nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒01‒25
twenty-one papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Optimal Delegation and Information Transmission Under Limited Awareness By Sarah Auster; Nicola Pavoni
  2. Search, Information, and Prices By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  3. Weighing Sample Evidence By Szwagrzak, Karol
  4. Persuading communicating voters By Kerman, Toygar; Tenev, Anastas P.
  5. Ex post fairness and ex ante fairness in social preferences under risk By Seiji TAKANASHI
  6. A Theory of Debt Maturity and Innovation By Yuliyan Mitkov
  7. Increasing consumer surplus through a novel product testing mechanism By Vollstaedt, Ulrike; Imcke, Patrick; Brendel, Franziska; Ehses-Friedrich, Christiane
  8. Strength in Numbers: Robust Mechanisms for Public Goods with Many Agents By Jin Xi; Haitian Xie
  9. Ordinal status games on networks By Kukushkin, Nikolai S.
  10. Homo moralis goes to the voting booth: coordination and information aggregation By Ingela Alger; Jean-François Laslier
  11. An Algorithm for Identifying Least Manipulable Envy-Free and Budget-Balanced Allocations in Economies with Indivisibilities By Andersson, Tommy; Ehlers, Lars
  12. The Social Costs of Side Trading By Andrea Attar; Thomas Mariotti; François Salanié
  13. Contracting under Adverse Selection: Certifiable vs. Uncertifiable Information By Schmitz, Patrick W.
  14. Organized Information Transmission By Mathevet, Laurent; Taneva, Ina
  15. Obfuscation and Rational Inattention in Digitalized Markets By Janssen, Aljoscha; Kasinger, Johannes
  16. Decision Making under Uncertainty: A Game of Two Selves By Jianming Xia
  17. Optimally Imprecise Memory and Biased Forecasts By Rava Azeredo da Silveira; Yeji Sung; Michael Woodford
  19. Optimally Controlling an Epidemic By Martín Gonzalez-Eiras; Dirk Niepelt
  20. A Theory of Elite-Biased Democracies By Raouf Boucekkine; Rodolphe Desbordes; Paolo Melindi-Ghidi
  21. Which is better for durable goods producers, exclusive or open supply chain? By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato

  1. By: Sarah Auster; Nicola Pavoni
    Abstract: We study the delegation problem between a principal and an agent, who not only has better information about the performance of the available actions but also has superior awareness of the set of actions that are actually feasible. The agent decides which of the available actions to reveal and which ones to hide. We provide conditions under which the agent finds it optimal to leave the principal unaware of relevant options. By doing so, the agent increases the principal's cost of distorting the agent's choices and thereby increases the principal's willingness to grant him higher information rents. We also consider communication between the principal and the agent after the contract is signed and the agent receives information. We show that limited awareness of actions improves communication in such signalling games: the principal makes a coarser inference from the recommendations of the privately informed agent and accepts a larger number of his proposals.
    Keywords: Unawareness, optimal delegation, strategic disclosure
    JEL: D82 D83 D86
    Date: 2021–01
  2. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, University of Chicago); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: Consider a market with identical ï¬ rms offering a homogeneous good. A consumer obtains price quotes from a subset of ï¬ rms and buys from the ï¬ rm offering the lowest price. The “price count†is the number of ï¬ rms from which the consumer obtains a quote. For any given ex ante distribution of the price count, we derive a tight upper bound (under ï¬ rst-order stochastic dominance) on the equilibrium distribution of sales prices. The bound holds across all models of ï¬ rms’ common-prior higher-order beliefs about the price count, including the extreme cases of full information (ï¬ rms know the price count) and no information (ï¬ rms only know the ex ante distribution of the price count). A qualitative implication of our results is that a small ex ante probability that the price count is equal to one can lead to a large increase in the expected price. The bound also applies in a large class of models where the price count distribution is endogenously determined, including models of simultaneous and sequential consumer search.
    Keywords: Search, Price Competition, Bertrand Competition, "Law of One Price", Price Count, Price Quote, Information Structure, Bayes Correlated Equilibrium
    JEL: D41 D42 D43 D83
    Date: 2020–03
  3. By: Szwagrzak, Karol (Department of Economics, Copenhagen Business School)
    Abstract: We model how sample evidence guides choice: An agent faces a number of alternative actions. For each action, she observes a sample of outcomes; she cannot see the distribution from where the sample was drawn. To make her choice, she evaluates the evidence for the hypothesis that an action is optimal. The strength of evidence in favor of the hypothesis is measured by the average decision utility of the outcomes in its sample; its weight gauges predictive validity and is approximated by the size of the sample. We identify necessary and sufficient conditions for her choice to be determined by the interaction of strength and weight, reflecting the determinants of confidence judgements documented in experiments (Griffin and Tversky, 1992). These conditions characterize a model consistent with non-trivial uncertainty attitudes and “frequentist" expected utility maximization.
