nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒10‒05
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Economic Agents as Imperfect Problem Solvers By Cosmin L. Ilut; Rosen Valchev
  2. Learning in a Small/Big World By Benson Tsz Kin Leung
  3. Strategy-proof allocation with outside option By Jun Zhang
  4. Homo Moralis and regular altruists – preference evolution for when they disagree By Aslihan Akdeniz; Christopher Graser; Matthijs van Veelen
  5. How Does Kompromat Affect Politics? A Model of Transparency Regimes By Monika Nalepa; Konstantin Sonin
  6. Pareto efficient combinatorial auctions: dichotomous preferences without quasilinearity By Komal Malik; Debasis Mishra
  7. Trust and Trustworthiness in Procurement Contracts with Retainage By Matthew J. Walker; Elena Katok; Jason Shachat
  8. Tiered Random Matching Markets: Rank is Proportional to Popularity By Itai Ashlagi; Mark Braverman; Clayton Thomas; Geng Zhao
  9. Financial market equilibrium with bounded awareness By Guerdjikova, A.; Quiggin, J.
  10. Price-setting mixed duopoly, subsidization and the order of firms' moves: the relevance of privatization By Ohnishi, Kazuhiro
  11. Optimal Menu when Agents Make Mistakes By Sergei Mikhalishchev
  12. A Political Model of Trust By Marina Agranov; Ran Eilat; Konstantin Sonin
  13. Crime Aggregation, Deterrence, and Witness Credibility By Harry Pei; Bruno Strulovici
  14. Mechanisms for a No-Regret Agent: Beyond the Common Prior By Modibo Camara; Jason Hartline; Aleck Johnsen
  15. Political Scandal: A Theory By Wioletta Dziuda; William G. Howell

  1. By: Cosmin L. Ilut; Rosen Valchev
    Abstract: We develop a tractable model of limited cognitive perception of the optimal policy function, with agents using costly reasoning effort to update beliefs about this optimal mapping of economic states into actions. A key result is that agents reason less (more) when observing usual (unusual) states, producing state- and history-dependent behavior. Our application is a standard incomplete markets model with ex-ante identical agents that hold no a-priori behavioral biases. The resulting ergodic distribution of actions and beliefs is characterized by “learning traps”, where locally stable dynamics of wealth generate “familiar” regions of the state space within which behavior appears to follow past-experience-based heuristics. We show qualitatively and quantitatively how these traps have empirically desirable properties: the marginal propensity to consume is higher, hand-to-mouth status is more frequent and persistent, and there is more wealth inequality than in the standard model.
    JEL: C11 D83 D91 E21
    Date: 2020–09
  2. By: Benson Tsz Kin Leung
    Abstract: Savage (1972) lays down the foundation of Bayesian decision theory, but asserts that it is not applicable in big worlds where the environment is complex. Using the theory of finite automaton to model belief formation, this paper studies the characteristics of optimal learning behavior in small and big worlds, where the complexity of the environment is low and high, respectively, relative to the cognitive ability of the decision maker. Confirming Savage's claim, optimal learning behavior is closed to Bayesian in small worlds but significantly different in big worlds. In addition, I show that in big worlds, the optimal learning behavior could exhibit a wide range of well-documented non-Bayesian learning behavior, including the use of heuristic, correlation neglect, persistent over-confidence, inattentive learning, and other behaviors of model simplification or misspecification. These results establish a clear and testable relationship between the prominence of non-Bayesian learning behavior, complexity and cognitive ability.
    Date: 2020–09
  3. By: Jun Zhang
    Abstract: We consider strategy-proof mechanisms to solve allocation problems where agents can choose outside options if they wish. Mechanisms could return an allocation or a randomization over allocations. We prove two useful theorems, relying on an invariance property of the allocations found by strategy-proof mechanisms when agents vary the ranking of outside options in their preferences. The first theorem proves that, among individually rational and strategy-proof mechanisms, pinning down every agent's probability of choosing outside option in every preference profile is equivalent to pinning down a mechanism. The second theorem provides a sufficient condition for proving equivalence between two strategy-proof mechanisms when the number of possible allocations is finite. The two theorems provide a unified foundation for existing results in several distinct models and imply new results in some models.
    Date: 2020–09
  4. By: Aslihan Akdeniz (University of Amsterdam); Christopher Graser (University of Amsterdam); Matthijs van Veelen (University of Amsterdam)
    Abstract: Alger and Weibull (2013) present a model for the evolution of preferences under incomplete information and assortative matching. Their main result is that Homo Moralis – who maximizes a convex combination of her narrow self-interest and “the right thing to do†– is evolutionarily stable, if it assigns a weight on the right thing to do that is equal to the assortment parameter. We give a counterexample against their central result, and a way to repair it. We also show that the result ceases to hold if we allow for mixed equilibria or coordination on asymmetric equilibria. Allowing for mixed equilibria, we show that if there is a stable preference, it will be behaviorally equivalent to a regular altruist that puts a positive weight on the payoff of the other that is equal to the assortment parameter. We also consider the cross-species empirical evidence.
