nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒06‒28
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Testing the sender: When signaling is not enough By Nicolás Figueroa; Carla Guadalupi
  2. Signaling and Discrimination in Collaborative Projects By Paula Onuchic ⓡ; Debraj Ray
  3. Multiproduct Intermediaries By Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong
  4. Aggregating Welfare Gains By Eden, Maya
  5. Intrapersonal price discrimination in a dominant firm model By Antelo, Manel; Bru, Lluís
  6. Voting by Simultaneous Vetoes By Margarita Kirneva; Matias Nunez
  7. Alternative Microfoundations for Strategic Classification By Meena Jagadeesan; Celestine Mendler-D\"unner; Moritz Hardt
  8. Vox Populi, Vox Dei? Tacit Collusion in Politics By Johansson, Christian; Kärnä, Anders; Meriläinen, Jaakko
  9. Robust Decisions for Heterogeneous Agents via Certainty Equivalents By Anne G. Balter; Nikolaus Schweizer
  10. Uncertainty Aversion and Convexity in Portfolio Choice By Dong, Xueqi
  11. Unique Stable Matchings By Gregory Z. Gutin; Philip R. Neary; Anders Yeo
  12. The Bargaining Set and Coalition Formation By Ken-Ichi Shimomura
  13. Robust Model Misspecification and Paradigm Shifts By Cuimin Ba
  14. A Central Limit Theorem, Loss Aversion and Multi-Armed Bandits By Zengjing Chen; Larry G. Epstein; Guodong Zhang

  1. By: Nicolás Figueroa; Carla Guadalupi
    Abstract: We study signaling in the presence of endogenous information acquisition by the receiver. A firm, after observing the worker’s costly action, may acquire further information by performing a test on the applicant, and then decide to hire him. We consider different models of information acquisition, including the rational inattention, a generalization of the “truth or noise” and a general grading model. We study test effectiveness as function of beliefs generated through signaling by the worker, and provide clear-cut predictions on the complementarity/substitutability between costly information transmission (signaling) and acquisition, and its implications for the equilibrium. We first show that test effectiveness is non-monotone in beliefs. It exhibits increasing regions, where beliefs and test effectiveness act as complements, with higher beliefs inducing more effective tests, and decreasing regions in which higher beliefs crowd out the firm’s information acquisition. We then show that, when beliefs and test effectiveness are complements, the equilibrium involves (at least partial) separation between workers’ types. Since the high type is more willing to face a more exacting test than a low type, he will exert costly effort to improve the firm’s opinion. When beliefs and test effectiveness are substitutes, any signaling attempt by the high type will be mimicked by the low one who benefits more from relaxed standards and indiscriminate hiring, and the only plausible equilibrium involves both types pooling.
    Date: 2020
  2. By: Paula Onuchic ⓡ; Debraj Ray
    Abstract: We propose a model of collaborative work in pairs. Each potential partner draws an idea from a distribution that depends on their unobserved ability. The partners then choose to combine their ideas, or work separately. These decisions are based on the intrinsic value of their projects, but also on signaling payoffs, which depend on the public’s assessment of individual contributions to joint work. In equilibrium, collaboration strategies both justify and are justified by public assessments. When partners are symmetric, equilibria with symmetric collaborative strategies are often fragile, in a sense made precise in the paper. In such cases, asymmetric equilibria exist: upon observing a collaborative outcome, the public ascribes higher credit to one of the partners based on payoff-irrelevant “identities.” Such favored identities do receive a higher payoff relative to their disfavored counterparts conditional on collaborating, but may receive lower overall expected payoff. Finally, we study a policy that sometimes (but not always) clarifies the ordinal ranking of partners’ contributions, and find that such disclosures can be Pareto-improving and reduce the scope for discrimination across payoff-irrelevant identities.
    JEL: D70 D82 J71
    Date: 2021–06
  3. By: Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong
    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: Direct-to-consumer sales; Exclusivity; intermediaries; Multiproduct demand; Product range; search
    JEL: D83 L42 L81
    Date: 2020–05
  4. By: Eden, Maya
    Abstract: I characterize the set of policy decision rules which, in addition to satisfying the standard Pareto condition and a weak anonymity requirement, utilize only information about the objective effects of a policy change and its associated profile of individual "welfare gains". I establish that, depending on the assumptions made about individual preferences, there is either no social decision rule that satisfies these requirements, or a unique one. I characterize the unique social decision rules under different common definitions of "welfare gains" and common assumptions about individual preferences.
