nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒11‒16
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information Acquisition and Financial Advice By Gülen Karakoç; Marco Pagnozzi; Salvatore Piccolo; Giovanni W. Puopolo
  2. Time consistent equilibria in dynamic models with recursivepayoffs and behavioral discounting By Lukasz Balbus; Kevin Reffett; Lukasz Wozny
  3. Introducing media in a model of electoral competition with candidate quality By Gerard Domènech i Gironell
  4. Endowments-regarding preferences By Van Nguyen
  5. Interim Rationalizable Implementation of Functions By Kunimoto, Takashi; Saran, Rene; Serrano, Roberto
  6. Agenda-Setter Power Dynamics: Learning in Multi-Issue Bargaining By Renee Bowen; Ilwoo Hwang; Stefan Krasa
  7. Social Networks, Confirmation Bias and Shock Elections By Gallo, E.; Langtry, A.
  8. A Taxonomy of Non-dictatorial Domains By Chatterji, Shurojit; Zeng, Huaxia
  9. A Continuous-Time Model of Self-Protection By Sarah Bensalem; Nicolás Hernández Santibáñez; Nabil Kazi-Tani
  10. Rent dissipation in share contests By Alex Dickson; Ian MacKenzie; Petros G Sekeris
  11. Epistemological Mechanism Design (Revised version of CARF-F-496) By Hitoshi Matsushima; Shunya Noda
  12. Robust Moral Hazard with Distributional Ambiguity By Li, Zhaolin
  13. Naive analytics equilibrium By Ron Berman; Yuval Heller
  14. Per Unit and Ad Valorem Royalties in a Patent Licensing Game By Montinaro, Marta; Pal, Rupayan; Scrimitore, Marcella
  15. Pricing, competition and content for internet service providers By Key, Peter; Steinberg, Richard

  1. By: Gülen Karakoç (Università degli studi di Milano); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università di Bergamo and CSEF); Giovanni W. Puopolo (Università di Napoli Federico II and CSEF)
    Abstract: This paper studies the interplay between the investor’s incentives to delegate her asset allocation choice to a biased financial advisor, and the advisor’s decision to acquire information about multiple characteristics of the risky asset. We show that, to prevent unprofitable investments, the investor may delegate to the advisor imposing a cap on the amount of wealth that the advisor can invest. This cap (i) is decreasing in the magnitude of the conflict of interests between the investor and the advisor and (ii) may be lower when the advisor possesses more information. Interestingly, although the investor always prefers a more-informed advisor, the advisor may choose not to acquire full information, and reducing the conflict of interests with the investor may actually induce the advisor to acquire less information.
    Keywords: Financial Advice, Asset-Allocation, Delegation, Information Acquisition.
    JEL: G11 G21 D40 D82 D83
    Date: 2019–11–04
  2. By: Lukasz Balbus; Kevin Reffett; Lukasz Wozny
    Abstract: We prove existence of time consistent equilibria in a wide class of dynamic models with recursive payoffs and generalized discounting involving both behavioral and normative applica-tions. Our generalized Bellman equation method identifies and separates both: recursive andstrategic aspects of the equilibrium problem and allows to precisely determine the sufficientassumptions on preferences and stochastic transition to establish existence. In particular we show existence of minimal state space stationary Markov equilibrium (a time-consistent solution) in a deterministic model of consumption-saving with beta-delta discounting andits generalized versions involving magnitude effects, non-additive payoffs, semi-hyperbolic or hyperbolic discounting (over possibly unbounded state and unbounded above reward space). We also provide an equilibrium approximation method for a hyperbolic discounting model.
