nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒01‒20
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Experimental Cost of Information By Tommaso Denti; Massimo Marinacci; Aldo Rustichini
  2. Communication Costs and Incentives to Acquire Soft and HardKnowledge By ABATEMARCO, Antonio; BENNARDO, Alberto
  3. Tying in evolving industries, when future entry cannot be deterred By Chiara Fumagalli; Massimo Motta
  4. Media See-saws: Winners and Losers in Platform Markets By Simon P. Anderson; Martin Peitz
  5. Ad Clutter, Time Use and Media Diversity By Ad Clutter, Time Use and Media Diversity; Martin Peitz
  6. A General Framework for Studying Contests By Spencer Bastani; Thomas Giebe; Oliver Gürtler
  7. Equilibria of nonatomic anonymous games By Simone Cerreia-Vioglio; Fabio Maccheroni; David Schmeidler
  8. Social Connectivity, Media Bias, and Correlation Neglect By Denter, Philipp; Dumav, Martin; Ginzburg, Boris
  9. Affective empathy in non-cooperative games By Jorge Vasquez; Marek Weretka
  10. Strategy-proof multi-object mechanism design: Ex-post revenue maximization with non-quasilinear preferences By Tomoya Kazumura; Debasis Mishra; Shigehiro Serizawa
  11. Perfect bidder collusion through bribe and request By Jingfeng Lu; Zongwei Lu; Christian Riis
  12. Strategic Issues in One-to-One Matching with Externalities By Mumcu, Ayse; Saglam, Ismail
  13. The Perks of Being in the Smaller Team: Incentives in Overlapping Contests By Christoph March; Marco Sahm
  14. Fundamental Utilitarianism and Intergenerational Equity with Extinction Discounting By Chichilnisky, Graciela; Hammond, Peter J.; Stern, Nicholas
  15. Behavioral Equivalence of Extensive Game Structures By Pierpaolo Battigalli; Paolo Leonetti; Fabio Maccheroni
  16. Signaling with Reform: How the Threat of Corruption Prevents Informed Policymaking By Schnakenberg, Keith; Turner, Ian R
  17. Moral Hazard and the Property Rights Approach to the Theory of the Firm By Schmitz, Patrick W.
  18. Regulatory risk, vertical integration, and upstream investment By Fiocco, Raffaele; Guo, Dongyu
  19. Coalition-Proof Risk Sharing Under Frictions By Harold L. Cole; Dirk Krueger; George J. Mailath; Yena Park
  20. Privacy Harms By Cofone, Ignacio; Robertson, Adriana
  21. Optimal switching from competition to cooperation: a preliminary exploration By Raouf Boucekkine; Carmen Camacho; Benteng Zou

  1. By: Tommaso Denti; Massimo Marinacci; Aldo Rustichini
    Abstract: We study the relation between two alternative representations for the cost of acquiring information: a cost that depends on the experiment that the decision maker performs, as in Wald's statistical decision theory, and a cost that depends on the distribution of posterior beliefs that the decision maker ends up with, as in Sims' theory of rational inattention. We show that in many cases of interests, such as Sims' entropy cost, the two representations are inconsistent with each other. Our main contribution is a systematic analysis of experimental cost functions, which are cost functions over distributions of posteriors that are consistent with an underlying model of costly experimentation. We also develop a regularization scheme to bridge the gap between experimental and non-experimental cost functions.
    Date: 2019
  2. By: ABATEMARCO, Antonio (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy); BENNARDO, Alberto (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy)
    Abstract: We study a multiple tasking principal-agent model where the agentgathers soft and hard knowledge for operational purposes. Within thisset-up, we model communication from the agent to the principal as theprocess of hardening and transmitting soft knowledge, in the spirit ofDewatripont and Tirole (2005), and we assume that soft information,once hardened, can be used by the principal as a measure of the agentcontribution to production (e.g., for incentive purposes). The assump-tion that hard and soft knowledge are complements in the communica-tion technology, which naturally reflects the non-depletable nature ofhard knowledge, leads to the following results. Under full delegation ofinformation gathering choices, the agent’s private incentives to gatherhard information fall short of social incentives; therefore, in the secondbest, the principal imposes the agent to gather more hard informationthan he would freely do were his decision reflect market prices (e.g.,under full delegation).