    Keywords: Sample; Sample size; Uncertainty attitudes
    JEL: D81 D83
    Date: 2021–01–08
  4. By: Kerman, Toygar (General Economics 0 (Onderwijs), RS: GSBE other - not theme-related research); Tenev, Anastas P. (General Economics 0 (Onderwijs), RS: GSBE Theme Conflict & Cooperation)
    Abstract: This paper studies a multiple-receiver Bayesian persuasion model, where a sender communicates with receivers who have homogeneous beliefs and aligned preferences. The sender wants to implement a proposal and commits to a communication strategy which sends private (possibly) correlated messages to the receivers, who are in an exogenous and commonly known network. Receivers can observe their neighbors’ private messages and after updating their beliefs, vote sincerely on the proposal. We examine how networks of shared information affect the sender’s gain from persuasion and find that in many cases it is not restricted by the additional information provided by the receivers’ neighborhoods. Perhaps surprisingly, the sender’s gain from persuasion is not monotonically decreasing with the density of the network.
    JEL: C72 D72 D82 D85
    Date: 2021–01–01
  5. By: Seiji TAKANASHI
    Abstract: We extend the domain of social preferences, which depend on not only one’s outcomes but also vectors of outcomes of all other agents, from deterministic outcome vectors to lotteries over outcome vectors. First, we axiomatically characterize a class of utility functions which satisfies the expected utility theory and reversal of order as far as these two requirements are consistent with ex post fairness and ex ante fairness. Based on this class, we characterize three classes of utility functions which additionally satisfy ex ante fairness, inequality-aversion, and ex post fairness for probability mixture, respectively. Finally, we characterize our main class of utility functions which satisfies these axioms. Saito (2013) also axiomatizes social preferences on lotteries over the outcome vectors which are an extension of the utility functions proposed by Fehr and Schmidt (1999). We characterize a wider class of utility functions which explains heterogeneous attitudes of how much the decision maker cares about ex ante fairness and ex post fairness toward each agent. Moreover, we provide an additional axiom under which our class of utility functions coincides with Saito’s class of utility functions. We reveal that the axiom requires that the attitudes are the same among all the agents.
    Keywords: Social preference, Risk, Fairness
    JEL: D81 D63 D91
  6. By: Yuliyan Mitkov (University of Bonn)
    Abstract: I propose a theory of debt maturity as an incentive device to motivate innovation when contracts are fundamentally incomplete and shaped by ex-post renegotiation. The financing of innovative firms must balance two goals. On the one hand, since innovation is inherently risky, the entrepreneur must receive adequate protection after failure. Simultaneously, the firm must be liquidated when its assets can be redeployed more efficiently elsewhere. Meeting these two goals can be especially challenging when contracts are incomplete. I show how an appropriate choice of debt maturity, together with ex-post contract renegotiation, embeds a "put option" into the firm's capital structure. The put is exercised when liquidation is efficient, and it partially insures the entrepreneur against failure and thus motivates innovation. The theory has novel empirical implications for the financing patterns of innovative firms.
    Keywords: Innovation, Debt maturity, Incomplete contracts, Renegotiation
    JEL: C78 D82 D86 G32 G33 O31
    Date: 2020–12
  7. By: Vollstaedt, Ulrike; Imcke, Patrick; Brendel, Franziska; Ehses-Friedrich, Christiane
    Abstract: Our study proposes a novel mechanism to reduce information asymmetry about product quality between buyers and sellers. Product testing organizations like Consumer Reports (US) and Stiftung Warentest (Germany) seek to reduce this asymmetry by providing credible information. However, limited capacity leads to testing of only a select number of product models, often bestsellers, which can yield suboptimal information. After outlining our mechanism, we develop a game to derive testable predictions. We show theoretically that a unique Nash equilibrium exists in which our mechanism yields optimal information, equivalent to a world of complete information, while selecting bestsellers does not. Subsequently, we confirm experimentally that our mechanism increases consumer surplus.
