nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒06‒08
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Recursive objective and subjective multiple priors By Federica Ceron; Vassili Vergopoulos
  2. Optimal provision of a public good with costly exclusion By Nicolas Gravel; Michel Poitevin
  3. Stability and Robustness in Misspecified Learning Models By Mira Frick; Ryota Iijima; Yuhta Ishii
  4. Strategic Voting in Two-Party Legislative Elections By Hughes, Niall
  5. Accountability and Grand Corruption By Cesar Martinelli
  6. On the paradox of mediocracy By Fu, Qiang; Li, Ming; Qiao, Xue
  7. Using multiple reference levels in Multi-Criteria Decision aid: The Generalized-Additive Independence model and the Choquet integral approaches By Christophe Labreuche; Michel Grabisch
  8. Costly agreement-based transfers and targeting on networks with synergies By Mohamed Belhaj; Frédéric Deroïan; Shahir Safi
  9. Competition and Public Information: A Note By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  10. Savage's Theorem Under Changing Awareness By Franz Dietrich
  11. A Characterisation of Trading Equilibria in Market Games By Mitra, Manipushpak; Ray, Indrajit; Roy, Souvik
  12. You go First! Coordination Problems and the Standard of Proof in Inquisitorial Prosecution By Christmann, Robin; Kirstein, Roland
  13. Political Parties and Policy Outcomes. Do Parties Block Reforms? By Dotti, Valerio
  14. An Algebraic Approach to Revealed Preference By Mikhail Freer; Cesar Martinelli
  15. Daily commuting By Berliant, Marcus
  16. Optimal switching from competition to cooperation: a preliminary exploration By Raouf Boucekkine; Carmen Camacho; Benteng Zou
  17. The Economics of Platforms in a Walrasian Framework By Anil K. Jain; Robert M. Townsend
  18. Investment Strategy and Selection Bias: An Equilibrium Perspective on Overoptimism By Philippe Jehiel

  1. 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
  2. By: Nicolas Gravel (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université); Michel Poitevin (CIREQ - Centre interuniversitaire de recherche en économie quantitative)
    Abstract: We examine the problem of providing a non-rival and excludable public good to individuals with the same preferences and differing contributing capacities. Exclusion from the public good is costly in the sense that if two different quantities of the public good are consumed in the community, then the sum of the costs of providing the two quantities must be borne. By contrast, costless exclusion only requires the cost of the largest quantity consumed of the public good to be financed. We show that despite its important cost, providing public goods in different quantities is often part of any optimal provision of public good when the public authority is imperfectly informed about the agents' contributive capacities. In the specific situation where individuals have an additively separable logarithmic utility function, we provide a complete characterization of the optimal exclusion structure in the two-type case. We also show that the preference for such a costly exclusion is more likely when the heterogeneity in the population or income is large, and when the aversion to utility inequality is important.
    Keywords: Mechanism design,Asymmetric information,Public goods,Costly exclusion
    Date: 2019–09
  3. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yuhta Ishii (Department of Economics at Pennsylvania State University)
    Abstract: We present an approach to analyze learning outcomes in a broad class of misspeciï¬ ed environments, spanning both single-agent and social learning. Our main results provide general criteria to determine—without the need to explicitly analyze learning dynamics—when beliefs in a given environment converge to some long-run belief either locally or globally (i.e., from some or all initial beliefs). The key ingredient underlying these criteria is a novel “prediction accuracy†ordering over subjective models that reï¬ nes existing comparisons based on Kullback-Leibler divergence. We show that these criteria can be applied, ï¬ rst, to unify and generalize various convergence results in previously studied settings. Second, they enable us to identify and analyze a natural class of environments, including costly information acquisition and sequential social learning, where unlike most settings the literature has focused on so far, long-run beliefs can fail to be robust to the details of the true data generating process or agents’ perception thereof. In particular, even if agents learn the truth when they are correctly speciï¬ ed, vanishingly small amounts of misspeciï¬ cation can lead to extreme failures of learning.
