nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒04‒13
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Conditional expected utility criteria for decision making under ignorance or objective ambiguity By Nicolas Gravel; Thierry Marchant; Arunava Sen
  2. When choosing is painful: anticipated regret and psychological opportunity cost By Emmanuelle GABILLON
  3. Dynamic strategic complements in two stage, 2x2 games By Yue Feng; Tarun Sabarwal
  4. Doubly Strong Equilibrium By Scalzo, Vincenzo
  5. On some k-scoring rules for committee elections: agreement and Condorcet Principle By Mostapha Diss; Eric Kamwa; Abdelmonaim Tlidi
  6. Failure of Equilibrium Selection Methods for Multiple-Principal, Multiple-Agent Problems with Non-Rivalrous Goods: An Analysis of Data Markets By Samir Wadhwa; Roy Dong
  7. Correlated Equilibrium Under Costly Disobedience By Ozdogan, Ayca; Saglam, Ismail
  8. Network compatibility, intensity of competition and process R&D: A Generalization By Sumit Shrivastav
  9. Dynamic Adverse Selection and Belief Update in Credit Markets By Kang, Kee-Youn; Jang, Inkee
  10. Behavior-Based Personalized Pricing: When Firms Can Share Customer Information By Chongwoo Choe; Noriaki Matsushima; Mark J. Tremblay
  11. By Force of Habit: Self-Trapping in a Dynamical Utility Landscape By Jos\'e Moran; Antoine Fosset; Davide Luzzati; Jean-Philippe Bouchaud; Michael Benzaquen
  12. Optimal Reduction of Cartel Fines induced by the Settlement Procedure By Fotis, Panagiotis; Tselekounis, Markos
  13. Two-worker competition in gift-exchange: assessing intention-based reciprocity and inequity aversion By Bogliacino, Francesco; Rodríguez González, Nicolás
  14. Does improved information improve incentives? By Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
  15. The Speed of Innovation Diffusion in Social Networks* By Itai Arieli; Yakov Babichenko; Ron Peretz; H. Peyton Young
  16. Solving Strong-Substitutes Product-Mix Auctions By Elizabeth Baldwin; Paul W. Goldberg; Paul Klemperer; Edwin Lock
  17. A Knightian Irreversible Investment Problem By Giorgio Ferrari; Hanwu Li; Frank Riedel

  1. By: Nicolas Gravel (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Thierry Marchant (UGENT - Ghent University [Belgium]); Arunava Sen (Indian Statistical Institute [New Delhi])
    Abstract: We provide an axiomatic characterization of a family of criteria for ranking completely uncertain and/or ambiguous decisions. A completely uncertain decision is described by the set of all its consequences (assumed to be finite). An ambiguous decision is described as a set of possible probability distributions over a set of prizes. Every criterion in the family compares sets on the basis of their conditional expected utility , for some "likelihood" function taking strictly positive values and some utility function both having the universe of alternatives as their domain.
    Keywords: Ignorance,Ambiguity,Conditional Probabilities,Expected Utility,Ranking Sets,axioms JEL classification numbers: D80,D81
    Date: 2018–10
  2. By: Emmanuelle GABILLON
    Abstract: This paper is a contribution to regret theory, which we generalize in two ways. Since the intensity of regret depends on the information the decision-maker has about the results of the foregone strategies (feedback), we build a model of choice which accommodates any feedback structure. We also show that the reference point, which characterizes the regret utility function introduced by Quiggin (1994), does not always represent an anticipated feeling of regret. It can also correspond to another negative feeling related to the act of choosing, which we call psychological opportunity cost (POC), borne at the very moment of choosing. We find behavioral deviations from the predictions of the classical Expected Utility Theory. We obtain correlation loving, greater reluctance to take on risk, and information avoidance at decision time. Our model also offers a theoretical framework for experimental studies about inaction inertia.
    Keywords: Choice; Correlation loving; Inaction inertia; Information; Regret; Risk aversion
    JEL: D80 D81 D91
    Date: 2020
  3. By: Yue Feng (School of Business, Nanjing University, China and Center for Post-Doctoral Studies, Bank of Nanjing, China); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: Strategic complements are well understood for normal form games, but less so for extensive form games. There is some evidence that extensive form games with strategic complementarities are a very restrictive class of games (Echenique (2004)). We study necessary and sufficient conditions for strategic complements (defined as increasing best responses) in two stage, 2x2 games. We find that the restrictiveness imposed by quasisupermodularity and single crossing property is particularly severe, in the sense that the set of games in which payoffs satisfy these conditions has measure zero. Payoffs with these conditions require the player to be indifferent between their actions in two of the four subgames in stage two, eliminating any strategic role for their actions in these two subgames. In contrast, the set of games that exhibit strategic complements (increasing best responses) has infinite measure. This enlarges the scope of strategic complements in two stage, 2x2 games (and provides a basis for possibly greater scope in more general games). The set of subgame perfect Nash equilibria in the larger class of games continues to remain a nonempty, complete lattice. The results are easy to apply, and are robust to including dual payoff conditions and adding a third player. Examples with several motivations are included.
