nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒05‒11
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Incomplete Information Robustness By Takashi Ui; Stephen Morris
  2. On the Existence of Positive Equilibrium Profits in Competitive Screening Markets By Yehuda John Levy; Andre Veiga
  3. Bilateral Information Disclosure in Adverse Selection Markets with Nonexclusive Competition By Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
  4. Persuading Strategic Voters By Kerman, Toygar; Herings, P. Jean-Jacques; Karos, Dominik
  5. Robust Implementation in Rationalizable Strategies in General Mechanisms By Kunimoto, Takashi; Saran, Rene
  6. Equilibria of nonatomic anonymous games By Simone Cerreia-Vioglio; Fabio Maccheroni; David Schmeidler
  7. Preferences, confusion and competition By Andreas Hefti; Shuo Liu; Armin Schmutzler
  8. Stable Roommate Problem with Diversity Preferences By Niclas Boehmer; Edith Elkind
  9. Merchants of doubt: Corporate political action when NGO credibility is uncertain By Mireille Chiroleu-Assouline; Thomas Lyon
  10. Weighted Envy-Freeness in Indivisible Item Allocation By Mithun Chakraborty; Ayumi Igarashi; Warut Suksompong; Yair Zick
  11. Security design in non-exclusive markets with asymmetric information By Vladimir Asriyan; Victoria Vanasco
  12. Present-Focused Preferences and Sin Goods Consumption at the Extensive and Intensive Margins By Zarko Kalamov; Marco Runkel
  13. Partial privatization and subsidization in a time-consistent policy: output versus R&D subsidies By Lee, Sang-Ho; Muminov, Timur
  14. Optimal epidemic suppression under an ICU constraint By Laurent Miclo; Daniel Spiro; J\"orgen Weibull
  15. Exclusionary contracts and incentives to innovate By Ulsaker, Simen A.
  16. Soft Affirmative Action and Minority Recruitment By Daniel Fershtman; Alessandro Pavan
  17. Statistical Discrimination in Ratings-Guided Markets By Yeon-Koo Che; Kyungmin Kim; Weijie Zhong

  1. By: Takashi Ui (Department of Economics, Hitotsubashi University); Stephen Morris (Department of Economics, Massachusetts Institute of Technology)
    Abstract: Consider an analyst who models a strategic situation in terms of an incomplete information game and makes a prediction about players’ behavior. The analyst’s model approximately describes each player’s hierarchies of beliefs over payoff-relevant states, but the true incomplete information game may have correlated duplicated belief hierarchies, and the analyst has no information about the correlation. Under these circumstances, a natural candidate for the analyst’s prediction is the set of belief-invariant Bayes correlated equilibria (BIBCE) of the analyst’s incomplete information game. We introduce the concept of robustness for BIBCE: a subset of BIBCE is robust if every nearby incomplete information game has a BIBCE that is close to some BIBCE in this set. Our main result provides a sufficient condition for robustness by introducing a generalized potential function of an incomplete information game. A generalized potential function is a function on the Cartesian product of the set of states and a covering of the action space which incorporates some information about players’ preferences. It is associated with a belief-invariant correlating device such that a signal sent to a player is a subset of the player’s actions, which can be interpreted as a vague prescription to choose some action from this subset. We show that, for every belief-invariant correlating device that maximizes the expected value of a generalized potential function, there exists a BIBCE in which every player chooses an action from a subset of actions prescribed by the device, and that the set of such BIBCE is robust, which can differ from the set of potential maximizing BNE.
    Keywords: Bayes correlated equilibria, belief hierarchies, belief invariance, generalized potentials, incomplete information games, potential games
    JEL: C72 D82
    Date: 2020–03
  2. By: Yehuda John Levy; Andre Veiga
    Abstract: We assume a fixed number of symmetric firms, competition in prices, constant returns to scale and frictionless consumer choices. Consumers differ in their preferences and profitability (e.g., due to heterogeneous risk aversion and loss probabilities), which creates adverse selection. Firms can offer multiple contracts to screen individuals, in equilibrium and in any deviation. We show that equilibrium profits vanish if each consumer has a unique optimizing bundle at equilibrium prices or, more generally, if there exists a linear ordering over of contracts that dictates the preferences of firms whenever consumers are indifferent between multiple optimal contracts. For instance, equilibrium profits vanish if the marginal rate of substitution of quality for price is sharper for profit than for utility. In particular, profit also vanishes if utility equals the sum of (negative) profit, and a surplus (eg, due to risk aversion). We provide examples of economies where there exists an equilibrium with strictly positive profit and show that these examples are robust (hold for an open set of economies).
