nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒05‒18
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Dynamically Consistent Objective and Subjective Rationality By Lorenzo Bastianello; Jos\'e Heleno Faro; Ana Santos
  2. Recursive objective and subjective multiple priors By Federica Ceron; Vassili Vergopoulos
  3. Degree-K subgame perfect Nash equilibria and the folk theorem By Zhonghao SHUI
  4. Belief-Averaged Relative Utilitarianism By Florian Brandl
  5. Con?dence Management in Tournaments By Shanglyu Deng; Hanming Fang; Qiang Fu; Zenan Wu
  6. The role of diagnostic ability in markets for expert services By Fang Liu; Alexander Rasch; Marco A. Schwarz; Christian Waibel
  7. Slot-specific Priorities with Capacity Transfers By Michelle Avataneo; Bertan Turhan
  8. Balanced scorecards: a relational contract approach By Kvaløy, Ola; Olsen, Trond E.
  9. Borda rule as an almost first-order stochastic dominance rule By Mostapha Diss; Eric Kamwa; Muhammad Mahajne
  10. Price Manipulation, Dynamic Informed Trading, and the Uniqueness of Equilibrium in Sequential Trading By Shino Takayama
  11. Third-degree price discrimination in oligopoly when markets are covered By Dertwinkel-Kalt, Markus; Wey, Christian
  12. Route choice, travel time variability, and rational inattention By Jiang, Gege; Fosgerau, Mogens; Lo, Hong
  13. Software vulnerabilities and bug bounty programs By Bienz, Carsten; Juranek, Steffen
  14. Matching with Generalized Lexicographic Choice Rules By Orhan Ayg\"un; Bertan Turhan

  1. By: Lorenzo Bastianello; Jos\'e Heleno Faro; Ana Santos
    Abstract: A group of experts, for instance climate scientists, is to choose among two policies $f$ and $g$. Consider the following decision rule. If all experts agree that the expected utility of $f$ is higher than the expected utility of $g$, the unanimity rule applies, and $f$ is chosen. Otherwise the precautionary principle is implemented and the policy yielding the highest minimal expected utility is chosen. This decision rule may lead to time inconsistencies when an intermediate period of partial resolution of uncertainty is added. We provide axioms that enlarge the initial group of experts with veto power, which leads to a set of probabilistic beliefs that is "rectangular" in a minimal sense. This makes this decision rule dynamically consistent and provides, as a byproduct, a novel behavioral characterization of rectangularity.
    Date: 2020–04
  2. By: Federica Ceron (UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12); Vassili Vergopoulos (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: We provide an axiomatic characterization of recursive Maxmin preferences that stem from (possibly) incomplete preferences representing choices that are justified by hard evidence. The decision-maker disposes of objective probabilistic information that may induce dynamically inconsistent behavior. To ensure that her choices be informed by objective information, dynamically consistent, and ambiguity averse, she constructs her subjective set of priors as the rectangular hull of the objective information set. The characterization builds upon two axioms that naturally combine these three requirements in a behavioral way. Moreover, our main result suggests a principled justification for the use of recursive Maxmin preferences in applications to dynamic choice problems.
    Keywords: Rectangularity,Rectangularization,Maxmin Expected Utility,Unanimity Rule,Dynamic Consistency,Prior-by-prior Updating,Objective and Subjective Rationality Keywords: Rectangularity,Unanim- ity Rule,Objective and Subjective Rationality JEL classification: D81
    Date: 2020–05
  3. By: Zhonghao SHUI
    Abstract: In infinitely repeated n-player games, we introduce a notion of degree-K subgame perfect Nash equilibria, in which any set of players whose size is up to K can coalitionally deviate and can transfer their payoffs within the coalition. If we only assume that players’ actions are observable, a coalitional deviation with hidden deviators who play as in the equilibrium cannot be detected by the other players. Hence we consider two models in which the hidden deviators can and cannot be detected, respectively. In the first model, there is an observer who can detect any coalitional deviation and report it to all players. We show an extension of the standard folk theorem; all feasible payoff vectors in which the sum of payoffs within any feasible coalition is strictly larger than the counterpart of the minmax value defined for the coalition arise as a degree-K subgame perfect Nash equilibrium if players are sufficiently patient. In the second model where the hidden deviators cannot be distinguished, we characterize degree-K subgame perfect equilibrium payoff vectors under patience by strategies which punish all players after any deviation. Finally, we adopt a new approach to characterize degree-n subgame perfect Nash equilibrium payoff vectors in the first model, since the punishment in the above folk theorem does not work when the grand coalition is feasible.
