nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒02‒08
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Growing Consideration By Yuta Inoue
  2. Equilibrium Player Choices in Team Contests with Multiple Pairwise Battles By Hideo Konishi; Chen-Yu Pan; Dimitar Simeonov
  3. Competitive Procurement With Ex Post Moral Hazard By Indranil Chakraborty; Fahad Khalil; Jacques Lawarree
  4. Strategy-proof Allocation of Indivisible Goods when Preferences are Single-peaked By Mandal, Pinaki; Roy, Souvik
  5. Implementation with farsighted agents By Ville Korpela; Michele Lombardi; Hannu Vartiainen
  6. Best-response dynamics in directed network games By P\'eter Bayer; Gy\"orgy Kozics; N\'ora Gabriella Sz\H{o}ke
  7. Behavioral Strong Implementation By Takashi Hayashi; Ritesh Jain; Ville Korpela; Michele Lombardi
  8. Turning Relative Deprivation into a Performance Incentive Device By Stark, Oded; Kosiorowski, Grzegorz
  9. Shareholder Heterogeneity, Asymmetric Information, and the Equilibrium Manager By Bianchi, Milo; Dana, Rose-Anne; Jouini, Elyès
  10. Assignment mechanisms: common preferences and information acquisition By Georgy Artemov
  11. Effort Complementarity and Sharing Rules in Group Contests By Hideo Konishi; Katsuya Kobayashi
  12. Does Ambiguity Generate Demand for Options? By Takashi Nishiwaki
  13. Optimal Consumption Under Different Resolution Times of Uncertainty By Takashi Nishiwaki
  14. Rationalizing choice functions with a weak preference By Yuta Inoue
  15. Robust communication on networks By Marie Laclau; Ludovic Renou; Xavier Venel

  1. By: Yuta Inoue (Graduate School of Economics, Waseda University)
    Abstract: This paper proposes a behavioral model which we refer to as a Growing Consideration model, and derive observable implications using a revealed preference approach. This model inherits the main idea of Limited Consideration models, and adds to it an assumption that an agent's consideration grows over time. An agent makes choices over multiple time periods, while she may not pay attention to all available alternatives at all times. In addition, we require that she pays attention to alternatives that she chose in the past, which property we refer to as Growing Consideration. Revealed preference tests, as well as conditions under which we can robustly infer agent's preference, consideration, and non-consideration are given for two types of Growing Consideration models.
    Keywords: Choice; Behavior; Time; Revealed preference; Robust inference; Limited Consideration; Limited Attention; Overwhelming Choice; Growing Consideration
    JEL: D1 D8
    Date: 2020–05
  2. By: Hideo Konishi (Boston College); Chen-Yu Pan (Wuhan University); Dimitar Simeonov (Boston College)
    Abstract: We consider games in which team leaders strategically choose the order of players sent to the battlefield in majoritarian team contests with multiple pairwise battles as in Fu, Lu, and Pan (2015 American Economic Review). We consider one-shot order choice games and battle-by-battle sequential player choice games. We show that as long as the number of players on each team is the same as the number of battles, the equilibrium winning probability of a team and the ex ante expected effort of each player in a multi-battle contest are independent of whether players' assignments are one-shot or battle-by-battle sequential. This equilibrium winning probability and ex ante expected total effort coincide with those where the player matching is chosen totally randomly with an equal probability lottery by the contest organizer. Finally, we show how player choices add subtleties to the equivalence result by examples.
    Keywords: group contest, team contest, multi-battle contest, sports economics
    JEL: C72 D72 D74 D82
    Date: 2021–01–22
  3. By: Indranil Chakraborty; Fahad Khalil; Jacques Lawarree
    Abstract: Unlike standard auctions, we show that competitive procurement may optimally limit competition or use inefficient allocation rules that award the project to a less efficient firm with positive probability. Procurement projects often involve ex post moral hazard after the competitive process is over. A procurement mechanism must combine an incentive scheme with the auction to guard against firms bidding low to win the contract and then cutting back on effort. While competition helps reduce the rent of efficient firms, it exacerbates the problem due to moral hazard. If allocative efficiency is a requirement, limiting the number of participants may be optimal. Alternatively, the same incentives can be optimally provided using inefficient allocation rules.
    Keywords: competitive procurement, auctions, moral hazard
    Date: 2021
  4. By: Mandal, Pinaki; Roy, Souvik
    Abstract: We consider assignment problems where heterogeneous indivisible goods are to be assigned to individuals so that each individual receives at most one good. Individuals have single-peaked preferences over the goods. In this setting, first we show that there is no strategy-proof, non-bossy, Pareto efficient, and strongly pairwise reallocation-proof assignment rule on a minimally rich single-peaked domain when there are at least three individuals and at least three objects in the market. Next, we characterize all strategy-proof, Pareto efficient, top-envy-proof, non-bossy, and pairwise reallocation-proof assignment rules on a minimally rich single-peaked domain as hierarchical exchange rules. We additionally show that strategy-proofness and non-bossiness together are equivalent to group strategy-proofness on a minimally rich single-peaked domain, and every hierarchical exchange rule satisfies group-wise reallocation-proofness on a minimally rich single-peaked domain.
