nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒02‒21
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Contracts as a Barrier to Entry: Impact of Buyer's Asymmetric Information and Bargaining Power By David Martimort; Jérôme Pouyet; Thomas Trégouët
  2. An Implementation Approach to Rotation Programs By Ville Korpela; Michele Lombardi; Riccardo Saulle
  3. Behavior-based price discrimination and signaling of product quality By Li, Jianpei; Zhang, Wanzhu
  4. Opportunism Problems of Colluding Manufacturers By Jana Gieselmann; Matthias Hunold; Johannes Muthers; Alexander Rasch
  5. Strategically biased learning in market interactions By Giulio Bottazzi; Daniele Giachini
  6. Optimal Checks and Balances Under Policy Uncertainty By Gabriele Gratton; Massimo Morelli
  7. The Optimality of Public-Private Partnerships under Financial and Fiscal Constraints By Marco Buso; Luciano Greco
  8. Backward Induction Reasoning beyond Backward Induction By Catonini, Emiliano; Penta, Antonio
  9. In platforms we trust: misinformation on social networks in the presence of social mistrust By Charlson, G.

  1. By: David Martimort (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, EHESS - École des hautes études en sciences sociales); Jérôme Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School); Thomas Trégouët (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: An incumbent seller contracts with a buyer and faces the threat of entry. The contract stipulates a price and a penalty for breach if the buyer later switches to the entrant. Sellers are heterogenous in terms of the gross surplus they provide to the buyer. The buyer is privately informed on her valuation for the incumbent's service. Asymmetric information makes the incumbent favor entry as it helps screening buyers. When the entrant has some bargaining power vis-à-vis the buyer and keeps a share of the gains from entry, the incumbent instead wants to reduce entry. The compounding effect of these two forces may lead to either excessive entry or foreclosure, and possibly to a fixed rebate for exclusivity given to all buyers.
    Keywords: excessive entry,foreclosure,exclusionary behavior,incomplete information
    Date: 2021–12
  2. By: Ville Korpela (Turku School of Economics, University of Turku); Michele Lombardi (University of Liverpool Management School, Liverpool, UK); Riccardo Saulle (Department of Economics and Management, University of Padova)
    Abstract: We study rotation programs within the standard implementation framework under complete information. A rotation program is a myopic stable set whose states are arranged circularly, and agents can effectively move only between two consecutive states. We provide characterizing conditions for the implementation of efficient rules in rotation programs. Moreover, we show that the conditions fully characterize the class of implementable multi-valued and efficient rules.
    Keywords: Rotation Programs; Job Rotation; Assignment Problems; Implementation; rights structures; Stability.
    JEL: C71 D71 D82
    Date: 2022–01
  3. By: Li, Jianpei; Zhang, Wanzhu
    Abstract: We analyse a two-period model in which a monopolistic seller may adopt behavior-based price discrimination (BBPD) and charge consumers different prices based on their purchasing histories. We show that if there is quality uncertainty and prices convey valuable information about product quality, BBPD can be profitable for the seller both when the seller can and can not commit to future prices, contrasting the traditional view that the seller would like to avoid BBPD due to strategic delay of consumption on the consumers' side. BBPD increases consumers' sensitivity to a price change in the first period and enables the high type seller to signal product quality with relatively low prices, effectively reducing signaling costs in comparison to uniform pricing. In the separating equilibria that survive the intuitive criterion, first-time purchasers pay lower prices than repeat purchasers.
    Keywords: Behavior-based Price Discrimination (BBPD); Quality Uncertainty; Signaling
    JEL: D82 L11 L15
    Date: 2022–01–17
  4. By: Jana Gieselmann (HHU); Matthias Hunold; Johannes Muthers; Alexander Rasch
    Abstract: In a market with two exclusive manufacturer-retailer pairs, we show that colluding manufacturers may not be able to attain supra-competitive profits when contracts with retailers are secret. The stability of manufacturer collusion depends on the retailers’ beliefs. We consider various dynamic beliefs and find that industry-profit-maximizing collusion is feasible for some. Collusion is even renegotiation-proof under trigger beliefs if a novel condition of opportunism-proofness holds, which can be more demanding than the standard stability condition. Trigger beliefs are not flexible enough to allow for formation of collusion. We demonstrate that adaptive beliefs may be necessary for the formation of manufacturer collusion in a non-collusive industry.
    Keywords: opportunism, credible punishment, cartel formation, manufacturer collusion, vertical relations, renegotiation-proof, secret contracting
    JEL: C73 D43 L13 L41 L81
    Date: 2021–12
  5. By: Giulio Bottazzi; Daniele Giachini
    Abstract: We consider a market economy where two rational agents are able to learn the distribution of future events. In this context, we study whether moving away from the standard Bayesian belief updating, in the sense of under-reaction to some degree to new information, may be strategically convenient for traders. We show that, in equilibrium, strong under-reaction occurs, thus rational agents may strategically want to bias their learning process. Our analysis points out that the underlying mechanism driving ex-ante strategical decisions is diversity seeking. Finally, we show that, even if robust with respect to strategy selection, strong under-reaction can generate low realized welfare levels because of a long transient phase in which the agent makes poor predictions.
