nep-mic New Economics Papers
on Microeconomics
Issue of 2019‒12‒09
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Consumer information and the limits to competition By Armstrong, Mark; Zhou, Jidong
  2. The simple economics of white elephants By Juan José Ganuza; Gerard Llobet
  3. The Formation of Social Groups under Status Concern By Staab, Manuel
  4. Product Liability, Multidimensional R&D and Innovation By Lin, Ping; Zhang, Tianle
  5. Speed of Rational Social Learning in Networks with Gaussian Information By Krishna Dasaratha; Kevin He
  6. Proportionality and the Limits of Welfarism By Dominik Peters; Piotr Skowron
  7. Attentional Role of Quota Implementation By Andrei Matveenko; Sergei Mikhalishchev
  8. Just a big misunderstanding? Bias and Bayesian affective polarization By Stone, Daniel
  9. On the Disclosure of Promotion Value in Platforms with Learning Sellers By Yonatan Gur; Gregory Macnamara; Daniela Saban
  10. Two values are sufficient for choice consistency By Chintala, Vineeth
  11. Should I Stalk or Should I Go? An Auditing Exploration/Exploitation Dilemma By Reda Aboutajdine; Pierre Picard
  12. Reputation Effects in Repeated Audits, with Application to Insurance Fraud Deterrence By Reda Aboutajdine; Pierre Picard
  13. Information revelation in procurement auctions: an equivalence result By Domenico Colucci; Nicola Doni; Vincenzo Valori

  1. By: Armstrong, Mark; Zhou, Jidong
    Abstract: This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relaxing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens differentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.
    Keywords: Information design, Bertrand competition, product differentiation, online platforms
    JEL: D43 D47 D83 L13 L15
    Date: 2019–11
  2. By: Juan José Ganuza; Gerard Llobet
    Abstract: This paper shows that the concession model discourages firms from acquiring information about the future profitability of a project. Uninformed contractors carry out good and bad projects because they are profitable in expected terms even though it would have been optimal to invest in screening them out according to their value. White elephants are identified as avoidable negative net present-value projects that are nevertheless undertaken. Institutional arrangements that limit the losses that firms can bear exacerbate this distortion. We characterize the optimal concession contract, which fosters the acquisition of information and achieves the first best by conditioning the duration of the concession to the realization of the demand and includes payments for not carrying out some projects.
    Keywords: Concession contracts, information acquisition, flexible-term concessions.
    JEL: D82 D86 H21 L51
    Date: 2019–11
  3. By: Staab, Manuel
    Abstract: I study the interaction of two forces in the formation of social groups: the preference for high quality peers and the desire for status among one's peers. I present a characterization of fundamental properties of equilibrium group structures in a perfect information, simultaneous move game when group membership is priced uniformly and cannot directly depend on type. While equilibrium groups generally exhibit some form of assortative matching between individual type and peer quality, the presence of status concern reduces the potential degree of sorting and acts as a force for greater homogeneity across groups. I analyse the effect of status concern for the provision of groups under different market structures and particularly focus on the implications for segregation and social exclusion. I find that status concern reduces the potential for and benefit from segregation - both for a social planner and a monopolist - but the interaction of preference for rank and status can make the exclusion of some agents a second-best outcome.
    Keywords: peer effects, status concern, public goods, network effects
    JEL: D62 D71 H41 L10
    Date: 2019–11
  4. By: Lin, Ping; Zhang, Tianle
    Abstract: We study the effect of product liability on the incentives of product and safety innovation. We first develop a monopoly model in which a firm chooses both product novelty and safety in an innovation stage followed by a production stage. A greater product liability directly increases the marginal benefit of producing a safer product and thus increases product safety. However, as product liability increases, product novelty may increase or decrease, depending on the relative strengths of demand-shifting and cross-R&D effects identified in the model. Consequently, a greater product liability may decrease consumer welfare and thus total welfare. We extend the results to an oligopoly model with differentiated products and study the effects of competition measured by the number of firms and the degree of product substitutability. We find that equilibrium product novelty and safety decrease with the number of firms but exhibit non-monotonic relationships with the degree of product substitutability.
