nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒09‒14
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Pricing group membership By Bandyopadhyay, Siddhartha; Cabrales, Antonio
  2. Proportional Participatory Budgeting with Cardinal Utilities By Dominik Peters; Grzegorz Pierczy\'nski; Piotr Skowron
  3. Competing Persuaders in Zero-Sum Games By Dilip Ravindran; Zhihan Cui
  4. Lindahl Equilibrium as a Collective Choice Rule By Faruk Gul; Wolfgang Pesendorfer
  5. Persuasion on Networks By Georgy Egorov; Konstantin Sonin
  6. Price Advertising, Double Marginalisation and Vertical Restraints By Garrod, Luke; Olczak, Matthew; Wilson, Chris M
  7. Network goods, price discrimination, and two-sided platforms By BELLEFLAMME, Paul,; PEITZ, Martin,
  8. The Nash Bargaining Solution in Labor Market Analysis By Gilbert L. Skillman
  9. Anonymous, non-manipulable, binary social choice By Achille Basile; Surekha Rao; K. P. S. Bhaskara Rao
  10. Dynamic Awareness By Joseph Y. Halpern; Evan Piermont
  11. The Hidden Costs of Strategic Opacity By Ana Babus; Maryam Farboodi
  12. The tension between market shares and profi t under platform competition By Paul Belleflamme; Martin Peitz; Eric Toulemonde
  13. Price Transparency and Market Screening By Ayca Kaya; Santanu Roy
  14. Second-Order Beliefs and Second-Order Expected Utility By V. Filipe Martins-Da-Rocha; Rafael Mouallem
  15. Welfare Improving Tax Evasion By Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
  16. Committee Search: Evaluating One or Multiple Candidates at a Time? By Christina Luxen; Tobias Rachidi
  17. Whom Should I Merge With? How product substitutability affects merger profitability By Cellini, Roberto
  18. Implications of the Tradeoff between Inside and Outside Social Status in Group Choice By Takaaki Hamada
  19. Entrepreneur-Investor Information Design By Oleg Muratov
  20. Efficiently Imprecise Contracts By Toru Suzuki
  21. Hunting for the discouragement effect in contests By Mikhail Drugov; Dmitry Ryvkin

  1. By: Bandyopadhyay, Siddhartha; Cabrales, Antonio
    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 efficient. 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: D02, D64, D71, H41
    JEL: D02 D64 D71 H41
    Date: 2020–08–05
  2. By: Dominik Peters; Grzegorz Pierczy\'nski; Piotr Skowron
    Abstract: We study voting rules for participatory budgeting, where a group of voters collectively decides which projects should be funded using a common budget. We allow the projects to have arbitrary costs, and the voters to have arbitrary additive valuations over the projects. We formulate two axioms that guarantee proportional representation to groups of voters with common interests. To the best of our knowledge, all known rules for participatory budgeting do not satisfy either of the two axioms; in addition we show that the most prominent proportional rules for committee elections (such as Proportional Approval Voting) cannot be adapted to arbitrary costs nor to additive valuations so that they would satisfy our axioms of proportionality. We construct a simple and attractive voting rule that satisfies one of our axioms (for arbitrary costs and arbitrary additive valuations), and that can be evaluated in polynomial time. We prove that our other stronger axiom is also satisfiable, though by a computationally more expensive and less natural voting rule.
    Date: 2020–08
  3. By: Dilip Ravindran; Zhihan Cui
    Abstract: We study a Bayesian Persuasion game with multiple senders employing conditionally independent experiments. Senders have zero-sum preferences over what information is revealed. We characterize when a set of states cannot be pooled in any equilibrium, and in particular, when the state is (fully) revealed in every equilibrium. The state must be fully revealed in every equilibrium if and only if sender utility functions are sufficiently nonlinear. In the binary-state case, the state is fully revealed in every equilibrium if and only if some sender has nontrivial preferences. Our takeaway is that `most' zero-sum sender preferences result in full revelation.
