nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒04‒19
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Conflict Prevention by Bayesian Persuasion By Raphaela Hennigs
  2. Double Marginalization and Vertical Integration By Philippe Choné; Laurent Linnemer; Thibaud Vergé
  3. Preemption contests between groups By Stefano Barbieri; Kai A. Konrad; David A. Malueg
  4. Multiproduct Intermediaries By Makoto Watanabe; Jidong Zhou
  5. Bid Caps and Disclosure Policies By Bo Chen; Marco Serena
  6. A network solution to robust implementation: The case of identical but unknown distributions By Mariann Ollar; Antonio Penta
  7. Attack and Interception in Networks By Francis Bloch; Kalyan Chatterjee; Bhaskar Dutta
  8. Optimal Epidemic Control in Equilibrium with Imperfect Testing and Enforcement By Thomas Phelan; Alexis Akira Toda
  9. Fair Representation in Primaries: Heterogeneity and the New Hampshire Effect By Stefano Barbieri; Marco Serena
  10. Belief Convergence under Misspecified Learning: A Martingale Approach By Mira Frick; Ryota Iijima; Yuhta Ishii
  11. Winner's Effort Maximization in Large Contests By Stefano Barbieri; Marco Serena
  12. Conservative Updating By Matthew Kovach
  13. Characterization of Nash equilibria in Cournotian oligopolies with interdependent preferences By Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
  14. Contests with Supporters By Bharat Goel; Arijit Sen
  15. Comparative statics and centrality measures in oligopolies with interdependent preferences By Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
  16. Optimal Design of Limited Partnership Agreements By Mohammad Abbas Rezaei
  17. Attacking and Defending Multiple Valuable Secrets in a Big Data World By Kai A. Konrad
  18. Motivational Ratings By Johannes Hörner; Nicolas Lambert
  19. Reward Design in Risk-Taking Contests By Marcel Nutz; Yuchong Zhang
  20. Too Big to Prevail: The Paradox of Power in Coalition Formation By Changxia Ke; Florian Morath; Anthony Newell; Lionel Page

  1. By: Raphaela Hennigs
    Abstract: Drawing upon the Bayesian persuasion literature, I show that a mediator can provide conflicting parties strategically with information to decrease the ex-ante war probability. In a conflict between two parties with private information about military strength, the mediator generates information about each conflicting party’s strength and commits to sharing the obtained information with the respective opponent. The conflicting parties can be convinced not to ï¬ ght each other. The conflicting parties beneï¬ t from mediation, as the ex-ante war probability is reduced. The beneï¬ t is taken up by weak conflicting parties. This beneï¬ t is larger when war is costlier and when the war probability absent mediation is higher.
    Keywords: mediation, conflict, information design, Bayesian persuasion
    JEL: C72 D82 D83
    Date: 2019–09
  2. By: Philippe Choné; Laurent Linnemer; Thibaud Vergé
    Abstract: Asymmetric information in procurement entails double marginalization. The phenomenon is most severe when the buyer has all the bargaining power at the production stage, while it vanishes when the buyer and suppliers’ weights are balanced. Vertical integration eliminates double marginalization and reduces the likelihood that the buyer purchases from independent suppliers. Conditional on market foreclosure, the probability that final consumers are harmed is positive only if the buyer has more bargaining power when selecting suppliers than when negotiating over quantities and intermediate prices. The buyer’s and consumers’ interests are otherwise aligned.
    Keywords: antitrust policy, vertical merger, asymmetric information, bargaining, double marginalization, procurement mechanism
    JEL: L10 L40 D40 D80
    Date: 2021
  3. By: Stefano Barbieri; Kai A. Konrad; David A. Malueg
    Abstract: We consider a preemption game between groups where the ï¬ rst agent to take a costly action wins the prize on behalf of his group. We describe the equilibrium solution of this problem when players differ in their own costs of action and these costs are private information. The equilibrium is typically characterized by delay. The nature of the equilibrium depends on key parameters such as the number of groups and their size. More competition between groups reduces delay, whereas in larger groups members of a given cost type are more reluctant to act but may yield an earlier resolution of the conflict. We analyze asymmetries across groups, focusing on group size and strength of the externalities within groups.
