nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒03‒09
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Sweet Lemons: Mitigating Collusion in Organizations By Colin von Negenborn; Martin Pollrich
  2. Signaling Covertly Acquired Information By Mehmet Ekmekci; Nenad Kos
  3. Optimal Auctions with Signaling Bidders By Oliver Bos; Martin Pollrich
  4. Bribing in Team Contests By Serhat Dogan; Emin Karagözoðlu; Kerim Keskin; Cagri Saglam; Emin Karagözoglu
  5. Strategies under Strategic Uncertainty By Helene Mass
  6. Random horizon principal-agent problem By Yiqing Lin; Zhenjie Ren; Nizar Touzi; Junjian Yang
  7. A Rationalization of the Weak Axiom of Revealed Preference By Aguiar, Victor H.; Hjertstrand, Per; Serrano, Roberto
  8. Optimal payment contracts in trade relationships By Fischer, Christian
  9. Fairness and Efficiency in Cake-Cutting with Single-Peaked Preferences By Bhavook Bhardwaj; Rajnish Kumar; Josue Ortega
  10. R&D incentives with uncertain probability of success By Chatterjee, Rittwik; Chattopadhyay, Srobonti; Kabiraj, Tarun
  11. On the cost of misperception: general results and behavioural applications By Gossner, Olivier; Steiner, Jakub
  12. A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers By Sergey G. Kokovin; Shamil Sharapudinov; Alexander Tarasov; Philip Ushchev
  13. A Capital Asset Pricing Model with Market Sentiment By Mark A. Schneider; Manuel A. Nunez
  14. Strategic Issues in College Admissions with Early Decision By Mumcu, Ayse; Saglam, Ismail
  15. Contest with Incomplete Information: When to Turn Up the Heat, and How? By Mengxi Zhang

  1. By: Colin von Negenborn; Martin Pollrich
    Abstract: We show that mechanisms which generate endogenous asymmetric information fully mitigate collusion. In our model, an agent has private information and a supervisor observes a signal that is correlated with the agent’s type. Agent and supervisor can form collusive side agreements. We study the implementation of social choice functions that condition on the agent’s type and the supervisory signal. Our main result establishes that any social choice function that is implementable if the signal is public can also be implemented when the signal is private information and collusion is possible. Despite collusion, the signal is obtained for free, i.e., the supervisor does not receive an information rent. Our mechanism breaks collusion via endogenous creation of asymmetric information between agent and supervisor. The associated bargaining frictions prevent formation of collusive agreements, similar to the trade failure in the classical lemons market.
    Keywords: Mechanism Design, Collusion, Correlation, Asymmetric Information, Random Incentives
    JEL: D82 D83 L51
    Date: 2020–02
  2. By: Mehmet Ekmekci; Nenad Kos
    Abstract: We study the interplay between information acquisition and signaling. A sender decides whether to learn his type at a cost prior to taking a signaling action. A receiver responds after observing the signaling action. In the benchmark model where the sender’s information acquisition decision is observed the sender does not acquire information and, therefore, does not signal. A rationale for signaling is provided by the model in which information acquisition is covert. There, in the unique equilibrium outcome surviving a form of never weak best response refinement the sender does acquire information and signals when the information is cheap.Keywords: Signaling, information acquisition, refinements. JEL Classification Numbers: D82, G34.
    Date: 2020
  3. By: Oliver Bos; Martin Pollrich
    Abstract: We study optimal auctions in a symmetric private values setting, where bidders’ care about winning the object and a receiver’s inference about their type. We reestablish revenue equivalence when bidders’ signaling concerns are linear, and the auction makes participation observable via an entry fee. With convex signaling concerns, optimal auctions are fully transparent: every standard auction, which reveals all bids yields maximal revenue. With concave signaling concerns there is no general revenue ranking. We highlight a trade-off between maximizing revenue derived from signaling, and extracting information from bidders. Our methodology combines tools from mechanism design with tools from Bayesian persuasion.
    Keywords: optimal auctions, revenue equivalence, Bayesian persuasion, information design
    JEL: D44 D82
    Date: 2020–02
  4. By: Serhat Dogan; Emin Karagözoðlu; Kerim Keskin; Cagri Saglam; Emin Karagözoglu
    Abstract: We study bribing in a sequential team contest with multiple pairwise battles. We allow for asymmetries in winning prizes and marginal costs of effort; and we characterize the conditions under which (i) a player in a team is offered a bribe by the owner of the other team and (ii) she accepts the bribe. We show that these conditions depend on the ratios of players’ winning prizes and marginal costs of effort: the team owner chooses to bribe the player with the most favorable winning prize to marginal cost of effort ratio, and offer a bribe that leaves her indifferent between accepting (and exerting zero effort) and not accepting (and exerting her optimal effort). In some cases, the competition between players and the negative consequences of one player receiving a bribe on the team performance can drag down equilibrium bribe to zero. We also study the impact of changes in winning prizes and marginal costs of effort on equilibrium bribing behavior.