    Keywords: Behavioral discounting; Time consistency; Markov equilibrium; Existence; Approximation; Generalized Bellman equation; Hyperbolic discounting; Semi-hyperbolic discounting; Quasi-hyperbolic discounting
    JEL: C61 C73
    Date: 2020–11
  3. By: Gerard Domènech i Gironell (Universitat de Barcelona)
    Abstract: This work proposes and studies a two candidate model of electoral competition with candidate quality and media. The role of media is to inform voters about the quality of each candidate. We assume that there are two non-strategic media outlets, each one with a different ideal policy (there is a leftist media outlet and a rightist one), and that both of them transmit lower quality for a candidate the further from their ideal policy the policy the candidate proposes is. We also assume that the rightist media outlet has greater coverage, in the sense that it informs neutral voters and voters slightly on the left side of the political spectrum. We study the model under the classical assumption of risk-averse voters. Classical results concerning PSNE generally hold with a "media bias". We extend and characterize in our setting the MSNE found in Aragonés and Xefteris (2012), which sometimes fails to exist in our model.
    Keywords: Electoral competition, Median voter, Media manipulation, Candidate quality.
    JEL: C72 C82 D72
    Date: 2020
  4. By: Van Nguyen (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We consider a pure exchange economy model with endowments-regarding regarding preferences, which means that demand functions and preferences depend not only on the own consumption of a consumer but also on other consumer's endowments. First, we study the particular case called wealth concern by Balasko (2015) when the consumers care about the wealth of the others. We generalise the result of Balasko by showing that most properties of the standard general equilibrium model without externalities are robust with respect to these kind of externalities if the external effect produced by only one agent is a wealth effect and not all. Next, we clarify under which sufficient conditions those properties hold true under the most general form of endowments externalities. Furthermore, we generalise the above sufficient condition to obtain generic regularity results in the economies with consumption and endowments externalities.
    Keywords: general equilibrium,regular economy,Endowment externalities,other-regarding preferences
    Date: 2020–07
  5. By: Kunimoto, Takashi (School of Economics, Singapore Management University); Saran, Rene (University of Cincinnati); Serrano, Roberto (Brown University)
    Abstract: This paper investigates rationalizable implementation of social choice functions (SCFs) in incomplete information environments. We identify weak interim rationalizable monotonicity (weak IRM) as a novel condition and show that weak IRM is a necessary and almost sufficient condition for rationalizable implementation. We show by means of an example that interim rationalizable monotonicity (IRM), found in the literature, is strictly stronger than weak IRM as its name suggests, and that IRM is not necessary for rationalizable implementation, as had been previously claimed. The same example also demonstrates that Bayesian monotonicity, the key condition for full Bayesian implementation, is not necessary for rationalizable implementation. This implies that rationalizable implementation can be more permissive than Bayesian implementation: one can exploit the fact that there are no mixed Bayesian equilibria in the implementing mechanism.
    Keywords: Bayesian incentive compatibility; bayesian monotonicity; weak interim rationalizable monotonicity; interim rationalizable monotonicity; implementation; rationalizability
    JEL: C72 D78 D82
    Date: 2020–10–17
  6. By: Renee Bowen; Ilwoo Hwang; Stefan Krasa
    Abstract: We study a dynamic bargaining model between a fixed agenda-setter and responder over successive issues. If the responder rejects the setter’s proposal, the setter can attempt to assert her will to implement her ideal and will succeed with a probability that depends on her “personal power”. The players learn about the setter’s power as gridlock persists. Gridlock occurs when the setter’s perceived power is either too high or too low, and the players reach compromise in an intermediate interval of beliefs. The presence of “difficult” issues can induce more compromise as the players have incentives to avoid learning.
    JEL: C78 D72 D74 D83
    Date: 2020–10
  7. By: Gallo, E.; Langtry, A.
    Abstract: In recent years online social networks have become increasingly prominent in political campaigns and, concurrently, several countries have experienced shock election outcomes. This paper proposes a model that links these two phenomena. In our set-up, the process of learning from others on a network is influenced by confirmation bias, i.e. the tendency to ignore contrary evidence and interpret it as consistent with one's own belief. When agents pay enough attention to themselves, confirmation bias leads to slower learning in any symmetric network, and it increases polarization in society. We identify a subset of agents that become more/less influential with confirmation bias. The socially optimal network structure depends critically on the information available to the social planner. When she cannot observe agents' beliefs, the optimal network is symmetric, vertex-transitive and has no self-loops. We explore the implications of these results for electoral outcomes and media markets. Confirmation bias increases the likelihood of shock elections, and it pushes fringe media to take a more extreme ideology.
