nep-mic New Economics Papers
on Microeconomics
Issue of 2020‒12‒21
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Common-Value Auction with State-Dependent Participation By Stephan Lauermann; Asher Wolinsky
  2. Overcoming Free-Riding in Bandit Games By Johannes Hörner; Nicolas Klein; Sven Rady
  3. The Robustness of Incomplete Penal Codes in Repeated Interactions. By Olivier GOSSNER
  4. Dynamically Consistent Menu Preferences By Youichiro Higashi; Kazuya Hyogo; Gil Riella
  5. Asymmetric Information and Delegated Selling By Maarten Janssen; Santanu Roy
  6. Testable Implications of Multiple Equilibria in Discrete Games with Correlated Types By Aureo de Paula; Xun Tang
  7. Competition, Politics, & Social Media By Benson Tsz Kin Leung; Pinar Yildirim
  8. Strategy-proof Popular Mechanisms By Mustafa O\u{g}uz Afacan; In\'acio B\'o
  9. Optimism leads to optimality: Ambiguity in network formation * By Péter Bayer; Ani Guerdjikova
  10. Choice Screen Auctions By Michael Ostrovsky
  11. Simple Mechanisms for Non-linear Agents By Yiding Feng; Jason Hartline; Yingkai Li
  12. Consumer Vulnerability and Behavioral Biases By Hanming Fang; Zenan Wu
  13. Optimally Imprecise Memory and Biased Forecasts By Rava Azeredo da Silveira; Yeji Sung; Michael Woodford
  14. A Theory of Elite-Biased Democracies By Raouf Boucekkine; Rodolphe Desbordes; Paolo Melindi-Ghidi
  15. Uncertain Commitment Power in a Durable Good Monopoly By Seres, Gyula
  16. Rational policymaking during a pandemic By Loic BERGER; Nicolas BERGER; Valentina BOSETTI; Itzhak GILBOA; Lars Peter HANSEN; Christopher JARVIS; Massimo MARINACCI; Richard D. Smith
  17. Optimally Controlling an Epidemic By Martin Gonzalez-Eiras; Dirk Niepelt
  18. Maximize Utility subject to R≤1: A Simple Price-Theory Approach to Covid-19 Lockdown and Reopening Policy By Eric Budish

  1. By: Stephan Lauermann; Asher Wolinsky
    Abstract: This paper analyzes a common-value, …rst-price auction with state-dependent participation. The number of bidders, which is unobservable to them, depends on the true value. For exogenously given participation patterns that involve many bidders in each state, the bidding equilibrium may be of a “pooling” type—with high probability, the winning bid is the same across states and is below the ex-ante expected value—or of a “partially revealing” type—with no signi…cant atoms in the winning bid distribu- tion and an expected winning bid increasing in the true value. Which of these forms will arise is determined by the likelihood ratio at the top of the signal distribution and the participation across states. When the state-dependent participation is endogenized as the strategic solicitation by an informed seller who bears a small cost for each solicited bidder, an equilibrium of the partially revealing type always exists and is unique of this type; for certain signal distributions there also exist equilibria of the pooling type.
    Keywords: Search, Auctions, Adverse Selection
    JEL: C78 D83
    Date: 2020–12
  2. By: Johannes Hörner; Nicolas Klein; Sven Rady
    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 (Markov perfect equilibrium). This is not an artifact of continuous time: we prove that efficient equilibria arise as limits of equilibria in the discrete-time game. Furthermore, it suffices to relax the solution concept to strongly symmetric equilibrium.
    Keywords: Two-Armed Bandit, Bayesian Learning, Strategic Experimentation, Strongly Symmetric Equilibrium
    JEL: C73 D83
    Date: 2020–12
  3. By: Olivier GOSSNER (CNRS – CREST, Institut Polytechnique de Paris and Department of Mathematics, London School of Economics.)
    Abstract: We study the robustness of equilibria with regards to small payoff perturbations of the dynamic game. We show that complete penal codes, that specify players’ strategies after every history, have only limited robustness. We define incomplete penal codes as partial descriptions of equilibrium strategies and introduce a notion of robustness for incomplete penal codes. We prove a Folk Theorem in robust incomplete codes that generates a Folk Theorem in a class of stochastic games.
    Keywords: Repeated games, stochastic games, Folk Theorem, robust equilibrium.
    Date: 2020–12–09
  4. By: Youichiro Higashi (Faculty of Economics, Okayama University); Kazuya Hyogo (Faculty of Economics, Ryukoku University); Gil Riella (School of Public Policy and Government, Getulio Vargas Foundation)
    Abstract: We provide a unified analysis of dynamically consistent menu preferences that may exhibit preference for flexibility, preference for commitment, or both. Our work generalizes prior results, which investigated this problem for an agent who always exhibits preference for flexibility. By using two types of consistency conditions, we characterize an agent with a subjective state space who reacts to information about her subjective states in a dynamically consistent way. We apply our reuslts to the multiple temptations and the anticipating regret models.