    Keywords: Product Liability, Safety, Novelty, Innovation Incentive
    JEL: D4 K13 L13
    Date: 2019–11
  5. By: Krishna Dasaratha; Kevin He
    Abstract: We consider a sequential social-learning environment with rational agents and Gaussian private signals, focusing on how the observation network affects the speed of learning. Agents learn about a binary state and take turns choosing actions based on own signals and observations of network neighbors' behavior. The observation network generally presents an obstruction to the efficient rate of signal aggregation, as agents compromise between incorporating the signals of the observed neighbors and not over-counting the signals of the unobserved early movers. We show that on any network, equilibrium actions are a log-linear function of observations and each agent's accuracy admits a signal-counting interpretation. We then consider a network structure where agents move in generations and observe all members of the previous generation. The additional information aggregated by each generation is asymptotically equivalent to fewer than two independent signals, even when generations are arbitrarily large.
    Date: 2019–11
  6. By: Dominik Peters; Piotr Skowron
    Abstract: We study two influential voting rules proposed in the 1890s by Phragm\'en and Thiele, which elect a committee or parliament of k candidates which proportionally represents the voters. Voters provide their preferences by approving an arbitrary number of candidates. Previous work has proposed proportionality axioms satisfied by Thiele's rule (now known as Proportional Approval Voting, PAV) but not by Phragm\'en's rule. By proposing two new proportionality axioms (laminar proportionality and priceability) satisfied by Phragm\'en but not Thiele, we show that the two rules achieve two distinct forms of proportional representation. Phragm\'en's rule ensures that all voters have a similar amount of influence on the committee, and Thiele's rule ensures a fair utility distribution. Thiele's rule is a welfarist voting rule (one that maximizes a function of voter utilities). We show that no welfarist rule can satisfy our new axioms, and we prove that no such rule can satisfy the core. Conversely, some welfarist fairness properties cannot be guaranteed by Phragm\'en-type rules. This formalizes the difference between the two types of proportionality. We then introduce an attractive committee rule which satisfies a property intermediate between the core and extended justified representation (EJR). It satisfies laminar proportionality, priceability, and is computable in polynomial time. We show that our new rule provides a logarithmic approximation to the core. On the other hand, PAV provides a factor-2 approximation to the core, and this factor is optimal for rules that are fair in the sense of the Pigou--Dalton principle.
    Date: 2019–11
  7. By: Andrei Matveenko; Sergei Mikhalishchev
    Abstract: This paper introduces a new role of quotas, e.g., labor market quotas: the attentional role. We study the effect of quota implementation on the attention allocation strategy of a rationally inattentive (RI) agent. Our main result is that a RI agent who is forced to fulfill a quota never hires the candidates without acquiring information about them, unlike an unrestricted RI agent who in some cases bases her decision on prior belief only. We also show that in our context quotas are equivalent to other types of affirmative policies such as subsidies and blind resume policy. We show how our results can be used to set a quota level that increases the expected value of the chosen candidate and also decreases statistical discrimination and discrimination in terms of how much attention is paid to each applicant. At the same time, quota implementation could be destructive if the social planner has imperfect information about the parameters of the model.
    Keywords: discrete choice; rational inattention; multinomial logit; quotas;
    JEL: D63 D81 D83 H23 J08
    Date: 2019–11
  8. By: Stone, Daniel
    Abstract: I present a model of affective polarization---growth in hostility over time between two parties---via quasi-Bayesian inference. In the model, two agents repeatedly choose actions. Each choice is based on a balance of concerns for private interests and the social good. More weight is put on private interests when an agent's character is intrinsically more self-serving and when the other agent is believed to be more self-serving. Each agent Bayesian updates about the other's character, and dislikes the other more when she is perceived as more self-serving. I characterize the effects on growth in dislike of three biases: a prior bias against the other agent's character, the false consensus bias, and limited strategic thinking. Prior bias against the other's character remains constant or declines over time, and actions do not diverge. The other two biases cause actions to become more extreme over time and repeatedly be ``worse'' than expected, causing mutual growth in dislike, i.e., affective polarization. The magnitude of dislike can become arbitrarily large---even when both players are arbitrarily ``good'' (unselfish). The results imply that seemingly irrelevant cognitive biases can be an important cause of the devolution of relationships, in politics and beyond, and that subtlety and unawareness of bias can be key factors driving the degree of polarization.