    Keywords: Perfect Competition, Equilibrium, Screening
    JEL: D41 C62 D82 G22
    Date: 2020–01
  3. By: Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
    Abstract: We study insurance markets with nonexclusive contracts, introducing bilateral endogenous information disclosure about insurance sales and purchases by firms and consumers. We show that a competitive equilibrium exists under remarkably mild conditions, and characterize the unique equilibrium outcome. With two types of consumers the outcome consists of a pooling contract which maximizes the well-being of the low risk type (along the zero profit pooling line) plus a supplemental (undisclosed and nonexclusive) contract that brings the high risk type to full insurance (at his own odds). We show that this outcome is extremely robust and constrained Pareto efficient. Consumer disclosure and asymmetric equilibrium information flows are critical in supporting the equilibrium.
    JEL: D43 D82 D86
    Date: 2020–04
  4. By: Kerman, Toygar (RS: GSBE other - not theme-related research, General Economics 1 (Micro)); Herings, P. Jean-Jacques (RS: GSBE Theme Data-Driven Decision-Making, RS: GSBE Theme Conflict & Cooperation, General Economics 1 (Micro)); Karos, Dominik (RS: GSBE Theme Conflict & Cooperation, General Economics 1 (Micro))
    Abstract: A Sender wants to persuade multiple Receivers with homogeneous preferences and a common belief about the state of the world to vote in favor of a proposal. Prior to the vote Sender commits to a communication strategy which sends private, potentially correlated, signals to Receivers that are contingent on the true state of the world. While Sender benefits from using private messages rather than public communication if Receivers vote sincerely, under the optimal communication strategy, sincere voting is not in any Receiver’s best interest. If the proposal does not require unanimous agreement, Sender’s optimal communication strategy after which sincere voting indeed constitutes a Bayes-Nash equilibrium is such that no voter is ever pivotal.
    JEL: C72 D72 D82 D83
    Date: 2020–02–20
  5. By: Kunimoto, Takashi (School of Economics, Singapore Management University); Saran, Rene (University of Cincinnati)
    Abstract: A social choice function (SCF) is robustly implementable in rationalizable strate-gies if every rationalizable strategy profile on every type space results in outcomes consistent with it. First, we establish an equivalence between robust implementation in rationalizable strategies and “weak rationalizable implementation”. Second, using the equivalence result, we identify weak robust monotonicity as a necessary and al-most sufficient condition for robust implementation in rationalizable strategies. This exhibits a contrast with robust implementation in interim equilibria, i.e., every equilib-rium on every type space achieves outcomes consistent with the SCF. Bergemann and Morris (2011) show that strict robust monotonicity is a necessary and almost sufficient condition for robust implementation in interim equilibria. We argue that strict robust monotonicity is strictly stronger than weak robust monotonicity, which further implies that, within general mechanisms, robust implementation in rationalizable strategies is more permissive than robust implementation in interim equilibria. The gap between robust implementation in rationalizable strategies and that in interim equilibria stems from the strictly stronger nonemptiness requirement inherent in the latter concept.
    Keywords: Ex post incentive compatibility; rationalizability; interim equilibrium; robust implementation; weak rationalizable implementation; weak robust monotonicity
    JEL: C72 D78 D80
    Date: 2020–04–14
  6. 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 $\varepsilon$-estimated equilibrium and prove its existence for any positive $\varepsilon$. 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 subset 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 $\varepsilon$-equilibria.
    Date: 2020–05
  7. By: Andreas Hefti; Shuo Liu; Armin Schmutzler
    Abstract: Do firms seek to make the market transparent,or do they confuse the consumers in their product perceptions? We show that the answer to this question depends decisively on preference heterogeneity. Contrary to the well-studied case of homogeneous goods, confusion is not necessarily an equilibrium in markets with differentiated goods. In particular, if the taste distribution is polarized, so that indifferent consumers are relatively rare, firms strive to fully educate consumers. By contrast, if the taste distribution features a concentration of indecisive consumers, confusion becomes part of the equilibrium strategies. The adverse welfare consequences of confusion can be more severe than with homogeneous goods, as consumers may not only pay higher prices, but also choose a dominated option, or inefficiently refrain from buying. Qualitatively similar insights obtain for political contests, in which candidates compete for voters with heterogeneous preferences.