    Keywords: Homo Moralis, altruism, preference evolution
    JEL: C73
    Date: 2020–09–22
  5. By: Monika Nalepa (University of Chicago); Konstantin Sonin (University of Chicago)
    Abstract: Why are transparency regimes so rare? When some politicians have something to conceal, why would their opponents not press for transparency? To analyze transitional justice, we build a model that explains why uncompromised politicians might avoid a transparency regime, which could signal to the voters that they are clean. We model the interaction between an incumbent, an opposition leader, a strategic blackmailer, and voters who know that the opposition politician may be compromised. The incumbent can implement a transparency regime, which would force out a compromised opponent and thus make blackmail impossible. We show that, instead, she might strategically opt for no transparency that keeps all skeletons of the ancien regime in the closet, as it is easier to defeat a potentially compromised opponent. We corroborate our results using original data from the Global Transitional Justice Dataset combined with data on elections, incumbency, and successor autocrat status in post-communist Europe.
    Keywords: transitional justice, transparency regime, blackmail, signaling
    JEL: P26 D82
    Date: 2020
  6. By: Komal Malik; Debasis Mishra
    Abstract: We consider a combinatorial auction model where preferences of agents over bundles of objects and payments need not be quasilinear. However, we restrict the preferences of agents to be dichotomous. An agent with dichotomous preference partitions the set of bundles of objects as acceptable} and unacceptable, and at the same payment level, she is indifferent between bundles in each class but strictly prefers acceptable to unacceptable bundles. We show that there is no Pareto efficient, dominant strategy incentive compatible (DSIC), individually rational (IR) mechanism satisfying no subsidy if the domain of preferences includes all dichotomous preferences. However, a generalization of the VCG mechanism is Pareto efficient, DSIC, IR and satisfies no subsidy if the domain of preferences contains only positive income effect dichotomous preferences. We show the tightness of this result: adding any non-dichotomous preference (satisfying some natural properties) to the domain of quasilinear dichotomous preferences brings back the impossibility result.
    Date: 2020–09
  7. By: Matthew J. Walker (Durham University Business School); Elena Katok (Naveen Jindal School of Management, University of Texas at Dallas); Jason Shachat (Durham University Business School)
    Abstract: When product quality is unverifiable by third parties, enforceable contracts that condition price upon quality are not feasible. If higher quality is also costly to deliver, moral hazard by sellers flourishes, particularly when procurement is via a competitive auction process. Retainage is a contractual mechanism that presents a solution to the third-party unverifiability problem, by setting aside a portion of the purchase price. After delivery, the buyer has sole discretion over the amount of retainage money that is released to the seller. While generally a feasible contract form to implement, retainage introduces a moral hazard for the buyer. We use laboratory experiments to investigate how and when retainage might be successfully used to facilitate trust and trustworthiness in procurement contracts. We observe that retainage induces a significant improvement in product quality when there are some trustworthy buyers in the population, consistent with a model of fair payment norms that we develop. This improvement is realized at the cost of increased buyer-seller profit inequalities. We also observe that at high levels of retainage, there is a welfaredecreasing market unraveling in which sellers do not bid on contracts. Our results imply that retainage incentives can mitigate the tension between competition and cooperation arising from reverse auctions, but only at appropriate levels of retainage
    Keywords: trust, procurement, reverse auction, retainage, moral hazard
    JEL: C92 L15 D86
    Date: 2020
  8. By: Itai Ashlagi; Mark Braverman; Clayton Thomas; Geng Zhao
    Abstract: We study the stable marriage problem in two-sided markets with randomly generated preferences. We consider agents on each side divided into a constant number of "soft tiers", which intuitively indicate the quality of the agent. Specifically, every agent within a tier has the same public score, and agents on each side have preferences independently generated proportionally to the public scores of the other side. We compute the expected average rank which agents in each tier have for their partners in the men-optimal stable matching, and prove concentration results for the average rank in asymptotically large markets. Furthermore, we show that despite having a significant effect on ranks, public scores do not strongly influence the probability of an agent matching to a given tier of the other side. This generalizes results of [Pittel 1989] which correspond to uniform preferences. The results quantitatively demonstrate the effect of competition due to the heterogeneous attractiveness of agents in the market, and we give the first explicit calculations of rank beyond uniform markets.
