nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒10‒26
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Debunking Rumors in Networks By Luca P. Merlino; Paolo Pin; Nicole Tabasso
  2. Revealed preference analysis with framing effects By Goldin, Jacob; Reck, Daniel
  3. Selling Two Identical Objects By Sushil Bikhchandani; Debasis Mishra
  4. Should the Ransomware be Paid? By Rui Fang; Maochao Xu; Peng Zhao
  5. On the Private and Social Value of Consumer Data in Vertically-Integrated Platform Markets By Jorge Padilla; Salvatore Piccolo; Helder Vasconcelos
  6. Bayesian Learning in Dynamic Non-atomic Routing Games By Emilien Macault; Marco Scarsini; Tristan Tomala
  7. Optimal Voting Mechanisms on Generalized Single-Peaked Domains By Tobias Rachidi
  8. Upstream competition, exclusive content provision, and vertical integration in media markets By Kiho Yoon
  9. Team Formation in Coordination Games with Fixed Neighborhoods By Alejandro Caparrós; Esther Blanco; Philipp Buchenauer; Michael Finus
  10. A Theory of Small Campaign Contributions By Laurent Bouton; Micael Castanheira De Moura; Allan Drazen
  11. Grantmaking By Marco Ottaviani
  12. Optimal Echo Chambers By Gabriel Martinez; Nicholas H. Tenev
  13. Optimal Insurance under Maxmin Expected Utility By Corina Birghila; Tim J. Boonen; Mario Ghossoub
  14. The quest for the perfect auction By Committee, Nobel Prize

  1. By: Luca P. Merlino; Paolo Pin; Nicole Tabasso
    Abstract: We study the diffusion of a true and a false message (the rumor) in a social network. Upon hearing a message, individuals may believe it, disbelieve it, or debunk it through costly verification. Whenever the truth survives in steady state, so does the rumor. Online social communication exacerbates relative rumor prevalence as long as it increases homophily or verification costs. Our model highlights that successful policies in the fight against rumors increase individuals' incentives to verify.
    Date: 2020–10
  2. By: Goldin, Jacob; Reck, Daniel
    Abstract: In many settings, decision-makers’ behavior is observed to vary based on seemingly arbitrary factors. Such framing effects cast doubt on the welfare conclusions drawn from revealed preference analysis. We relax the assumptions underlying that approach to accommodate settings in which framing effects are present. Plausible restrictions of varying strength permit either partial- or point-identification of preferences for the decision-makers who choose consistently across frames. Recovering population preferences requires understanding the empirical relationship between decision-makers’ preferences and their sensitivity to the frame. We develop tools for studying this relationship and illustrate them with data on automatic enrollment into pension plans.
    JEL: C10 D60 I30
    Date: 2019–10–11
  3. By: Sushil Bikhchandani; Debasis Mishra
    Abstract: It is well-known that optimal (i.e., revenue-maximizing) selling mechanisms in multidimensional type spaces may involve randomization. We study mechanisms for selling two identical, indivisible objects to a single buyer. We analyze two settings: (i) decreasing marginal values (DMV) and (ii) increasing marginal values (IMV). Thus, the two marginal values of the buyer are not independent. We obtain sufficient conditions on the distribution of buyer values for the existence of an optimal mechanism that is deterministic. In the DMV model, we show that under a well-known condition, it is optimal to sell the first unit deterministically. Under the same sufficient condition, a bundling mechanism (which is deterministic) is optimal in the IMV model. Under a stronger sufficient condition, a deterministic mechanism is optimal in the DMV model. Our results apply to heterogenous objects when there is a specified sequence in which the two objects must be sold.
    Date: 2020–09
  4. By: Rui Fang; Maochao Xu; Peng Zhao
    Abstract: Ransomware has emerged as one of the most concerned cyber risks in recent years, which has caused millions of dollars monetary loss over the world. It typically demands a certain amount of ransom payment within a limited timeframe to decrypt the encrypted victim's files. This paper explores whether the ransomware should be paid in a novel game-theoretic model from the perspective of Bayesian game. In particular, the new model analyzes the ransom payment strategies within the framework of incomplete information for both hacker and victim. Our results show that there exist pure and randomized Bayesian Nash equilibria under some mild conditions for the hacker and victim. The sufficient conditions that when the ransom should be paid are presented when an organization is compromised by the ransomware attack. We further study how the costs and probabilities of cracking or recovering affect the expected payoffs of the hacker and the victim in the equilibria. In particular, it is found that the backup option for computer files is not always beneficial, which actually depends on the related cost. Moreover, it is discovered that fake ransomware may be more than expected because of the potential high payoffs. Numerical examples are also presented for illustration.