    Date: 2020–08
  4. By: Faruk Gul (Princeton University); Wolfgang Pesendorfer (Princeton University)
    Abstract: A collective choice problem is a finite set of social alternatives and a finite set of economic agents with vNM utility functions. We associate a public goods economy with each collective choice problem and establish the existence and efficiency of (equal income) Lindahl equilibrium allocations. We interpret collective choice problems as cooperative bargaining problems and define a set-valued solution concept, {\it the equitable solution} (ES). We provide axioms that characterize ES and show that ES contains the Nash bargaining solution. Our main result shows that the set of ES payoffs is the same a the set of Lindahl equilibrium payoffs. We consider two applications: in the first, we show that in a large class of matching problems without transfers the set of Lindahl equilibrium payoffs is the same as the set of (equal income) Walrasian equilibrium payoffs. In our second application, we show that in any discrete exchange economy without transfers every Walrasian equilibrium payoff is a Lindahl equilibrium payoff of the corresponding collective choice market. Moreover, for any cooperative bargaining problem, it is possible to define a set of commodities so that the resulting economy's utility possibility set is that bargaining problem {\it and} the resulting economy's set of Walrasian equilibrium payoffs is the same as the set of Lindahl equilibrium payoffs of the corresponding collective choice market.
    Date: 2020–08
  5. By: Georgy Egorov; Konstantin Sonin
    Abstract: We analyze persuasion in a model in which each receiver can buy a direct access to the sender's signal or rely on her network connections to get it. For the sender, a higher bias increases the impact per direct receiver, yet diminishes the willingness of agents to receive information. Contrary to naive intuition, the optimal propaganda might target peripheral, rather than centrally-located agents, and is at its maximum levels when the probability that information flows between agents is close to zero or one, but not in-between. The impact of network density depends on this probability as well.
    JEL: D85 L82 P16
    Date: 2020–07
  6. By: Garrod, Luke; Olczak, Matthew; Wilson, Chris M
    Abstract: Abstract The developing literature on consumer information and vertical relations has yet to consider information provision via costly retail price advertising. By exploring this, we show that the double marginalisation problem exists in equilibrium despite an upstream supplier offering a two-part tariff that is common knowledge to consumers. Intuitively, the supplier elicits higher retail prices to strategically reduce retailers' advertising expenditure in order to extract additional rents. We then demonstrate how vertical restraints, such as resale price maintenance, can increase supply-chain profits and consumer welfare by lowering retail prices despite paradoxically discouraging price advertising.
    Keywords: Price Advertising; Consumer Search; Double Marginalisation; Vertical Restraints; Clearinghouse
    JEL: D40 D83 L42
    Date: 2020–08–26
  7. By: BELLEFLAMME, Paul, (CORE, Université catholique de Louvain); PEITZ, Martin, (Universität Mannheim)
    Abstract: A monopolist sells a network good to a set of heterogeneous users who all care about total participation. We show that the provider of the network good effectively becomes a two-sided platform if it can condition prices on some user characteristics. This still holds true if the network operator cannot obsoerve consumer characteristics but induces user self-selection when it offers screening contracts. In our setting, all incentive constraints are slack The use of freemium strategies emerges as a special case of versioning. Here, a base version is offered at zero price and a premium version at a positive price. Overall, the paper illustrates the close link between price discrimination in the presence of a network good and pricing by a two-sided platform.
    Keywords: network goods, two-sided markets, platform pricing, group pricing, menu pricing
    JEL: D62 L12 L82 L86
    Date: 2020–07–01
  8. By: Gilbert L. Skillman (Department of Economics, Wesleyan University)
    Abstract: The non-symmetric Nash bargaining solution is frequently applied in the study of labor market outcomes, but the axiomatic approach in which it is grounded offers little guidance as to the determinants of agents’ threat points and relative bargaining power. This paper modifies the Rubinstein-Wolinsky (1985) sequential matching and bargaining model to study the role of individual bargaining costs, status quo payoffs, and outside options in determining bargaining power weights and threat points in Nash bargaining solution. Key results differentiate the strategic implications of fixed and time discount-based bargaining costs and demonstrate the general validity of the Nash bargaining solution in characterizing steady-state market outcomes in which outside options are endogenously determined. In this scenario, agents’ relative bargaining weights depend on their matching probabilities.