    Date: 2018–10–19
  9. By: Yonatan Gur; Gregory Macnamara; Daniela Saban
    Abstract: We consider a platform facilitating trade between sellers and buyers with the objective of maximizing consumer surplus. In many such platforms prices are set by revenue-maximizing sellers, but the platform may influence prices through its promotion policy (e.g., increasing demand to a certain product by assigning to it a prominent position on the webpage), and the information it reveals about the additional demand associated with being promoted. Identifying effective joint information design and promotion policies for the platform is a challenging dynamic problem as sellers can sequentially learn the promotion "value" from sales observations and update prices accordingly. We introduce the notion of confounding promotion polices, which are designed to prevent a Bayesian seller from learning the promotion value (at the cost of diverting consumers away from the best product offering). Leveraging this notion, we characterize the maximum long-run average consumer surplus that is achievable by the platform when the seller is myopic. We then establish that long-run average optimality can be maintained by optimizing over a class of joint information design and promotion policies under which the platform provides the seller with a (random) information signal at the beginning of the horizon, and then uses the best confounding promotion policy, which prevents the seller from further learning. Additionally, we show that myopic pricing is a best response to such a platform strategy, thereby establishing an approximate Bayesian Nash equilibrium between the platform and the seller. Our analysis allows one to identify practical long-run average optimal platform policies in a broad range of demand models and evaluate the impact of the search environment and the design of promotions on consumer surplus.
    Date: 2019–11
  10. By: Chintala, Vineeth
    Abstract: In many situations, people make choices which are optimal under some social and moral rules. So how can an outside observer, with no access to such private rules, make sense of their behavior? One way to understand choices is by assigning different values (or meanings) to the alternatives depending on the context. The number of additional values can then be viewed as a measure of the background information involved while making the choice. In this paper, we show that two values are sufficient to perceive any choice behavior as consistent. This implies that the information gleaned from a menu is never less than the background information involved in making the choice.
    Date: 2018–06–14
  11. By: Reda Aboutajdine (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Pierre Picard (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We consider a fraud inspection problem where service providers are central to the fraud generating process, either as the main protagonists or as colluding third parties. Because interactions are repeated between the auditor (insurer, tax collector , environmental regulation agency, etc.) and auditees (doctors, tax preparers, waste management subcontractors, etc.), auditing behaves as a learning mechanism to separate the wheat (honest agents) from the chaff (defrauders). We analyze a Bayesian inspector's dynamic auditing problem in the face of fraud, and characterize its optimal strategy as a strategic exploration/one-armed bandit one. The insurer faces the well-known reinforcement learning exploration/exploitation trade-off between gathering information for higher future profits (exploration) and prioritizing immediate profits (exploitation). We then derive optimal auditing strategies with multiple auditees and capacity constraints as the solution to a k-armed bandit problem. We finally investigate the extents to which learning occurs under optimality in terms of how much information is obtained and how quickly it is obtained.
    Keywords: Armed bandit,Information acquisition,Fraud,Dynamic optimal auditing
    Date: 2019–11–20
  12. By: Reda Aboutajdine (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Pierre Picard (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In principal-agent problems, the repetition of interactions in a dynamic setting may alter the equilibrium outcomes. In insurance fraud, the frequency of auditor-auditee interactions is higher when there is collusion between policyholders and service providers (e.g., car repairers, health care providers...). The same service provider usually handles claims filed by many policyholders affiliated to the same insurer, and thus the insurer-service provider interactions are repeated with reputation effects. We analyze this issue in a repeated game where the insurer may potentially face a dishonest service provider who colludes with policyholders. The insurer has beliefs about the type (honest or dishonest) of the service provider and she may verify the truthfulness of the claim through costly audits. The reputation of the service provider corresponds to these beliefs and changes over time, and misbehaving deteriorates this reputation. In the end, it may lead to a breach of contract and thus represents a threat that may deter from defrauding. We show that, at early periods, the insurer audits agents who would not be monitored in a static setting because their reputation is good enough. Corresponding dishonest agents who slipped under the radar and have an initially good reputation do not defraud systematically at early periods, as opposed to the instantaneous game. In addition, auditing efforts for medium reputations are lower as dishonest agents want to preserve the possibility of defrauding later. Both aspects corresponds to a reputation-based deterrence mechanism, where the fear of deteriorating one's reputation acts as a discipline device for dishonest service providers.
    Keywords: Deterrence,Learning,Insurance fraud,Optimal auditing,Reputation
    Date: 2019–11–20
  13. By: Domenico Colucci; Nicola Doni; Vincenzo Valori
    Abstract: Procurement auctions often involve quality considerations as a determinant of the final outcome. When the procurer has private information about qualities, various information policies may be used to affect the expected outcome. For auctions with two cost heterogeneous suppliers, this work defines a notion of duality between pairs of policies, and shows that dual policies are revenue equivalent.
    Keywords: procurement, information revelation, discriminatory policy, asymmetric auctions
    JEL: D44 D82 H57
    Date: 2019–11–01

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