    Keywords: Consumer surplus,information asymmetry,product quality,product test,information disclosure,mechanism design,experiment
    JEL: C72 C91 D82 L15
    Date: 2020
  8. By: Jin Xi; Haitian Xie
    Abstract: This paper studies the robust mechanism design problem of a public good when there are many agents. We propose a class of dominant strategy incentive compatible (DSIC) and ex post individual rational (EPIR) mechanisms that balance the budget and approximates the first-best welfare level when the number of participants is large. The decision rule is based on thresholding the sum of transformed valuations of the agents. We show that the rate of change of the threshold is the key to characterizing the trade-off between balancing the budget and maximizing the welfare. In particular, we find that when this rate is controlled in a certain range, the two goals can be achieved at the same time asymptotically. The proposed mechanisms are robust in two ways: first, they depend on the valuation distributions only through certain moments; second, they allow for asymmetric and irregular valuation distributions. More specifically, we show that the Myerson regularity condition plays no role in this constrained problem of welfare approximation. In addition to welfare approximation, we also study profit approximation using similar mechanisms but with a different threshold and show that a fraction of the optimal profit can be achieved with a large number of participants. Lastly, we extend the model to accommodate for non-binary decision and general utility functions.
    Date: 2021–01
  9. By: Kukushkin, Nikolai S.
    Abstract: We consider a modification of ordinal status games of Haagsma and von Mouche (2010). A number of agents make scalar choices, e.g., their levels of conspicuous consumption. The wellbeing of each agent is affected by her choice in three ways: internal satisfaction, expenses, and social status determined by comparisons with the choices of others. In contrast to the original model, as well as its modifications considered so far, we allow for some players not caring about comparisons with some others. Assuming that the status of each player may only be "high" or "low," the existence of a strong Nash equilibrium is shown; for a particular subclass of such games, the convergence of Cournot tatonnement is established. If an intermediate status is possible, then even Nash equilibrium may fail to exist in very simple examples.
    Keywords: status game; strong equilibrium; Nash equilibrium; Cournot tatonnement
    JEL: C72
    Date: 2020–12–14
  10. By: Ingela Alger (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, Institute for Advanced Study Toulouse); Jean-François Laslier (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper revisits two classical problems in the theory of voting-viz. the divided majority problem and the strategic revelation of information by majority vote-in the light of evolutionarily founded partial Kantian morality. It is shown that, compared to electorates consisting of purely self-interested voters, such Kantian morality helps voters solve coordination problems and improves the information aggregation properties of equilibria, even for modest levels of morality.
    Keywords: Condorcet jury theorem,divided majority problem,voting,Homo moralis,Kantian morality,social dilemmas
    Date: 2020–11
  11. By: Andersson, Tommy (Department of Economics, Lund University); Ehlers, Lars (Département de sciences économiques, Université de Montréal)
    Abstract: We analyze the problem of allocating indivisible objects and monetary compensations to a set of agents. In particular, we consider envy-free and budget-balanced rules that are least manipulable with respect to agents counting or with respect to utility gains. A key observation is that, for any profile of quasi-linear preferences, the outcome of any such least manipulable envy-free rule can be obtained via so-called agent-k-linked allocations. Given this observation, we provide an algorithm for identifying agent-k-linked allocations.
    Keywords: Envy-freeness; Budget-balance; Least manipulable; Algorithm
    JEL: C71 C78 D63 D71 D78
    Date: 2021–01–14
  12. By: Andrea Attar (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); Thomas Mariotti (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); François Salanié (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)
    Abstract: We study resource allocation under private information when the planner cannot prevent bilateral side trading between consumers and firms. Adverse selection and side trading severely restrict feasible trades: each marginal quantity must be fairly priced given the consumer types who purchase it. The resulting social costs are twofold. First, second-best efficiency and robustness to side trading are in general irreconcilable requirements. Second, there actually exists a unique budget-feasible allocation robust to side trading, which deprives the planner from any capacity to redistribute resources between different types of consumers. We discuss the relevance of our results for insurance and financial markets.
    Date: 2020–08
  13. By: Schmitz, Patrick W.
    Abstract: The analysis of adverse selection problems in seller-buyer relationships has typically been based on the assumption that private information is uncertifiable, while in practice it may well be certifiable. If a buyer has certifiable private information, he can conceal evidence, but he cannot claim to have information for which he has no evidence, so he has fewer possibilities to misrepresent his information. Nevertheless, we find that the expected total surplus can be strictly smaller in the case of certifiable information than in the case of uncertifiable information. This finding holds when the buyer may have private information with some exogenous probability as well as in the case of opportunistic information gathering, where the buyer can privately decide whether or not to acquire information for strategic reasons.