    Keywords: Assignment problem; Single-peaked preferences; Strategy-proofness; Pareto efficiency; Non-bossiness; Top-envy-proofness; Strong reallocation-proofness; Pairwise/group-wise reallocation-proofness
    JEL: C78 D82
    Date: 2021–01–15
  5. By: Ville Korpela (Turku School of Economics, University of Turku FI-20014, Finland); Michele Lombardi (Adam Smith Business School, University of Glasgow; Department of Economics and Statistics, University of Naples); Hannu Vartiainen (University of Helsinki and Helsinki Graduate School of Economics, Finland)
    Abstract: Agents are farsighted when they consider the ultimate consequences of their actions. We re-examine the classical questions of implementation theory under complete information in a setting with transfers, where farsighted coalitions are considered fundamental behavioral units, and the equilibrium outcomes of their interactions are predicted via the stability notion of the largest consistent set. The designer’s exercise consists of designing a rights structure that formalizes the idea of power distribution in society. The designer’s challenge lies in forming a rights structure in which the equilibrium behavior of agents always coincides with the recommendation given by a social choice rule. We show that (Maskin) monotonicity fully identifies the class of implementable single-valued social choice rules. Even though, monotonicity is not necessary for implementation in general, we show that every monotonic social choice rule can be implemented. These findings imply that the class of implementable social choice rules in core equilibria is unaltered by farsighted reasoning.
    Keywords: Implementation, rights structures, largest consistent set, core, (Maskin) monotonicity
    JEL: C72 C78 D71
    Date: 2021–01
  6. By: P\'eter Bayer; Gy\"orgy Kozics; N\'ora Gabriella Sz\H{o}ke
    Abstract: We study public goods games played on networks with possibly non-reciprocal relationships between players. Examples for this type of interactions include one-sided relationships, mutual but unequal relationships, and parasitism. It is well known that many simple learning processes converge to a Nash equilibrium if interactions are reciprocal, but this is not true in general for directed networks. However, by a simple tool of rescaling the strategy space, we generalize the convergence result for a class of directed networks and show that it is characterized by transitive weight matrices. Additionally, we show convergence in a second class of networks; those rescalable into networks with weak externalities. We characterize the latter class by the spectral properties of the absolute value of the network's weight matrix and show that it includes all directed acyclic networks.
    Date: 2021–01
  7. By: Takashi Hayashi (Adam Smith Business School, University of Glasgow); Ritesh Jain (Institute of Economics, Academia Sinica); Ville Korpela (Turku School of Economics, University of Turku FI-20014, Finland); Michele Lombardi (Adam Smith Business School, University of Glasgow; Department of Economics and Statistics, University of Naples "Federico II")
    Abstract: Choice behavior is rational if it is based on the maximization of some context-independent preference relation. This study re-examines the questions of implementation theory in a setting where players’ choice behavior need not be rational and coalition formation must be taken into account. Our model implies that with boundedly rational players, the formation of groups greatly affects the design exercise. As a by-product, we also propose a notion of behavioral efficiency and we compare it with existing notions.
    Keywords: Strong equilibrium, implementation, state-contingent choice rules, bounded rationality
    JEL: D11 D60 D83
    Date: 2021–01
  8. By: Stark, Oded (University of Bonn); Kosiorowski, Grzegorz (Cracow University of Economics)
    Abstract: The inclination of individuals to improve their performance when it lags behind that of others with whom they naturally compare themselves can be harnessed to optimize the individuals' effort in work and study. In a given set of individuals, we characterize each individual by his relative deprivation, which measures by how much the individual trails behind other individuals in the set doing better than him. We seek to divide the set into an exogenously predetermined number of groups (subsets) in order to maximize aggregate relative deprivation, so as to ensure that the incentive for the individuals to work or study harder because of unfavorable comparison with others is at its strongest. We find that the solution to this problem depends only on the individuals’ ordinally-measured levels of performance independent of the performance of comparators.
    Keywords: social preferences, relative deprivation, effort elicitation, assignment to groups, performance optimization
    JEL: D01 D02 D23 D61 D90 L22 M11 M52
    Date: 2021–01
  9. By: Bianchi, Milo; Dana, Rose-Anne; Jouini, Elyès
    Abstract: Consider a Örm owned by shareholders with heterogeneous beliefs and discount rates who delegate to a manager the choice of a production plan. The shareholders and the manager can trade contingent claims in a complete asset market. Shareholders cannot observe the chosen production plan and design a compensation scheme so that at equilibrium the manager chooses the plan they prefer and reveals it truthfully. We show that at equilibrium i) proÖt is maximized, ii) the manager gets a constant share of production, iii) she has no incentive to trade. We then show that such equilibrium exists if and only if the manager has the same belief and discount rate as the representative shareholder. This allows us to characterize the required characteristics of the manager as a function of shareholdersí characteristics.
