nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒01‒13
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Agency Theory Meets Matching Theory By Inés Macho-Stadler; David Pérez-Castrillo
  2. A general framework for studying contests By Bastani, Spencer; Giebe, Thomas; Gürtler, Oliver
  3. The Simple Economics of White Elephants By Juan-José Ganuza; Gerard Llobet
  4. Corporate self-regulation of imperfect competition. By Herve Cres; Mich Tvede
  5. Optimality of Winner-Take-All Contests: The Role of Attitudes toward Risk By Treich, Nicolas; Liu, Linqun
  6. The perks of being in the smaller team: Incentives in overlapping contests By March, Christoph; Sahm, Marco
  7. Platform competition and incumbency advantage under heterogeneous switching cost — exploring the impact of data portability By Siciliani, Paolo; Giovannetti, Emanuele
  8. Horizontal mergers on platform markets: cost savings v. cross-group network effects? By Baranes, Edmond; Cortade, Thomas; Cosnita-Langlais, Andreea
  9. Who is afraid of Bayesian persuasion? By Luc Lauwers; Patrick Van Cayseele
  10. Helping Friends or Influencing Foes: Electoral and Policy Effects of Campaign Finance Contributions By Schnakenberg, Keith; Turner, Ian R
  11. Experimentation, Innovation, and Economics By Kremer, Michael
  12. Field experiments and the practice of economics By Banerjee, Abhijit
  13. Field experiments and the practice of policy By Duflo, Esther

  1. By: Inés Macho-Stadler; David Pérez-Castrillo
    Abstract: The theory of incentives and matching theory can complement each other. In particular, matching theory can be a tool for analyzing optimal incentive contracts within a general equilibrium framework. We propose several models that study the endogenous payoffs of principals and agents as a function of the characteristics of all the market participants, as well as the joint attributes of the principal-agent pairs that partner in equilibrium. Moreover, considering each principal-agent relationship as part of a market may strongly influence our assessment of how the characteristics of the principal and the agent affect the optimal incentive contract. Finally, we discuss the effect of the existence of moral hazard on the nature of the matching between principals and agents that we may observe at equilibrium, compared to the matching that would happen if incentive concerns were absent.
    Keywords: Incentives, contracts, matching, moral hazard
    JEL: D86 D03 C78
    Date: 2020–01
  2. By: Bastani, Spencer; Giebe, Thomas; Gürtler, Oliver
    Abstract: We develop a general framework to study contests, containing the well-known models of Tullock (1980) and Lazear and Rosen (1981) as special cases. The contest outcome depends on players' effort and skill, the latter being subject to symmetric uncertainty. The model is tractable, because a symmetric equilibrium exists under general assumptions regarding production technologies and skill distributions. We construct a link between our contest model and expected utility theory and exploit this link to revisit important comparative statics results of contest theory and show how these can be overturned. Finally, we apply our results to study optimal workforce composition.
    Keywords: contest theory, symmetric equilibrium, heterogeneity, risk, decision theory
    JEL: C72 D74 D81 J23 M51
    Date: 2019–12–03
  3. 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: 2019–12
  4. By: Herve Cres (New York University in Abu Dhabi); Mich Tvede (University of East Anglia)
    Abstract: We consider Cournot competition in general equilibrium. Decisions in firms are taken by majority voting. Naturally, interests of voters–shareholders or stakeholders–depend on their endowments and portfolios. We introduce two notions of local Cournot-Walras equilibria to overcome difficulties arising from non-concavity of profit functions and multiplicity of equilibrium prices. We show existence of local Cournot-Walras equilibria, and characterize distributions of voting weights for which equilibrium allocations are Pareto optimal. We discuss the performance of various governances and highlight the importance of financial markets in regulating large firms.
    Keywords: Cournot-Walras equilibrium Majority voting Pareto optimality Shareholder governance Stakeholder democracy Walrasian equilibria
    JEL: D41 D43 D51 D61 D71
    Date: 2020–01–02
  5. By: Treich, Nicolas; Liu, Linqun
    Abstract: It has been established in the literature that, under the assumption of risk-neutral contestants, it is usually optimal for an effort-maximizing contest organizer with a fixed prize budget to award everything to a single winner. This paper studies the role of risk attitudes – risk aversion and prudence in particular – in determining the optimality of winner-take-all contests. We compare the typical single-winner lottery contest with two alternative ways of spreading the rewards to more players: through holding multiple prize-giving lottery competitions or through guaranteeing a bottom prize for the losers. In the first comparison, we found that the multiple-competition contest is as effective as the winner-take-all contest when the contestants are risk neutral, but the former induces more effort than the latter when the contestants are both risk averse and prudent. In the second comparison, we found that the contest with a bottom prize is always dominated by the winner-take-all contest when the contestants are risk neutral, but the former could have an advantage over the latter when the contestants are both risk averse and prudent, and it is more likely so as the contestants become more prudent.