    Keywords: Dynamic consistency; Preference for flexibility; Preference for commitment; Bayesian updating; Subjective state space
    JEL: D11 D81 D91
    Date: 2020–12
  5. By: Maarten Janssen (University of Vienna); Santanu Roy (Southern Methodist University)
    Abstract: Asymmetric information about product quality can create incentives for a privately informed manufacturer to sell to uninformed consumers through a retailer and to maintain secrecy of upstream pricing. Delegating retail price setting to an intermediary generates pooling equilibria that avoid signaling distortions associated with direct selling even under reasonable restrictions on beliefs; these beliefs can also prevent double marginalization by the retailer. Expected profit, consumer surplus and social welfare can all be higher with intermediated selling. However, if secrecy of upstream pricing cannot be maintained, selling through a retailer can only lower the expected profit of the manufacturer.
    Keywords: Asymmetric Information; Product Quality; Delegation, Intermediary, Signaling.
    JEL: L13 L15 D82 D43
    Date: 2020–12
  6. By: Aureo de Paula; Xun Tang
    Abstract: We study testable implications of multiple equilibria in discrete games with incomplete information. Unlike de Paula and Tang (2012), we allow the players' private signals to be correlated. In static games, we leverage independence of private types across games whose equilibrium selection is correlated. In dynamic games with serially correlated discrete unobserved heterogeneity, our testable implication builds on the fact that the distribution of a sequence of choices and states are mixtures over equilibria and unobserved heterogeneity. The number of mixture components is a known function of the length of the sequence as well as the cardinality of equilibria and unobserved heterogeneity support. In both static and dynamic cases, these testable implications are implementable using existing statistical tools.
    Date: 2020–12
  7. By: Benson Tsz Kin Leung; Pinar Yildirim
    Abstract: An increasing number of politicians are relying on cheaper, easier to access technologies such as online social media platforms to communicate with their constituency. These platforms present a cheap and low-barrier channel of communication to politicians, potentially intensifying political competition by allowing many to enter political races. In this study, we demonstrate that lowering costs of communication, which allows many entrants to come into a competitive market, can strengthen an incumbent's position when the newcomers compete by providing more information to the voters. We show an asymmetric bad-news-good-news effect where early negative news hurts the challengers more than the positive news benefit them, such that in aggregate, an incumbent politician's chances of winning is higher with more entrants in the market. Our findings indicate that communication through social media and other platforms can intensify competition, how-ever incumbency advantage may be strengthened rather than weakened as an outcome of higher number of entrants into a political market.
    Date: 2020–12
  8. By: Mustafa O\u{g}uz Afacan; In\'acio B\'o
    Abstract: We consider the allocation of indivisible objects when agents have preferences over their own allocations, but share the ownership of the resources to be distributed. Examples might include seats in public schools, faculty offices, and time slots in public tennis courts. Given an allocation, groups of agents who would prefer an alternative allocation might challenge it. An assignment is popular if it is not challenged by another one. By assuming that agents' ability to challenge allocations can be represented by weighted votes, we characterize the conditions under which popular allocations might exist and when these can be implemented via strategy-proof mechanisms. Serial dictatorships that use orderings consistent with the agents' weights are not only strategy-proof and Pareto efficient, but also popular, whenever these assignments exist. We also provide a new characterization for serial dictatorships as the only mechanisms that are popular, strategy-proof, non-wasteful, and satisfy a weak consistency condition.
    Date: 2020–12
  9. By: Péter Bayer (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Ani Guerdjikova (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA [2020-....] - Université Grenoble Alpes [2020-....] - CNRS - Centre National de la Recherche Scientifique - UGA [2020-....] - Université Grenoble Alpes [2020-....])
    Abstract: We analyze a model of endogenous two-sided network formation where players are affected by uncertainty in their opponents' decisions. We model this uncertainty using the notion of equilibrium under ambiguity (Eichberger and Kelsey, 2014). Unlike the set of Nash equilibria, the set of equilibria under ambiguity does not always include underconnected and thus inefficient networks such as the empty network. On the other hand, it may include networks with unreciprocated, one-way links, which comes with an efficiency loss as linking efforts are costly. We characterize equilibria under ambiguity and provide conditions under which increased player optimism comes with an increase in efficiency in equilibrium. Next, we analyze the dynamic situation with one-sided, myopic updating with regular optimistic shocks and derive a global stability condition of benefit-maximizing equilibrium networks.
