nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒02‒01
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information Design by an Informed Designer By Frédéric Koessler; Vasiliki Skreta
  2. Optimal Delegation and Information Transmission under Limited Awareness By Sarah Auster; Nicola Pavoni
  3. Large Games with Heterogeneous Players By Serrano-Padial, Ricardo
  4. Evolutionarily Stable (Mis)specifications: Theory and Applications By Kevin He; Jonathan Libgober
  5. Limited tenure concessions for collective goods By Nicolas Quérou; Agnes Tomini; Christopher Costello
  6. Dynamic Price Competition, Learning-By-Doing and Strategic Buyers By Andrew Sweeting; Dun Jia; Shen Hui; Xinlu Yao
  7. Designing Interrogations By Alessandro Ispano; Peter Vida
  8. Consumer Information and the Limits to Competition By Mark Armstrong; Jidong Zhou
  9. Approval Voting & Majority Judgment in Weighted Representative Democracy By Arnold Cédrick SOH VOUTSA
  10. Multi-Player Bayesian Learning with Misspecified Models By Takeshi Murooka; Yuichi Yamamoto
  11. Economics and duty-motivated choices By Giovanni Razzu
  12. Negative votes to depolarize politics By Karthik H. Shankar
  13. Exponential Communication Separations between Notions of Selfishness By Aviad Rubinstein; Raghuvansh R. Saxena; Clayton Thomas; S. Mathew Weinberg; Junyao Zhao
  14. Horizonal Merger Analysis By Louis Kaplow
  15. Mixed Bundling in Oligopoly Markets By Jidong Zhou
  16. Market segmentation through information By Elliott, M.; Galeotti., A.; Koh., A.
  17. A Theory of Updating Ambiguous Information By Rui Tang
  18. Twofold Conservatism in Choice under Uncertainty By Federico Echenique; Luciano Pomatto; Jamie Vinson

  1. By: Frédéric Koessler (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); Vasiliki Skreta (CEPR - Center for Economic Policy Research - CEPR, University of Texas at Austin [Austin], UCL - University College of London [London])
    Abstract: A designer is privately informed about the state and chooses an information disclosure mechanism to influence the decisions of multiple agents playing a game. We define an intuitive class of incentive compatible information disclosure mechanisms which we coin interim optimal mechanisms. We prove that an interim optimal mechanism exists, and that it is an equilibrium outcome of the interim information design game. An ex-ante optimal mechanism may not be interim optimal, but it is whenever it is ex-post optimal. In addition, in leading settings in which action sets are binary, every ex-ante optimal mechanism is interim optimal. We relate interim optimal mechanisms to other solutions of informed principal problems.
    Keywords: strong-neologism proofness,neutral optimum,informed principal,Bayesian persuasion,interim information design,core mechanism,verifiable types.
    Date: 2021–02
  2. By: Sarah Auster (Department of Economics, University of Bonn); Nicola Pavoni (Department of Economics, Bocconi University)
    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.
    JEL: D82 D83 D86
    Date: 2021–01
  3. By: Serrano-Padial, Ricardo (School of Economics)
    Abstract: We study large games played by heterogeneous agents whose payoffs depend on the aggregate action and provide novel equilibrium selection and comparative statics results. We prove the equivalence between the global games selection and potential maximization in games with strategic complementarities, and characterize the selected equilibrium as the solution to maximizing the ex-ante expected payoffs of a player with pessimistic beliefs. To obtain our results we uncover two key properties. First, we show that potential games exhibit quasilinear payoffs, which include as examples Cournot competition, public goods and externalities, search models and coordination games. Second, we show that beliefs in the global game satisfy a generalized Laplacian property, which links average beliefs about the aggregate action to the uniform distribution. Our comparative statics results rely on average rather than pointwise conditions on payoffs and can be used to analyze both parameter changes and the impact of heterogeneity.