    Keywords: Nash bargaining solution, strategic bargaining, outside options, status quo payoffs, labor markets, matching and bargaining
    JEL: C78 J31 J52
    Date: 2020–04
  9. By: Achille Basile; Surekha Rao; K. P. S. Bhaskara Rao
    Abstract: Let V be a finite society whose members express weak orderings (hence also indifference, possibly) about two alternatives. We show a simple representation formula that is valid for all, and only, anonymous, non-manipulable, binary social choice functions on V . The number of such functions is $2^{n+1}$ if V contains $n$ agents.
    Date: 2020–07
  10. By: Joseph Y. Halpern; Evan Piermont
    Abstract: We investigate how to model the beliefs of an agent who becomes more aware. We use the framework of Halpern and Rego (2013) by adding probability, and define a notion of a model transition that describes constraints on how, if an agent becomes aware of a new formula $\phi$ in state $s$ of a model $M$, she transitions to state $s^*$ in a model $M^*$. We then discuss how such a model can be applied to information disclosure.
    Date: 2020–07
  11. By: Ana Babus; Maryam Farboodi
    Abstract: We explore a model in which banks strategically hold interconnected and opaque portfolios, despite increasing the likelihood they are subject to financial crises. In our framework, banks choose their degree of exposure to other banks to influence how investors can use their information. In equilibrium banks choose portfolios which are neither fully opaque, nor fully transparent. However, their portfolios are excessively interconnected to obfuscate investor information. Banks can create a degree of opacity that decreases welfare, and makes bank crises more likely. Our model is suggestive about the implications of asset securitization, as well as government bailouts.
    JEL: D43 D82 G14 G21
    Date: 2020–07
  12. By: Paul Belleflamme; Martin Peitz; Eric Toulemonde
    Abstract: We introduce asymmetries across platforms in the linear model of competing two-sided platforms with singlehoming on both sides and fully characterize the price equilibrium. We identify market environments in which one platform has a larger market share on both sides while obtaining a lower profit than the other platform. This platform enjoys a competitive advantage on one or both sides. Our finding raises further doubts on using market shares as a measure of market power in platform markets.
    Keywords: Two-sided platforms, market share, market power, oligopoly, network effects, antitrust
    JEL: D43 L13 L86
    Date: 2020–08
  13. By: Ayca Kaya (University of Miami); Santanu Roy (Southern Methodist University)
    Abstract: We consider repeated trading by sellers with persistent private information in dynamic lemons markets. We compare the outcomes of a transparent market where past trading prices are public to those of an opaque market, where they are private. We characterize the upper bound of trading surplus in an opaque market and construct a class of equilibria in a transparent market that improves upon this bound. We conclude that price transparency is beneficial in a repeated trading environment. The advantage of price transparency is indirect and operates through the strategic tools it provides the sellers of high quality to sustain high payoffs.
    Keywords: Repeated sales, adverse selection, lemons market, price transparency.
    JEL: D82 C73 D61
    Date: 2020–07
  14. By: V. Filipe Martins-Da-Rocha (LEDa - Laboratoire d'Economie de Dauphine - CNRS - Centre National de la Recherche Scientifique - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL, EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro]); Rafael Mouallem (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro])
    Abstract: We present an axiomatization of the Second-Order Expected Utility model in the environment of Anscombe and Aumann (1963) where the domain of the preference relation is the set of lotteries over all acts whose prize are lotteries. We replace the axiom of reversal of order in compound lotteries (Assumption 1 in Anscombe and Aumann (1963)) by an extension of monotonicity in the prizes (Assumption 2 in Anscombe and Aumann (1963)) that is a strengthening of the Dominance axiom introduced by Seo (2009). This extends the contributions of Grant et al. (2009) by allowing for a general representation result without restricting the decision maker's attitude towards subjective uncertainty.
