nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒06‒29
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Reaping the Informational Surplus in Bayesian Persuasion By Ronen Gradwohl; Niklas Hahn; Martin Hoefer; Rann Smorodinsky
  2. Information design in the hold-up problem By Condorelli, Daniele; Szentes, Balázs
  3. Collusive Market Allocations By Iossa, Elisabetta; Loertscher, Simon; Marx, Leslie; Rey, Patrick
  4. Two-Stage Matching Contests By Sela, Aner
  5. Assortative Matching Contests By Sela, Aner
  6. Assortative Information Disclosure By Anton Kolotilin; Alexander Wolitzky
  7. Uncertainty and Robustness of Surplus Extraction By Luca Rigotti
  8. Moral hazard and capability By Nicolas Quérou; Antoine Soubeyran; Raphael Soubeyran
  9. Subjective Complexity Under Uncertainty By Quitz\'e Valenzuela-Stookey
  10. Robust Multiple Stopping -- A Pathwise Duality Approach By Roger J. A. Laeven; John G. M. Schoenmakers; Nikolaus F. F. Schweizer; Mitja Stadje
  11. On competitive nonlinear pricing By Andrea Attar; Thomas Mariotti; Francois Salanie
  12. Tacit Collusion with Consumer Preference Costs By Roig, G.
  13. A Political Model of Trust By Agranov, Marina; Eilat, Ran; Sonin, Konstantin
  14. Evaluating the Properties of a First Choice Weighted Approval Voting System By Peter Butler; Jerry Lin
  15. Product Quality and Consumer Search By Moraga-González, José-Luis; Sun, Yajie
  16. Value-Free Reductions By David Pérez-Castrillo; Chaoran Sun
  17. A Dynamic Theory of Secessionist vs Centrist Conflict By Esteban, Joan; Flamand, Sabine; Morelli, Massimo; Rohner, Dominic
  18. Extractive contest design By Tomohiko Kawamori
  19. Corruption and Extremism By Giommoni, Tommaso; Morelli, Massimo; Nicolò, Antonio
  20. Fiscal Rules as Bargaining Chips By Piguillem, Facundo; Riboni, Alessandro
  21. Detectability, Duality, and Surplus Extraction By Luca Rigotti

  1. By: Ronen Gradwohl; Niklas Hahn; Martin Hoefer; Rann Smorodinsky
    Abstract: The Bayesian persuasion model studies communication between an informed sender and a receiver with a payoff-relevant action, emphasizing the ability of a sender to extract maximal surplus from his informational advantage. In this paper we study a setting with multiple senders, but in which the receiver interacts with only one sender of his choice: senders commit to signals and the receiver then chooses, at the interim stage, with which sender to interact. Our main result is that whenever senders are even slightly uncertain about each other's preferences, the receiver receives all the informational surplus in all equilibria of this game.
    Date: 2020–06
  2. By: Condorelli, Daniele; Szentes, Balázs
    Abstract: We analyze a bilateral trade model where the buyer chooses the distribution of her valuation for the good. The seller, after observing the buyer’s distribution but not the realized valuation, makes a take-it-or-leave-it offer. If distributions are costless, the price and the payoffs of both the buyer and the seller are shown to be 1=e in the unique equilibrium outcome. The buyer’s equilibrium distribution generates a unit-elastic demand, and trade is ex post efficient. These properties are shown to be preserved even when different distributions are differentially costly as long as the cost is monotone in the dispersion of the distribution.
    JEL: L81
    Date: 2020–02–01
  3. By: Iossa, Elisabetta; Loertscher, Simon; Marx, Leslie; Rey, Patrick
    Abstract: Collusive schemes by suppliers often take the form of allocating customers or markets among cartel members. We analyze incentives for suppliers to initiate and sustain such a collusive schemes in a repeated procurement setting. We show that, contrary to some prevailing beliefs, staggered (versus synchronized) purchasing does not make collusion more difficult to sustain or initiate. Buyer defensive measures include synchronized rather than staggered purchasing, first-price rather than second-price auctions, more aggressive or secrete reserve prices, longer contract lengths, withholding information, and avoiding observable registration procedures. Inefficiency induced by defensive measures is an often unrecognized social cost of collusive conduct.