    Keywords: social learning, confirmation bias, network, elections, media
    JEL: C63 D72 D83 D85 D91 L15
    Date: 2020–11–02
  8. By: Chatterji, Shurojit (School of Economics, Singapore Management University); Zeng, Huaxia (Shanghai University of Finance and Economics)
    Abstract: We provide an exhaustive classification of all preference domains that allow the design of unanimous social choice functions (henceforth, rules) that are non-dictatorial and strategy-proof. This taxonomy is based on a richness assumption and employs a simple property of two-voter rules called invariance. The preference domains that form the classification are semi-single-peaked domains (introduced by Chatterji et al. (2013)) and semi-hybrid domains (introduced here) which are two appropriate weakenings of the single-peaked domains, and which, more importantly, are shown to allow strategy-proof rules to depend on non-peak information of voters’ preferences. As a refinement of the classification, single-peaked domains and hybrid domains emerge as the only preference domains that force strategy-proof rules to be determined completely by the peaks of voters’ preferences. We also provide characterization results for strategy-proof rules on these domains.
    Keywords: Strategy-proofness; invariance; path-connectedness; (semi)-singlepeaked preference; (semi)-hybrid preference
    JEL: D71
    Date: 2020–10–27
  9. By: Sarah Bensalem; Nicolás Hernández Santibáñez (UCHILE - Universidad de Chile = University of Chile [Santiago]); Nabil Kazi-Tani
    Abstract: This paper deals with an optimal linear insurance demand model, where the protection buyer can also exert time-dynamic costly prevention effort to reduce her risk exposure. This is expressed as a stochastic control problem, in which the agent maximizes an exponential utility of her terminal wealth. We assume that the effort reduces the intensity of the jump arrival process, and we interpret this as dynamic self-protection. We solve the problem using a dynamic programming principle approach, and we provide a representation of the value function using a particular backward SDE. This allows us to solve the problem explicitly: we identify the dynamic certainty equivalent of the agent, and prove that the dynamic effort is actually constant, for a large class of loss processes. This shows in particular that the Lévy property is preserved under exponential utility maximization. We also characterize the constant effort as a the unique minimizer of an explicit Hamiltonian, from which we can determine the optimal effort in particular cases. Finally, after studying the dependence of the BSDE on the linear insurance contract parameter, we prove the existence of an optimal linear cover, that is not necessarily zero or full insurance.
    Keywords: Self-Protection,Prevention effort,Dynamic programming,Continuation utility,Backward SDEs
    Date: 2020–10–22
  10. By: Alex Dickson (Department of Economics, University of Strathclyde); Ian MacKenzie (School of Economics, University of Queensland); Petros G Sekeris (Montpellier Business School)
    Abstract: This article investigates rent dissipation—the total costs of rent seeking in relation to the value of the contested rent—in share contests. We consider preferences that are more general than usually assumed in the literature, which allow for contestants to have diminishing marginal utility. With sufficiently concave preferences the equilibrium will feature over-dissipation if the rent is small, and under-dissipation if the rent is large: if contestants have strong diminishing marginal utility and they are contesting a small rent they are highly sensitive to changes in their allocation of the rent so are relatively effortful in contesting it; by contrast when the rent is large they are less effortful relative to the size of the rent. Thus, the inclusion of diminishing marginal utility allows us to reconcile the Tullock paradox—where rent-seeking levels are observed to be relatively small compared to the contested rent—with observed over-dissipation of rents in, for example, experimental settings. We also propose a more general rent dissipation measure that applies to any contest and is suitable for general preferences.
    Keywords: Rent seeking; rent dissipation; share contests.