    Keywords: Strategic complements, extensive form game, two stage game
    JEL: C60 C70
    Date: 2020–04
  4. By: Scalzo, Vincenzo
    Abstract: We present a new concept for (generalized) strategic form games, called \emph{doubly strong equilibrium}, and give an existence result when the players have non-ordered and discontinuous preferences. Since a doubly strong equilibrium is a strong equilibrium in the sense of Aumann, we get the existence of strong equilibria in discontinuous games. The result has been obtained by using the \emph{quasi-Ky Fan minimax inequality}. Applications to exchange economies are given. We prove the existence of \emph{doubly strong allocations}, which maximize consumers' preferences on the set of feasible allocations. The doubly strong allocations belong to the core of the economy. When consumers' preferences are selfish, we have that the doubly strong allocations are fair in the sense of Schmeidler and Yaari. So, we get the existence of fair allocations in the setting of non-ordered and discontinuous preferences.\
    Keywords: Generalized games.Discontinuous and non-ordered preferences. Doubly strong equilibrium. Quasi-Ky Fan minimax inequality. Exchange economies. Core allocations. Fair allocations.
    JEL: C60 C70 D51 D63
    Date: 2020–03–28
  5. By: Mostapha Diss (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Eric Kamwa (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles); Abdelmonaim Tlidi (ENSA Marrakech - École nationale des sciences appliquées de Marrakech)
    Abstract: Given a collection of individual preferences on a set of candidates and a desired number of winners, a multi-winner voting rule outputs groups of winners, which we call committees. In this paper, we consider five multi-winner voting rules widely studied in the literature of social choice theory: the k-Plurality rule, the k-Borda rule, the k-Negative Plurality rule, the Bloc rule, and the Chamberlin-Courant rule. The objective of this paper is to provide a comparison of these multi-winner voting rules according to many principles by taking into account a probabilistic approach using the well-known Impartial Anonymous Culture (IAC) assumption. We first evaluate the probability that each pair of the considered voting rules selects the same unique committee in order to identify which multi-winner rules are the most likely to agree for a given number of candidates and a fixed target size of the committee. In this matter, our results show that the Chamberlin-Courant rule and the k-Plurality rule on one side, and the k-Borda rule and the Bloc rule on the other side, are the pairs of rules that most agree in comparison to other pairs. Furthermore, we evaluate the probability of every multi-winner voting rule selecting the Condorcet committee à la Gehrlein when it exists. The Condorcet committee à la Gehrlein is a fixed-size committee such that every member defeats every non-member in pairwise comparisons. In addition, we compare the considered multi-winner voting rules according to their ability (susceptibility) to select a committee containing the Condorcet winner (loser) when one exists. Here, our results tell us that in general, the k-Borda rule has the highest performance amongst all the considered voting rules. Finally, we highlight that this paper is one of the very rare contributions in the literature giving exact results under the Impartial Anonymous Culture (IAC) condition for the case of four candidates.
    Keywords: Scoring rules,Chamberlin-Courant,Borda,Condorcet,Voting,Committee
    Date: 2020
  6. By: Samir Wadhwa; Roy Dong
    Abstract: The advent of machine learning tools has led to the rise of data markets. These data markets are characterized by multiple data purchasers interacting with a set of data sources. Data sources have more information about the quality of data than the data purchasers; additionally, data itself is a non-rivalrous good that can be shared with multiple parties at negligible marginal cost. In this paper, we study the multiple-principal, multiple-agent problem with non-rivalrous goods. Under the assumption that the principal's payoff is quasilinear in the payments given to agents, we show that there is a fundamental degeneracy in the market of non-rivalrous goods. Specifically, for a general class of payment contracts, there will be an infinite set of generalized Nash equilibria. This multiplicity of equilibria also affects common refinements of equilibrium definitions intended to uniquely select an equilibrium: both variational equilibria and normalized equilibria will be non-unique in general. This implies that most existing equilibrium concepts cannot provide predictions on the outcomes of data markets emerging today. The results support the idea that modifications to payment contracts themselves are unlikely to yield a unique equilibrium, and either changes to the models of study or new equilibrium concepts will be required to determine unique equilibria in settings with multiple principals and a non-rivalrous good.