    Keywords: Misspecified learning, Stability, Robustness, Berk-Nash equilibrium
    Date: 2020–05
  4. By: Hughes, Niall
    Abstract: It is commonly thought that in an election with two parties there can be no strategic voting - voters simply vote for their preferred candidate. In this paper, I show that strategic voting comes to the fore in legislative elections with multiple policy dimensions. In sharp contrast to single-district elections, the intensity of a voter’s preference on each dimension is irrelevant for her voting decision. Instead, she votes solely based on the dimension which is most likely to be pivotal in the legislature. Anticipating this behaviour, candidates put forward a different set of policies than they would in a single-district election. For large elections I show that the implemented policy bundle: (a) is uniquely pinned down by voter preferences, (b) is preferred by a majority of districts on each dimension, (c) is a Condorcet winner, if one exists. These properties are not guaranteed in a single-district election. Furthermore, I show that (i) parliamentary systems generate superior policies to presidential systems and (ii) voter polarisation affects outcomes in single-district elections but not legislative elections.
    Keywords: Strategic Voting, Legislative Elections, Multi-dimensional Policy, Pivotal Voting, Plurality Rule, Large Elections
    JEL: C72 D72 D78
    Date: 2020–04–30
  5. By: Cesar Martinelli (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: We propose a model of political careers and electoral accountability, in an environment in which politicians may take bribes at different stages of their careers, and in which politicians actions are only imperfectly observed by voters. Our model throws light on relatively unexplored dynamic effects of corruption on politician selection. In particular, we show that the expectation of promotion to higher office may motivate some politicians to behave worse at the latest stages of their careers, thus setting off a trade-off between providing incentives for good behavior at lower office and selecting better politicians for higher office. We also show that the optimal design of rewards for higher office has a simple bang-bang structure-optimal rewards focus either on stamping corruption at lower office, or on improving selection at the higher office. If rewards are set optimally, a more intense competition for higher office benefits voters, but better quality of information about bribe-taking does not unambiguously benefit voters.
    Date: 2020–05
  6. By: Fu, Qiang (National University of Singapore); Li, Ming (Concordia University, CIRANO, and CIREQ); Qiao, Xue (Renmin University of China)
    Abstract: We consider a two-agent hierarchical organization with a leader and a manager in a reputation-signaling model. The manager proposes an innovative but risky projectto the leader, and decides whether to exert an effort to improve the value of the project, which benefi ts the organization. The leader decides whether to endorse the project or block it. The leader's competence is her private information, and the market updates its belief about the leader's type based on observation of her action (endorsing the project or blocking it) and its outcome. In equilibrium, the leader could behave excessively conservatively when she is subject to reputation concerns. We have two main fi ndings. First, aside from its usual distortionary effects, the leader's reputation concern has a benefi cial effect by inducing the manager to supply productive effort and improves the organization's performance. Second, there exists a non-monotonic relationship between the perceived competence of the leader and the performance ofthe organization. As a result, a paradox of mediocracy emerges: The organization may benefi t from a seemingly mediocre leader, as a mediocre leader motivates the manager to exert effort, which offsets the efficiency loss due to incorrect decisions.
    Keywords: Leadership, Meritocracy, Organizational Performance, Reputation Concerns, Managerial Effort
    JEL: C72 D23 D72 D82
    Date: 2018–08
  7. By: Christophe Labreuche (UMP CNRS/THALES - Unité mixte de physique CNRS/Thalès - THALES - CNRS - Centre National de la Recherche Scientifique); Michel Grabisch (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, PSE - Paris School of Economics)
    Abstract: In many Multi-Criteria Decision problems, one can construct with the decision maker several reference levels on the attributes such that some decision strategies are conditional on the comparison with these reference levels. The classical models (such as the Choquet integral) cannot represent these preferences. We are then interested in two models. The first one is the Choquet with respect to a p-ary capacity combined with utility functions, where the p-ary capacity is obtained from the reference levels. The second one is a specialization of the Generalized-Additive Independence (GAI) model, which is discretized to fit with the presence of reference levels. These two models share common properties (monotonicity, continuity, properly weighted,.. .), but differ on the interpolation means (Lovász extension for the Choquet integral, and multi-linear extension for the GAI model). A drawback of the use of the Choquet integral with respect to a p-ary capacity is that it cannot satisfy decision strategies in each domain bounded by two successive reference levels that are completely independent of one another. We show that this is not the case with the GAI model.