    Keywords: Learning, Strategic interaction, Behavioral Bias, Financial Markets
    Date: 2022–01–15
  6. 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
  7. By: Marco Buso (Catholic University of Milan & CIFREL & CRIEP); Luciano Greco (dSEA—University of Padua & CRIEP)
    Abstract: The government may delegate two sequential tasks (e.g., building and operating an infrastructure) to the same or different agents (i.e., partnership versus sequential con- tracts). Agents are risk-neutral but face financial constraints, whereas the government’s contractual capacity may be limited by the renegotiation-proof and fiscal constraints. By relying on history-dependent incentives, the partnership contract corrects moral hazard more effectively than sequential contracts. Thus, it is socially preferred unless bundling different tasks deteriorates the agent’s financial conditions. Our results shed new light on the role of firms’ financial and government’s fiscal conditions in driving the cost-benefit analysis of public-private partnerships.
    Keywords: Sequential moral hazard, Bundling, Limited liability, Budget constraint, Memory contracts
    JEL: D86 H11 H57 L33
    Date: 2021–11
  8. By: Catonini, Emiliano; Penta, Antonio
    Abstract: Backward Induction is a fundamental concept in game theory. As an algorithm, it can only be used to analyze a very narrow class of games, but its logic is also invoked, albeit informally, in several solution concepts for games with imperfect or incomplete informa-tion (Subgame Perfect Equilibrium, Sequential Equilibrium, etc.). Yet, the very meaning of ‘backward induction reasoning’ is not clear in these settings, and we lack a way to apply this simple and compelling idea to more general games. We remedy this by introducing a solution concept for games with imperfect and incomplete information, Backwards Rational-izability, that captures precisely the implications of backward induction reasoning. We show that Backwards Rationalizability satisfies several properties that are normally ascribed to backward induction reasoning, such as: (i) an incomplete-information extension of subgame consistency (continuation-game consistency); (ii) the possibility, in finite horizon games, of being computed via a tractable backwards procedure; (iii) the view of unexpected moves as mistakes; (iv) a characterization of the robust predictions of a ‘perfect equilibrium’ notion that introduces the backward induction logic and nothing more into equilibrium analysis. We also discuss a few applications, including a new version of peer-confirming equilibrium (Lipnowski and Sadler (2019)) that, thanks to the backward induction logic distilled by Backwards Rationalizability, restores in dynamic games the natural comparative statics the original concept only displays in static settings.
    Keywords: ackward induction; backwards procedure; backwards rationalizability; incomplete information; interim perfect equilibrium, rationalizability; robustness
    JEL: C72 C73 D82
    Date: 2022–02–03
  9. By: Charlson, G.
    Abstract: We examine the effect social mistrust has on the propagation of misinformation on a social network. Agents communicate with each other and observe information sources, changing their opinion with some probability determined by their social trust, which can be low or high. Low social trust agents are less likely to be convinced out of their opinion by their peers and, in line with recent empirical literature, are more likely to observe misinformative information sources. A platform facilitates the creation of a homophilic network where users are more likely to connect with agents of the same level of social trust and the same social characteristics. Networks in which worldview is relatively important in determining network structure have more pronounced echo chambers, reducing the extent to which high and low social trust agents interact. Due to the asymmetric nature of these interactions, echo chambers then decrease the probability that agents believe misinformation. At the same time, they increase polarisation, as disagreeing agents interact less frequently, leading to a trade-off which has implications for the optimal intervention of a platform wishing to reduce misinformation. We characterise this intervention by delineating the most effective change in the platform's algorithm, which for peer-to-peer connections involves reducing the extent to which relatively isolated high and low social trust agents interact with one another.
    Keywords: communication, misinformation, network design, platforms
    JEL: D82 D83 D85
    Date: 2022–01–14
  10. By: Hitoshi Matsushima (Department of Economics, University of Tokyo)
    Abstract: This study investigates free-rider problems in long-term relationships, where each player seeks loopholes to impose the burden of cooperation on other players. The players establish a committee that demands that each player select an action as promised by a preset commitment rule, contingent on all players’ pre-play announcements. We require the committee to protect player sovereignty in that no player is forced to carry out high cooperation levels against their will or receive future retaliation from the other players for their low commitment. We demonstrate a method called the cautious commitment rule, according to which the committee makes each player a promise that is not necessarily the same as, but always close to and not greater than, their announced upper limit. We show that by adopting this rule, the committee can solve the free-rider problem while adhering to sovereignty protection and rule sustainability. As an application, we investigate global warming and show that adopting the cautious commitment rule is crucial for solving the tragedy of the global commons that all countries in the world have long faced.
    Date: 2022–01

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