    Keywords: Contracting; Asymmetric information; Adverse selection; Screening; Information gathering
    JEL: D82 D86 L24 M11 M4
    Date: 2021
  14. By: Mathevet, Laurent; Taneva, Ina
    Abstract: In reality, the organizational structure of information — describing how information is transmitted to its recipients — is as important as its content. In this paper, we introduce families of (indirect) information structures, namely meeting schemes and delegated hierarchies, that capture the horizontal and vertical dimensions of real-world transmission. We characterize the outcomes that they implement in general (finite) games and show that they are optimal in binary-action environments with strategic complementarities. Our application to classical regime-change games illustrates the variety of optimal meeting schemes and delegated hierarchies as a function of the objective
    Keywords: Incomplete information, information hierarchy, delegated transmission, meeting scheme, Bayes correlated equilibrium, information design.
    JEL: C72 D82 D83
    Date: 2020–07–20
  15. By: Janssen, Aljoscha (Singapore Management University, and); Kasinger, Johannes (Goethe University Frankfurt and Leibniz Institute for Financial Research SAFE)
    Abstract: This paper studies the behavior of competing firms in a duopoly with rational inattentive consumers. Firms play a sequential game in which they decide to obfuscate their individual prices before competing on price. Probabilistic demand functions are endogenously determined by the consumers' optimal information strategy, which depends on the firms' obfuscation choice and the consumers' unrestricted prior beliefs. We show that the game may result in an obfuscation equilibrium with high prices where both firms obfuscate and a transparency equilibrium with low prices and no obfuscation, providing an argument for market regulation. Lower information costs and asymmetric prior beliefs about prices reduce the probability of an obfuscation equilibrium. Using data on Sweden, we document a decrease in price complexity and corresponding prices in the market for mobile phone subscriptions in the last two decades. Our model rationalizes these changes and explains why complexity and high prices persist in some but not all digitalized markets.
    Keywords: Rational Inattention; Obfuscation; Price Competition; Digitalized Markets
    JEL: D11 D21 D43
    Date: 2021–01–20
  16. By: Jianming Xia
    Abstract: In this paper we characterize the niveloidal preferences that satisfy the Weak Order, Monotonicity, Archimedean, and Weak C-Independence Axioms from the point of view of an intra-personal, leader-follower game. We also show that the leader's strategy space can serve as an ambiguity aversion index.
    Date: 2020–12
  17. By: Rava Azeredo da Silveira (Biophysique et Neuroscience Théoriques - LPENS (UMR_8023) - Laboratoire de physique de l'ENS - ENS Paris - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique - UP - Université de Paris, Unibas - University of Basel); Yeji Sung (Columbia University [New York]); Michael Woodford (Columbia University [New York])
    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).
    Keywords: Over-reaction,Survey expectations,Rational inattention
    Date: 2020
  18. By: Loïc Berger (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, IÉSEG School Of Management [Puteaux]); Louis Eeckhoudt (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Diversification is a basic economic principle that helps to hedge against uncertainty. It is therefore intuitive that both risk aversion and ambiguity aversion should positively affect the value of diversification. In this paper, we show that this intuition (1) is true for risk aversion but (2) is not necessarily true for ambiguity aversion. We derive sufficient conditions, showing that, contrary to the economic intuition, ambiguity and ambiguity aversion may actually reduce the diversification value.
    Keywords: Diversification,ambiguity aversion,model uncertainty,hedging
    Date: 2020
  19. By: Martín Gonzalez-Eiras; Dirk Niepelt
    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-continuous, 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.
    Keywords: epidemic, lockdown, forced opening, SIR model, SIS model, SI model, logistic model, Covid-19
    JEL: I18
    Date: 2020
  20. By: Raouf Boucekkine (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université, UCL IRES - Institut de recherches économiques et sociales - UCL - Université Catholique de Louvain); Rodolphe Desbordes (SKEMA BS - UCA - Université Côte d'Azur); Paolo Melindi-Ghidi (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université, UCL IRES - Institut de recherches économiques et sociales - UCL - Université Catholique de Louvain)
    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,economic favouritism,inequality,revolution
    Date: 2020–12–01
  21. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: We explore the supply chain problem of a downstream durable goods monopolist, who chooses one of the following trading modes: an exclusive supply chain with an incumbent supplier or an open supply chain, allowing the monopolist to trade with a new efficient entrant in the future. The expected retail price reduction in the future dampens the profitability of the original firms. An efficient entrant's entry magnifies such a price reduction, causing a further reduction of original firms' joint profits. In equilibrium, the downstream monopolist chooses the exclusive supply chain to escape further price reductions, although it expects efficient entry.
    Date: 2020–04

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