    Keywords: Folk theorem; Coalition; Perfect monitoring; Subgame perfect Nash equilibrium
    JEL: C72 C73 D43
    Date: 2020–05
  4. By: Florian Brandl
    Abstract: We study preference aggregation under uncertainty when individual and collective preferences are based on subjective expected utility. A natural procedure for determining the collective preferences of a group then is to average its members' beliefs and add up their $(0,1)$-normalized utility functions. This procedure extends the well-known relative utilitarianism to decision making under uncertainty. We show that it is the only aggregation function that gives tie-breaking rights to agents who join a group and satisfies an independence condition in the spirit of Arrow's independence of irrelevant alternatives as well as four undiscriminating axioms.
    Date: 2020–05
  5. By: Shanglyu Deng (University of Maryland); Hanming Fang (University of Pennsylvania); Qiang Fu (National University of Singapore); Zenan Wu (Peking University)
    Abstract: An incumbent employee competes against a new hire for bonus or promotion. The incumbent’s ability is commonly known, while that of the new hire is private infor-mation. The incumbent is subject to a perceptional bias: His prior about the new hire’s type di?ers from the true underlying distribution. He can be either ex ante overcon?dent or undercon?dent. We ?rst explore whether a ?rm that aims to maxi-mize aggregate e?ort would bene?t or su?er from the bias. It is shown that debiasing may not be productive in incentivizing e?orts. We then study the optimal information disclosure policy. The ?rm is allowed to ex ante commit to whether an informative signal—which allows the incumbent to infer the new hire’s type—will be disclosed publicly. We fully characterize the conditions under which transparency or opacity will prevail. We further take a Bayesian persuasion approach to optimally design the ?rm’s evaluation and feedback structure. We also consider an alternative context in which the manager is concerned about the expected winner’s e?ort. We demonstrate that the insights obtained from the baseline setting remain intact. Our results shed light on the extensive discussion of con?dence management in ?rms and the debate about organizational transparency.
    Date: 2020–05–10
  6. By: Fang Liu; Alexander Rasch; Marco A. Schwarz; Christian Waibel
    Abstract: In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. Experts may exploit their informational advantage by defrauding customers. Market institutions have been shown theoretically to be effective in mitigating fraudulent expert behavior. We analyze whether this positive result carries over to when experts are heterogeneous in their diagnostic abilities. We find that efficient market outcomes are always possible. However, inefficient equilibria can also exist. When such inefficient equilibria are played, a larger share of high-ability experts can lead to more inefficiencies relative to the efficient equilibria.
    Keywords: Credence good; Diagnosis; Expert; Fraud; Overtreatment; Undertreatment
    JEL: D81 L15
    Date: 2020–07
  7. By: Michelle Avataneo; Bertan Turhan
    Abstract: We study two-sided matching markets in which agents match to institutions that may have multiple slots available to accept contracts. In many real-world institutions, there are restrictions for some slots (if not all) either on slot priorities or on the transferability of unfilled slots over others (or both). We construct a rich family of practical choice rules, slot-specific priorities with capacity transfers (SSPwCT), that utilize both independent slot priorities and transferability of vacant slots. We show that the cumulative offer mechanism (COM) is stable, strategy-proof and respects improvements with regards to SSPwCT choice rules. Transferring the capacity of one more unfilled slot, while all else is constant, leads to strategy-proof Pareto improvement of the COM. We also provide comparative static results for expansion of branch capacity and addition of new contracts. Our results have implications for resource allocation problems with diversity considerations.
    Date: 2020–04
  8. By: Kvaløy, Ola (UiS Business School, University of Stavanger); Olsen, Trond E. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: Reward systems based on balanced scorecards typically connect pay to an index, i.e. a weighted sum of multiple performance measures. However, there is no formal incentive model that actually describe this kind of index contracts as an optimal solution. In this paper, we show that an index contract may indeed be optimal if performance measures are non-verifiable so that the contracting parties must rely on self-enforcement. Under standard assumptions, the optimal self-enforcing (relational) contract between a principal and a Multitasking agent is an index contract where the agent gets a bonus if a weighted sum of performance outcomes on the various tasks (the index) exceeds a hurdle. For a parametric (multinormal) specification, the efficiency of the contract improves with higher precision of the index measure, since this strengthens incentives. Correlations between measurements may for this reason be beneficial. For a similar reason, the principal may also want to include verifiable performance measures in the relational index contract in order to improve incentives.