    Keywords: aggregative games; potential games; global games; comparative statics; noise-independent selection; Laplacian beliefs
    JEL: C72 D82 D83 D84
    Date: 2020–08–18
  4. By: Kevin He; Jonathan Libgober
    Abstract: We introduce an evolutionary framework to evaluate competing (mis)specifications in strategic situations, focusing on which misspecifications can persist over a correct specification. Agents with heterogeneous specifications coexist in a society and repeatedly match against random opponents to play a stage game. They draw Bayesian inferences about the environment based on personal experience, so their learning depends on the distribution of specifications and matching assortativity in the society. One specification is evolutionarily stable against another if, whenever sufficiently prevalent, its adherents obtain higher expected objective payoffs than their counterparts. The learning channel leads to novel stability phenomena compared to frameworks where the heritable unit of cultural transmission is a single belief instead of a specification (i.e., set of feasible beliefs). We apply the framework to linear-quadratic-normal games where players receive correlated signals but possibly misperceive the information structure. The correct specification is not evolutionarily stable against a correlational error, whose direction depends on matching assortativity. As another application, the framework also endogenizes coarse analogy classes in centipede games.
    Date: 2020–12
  5. By: Nicolas Quérou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Agnes Tomini (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); Christopher Costello (UCSB - University of California [Santa Barbara] - University of California)
    Abstract: This paper proposes and analyzes the consequences of a widely-used, but little-studied institution, limited-tenure concessions, for governing club goods and common-pool resources. We first show in a simple repeated game setting that such a system can incentivize socially-efficient provision of club goods. We then extend the model to account for spatially-connected resources, an arbitrary number of heterogeneous agents, and natural resource dynamics, and show that the basic ability of limited-tenure concessions to incentivize the first best private provision is preserved in this rich setting that is more representative of natural resources such as fish, water, and game. The duration of tenure and the dispersal of the resource then play pivotal roles in whether this limited-duration concession achieves the socially optimal outcome. Finally, in a setting with costly monitoring, we discuss the features of a concession contract that ensure first-best behavior, but at least cost to the implementing agency.
    Keywords: Concessions,club goods,cooperation,natural resources,spatial externalities,dynamic games
    Date: 2020–10–19
  6. By: Andrew Sweeting; Dun Jia; Shen Hui; Xinlu Yao
    Abstract: We generalize recent models of dynamic price competition where sellers benefit from learning-by-doing by allowing for long-lived strategic buyers, with a single parameter capturing the extent to which each buyer internalizes future buyer surplus. Many of the equilibria that exist when buyers are atomistic or myopic are eliminated when buyers internalize even a modest share of their effects on future surplus. The equilibria that survive tend to be those where long-run market competition is preserved.
    JEL: C73 D21 D43 L13 L41
    Date: 2020–12
  7. By: Alessandro Ispano; Peter Vida (Université de Cergy-Pontoise, THEMA)
    Abstract: We provide an equilibrium model of interrogations with two-sided asymmetric information. The suspect knows his status as guilty or innocent and the likely strength of law enforcers' evidence, which is informative about the suspect's status and may also disprove lies. We study the evidence strength standards for interro- gating and for drawing adverse inferences from silence that minimize prosecution errors. We consider scenarios where interrogations can be delegated. We describe the optimal mechanism under full commitment and a dynamic interrogation with two-sided information revelation implementing the optimum in equilibrium.
    Keywords: lie, evidence, leniency, questioning, confession, law, prosecution, two-sided asymmetric information
    JEL: D82 D83 C72 K40
    Date: 2021
  8. By: Mark Armstrong (Department of Economics Oxford University); Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: This paper studies competition between ï¬ rms when consumers observe a private signal of their preferences over products. Within the class of signal structures which induce pure-strategy pricing equilibria, we derive signal structures which are optimal for ï¬ rms and those which are optimal for consumers. The ï¬ rm-optimal policy ampliï¬ es underlying product differentiation, thereby relaxing competition, while ensuring consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal policy dampens differentiation, which intensiï¬ es competition, but induces some consumers to buy their less-preferred product. Our analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.
    Keywords: Information design, Bertrand competition, Product differentiation, Online platforms
    JEL: D43 D83 L13
    Date: 2021–01
  9. By: Arnold Cédrick SOH VOUTSA (Université de Cergy-Pontoise, THEMA)
    Abstract: Pivato and Soh [Pivato, M., Soh, A., 2020.Weighted representative democracy. Journal of Mathematical Economics 88 (2020) 52-63] proposed a new system of democratic representation whereby any individual can choose any legislator as her representative and different legislators can represent different numbers of individuals, concomitantly determining their weights in the legislature. For such legislatures, we consider other voting rules, namely, the Weighted Approval Voting rule and Weighted Majority Judgment rule. We show that if the size of the electorate is large, then with very high probability, the decisions made by the legislature will be the same as the decisions that would have been reached by a direct democracy, as decided by the corresponding simple (unweighted) voting rules.
