nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒07‒27
25 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Optimal Attention Management: A Tractable Framework By Elliot Lipnowski; Laurent Mathevet; Dong Wei
  2. Rational Inattention via Ignorance Equivalence By Roc Armenter; Michèle Müller-Itten; Zachary Stangebye
  3. Incentives and Efficiency in Constrained Allocation Mechanisms By Joseph Root; David S. Ahn
  4. Project selection with partially verifiable information By Sumit Goel; Wade Hann-Caruthers
  5. Delegation in Veto Bargaining By Navin Kartik; Andreas Kleiner; Richard Van Weelden
  6. Public Good Provision By Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
  7. Goal-Oriented Agents in a Market By Inés Macho-Stadler; David Pérez-Castrillo; Nicolas Quérou
  8. Social Welfare in Search Games with Asymmetric Information By Gilad Bavly; Yuval Heller; Amnon Schreiber
  9. Reputation Building under Observational Learning By Harry Pei
  10. Biased-Belief Equilibrium By Yuval Heller; Eyal Winter
  11. To fight or to give up? Dynamic contests with a deadline By Dmitry Ryvkin
  12. Learning While Setting Precedents By Ying Chen; Hülya Eraslan
  13. Expectational Equilibria in Many-to-one Matching Models with Contracts - A Reformulation of Competitive Equilibrium By Herings, P. Jean-Jacques
  14. Repeated Communication with Private Lying Cost By Harry Pei
  15. Unraveling of Value-Rankings in Auctions with Resale By Sanyyam Khurana
  16. Trust and Betrayals: Reputational Payoffs and Behaviors without Commitment By Harry Pei
  17. Coalition-Proof Risk Sharing Under Frictions By Cole, Harold; Krueger, Dirk; Mailath, George J; Park, Yena
  18. Welfare improving tax evasion By Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
  19. Mergers and Innovation Portfolios By Moraga-González, José-Luis; Motchenkova, Evgenia; Nevrekar, Saish
  20. Temptation in Consumption and Optimal Redistributive Taxation By Maria Arvaniti; Tomas Sjögren
  21. Ethnic Conflicts and the Informational Dividend of Democracy By Laurent-Lucchetti, Jérémy; Rohner, Dominic; Thoenig, Mathias
  22. Robust communication on networks By Marie Laclau; Ludovic Renou; Xavier Venel
  23. Corporate Culture as a Theory of the Firm By Gary B. Gorton; Alexander K. Zentefis
  24. The Value of Information in Zero-Sum Games By Olivier GOSSNER; Jean-François MERTENS
  25. Decentralizing Cooperation through Upstream Bilateral Agreements By Jeon, Doh-Shin; Lefouili, Yassine

  1. By: Elliot Lipnowski; Laurent Mathevet; Dong Wei
    Abstract: A well-intentioned principal provides information to a rationally inattentive agent without internalizing the agent's cost of processing information. Whatever information the principal makes available, the agent may choose to ignore some. We study optimal information provision in a tractable model with quadratic payoffs where full disclosure is not optimal. We characterize incentive-compatible information policies, that is, those to which the agent willingly pays full attention. In a leading example with three states, optimal disclosure involves information distortion at intermediate costs of attention. As the cost increases, optimal information abruptly changes from downplaying the state to exaggerating the state.
    Date: 2020–06
  2. By: Roc Armenter; Michèle Müller-Itten; Zachary Stangebye
    Abstract: We present a novel approach to finite Rational Inattention (RI) models based on the ignorance equivalent, a fictitious action with state-dependent payoffs that effectively summarizes the optimal learning and conditional choices. The ignorance equivalent allows us to recast the RI problem as a standard expected utility maximization over an augmented choice set called the learning-proof menu, yielding new insights regarding the behavioral implications of RI, in particular as new actions are added to the menu. Our geometric approach is also well suited to numerical methods, outperforming existing techniques both in terms of speed and accuracy, and offering robust predictions on the most frequently implemented actions.
    Keywords: Rational inattention; information acquisition; learning.