    Keywords: bribing, contest games, pairwise battles, team contests
    JEL: C72 D73 D74
    Date: 2020
  5. By: Helene Mass
    Abstract: I investigate the decision problem of a player in a game of incomplete information who faces uncertainty about the other players’ strategies. I propose a new decision criterion — the rational maximin criterion — which works in two steps. First, I assume common knowledge of rationality and eliminate all strategies which are not rationalizable. Second, I apply the maximin criterion. Using this decision criterion, one can derive predictions about outcomes and recommendations for players facing strategic uncertainty. I analyze applications to first-price auctions, contests, and bilateral trade.
    Keywords: Incomplete Information, Informational Robustness, Rationalizability
    JEL: D81 D82 D83
    Date: 2020–02
  6. By: Yiqing Lin; Zhenjie Ren; Nizar Touzi; Junjian Yang
    Abstract: We consider a general formulation of the random horizon Principal-Agent problem with a continuous payment and a lump-sum payment at termination. In the European version of the problem, the random horizon is chosen solely by the principal with no other possible action from the agent than exerting effort on the dynamics of the output process. We also consider the American version of the contract, which covers the seminal Sannikov's model, where the agent can also quit by optimally choosing the termination time of the contract. Our main result reduces such non-zero-sum stochastic differential games to appropriate stochastic control problems which may be solved by standard methods of stochastic control theory. This reduction is obtained by following Sannikov's approach, further developed by Cvitanic, Possamai, and Touzi. We first introduce an appropriate class of contracts for which the agent's optimal effort is immediately characterized by the standard verification argument in stochastic control theory. We then show that this class of contracts is dense in an appropriate sense so that the optimization over this restricted family of contracts represents no loss of generality. The result is obtained by using the recent well-posedness result of random horizon second-order backward SDE.
    Date: 2020–02
  7. By: Aguiar, Victor H. (Department of Economics); Hjertstrand, Per (Research Institute of Industrial Economics (IFN)); Serrano, Roberto (Department of Economics)
    Abstract: We offer a rationalization of the weak axiom of revealed preference (WARP) and of the weak generalized axiom of revealed preference (WGARP) for both finite and infinite data sets of consumer choice. We call it maximin rationalization, in which each pairwise choice is associated with a local utility function. We develop its associated revealed-preference theory. We show that preference recoverability and welfare analysis à la Varian (1982) may not be informative enough when the weak axiom holds but when consumers are not utility maximizers. In addition, we show that counterfactual analysis may fail with WGARP/WARP. We clarify the reasons for these failures and provide new informative bounds for the consumer’s true preferences, as well as a new way to perform counterfactual analysis. Finally, by adding the Gorman form and quasilinearity restrictions to the “local” utility functions, we obtain new characterizations of the choices of the Shafer (1974) nontransitive consumer and those choices satisfying the law of demand.
    Keywords: Consumer choice; Revealed preference; Maximin rationalization; Nonconvex preferences; Reference-dependent utility; Law of demand
    JEL: C60 D10
    Date: 2020–02–26
  8. By: Fischer, Christian
    Abstract: Trade credit is one of the most important sources of short-term finance in buyer-seller transactions.This paper studies a seller's trade credit provision decision in a situation of repeated contracting withincomplete information over the buyer's ability and willingness of payment compliance when theenforceability of formal contracts is uncertain. We show that selecting the payment terms of a trans-action corresponds to managing an inter-temporal trade-off between improving the quality of infor-mation acquisition and mitigating relationship breakdown risks. The dynamically optimal sequenceof payment contracts can be uniquely determined provided that the quality of contract enforcementinstitutions is sufficiently low.
    Keywords: Payment contracts,Trade credit,Trade dynamics,Relational contracts,Contract enforcement
    JEL: L14 F34 G32 D83
    Date: 2020
  9. By: Bhavook Bhardwaj; Rajnish Kumar; Josue Ortega
    Abstract: We study the cake-cutting problem when agents have single-peaked preferences over the cake. We show that a recently proposed mechanism by Wang-Wu (2019) to obtain envy-free allocations can yield large welfare losses. Using a simplifying assumption, we characterize all Pareto optimal allocations, which have a simple structure: are peak-preserving and non-wasteful. Finally, we provide simple alternative mechanisms that Pareto dominate that of Wang-Wu, and which achieve envy-freeness or Pareto optimality.