    Date: 2020–03
  7. By: Ozdogan, Ayca; Saglam, Ismail
    Abstract: In this paper, we extend Aumann's (1974) well-known solution of correlated equilibrium to allow for a cost of disobedience for each player. Calling the new solution costly correlated equilibrium (CCE), we derive the necessary and sufficient conditions under which the set of CCE strictly expands when the players' cost of disobedience is increased by the mediator in any finite normal-form game. These conditions imply that for any game that has a Nash equilibrium (NE) that is unpure, the set of CCE strictly expands with the addition of even arbitrarily small cost of disobedience, whereas for games that have a unique NE in pure strategies, the set of CCE stays the same unless the cost gets sufficiently high. We also study the welfare implications and changes in the value of mediation with exogenous cost changes. We find that strictly better social outcomes can be attained and the value of mediation cannot decrease with an increase in the cost level. We also illustrate how our model can be integrated with a cost-selection game where players non-cooperatively choose their costs of disobedience before mediation occurs. We show that there exist cost-selection games in which setting the cost of disobedience at zero is a strictly dominated strategy for each player as well as games this strategy becomes weakly dominant for everyone.
    Keywords: Correlated equilibrium; cost of disobedience.
    JEL: C72
    Date: 2020–03–30
  8. By: Sumit Shrivastav (Indira Gandhi Institute of Development Research)
    Abstract: This paper analyses implications of network compatibility and competition on process innovation in differentiated network goods duopoly. It shows that firms R&D investments are strategic substitutes (complements), if effective network compatibility is less (more) than product substitutability, regardless of the nature of competition. If R&D investments are strategic complements, firms always invest in process innovation and they invest more under Bertrand competition than under Cournot competition. If R&D investments are strategic substitutes, unlike Cournot firms, Bertrand firms dont always undertake process innovation; but, when Bertrand firms also undertake process innovation, Cournot-Bertrand R&D ranking depends on the strength of network externalities.
    Keywords: Network compatibility, Network Externalities, Process R&D, Bertrand-Cournot Compari- son, Product Differentiation
    JEL: L13 D43 O31
    Date: 2020–02
  9. By: Kang, Kee-Youn; Jang, Inkee
    Abstract: We develop a dynamic model of debt contracts with adverse selection and belief updates. In the model, entrepreneurs borrow investment goods from lenders to run businesses whose returns depend on entrepreneurial productivity and common productivity. The entrepreneurial productivity is the entrepreneur's private information, and the lender constructs beliefs about the entrepreneur's productivity based on the entrepreneur's business operation history, common productivity history, and terms of the contract. The model provides insights on the dynamic and cross-sectional relation between firm age and credit risk, cyclical asymmetry of the business cycle, slow recovery after a crisis, and the constructive economic downturn.
    Keywords: Adverse selection, Bayesian learning, Debt contracts, Belief update
    JEL: C78 D82 E44 G0
    Date: 2020–02–01
  10. By: Chongwoo Choe; Noriaki Matsushima; Mark J. Tremblay
    Abstract: We study a model of behavior-based price discrimination where firms can agree to share customer information that can be used for personalized pricing. We show that firms are better off sharing customer information as it softens up-front competition when they gather information, consumers are worse off as a result, but total surplus can increase thanks to the improved quality of matching between firms and consumers.
  11. By: Jos\'e Moran; Antoine Fosset; Davide Luzzati; Jean-Philippe Bouchaud; Michael Benzaquen
    Abstract: Historically, rational choice theory has focused on the utility maximization principle to describe how individuals make choices. In reality, there is a computational cost related to exploring the universe of available choices and it is often not clear whether we are truly maximizing an underlying utility function. In particular, memory effects and habit formation may dominate over utility maximisation. We propose a stylized model with a history-dependent utility function where the utility associated to each choice is increased when that choice has been made in the past, with a certain decaying memory kernel. We show that self-reinforcing effects can cause the agent to get stuck with a choice by sheer force of habit. We discuss the special nature of the transition between free exploration of the space of choice and self-trapping. We find in particular that the trapping time distribution is precisely a Zipf law at the transition, and that the self-trapped phase exhibits super-aging behaviour.
    Date: 2020–03
  12. By: Fotis, Panagiotis; Tselekounis, Markos
    Abstract: EC’s Notice on the conduct of settlement procedures mentions that if the EC decides to reward a firm for settlement in the framework of its Notice, a reduction of 10% on cartel fine will be granted to that firm. In this paper, we compare the cartel profits with the ones derived when the cartel members decide to settle with competition authority so as to find the optimal reduction on cartel fines that fulfills EC’s Notice goal of inducing all cartel firms to participate in the settlement procedure. We find that such reduction is negatively correlated with the likelihood that the cartel would be detected, meaning that a higher probability of cartel detection is required for a lower reduction to be effective.
