nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒08‒24
23 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Reputation Concerns in Risky Experimentation By Chia-Hui Chen; Junichiro Ishida; Wing Suen
  2. Sins of Omission and Commission in Complex Systems By Drew Fudenberg; David K Levine
  3. Competing Models By Montiel Olea, José Luis; Ortoleva, Pietro; Pai, Mallesh; Prat, Andrea
  4. Making Decisions under Model Misspecification By Simone Cerreia-Vioglio; Lars Peter Hansen; Fabio Maccheroni; Massimo Marinacci
  5. Only Time Will Tell: Credible Dynamic Signaling By Egor Starkov
  6. Recursive objective and subjective multiple priors By Federica Ceron; Vassili Vergopoulos
  7. Imperfect Information, Social Norms, and Beliefs in Networks By Rapanos, Theodoros; Sommer, Marc; Zenou, Yves
  8. Pricing group membership By Siddhartha Bandyopadhyay; Antonio Cabrales
  9. Overcoming Free-Riding in Bandit Games By Hörner, Johannes; Klein, Nicolas; Rady, Sven
  10. A General Framework for Studying Contests By Spencer Bastani; Thomas Giebe; Oliver Gürtler
  11. Efficient and Strategy-Proof Multi-Unit Object Allocation with Money: (Non)decreasing Marginal Valuations without Guasi-Linearity By Hiroki Shinozaki; Tomoya Kazumura; Shigehiro Serizawa
  12. The Market for Lemons with Seller Partition By Gersbach, Hans; Mamageishvili, Akaki; Tejada, Oriol
  13. Optimal Relevance in Imperfect Information Games By Jorge Miguel Streb
  15. Bunching and Rank-Dependent Optimal Income Taxation By Laurent Simula; Alain Trannoy
  16. A Canon of Probabilistic Rationality By Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Aldo Rustichini
  17. Preference Aggregation for Couples By Rouzbeh Ghouchani; Szilvia Pápai
  18. Competition in Taxes and IPR By Ronald B. Davies; Yutao Han; Kate Hynes; Yong Wang
  19. Existence and uniqueness of recursive utilities without boundedness By Timothy M. Christensen
  20. Fine Cartels By David K Levine
  21. Continuous-time incentives in hierarchies By Emma Hubert
  22. Consumer search and the uncertainty effect By Heiko Karle; Heiner Schumacher; Rune Vølund
  23. Robust Sequential Search By Karl H. Schlag; Andriy Zapechelnyuk

  1. By: Chia-Hui Chen; Junichiro Ishida; Wing Suen
    Abstract: High-ability agents are more likely to achieve early success in risky experimentation, but learn faster that their project is not promising. These counteracting effects give rise to a signaling model with double-crossing property. This property tends to induce homogenization of quitting times between types, which in turn leads to some pooling in equilibrium. Low-ability agents may hold out to continue their project for the prospect of pooling with the high type, despite having a negative instantaneous net payoff. A war-of-attrition mechanism causes low-ability agents to quit only gradually over time, and to stop quitting for a period immediately before all agents exit.
    Date: 2019–07
  2. By: Drew Fudenberg; David K Levine
    Date: 2020–08–04
  3. By: Montiel Olea, José Luis; Ortoleva, Pietro; Pai, Mallesh; Prat, Andrea
    Abstract: We develop a model in which different agents compete to predict a variable of interest. This variable is related to observables via an unknown data generating process. All agents are Bayesian, but may have 'misspecified models' of the world, i.e., they consider different subsets of observables to make their prediction. After observing a common dataset, who has the highest confidence in her predictive ability? We characterize it and show that it crucially depends on the size of the dataset. With big data, we show it is typically 'large dimensional,' possibly using more variables than the true model. With small data, we show (under additional assumptions) that it is an agent using a model that is 'small-dimensional,' in the sense of considering fewer covariates than the true data generating process. The theory is applied to auctions of assets where bidders observe the same information but hold different priors.
    Date: 2019–10
  4. By: Simone Cerreia-Vioglio; Lars Peter Hansen; Fabio Maccheroni; Massimo Marinacci
    Abstract: We use decision theory to confront uncertainty that is sufficiently broad to incorporate "models as approximations." We presume the existence of a featured collection of what we call "structured models" that have explicit substantive motivations. The decision maker confronts uncertainty through the lens of these models, but also views these models as simplifications, and hence, as misspecified. We extend min-max analysis under model ambiguity to incorporate the uncertainty induced by acknowledging that the models used in decision-making are simplified approximations. Formally, we provide an axiomatic rationale for a decision criterion that incorporates model misspecification concerns.