    Date: 2020–08–26
  15. By: Canta, Chiara (Toulouse Business School); Cremer, Helmuth (Toulouse School of Economics); Gahvari, Firouz (University of Illinois at Urbana-Champaign)
    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
  16. By: Christina Luxen; Tobias Rachidi
    Abstract: This paper studies committee search where members either assess candidates “one at a time”, i.e., on a rolling basis, or they simultaneously review a set of candidates of fixed size in each time period. We compare both search procedures in terms of acceptance standards and welfare. There is a trade-off between the expected value of a candidate conditional on stopping and the expected search costs. The resolution of this trade-off depends on the voting rule and the specification of search costs associated with the simultaneous evaluation of multiple candidates. The adoption of a qualified majority rule changes the evaluation of search procedures compared to the unanimity rule, revealing that the presence of a search committee alters the search design problem in comparison with the single decision-maker case. This is the main qualitative insight of this paper and we discuss its implications for committee search in practice.
    Keywords: Committee search, sequential search, multiple options
    JEL: D71 D83
    Date: 2020–08
  17. By: Cellini, Roberto
    Abstract: The paper presents a simple model of oligopoly, in which three firms supply differentiated products. The degree of product substitutability is not uniform across goods. We investigate the merger profitability, and we show that profitability depends on the degree of good differentiation. Contrary to what seems to emerge from different models, we find that merger between firms that supply “more similar” product is more profitable as compared to merger between firms supplying more differentiated goods.
    Keywords: oligopoly; merger; profitability; merger paradox
    JEL: D43 L13
    Date: 2020–06
  18. By: Takaaki Hamada
    Abstract: We investigate a group choice problem of agents pursuing social status. We assume heterogeneous agents want to signal their private information (ability, income, patience, altruism, etc.) to others, facing tradeoff between "outside status" (desire to be perceived in prestigious group from outside observers) and "inside status" (desire to be perceived talented from peers inside their group). To analyze the tradeoff, we develop two stage signaling model in which each agent firstly chooses her group and secondly chooses her action in the group she chose. They face binary choice problems both in group and action choices. Using cutoff strategy, we construct an partially separating equilibrium such that there are four populations: (i) choosing high group with strong incentive for action in the group, (ii) high group with weak incentive, (iii) low group with strong incentive, and (iv) low group with weak incentive. By comparative statics results, we find some spillover effects from a certain group to another, on how four populations change, when a policy is taken in each group. These results have rich implications for group choice problems like school, firm or residential preference.
    Date: 2020–08
  19. By: Oleg Muratov
    Abstract: I consider an environment in which the entrepreneur generates information about the quality of the projects prior to contracting with the investor. The investor faces a moral hazard problem, since the entrepreneur may divert the funding for private consumption. When the investor bargains with the entrepreneur, I nd that the ecient amount of information is generated if and only if the bargaining power of the entrepreneur is high enough. I interpret this result in terms of investors' concentration, competitiveness, and generosity measures. I show that the investor prefers a non-absolute bargaining power when the project costs are high enough.
    Date: 2020–08
  20. By: Toru Suzuki (University of Technology Sydney)
    Abstract: Actual contracts are often written in an imprecise manner. This paper introduces a formal writing cost framework in which the language of a contract, i.e., natural language, is explicitly modeled with predicate logic. It is shown that even if any obligation is contractible and describable by the language, the equilibrium contract can exhibit two kinds of impreciseness: (i) descriptive impreciseness, i.e., a contract leaves some relevant detail of the duty unmentioned, and (ii) semantic impreciseness, i.e., a contract uses some imprecise words leaving room for interpretation. Contractual impreciseness can persist even under a vanishingly small writing cost. Some novel comparative statics and other economic applications are provided.
    Keywords: A foundation of incomplete contract; contractual impreciseness; writing cost; predicate logic
    Date: 2020–09–02
  21. By: Mikhail Drugov (New Economic School); Dmitry Ryvkin (Florida State University)
    Abstract: The "discouragement effect" (DE) is mentioned routinely as a reason for why heterogeneity is detrimental for incentives in contests. It serves as a theoretical argument for various policies aimed at homogenizing contestants. We show that, at least in static contests, the DE has no robust theoretical foundation. We divide widely used contest models into two classes. In the first class, heterogeneity either decreases or increases aggregate effort. In the second class, the effect of heterogeneity depends crucially on how it is defined. Hence, the DE cannot serve as a go-to argument for why heterogeneity in contests is undesirable.
    Keywords: discouragement effect, contest, heterogeneity
    JEL: C72 D63
    Date: 2020–07

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