    Keywords: Coordinated effects; sustainability and initiation of collusion; synchronized vs staggered purchasing
    JEL: D44 D82 L41
    Date: 2020–04
  4. By: Sela, Aner
    Abstract: We study two-sided matching contests with two sets of agents, each of which includes n heterogeneous agents with commonly known types. In the first stage, the agents simultaneously send their costly efforts and then the order of choosing a partner from the other set is determined according to the Tullock contest success function. In the second stage, each agent chooses a partner from the other set, and an agent has a positive revenue if there is a matching in which he chooses a partner from the other set and this partner also chooses him. We analyze the agents' equilibrium efforts in the first stage as well as their choices of partners in the second stage, and demonstrate that if the agents' values, which are functions of the types of the agents who are matched, are either multiplicative or additive, their efforts are not necessarily monotonically increasing in their types.
    Keywords: Matching; Tullock contest
    JEL: D44 D72 D82 J31
    Date: 2020–04
  5. By: Sela, Aner
    Abstract: We study two-sided matching contests with two sets, A and B, each of which includes a finite number of heterogeneous agents with commonly known types. The agents in each set compete in Tullock contests where they simultaneously send their costly efforts, and then are assortatively matched, namely, the winner of set A is matched with the winner of set B and so on until all the agents in the set with the smaller number of agents are matched. We analyze the agents' equilibrium efforts for which an agent's match-value is either a multiplicative or an additive function of the types who are matched. We demonstrate that whether or not both sets have the same number of agents might have a critical effect on their equilibrium efforts. In particular, a little change in the size of one of the sets might have a radical effect on the agents' equilibrium efforts.
    Keywords: Tullock contest; Two-sided matching
    JEL: D44 D72 D82 J31
    Date: 2020–04
  6. By: Anton Kolotilin (School of Economics, UNSW Business School); Alexander Wolitzky (Department of Economics, MIT)
    Abstract: We consider a standard persuasion problem in which the receiver’s action and the state of the world are both one-dimensional. Fully characterizing optimal signals when utilities are non-linear is a daunting task. Instead, we develop a general approach to understanding a key qualitative property of optimal signals: their assortative structure, which describes the overall pattern of what states are pooled together. We derive simple conditions—driven by intuitive economic properties, such as supermodularity and submodularity of preferences—for the optimality of positive and negative assortative patterns of information disclosure. Our approach unifies a wide range of previous findings and generates new applications.
    Keywords: persuasion, information design, assortative matching
    JEL: C78 D82 D83
    Date: 2020–06
  7. By: Luca Rigotti
    Abstract: This paper studies a robust version of the classic surplus extraction problem, in which the designer knows only that the beliefs of each type belong to some set, and designs mechanisms that are suitable for all possible beliefs in that set. We derive necessary and sufficient conditions for full extraction in this setting, and show that these are natural set-valued analogues of the classic convex independence condition identified by Cremer and McLean (1985, 1988). We show that full extraction is neither generically possible nor generically impossible, in contrast to the standard setting in which full extraction is generic. When full extraction fails, we show that natural additional conditions can restrict both the nature of the contracts a designer can offer and the surplus the designer can obtain.