    Date: 2020–08
  5. By: Egor Starkov (Department of Economics, University of Copenhagen, Denmark)
    Abstract: This paper explores a model of dynamic signaling without commitment. It is known that separating equilibria do not exist if the sender cannot commit to future costly actions, since no single action can have enough weight to be an effective signal. This paper, however, shows that informative and payoff-relevant signaling can occur even without commitment and without resorting to unreasonable off-path beliefs. Such signaling can only happen through attrition, when the weakest type mixes between revealing own type and pooling with the stronger types. The possibility of full information revelation in the limit hence depends crucially on the assumptions about the state space. We illustrate the results by exploring a model of dynamic price signaling and show that prices may be informative of product quality even if the seller cannot commit to future prices, with both high and low prices being able to signal high quality.
    Keywords: dynamic signaling, repeated signaling, reputation, attrition
    JEL: C73 D82 D83 L15
    Date: 2020–08
  6. By: Federica Ceron (Université Paris Est Créteil); Vassili Vergopoulos (Centre d'Economie de la Sorbonne - 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
    JEL: D81
    Date: 2020–05
  7. By: Rapanos, Theodoros; Sommer, Marc; Zenou, Yves
    Abstract: We develop a simple Bayesian network game in which players, embedded in a network of social interactions, bear a cost from deviating from the social norm of their peers. All agents face uncertainty about the private benefits and the private and social costs of their actions. We prove the existence and uniqueness of a Bayesian Nash equilibrium and characterize players' optimal actions. We then show that denser networks do not necessary increase agents' actions and welfare. We also find that, in some cases, it is optimal for the planner to affect the payoffs of selected individuals rather than all agents in the network. We finally show that having more information is not always beneficial to agents and can, in fact, reduce their welfare. We illustrate all our results in the context of criminal networks in which offenders do not know with certitude the probability of being caught and do not want to be different from their peers in terms of criminal activities.
    Keywords: Bayesian games; beliefs; Conformism; crime; networks; value of information
    JEL: C72 D82 D85 K42
    Date: 2019–10
  8. By: Siddhartha Bandyopadhyay (University of Birmingham); Antonio Cabrales (University College London)
    Abstract: We consider a model where agents differ in their 'types' which determines their voluntary contribution towards a public good. We analyze what the equilibrium composition of groups are under centralized and centralized choice. We show that there exists a top-down sorting equilibrium i.e. an equilibrium where there exists a set of prices which leads to groups that can be ordered by level of types, with the first k types in the group with the highest price and so on. This exists both under decentralized and centralized choosing. We also analyze the model with endogenous group size and examine under what conditions is top-down sorting socially effcient. We illustrate when integration (i.e. mixing types so that each group's average type if the same) is socially better than top-down sorting. Finally, we show that top down sorting is efficient even when groups compete among themselves.
    Keywords: Top down sorting, Group formation, Public good, Segregation, Integration.
    JEL: D02 D64 D71 H41
    Date: 2020–08
  9. By: Hörner, Johannes; Klein, Nicolas; Rady, Sven
    Abstract: This paper considers a class of experimentation games with Lévy bandits encompassing those of Bolton and Harris (1999) and Keller, Rady and Cripps (2005). Its main result is that efficient (perfect Bayesian) equilibria exist whenever players' payoffs have a diffusion component. Hence, the trade-offs emphasized in the literature do not rely on the intrinsic nature of bandit models but on the commonly adopted solution concept (MPE). This is not an artifact of continuous time: we prove that such equilibria arise as limits of equilibria in the discrete-time game. Furthermore, it suffices to relax the solution concept to strongly symmetric equilibrium.
    Keywords: Bayesian learning; strategic experimentation; Strongly Symmetric Equilibrium; Two-Armed Bandit
    JEL: C73 D83
    Date: 2019–10
  10. By: Spencer Bastani (Department of Economics and Statistics, School of Business and Economics, Linnaeus University,Sweden); Thomas Giebe (Department of Economics and Statistics, School of Business and Economics, Linnaeus University,Sweden); Oliver Gürtler (Department of Economics, University of Cologne, Germany)
    Abstract: We develop a general framework for studying contests, including the well-known models of Tullock(1980) and Lazear & Rosen (1981) as special cases. The contest outcome depends on players’ efforts and skills, the latter being subject to symmetric uncertainty. The model is tractable, because asymmetric equilibrium exists under general assumptions regarding production technologies and skill distributions. Using a link between our contest model and expected utility theory, we are able to derive new comparative statics results regarding how the size and composition of contests affect equilibrium effort, showing how standard results can be overturned. We also discuss the robustness ofour results to changes in the information structure and the implications of our findings for the optimal design of teams.