    Date: 2020–10
  5. By: Jorge Padilla (Compass Lexecon); Salvatore Piccolo (Università di Bergamo, Compass Lexecon and CSEF); Helder Vasconcelos (Porto University and Compass Lexecon)
    Abstract: We characterize and compare the private and social incentives to collect consumer data by a vertically-integrated online intermediary who competes with third-party sellers listed on its platform and is required by regulation to share with rivals all the information it gathers. With linear intermediation fees and price competition, the intermediary over-invests in accuracy compared to the social optimum when the intra-platform competition is sufficiently weak and when demand is not too responsive to quality. By contrast, the intermediary tends to under-invest in accuracy when the intra-platform competition is strong enough, and demand is sufficiently responsive to quality. With quantity competition, the intermediary always over-invests in accuracy. Importantly, when consumers exhibit privacy concerns, the over-investment problem worsens, whereas the under-investment problem mitigates. We also investigate the impact of alternative (non-linear) contractual arrangements.
    Keywords: Consumer Data, Competition, Information Accuracy, Platforms, Privacy, Value of Information, Vertical Integration.
    JEL: D47 D85 L5 L81 M3
    Date: 2020–10–11
  6. By: Emilien Macault; Marco Scarsini; Tristan Tomala
    Abstract: We consider a discrete-time nonatomic routing game with variable demand and uncertain costs. Given a fixed routing network with single origin and destination, the costs functions on edges depend on some uncertain persistent state parameter. Every period, a variable traffic demand routes through the network. The experienced costs are publicly observed and the belief about the state parameter is Bayesianly updated. This paper studies the dynamics of equilibrium and beliefs. We say that there is strong learning when beliefs converge to the truth and there is weak learning when equilibrium flows converge to those under complete information. Our main result is a characterization of the networks for which learning occurs for all increasing cost functions, given highly variable demand. We prove that these networks have a series-parallel structure and provide a counterexample to prove that the condition is necessary.
    Date: 2020–09
  7. By: Tobias Rachidi
    Abstract: This paper studies the design of voting mechanisms in a setting with more than two alternatives and arbitrarily many voters who have generalized single-peaked preferences derived from median spaces as introduced in [Nehring and Puppe, 2007b]. This class of preferences is considerably larger than the well-known class of preferences that are single-peaked on a line. I characterize the voting rules that maximize ex-ante utilitarian welfare among all social choice functions satisfying strategy-proofness, anonymity, and surjectivity. The optimal mechanism takes the form of voting by properties, that is, the social choice is determined through a collection of binary votes on subsets of alternatives involving qualified majority requirements that reflect the characteristics of these subsets of alternatives. I illustrate my general optimality result by means of applications including, for instance, collective choice when preferences are single-peaked with respect to a tree. Finally, I emphasize the importance of my characterization result for the analysis of stable constitutions.
    Keywords: Voting; Generalized Single-Peaked Preferences; Mechanism Design
    JEL: D71 D72 D82
    Date: 2020–09
  8. By: Kiho Yoon (Department of Economics, Korea University 145 Anam-ro, Seongbuk-gu, Seoul, Korea 02841)
    Abstract: With a multilateral vertical contracting model, we examine the contractual form and the vertical structure in media markets. We analyze the trade of content by the Nash bargaining solution and the downstream competition by the Hotelling location model. We show that the possibility of exclusive contracts rises when the value of the premium content increases, the degree of horizontal differentiation in the downstream market decreases, the importance of advertising revenue decreases, and the relative bargaining power of upstream firm decreases. We also show that vertical separation (full vertical integration, respectively) is plausible when the relative bargaining power of upstream firm is strong (weak, respectively).
    Keywords: content provision, exclusive contract, vertical integration, media market, video programming.