    Date: 2020–01
  8. By: Nicolas Quérou (LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier - INRA - Institut National de la Recherche Agronomique - UM3 - Université Paul-Valéry - Montpellier 3 - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - UM1 - Université Montpellier 1 - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques, CNRS - Centre National de la Recherche Scientifique); Antoine Soubeyran (Aix-Marseille School of Economics [Aix-Marseille Université] - Centre de la Vieille Charité [Aix-Marseille Université] - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique); Raphael Soubeyran (LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier - INRA - Institut National de la Recherche Agronomique - UM3 - Université Paul-Valéry - Montpellier 3 - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - UM1 - Université Montpellier 1 - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques)
    Abstract: We consider a moral hazard problem where the agent has limited wealth which limits his possible actions. This may be due to different reasons: the opportunity cost can be monetary, the effort provided by the agent can actually be an investment, or the agent can invest in training activities in order to improve his capability. In such cases, the lower the level of wealth is, including transfer from or to the principal, the lower the maximum effort level that can be provided. The principal and the agent are risk neutral, so that limited wealth which limits possible actions is the distortion we consider compared to the standard model. We show then that the optimal contract is, in some cases, a sharing contract and the optimal up-front transfer is a payment from the principal to the agent. Moreover, whereas incentives and aid are substitutes in the case where the agent has sufficient wealth, they are complements when the agent has limited wealth. We also show that, if the agent can consume his wealth before the contract is signed, he gets all the surplus of the relationship. We discuss the implications of our findings in a variety of settings, including payments for ecosystem services, venture capital, and a current debate on wealth and cognitive functions.
    Keywords: aid,capability,incentives,moral hazard,wealth constraint,contract
    Date: 2020–06–05
  9. By: Quitz\'e Valenzuela-Stookey
    Abstract: Complexity of the problem of choosing among uncertain acts is a salient feature of many of the environments in which departures from expected utility theory are observed. I propose and axiomatize a model of choice under uncertainty in which the size of the partition with respect to which an act is measurable arises endogenously as a measure of subjective complexity. I derive a representation of incomplete Simple Bounds preferences in which acts that are complex from the perspective of the decision maker are bracketed by simple acts to which they are related by statewise dominance. The key axioms are motivated by a model of learning from limited data. I then consider choice behavior characterized by a "cautious completion" of Simple Bounds preferences, and discuss the relationship between this model and models of ambiguity aversion. I develop general comparative statics techniques, and explore applications to portfolio choice, contracting, and insurance choice.
    Date: 2020–06
  10. By: Roger J. A. Laeven; John G. M. Schoenmakers; Nikolaus F. F. Schweizer; Mitja Stadje
    Abstract: In this paper we develop a solution method for general optimal stopping problems. Our general setting allows for multiple exercise rights, i.e., optimal multiple stopping, for a robust evaluation that accounts for model uncertainty, and for general reward processes driven by multi-dimensional jump-diffusions. Our approach relies on first establishing robust martingale dual representation results for the multiple stopping problem which satisfy appealing pathwise optimality (almost sure) properties. Next, we exploit these theoretical results to develop upper and lower bounds which, as we formally show, not only converge to the true solution asymptotically, but also constitute genuine upper and lower bounds. We illustrate the applicability of our general approach in a few examples and analyze the impact of model uncertainty on optimal multiple stopping strategies.
    Date: 2020–06
  11. By: Andrea Attar (TSE - Toulouse School of Economics - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UT1 - Université Toulouse 1 Capitole); Thomas Mariotti (TSE - Toulouse School of Economics - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UT1 - Université Toulouse 1 Capitole); Francois Salanie (TSE - Toulouse School of Economics - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UT1 - Université Toulouse 1 Capitole)
    Abstract: We study a discriminatory limit-order book in which market makers compete in nonlinear tariffs to serve a privately informed insider. Our model allows for general nonparametric specifications of preferences and arbitrary discrete distributions for the insider's private information. Adverse selection severely restricts equilibrium outcomes: in any pure-strategy equilibrium with convex tariffs, pricing must be linear and at most one type can trade, leading to an extreme form of market breakdown. As a result, such equilibria exist only under exceptional circumstances that we fully characterize. These results are strikingly different from those of existing analyses that postulate a continuum of types. The two approaches can be reconciled when we consider epsilon-equilibria of games with a large number of market makers or a large number of types.
