nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒06‒15
nineteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Preemption with a Second-Mover Advantage By Smirnov, Vladimir; Wait, Andrew
  2. A Dynamic Theory of Regulatory Capture By Alessandro De Chiara; Marco A. Schwarz
  3. Renegotiation and Coordination with Private Values By Yuval Heller; Christoph Kuzmics
  4. Confidence Management in Tournaments By Shanglyu Deng; Hanming Fang; Qiang Fu; Zenan Wu
  5. Efficient Bilateral Trade with Interdependent Values: The Use of Two-Stage Mechanisms By Kunimoto, Takashi; Zhang, Cuiling
  6. Undiscounted Bandit Games By Godfrey Keller; Sven Rady
  7. Poisson-Cournot Games By Francesco De Sinopoli; Christopher Kunstler; Claudia Meroni; Carlos Pimienta
  8. Vertical Price Restraints and Free Entry Under Asymmetric Information By Leda Maria Bonazzi; Raffaele Fiocco; Salvatore Piccolo
  9. The Quran and the Sword: The Strategic Game Between Autocratic Power, the Military and the Clerics By Auriol, Emmanuelle; Platteau, Jean-Philippe; Verdier, Thierry
  10. Search, Information, and Prices By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  11. Instability of Defection in the Prisoner's Dilemma: Best Experienced Payoff Dynamics Analysis By Srinivas Arigapudi; Yuval Heller; Igal Milchtaich
  12. Information Disclosure in Elections with Sequential Costly Participation By Dmitriy Vorobyev
  13. Influential News and Policy-making By Vaccari, Federico
  14. Information Validates the Prior: A Theorem on Bayesian Updating and Applications By Navin Kartik; Frances Lee; Wing Suen
  15. Improved Information in Search Markets By Zhou, Jidong
  16. An augmented first-order approach for incentive problems By Philipp Renner
  17. Electoral Intermediaries By Gallego, Jorge; Li, Christopher; Wantchekon, Leonard
  18. Choice with Endogenous Categorization By Andrew Ellis; Yusufcan Masatlioglu
  19. Two-Sided Random Matching Markets: Ex-Ante Equivalence of the Deferred Acceptance Procedures By Simon Mauras

  1. By: Smirnov, Vladimir; Wait, Andrew
    Abstract: We examine innovation in a market-entry timing game with complete information and observable actions when there is a second-mover advantage. Allowing for heterogenous payoffs between players, and for both leader's and follower's payoff functions to be multi-peaked and non-monotonic, we find that there are at most two pure-strategy subgame perfect equilibria. Sometimes these resemble familiar second-mover advantage equilibria from the literature. However, we show that despite there being a follower advantage at all times, there can be a preemption equilibrium with inefficient early entry. In fact, immediate entry is possible in a continuous analogue of the centipede game. These results are related to the observed premature entry and product launches in various markets.
    Keywords: timing games, second-mover advantage, preemption.
    Date: 2020–05
  2. By: Alessandro De Chiara; Marco A. Schwarz
    Abstract: Firms have incentives to influence regulators' decisions. In a dynamic setting, we show that a firm may prefer to capture regulators through the promise of a lucrative future job opportunity (i.e., the revolving-door channel) than through a hidden payment (i.e., a bribe). This is because the revolving door publicly signals the firm's eagerness and commitment to reward friendly regulators, which facilitates collusive equilibria. Moreover, the revolving-door channel need not require an explicit agreement between the firm and the regulator, but may work implicitly giving rise to an industry norm. This renders ineffective standard anti-corruption practices, such as whistle-blowing protection policies. We highlight that closing the revolving door may give rise to other inefficiencies. Moreover, we show that cooling-off periods may make all players worse off if timed wrongly. Opening the revolving door conditional on the regulator's report may increase social welfare.
    Keywords: collusion, corruption, dynamic games, experts, regulation, regulatory capture, revolving door
    JEL: D82 J45 K23 L14 L51
    Date: 2020–12
  3. By: Yuval Heller; Christoph Kuzmics
    Abstract: We define and characterize the set of renegotiation-proof equilibria of coordination games with pre-play communication in which players have private preferences over the feasible coordinated outcomes. Renegotiation-proof equilibria provide a narrow selection from the large set of qualitatively diverse Bayesian Nash equilibria in such games. They are such that players never mis-coordinate, play their jointly preferred outcome whenever there is one, and communicate only the ordinal part of their preferences. Moreover, they are robust to changes in players beliefs, interim Pareto efficient, and evolutionarily stable.
