nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒05‒03
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Objective Rationality Foundations for (Dynamic) α-MEU By Frick, Mira; Iijima, Ryota; Le Yaouanq, Yves
  2. Public Good Overprovision by a Manipulative Provider By Celik, Gorkem; Shin, Dongsoo; Strausz, Roland
  3. Strategic Leaks in First-Price Auctions and Tacit Collusion: The Case of Spying and Counter-Spying By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  4. Robust Contracting in General Contract Spaces By Backhoff-Veraguas, Julio; Beissner, Patrick; Horst, Ulrich
  5. Search and Competition with Flexible Investigations By Vasudha Jain; Mark Whitmeyer
  6. History-Based Price Discrimination with Imperfect Information Accuracy and Asymmetric Market Shares By Stefano Colombo; Clara Graziano; Aldo Pignataro
  7. Relational Enforcement By Peter Wagner; Jan Knoepfle
  8. Procrastination and Learning about Self-Control By Christensen, Else; Murooka, Takeshi
  9. Obviously Strategy-proof Mechanism Design With Rich Private Information By Mariya Halushka
  10. Optimal Checks and Balances Under Policy Uncertainty By Gabriele Gratton; Massimo Morelli
  11. All-Pay Auctions with Reserve Price and Bid Cap By Oleg Muratov
  12. Repeated Games with Endogenous Discounting By Kochov, Asen; Song, Yangwei
  13. Reciprocity in Dynamic Employment Relationships By Fahn, Matthias
  14. Endogenous Organizational Restructuring: Status, Productivity, & Meritocratic Dynamics By Ashutosh Thakur; Jonathan Bendor

  1. By: Frick, Mira (Yale University); Iijima, Ryota (Yale University); Le Yaouanq, Yves (LMU Munich)
    Abstract: We show how incorporating Gilboa, Maccheroni, Marinacci, and Schmeidler’s (2010) notion of objective rationality into the α-MEU model of choice under ambiguity (Hurwicz, 1951) can overcome several challenges faced by the baseline model without objective rationality. The decision-maker (DM) has a subjectively rational preference ≥^, which captures the complete ranking over acts the DM expresses when forced to make a choice; in addition, we endow the DM with a (possibly incomplete) objectively rational preference ≥*, which captures the rankings the DM deems uncontroversial. Under the objectively founded α-MEU model, ≥^ has an α-MEU representation and ≥* has a unanimity representation à la Bewley (2002), where both representations feature the same utility index and set of beliefs. While the axiomatic foundations of the baseline α-MEU model are still not fully understood, we provide a simple characterization of its objectively founded counterpart. Moreover, in contrast with the baseline model, the model parameters are uniquely identified. Finally, we provide axiomatic foundations for prior-by-prior Bayesian updating of the objectively founded α-MEU model, while we show that, for the baseline model, standard updating rules can be ill-defined.
    Keywords: ambiguity; α-MEU; objective rationality; updating;
    Date: 2020–07–27
  2. By: Celik, Gorkem (ESSEC Business School); Shin, Dongsoo (Santa Clara University); Strausz, Roland (HU Berlin)
    Abstract: We study contracting between a public good provider and users with private valuations of the good. We show that, once the provider extracts the users' private information, she benefits from manipulating the collective information received from all users when communicating with them. We derive conditions under which such manipulation determines the direction of distortions in public good provision. If the provider is non-manipulative, the public good is always underprovided, whereas overprovision occurs with a manipulative provider. With overprovision, not only high-valuation users, but also low-valuation users may obtain positive rents - users may prefer facing a manipulative provider.
    Keywords: information manipulation; public goods;
    JEL: D82 D86 H41
    Date: 2020–07–23
  3. By: Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
    Abstract: We analyze strategic leaks due to spying out a rival’s bid in a first-price auction. Such leaks induce sequential bidding, complicated by the fact that the spy may be a counterspy who serves the interests of the spied at bidder and reports strategically distorted information. This ambiguity about the type of spy gives rise to a non-standard signaling problem where both sender and receiver of messages have private information and the sender has a chance to make an unobserved move. Whereas spying without counterspy exclusively benefits the spying bidder, the potential presence of a counterspy yields a collusive outcome, even if the likelihood that the spy is a counterspy is arbitrarily small. That collusive impact shows up in all equilibria and is strongest in the unique pooling equilibrium which is also the payoff dominant equilibrium.