    Keywords: contest theory, symmetric equilibrium, heterogeneity, risk, stochastic dominance
    JEL: C72 D74 D81 J23 M51
    Date: 2020–06
  11. By: Hiroki Shinozaki; Tomoya Kazumura; Shigehiro Serizawa
    Abstract: We consider the problem of allocating multiple units of an indivisible object among agents and collecting payments. Each agent can receive multiple units of the object, and his (consumption) bundle is a pair of the units he receives and his payment. An agent's preference over bundles may be non-quasi-linear, which accommodates income effects or soft budget constraints. We show that the generalized Vickrey rule is the only rule satisfying efficiency, strategy-proofness, individual rationality, and no subsidy for losers on rich domains with nondecreasing marginal valuations. We further show that if a domain is minimally rich and includes an arbitrary preference exhibiting both decreasing marginal valuations and a positive income effect, then no rule satisfies the same four properties. Our results suggest that in non-quasi-linear environments, the design of an efficient multi-unit auction mechanism is possible only when agents have nondecreasing marginal valuations.
    Date: 2020–08
  12. By: Gersbach, Hans; Mamageishvili, Akaki; Tejada, Oriol
    Abstract: We introduce a four-stage, multi-prize buying mechanism, which can be used by a (big) buyer to separate low-quality sellers, called "lemon" owners, from high-quality sellers. When the pool of sellers can be partitioned into groups with known mixes of high- and low-quality sellers, the buyer obtains the commodities from the high-quality sellers at a price that matches the willingness to sell. By contrast, "lemon" owners are trapped into selling their items at a low, or even negligible, price. These properties hold even if the buyer cannot commit to a single execution of the mechanism. We outline some applications of our results and suggest that our mechanism might be useful for market makers.
    Keywords: Lemons market - Partition - Signaling - Commitment - Decoy ballots
    JEL: C72 D4 D82 D86
    Date: 2019–10
  13. By: Jorge Miguel Streb
    Abstract: I analyze how natural language transmits information about the sender’s intended actions, complementing previous work on sender-receiver games where natural language transmits information about the sender’s type. Unlike solution concepts based on Nash equilibria, here the solution concept takes into account that when language is used as a signal, a message’s literal meaning may convey common understandings. I incorporate the semantic feature that only a shared natural language is comprehensible, but the equilibrium meaning depends on the strategic context because the credibility of the message depends on the sender’s incentives to be truthful. This setup can be interpreted as a formal pragmatics, i.e., as a setup that studies the actual use of language in specific games. Words are not proof of what they state, so mistrust equilibria are always possible. In trust equilibria, the sender aims at optimal relevance.
    Keywords: asymmetric information, unilateral communication, conventional signs, semantics, pragmatics
    JEL: D83 C72
    Date: 2019–11
  14. By: Loïc Berger (LEM - Lille économie management - LEM - UMR 9221 - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux]); Louis Eeckhoudt (LEM - Lille économie management - LEM - UMR 9221 - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Diversification is a basic economic principle that helps to hedge against uncertainty. It is therefore intuitive that both risk aversion and ambiguity aversion should positively affect the value of diversification. In this paper, we show that this intuition (1) is true for risk aversion but (2) is not necessarily true for ambiguity aversion. We derive sufficient conditions, showing that, contrary to the economic intuition, ambiguity and ambiguity aversion may actually reduce the diversification value.
    Keywords: Diversification,ambiguity aversion,model uncertainty,hedging
    Date: 2020–08–03
  15. By: Laurent Simula; Alain Trannoy
    Abstract: We consider optimal non-linear income tax problems when the social welfare function only depends on ranks as in Yaari (1987) and weights agree with the Lorenz quasi-ordering. Gini, S-Gini, and a class putting more emphasis on inequality in the upper part of the distribution belong to this set. Adopting a first-order approach, we establish marginal tax formula assuming a continuous population framework, and derive conditions on the primitives of the model for which the socially optimal allocation is either fully separating or involves some bunching. For all log-concave survival functions, bunching is precluded for the maximin, Gini, and ”illfare-ranked single-series Ginis”. We then turn to a discrete population setting, and provide ”ABC” formulas for optimal marginal tax rates, which are related to those for a continuum of types but remain essentially distinct.
    Keywords: rank dependence, Gini, optimal income taxation, bunching, log-concavity
    JEL: D63 D82 H21
    Date: 2020
  16. By: Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Aldo Rustichini
    Abstract: We prove that a random choice rule satisfies Luce's Choice Axiom if and only if its support, the set of "alternatives that can be chosen," is a choice correspondence that satisfies the Weak Axiom of Revealed Preference, and random choice occurs according to a stochastic tie breaking among optimizers that satisfies Renyi's Conditioning Axiom. Our result shows that the Choice Axiom is, in a precise formal sense, a probabilistic version of the Weak Axiom. It thus supports Luce's view of his own axiom as a "canon of probabilistic rationality."