    Date: 2020–05
  5. By: Antelo, Manel; Bru, Lluís
    Abstract: The standard dominant firm (DF)-competitive fringe model, in which all firms sell the good through linear pricing, is extended to the use of nonlinear contracts in the form of two-part tariffs (2PT). We show that under general conditions, the DF practices intrapersonal price discrimination, and supplies to fewer consumers than under linear pricing. As a consequence, nonlinear pricing leads to an inefficient result and consumers are worse off than when the DF uses linear prices; on the contrary, fringe firms are better off as they end up charging a higher price for the good.
    Keywords: Dominant firm, fringe firms, linear and nonlinear contracts, intrapersonal price discrimination
    JEL: L13
    Date: 2021–06
  6. By: Margarita Kirneva (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, IP Paris - Institut Polytechnique de Paris, GENES - Groupe des Ecoles Nationales d'Economie et Statistique - Institut national de la statistique et des études économiques (INSEE)); Matias Nunez (CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], IP Paris - Institut Polytechnique de Paris, GENES - Groupe des Ecoles Nationales d'Economie et Statistique - Institut national de la statistique et des études économiques (INSEE))
    Abstract: We propose the first class of simultaneous voting mechanisms in which each Nash equilibrium is coalition-proof. These mechanisms hence prevent the coordination failures which arise when some (coalition of) voters could have induced an outcome that they all prefer to the equilibrium outcome had they agreed on a common strategy. In each of these mechanisms, some voter(s) has the right to veto a list of alternatives. For each specification of the veto rights, each of these mechanisms implements a Veto by random priority rule introduced by Moulin [1981]. We then discuss necessary conditions for arbitrary mechanisms to implement a Pareto efficient rule ensuring that each equilibrium is coalition-proof. We show that the presence of veto rights in the mechanism is unavoidable to achieve this demanding implementation notion.
    Keywords: Implementation,Voting,Vetoes,Coalition Formation,Efficiency
    Date: 2021–05–28
  7. By: Meena Jagadeesan; Celestine Mendler-D\"unner; Moritz Hardt
    Abstract: When reasoning about strategic behavior in a machine learning context it is tempting to combine standard microfoundations of rational agents with the statistical decision theory underlying classification. In this work, we argue that a direct combination of these standard ingredients leads to brittle solution concepts of limited descriptive and prescriptive value. First, we show that rational agents with perfect information produce discontinuities in the aggregate response to a decision rule that we often do not observe empirically. Second, when any positive fraction of agents is not perfectly strategic, desirable stable points -- where the classifier is optimal for the data it entails -- cease to exist. Third, optimal decision rules under standard microfoundations maximize a measure of negative externality known as social burden within a broad class of possible assumptions about agent behavior. Recognizing these limitations we explore alternatives to standard microfoundations for binary classification. We start by describing a set of desiderata that help navigate the space of possible assumptions about how agents respond to a decision rule. In particular, we analyze a natural constraint on feature manipulations, and discuss properties that are sufficient to guarantee the robust existence of stable points. Building on these insights, we then propose the noisy response model. Inspired by smoothed analysis and empirical observations, noisy response incorporates imperfection in the agent responses, which we show mitigates the limitations of standard microfoundations. Our model retains analytical tractability, leads to more robust insights about stable points, and imposes a lower social burden at optimality.
    Date: 2021–06
  8. By: Johansson, Christian (Chalmers University of Technology); Kärnä, Anders (Research Institute of Industrial Economics (IFN)); Meriläinen, Jaakko (ITAM)
    Abstract: We study competition between political parties in repeated elections with probabilistic voting, allowing a multidimensional policy space and multiple political parties. This model entails multiple equilibria. When parties hold different opinions on some policy, they may take different policy positions that do not coincide with the median voter’s preferred policy platform but converge towards it. In contrast, when parties have a mutual understanding on a particular policy, their policy positions may converge (on some dimension) but not to the median voter’s preferred policy. Parties may collude with one another and take a position that differs from what the median voter prefers, despite political competition. Collusion may collapse, for instance, after the entry of a new political party. We substantiate the theoretical arguments with descriptive evidence using Swedish survey data on politicians and voters, which suggests that there is competition on some dimensions and collusion on others.