    JEL: D81 D83 C63
    Date: 2020–06–22
  3. By: Joseph Root; David S. Ahn
    Abstract: We study private-good allocation mechanisms where an arbitrary constraint delimits the set of feasible joint allocations. This generality provides a unified perspective over several prominent examples that can be parameterized as constraints in this model, including house allocation, roommate assignment, and social choice. We first characterize the set of two-agent strategy-proof and Pareto efficient mechanisms, showing that every mechanism is a "local dictatorship." For more than two agents, we leverage this result to provide a new characterization of group strategy-proofness. In particular, an N-agent mechanism is group strategy-proof if and only if all its two-agent marginal mechanisms (defined by holding fixed all but two agents' preferences) are individually strategy-proof and Pareto efficient. To illustrate their usefulness, we apply these results to the roommates problem to discover the novel finding that all group strategy-proof and Pareto efficient mechanisms are generalized serial dictatorships, a new class of mechanisms. Our results also yield a simple new proof of the Gibbard-Satterthwaite Theorem.
    Date: 2020–06
  4. By: Sumit Goel; Wade Hann-Caruthers
    Abstract: We consider a problem where the principal chooses a project from a set of available projects for the agent to work on. Each project provides some profit to the principal and some payoff to the agent and these profits and payoffs are the agent's private information. The principal has a belief over these values and his problem is to find an incentive compatible mechanism without using transfers that maximizes expected profit. Importantly, we assume partial verifiability so that the agent cannot report a project to be more profitable to the principal than it actually is. In this setup, we find a neat characterization of the set of incentive compatible mechanisms. Using this characterization, we find the optimal mechanism for the principal when there are two projects. Within a subclass of incentive compatible mechanisms, we show that a single cutoff mechanism is optimal and conjecture that it is the optimal incentive compatible mechanism.
    Date: 2020–07
  5. By: Navin Kartik; Andreas Kleiner; Richard Van Weelden
    Abstract: A proposer requires the approval of a veto player to change a status quo. Preferences are single peaked. Proposer is uncertain about Vetoer's ideal point. We study Proposer's optimal mechanism without transfers. Vetoer is given a menu, or a delegation set, to choose from. The optimal delegation set balances the extent of Proposer's compromise with the risk of a veto. Under reasonable conditions, "full delegation" is optimal: Vetoer can choose any action between the status quo and Proposer's ideal action. This outcome largely nullifies Proposer's bargaining power; Vetoer frequently obtains her ideal point, and there is Pareto efficiency despite asymmetric information. More generally, we identify when "interval delegation" is optimal. Optimal interval delegation can be a Pareto improvement over cheap talk. We derive comparative statics. Vetoer receives less discretion when preferences are more likely to be aligned, by contrast to expertise-based delegation. Methodologically, our analysis handles stochastic mechanisms.
    Date: 2020–06
  6. By: Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
    Abstract: We develop a model that links tax evasion, corruption, and public good provision. In our model, citizens pay or evade taxes into the public fund, which a corrupt governor redistributes. Each citizen forms expectations about the amount of public goods the governor should provide. After observing the actual level of public goods, a citizen punishes the governor if this level is below his expectations. We describe three types of equilibria: tax evasion, efficient public good provision, and symmetric mixed-strategy. We show that the highest expectations can lead to no free riding (tax evasion) and the efficient level of public good provision even with the corrupt governor and without punishment for tax evasion.
    Keywords: Tax evasion, Audits, Embezzlement, Corruption, Sanctions, Public goods
    JEL: H40 D83 D73
    Date: 2020
  7. By: Inés Macho-Stadler; David Pérez-Castrillo; Nicolas Quérou
    Abstract: We consider a market where "standard" risk-neutral agents coexist with "goal-oriented" agents who, in addition to the expected income, seek a high-enough monetary payoff¤ (the "trigger") to fulfill a goal. We analyze a two-sided one-to-one matching model where the matching between principals and agents and the incentive contracts are endogenous. In any equilibrium contract, goal-oriented agents are matched with the principals with best projects and receive the trigger with a positive probability. Moreover, goal and monetary incentives are complementary since goal- oriented agents receive stronger monetary incentives than standard agents. Finally, we discuss policy interventions in relevant environments.
    Keywords: goal-oriented agents, Incentives, matching market
    JEL: D82 D86
    Date: 2020–07
  8. By: Gilad Bavly; Yuval Heller; Amnon Schreiber
    Abstract: We consider games in which players search for a hidden prize, and they have asymmetric information about the prize location. We study the social payoff in equilibria of these games. We present sufficient conditions for the existence of an equilibrium that yields the first-best payoff (i.e., the highest social payoff under any strategy profile), and we characterize the first-best payoff. The results have interesting implications for innovation contests and R&D races.