    Keywords: hard knowledge; soft knowledge; communication; agency
    JEL: D20 D82 D86
    Date: 2019–12–13
  3. By: Chiara Fumagalli; Massimo Motta
    Abstract: We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when tying cannot be used as a defensive strategy to protect the incumbent's dominant position in the primary market. By engaging in tying, an incumbent firm sacrifices current profits but can exclude a more efficient rival from a complementary market by depriving it of the critical scale it needs to be successful. In turn, exclusion in the complementary market allows the incumbent to be in a favorable position when a more efficient rival will enter the primary market, and to appropriate some of the rival's efficiency rents. The paper also shows that tying is a more profitable exclusionary strategy than pure bundling, and that exclusion is the less likely the higher the proportion of consumers who multi-home. Keywords:Inefficient foreclosure, Tying, Scale economies, Network Externalities. JEL Codes: K21, L41
    Date: 2019
  4. By: Simon P. Anderson; Martin Peitz
    Abstract: e customize the aggregative game approach to oligopoly to study media platforms which may differ by popularity. Advertiser, platform, and consumer surplus are tied together by a simple summary statistic. When media are ad-financed and ads are a nuisance to consumers we establish see-saws between consumers and advertisers. Entry increases consumer surplus, but decreases advertiser surplus if total platform profits decrease with entry. Merger decreases consumer surplus, but advertiser surplus tends to increase. By contrast, when platforms use two-sided pricing or consumers like advertising, advertiser and consumer interests are often aligned. We show see-saws under alternative homing assumptions.
    Keywords: two-sided markets, media economics, mergers, entry, advertising, aggregative games, single-homing, multi-homing, competitive bottleneck
    JEL: D43 L13
    Date: 2019–12
  5. By: Ad Clutter, Time Use and Media Diversity; Martin Peitz
    Abstract: We introduce advertising congestion along with a time-use model of consumer choice among media. Both consumers and advertisers multi-home. Higher equilibrium advertising levels ensue on less popular media platforms because platforms treat consumer attention as a common property resource: smaller platforms internalize less the congestion from advertising and so advertise more. Platform entry raises the ad nuisance “price” to consumers and diminishes the quality of the consumption experience on all platforms. With symmetric platforms, entry still leads to higher consumer benefits. However, entry of less attractive platforms can increase ad nuisance levels so much that consumers are worse off.
    Keywords: media economics, advertising clutter, limited attention, information congestion, two-sided markets
    JEL: D43 L13
    Date: 2019–12
  6. By: Spencer Bastani; Thomas Giebe; Oliver Gürtler
    Abstract: We develop a general framework to study contests, containing the well-known models of Tullock (1980) and Lazear & 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
  7. By: Simone Cerreia-Vioglio; Fabio Maccheroni; David Schmeidler
    Abstract: We add here another layer to the literature on nonatomic anonymous games started with the 1973 paper by Schmeidler. More specifically, we define a new notion of equilibrium which we call "-estimated equilibrium and prove its existence for any positive ". This notion encompasses and brings to nonatomic games recent concepts of equilibrium such as self-confirming, peer-confirming, and Berk-Nash. This augmented scope is our main motivation. At the same time, our approach also resolves some conceptual problems present in Schmeidler (1973), pointed out by Shapley. In that paper the existence of pure-strategy Nash equilibria has been proved for any nonatomic game with a continuum of players, endowed with an atomless countably additive probability. But, requiring Borel measurability of strategy profiles may impose some limitation on players’ choices and introduce an exogenous dependence among players’ actions, which clashes with the nature of noncooperative game theory. Our suggested solution is to consider every suset of players as measurable. This leads to a nontrivial purely finitely additive component which might prevent the existence of equilibria and requires a novel mathematical approach to prove the existence of "-equilibria.
    Date: 2019
  8. By: Denter, Philipp; Dumav, Martin; Ginzburg, Boris
    Abstract: We propose a model of political persuasion in which a biased newspaper aims to convince voters to vote for the government. Each voter receives the newspaper's report, as well as an independent private signal. Voters then exchange this information on social media and form posterior beliefs, neglecting correlation among signals. An increase in connectivity increases the newspaper's bias if voters are ex ante predisposed to vote against the government, and reduces the bias if they are predisposed in favour of the government. While more precise independent signals reduce the newspaper's optimal bias, the bias remains positive even when connectivity becomes large. Thus, even with a large number of social connections, the election produces an inefficient outcome with positive probability, implying a failure of the Condorcet jury theorem.
    Keywords: social media; media bias; correlation neglect; Bayesian persuasion; voting; deliberation
    JEL: D72 D83 P16
    Date: 2019–12–13
  9. By: Jorge Vasquez (Smith University; Group for Research in Applied Economics (GRAPE)); Marek Weretka (Group for Research in Applied Economics (GRAPE); University of Wisconsin-Madison)
    Abstract: According to psychology, affective empathy is one of the key processes governing human interactions. It refers to the automatic transmission and diffusion of emotions in response to others' emotions, which gives rise to emotional contagion. Contrary to other forms of empathy, affective empathy has received little attention in economics. In this paper, we augment the standard game-theoretic framework by allowing players to affectively empathize. Players' utility functions depend not only on the strategy prole being played, but also on the realized utilities of other players. Thus, players' realized utilities are interdependent, capturing emotional contagion. We offer a solution concept for these empathetic games and show that the set of equilibria is non-empty and, generically, finite. Motivated by psychological evidence, we analyze sympathetic and antipathetic games. In the former, players' utilities increase in others' realized utilities, capturing unconditional friendship; whereas in the latter the opposite holds, resembling hostility.