    Keywords: Electoral competition; Partisan collusion; Probabilistic voting; Repeated elections; Tacit collusion
    JEL: C73 D72 P16
    Date: 2021–06–16
  9. By: Anne G. Balter; Nikolaus Schweizer
    Abstract: We study the problem of a planner who resolves risk-return trade-offs - like financial investment decisions - on behalf of a collective of agents with heterogeneous risk preferences. The planner's objective is a two-stage utility functional where an outer utility function is applied to the distribution of the agents' certainty equivalents from a given decision. Assuming lognormal risks and heterogeneous power utility preferences for the agents, we characterize optimal behavior in a setting where the planner can let each agent choose between different options from a fixed menu of possible decisions, leading to a grouping of the agents by risk preferences. These optimal decision menus are derived first for the case where the planner knows the distribution of preferences exactly and then for a case where he faces uncertainty about this distribution, only having access to upper and lower bounds on agents' relative risk aversion. Finally, we provide tight bounds on the welfare loss from offering a finite menu of choices rather than fully personalized decisions.
    Date: 2021–06
  10. By: Dong, Xueqi
    Abstract: This note studies the implication of the general notion of uncertainty aversion (Schmeidler 1989) on the problem of portfolio choice, which involves allocating the proportions of fixed capital to several assets. We prove that if an investor is both risk averse and uncertainty averse, then preference in a portfolio space is convex. This result means that the convexity in a portfolio choice problem can be guaranteed without restricting preference representation to a particular functional form.
    Keywords: Convexity, Portfolio Choice, Ambiguity, Uncertainty Aversion, Risk Aversion
    JEL: D8
    Date: 2021–06–11
  11. By: Gregory Z. Gutin; Philip R. Neary; Anders Yeo
    Abstract: We provide necessary and sufficient conditions on the preferences of market participants for a unique stable matching in models of two-sided matching with non-transferable utility. We use the process of iterated deletion of unattractive alternatives (IDUA), a formalisation of the reduction procedure in Balinski and Ratier (1997), and we show that an instance of the matching problem possesses a unique stable matching if and only if IDUA collapses each participant preference list to a singleton. (This is in a sense the matching problem analog of a strategic game being dominance solvable.)
    Date: 2021–06
  12. By: Ken-Ichi Shimomura (Research Institute for Economics and Business Administration(RIEB), Kobe University, JAPAN)
    Abstract: We address the problem of predicting how rational agents will form coalitions in a nontransferable utility game, and within each coalition how they will allocate the gains obtained through cooperation. To answer these questions, we propose solution concepts according to which the coalition structure and the payoff allocations are simultaneously determined. We prove the nonemptiness and partial efficiency of the steady bargaining set, a refinement of the Zhou bargaining set, for at least one coalition structure under the restrictive non-crossing condition. In addition, we show the nonemptiness and possible inefficiency of the Mas-Colell bargaining set if this condition is not assumed.
    Keywords: Nontransferable utility game; Coalition structure; Bargaining set; Restrictive non-crossing condition
    JEL: C71 D71
    Date: 2021–06
  13. By: Cuimin Ba
    Abstract: This paper studies the forms of model misspecification that are likely to persist when compared with competing models. I consider an agent using a subjective model to learn about an action-dependent outcome distribution. Aware of potential model misspecification, she uses a threshold rule to switch between models according to how well they fit the data. A model is globally robust if it can persist against every finite set of competing models and is locally robust if it can persist against every finite set of nearby competing models. The main result provides simple characterizations of globally robust and locally robust models based on the set of Berk-Nash equilibria they induce. I then apply the results to examples including risk underestimation, overconfidence, and incorrect beliefs about market demand.
    Date: 2021–06
  14. By: Zengjing Chen; Larry G. Epstein; Guodong Zhang
    Abstract: This paper establishes a central limit theorem under the assumption that conditional variances can vary in a largely unstructured history-dependent way across experiments subject only to the restriction that they lie in a fixed interval. Limits take a novel and tractable form, and are expressed in terms of oscillating Brownian motion. A second contribution is application of this result to a class of multi-armed bandit problems where the decision-maker is loss averse.
    Date: 2021–06

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