    Date: 2020–06
  9. By: Harry Pei
    Abstract: A patient seller faces a sequence of buyers and decides whether to build a reputation for supplying high quality products. Each buyer does not have access to the seller's complete records, but can observe all previous buyers' actions, and some informative private signal about the seller's actions. I examine how the private signals the buyers receive affect the speed of social learning and the seller's incentives to establish reputations. When each buyer privately observes a bounded (possibly stochastic) subset of the seller's past actions, the speed of social learning is strictly positive but can vanish to zero as the seller becomes patient. As a result, reputation building leads to low payoff for the patient seller and low social welfare. When each buyer observes an unboundedly informative private signal about the seller's current-period action, the speed of learning is uniformly bounded below and a patient seller can secure high returns from building reputations. My results provide an explanation to empirical findings of reputation failures in developing countries. I also discuss the effectiveness of various policies in accelerating social learning and encouraging sellers to establish good reputations.
    Date: 2020–06
  10. By: Yuval Heller; Eyal Winter
    Abstract: We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a player's beliefs about the opponent's strategy and the actual strategy. Our equilibrium condition requires that (i) each player choose a best-response strategy to his distorted belief about the opponent's strategy, and (ii) the distortion functions form best responses to one another. We obtain sharp predictions and novel insights into the set of stable outcomes and their supporting stable biases in various classes of games.
    Date: 2020–06
  11. By: Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: We study dynamic contests where each player's performance is determined jointly by effort and luck. The players observe each other's positions in real time. There is a fixed deadline, and the player with a higher performance at the deadline wins the contest. We fully characterize the Markov perfect equilibrium. As the deadline approaches, competition becomes more intense but is confined to an ever narrowing "window of opportunity" around the symmetric states where the players are tied. Outside this window, the follower gives up and the leader is complacent. Total expected effort can be nonmonotone in the prize.
    Keywords: dynamic contest, deadline, finite time horizon, Browinian motion, momentum effect
    JEL: C72 C73
    Date: 2020–07
  12. By: Ying Chen; Hülya Eraslan
    Abstract: A decision maker makes a ruling on a random case in each period. She is uncertain about the correct ruling until conducting a costly investigation. A ruling establishes a precedent, which cannot be violated under binding precedent. We compare the information acquisition incentives, the evolution of standards and the social welfare under nonbinding and binding precedents. Compared to nonbinding precedent, under binding precedent, information acquisition incentives are stronger in earlier periods, but become weaker as more precedents are established. Although erroneous rulings may be perpetuated under binding precedent, welfare can be higher because of the more intensive investigation early on.
    Date: 2020–06
  13. By: Herings, P. Jean-Jacques (RS: GSBE Theme Data-Driven Decision-Making, RS: GSBE Theme Conflict & Cooperation, Microeconomics & Public Economics)
    Abstract: We introduce the notion of expectational equilibrium in a very general specification of the many-to-one matching with contracts model. The endogenous variables in an expectational equilibrium are expectations about tradable contracts. Expectational equilibrium outcomes are equivalent to stable outcomes. Substitutability of preferences is a sufficient condition for existence. Expectational equilibrium unifies all the other approaches used in the literature so far, in particular Walrasian equilibrium, Drèze equilibrium, and market clearing cutoffs. It also applies to cases where contracts do not involve money as well as cases where there is a smallest monetary unit of account.
    JEL: C71 C78 D45 D51
    Date: 2020–07–02
  14. By: Harry Pei
    Abstract: I study repeated communication games between a patient sender and a sequence of receivers. The sender has persistent private information about his psychological cost of lying, and in every period, can privately observe the realization of an i.i.d. state before communication takes place. I characterize every type of sender's highest equilibrium payoff. When the highest lying cost in the support of the receivers' prior belief approaches the sender's benefit from lying, every type's highest equilibrium payoff in the repeated communication game converges to his equilibrium payoff in a one-shot Bayesian persuasion game. I also show that in every sender-optimal equilibrium, no type of sender mixes between telling the truth and lying at every history. When there exist ethical types whose lying costs outweigh their benefits, I provide necessary and sufficient conditions for all non-ethical type senders to attain their optimal commitment payoffs. I identify an outside option effect through which the possibility of being ethical decreases every non-ethical type's payoff.