    Date: 2020–07
  17. By: Rouzbeh Ghouchani (Concordia University); Szilvia Pápai (Concordia University)
    Abstract: We study the aggregation of a couple's preferences over their respective jobs when they enter a centralized labor market jointly, such as the market for assigning hospital residencies to medical students. Usually in such markets couples need to submit joint preferences over pairs of jobs. Starting from two individual preference orderings over jobs, we first study the Lexicographic and the Rank-Based Leximin aggregation rules, and then propose a family of aggregation rules, the k-Lexi-Pairing rules, and provide an axiomatic characterization of these rules. The parameter k indicates the degree of selfishness for one partner (and altruism for the other partner), with the least selfish Rank-Based Leximin rule at one extreme and the most selfish Lexicographic rule at the other extreme. Since couples care about geographic proximity, we also identify a simple parametric family of preference aggregation rules which build on the k-Lexi-Pairing rules and reflect the couple's preference for togetherness.
    Keywords: matching with couples; preference aggregation; leximin; compromise; togetherness
    JEL: D71 D47
    Date: 2020–08–05
  18. By: Ronald B. Davies; Yutao Han; Kate Hynes; Yong Wang
    Abstract: We examine competition for foreign direct investment when governments compete in tax incentives along with intellectual property rights (IRPs) protection. Higher IPRs result in a lower probability of the multinational enterprise (MNE) being imitated and thus higher expected profits and tax revenues, all else equal. We show that, from the perspective of competing hosts, equilibrium IPRs are too high while taxes are too low. Coordination between jurisdictions can therefore lower the multinational's expected payoff, providing a rationale for why during recent trade negotiations FDI home countries complain about low IPRs in some locations while not pushing for them to be centrally determined.
    Keywords: Tax competition; FDI; IPRs; Imitation
    JEL: F23 H25
    Date: 2020–06
  19. By: Timothy M. Christensen
    Abstract: This paper derives primitive, easily verifiable sufficient conditions for existence and uniqueness of recursive utilities for a number of important classes of preferences. In order to accommodate models commonly used in practice, we allow both the statespace and per-period utilities to be unbounded. For many of the models we study, existence and uniqueness is established under a single "thin tail" condition on the distribution of growth in per-period utilities. We illustrate our approach with applications to robust preferences, models of ambiguity aversion and learning about hidden states, dynamic discrete choice models, and Epstein-Zin preferences.
    Date: 2020–07
  20. By: David K Levine
    Date: 2020–08–04
  21. By: Emma Hubert
    Abstract: This paper studies continuous-time optimal contracting in a hierarchy problem which generalises the model of Sung (2015). The hierarchy is modeled by a series of interlinked principal-agent problems, leading to a sequence of Stackelberg equilibria. More precisely, the principal can contract with the managers to incentivise them to act in her best interest, despite only observing the net benefits of the total hierarchy. Managers in turn subcontract with the agents below them. Both agents and managers independently control in continuous time a stochastic process representing their outcome. First, we show through a continuous-time adaptation of Sung's model that, even if the agents only control the drift of their outcome, their manager controls the volatility of their continuation utility. This first simple example justifies the use of recent results on optimal contracting for drift and volatility control, and therefore the theory of second-order backward stochastic differential equations, developed in the theoretical part of this paper, dedicated to a more general model. The comprehensive approach we outline highlights the benefits of considering a continuous-time model and opens the way to obtain comparative statics. We also explain how the model can be extended to a large-scale principal-agent hierarchy. Since the principal's problem can be reduced to only an $m$-dimensional state space and a $2m$-dimensional control set, where $m$ is the number of managers immediately below her, and is therefore independent of the size of the hierarchy below these managers, the dimension of the problem does not explode.
    Date: 2020–07
  22. By: Heiko Karle; Heiner Schumacher; Rune Vølund
    Abstract: We consider a model of Bertrand competition where consumers are uncertain about the qualities and prices of firms’ products. Consumers can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, a purchase plan, which involves buying products of varying quality and price with positive probability, creates scale-dependent disutility from gain-loss sensations. Even if their degree of loss aversion is modest, they may refrain from inspecting all products and choose an individual default that is first-order stochastically dominated. Firms’ strategic behavior can exacerbate the scope for this “uncertainty effect”, and sellers of inferior products may earn positive profits despite Bertrand competition. We find suggestive evidence for the predicted association between consumer behavior and loss aversion in new survey data.
    Keywords: Consumer Search, Competition, Loss Aversion
    Date: 2020–07–29
  23. By: Karl H. Schlag; Andriy Zapechelnyuk
    Abstract: We study sequential search without priors. Our interest lies in decision rules that are close to being optimal under each prior and after each history. We call these rules dynamically robust. The search literature employs optimal rules based on cutoff strategies that are not dynamically robust. We derive dynamically robust rules and show that their performance exceeds 1/2 of the optimum against binary environments and 1/4 of the optimum against all environments. This performance improves substantially with the outside option value, for instance, it exceeds 2/3 of the optimum if the outside option exceeds 1/6 of the highest possible alternative.
    Date: 2020–08

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