    Keywords: affective empathy, emotional contagion, Interdependent utilities, non-paternalistic preferences
    JEL: D64 D90 D91
    Date: 2020
  10. By: Tomoya Kazumura; Debasis Mishra; Shigehiro Serizawa
    Abstract: A seller is selling multiple objects to a set of agents, who can buy at most one object. Each agent's preference over (object, payment) pairs need not be quasilinear. The seller considers the following desiderata for her mechanism, which she terms desirable: (1) strategy-proofness, (2) ex-post individual rationality, (3) equal treatment of equals, (4) no wastage (every object is allocated to some agent). The minimum Walrasian equilibrium price (MWEP) mechanism is desirable. We show that at each preference profile, the MWEP mechanism generates more revenue for the seller than any desirable mechanism satisfying no subsidy. Our result works for the quasilinear domain, where the MWEP mechanism is the VCG mechanism, and for various non-quasilinear domains, some of which incorporate positive income effect of agents. We can relax no subsidy to no bankruptcy in our result for certain domains with positive income effect. .Creation-Date: 2017-05
    Date: 2020–01
  11. By: Jingfeng Lu; Zongwei Lu; Christian Riis
    Abstract: We study collusion in a second price auction with two bidders in a dynamic environment. One bidder can make a take-it-or-leave-it collusion proposal, which consists of both an offer and a request of bribes, to the opponent. We show there always exists a robust equilibrium in which the collusion success probability is one. In the equilibrium, the interim expected payoff of the collusion initiator Pareto dominates the counterpart in any robust equilibria of the single-option model (Es\"{o} and Schummer (2004)) and any other separating equilibria in our model.
    Date: 2019–12
  12. By: Mumcu, Ayse; Saglam, Ismail
    Abstract: We consider strategic issues in one-to-one matching with externalities. We show that no core (stable) mechanism is strategy-proof, extending an impossibility result of Roth (1982) obtained in the absence of externalities. Moreover, we show that there are no limits on successful manipulation of preferences by coalitions of men and women, in contrast with the result of Demange et al. (1987) obtained in the absence of externalities.
    Keywords: One-to-one matching; externalities; stability; core; strategic manipulation.
    JEL: C71 C78 D62
    Date: 2019–12–18
  13. By: Christoph March; Marco Sahm
    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 intra-divisional 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
  14. By: Chichilnisky, Graciela (Columbia University); Hammond, Peter J. (University of Warwick); Stern, Nicholas (London School of Economics)
    Abstract: Ramsey famously condemned discounting “future enjoyments” as “ethically indefensible”. Suppes enunciated an equity criterion which, when social choice is utilitarian, implies giving equal weight to all individuals’ utilities. By contrast, Arrow (1999a, b) accepted, perhaps reluctantly, what he called Koopmans’ (1960) “strong argument” implying that no equitable preference ordering exists for a sufficiently unrestricted domain of infinite utility streams. Here we derive an equitable utilitarian objective for a finite population based on a version of the Vickrey–Harsanyi original position, where there is an equal probability of becoming each person. For a potentially infinite population facing an exogenous stochastic process of extinction, an equitable extinction biased original position requires equal conditional probabilities, given that the individual’s generation survives the extinction process. Such a position is well-defined if and only if survival probabilities decline fast enough for the expected total number of individuals who can ever live to be finite. Then, provided that each individual’s utility is bounded both above and below, maximizing expected “extinction discounted” total utility — as advocated, inter alia, by the Stern Review on climate change — provides a coherent and dynamically consistent equitable objective, even when the population size of each generation can be chosen.
    Keywords: Discounting, time perspective, fundamental preferences, fundamental utilitarianism, consequentialization, Vickrey–Harsanyi original position, Suppes equity, intergenerational equity, sustainable preferences, extinction discounting JEL Classification: D63, D70, D90, Q54, Q56
    Date: 2020
  15. By: Pierpaolo Battigalli; Paolo Leonetti; Fabio Maccheroni
    Abstract: Two extensive game structures with imperfect information are said to be behaviorally equivalent if they share the same map (up to relabelings) from profiles of structurally reduced strategies to induced terminal paths. We show that this is the case if and only if one can be transformed into the other through a composition of two elementary transformations, commonly known as “Interchanging of Simultaneous Moves” and “Coalescing Moves/Sequential Agent Splitting.”