    Keywords: preemption, free riding, dynamic conflict, inter-group conflict, dynamic conflict, incomplete information, waiting
    JEL: D74 H41 L13
    Date: 2019–05
  4. By: Makoto Watanabe (Department of Economics VU Amsterdam); Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: This paper develops a new framework for studying multiproduct intermediaries when consumers demand multiple products and face search frictions. We show that a multiproduct intermediary is profitable even when it does not improve consumer search efficiency. In its optimal product selection, it stocks high-value products exclusively to attract consumers to visit, then profits by selling non-exclusive products which are relatively cheap to buy from upstream suppliers. However, relative to the social optimum, the intermediary tends to be too big and stock too many products exclusively. As applications we use the framework to study the optimal design of a shopping mall, and the impact of direct-to-consumer sales by upstream suppliers on the retail market.
    Keywords: Intermediaries, Multiproduct demand, Search, Direct-to-consumer sales, Product range, Exclusivity
    JEL: D83 L42 L81
    Date: 2020–11
  5. By: Bo Chen; Marco Serena
    Abstract: We examine the effect of publicly disclosing or concealing bidders’ types in an all-pay auction with a common bid cap. We call partial (full) disclosure policy the setup where the contest designer’s disclosure policy is (not) contingent on type realization. Despite a bid cap possibly increasing the expected expenditures under a partial disclosure policy and the expected expenditures of low-types under a policy of full disclosure, the bid cap unambiguously decreases the expected total expenditures, regardless of the disclosure policy. For any given bid cap and allowing for full and partial disclosure policies, we ï¬ nd that expenditures are minimized with the policy in which a designer discloses bidders’ types only if both players have a low valuation of the prize. The expenditures are maximized with the full concealment policy or with the policy in which a designer discloses the information only if both players have a high valuation. All in all, when the designer can choose both the disclosure policy and the bid cap, revenue is maximized employing full concealment with no bid cap.
    Keywords: contest, all-pay auction, stochastic abilities, bid cap, disclosure
    JEL: C72 D44 D82
    Date: 2020–06
  6. By: Mariann Ollar; Antonio Penta
    Abstract: We consider mechanism design environments in which agents commonly know that others' types are identically distributed, but without assuming that the actual distribution is common knowledge, nor that it is known to the designer (common knowledge of identicality, CKI). Under these assumptions, we study problems of partial and full implementation, as well as robustness. First, we characterize the transfers which are incentive compatible under the CKI assumption, and provide necessary and sufficient conditions for partial implementation. Second, we characterize the conditions under which full implementation is possible via direct mechanisms, as well as the transfer schemes which achieve full implementation whenever it is possible. We do this by pursuing a network approach, which is based on the observation that the full implementation problem in our setting can be conveniently transformed into one of designing a network of strategic externalities, subject to suitable constraints which are dictated by the incentive compatibility requirements entailed by the CKI assumption. This approach enables us to uncover a fairly surprising result: the possibility of full implementation is characterized by the strength of the preference interdependence of the two agents with the least amount of preference interdependence, regardless of the total number of agents, and of their preferences. Finally, we study the robustness properties of the implementing transfers with respect to both misspecifications of agents' preferences and with respect to lower orders beliefs in rationality.