    Keywords: heterogeneous shareholders, asymmetric information, manager-shareholders equilibrium
    JEL: G32 G34 D24 D51 D53 D70
    Date: 2021–01–27
  10. By: Georgy Artemov
    Abstract: I study costly information acquisition in a two-sided matching problem, such as matching applicants to schools. An applicant's utility is a sum of common and idiosyncratic components. The idiosyncratic component is unknown to the applicant but can be learned at a cost. When applicants are assigned using an ordinal strategy-proof mechanism, too few acquire information, generating a significant welfare loss. Affirmative action and other realistic policies may lead to a Pareto improvement. As incentives to acquire information differ across mechanisms, ignoring such incentives may lead to incorrect welfare assessments, for example, in comparing a popular Immediate Assignment and an ordinal strategy-proof mechanism.
    Date: 2021–01
  11. By: Hideo Konishi (Boston College); Katsuya Kobayashi (Hosei University)
    Abstract: In this paper, we consider a prize-sharing rule design problem in a group contest with effort complementarities within groups by employing a CES effort aggregator function. We derive the conditions for a monopolization rule that dominates an egalitarian rule if the objective of the rule design is to maximize the group's winning probability. We find conditions under which the monopolization rule maximizes the group's winning probability, while the egalitarian rule is strictly preferred by all members of the group. Without effort complementarity, there cannot be such a conflict of interest.
    Keywords: group contest, complementarity in efforts, free riding, prize sharing rule
    JEL: C72 D23 D74
    Date: 2020–04–10
  12. By: Takashi Nishiwaki (Graduate School of Economics, Waseda University)
    Abstract: This study examinesthe optimal investment strategies for risk-and-ambiguity averse investors and characterizes conditions under which ambiguity induces investors to buy or sell options. Under identical constant relative risk aversion utility functions, we show that ambiguity-averse investors should sell portfolio insurance. In particular, when investors' relative risk aversion is less than or equal to two, ambiguity-averse investors should sell options at any realization values of a reference asset. In addition, if the relative risk aversion is greater than two, we demonstrate that ambiguity-averse investors should sell options at smaller and buy them at higher realization values of the reference portfolio.
    Keywords: Ambiguity; Multiple prior model; Options demand; Kullback-Leibler divergence
    JEL: G11 G22
    Date: 2020–09
  13. By: Takashi Nishiwaki (Graduate School of Economics, Waseda University)
    Abstract: This study compares the optimal consumption amount for a risk-averse agent under different uncertainty resolution times in a time-separable utility setting. We show that an agent with a positive third derivative utility function (i.e., a prudent agent) reduces his/her consumption amount when the uncertainty resolution is postponed. We also demonstrate that an agent does not change consumption behavior under different uncertainty resolution times if and only if the agent has a quadratic utility.
    Keywords: Background risk; Time-separable utility; Prudence, Optimal consumption; Timing of uncertainty resolution
    JEL: G11 G22 G51
    Date: 2020–08
  14. By: Yuta Inoue (Graduate School of Economics, Waseda University)
    Abstract: This paper develops revealed preference analysis of an individual choice model where an agent is a weak preference maximizer, under the assumption that a choice function, rather than a choice correspondence, is observed. In particular, we provide a revealed preference test for such model, and then provide conditions under which we can surely say whether some alternative is indifferent / weakly preferred / strictly preferred to another, solely from the information of the choice function. Furthermore, interpreting a choice correspondence as sets of potential candidates of alternatives that could be chosen from each feasible set, we analyze which alternatives must be, or cannot be a member of the choice correspondence: sharp lower and upper bounds of this underlying choice correspondence are given. As an assumption on observability of data, we assume that the choice function is defined on a non-exhaustive domain, so our results are applicable to data analysis even when only a limited data set is available.
    Keywords: Revealed preference; Choice function; Choice correspondence; Weak preference; Bounded rationality
    JEL: D1 D6
    Date: 2020–05
  15. By: Marie Laclau (CNRS - Centre National de la Recherche Scientifique, GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, HEC Paris - Ecole des Hautes Etudes Commerciales); Ludovic Renou (QMUL - Queen Mary University of London, University of Adelaide); Xavier Venel (LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli [Roma])
    Abstract: We consider sender-receiver games, where the sender and the receiver are two distinct nodes in a communication network. Communication between the sender and the receiver is thus indirect. We ask when it is possible to robustly implement the equilibrium outcomes of the direct communication game as equilibrium outcomes of indirect communication games on the network. Robust implementation requires that: (i) the implementation is independent of the preferences of the intermediaries and (ii) the implementation is guaranteed at all histories consistent with unilateral deviations by the intermediaries. We show that robust implementation of direct communication is possible if and only if either the sender and receiver are directly connected or there exist two disjoint paths between the sender and the receiver. We also show that having two disjoint paths between the sender and the receiver guarantees the robust implementation of all communication equilibria of the direct game. We use our results to reflect on organizational arrangements.
    Keywords: Cheap talk,direct,mediated,communication,protocol,network. JEL CLASSIFICATION: C72,D82
    Date: 2021–01–06

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