    Date: 2020–06
  15. By: Sanyyam Khurana (Department of Economics, Delhi School of Economics)
    Abstract: Consider a single-unit auction with resale and two risk neutral bidders. The ranking of the valuations is known to both the bidders—that is, the bidders know the identity of the highest and lowest valuation bidders. We show that, with the revelation of value-rankings, the classic result of “bid symmetrization” does not hold. Surprisingly, the bidder with the lowest valuation produces a stronger bid distribution than the bidder with the highest valuation. We also show that the revelation of value-rankings in auctions with resale asymmetrizes the bidding strategies. Finally, under restrictive assumptions, we compare seller’s and bidders’ ranking of a first-price and second-price auction.
    JEL: D44 D82
    Date: 2020–06
  16. By: Harry Pei
    Abstract: I study a repeated game in which a patient player (e.g., a seller) wants to win the trust of some myopic opponents (e.g., buyers) but can strictly benefit from betraying them. Her benefit from betrayal is strictly positive and is her persistent private information. I characterize every type of patient player's highest equilibrium payoff. Her persistent private information affects this payoff only through the lowest benefit in the support of her opponents' prior belief. I also show that in every equilibrium which is optimal for the patient player, her on-path behavior is nonstationary, and her long-run action frequencies are pinned down for all except two types. Conceptually, my payoff-type approach incorporates a realistic concern that no type of reputation-building player is immune to reneging temptations. Compared to commitment-type models, the incentive constraints for all types of patient player lead to a sharp characterization of her highest attainable payoff and novel predictions on her behaviors.
    Date: 2020–06
  17. By: Cole, Harold; Krueger, Dirk; Mailath, George J; Park, Yena
    Abstract: We analyze efficient risk-sharing arrangements when coalitions may deviate. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any deviating coalition rely on a belief in future cooperation, and we treat the contracting conditions of original and deviating coalitions symmetrically. We show that better belief coordination (higher social capital) tightens incentive constraints since it facilitates both the formation of the original as well as a deviating coalition. As a consequence, the payoff of successfully formed coalitions might be declining in the degree of belief coordination and equilibrium allocations might feature resource burning or utility burning.
    Keywords: Coalitions; Limited Commitment; Risk Sharing
    JEL: E20
    Date: 2020–01
  18. By: Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
    Abstract: We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.
    Keywords: Optimal taxation, tax evasion, audits, welfare-improving.
    JEL: H20 H21 H26
    Date: 2020–07
  19. By: Moraga-González, José-Luis; Motchenkova, Evgenia; Nevrekar, Saish
    Abstract: This paper studies mergers in markets where firms invest in a portfolio of research projects of different profitability and social value. The portfolio nature of the investment problem brings about novel insights on the external effects of firms' investments. The investment of a firm in one project imposes a negative business-stealing externality on the rival firms because it lowers the probability they win the innovation contest for that project; however, the investment of a firm in one project also exerts a positive business-giving externality on the rival firms because it increases the likelihood they win the contest for the alternative project. Merging firms internalize these positive and negative externalities they impose on each other. We show that when the project that is relatively more profitable for the firms is also the more appropriable, then a merger increases consumer welfare by reducing investment in the most profitable project and increasing investment in the alternative (less profitable) project. For the case of linear demand and constant marginal costs, the portfolio effect of mergers makes them consumer welfare improving. With constant elasticity of demand and constant marginal costs, a merger increases consumer welfare if the more profitable project corresponds to the market with the higher elasticity of demand. The portfolio effect of mergers may dominate the usual market power effects of mergers.
    Keywords: Horizontal mergers; innovation portfolios; R&D contests
    JEL: L13 L22 O31 O32
    Date: 2019–12
  20. By: Maria Arvaniti (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland); Tomas Sjögren (Department of Economics, USBE, Umeå University, Sweden)
    Abstract: The purpose of this article is to integrate the class of preferences developed by Gul and Pesendorfer into the theory of optimal redistributive taxation with heterogenous consumers and asymmetric information. The consumers are inclined to over-spend on a commodity for which they experience temptation (TP good). Resisting that temptation gives rise to a utility cost. This cost provides two novel motives for influencing the consumption and labor supply choices; improving the welfare (by reducing the utility cost of exercising self-control) and providing the government with a novel channel via which tax policy can be used to relax a binding self-selection constraint. The welfare motive implies a positive tax on the TP good, as well as a positive (negative) marginal labor income tax rate if the consumer´s marginal valuation of leisure exceeds (falls short of) the marginal valuation of leisure that arises if the consumer would succumb to the temptation. We use iso-elastic and logarithmic utility functional form specifications to exemplify when the self-selection channel may lead to higher/lower commodity and marginal labor income taxes.