    Keywords: Antitrust policy; Competition policy; Cartel fines; Settlement Procedure
    JEL: K21 L13 L41
    Date: 2020–03–17
  13. By: Bogliacino, Francesco; Rodríguez González, Nicolás
    Abstract: In this article, we study a three-person gift exchange, where two workers compete for a bonus. We derive the equilibrium properties of the models of sequential reciprocity and inequity aversion. We then prove a comparative statics theorem, when one worker becomes more productive. We show that compared with the predictions of outcome based model, those of the intention based model contrast sharply. This creates an ideal setting in which to perform a controlled experiment to test them. Our results largely support sequential reciprocity.
    Keywords: Gift exchange; sequential reciprocity; inequity aversion
    JEL: A13 C72 C91 D63
    Date: 2020–03
  14. By: Chaigneau, Pierre; Edmans, Alex; Gottlieb, Daniel
    Abstract: This paper studies the value of more precise signals on agent performance in an optimal contracting model with endogenous effort. With limited liability, the agent's wage is increasing in output only if output exceeds a threshold, else it is zero regardless of output. If the threshold is sufficiently high, the agent only beats it, and is rewarded for increasing output through greater effort, if there is a high noise realization. Thus, a fall in output volatility reduces effort incentives—information and effort are substitutes—offsetting the standard effect that improved information lowers the cost of compensation. We derive conditions relating the incentive effect to the underlying parameters of the agency problem.
    Keywords: executive compensation; limited liability; options; relative performance evaluation; risk management
    JEL: D86 G32 G34 J33
    Date: 2018–11–01
  15. By: Itai Arieli (Faculty of Industrial Engineering and Management, Technion–Israel Institute of Technology); Yakov Babichenko (Faculty of Industrial Engineering and Management, Technion–Israel Institute of Technology); Ron Peretz (Department of Economics, Bar Ilan University); H. Peyton Young (London School of Economics and Nuffield College, University of Oxford)
    Abstract: New ways of doing things often get started through the actions of a few innovators, then diffuse rapidly as more and more people come into contact with prior adopters in their social network. Much of the literature focuses on the speed of diffusion as a function of the network topology. In practice, however, the topology may not be known with any precision, and it is constantly in flux as links are formed and severed. Here we establish an upper bound on the expected waiting time until a given proportion of the population has adopted that holds independently of the network structure. Kreindler and Young [33, 2014] demonstrated such a bound for regular networks when agents choose between two options: the innovation and the status quo. Our bound holds for directed and undirected networks of arbitrary size and degree distribution, and for multiple competing innovations with different payoffs.
    Date: 2019–08–22
  16. By: Elizabeth Baldwin (Dept. of Economics, Oxford University); Paul W. Goldberg (Dept. of Computer Science, Oxford University); Paul Klemperer (Dept. of Economics, Oxford University); Edwin Lock (Dept. of Computer Science, Oxford University)
    Abstract: This paper develops algorithms to solve strong-substitutes product-mix auctions: it finds competitive equilibrium prices and quantities for agents who use this auction’s bidding language to truthfully express their strong-substitutes preferences over an arbitrary number of goods, each of which is available in multiple discrete units. Our use of the bidding language, and the information it provides, contrasts with existing algorithms that rely on access to a valuation or demand oracle. We compute market-clearing prices using algorithms that apply existing submodular minimisation methods. Allocating the supply among the bidders at these prices then requires solving a novel constrained matching problem. Our algorithm iteratively simplifies the allocation problem, perturbing bids and prices in a way that resolves tie-breaking choices created by bids that can be accepted on more than one good. We provide practical running time bounds on both price-finding and allocation, and illustrate experimentally that our allocation mechanism is practical.
    Keywords: bidding language, product-mix auction, competitive equilibrium, Walrasian equilibrium, convex optimisation, strong substitutes, submodular minimisation
    Date: 2019–10–06
  17. By: Giorgio Ferrari; Hanwu Li; Frank Riedel
    Abstract: In this paper, we study an irreversible investment problem under Knightian uncertainty. In a general framework, in which Knightian uncertainty is modeled through a set of multiple priors, we prove existence and uniqueness of the optimal investment plan, and derive necessary and sufficient conditions for optimality. This allows us to construct the optimal policy in terms of the solution to a stochastic backward equation under the worst-case scenario. In a time-homogeneous setting - where risk is driven by a geometric Brownian motion and Knightian uncertainty is realized through a so-called ``k-ignorance'' - we are able to provide the explicit form of the optimal irreversible investment plan.
    Date: 2020–03

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