nep-mic New Economics Papers
on Microeconomics
Issue of 2021‒11‒22
six papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Moral Hazard, Dynamic Incentives, and Ambiguous Perceptions By Martin Dumav
  2. Too much trade: the hidden problem of adverse selection By De Meza, David; Reito, Francesco; Reyniers, Diane J.
  3. Rational play in games: A behavioral approach By Giacomo Bonanno
  4. Strategy-proofness of the unanimity with status-quo rule over restricted domains By Sarvesh Bandhu; Bishwajyoti Mondal; Anup Pramanik
  5. Perverse Ethical Concerns: Online Platforms and Offline Conflicts By Chang, Dongkyu; Vong, Allen
  6. Market areas in general equilibrium By Gianandrea Lanzara; Matteo Santacesaria

  1. By: Martin Dumav
    Abstract: This paper considers dynamic moral hazard settings, in which the consequences of the agent's actions are not precisely understood. In a new continuous-time moral hazard model with drift ambiguity, the agent's unobservable action translates to drift set that describe the evolution of output. The agent and the principal have imprecise information about the technology, and both seek robust performance from a contract in relation to their respective worst-case scenarios. We show that the optimal long-term contract aligns the parties' pessimistic expectations and broadly features compressing of the high-powered incentives. Methodologically, we provide a tractable way to formulate and characterize optimal long-run contracts with drift ambiguity. Substantively, our results provide some insights into the formal link between robustness and simplicity of dynamic contracts, in particular high-powered incentives become less effective in the presence of ambiguity.
    Date: 2021–10
  2. By: De Meza, David; Reito, Francesco; Reyniers, Diane J.
    Abstract: Adverse selection famously leads to the crowding out of socially benecial trades. We show that even more trades may be simultaneously crowded in. The reason is that, in the absence of complete unravelling, \lemons" fetch more under adverse selection. It is demonstrated how these \bad" trades occur in insurance, credit and used-car markets, and some policy implications are discussed.
    Keywords: adverse selection; insurance; credit; used cars
    JEL: C13 D14 D82
    Date: 2021–10–29
  3. By: Giacomo Bonanno (Department of Economics, University of California Davis)
    Abstract: We argue in favor of a departure from the standard equilibrium approach in game theory in favor of the less ambitious goal of describing only the actual behavior of rational players. We investigate the notion of rationality in behavioral models of extensive-form games (allowing for imperfect information), where a state is described in terms of a play of the game instead of a strategy profile. The players' beliefs are specified only at reached decision histories and are modeled as pre-choice beliefs, allowing us to carry out the analysis without the need for (objective or subjective) counterfactuals. The analysis is close in spirit to the literature on self-confirming equilibrium, but it does not rely on the notion of strategy. We also provide a characterization of rational play that is compatible with pure-strategy Nash equilibrium.
    Keywords: Rationality, extensive-form game, self-confirming equilibrium, Nash equilibrium, behavioral model
    JEL: C7
    Date: 2021–11–17
  4. By: Sarvesh Bandhu (IIM, Bangalore); Bishwajyoti Mondal (Department Of Economics, Shiv Nadar University); Anup Pramanik (Department Of Economics, Shiv Nadar University)
    Abstract: In this paper we provide a complete characterization of preference domains on which the Unanimity with Status-quo rule is strategy-proof. Further, we introduce a notion of "conflicting preference domains" and show that the Unanimity with Status- quo rule defined over these domains is strategy-proof.
    Keywords: Voting, Strategy-proofness, Unanimity with status-quo rules, Conflicting preference domains.
    JEL: D71
    Date: 2021–11–11
  5. By: Chang, Dongkyu; Vong, Allen
    Abstract: We study a model where many citizens learn a hidden state individually on an online platform. The platform slants news and imperfectly filters misinformation, triggering conflicts about the state among the citizens. We show that a platform that faces an ethical concern to internalize conflict costs could perversely aggravate conflicts. This cautionary observation highlights that societal efforts to mitigate conflicts, such as investments in ethical algorithms, public awareness campaigns, and government policies, are effective if and only if their implementations are sufficiently aggressive.
    Keywords: platforms, social media, polarization, conflicts
    JEL: C72 D83 L86
    Date: 2021–11–05
  6. By: Gianandrea Lanzara; Matteo Santacesaria
    Abstract: We consider a spatial model where a continuous set of sellers (e.g. farmers) must choose one trading location in a discrete set (e.g. cities) in a subset of the plane. Locations differ in terms of productivity, and shipping costs depend on the underlying geography via very general distance functions. Our analysis combines tools from general equilibrium theory and computational geometry. The key insight is that, under Constant Elasticity of Substitution (CES) preferences, the equilibrium trading choices of farmers can be represented as a Voronoi tessellation with additive weights, where the weights are determined at the market equilibrium. Using this insight, we prove that an equilibrium partition of space into market areas exists and is unique for general underlying geographies, and we characterize their comparative statics in terms of the model parameters. Moreover, we develop a set of tools that are useful in empirical applications. We show that the model can be solved with a simple, and economically-interpretable, gradient-descent algorithm, and we discuss two metrics to evaluate the distance between tessellations. Finally, we provide an illustrative application to the case of Swiss cantons.
    Date: 2021–10

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