    Date: 2020–02
  10. By: Chatterjee, Rittwik; Chattopadhyay, Srobonti; Kabiraj, Tarun
    Abstract: A firm’s decision to invest in R&D depends on a number of factors like availability of funds, extent of R&D spillovers, market structure, and success probability. However, probability of success depends, to a large extent, on factors endogenous to a firm. This means, success probability can be known to the firm undertaking R&D investment, not to the rivals, hence there is incomplete information about probability of success in R&D. There are also uncertainties about rival’s R&D decision and R&D status. In a duopoly we show that there is a non-monotone relation between R&D incentives and the level of information.
    Keywords: R&D incentives, Duopoly, Incomplete information, Type distribution
    JEL: D43 D82 L13 O31
    Date: 2020–01–31
  11. By: Gossner, Olivier; Steiner, Jakub
    Abstract: In a choice model, we characterize the loss induced by misperceptions of payoff-relevant parameters across a distribution of decision problems. When the agent cannot avoid misperceptions but has some control over the distribution of errors, we show that strategies that minimize loss from misperception exhibit systematic biases, akin to some documented in the behavioural and psychological literatures. We include illusion of control, order effect, overprecision, and overweighting of small probabilities as illustrative examples.
    JEL: J1
    Date: 2018–08–20
  12. By: Sergey G. Kokovin; Shamil Sharapudinov; Alexander Tarasov; Philip Ushchev
    Abstract: Our novel approach to modeling monopolistic competition with heterogeneous consumers involves a space of characteristics of a differentiated good (consumers’ ideal points), alike Hotelling (1929). Firms have heterogeneous costs à la Melitz (2003). In addition to price setting, each firm also chooses its optimal location/niche in this space. We formulate conditions for positive sorting: more efficient firms serve larger market segments and face tougher competition in the equilibrium. Our framework entails rich equilibrium patterns displaying non-monotonic markups, high in the most and least populated niches, and the unequal gains from trade across different consumers.
    Keywords: firm heterogeneity, product space, positive sorting, product niches
    JEL: F10 L11 L13
    Date: 2020
  13. By: Mark A. Schneider (Culverhouse College of Business, University of Alabama and Economic Science Institute, Chapman University); Manuel A. Nunez (School of Business, University of Connecticut)
    Abstract: We derive a capital asset pricing model with market sentiment from a representative agent that exhibits two basic behavioral biases – ambiguity aversion and positive skewness preference. The asset pricing formula generalizes the classical CAPM by accounting for model uncertainty, positive skewness, disaster risk, and market sentiment, thereby linking four strands of the literature. We apply the Market Sentiment CAPM to provide a uni?ed explanation for the beta anomaly and three other market anomalies, and to predict how they are a?ected by sentiment. The Market Sentiment CAPM provides a theoretical foundation for the pricing of sentiment in the cross-section of returns.
    Keywords: Capital Asset Pricing Model, Beta Anomaly, Sentiment, Uncertainty, Skewness Preference, Disaster Risk
    JEL: D81
    Date: 2020
  14. By: Mumcu, Ayse; Saglam, Ismail
    Abstract: In this paper, we consider college admissions with early decision using a many-to-one matching model with two periods. As in reality, each student commits to only one college in the early decision period and agrees to enroll if admitted. Under responsive and consistent preferences for both colleges and students, we show that there exists no stable matching system, consisting of early and regular decision matching rules, which is nonmanipulable via early decision quotas by colleges or early decision preferences by colleges or students.
    Keywords: College admissions; early decision; manipulability; many-to-one matching.
    JEL: C71 C78
    Date: 2020–02–11
  15. By: Mengxi Zhang
    Abstract: I investigate the optimal design of contests when contestants have both private infor- mation and convex effort costs. The designer has a fixed prize budget and her objective is to maximize the expected total effort. I first demonstrate that it is always optimal for the designer to employ a static, grand all-pay-contest with as many as possible participants. In addition, I identify a sufficient and necessary condition for the winner- takes-all prize structure to be optimal. When this condition fails, the designer may prefer to award multiple prizes of descending sizes. I also provide a characterization of the optimal prize structure for this case. Lastly, I illustrate how the optimal prize structure evolves as contest size grows: the prize structure first becomes more unequal until the optimal level of competition intensity is obtained, and then becomes less unequal to maintain the optimal intensity.
    Date: 2020–02

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