    JEL: C72 D72 H40
    Date: 2020–10
  11. By: Hitoshi Matsushima (University of Tokyo); Shunya Noda (University of British Columbia)
    Abstract: This study demonstrates a new approach to mechanism design from an epistemological perspective. We introduce an epistemological type space in which agents are either selfish or honest, and show that a slight possibility of honesty in higher-order beliefs motivates all selfish agents to behave sincerely. Specifically, we consider a situation in which a central planner attempts to elicit correct information from informed agents through mutual monitoring. We assume severe restrictions on incentive device availability: neither public monitoring nor allocation rules are available. Thus, the central planner uses only monetary payment rules. If “all agents are selfish†is common knowledge, eliciting correct information as unique equilibrium behavior is generally impossible. However, we show a very permissive result in our epistemological model by designing a quadratic scoring rule as the monetary payment rule: the central planner can elicit correct information from all agents as unique Bayes Nash equilibrium behavior if “all agents are selfish†is never common knowledge. This result holds even if honest agents are mostly motivated by monetary interest.
    Date: 2020–11
  12. By: Li, Zhaolin
    Abstract: We present a moral hazard model in which both the entrepreneur and investor face limited liability and employ a robust decision rule that maximizes their worst-case expected profit when distributional ambiguity exists. Applying strong duality, we reformulate the robust moral hazard model by introducing a new set of incentive compatibility constraints associated with choosing the most unfavourable distribution. We develop a one-step-ahead method using shadow prices for such probabilistic resources as mean and variance to characterize the robustly optimal contract and to improve the commonly used debt contract.
    Keywords: Debt contract; Moral hazard; Robust optimization
    Date: 2020–10–14
  13. By: Ron Berman; Yuval Heller
    Abstract: We study interactions with uncertainty about demand sensitivity. In our solution concept (1) firms choose seemingly-optimal strategies given the level of sophistication of their data analytics, and (2) the levels of sophistication form best responses to one another. Under the ensuing equilibrium firms underestimate price elasticities and overestimate advertising effectiveness, as observed empirically. The misestimates cause firms to set prices too high and to over-advertise. In games with strategic complements (substitutes), profits Pareto dominate (are dominated by) those of the Nash equilibrium. Applying the model to team production games explains the prevalence of overconfidence among entrepreneurs and salespeople.
    Date: 2020–10
  14. By: Montinaro, Marta; Pal, Rupayan; Scrimitore, Marcella
    Abstract: In a context of product innovation, we study two-part tariff licensing between a patentee and a potential rival which compete in a differentiated product market characterized by network externalities. The latter are shown to crucially affect the relative profitability of Cournot vs. Bertrand when a per unit royalty is applied. By contrast, we find that Cournot yields higher profits than Bertrand under ad valorem royalties, regardless of the strength of network effects.
    Keywords: Production Economics
    Date: 2020–11–05
  15. By: Key, Peter; Steinberg, Richard
    Abstract: We examine competition between two Internet Service Providers (ISPs), where the first ISP provides basic Internet service, while the second ISP provides Internet service plus content, i.e., enhanced service , where the first ISP can partner with a Content Provider to provide the same content as the second ISP. When such a partnering arrangement occurs, the Content Provider pays the first ISP a transfer price for delivering the content. Users have heterogeneous preferences, and each in general faces three options: (1) buy basic Internet service from the first ISP; (2) buy enhanced service from the second ISP; or (3) buy enhanced service jointly from the first ISP and the Content Provider. We derive results on the existence and uniqueness of a Nash equilibrium, and provide closed-form expressions for the prices, user masses, and profits of the two ISPs and the Content Provider. When the first ISP has the ability to choose the transfer price, then when congestion is linear in the load, it is never optimal for the first ISP to set a negative transfer price in the hope of attracting more revenue from additional customers desiring enhanced service. Conversely, when congestion is sufficiently super-linear, the optimal strategy for the first ISP is either to set a negative transfer price (subsidizing the Content Provider) or to set a high transfer price that shuts the Content Provider out of the market.
    Keywords: communication networks; competition; content provider; optimal pricing; Nash equilibrium; profit
    JEL: R14 J01
    Date: 2020–10–01

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