    Keywords: auctions, tacit collusion, espionage, second-mover advantage, signaling, incomplete information
    JEL: L12 L13 L41 D43 D44 D82
    Date: 2021
  4. By: Backhoff-Veraguas, Julio (University of Twente); Beissner, Patrick (Australian National University); Horst, Ulrich (HU Berlin)
    Abstract: We consider a general framework of optimal mechanism design under adverse selection and ambiguity about the type distribution of agents. We prove the existence of optimal mechanisms under minimal assumptions on the contract space and prove that centralized contracting implemented via mechanisms is equivalent to delegated contracting implemented via a contract menu under these assumptions. Our abstract existence results are applied to a series of applications that include models of optimal risk sharing and of optimal portfolio delegation.
    Keywords: robust contracts; nonmetrizable contract spaces; ambiguity; financial markets;
    JEL: C02 D82
    Date: 2020–05–14
  5. By: Vasudha Jain; Mark Whitmeyer
    Abstract: We modify the standard model of price competition with horizontally differentiated products, imperfect information, and search frictions by allowing consumers to flexibly acquire information about a product's match value during their visits. We characterize a consumer's optimal search and information acquisition protocol and analyze the pricing game between firms. Notably, we establish that in search markets there are fundamental differences between search frictions and information frictions, which affect market prices, profits, and consumer welfare in markedly different ways. Although higher search costs beget higher prices (and profits for firms), higher information acquisition costs lead to lower prices and may benefit consumers. We discuss implications of our findings for policies concerning disclosure rules and hidden fees.
    Date: 2021–04
  6. By: Stefano Colombo; Clara Graziano; Aldo Pignataro
    Abstract: The paper considers a duopoly model in which firms inherited asymmetric market shares and history-based price discrimination is viable. However, firms can identify only a share of their own consumers depending to the degree of information accuracy. We derive the pricing strategies and we analyze the relationship between information accuracy and asymmetric market shares, showing under which circumstances there exists an equilibrium in pure strategies. We show that history-based price discrimination makes the dominant firm’s profits always lower than those of the rival, with an ambiguous effect of the information accuracy on industry profits. Moreover, we prove that the level of information accuracy has a decreasing effect on social welfare, while it affects consumer surplus non-monotonically, according to the size of asymmetry in the inherited market shares.
    Keywords: history-based price discrimination, information accuracy, asymmetric market shares
    JEL: D80 D43 L10
    Date: 2021
  7. By: Peter Wagner; Jan Knoepfle
    Abstract: This paper studies a principal who incentivizes an agent to achieve and maintain compliance and voluntarily disclose incidences of non-compliance. Compliance is modeled as a persistent binary process that jumps at random times arriving at a rate that depends on the agent's efforts. The state of compliance is verifiable by the principal only at isolated instances through costly inspections. We show that in principal-optimal equilibria, the principal attains maximum compliance by using deterministic inspections. The optimal equilibrium features periodic inspection cycles which are suspended during periods of self-reported non-compliance, in which the agent is fined. We explain how commitment to random inspections benefits the principal by relaxing the agent's incentive- compatibility constraints, and we discuss possible ways for the principal to overcome her commitment problem through third-party involvement.
    Keywords: Relational contracts, compliance, costly inspections, commitment, randomization
    JEL: C73 D82 D83 D86 L51
    Date: 2021–04
  8. By: Christensen, Else (RBB Economics); Murooka, Takeshi (Osaka University)
    Abstract: We study a model of task completion with the opportunity to learn about own self-control problems over time. While the agent is initially uncertain about her future self-control, in each period she can choose to learn about it by paying a non-negative learning cost and spending one period. If the agent has time-consistent preferences, she always chooses to learn whenever the learning is beneficial. If the agent has time-inconsistent preferences, however, she may procrastinate such a learning opportunity. Further, if her time preferences exhibit inter-temporal conflicts between future selves (e.g., hyperbolic discounting), the procrastination of learning can occur even when the learning cost is zero. The procrastination also leads to a non-completion of the task. When the agent has multiple initially-uncertain attributes (e.g., own future self-control and own ability for the task), the agent’s endogenous learning decisions may be misdirected — she chooses to learn what she should not learn from her initial perspective, and she chooses not to learn what she should.
    Keywords: procrastination; self-control; naivete; hyperbolic discounting; misdirected learning;
    JEL: C70 D83 D90 D91
    Date: 2019–10–21
  9. By: Mariya Halushka (Department of Economics, University of Ottawa)
    Abstract: I consider settings with rich private information – an agent's type may include private information other than just his preferences. In such settings, I identify a necessary condition for obviously strategy-proof implementation of social choice rules. I consider applications to strict preferences, matching and object allocation.