    Keywords: Temptation, self-control, optimal taxation, redistribution, commodity taxation, income taxation
    JEL: D03 H21 H24 H31
    Date: 2020–07
  21. By: Laurent-Lucchetti, Jérémy; Rohner, Dominic; Thoenig, Mathias
    Abstract: Prevailing explanations view democracy as an institutional arrangement that solves a class conflict between a rich elite and the rest of population. We study the logic of democratic transition when ethnic tensions are more salient than the poor/rich divide. We build a simple theory where (i) ethnic groups negotiate over allocating the economic surplus and (ii) both military and political mobilizations rest on the unobserved strength of ethnic identity. By eliciting information on mobilization, free and fair elections restore inter-ethnic bargaining efficiency and prevent conflict outbreak. We show that democratic transition can be rationally chosen by autocrats, even if it involves a risk of losing power, as elections reduce the informational rent of the opposition, allowing the legitimately elected ruler to grab more economic surplus. Our setup generates new predictions on the nature of political regime, government tenure, ethnic favoritism and social unrest for ethnically divided countries - all consistent with novel country-level and ethnic group-level panel evidence on democratization in the post-decolonization period.
    JEL: C72 D02 D72 D74 D82 P16
    Date: 2019–12
  22. By: Marie Laclau; Ludovic Renou; Xavier Venel
    Abstract: We consider sender-receiver games, where the sender and the receiver are two distinct nodes in a communication network. Communication between the sender and the receiver is thus indirect. We ask when it is possible to robustly implement the equilibrium outcomes of the direct communication game as equilibrium outcomes of indirect communication games on the network. Robust implementation requires that: (i) the implementation is independent of the preferences of the intermediaries and (ii) the implementation is guaranteed at all histories consistent with unilateral deviations by the intermediaries. Robust implementation of direct communication is possible if and only if either the sender and receiver are directly connected or there exist two disjoint paths between the sender and the receiver.
    Date: 2020–07
  23. By: Gary B. Gorton; Alexander K. Zentefis
    Abstract: Markets and firms offer contrasting methods to arrange production. In markets, contracts govern the purchase of parts and services that compose production. In firms, the shared values, customs, and norms coming from a corporate culture govern employees’ joint development of those parts and services. We argue for this distinction as a theory of the firm. Firms exist because corporate culture at times is more efficient at carrying out production than detailed contracts. The firm’s boundary encircles the parts of production for which a manager optimally chooses corporate culture as the organizing device. The model can explain why some mergers and acquisitions fail, in a way consistent with empirical evidence, and why corporate cultures are hard to change.
    JEL: D02 D4 G30
    Date: 2020–06
  24. By: Olivier GOSSNER (CNRS – CREST, Institut Polytechnique de Paris and Department of Mathematics, London School of Economics); Jean-François MERTENS (CORE, Université Catholique de Louvain.)
    Abstract: We study the description and value of information in zero-sum games. We define a series of informational relations between information schemes, and show that informational equivalence classes are captured by canonical information structures. Moreover, two information schemes induce the same value in every game if and only if they are informationally equivalent.
    Date: 2020–07–06
  25. By: Jeon, Doh-Shin; Lefouili, Yassine
    Abstract: We consider an industry with n≥3 firms owning upstream inputs and interacting noncooperatively in a downstream market. Under general conditions, upstream bilateral agreements giving firms access to one another's input lead to industry profit maximization. This decentralization result applies to various upstream agreements including cross-licensing agreements among patent-holding manufacturers, interconnection agreements among telecommunication companies, interbank payments for ATM networks, and data-sharing agreements among competitors or complementors.
    Keywords: Bilateral oligopoly; upstream agreement; cooperation
    JEL: L13 L41
    Date: 2020–06

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