    Keywords: Extensive game structure; behavioral equivalence; invariant transformations. JEL Codes: C72
    Date: 2019
  16. By: Schnakenberg, Keith; Turner, Ian R (Yale University)
    Abstract: Lobbying is a potential source of corruption but is also a valuable source of information for policymakers. We analyze a game-theoretic model that shows how the threat of corruption affects the incentives of non-corrupt politicians to enlist the help of lobbyists to make more informed decisions. Politicians face a dilemma because voters cannot always tell whether a politician allows access to lobbyists in order to solicit corruption or to seek information. Thus, a non-corrupt politician may deny access to lobbyists to signal that she is non-corrupt even though doing so impedes her ability to make good policy. This signaling may decrease the welfare of the voters depending on the value of the lost policy information relative to the value of screening out corrupt politicians.
    Date: 2019–02–19
  17. 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; ownership rights; investment incentives; relationship specificity; moral hazard
    JEL: D23 D86
    Date: 2020
  18. By: Fiocco, Raffaele; Guo, Dongyu
    Abstract: We investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors. Regulatory risk reflects uncertainty about the regulator's commitment to a regulatory policy that promotes the regulated firm's unobservable investment effort. We show that, when the regulator sets the regulatory policy after the vertical industry structure has been established, some degree of regulatory risk is ex ante socially beneficial. Regulatory risk makes vertical integration profitable and stimulates upstream investment at a lower social cost. This occurs for moderate costs of investment effort and firm small risk aversion. Our analysis sheds new light on some relevant empirical patterns in vertically related markets.
    Keywords: commitment, moral hazard, regulatory risk, upstream investment, vertical integration, vertically related markets.
    JEL: D82 L43 L51
    Date: 2020–01
  19. By: Harold L. Cole (University of Pennsylvania); Dirk Krueger (University of Pennsylvania); George J. Mailath (University of Pennsylvania); Yena Park (University of Rochester)
    Abstract: We analyze e?cient risk-sharing arrangements when coalitions may deviate. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any deviating coalition rely on a belief in future cooperation, and we treat the contracting conditions of original and deviating coalitions symmetrically. We show that better belief coordination (higher social capital) tightens incentive constraints since it facilitates both the formation of the original as well as a deviating coalition. As a consequence, the payo? of successfully formed coalitions might be declining in the degree of belief coordination and equilibrium allocations might feature resource burning or utility burning.
    Keywords: Financial Coalition, Limited Enforcement, Risk Sharing, Coalition-Proof Equi-librium
    JEL: E21 G22 D11 D91
    Date: 2019–01–08
  20. By: Cofone, Ignacio (McGill University); Robertson, Adriana
    Abstract: Privacy loss is central to privacy law scholarship, but a clear definition of the concept remains elusive. We present a model that both captures the essence of privacy loss and can be easily applied to policy evaluations and doctrinal debates. To do so, we use standard Bayesian statistics to formalize a key intuition: that information privacy is fundamentally linked to how much other people know about you. A key advantage of our model is that, for the first time, it takes privacy preferences seriously while maintaining tractability. Another key advantage is that, by viewing privacy as a continuum, it is more realistic and is better suited for evaluating “gray areas” than prior models. We apply this framework to two central areas of privacy law: the common law privacy tort and the Fourth Amendment’s third-party doctrine. In the tort context, we first show how our proposal helps to clarify current law, and then use it to distinguish between the two interests protected by the privacy tort: privacy interests and reputational interests. We then propose a simple framework for judges to use in providing remedies for both classes of claims. We then move on to the third party doctrine. We show that many of the shortcomings associated with the doctrine stem from the misguided assumption that privacy is dichotomous rather than a spectrum, as in our model. We then liken this to the standard of care familiar from tort law, and show how the current doctrine results in the equivalent of a strict liability standard, rather than a more appropriate negligence-based standard.
    Date: 2019–02–10
  21. By: Raouf Boucekkine (Aix-Marseille School of Economics [Aix-Marseille Université] - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - Centre de la Vieille Charité [Aix-Marseille Université]); Carmen Camacho (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics); Benteng Zou ( - Université du Luxembourg)
    Abstract: In this paper, we tackle a generic optimal regime switching problem where the decision making process is not the same from a regime to another. Precisely, we consider a simple model of optimal switching from competition to cooperation. To this end, we solve a two- stage optimal control problem. In the first stage, two players engage in a dynamic game with a common state variable and one control for each player. We solve for open-loop strategies with a linear state equation and linear-quadratic payoffs. More importantly, the players may also consider the possibility to switch at finite time to a cooperative regime with the associated joint optimization of the sum of the individual payoffs. Using the- oretical analysis and numerical exercises, we study the optimal switching strategy from competition to cooperation. We also discuss the reverse switching.
    Keywords: Cooperation,competition,dynamic games,multi-stage optimal control
    Date: 2020–01

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