    JEL: D43 L42 L82
    Date: 2020
  9. By: Alejandro Caparrós; Esther Blanco; Philipp Buchenauer; Michael Finus
    Abstract: This study contributes to the recent experimental literature addressing the role of team formation in overcoming coordination failure in weakest-link games. We investigate the endogenous formation of teams in fixed neighborhoods in which it is not possible to exclude players from influencing the weakest-link. Our experimental results show that team formation helps in overcoming the coordination problem, raises equilibrium provision levels, but falls short of providing the Pareto-optimal contribution. As the problem of multiplicity of Nash equilibria in weakest-link games is exacerbated when team formation is introduced, we provide Quantal Response Equilibrium (QRE) and Agent QRE analyses. The analysis demonstrates that team formation would solve the problem with (almost) perfectly rational agents, but also that our experimental results are consistent with (A)QRE models under bounded rationality.
    Keywords: Weakest-link; Coalition Formation; Experimental Economics; Quantal Response Equilibrium; Agent Quantal Response Equilibrium
    JEL: C72 C91 C92 H41
    Date: 2020–07
  10. By: Laurent Bouton; Micael Castanheira De Moura; Allan Drazen
    Abstract: We propose a theory of small campaign contributions driven by an electoral motive, i.e. the desire to influence election outcomes. Though small donors take as given the actions of others, strategic interactions induce patterns consistent with empirical findings, e.g. election closeness and underdog effects. We also study different forms of campaign finance laws, and show why caps should be combined with a progressive tax on contributions. Next, we introduce large donors and show how several conclusions in the literature may be modified by the interaction with small donors. Throughout, we discuss the empirical implications of our findings.
    Keywords: Campaign contributions; Small donors; Campaign finance laws; Elections; Income inequality
    JEL: D71 D72 H31
    Date: 2020–10
  11. By: Marco Ottaviani
    Abstract: The paper develops a foundational model of the decentralized allocation of subsidies through competitive grantmaking. Casting the problem in a simple supply and demand framework, we characterize the equilibrium acceptance standard and applications. The equilibrium success rate (grants over applications) decreases in the budget, consistent with some recent evidence, if and only if the distribution of types has decreasing hazard rate. In all stable equilibria resulting when funds are allocated across fields proportionally to applications—as well as under apportionment rules in a general class characterized in the paper—an increase in noise in the evaluation in a field perversely raises applications in that field and reduces applications in all the other fields. We characterize how the design of allocation rules can be modified to improve welfare.
    Date: 2020
  12. By: Gabriel Martinez; Nicholas H. Tenev
    Abstract: This paper studies some benefits of ignoring those who disagree with you. We model a decision maker who draws a signal about the (real-valued) state of the world from a collection of unbiased sources of heterogeneous quality. Exclusively sampling signals close to the prior expectation can be beneficial, as they are more likely high quality. Since echo chambers are a rational response to uncertain information quality, eliminating them can backfire. Signals close to the prior expectation can move beliefs further than more contrary views; limiting the ability to ignore opposing views can make beliefs less accurate and reduce the extent to which signals are heeded.
    Date: 2020–10
  13. By: Corina Birghila; Tim J. Boonen; Mario Ghossoub
    Abstract: We examine a problem of demand for insurance indemnification, when the insured is sensitive to ambiguity and behaves according to the Maxmin-Expected Utility model of Gilboa and Schmeidler (1989), whereas the insurer is a (risk-averse or risk-neutral) Expected-Utility maximizer. We characterize optimal indemnity functions both with and without the customary ex ante no-sabotage requirement on feasible indemnities, and for both concave and linear utility functions for the two agents. This allows us to provide a unifying framework in which we examine the effects of the no-sabotage condition, marginal utility of wealth, belief heterogeneity, as well as ambiguity (multiplicity of priors) on the structure of optimal indemnity functions. In particular, we show how the singularity in beliefs leads to an optimal indemnity function that involves full insurance on an event to which the insurer assigns zero probability, while the decision maker assigns a positive probability. We examine several illustrative examples, and we provide numerical studies for the case of a Wasserstein and a Renyi ambiguity set.
    Date: 2020–10
  14. By: Committee, Nobel Prize (Nobel Prize Committee)
    Abstract: Every day, auctions distribute astronomical values between buyers and sellers. This year’s Laureates, Paul Milgrom and Robert Wilson, have improved auction theory and invented new auction formats, benefitting sellers, buyers and taxpayers around the world
    Keywords: Auctions
    JEL: D44
    Date: 2020–10–12

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.