    Keywords: Relational contracts; balanced scorecards; multiple performance measures; index contracts; performance reward
    JEL: D00 D20 D21 D80 D86
    Date: 2020–05–08
  9. By: Mostapha Diss (CRESE - Centre de REcherches sur les Stratégies Economiques (EA 3190) - UBFC - Université Bourgogne Franche-Comté [COMUE] - UFC - Université de Franche-Comté); Eric Kamwa (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles); Muhammad Mahajne (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon)
    Abstract: In single-winner elections and individuals expressing linear orderings, an alternative has first-order stochastic dominance if the cumulative standing for this alternative at each rank is higher than that of the other alternatives. It is well-known that this criterion may fail in ranking the competing alternatives since the first-order stochastic dominance winner may not exist in some situations. Making an adaptation of a centrality measure from network theory, we introduce in this note a rule, called the almost first-order stochastic dominance rule, which selects the alternative having first-order stochastic dominance if such an alternative exists, otherwise it selects the alternative which is close to achieve first-order stochastic dominance. It turns out that this rule is equivalent to the well-studied Borda rule. This result highlights an unknown property of the Borda rule.
    Keywords: Network,Centrality,Rankings,First-order stochastic dominance,Scoring rules,Borda's rule
    Date: 2020–04–27
  10. By: Shino Takayama (School of Economics, University of Queensland)
    Abstract: We study the manipulation of prices in a dynamic version of the Glosten and Milgrom (1985) model with a long-lived informed trader. The conditions under which a unique equilibrium exists are clarified. We show that within the unique equilibrium, bid and ask prices are monotonically increasing functions of the market maker’s belief, and we characterize the situations in which this equilibrium involves manipulation of prices by the informed trader. Finally, we describe a computational method to find equilibria in the model, and give simulation results that confirm and extend our theoretical findings.
    Keywords: Market microstructure; Glosten–Milgrom; Insider trading; Dynamic trading; Price formation; Sequential trade; Asymmetric information; Bid–ask spreads.
    JEL: D82 G12
    Date: 2020–05–05
  11. By: Dertwinkel-Kalt, Markus; Wey, Christian
    Abstract: We analyze oligopolistic third-degree price discrimination relative to uniform pricing, when markets are always covered. Pricing equilibria are critically determined by supply-side features such as the number of firms and their marginal cost differences. It follows that each firm's Lerner index under uniform pricing is equal to the weighted harmonic mean of the firm's relative margins under discriminatory pricing. Uniform pricing then decreases average prices and raises consumer surplus. We provide an intriguingly simple approach to calculate the consumer surplus gain from uniform pricing only based on market data of the discriminatory equilibrium (prices and quantities).
    Keywords: Third-Degree Price Discrimination,Uniform Pricing,Harmonic Mean Formula,Covered Demand
    JEL: D43 L13 L41 K21
    Date: 2020
  12. By: Jiang, Gege; Fosgerau, Mogens; Lo, Hong
    Abstract: This paper sets up a rational inattention model for the route choice problem in a stochastic network where travelers face random travel time. Previous research has assumed that travelers incorporate all provided information without effort. This study assumes that information is costly and that travelers rationally choose how much information to acquire prior to choosing route. We begin with a single traveler and then extend the model to heterogeneous travelers where rationally inattentive user equilibrium (RIUE) is achieved. From the perspective of a single traveler, more information always reduces the impact of travel time variability and increases the probability of choosing a less costly route. However, in RIUE, more information may reduce the social welfare in some scenarios.
    Keywords: Rational inattention; Travel time variability; Imperfect information; Information strategy; Discrete choice
    JEL: D8 R4
    Date: 2020
  13. By: Bienz, Carsten (Dept. of Finance, Norwegian School of Economics); Juranek, Steffen (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: Many software developers employ bug bounty programs that award a prize for the detection of bugs in their software. We analyze, in a model with asymmetric information, under which conditions a bug bounty program is beneficial for a software developer. In our model, a bug bounty program allows developers to perfectly discriminate between different types of bugs, and help to avoid reputation costs of exploited bugs. We find that the benefits of bounty program do not only depend on the characteristics of the underlying software but also that a bounty program crucially interacts with other elements of the security strategy.
    Keywords: Bug bounty program; software security; information technology security; software vulnerability
    JEL: D82 L86 M15 M20
    Date: 2020–05–12
  14. By: Orhan Ayg\"un; Bertan Turhan
    Abstract: Motivated by the need for real-world matching problems, this paper formulates a large class of practical choice rules, Generalized Lexicographic Choice Rules (GLCR), for institutions that consist of multiple divisions. Institutions fill their divisions sequentially, and each division is endowed with a sub-choice rule that satisfies classical substitutability and size monotonicity in conjunction with a new property that we introduce, quota monotonicity. We allow rich interactions between divisions in the form of capacity transfers. The overall choice rule of an institution is defined as the union of the sub-choices of its divisions. The cumulative offer mechanism (COM) with respect to GLCR is the unique stable and strategy-proof mechanism. We define a choice-based improvement notion and show that the COM respects improvements. We employ the theory developed in this paper in our companion paper, Ayg\"un and Turhan (2020), to design satisfactory matching mechanisms for India with comprehensive affirmative action constraints.
    Date: 2020–04

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