    Keywords: contests; winner take all; multiple prizes; risk aversion; prudence
    JEL: C72 D72 D81
    Date: 2019–12
  6. By: March, Christoph; Sahm, Marco
    Abstract: We investigate overlapping contests in multi-divisional organizations in which an individual's effort simultaneously determines the outcome of several contests on different hierarchical levels. We show that individuals in smaller units are advantaged in the grand (organization-wide) contest for two reasons: First, the incentive to free-ride is smaller in inter-divisional contests. Second, competition in the intradivisional contest is less fierce. Both effects induce a higher marginal utility of effort provision. We test the model in a laboratory experiment and confirm its main predictions. Our results have important consequences for the provision of incentives in organizations and the design of sports competitions.
    Keywords: Contest,Rent-seeking,Hierarchy,Teams,Experiment
    JEL: C72 C92 D72
    Date: 2019
  7. By: Siciliani, Paolo (Bank of England and UCL Laws); Giovannetti, Emanuele (Anglia Ruskin University & Hughes Hall, University of Cambridge)
    Abstract: The paper develops a static model to explore how, under platform competition, heterogeneous levels of switching costs can give rise to an incumbency advantage. The key condition required for the coexistence of both platforms on the market, to have effective competition, relies on the relative strength of switching costs over the network effects. Only when switching costs are stronger than cross-group network benefits is market tipping avoided. The same condition also underpins the presence of a material incumbency advantage vis-à-vis the entrant platform. Therefore, regulatory intervention aimed at facilitating switching, for example by imposing data portability, might worsen entry condition as the incumbent platform is less accommodative. Besides the standard configuration with exogenous singlehoming, we also fully characterise the model with endogenous multihoming on both sides. Partial multihoming occurs only on one side, the one with comparatively lower switching costs. However, in contrast to the seminal ‘competition bottleneck’ model, on the opposite side, where singlehoming arises endogenously, agents face higher prices than under exogenous singlehoming. Therefore, the incumbent platform would normally opt for this regime, whereas we show that the entrant is basically indifferent between the two.
    Keywords: two-sided markets; platform competition; switching costs; multihoming
    JEL: L11 L13
    Date: 2019–12–20
  8. By: Baranes, Edmond; Cortade, Thomas; Cosnita-Langlais, Andreea
    Abstract: We study the impact of cost savings on the outcome of horizontal mergers between two-sided platforms. We consider four symmetrically differentiated platforms located equidistantly on the unit circle and competing in membership fees. Users on both sides single-home, and we allow for both positive and negative cross-group externalities. We find that the impact of merger cost savings on prices is generally not monotonic, and that synergies are necessary for horizontal platform mergers to be Pareto-improving. Furthermore, the merger may benefit users on one side while harming users on the opposite side, which raises some interesting questions for the enforcement of merger control on two-sided markets.
    Keywords: horizontal merger, two-sided markets, cost savings, indirect network effects, merger control
    JEL: D43 K21 L41
    Date: 2019–05
  9. By: Luc Lauwers; Patrick Van Cayseele
    Abstract: Bayesian persuasion (Kamenica and Gentzkow 2011) refers to the optimal signalling of a Sender with informational advantage over the Receiver, under the constraint that the expected posterior (over the state space) equals the common prior. In the basic example of a judicial system with a prosecutor (Sender) and a judge (Receiver) who needs to convict or acquit a defendant, the mechanism of Bayesian persuasion entails the detriment of the third party (absent in the model): innocent subjects who get convicted suffer from this optimal signalling scheme. If the judge is concerned about errors of convicting innocent defendants, or about the overall sustainability of the judicial system, outcomes different from Kamenica and Gentzkow (2011) may arise.
    Date: 2018–04–18
  10. By: Schnakenberg, Keith; Turner, Ian R (Yale University)
    Abstract: Campaign finance contributions may influence policy by affecting elections or influencing the choices of politicians once in office. To study the trade-offs between these two paths to influence, we use a game in which contributions may affect electoral outcomes and signal policy-relevant information to politicians. In the model, a campaign donor and two politicians each possess private information correlated with a policy-relevant state of the world. The donor may allocate his budget to either an ally candidate who has relatively similar preferences or a moderate candidate whose preferences are relatively divergent from the donor's preferred policy. Contributions that increase the likelihood of the moderate being elected can signal good news about the donor's preferred policy and influence the moderate's policy choice. However, when the electoral effect of contributions is too small to demand sufficiently high costs to deter imitation by groups with negative information, this informational effect breaks down.
    Date: 2019–05–11
  11. By: Kremer, Michael (Harvard University)
    Abstract: Michael Kremer delivered his Prize Lecture on Sunday 8 December 2019, at the Aula Magna, Stockholm University.
    Keywords: poverty; field experiments;
    JEL: C90 I30
    Date: 2019–12–08
  12. By: Banerjee, Abhijit (MIT)
    Abstract: Abhijit Banerjee delivered his Prize Lecture on Sunday 8 December 2019, at the Aula Magna, Stockholm University.
    Keywords: poverty; field experiments;
    JEL: C90 I30
    Date: 2019–12–08
  13. By: Duflo, Esther (MIT)
    Abstract: Esther Duflo delivered her Prize Lecture on Sunday 8 December 2019, at the Aula Magna, Stockholm University.
    Keywords: poverty; field experiments;
    JEL: C90 I30
    Date: 2019–12–08

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