    Date: 2020–05
  4. By: Shanglyu Deng; Hanming Fang; Qiang Fu; Zenan Wu
    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 information. The incumbent is subject to a perceptional bias: His prior about the new hire’s type differs from the true underlying distribution. He can be either ex ante overconfident or underconfident. We first explore whether a firm that aims to maximize aggregate effort would benefit or suffer from the bias. It is shown that debiasing may not be productive in incentivizing efforts. We then study the optimal information disclosure policy. The firm 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 firm’s evaluation and feedback structure. We also consider an alternative context in which the manager is concerned about the expected winner’s effort. We demonstrate that the insights obtained from the baseline setting remain intact. Our results shed light on the extensive discussion of confidence management in firms and the debate about organizational transparency.
    JEL: D03 D2 D82
    Date: 2020–05
  5. By: Kunimoto, Takashi (School of Economics, Singapore Management University); Zhang, Cuiling (School of Economics, Singapore Management University)
    Abstract: As efficient, voluntary bilateral trades are generally not incentive compatible in an interdependent-value environment (Fieseler, Kittsteiner, Moldovanu (2003) and Gresik (1991)), we seek for more positive results by employing two-stage mechanisms (Mezzetti (2004)). We say that a two-stage mechanism satisfies incentive compatibility if the truth-telling in both stages constitutes an equilibrium strategy.First, we show by means of a stylized example that the generalized two-stage Groves mechanism never guarantees voluntary trade, while it satisfies efficiency and incentive compatibility. In a general environment, we next propose Assumption 1 under which there exists a two-stage incentive compatible mechanism implementing an efficient, voluntary trade. Third, within the same example, we confirm that our Assumption 1 is very weak because it holds as long as the buyer’s degree of interdependence of preferences is not too high relative to the seller’s counterpart. Finally, we show by the same example that if Assumption 1 is violated, our proposed two-stage mechanism fails to achieve voluntary trade.
    Keywords: Bilateral trade; interdependent values; two-stage mechanisms
    JEL: C72 D78 D82
    Date: 2020–05–01
  6. By: Godfrey Keller; Sven Rady
    Abstract: We analyze undiscounted continuous-time games of strategic experimentation with two-armed bandits. The risky arm generates payoffs according to a Lévy process with an unknown average payoff per unit of time which nature draws from an arbitrary finite set. Observing all actions and realized payoffs, plus a free background signal, players use Markov strategies with the common posterior belief about the unknown parameter as the state variable. We show that the unique symmetric Markov perfect equilibrium can be computed in a simple closed form involving only the payoff of the safe arm, the expected current payoff of the risky arm, and the expected full-information payoff, given the current belief. In particular, the equilibrium does not depend on the precise specification of the payoff-generating processes.
    Keywords: Strategic Experimentation, Bayesian Two-Armed Bandit, Strong Long-Run Average Criterion, Markov Perfect Equilibrium, HJB Equation, Viscosity Solution
    JEL: C73 D83
    Date: 2020–05
  7. By: Francesco De Sinopoli (Department of Economics, University of Verona); Christopher Kunstler (Institute of Energy and Climate Research, FZ Julich); Claudia Meroni (Department of Economics, University of Verona); Carlos Pimienta (School of Economics, UNSW Business School, UNSW)
    Abstract: We construct a Cournot model in which firms have uncertainty about the total number of firms in the industry. We model such an uncertainty as a Poisson game and we characterize the set of equilibria after deriving some novel properties of the Poisson distribution. When the marginal cost is zero, the number of equilibria increases with the expected number of firms ( n) and for n ≥ 3 every equilibrium exhibits overproduction relative to the model with deterministic population size. Overproduction is robust to sufficiently small marginal costs, however, for a fixed marginal cost, the set of equilibria approaches the equilibrium quantity of the deterministic model as n goes to infinity.
    Keywords: Cournot competition, Population uncertainty, Poisson games, Poisson distribution
    JEL: C72 D43 L13
    Date: 2020–05
  8. By: Leda Maria Bonazzi (University of Essex); Raffaele Fiocco (Università di Bergamo); Salvatore Piccolo (Università di Bergamo, Compass Lexecon and CSEF)
    Abstract: We investigate the impact of vertical price restraints on the free-entry equilibrium and its welfare properties in a vertically related market where manufacturer-retailer hierarchies compete under asymmetric information. We compare the legal regimes of laissez-faire and ban on resale price maintenance (RPM) under different entry decision modes. When the entry decision is taken upstream, laissez-faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the spread of demand uncertainty. Conversely, when the entry decision is taken downstream, a ban on RPM stimulates entry and consumer surplus, but laissez-faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.