    Keywords: Social Choice, Ideal direct democracy, Representative democracy, Multioption decisions, Weighted Approval Voting, Weighted Majority Judgment
    JEL: D71 D72
    Date: 2020
  10. By: Takeshi Murooka (Osaka School of International Public Policy (OSIPP), Osaka University); Yuichi Yamamoto (Institute of Economic Research, Hitotsubashi University)
    Abstract: We consider strategic players who may have a misspecified view about an environment, and investigate their long-run behavior. Each period, players simultaneously take actions, observe a public outcome, and then update own belief about an uncertain economic state by using Bayes' rule. We provide a condition under which players' beliefs and actions converge to a steady state, and then characterize how one's misspecification influences the long-run (steady-state) actions. When a player has a biased view about the physical environment (e.g., overconfidence on own capability or prejudice on an opponent's capability), the presence of strategic interaction influences the size of the impact of misspecification, but not the direction. In particular, when the game is symmetric, the presence of strategic interaction amplifies the deviation of the long-run actions from those in the correctly specified model. When a player misspecifies the opponent's view about the environment (e.g., the player is not aware of the opponent's bias), the strategic interaction generates a directional impact for the long-run actions. We extensively discuss implications to a variety of applications, such as Cournot duopoly, team production, tournaments, and discrimination.
    Keywords: model misspecification, learning, convergence, overconfidence, bias transmission
    JEL: C73 D83 D90 D91
    Date: 2021–01
  11. By: Giovanni Razzu (Department of Economics, University of Reading)
    Abstract: We study the relationship between economics and duties, the latter considered as deep, intrinsic moral obligations that motivate individuals. We first define duty in a way that could be amenable to work within the tools of decision theory, distinguishing between perfect and imperfect duty-motivated choices. Finally, we apply standard decision theory to assess how duties relate to economics, particularly to rationality. Three main findings emerge. One, perfect duty-motivated choice is rational. Two, when imperfect duty is at play, rationality conditions can be violated. Third, by making use of the difference between two representations of the maximisation problem - the relational and the real valued utility function - we show that individuals motivated by duty can choose a maximal while optimising their preference rankings; instead, maximisation of utility may not be possible under duty-motivated choices that supervene the local non satiation assumption.
    Keywords: duties, decision theory, rationality, maximisation, optimisation
    JEL: B49 D01 D60 D91
    Date: 2021–01–22
  12. By: Karthik H. Shankar
    Abstract: The controversies around the 2020 US presidential elections certainly casts serious concerns on the efficiency of the current voting system in representing the people's will. Is the naive Plurality voting suitable in an extremely polarized political environment? Alternate voting schemes are gradually gaining public support, wherein the voters rank their choices instead of just voting for their first preference. However they do not capture certain crucial aspects of voter preferences like disapprovals and negativities against candidates. I argue that these unexpressed negativities are the predominant source of polarization in politics. I propose a voting scheme with an explicit expression of these negative preferences, so that we can simultaneously decipher the popularity as well as the polarity of each candidate. The winner is picked by an optimal tradeoff between the most popular and the least polarizing candidate. By penalizing the candidates for their polarization, we can discourage the divisive campaign rhetorics and pave way for potential third party candidates.
    Date: 2020–12
  13. By: Aviad Rubinstein; Raghuvansh R. Saxena; Clayton Thomas; S. Mathew Weinberg; Junyao Zhao
    Abstract: We consider the problem of implementing a fixed social choice function between multiple players (which takes as input a type $t_i$ from each player $i$ and outputs an outcome $f(t_1,\ldots, t_n)$), in which each player must be incentivized to follow the protocol. In particular, we study the communication requirements of a protocol which: (a) implements $f$, (b) implements $f$ and computes payments that make it ex-post incentive compatible (EPIC) to follow the protocol, and (c) implements $f$ and computes payments in a way that makes it dominant-strategy incentive compatible (DSIC) to follow the protocol. We show exponential separations between all three of these quantities, already for just two players. That is, we first construct an $f$ such that $f$ can be implemented in communication $c$, but any EPIC implementation of $f$ (with any choice of payments) requires communication $\exp(c)$. This answers an open question of [FS09, BBS13]. Second, we construct an $f$ such that an EPIC protocol implements $f$ with communication $C$, but all DSIC implementations of $f$ require communication $\exp(C)$.