    Keywords: Moment conditions, robust full implementation, Rationalizability, interdependent values, identical but unknown distributions, uniqueness, strategic externalities, spectral radius, canonical transfers,
    JEL: D62 D82 D83
    Date: 2021–04
  7. By: Francis Bloch (Paris School of Economics); Kalyan Chatterjee (Pennsylvania State University); Bhaskar Dutta (Ashoka University)
    Abstract: This paper studies a game of attack and interception in a network, where a single attacker chooses a target and a path, and each node chooses a level of protection. We show that the Nash equilibrium of the game exists and is unique. It involves a mixed strategy of the attacker except when one target has a very high value relative to others. We characterize equilibrium attack paths and attack distributions as a function of the underlying network and target values. We also show that adding a link or increasing the value of a target may harm the attacker - a comparative statics effect which is reminiscent of Braess's paradox in transportation economics. Finally, we contrast the Nash equilibrium with the equilibria of two variations of the model: one where nodes make sequential protection decisions upon observing the arrival of a suspicious object, and one where all nodes cooperate in defense.
    Keywords: Network interdiction, Networks, Attack and defense, Inspection
    Date: 2021–04
  8. By: Thomas Phelan; Alexis Akira Toda
    Abstract: We analyze equilibrium behavior and optimal policy within a Susceptible-Infected-Recovered epidemic model augmented with potentially undiagnosed agents who infer their health status and a social planner with imperfect enforcement of social distancing. We define and prove the existence of a perfect Bayesian Markov competitive equilibrium and contrast it with the efficient allocation subject to the same informational constraints. We identify two externalities, static (individual actions affect current risk of infection) and dynamic (individual actions affect future disease prevalence), and study how they are affected by limitations on testing and enforcement. We prove that a planner with imperfect enforcement will always wish to curtail activity, but that its incentives vanish as testing becomes perfect. When a vaccine arrives far into the future, the planner with perfect enforcement may encourage activity before herd immunity. We find that lockdown policies have modest welfare gains, whereas quarantine policies are effective even with imperfect testing.
    Date: 2021–04
  9. By: Stefano Barbieri; Marco Serena
    Abstract: In sequential primaries, fair representation of the electorate may be undermined by the New Hampshire effect. Simultaneous primaries address fair representation, but may increase expenditures. We analyze these issues by studying heterogeneity in sequential and simultaneous contests. If a player is stronger in every battle (e.g., a candidate is favorite by the entire electorate), then expenditures are smaller in sequential than in simultaneous contests, as in the literature for homogeneous players, and the stronger player is more likely to win in sequential than simultaneous contests. However, if playersÂ’ advantages alternate across battles, then expenditures may be greater in sequential than in simultaneous contests, and the player who has the advantage later in sequential contest is more likely to win: dynamics affect representation. We interpret our results in light of the candidatesÂ’advantages due to statesÂ’ demographics in the 2020 US primaries and discuss novel testable implications of our analysis.
    Keywords: contests, momentum effect, temporal structures.
    JEL: C72 D72 D74 D82
    Date: 2020–06
  10. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yuhta Ishii (Department of Economics at Pennsylvania State University)
    Abstract: We present an approach to analyze learning outcomes in a broad class of misspecified environments, spanning both single-agent and social learning. We introduce a novel "prediction accuracy" order over subjective models, and observe that this makes it possible to partially restore standard martingale convergence arguments that apply under correctly specified learning. Based on this, we derive general conditions to determine when beliefs in a given environment converge to some long-run belief either locally or globally (i.e., from some or all initial beliefs). We show that these conditions can be applied, first, to unify and generalize various convergence results in previously studied settings. Second, they enable us to analyze environments where learning is "slow," such as costly information acquisition and sequential social learning. In such environments, we illustrate that even if agents learn the truth when they are correctly specified, vanishingly small amounts of misspecification can generate extreme failures of learning.
    Keywords: Misspecified learning, Stability, Robustness, Berk-Nash equilibrium
    Date: 2020–05
  11. By: Stefano Barbieri; Marco Serena
    Abstract: We investigate the temporal structure that maximizes the winner's effort in large homogeneous contests, thus extending Hinnosaar (2019)'s analysis of total effort. We find that the winner's effort ranges from a lower bound of 0 to an upper bound of one third of the value of the prize, depending on the temporal structure; the upper (lower) bound is reached with an infinite number of players playing sequentially (simultaneously) in the first periods (period). This is in line with Hinnosaar's results for total effort. Nevertheless, when compare the speed of convergence of different temporal structures to the upper bound for the winner's effort, we prove the suboptimality of the fully sequential temporal structure, which is dominated by an initial number of fully sequential moves and a greater number of fully simultaneous moves in the very last period. This is in contrast with Hinnosaar's results for total effort.