    Keywords: Obfuscation, consumerconfusion, differentiated products, price competition, polarized/indecisive preferences, political competition
    JEL: D43 L13 M30
    Date: 2020–04
  8. By: Niclas Boehmer; Edith Elkind
    Abstract: In the multidimensional stable roommate problem, agents have to be allocated to rooms and have preferences over sets of potential roommates. We study the complexity of finding good allocations of agents to rooms under the assumption that agents have diversity preferences [Bredereck et al., 2019]: each agent belongs to one of the two types (e.g., juniors and seniors, artists and engineers), and agents' preferences over rooms depend solely on the fraction of agents of their own type among their potential roommates. We consider various solution concepts for this setting, such as core and exchange stability, Pareto optimality and envy-freeness. On the negative side, we prove that envy-free, core stable or (strongly) exchange stable outcomes may fail to exist and that the associated decision problems are NP-complete. On the positive side, we show that these problems are in FPT with respect to the room size, which is not the case for the general stable roommate problem. Moreover, for the classic setting with rooms of size two, we present a linear-time algorithm that computes an outcome that is core and exchange stable as well as Pareto optimal. Many of our results for the stable roommate problem extend to the stable marriage problem.
    Date: 2020–04
  9. By: Mireille Chiroleu-Assouline (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); Thomas Lyon (University of Michigan [Ann Arbor] - University of Michigan System)
    Abstract: The literature on special interest groups emphasizes two main influence channels: campaign contributions and informational lobbying. We introduce a third channel: providing information about the credibility of political rivals. In particular, nongovernmental organizations (NGOs) often aim to communicate scientific knowledge to policymakers, but industry‐backed groups often attempt to undermine their credibility. We extend a standard signaling model of interest‐group lobbying to include fixed costs of policymaker action and show that these costs make possible two mechanisms for creating doubt about the value of policy action. The first uses Bayesian persuasion to suggest the NGO may be a noncredible radical. The second involves creating an opposition think tank (TT) that acts as a possible radical, not a credible moderate. We show that the TT cannot always implement the Bayesian persuasion benchmark, and we characterize how optimal TT design varies with exogenous parameters.
    Keywords: Informational lobbying,persuasion,nonmarket strategy,special interest politics
    Date: 2020
  10. By: Mithun Chakraborty; Ayumi Igarashi; Warut Suksompong; Yair Zick
    Abstract: We introduce and analyze new envy-based fairness concepts for agents with weights that quantify their entitlements in the allocation of indivisible items. We propose two variants of weighted envy-freeness up to one item (WEF1): strong, where the envy can be eliminated by removing an item from the envied agent's bundle, and weak, where the envy can be eliminated either by removing an item as in the strong version or by replicating an item from the envied agent's bundle in the envying agent's bundle. We prove that for additive valuations, an allocation that is both Pareto optimal and strongly WEF1 always exists; however, an allocation that maximizes the weighted Nash social welfare may not be strongly WEF1 but always satisfies the weak version of the property. Moreover, we establish that a generalization of the round-robin picking sequence algorithm produces in polynomial time a strongly WEF1 allocation for an arbitrary number of agents; for two agents, we can efficiently achieve both strong WEF1 and Pareto optimality by adapting the adjusted winner procedure. Our work exhibits several aspects in which weighted fair division is richer and more challenging than its unweighted counterpart.
    Date: 2019–09
  11. By: Vladimir Asriyan; Victoria Vanasco
    Abstract: We revisit the classic problem of a seller (e.g. firm) who is privately informed about her asset and needs to raise funds from uninformed buyers (e.g. investors) by issuing securities backed by her asset cash flows. In our setting, buyers post menus of contracts to screen the seller, but the seller cannot commit to accept contracts from only one buyer, i.e., markets are non-exclusive. We show that an equilibrium of this screening game always exists, it is unique and features semi-pooling allocations for a wide range of parameters. In equilibrium, the seller tranches her asset cash flows into a debt security (senior tranche) and a levered-equity security (junior tranche). Whereas the seller of a high quality asset only issues her senior tranche, the seller of a low quality asset issues both tranches but to distinct buyers. Consistent with this, whereas the senior tranche is priced at pooling valuation, the junior tranche is priced at low valuation. Our theory's positive predictions are consistent with recent empirical evidence on issuance and pricing of mortgage-backed securities, and we analyze its normative implications within the context of recent reforms aimed at enhancing transparency of financial markets.