    Keywords: asymmetric information, free entry, quantity forcing, resale price maintenance, vertical restraints
    JEL: D82 L13 L42
    Date: 2020–05–27
  9. By: Auriol, Emmanuelle; Platteau, Jean-Philippe; Verdier, Thierry
    Abstract: This paper elucidates the willingness of an autocrat to push through institutional reforms in a context where traditional authorities represented by religious clerics are averse to them and where the military control the means of repression and can potentially make a coup. We show that although the autocrat always wants to co-opt the military, this is not necessarily true of the clerics. Empirically, the dominant regime in contemporary Muslim countries is the regime of double co-option. Exclusive co-option of the military obtains only where the autocrat's intrinsic legitimacy and the loyalty of his army are strong while the organizational strength of religious movements is rather low. Radical institutional reforms can then be implemented. Rent economies where ultra-conservative clerics are powerful enough to block any institutional reform that they dislike represent another polar case. More frequently, the autocrat resorts to a double-edged tactic: pleasing the official clerics by slowing the pace of reforms, and ensuring the loyalty of the military to be able to put down an opposition instigated by rebel clerics.
    Keywords: army; Autocracy; instrumentalization of religion; Islam; reforms
    JEL: D02 D72 N40 O57 P48 Z12
    Date: 2020–05
  10. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: Consider a market with identical ï¬ rms offering a homogeneous good. A consumer obtains price quotes from a subset of ï¬ rms and buys from the firm offering the lowest price. The \price count†is the number of ï¬ rms from which the consumer obtains a quote. For any given ex ante distribution of the price count, we obtain a tight upper bound (under ï¬ rst-order stochastic dominance) on the equilibrium distribution of sale prices. The bound holds across all models of ï¬ rms’ common-prior higher-order beliefs about the price count, including the extreme cases of full information ( ï¬ rms know the price count) and no information (ï¬ rms only know the ex ante distribution of the price count). A qualitative implication of our results is that a small ex ante probability that the price count is one can lead to a large increase in the expected price. The bound also applies in a wide class of models where the price count distribution is endogenized, including models of simultaneous and sequential consumer search.
    Keywords: Search, Price Competition, Bertrand Competition, "Law of One Price", Price Count, Price Quote, Information Structure, Bayes Correlated Equilibrium
    JEL: D41 D42 D43 D83
    Date: 2020–03
  11. By: Srinivas Arigapudi; Yuval Heller; Igal Milchtaich
    Abstract: We study population dynamics under which each revising agent tests each strategy k times, with each trial being against a newly drawn opponent, and chooses the strategy whose mean payoff was highest. When k = 1, defection is globally stable in the prisoner`s dilemma. By contrast, when k > 1 we show that there exists a globally stable state in which agents cooperate with probability between 28% and 50%. Next, we characterize stability of strict equilibria in general games. Our results demonstrate that the empirically plausible case of k > 1 can yield qualitatively different predictions than the case of k = 1 that is commonly studied in the literature.
    Date: 2020–05
  12. By: Dmitriy Vorobyev (Graduate School of Economics and Management, Ural Federal University, Yekaterinburg, Russia; CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences, Prague, Czech Republic)
    Abstract: Electoral legislation varies across countries and within countries over time, and across different types of elections in terms of how it allows publication of intermediate election results including turnout and candidates’ vote shares during an election day. Using a pivotal costly voting model of elections in which voters have privately observed preferences between two candidates and act sequentially, I study how different rules for disclosing information about the actions of early voters affect the actions of later voters, and how they ultimately impact voter and candidate welfare. Comparing three rules observed in real life elections (no disclosure, turnout disclosure and vote count disclosure), I find that vote count disclosure dominates the other two rules in terms of voter welfare. I further show that each of the rules can provide a candidate with either the greatest or the least chance to win, depending on the candidate’s ex-ante support.
    Keywords: voting, participation, information disclosure
    JEL: D71 D72 D83
    Date: 2020–05
  13. By: Vaccari, Federico
    Abstract: To counter misinformation, regulators can exercise control over the costs that media outlets incur for misreporting policy-relevant news, e.g. by imposing fines. This paper analyzes the welfare implications of those types of interventions that affect misreporting costs. I study a model of strategic communication between an informed media outlet and an uninformed voter, where the outlet can misreport information at a cost. The alternatives available to the voter are endogenously championed by two competing candidates before communication takes place. I find that there is no clear nexus between the voter's welfare and informational distortions: interventions that benefit the voter might be associated with more misreporting activity and persuasion; relatively low misreporting costs yield full revelation but minimize the voter's welfare because they induce large policy distortions. Interventions that increase misreporting costs never harm the voter, but lenient measures might be wasteful. Electoral incentives distort the process of regulation itself, resulting in sub-optimal interventions that are detrimental to the voter's welfare.