    Date: 2020–09
  12. By: Matthew Kovach
    Abstract: This paper provides a behavioral analysis of conservatism in beliefs. I introduce a new axiom, Dynamic Conservatism, that relaxes Dynamic Consistency when information and prior beliefs "conflict." When the agent is a subjective expected utility maximizer, Dynamic Conservatism implies that conditional beliefs are a convex combination of the prior and the Bayesian posterior. Conservatism may result in belief dynamics consistent with confirmation bias, representativeness, and the good news-bad news effect, suggesting a deeper behavioral connection between these biases. An index of conservatism and a notion of comparative conservatism are characterized. Finally, I extend conservatism to the case of an agent with incomplete preferences that admit a multiple priors representation.
    Date: 2021–01
  13. By: Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
    Abstract: We study the effects on the Nash equilibrium of the presence of a structure of social interdependent preferences in a Cournot oligopoly, described in terms of a game in which the network of interactions reflects on the utility functions of firms through a combination of weighted profits of their competitors as in [7]. Taking into account the channels of social and market interactions, we detail the consequence of preference interdependence on the best response of a firm, focusing on both direct and high degree of interdependence effects between two given firms. We characterize the Nash equilibrium in terms of social and market interactions among firms, through a Bonacich-like centrality measure and a scalar index describing the degree of competitiveness that characterizes an oligopoly with interdependent preferences. Finally, we study the equilibrium of some scenarios described by regular structures of interaction.
    Keywords: Cournot Game, Preference interdependence, Nash Equilibrium
    JEL: D43 C62 C70
    Date: 2021–03
  14. By: Bharat Goel; Arijit Sen
    Abstract: In many real-world contests ( political elections / lobbying for public projects), contestants try to engage supporters (unemployed youth / local residents) to fight for them. Such contests have the following features: a significant part of a contestant’s supporter compensation is contingent upon the contestant winning the contest, and supporters are (at least partially) mercenary in that higher compensation offers do induce them to switch allegiance away from a ‘like-minded’ contestant. We study a class of contests with the above features, where two contestants – a favourite and an underdog – recruit supporters by offering contingent (and non-contingent) compensations in cash or in excludable public goods like political access. Our analysis delineates contest equilibria with the following features: Contestants’ offers of contingent compensations force potential supporters to choose their allegiance on the basis of predicted winners – and that act, in and of itself, enables the favourite to extend her lead. In some cases, it is possible that the underdog is doubly disadvantaged – her total compensation bill is no less than the favourite’s though she manages to attract a smaller army of supporters and thus falls farther behind in the race. The contest is necessarily dissipative for the underdog: she would be strictly better off under a ban on the hiring of supporters (though she is the one who offers higher supporter compensation). In some cases, the availability of unemployed youth to act as supporters in contests causes everyone in the economy to lose (except, maybe, the supporters themselves).
    Keywords: Contests, supporters, elections, lobbying
    JEL: C72 D72 D74
    Date: 2019–05
  15. By: Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
    Abstract: Considering the Cournot oligopoly with interdependent preferences proposed in [5], we analyze the effects of a change in the network of social interactions. Reconsidering some of the main centrality measures proposed in the literature, we show how intercentrality, Bonacich and Friedkin-Johnsen centrality measures can be related in a network described by a general matrix of interaction. This allows showing under what conditions a firm can benefit, in terms of equilibrium performance, from a change in the weight of interaction with respect to one of its competitors. Extending the approach to the study of a uniform change in the behavior of all the firms, we show that it is collectively beneficial only if the structure of social interaction is characterized by a sufficient degree of homogeneity in terms of weight distributions.