    Keywords: Obvious strategy-proofness, Mechanism design.
    JEL: D82 D90
    Date: 2021
  10. By: Gabriele Gratton; Massimo Morelli
    Abstract: Political checks and balances are certainly among the most debated desiderata in the construction of democratic systems and their evaluation. This paper suggests a conceptual framework that could be useful to inform this debate. We propose a model where the pros and cons of a strengthening of checks and balances are respectively the reduction of type-I errors and the increase of potential type-II errors in policy decision-making. Political checks and balances are less desirable for intermediate levels of competence of the political class when in conjunction with high accountability. In policy areas where the welfare effects of a reform are harder to evaluate and effective accountability is low, political checks and balances are always desirable. Positive constitutional design unfortunately reveals the possibility of constitutional traps, with politicians choosing or defending the less desirable regime.
    Keywords: Checks and balances, Information, Uncertain policy quality, Effective accountability, constitutional design
    Date: 2021
  11. By: Oleg Muratov
    Abstract: I characterize equilibria in an all-pay auction with a reserve price and a bid cap. I consider the cases of two and three players. I show that equilibrium bidding is characterized by atoms at 0, the reserve price, and the bid cap, as well as continuous bidding above the bid cap. If the valuations are high enough, the range for continuous bidding shrinks completely. I show that for some parameter ranges there exist multiple equilibria. Under three players, I show that there exist equilibria with the following features: the player with the non-top valuation can have a positive rent; the players with completely different valuations can actively compete for the single prize; the player with positive payoff can have different payoff in different equilibria.
    Date: 2021–04
  12. By: Kochov, Asen (University of Rochester); Song, Yangwei (HU Berlin)
    Abstract: In a symmetric repeated game with standard preferences, there are no gains from intertemporal trade. In fact, under a suitable normalization of utility, the payoff set in the repeated game is identical to that in the stage game. We show that this conclusion may no longer be true if preferences are recursive and stationary, but not time separable. If so, the players’ rates of time preference are no longer fixed, but may vary endogenously, depending on what transpires in the course of the game. This creates opportunities for intertemporal trade, giving rise to new and interesting dynamics. For example, the efficient and symmetric outcome of a repeated prisoner’s dilemma may be to take turns defecting, even though the efficient and symmetric outcome of the stage game is to cooperate. A folk theorem shows that such dynamics can be sustained in equilibrium if the players are sufficiently patient.
    Keywords: repeated games; efficiency; folk theorems; endogenous discounting;
    Date: 2020–03–02
  13. By: Fahn, Matthias (JKU Linz and CESifo)
    Abstract: This paper explores the optimal provision of dynamic incentives for employees with reciprocal preferences. Building on the presumption that a relational contract can establish a norm of reciprocity, I show that generous upfront wages that activate an employee’s reciprocal preferences are more important when he is close to retirement. In earlier stages, “direct” performance-pay promising a bonus in exchange for effort is used more extensively. Then, a longer remaining time horizon increases the employer’s commitment which is generally determined by her future profits. Moreover, since future profits are affected by the employee’s reciprocal preferences, the norm of reciprocity already shapes the incentive system at the beginning of his career. I also show that more competition might magnify the use of reciprocity-based incentives, and that a formal commitment to paying nondiscretionary wages in the future can boost the employer’s credibibility.
    Keywords: reciprocity; relational contracts; dynamic incentives;
    JEL: C73 D21 D86 D90 D91
    Date: 2019–11–08
  14. By: Ashutosh Thakur (Stanford Graduate School of Business and University of Cologne); Jonathan Bendor (Stanford Graduate School of Business)
    Abstract: We model the dynamics of endogenous organizational restructuring, where those being assigned positions in an organization can themselves lobby for who gets which position. Internal labor market changes depend on how much individuals value their own status in the organization, the organizational output, their friends' welfare, and the quality of their own departmental colleagues. Meritocratic assignments are reached with probability one when agents value organizational output even with epsilon weight, provided friend networks and departments are not too large. We also characterize the effects of various voting rules, agendas, and specializations on the paths and the stability of organizational structures.
    Keywords: organizational reform, assignment, voting, institutions, meritocracy, status
    JEL: D71
    Date: 2021–04

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