    Date: 2020–12
  14. By: Louis Kaplow
    Abstract: Economic analysis of competition regulation is most developed in the domain of horizontal mergers, and modern agency guidelines reflect a substantial consensus on the appropriate template for merger assessment. Nevertheless, official protocols are understood to rest on a problematic market definition exercise, to use HHIs and ΔHHIs in ways that conflict with standard models, and more broadly to diverge with how economic analysis of proposed mergers should be and often is conducted. These gaps, unfortunately, are more consequential than is generally appreciated. Moreover, additional unrecognized errors and omissions are at least as important: analysis of efficiencies, which are thought to justify a permissive approach, fails to draw on the most relevant fields of economics; entry is often a misanalyzed afterthought; official information collection and decision protocols violate basic tenets of decision analysis; and single-sector, partial equilibrium analysis is employed despite the presence of substantial distortions (many due to imperfect competition) in many sectors of the economy. This article elaborates these deficiencies, offers preliminary analysis of how they can best be addressed, and identifies priorities for further research.
    JEL: D43 K21 L13 L41
    Date: 2020–12
  15. By: Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: This paper proposes a framework for studying competitive mixed bundling with an arbitrary number of ï¬ rms. We examine both a ï¬ rm’s incentive to introduce mixed bundling and equilibrium tariffs when all ï¬ rms adopt the mixed-bundling strategy. In the duopoly case, relative to separate sales, mixed bundling has ambiguous impacts on prices, proï¬ t and consumer surplus; with many ï¬ rms, however, mixed bundling typically lowers all prices, harms ï¬ rms and beneï¬ ts consumers.
    Keywords: Bundling, Multiproduct pricing, Price competition, Oligopoly
    JEL: D43 L13 L15
    Date: 2021–01
  16. By: Elliott, M.; Galeotti., A.; Koh., A.
    Abstract: Prodigious amounts of data are being collected by internet companies about their users' preferences. We consider the information design problem of how to share this information with traditional companies which, in turn, compete on price by offering personalised discounts to customers. We provide a necessary and sufficient condition under which the internet company is able to perfectly segment and monopolise all such markets. This condition is surprisingly mild, and suggests room for regulatory oversight.
    Keywords: Information design, market segmentation, price discrimination
    JEL: D43 D83 L13
    Date: 2021–01–14
  17. By: Rui Tang
    Abstract: We introduce a new updating rule, the conditional maximum likelihood rule (CML) for updating ambiguous information. The CML formula replaces the likelihood term in Bayes' rule with the maximal likelihood of the given signal conditional on the state. We show that CML satisfies a new axiom, increased sensitivity after updating, while other updating rules do not. With CML, a decision maker's posterior is unaffected by the order in which independent signals arrive. CML also accommodates recent experimental findings on updating signals of unknown accuracy and has simple predictions on learning with such signals. We show that an information designer can almost achieve her maximal payoff with a suitable ambiguous information structure whenever the agent updates according to CML.
    Date: 2020–12
  18. By: Federico Echenique; Luciano Pomatto; Jamie Vinson
    Abstract: Conservatism in choice under uncertainty means that a status-quo is abandoned in favor of some alternative only if it is dominated. The standard model of conservative choice introduced by Bewley (2002) introduces multiple decision criteria, and calls the status quo dominated when all criteria agree that the alternative is better than the status quo. We consider the case when multiple criteria are used to evaluate the status quo and the alternative, but cannot be used to rank them. The alternative is chosen only if it is preferable to the status quo even when the first is evaluated according to the worst-case scenario, and the second according to the best-case scenario. The resulting model is one of {\em obvious dominance}, or {\em twofold conservatism}.
    Date: 2020–12

This nep-mic issue is ©2021 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.