    Keywords: fake news, misreporting, media, policy-making, election, regulation
    JEL: D72 D82 D83 L51
    Date: 2020–05–16
  14. By: Navin Kartik; Frances Lee; Wing Suen
    Abstract: We develop a result on Bayesian updating, dubbed information validates the prior (IVP). Roughly, when two agents have different priors, each believes that a (Blackwell) more informative experiment will, on average, bring the other's posterior mean closer to his own prior mean. We apply the result in two contexts of games of asymmetric information: voluntary testing or certification, and costly signaling or falsification. IVP can be used to determine how an agent's behavior responds to additional exogenous or endogenous information. We discuss economic implications.
    Date: 2020–05
  15. By: Zhou, Jidong
    Abstract: This paper studies how an improved information environment affects consumer search and firm competition. We find conditions for information improvement to have unambiguous impacts on search duration, price, and consumer welfare. In many cases consumers benefit from information improvement regardless of how it affects the market price, but there are also cases where information improvement raises price significantly so that consumers suffer from it. Our model provides a unified way to consider the market implications of various types of information improvement such as search advertising, personalized recommendation, filtering, and new display technology.
    Keywords: consumer search, price competition, information improvement
    JEL: D43 D83 L13
    Date: 2020–05–19
  16. By: Philipp Renner
    Abstract: Incentive constraints are constraints that are optimization problems themselves. If these problems are non convex then the first order approach fails. We propose an alternative solution method where we use the value function as an additional constraint. This ensures that all solutions are incentive compatible. To get the value function we use a function interpolator like sparse grids. We demonstrate our approach by solving two examples from the literature were it was shown that the first order approach fails.
    Keywords: incentive constraints, first order approach, parametric optimization, value function approach
    JEL: C63 D80 D82
    Date: 2020
  17. By: Gallego, Jorge; Li, Christopher; Wantchekon, Leonard
    Abstract: Democratic elections increasingly involve political intermediaries (e.g. grassroots organizations or political brokers). We develop a model of electoral competition in which candidates must decide between brokers (patronage) and grassroots organizations. Our model shows that patronage is more likely when public offices are relatively more “valuable” for brokers. Moreover, setups that constrain candidates from funding grassroots campaigns and weaken ties between politicians and citizens make patronage more likely. We show that patronage negatively affects citizens’ welfare, as winning brokers turned civil servants undermine the quality of governments. Finally, our model explores the role of policy deliberation in curbing patronage politics.
    Keywords: Patronage; Intermediaries; Clientelism; Elections
    JEL: D70 D72
    Date: 2020–05
  18. By: Andrew Ellis; Yusufcan Masatlioglu
    Abstract: We propose a novel categorical thinking model (CTM) where the framing of the decision problem affects how the agent categorizes each product, and the product's category affects her evaluation of the product. We show that a number of prominent models of salience, status quo bias, loss-aversion, inequality aversion, and present bias all fit under the umbrella of CTM. This suggests categorization as an underlying mechanism for key departures from the neoclassical model of choice and an account for diverse sets of evidence that are anomalous from its perspective. We specialize CTM to provide a behavioral foundation for the salient thinking model of Bordalo et al. (2013), highlighting its strong predictions and distinctions from other existing models.
    Date: 2020–05
  19. By: Simon Mauras
    Abstract: Stable matching in a community consisting of $N$ men and $N$ women is a classical combinatorial problem that has been the subject of intense theoretical and empirical study since its introduction in 1962 in a seminal paper by Gale and Shapley. When the input preference profile is generated from a distribution, we study the output distribution of two stable matching procedures: women-proposing-deferred-acceptance and men-proposing-deferred-acceptance. We show that the two procedures are ex-ante equivalent: that is, under certain conditions on the input distribution, their output distributions are identical. In terms of technical contributions, we generalize (to the non-uniform case) an integral formula, due to Knuth and Pittel, which gives the probability that a fixed matching is stable. Using an inclusion-exclusion principle on the set of rotations, we give a new formula which gives the probability that a fixed matching is the women/men-optimal stable matching. We show that those two probabilities are equal with an integration by substitution.
    Date: 2020–05

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