    Keywords: Generalized Additive Independence,Multiple criteria analysis
    Date: 2018–06
  8. By: Mohamed Belhaj (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); Frédéric Deroïan (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); Shahir Safi (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)
    Abstract: We consider agents organized in an undirected network of local complementarities. A principal with a limited budget offers costly bilateral contracts in order to increase the sum of agents' effort. We study excess-effort linear payment schemes, i.e. contracts rewarding effort in excess to the effort made in absence of principal. The analysis provides the following main insights. First, for all contracting costs, the optimal unit returns offered to every targeted agent are positive and generically heterogeneous. This heterogeneity is due to the presence of outsiders, who create asymmetric interaction between contracting agents. Second, when contracting costs are low, it is optimal to contract with everyone and optimal unit returns are identical for all agents. Third, when contracting costs are sufficiently high, it becomes optimal to target a subset of agents, and optimal targeting can lead to NP-hard problems. In particular, when the intensity of complementarities is sufficiently low, a correspondence is established between optimal targeting and the densest k subgraph problem. Overall, the optimal targeting problem involves a trade-off between centrality and budget spending-central agents are influential, but are also more budget-consuming. These considerations can lead the principal to not target central agents.
    Keywords: networked synergies,aggregate effort,optimal group targeting,linear contract
    Date: 2020–04
  9. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, MIT)
    Abstract: We study price discrimination in a market in which two ï¬ rms engage in Bertrand competition. Some consumers are contested by both ï¬ rms, and other consumers are “captive†to one of the ï¬ rms. The market can be divided into segments, which have different relative shares of captive and contested consumers. It is shown that the revenue-maximizing segmentation involves dividing the market into “nested†markets, where exactly one ï¬ rm may have captive consumers.
    Keywords: Price Competition, Bertrand Competition, Price Count, Price Quote, Information Structure, Bayes Correlated Equilibrium
    JEL: D41 D42 D43 D83
    Date: 2020–05
  10. By: Franz Dietrich (PSE - Paris School of Economics, CNRS - Centre National de la Recherche Scientifique, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne)
    Abstract: This paper proposes a simple unified framework of choice under changing awareness, addressing both outcome awareness and (nature) state awareness, and both how fine and how exhaustive the awareness is. Six axioms characterize an (essentially unique) expected-utility rationalization of preferences, in which utilities and probabilities are revised according to three revision rules when awareness changes: (R1) utilities of unaffected outcomes are transformed affinely; (R2) probabilities of unaffected events are transformed proportionally; (R3) enough probabilities ‘objectively' never change (they represent revealed objective risk). Savage's Theorem is a special case of the theorem, namely the special case of fixed awareness, in which our axioms reduce to Savage's axioms while R1 and R2 hold trivially and R3 reduces to Savage's requirement of atomless probabilities. Rule R2 parallels Karni and Viero's (2013) ‘reverse Bayesianism' and Ahn and Ergin's (2010) ‘partition-dependence'. The theorem draws mathematically on Kopylov (2007), Niiniluoto (1972) and Wakker (1981).
    Date: 2018–07
  11. By: Mitra, Manipushpak (Economic Research Unit, Indian Statistical Institute); Ray, Indrajit (Cardiff Business School); Roy, Souvik (Economic Research Unit, Indian Statistical Institute,)
    Abstract: We provide a full characterisation of the set of trading equilibria (in which all goods are traded at a positive price) in a strategic market game (as introduced by Shapley and Shubik), for both the Òbuy and sellÓ and the Òbuy or sellÓ versions of this model under standard assumptions on the utility functions. We also interpret and illustrate our main equilibrium-characterising condition, using simple examples.
    Keywords: strategic market game, trading equilibrium, buy and sell, buy or sell.