    Keywords: Cournot Game, Preference interdependence, Network, Centrality measures, Comparative statics.
    JEL: D43 C62 C70
    Date: 2021–03
  16. By: Mohammad Abbas Rezaei
    Abstract: General partners (GP) are sometimes paid on a deal-by-deal basis and other times on a whole-portfolio basis. When is one method of payment better than the other? I show that when assets (projects or firms) are highly correlated or when GPs have low reputation, whole-portfolio contracting is superior to deal-by-deal contracting. In this case, by bundling payouts together, whole-portfolio contracting enhances incentives for GPs to exert effort. Therefore, it is better suited to alleviate the moral hazard problem which is stronger than the adverse selection problem in the case of high correlation of assets or low reputation of GPs. In contrast, for low correlation of assets or high reputation of GPs, information asymmetry concerns dominate and deal-by-deal contracts become optimal, as they can efficiently weed out bad projects one by one. These results shed light on recent empirical findings on the relationship between investors and venture capitalists.
    Date: 2021–04
  17. By: Kai A. Konrad
    Abstract: This paper studies the attack-and-defence game between a web user and a whole set of players over this user’s ‘valuable secrets.’ The number and type of these valuable secrets are the user’s private information. Attempts to tap information as well as privacy protection are costly. The multiplicity of secrets is of strategic value for the holders of these secrets. Users with few secrets keep their secrets private with some probability, even though they do not protect them. Users with many secrets protect their secrets at a cost that is smaller than the value of the secrets protected. The analysis also accounts for multiple redundant information channels with cost asymmetries, relating the analysis to attack-and-defence games with a weakest link.
    Keywords: OR in societal problem analysis, big-data, privacy, web user, conflict, information rents, valuable secrets, attack-and-defence, multiple attackers, multiple defence items, multi-front contest.
    JEL: D18 D72 D74 D82
    Date: 2019–05
  18. By: Johannes Hörner (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); Nicolas Lambert (Unknown)
    Abstract: Performance evaluation (\rating") systems not only provide information to users but also motivate the rated worker. This paper solves for the optimal(effort-maximizing) rating within the standard career concerns framework. We prove that this rating is a linear function of past observations. The rating, however, is not a Markov process, but rather the sum of two Markov processes. We show how it combines information of different types and vintages. An increase in effort may adversely affect some (but not all) future ratings.
    Keywords: Career Concerns,Mechanism Design,Ratings.
    Date: 2021–04–01
  19. By: Marcel Nutz; Yuchong Zhang
    Abstract: Following the risk-taking model of Seel and Strack, $n$ players decide when to stop privately observed Brownian motions with drift and absorption at zero. They are then ranked according to their level of stopping and paid a rank-dependent reward. We study the problem of a principal who aims to induce a desirable equilibrium performance of the players by choosing how much reward is attributed to each rank. Specifically, we determine optimal reward schemes for principals interested in the average performance and the performance at a given rank. While the former can be related to reward inequality in the Lorenz sense, the latter can have a surprising shape.
    Date: 2021–02
  20. By: Changxia Ke; Florian Morath; Anthony Newell; Lionel Page
    Abstract: In standard coalition games, players try to form a coalition to secure a prize and a coalition agreement specifies how the prize is to be split among its members. However, in practical situations where coalitions are formed, the actual split of the prize often takes place after the coalition formation stage. This creates the possibility for some players to ask for a renegotiation of the initial split. We predict that, in such situations, a player can suffer from being “too strong”. Our experimental results confirm that, when the actual split of the prize is delayed, a player’s strength can turn into a strategic disadvantage: a greater voting power in forming a winning coalition is undermined by the threat of being overly powerful at the stage when a split is determined. This result is relevant to many real world situations where “too strong” players find it paradoxically hard to partner with weaker players to win the game.
    Keywords: Shapley Value, (non) binding agreement, balance of power, communication
    JEL: C71 C92 D72 D74
    Date: 2021

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