang; Quanyan Zhu
    Abstract: This paper studies dynamic mechanism design in a quasilinear Markovian environment and analyzes a direct mechanism model of a principal-agent framework in which the agent is allowed to exit at any period. We consider that the agent's private information, referred to as state, evolves over time. The agent makes decisions of whether to stop or continue and what to report at each period. The principal, on the other hand, chooses decision rules consisting of an allocation rule and a set of payment rules to maximize her ex-ante expected payoff. In order to influence the agent's stopping decision, one of the terminal payment rules is posted-price, i.e., it depends only on the realized stopping time of the agent. We define the incentive compatibility in this dynamic environment in terms of Bellman equations, which is then simplified by establishing a one-shot deviation principle. Given the optimality of the stopping rule, a sufficient condition for incentive compatibility is obtained by constructing the state-dependent payment rules in terms of a set of functions parameterized by the allocation rule. A necessary condition is derived from envelope theorem, which explicitly formulates the state-dependent payment rules in terms of allocation rules. A class of monotone environment is considered to characterize the optimal stopping by a threshold rule. The posted-price payment rules are then pinned down in terms of the allocation rule and the threshold function up to a constant. The incentive compatibility constraints restrict the design of the posted-price payment rule by a regular condition.
    Date: 2019–09
  15. By: Levy, Gilat; Razin, Ronny
    Abstract: Repeated communication in networks is often considered to impose large information requirements on individuals, and for that reason, the literature has resorted to use heuristics, such as DeGroot's, to compute how individuals update beliefs. In this paper we propose a new heuristic which we term the Bayesian Peer Influence (BPI) heuristic. The BPI accords with Bayesian updating for all (conditionally) independent information structures. More generally, the BPI can be used to analyze the effects of correlation neglect on communication in networks. We analyze the evolution of beliefs and show that the limit is a simple extension of the BPI and parameters of the network structure. We also show that consensus in society might change dynamically, and that beliefs might become polarized. These results contrast with those obtained in papers that have used the DeGroot heuristic
    JEL: J1
    Date: 2018–03–23
  16. By: de Roos, Nicolas; Smirnov, Vladimir
    Abstract: We study the optimal behaviour of a cartel faced with fringe competition and imperfectly attentive consumers. Intertemporal price dispersion obfuscates consumer price comparison which aids the cartel through two channels: it reduces the effectiveness of free riding by the fringe; and it relaxes the cartel’s internal incentive constraints. Our theory explains the survival of a price-setting cartel in a homogeneous product market, provides a collusive rationale for sales and Edgeworth cycles, and characterises the cartel’s manipulation of its fringe rival through a double cut-off rule.
    Keywords: Collusion, fringe competition, obfuscation, price dispersion
    Date: 2019–09
  17. By: Alex Dickson (Department of Economics, University of Strathclyde, Glasgow, UK, G4 0QU); Ian A. MacKenzie (School of Economics, The University of Queensland); Petros G. Sekeris (Montpellier Business School, Montpellier, 34080, France)
    Abstract: In this article we investigate oligopolies where firm decision makers have multiple objectives. We focus on cases where the decision maker is incentivized by profit, and by revenue. Our innovation—motivated by the internal scrutiny that is often placed on revenue—is that managers derive utility from revenue in a potentially non-linear fashion. This allows for incremental changes in revenue to have different incentive effects when it comes to production choice, depending on the amount of revenue generated by the firm. We show that this intuitively appealing extension to the revenue maximisation model reverses some conventional results of that model: we derive conditions where decision makers may actually increase output in the presence of demand contractions. Whether a decision maker increases or decreases output in the presence of a demand shock depends on the concavity of their utility function with respect to revenue. Our findings help us in understanding cases of output growth in the presence of negative demand shocks.
    Keywords: Oligopoly; non-profit maximization; delegation
    JEL: L13 L21
    Date: 2019–09–24
  18. By: Charles I. Jones; Christopher Tonetti
    Abstract: Data is nonrival: a person's location history, medical records, and driving data can be used by any number of firms simultaneously. Nonrivalry leads to increasing returns and implies an important role for market structure and property rights. Who should own data? What restrictions should apply to the use of data? We show that in equilibrium, firms may not adequately respect the privacy of consumers. But nonrivalry leads to other consequences that are less obvious. Because of nonrivalry, there may be large social gains to data being used broadly across firms, even in the presence of privacy considerations. Fearing creative destruction, firms may choose to hoard data they own, leading to the inefficient use of nonrival data. Instead, giving the data property rights to consumers can generate allocations that are close to optimal. Consumers balance their concerns for privacy against the economic gains that come from selling data to all interested parties.
    JEL: E0 O4
    Date: 2019–09
  19. By: Mario, Gilli; Elena, Manzoni;
    Abstract: The aim of this paper is to investigate the links between lack of trust in ruling politicians and the functioning of a representative democracy. Within a standard principal-agent model of democracy, we show how lack of trust by citizens as reflected by passive beliefs updating may lead to the malfunctioning of representative democracy. We highlight how de facto accountability crucially depends on out-of-equilibrium beliefs, and that this is indeed descriptive of a substantive feature of public opinion that affects the functioning of democracy. Specifically, we show that effective accountability needs more than simple retrospective voting, as it requires voters to believe in the existence of good politicians that always choose according to voters’ interests, so that a deviation from bad policies can happen only because the leader is congruent. In this case, the unique equilibrium is an efficient one that maximizes voters’ welfare. However, if, on the other hand, the citizens share an overall lack of trust in ruling elites, then there is another inefficient equilibrium, where even the congruent politician behaves badly because of the adverse but rational voters’ behavior. This inefficient equilibrium does not depend on fake news or on distorted beliefs or, again, on voters’ heterogeneous preferences, since the voters' perfectly observe the quality of the policy implemented by the government, are fully rational and share the same interests. This result might contribute to explain the increasing negative perceptions on the working of democracy as due to a self-fulfilling equilibrium.
    Keywords: Government Performance, Democracy, Representation, Out-of-equilibrium Beliefs.
    JEL: H11 D72 D78
    Date: 2019–08
  20. By: Godfrey Keller; Sven Rady
    Abstract: We analyze undiscounted continuous-time games of strategic experimentation with two-armed bandits. The risky arm generates payoffs according to a L\'{e}vy process with an unknown average payoff per unit of time which nature draws from an arbitrary finite set. Observing all actions and realized payoffs, players use Markov strategies with the common posterior belief about the unknown parameter as the state variable. We show that the unique symmetric Markov perfect equilibrium can be computed in a simple closed form involving only the payoff of the safe arm, the expected current payoff of the risky arm, and the expected full-information payoff, given the current belief. In particular, the equilibrium does not depend on the precise specification of the payoff-generating processes.
    Date: 2019–09
  21. By: Ludvig Sinander
    Abstract: I prove an envelope theorem with a converse: the envelope formula is equivalent to a first-order condition. Like Milgrom and Segal's (2002) envelope theorem, my result requires no structure on the choice set. I use the converse envelope theorem to extend to abstract outcomes the canonical result in mechanism design that any increasing allocation is implementable, and apply this to selling information.
    Date: 2019–09

This nep-mic issue is ©2019 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.