    Keywords: adverse selection,competing mechanism,limit-order book
    Date: 2019
  12. By: Roig, G.
    Abstract: When consumers have preference costs, two opposing effects need to be assessed to analyze firms' incentives to set collusive prices. On the one hand, preference costs make a deviation from collusion less attractive, as the deviating firm must offer a steeper discount to cover these preference costs. On the other hand, preference costs lock in consumers and make punishment from rivals less effective. When preference costs are low, the second effect dominates and collusion is harder to sustain than in a situation with no preference costs. The contrary happens with high enough preference costs.
    Keywords: Tacit Collusion; Consumer Preference Costs
    JEL: D43 L13 L12
    Date: 2020–06–05
  13. By: Agranov, Marina; Eilat, Ran; Sonin, Konstantin
    Abstract: We analyze a simple model of political competition, in which the uninformed median voter chooses whether to follow or ignore the advice of the informed elites. In equilibrium, information transmission is possible only if voters trust the elites' endorsement of potentially biased candidates. When inequality is high, the elites' informational advantage is minimized by the voters' distrust. When inequality reaches a certain threshold, the trust, and thus the information transmission, breaks down completely. Finally, the size of the elite forming in equilibrium depends on the amount of trust they are able to maintain.
    Keywords: cheap talk; inequality; information club; political economy; Trust
    JEL: D72 D83
    Date: 2020–04
  14. By: Peter Butler; Jerry Lin
    Abstract: Plurality and approval voting are two well-known voting systems with different strengths and weaknesses. In this paper we consider a new voting system we call beta(k) which allows voters to select a single first-choice candidate and approve of any other number of candidates, where k denotes the relative weight given to a first choice; this system is essentially a hybrid of plurality and approval. Our primary goal is to characterize the behavior of beta(k) for any value of k. Under certain reasonable assumptions, beta(k) can be made to mimic plurality or approval voting in the event of a single winner while potentially breaking ties otherwise. Under the assumption that voters are honest, we show that it is possible to find the values of k for which a given candidate will win the election if the respective approval and plurality votes are known. Finally, we show how some of the commonly used voting system criteria are satisfied by beta(k).
    Date: 2020–05
  15. By: Moraga-González, José-Luis; Sun, Yajie
    Abstract: This paper carries out a positive and normative analysis of the provision of quality in a consumer search market for differentiated products. An increase in quality shifts up the distribution of match utilities offered by firms and makes consumers pickier. The typical number of products consumers inspect before settling, however, does not necessarily increase in quality. Higher search costs may lead to less investment in quality and, correspondingly, the equilibrium price may decrease in search costs. If the equilibrium is socially inefficient, it is only because of the inadequacy of quality investment. There is a one-to-one relationship between the intensity of search and the inefficiency of the market equilibrium. The market level of quality investment is excessive (insufficient) and consumers are too (little) picky from the point of view of welfare maximization if and only if a raise in quality results in that consumers inspect a higher (lower) number of products.
    Keywords: efficiency; quality investment; sequential search; super- and sub-modular match value distributions
    JEL: D43 D83 L13
    Date: 2020–04
  16. By: David Pérez-Castrillo; Chaoran Sun
    Abstract: We introduce the value-free (v-f ) reductions, which are operators that map a coalitional game played by a set of players to another "similar" game played by a subset of those players. We propose properties that v-f reductions may satisfy, we provide a theory of duality for them, and we characterize several v-f reductions (among which the value-free version of the reduced games propose by Hart and Mas-Colell, 1989, and Oishi et al., 2016). Unlike reduced games, which were introduced to characterize values in terms of consistency properties, v-f reductions are not defined in reference to values. However, a "path-independent" v-f reduction induces a value. We characterize v-f reductions that induce the Shapley value, the stand-alone value, and the Banzhaf value. Moreover, we can connect our approach to the literature on consistency because any value induced by a path-independent v-f reduction is consistent with that reduction.