    Date: 2020–09
  9. By: Guerdjikova, A.; Quiggin, J.
    Abstract: We consider an infinite-horizon economy with differential awareness in the form of coarsening. For such economies, we propose an equilibrium concept hich requires agents' consumption to be measurable w.r.t. the individual awareness partitions. We illustrate how the obtained equilibrium allocations observationally differ from those in economies with full awareness. In particular, economies with differential awareness can exhibit (i) lack of insurance against idiosyncratic risk; (ii) partial insurance against aggregate risk; (iii) biased state prices even when beliefs are correct and (iv) overpricing of assets which pay on events with low aggregate payoffs. We next adapt the results of Guerdjikova and Quiggin (2019 a) to show that agents with different levels of awareness can survive and influence prices in the limit. In this sense, the characteristics identified above would persist in the long-run. Moreover, differential awareness can lead to belief heterogeneity even in the limit. This is in contrast with the classical result of Blume and Easley (2006) stating that only agents with beliefs closest to the truth can survive. Finally, we examine the welfare implications of bounded awareness in the sense of Gilboa, Samuelson and Schmeidler (2014) and Blume et al. (2018). If an increase in awareness comes at the cost of wrong beliefs over the larger state-space, bounded awareness can be welfare-improving, both from an individual and from a social point of view. In this sense, heuristics which constrain agents to invest in "assets they understand" can be ecologically rational in the sense of Gigerenzer (2007) and improve the stability of financial markets by allowing a larger set of agents to survive.
    JEL: D81 D83 D53
    Date: 2020
  10. By: Ohnishi, Kazuhiro
    Abstract: This paper first examines a price-setting mixed duopoly game with production subsidies where a public firm acts as a leader against a private firm. Second, the paper examines a price-setting duopoly game with production subsidies where the public firm remains a leader after privatization. Third, the paper compares the equilibrium values for private leadership with those for public leadership.
    Keywords: Price competition; Subsidy; Privatization; Mixed Stackelberg duopoly; Privatized Stackelberg duopoly
    JEL: C72 D21 L32
    Date: 2020–09–10
  11. By: Sergei Mikhalishchev
    Abstract: This paper studies a welfare maximization problem with heterogeneous agents. A social planner designs a menu of choices for agents who misperceive either the properties of options or their own preferences. When agents misperceive the true properties of alternatives, it is optimal to limit a menu when the probability of a mistaken choice is moderately high. Additionally, it could be optimal to construct the menu with more distinct alternatives. However, when agents misperceive their own tastes, it is optimal to limit choice only when agents choose randomly, and to propose alternatives that are more similar when there is a greater probability of agents making a mistake.
    Keywords: discrete choice; optimal menu; bounded rationality; welfare analyses;
    JEL: D30 D60 D81 H80
    Date: 2020–09
  12. By: Marina Agranov (Caltech - Division of Humanities and Social Sciences); Ran Eilat (Ben-Gurion University - Department of Economics); Konstantin Sonin (University of Chicago - Harris School of Public Policy)
    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 elitesÕ endorsement of potentially biased candidates. When inequality is high, the elitesÕ informational advantage is minimized by the votersÕ 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: trust, inequality, political economy, cheap talk, information club
    JEL: D72 D83
    Date: 2020
  13. By: Harry Pei; Bruno Strulovici
    Abstract: We present a model for the equilibrium frequency of offenses and the informativeness of witness reports when potential offenders can commit multiple offenses and witnesses are subject to retaliation risk and idiosyncratic reporting preferences. We compare two ways of handling multiple accusations discussed in legal scholarship: (i) When convictions are based on the probability that the defendant committed at least one, unspecified offense and entail a severe punishment, potential offenders induce negative correlation in witnesses' private information, which leads to uninformative reports, information aggregation failures, and frequent offenses in equilibrium. Moreover, lowering the punishment in case of conviction can improve deterrence and the informativeness of witnesses' reports. (ii) When accusations are treated separately to adjudicate guilt and conviction entails a severe punishment, witness reports are highly informative and offenses are infrequent in equilibrium.
    Date: 2020–09
  14. By: Modibo Camara; Jason Hartline; Aleck Johnsen
    Abstract: A rich class of mechanism design problems can be understood as incomplete-information games between a principal who commits to a policy and an agent who responds, with payoffs determined by an unknown state of the world. Traditionally, these models require strong and often-impractical assumptions about beliefs (a common prior over the state). In this paper, we dispense with the common prior. Instead, we consider a repeated interaction where both the principal and the agent may learn over time from the state history. We reformulate mechanism design as a reinforcement learning problem and develop mechanisms that attain natural benchmarks without any assumptions on the state-generating process. Our results make use of novel behavioral assumptions for the agent -- centered around counterfactual internal regret -- that capture the spirit of rationality without relying on beliefs.
    Date: 2020–09
  15. By: Wioletta Dziuda (University of Chicago - Harris School of Public Policy); William G. Howell (University of Chicago - Harris School of Public Policy)
    Abstract: We study a model that characterizes the conditions under which past misbehavior becomes the subject of present scandal, with consequences for both the implicated politician and the parties that work with him. In the model, both authentic and fake scandals arise endogenously within a political framework involving two parties that trade off benefits of continued collaboration with a suspect politician against the possibility of reputational fallout. Rising polarization between the two parties, we show, increases the likelihood of scandal while decreasing its informational value. Scandals that are triggered by only the opposing party, we also find, are reputationally damaging to both parties and, in some instances, reputationally enhancing to the politician. The model also reveals that jurisdictions with lots of scandals are not necessarily beset by more misbehavior. Under well-defined conditions, in fact, scandals can be a sign of political piety.
    Date: 2020

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