    Keywords: adverse slection, security design, non-exclusivity, tranching, liquidity, securitization, transparency, opacity, complexity, market design, regulation
    JEL: G14 G18 D47 D82 D86
    Date: 2019–11
  12. By: Zarko Kalamov; Marco Runkel
    Abstract: This paper analyzes sin goods consumption when individuals exhibit present-focused preferences. It considers three types of present focus: present-bias with varying degrees of naiveté, Gul-Pesendorfer preferences, and a dual-self approach. We investigate the incentives to deviate from healthy consumption (the extensive margin). In the first model, the extensive margin of consumption is independent of the degree of present-bias and naiveté. Likewise, in the latter frameworks, the strength of temptation and the cost of self-control do not affect the extensive margin. Hence, present-focused preferences affect the intensive margin of sin goods consumption, but not the extensive margin.
    Keywords: present-bias, self-control, temptation, dual-self, sin goods
    JEL: D11 D60 D91 I12
    Date: 2020
  13. By: Lee, Sang-Ho; Muminov, Timur
    Abstract: This study revisits welfare comparisons between output and R&D subsidies for a mixed duopoly with partial privatization in a time-consistent policy framework. We show that an output subsidy is welfare-superior to an R&D subsidy policy only when the degree of privatization is high. We also show that the government has a lower incentive to privatize the public firm under the R&D subsidy but full nationalization with an R&D subsidy can decrease the welfare than full privatization with an output subsidy.
    Keywords: Partial privatization; R&D subsidy; Output subsidy; Time-consistenct policy
    JEL: H2 L13 L3
    Date: 2020–04
  14. By: Laurent Miclo; Daniel Spiro; J\"orgen Weibull
    Abstract: How much and when should we limit economic and social activity to ensure that the health-care system is not overwhelmed during an epidemic? We study a setting where ICU resources are constrained while suppression is costly (e.g., limiting economic interaction). Providing a fully analytical solution we show that the common wisdom of "flattening the curve", where suppression measures are continuously taken to hold down the spread throughout the epidemic, is suboptimal. Instead, the optimal suppression is discontinuous. The epidemic should be left unregulated in a first phase and when the ICU constraint is approaching society should quickly lock down (a discontinuity). After the lockdown regulation should gradually be lifted, holding the rate of infected constant thus respecting the ICU resources while not unnecessarily limiting economic activity. In a final phase, regulation is lifted. We call this strategy "filling the box".
    Date: 2020–05
  15. By: Ulsaker, Simen A. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The article considers a situation where several firms have the opportunity to sell an identical product to a set of buyers, and where each seller can invest in R&D to develop a higher quality version of the product in question. I consider the possibility of allowing the sellers to offer exclusionary contracts, prior to deciding how much to invest in R&D. In equilibrium every buyer will sign an exclusionary contract with the same seller. Since all buyers are locked to one seller, only this seller will have an incentive to invest in R&D. Whether or not banning exclusionary contracts increases the aggregate probability of successful innovation depends on the R&D technology. More specifically, banning exclusionary contracts will increase the aggregate probability of innovation and joint surplus of buyers and sellers only when the R&D technology exhibits sufficient diseconomies of scale.
    Keywords: Vertical relations; Exclusive contracts; Innovation
    JEL: L22 L42
    Date: 2020–04–27
  16. By: Daniel Fershtman; Alessandro Pavan
    Abstract: We study search, evaluation, and selection of candidates of unknown quality for a position. We examine the effects of "soft" affirmative action policies increasing the relative percentage of minority candidates in the candidate pool. We show that, while meant to encourage minority hiring, such policies may backfire if the evaluation of minority candidates is noisier than that of non-minorities. This may occur even if minorities are at least as qualified and as valuable as non-minorities. The results provide a possible explanation for why certain soft affirmative action policies have proved counterproductive, even in the absence of (implicit) biases.
    Date: 2020–04
  17. By: Yeon-Koo Che; Kyungmin Kim; Weijie Zhong
    Abstract: We study statistical discrimination of individuals based on payoff-irrelevant social identities in markets where ratings/recommendations facilitate social learning among users. Despite the potential promise and guarantee for the ratings/recommendation algorithms to be fair and free of human bias and prejudice, we identify the possible vulnerability of the ratings-based social learning to discriminatory inferences on social groups. In our model, users' equilibrium attention decisions may lead data to be sampled differentially across different groups so that differential inferences on individuals may emerge based on their group identities. We explore policy implications in terms of regulating trading relationships as well as algorithm design.
    Date: 2020–04

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