    Keywords: network formation,ambiguity,equilibrium selection,Pareto-optimality,optimism,pessimism
    Date: 2020–11–13
  10. By: Michael Ostrovsky
    Abstract: Choice screen auctions have been recently deployed in 31 European countries, allowing consumers to choose their preferred search engine on Google's Android platform instead of being automatically defaulted to Google's own search engine. I show that a seemingly minor detail in the design of these auctions—whether they are conducted on a “per appearance” or a “per install” basis—plays a major role in the mix and characteristics of auction winners, and, consequently, in their expected overall market share. I also show that “per install” auctions distort the incentives of alternative search engines toward extracting as much revenue as possible from each user who installs them, at the expense of lowering the expected number of such users. The distortion becomes worse as the auction gets more competitive and the number of bidders increases. Empirical evidence from Android choice screen auctions conducted in 2020 is consistent with my theoretical results.
    JEL: C72 D44 D47 K21 L40 L50 L86
    Date: 2020–11
  11. By: Yiding Feng; Jason Hartline; Yingkai Li
    Abstract: We consider agents with non-linear preferences given by private values and private budgets. We quantify the extent to which posted pricing approximately optimizes welfare and revenue for a single agent. We give a reduction framework that extends the approximation of multi-agent pricing-based mechanisms from linear utility to nonlinear utility. This reduction framework is broadly applicable as Alaei et al. (2012) have shown that mechanisms for linear agents can generally be interpreted as pricing-based mechanisms. We give example applications of the framework to oblivious posted pricing (e.g., Chawla et al., 2010), sequential posted pricing (e.g., Yan, 2011), and virtual surplus maximization (Myerson, 1981).
    Date: 2020–03
  12. By: Hanming Fang; Zenan Wu
    Abstract: A wealth of evidence shows that individuals are biased and firms can often exploit consumers' behavioral biases in their contract designs. In this paper, we study how vulnerable biased individuals are to their own behavioral biases in market equilibrium, and focus on the role of risk aversion and intertemporal elasticity of substitution (IES). We measure consumer vulnerability by the percentage loss in a consumer's equilibrium certainty equivalent from a market with non-biased consumers to that with biased ones. We examine several important behavioral biases that have been extensively studied in the literature, including the impact of biased beliefs (either over- or under-confidence) in an insurance market, the impact of present bias and naïveté about present bias in a dynamic model of credit contract design, the impact of projection bias about habit formation, and the impact of expectation-based loss aversion on an investor's portfolio choice. We show that consumer vulnerability to all four commonly studied behavioral biases has a non-monotonic relationship with risk aversion or IES. This is in striking contrast to the deviations in the equilibrium allocations from the rational benchmark, which are often monotonic to the risk aversion or IES. We also consider a setting of biased agents with Epstein-Zin preferences to isolate the effect of risk aversion from that of IES.
    JEL: D60 D81 D86 D91
    Date: 2020–11
  13. By: Rava Azeredo da Silveira; Yeji Sung; Michael Woodford
    Abstract: We propose a model of optimal decision making subject to a memory constraint. The constraint is a limit on the complexity of memory measured using Shannon's mutual information, as in models of rational inattention; but our theory differs from that of Sims (2003) in not assuming costless memory of past cognitive states. We show that the model implies that both forecasts and actions will exhibit idiosyncratic random variation; that average beliefs will also differ from rational-expectations beliefs, with a bias that fluctuates forever with a variance that does not fall to zero even in the long run; and that more recent news will be given disproportionate weight in forecasts. We solve the model under a variety of assumptions about the degree of persistence of the variable to be forecasted and the horizon over which it must be forecasted, and examine how the nature of forecast biases depends on these parameters. The model provides a simple explanation for a number of features of reported expectations in laboratory and field settings, notably the evidence of over-reaction in elicited forecasts documented by Afrouzi et al. (2020) and Bordalo et al. (2020a).
    JEL: D84 E03 G41
    Date: 2020–11
  14. By: Raouf Boucekkine (Aix-Marseille Univ, CNRS, AMSE, Marseille, France and IRES, UCLouvain, Belgium.); Rodolphe Desbordes (SKEMA Business School-UCA); Paolo Melindi-Ghidi (xEconomix, UPL, Paris-Nanterre University, CNRS ; AMSE Aix-Marseille University, France and IRES, UCLouvain, Belgium.)
    Abstract: Elite-biased democracies are those democracies in which former political incumbents and their allies coordinate to impose part of the autocratic institutional rules in the new political regime. We document that this type of democratic transition is much more prevalent than the emergence of pure (popular) democracies in which the majority decides the new political rules. We then develop a theoretical model explaining how an elitebiased democracy may arise in an initially autocratic country. To this end, we extend the benchmark political transition model of Acemoglu and Robinson (2006) along two essential directions. First, population is split into majority versus minority groups under the initial autocratic regime. Second, the minority is an insider as it benefits from a more favourable redistribution by the autocrat. We derive conditions under which elite-biased democracies emerge and characterise them, in particular with respect to pure democracies.