    Keywords: coalitional games, reduced games, axiomatization, consistency, shapley value, duality
    JEL: C71
    Date: 2020–06
  17. By: Esteban, Joan; Flamand, Sabine; Morelli, Massimo; Rohner, Dominic
    Abstract: This paper proposes an integrated dynamic theory of bargaining and conflict between ethnic groups, delivering novel predictions on secessionist versus centrist conflict. Ethnic identities, inequality and intertemporal preferences are predicted to impact the risk of secessionist conflict and the risk of centrist conflict in different directions. Beside obtaining a full characterization of equilibrium for every set of conditions, we also show empirical evidence that cultural similarity reduces the scope for secessionist conflict (compared to centrist conflict); that small ethnic groups stick more often to peaceful union; that higher patience and higher group inequality fuels secessionism.
    Keywords: conflict; Patience; Secessions; Surplus Sharing
    JEL: C7 D74
    Date: 2020–04
  18. By: Tomohiko Kawamori
    Abstract: We consider contest success functions (CSFs) that extract contestants' values of the prize. In the case in which the values are observable to the contest designer, in the more-than-two-contestant or common-value subcase, we present a CSF extractive in any equilibrium; in the other subcase, we present a CSF extractive in some equilibrium, but there exists no CSF extractive in any equilibrium. In the case in which the values are not observable, there exists no CSF extractive in some equilibrium. In the case in which the values are observable and common, we present extractive a CSF extractive in any equilibrium; we present a class of CSFs extractive in some equilibrium, and this class can control the number of active contestants.
    Date: 2020–06
  19. By: Giommoni, Tommaso; Morelli, Massimo; Nicolò, Antonio
    Abstract: When should we expect an opposition group to select an extremist leader or representative? This paper shows the important role of corruption for this choice. Moreover, we show an important asymmetry in the role of corruption, in that the effect on extremism exists only within the opposition group. When the elite has greater ability to use corruption to obtain a better bargaining outcome from the opposition group leader (political corruption), then the equilibrium selection of group leader is more likely to be extreme. On the other hand, the perception of an existing rent extraction by the elite in power may determine the opposite effect within the majority group. We provide strong evidence for these novel predictions using the random audits data in Brazil as exogenous corruption signals, verifying that only within the opposition (to state-level incumbents) the signals determined an extremism drift in voting. Finally, we extend the analysis to extremism and conflict risk in divided countries.
    Keywords: agency; Bargaining; Corruption; delegation; extremism
    JEL: D72 D73
    Date: 2020–04
  20. By: Piguillem, Facundo; Riboni, Alessandro
    Abstract: Most fiscal rules can be overridden by consensus. We show that this does not make them ineffectual. Since fiscal rules determine the outside option in case of disagreement, the opposition uses them as ``bargaining chips" to obtain spending concessions. We show that under some conditions this political bargain mitigates the debt accumulation problem. We analyze various rules and find that when political polarization is high, harsh fiscal rules (e.g., government shutdown) maximize the opposition's bargaining power and leads to lower debt accumulation. When polarization is low, less strict fiscal limits (e.g, balanced-budget rule) are preferable. Moreover, we find that the optimal fiscal rules could arise in equilibrium by negotiation. Finally, by insuring against power fluctuations, negotiable rules yield higher welfare than strict ones.
    Keywords: fiscal rules; Government Debt; Government shutdown=; legislative bargaining; Political Polarization
    JEL: D72 H2 H6
    Date: 2020–04
  21. By: Luca Rigotti
    Abstract: We study surplus extraction in the general environment of McAfee and Reny (1992), and provide two alternative proofs of their main theorem. The first is an analogue of the classic argument of Cremer and McLean (1985, 1988), using geometric features of the set of agents’ beliefs to construct a menu of contracts extracting the desired surplus. This argument, which requires a finite state space, also leads to a counterexample showing that full extraction is not possible without further significant conditions on agents’ beliefs or surplus, even if the designer offers an infinite menu of contracts. The second argument uses duality and applies for an infinite state space, thus yielding the general result of McAfee and Reny (1992). Both arguments suggest methods for studying surplus extraction in settings beyond the standard model.
    Date: 2020–01

This nep-mic issue is ©2020 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.