    JEL: C72 D44
    Date: 2020–05
  12. By: Christmann, Robin; Kirstein, Roland
    Abstract: The prosecution of criminals is costly, and subject to errors. In contrast to adversarial court procedures, the prosecutor is regarded as an impartial investigator and aide to the judge in inquisitorial justice systems. We show in a sequential prosecution game of a Bayesian court that a strategic interaction between these two benevolent enforcement agents exists where each player hopes to freeride on the other one´s investigative effort. This gives rise to inefficient equilibria with excessive operating and error costs. Moreover, we will demonstrate that our results are sensitive to the applied standard of proof and that, more disturbingly, the inefficient outcome becomes more probable when the conviction threshold is raised. Applying the concept of ‘beyond reasonable doubt’, we analyze the impact of the standard of proof and other legal policy instruments on type I and type II errors and operating costs.
    Keywords: criminal justice, reasonable doubt, litigation, court errors
    JEL: K14 K41
    Date: 2020–04–16
  13. By: Dotti, Valerio
    Abstract: I propose a model of legislative bargaining among endogenous political parties over multiple policy dimensions. I provide a characterization of (i) the partition of the legislature into parties, (ii) the policy reforms that parties propose (if any), and (iii) the policy outcome attained from these proposals. I show that - depending on the position of the status quo - either (1) the presence of parties does not affect the policy outcome and a median voter theorem holds, or (2) a party representing legislators with extreme and opposite political views - i.e., a coalition of extremes - can successfully block reforms that would be feasible if parties did not exist. Lastly, I show that the extent to which the existence of parties can increase the set of possible policy reforms is severely limited or null.
    Keywords: Multidimensional policy space, Political parties, Policy reforms
    JEL: C71 D72
    Date: 2019–10–23
  14. By: Mikhail Freer (University of Essex); Cesar Martinelli (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: We propose and develop an algebraic approach to revealed preference. Our approach dispenses with non algebraic structure, such as topological assumptions. We provide an algebraic axiom of revealed preference that subsumes previous, classical revealed preference axioms, and show that a dataset is rationalizable if and only if it is consistent with the axiom.
    Date: 2020–05
  15. By: Berliant, Marcus
    Abstract: Workers generally commute on a daily basis, so we model commuting as a repeated game. The folk theorem implies that for sufficiently large discount factors the repeated commuting game has as a Nash equilibrium any strategy profile that is at least as good as the maximin strategy for a commuter in the one shot game, including the efficient ones. This result applies whether the game is static, in the sense that only routes are chosen as a strategy by commuters, or dynamic, where both routes and times of departure are chosen. Our conclusions pose a challenge to congestion pricing. We examine evidence from St. Louis to determine what equilibrium strategies are actually played in the repeated commuting game.
    Keywords: Repeated game; Nash equilibrium; Commuting; Folk theorem
    JEL: R41
    Date: 2020–05–06
  16. By: Raouf Boucekkine (Aix-Marseille University, CNRS and EHESS); Carmen Camacho (Paris School of Economics, CNRS); Benteng Zou (CREA, 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 theoretical 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.
    JEL: C61 D71
    Date: 2020
  17. By: Anil K. Jain; Robert M. Townsend
    Abstract: We present a tractable model of platform competition in a general equilibrium setting. We endogenize the size, number, and type of each platform, while allowing for different user types in utility and impact on platform costs. The economy is Pareto effcient because platforms internalize the network effects of adding more or different types of users by offering type-specific contracts that state both the number and composition of platform users. Using the Walrasian equilibrium concept, the sum of type-specific fees paid cover platform costs. Given the Pareto efficiency of our environment, we argue against the presumption that platforms with externalities need be regulated.
    Keywords: First and second welfare theorems; Two-sided markets; Externalities
    JEL: D50 D62
    Date: 2020–05–18
  18. By: Philippe Jehiel (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Investors implement projects based on idiosyncratic signal observations, without knowing how signals and returns are jointly distributed. The following heuristic is studied: investors collect information on previously implemented projects with the same signal realization and invest if the associated mean return exceeds the cost. The corresponding steady states result in suboptimal investments, due to selection bias and the heterogeneity of signals across investors. When higher signals are associated with higher returns, investors are overoptimistic, resulting in overinvestment. Rational investors increase the overoptimism of sampling investors, thereby illustrating a negative externality imposed by rational investors.
    Date: 2018–06

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