    Keywords: elite-biased democracy, institutional change, minority/majority, economicfavouritism, Inequality, revolution.
    JEL: D72 C73
    Date: 2020–12
  15. By: Seres, Gyula (Tilburg University, School of Economics and Management)
    Date: 2019
  16. By: Loic BERGER (CNRS, IESEG School of Management, University of Lille, UMR 9221 -LEM, 59000 Lille, France; RFF-CMCC European Institute on Economics and the Environment (EIEE), Centro Euro-Mediterraneo sui Cambiamenti Climatici, 20123 Milan, Italy); Nicolas BERGER (Faculty of Public Health and Policy, London School of Hygiene & Tropical Medicine, WC1H 9SH, London, UK; Sciensano (Belgian Scientific Institute of Public Health), 1050 Brussels, Belgium); Valentina BOSETTI (RFF-CMCC European Institute on Economics and the Environment (EIEE), Centro Euro-Mediterraneo sui Cambiamenti Climatici, 20123 Milan, Italy; Department of Economics and IGIER, Bocconi University, 20136 Milan, Italy); Itzhak GILBOA (HEC, Paris-Saclay, 78350 Jouy-en-Josas, France; Eitan Berglas School of Economics, Tel Aviv University, Tel Aviv 69978, Israel); Lars Peter HANSEN (Department of Economics, University of Chicago, Chicago, IL 60637; Department of Statistics, University of Chicago, Chicago, IL 60637; Booth School of Business, University of Chicago, Chicago, IL 60637); Christopher JARVIS (Department of Infectious Disease Epidemiology, London School of Hygiene & Tropical Medicine, WC1E 7HT, London, UK); Massimo MARINACCI (Department of Decision Sciences and IGIER, Universita Bocconi, 20136 Milan, Italy); Richard D. Smith (Faculty of Public Health and Policy, London School of Hygiene & Tropical Medicine, WC1H 9SH, London, UK; College of Medicine and Health, University of Exeter, Exeter, EX1 2LU, UK)
    Abstract: Policymaking during a pandemic can be extremely challenging. As COVID-19 is a new disease and its global impacts are unprecedented, decisions are taken in a highly uncertain, complex, and rapidly changing environment. In such a context, in which human lives and the economy are at stake, we argue that using ideas and constructs from modern decision theory, even informally, will make policymaking a more responsible and transparent process.
    Keywords: model uncertainty, ambiguity, robustness, decision rules
    JEL: D81 I18
    Date: 2020–11
  17. By: Martin Gonzalez-Eiras (University of Copenhagen); Dirk Niepelt (Study Center Gerzensee, University of Bern, CEPR, CESifo)
    Abstract: We propose a flexible model of infectious dynamics with a single endogenous state variable and economic choices. We characterize equilibrium, optimal outcomes, static and dynamic externalities, and prove the following: (i) A lockdown generically is followed by policies to stimulate activity. (ii) Re-infection risk lowers the activity level chosen by the government early on and, for small static externalities, implies too cautious equilibrium steady-state activity. (iii) When a cure arrives deterministically, optimal policy is dis-continous, featuring a light/strict lockdown when the arrival date exceeds/falls short of a specific value. Calibrated to the ongoing COVID-19 pandemic the baseline model and a battery of robustness checks and extensions imply (iv) lockdowns for 3-4 months, with activity reductions by 25-40 percent, and (v) substantial welfare gains from optimal policy unless the government lacks instruments to stimulate activity after a lockdown.
    Date: 2020–12
  18. By: Eric Budish
    Abstract: This paper presents a simple price-theory approach to Covid-19 lockdown and reopening policy. The key idea is to conceptualize R ≤ 1 as a constraint, allowing traditional economic and societal goals to be the policy objective, all within a simple static optimization framework. This approach yields two main insights. First, the R ≤ 1 constraint imposes a disease-transmission budget on society. Society should optimally spend this budget on the activities with the highest ratio of utility to disease-transmission risk, dropping activities with too low a ratio of utility to risk. Second, masks, tests, and other simple interventions increase activities' utility-to-risk ratios, and hence expand how much activity society can engage in and utility society can achieve while staying within the R ≤ 1 budget. A simple numerical example, based on estimates from the medical literature for R0 and the efficacy of facemasks and complementary measures, suggests the potential gains are enormous. Overall, the formulation provides economics language for a policy middle ground between society-wide lockdown and ignore-the-virus, and a new infectious threat response paradigm alongside “eradicate” and “minimize”.
    JEL: C61 D47 D6 D7 E6 H12 I1 I18 L51
    Date: 2020–11

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