nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒02‒28
twenty papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Simultaneous Search and Adverse Selection By Sarah Auster; Piero Gottardi; Ronald Wolthoff
  2. The Benefits of Coarse Preferences By Halpern, Joe; Heller, Yuval; Winter, Eyal
  3. Buying Opinions By Mark Whitmeyer; Kun Zhang
  4. Optimism leads to optimality: Ambiguity in network formation By Bayer, Peter; Guerdjikova, Ani
  5. Voting With Endogenous Timing By Finn Schmieter
  6. Bargaining for Assembly By Soumendu Sarkar; Dhritiman Gupta
  7. Evaluation and strategic manipulation By Pablo Amorós
  8. Socially concerned duopolies with lifetime employment as a strategic commitment By Ohnishi, Kazuhiro
  9. Disclosure regime of contract terms and bargaining in vertical markets By Petrakis, Emmanuel; Skartados, Panagiotis
  10. Partnership Dissolution in a Search Market With On-The-Match Learning By Finn Schmieter
  11. Matching with Transfers under Distributional Constraints By Devansh Jalota
  12. Rationalizable Implementation of Social Choice Functions: Complete Characterization By Siyang Xiong
  13. Advance sales and deterrence with heterogeneous firms By Henry Thille; Sebastien Mitraille
  14. In platforms we trust: misinformation on social networks in the presence of social mistrust By Charlson, G.
  15. The dual of Bertrand with homogeneous products is Cournot with perfect complements By Paolo Bertoletti
  16. Technology licensing and Collusion By Sen, Neelanjan; Minocha, Priyansh; Dutta, Arghya
  17. A theory of cultural revivals By Murat Iyigun; Jared Rubin; Avner Seror
  18. Advertising Arbitrage By Sergey Kovbasyuk; Marco Pagano
  19. Optimal patent licensing: from three to two part tariffs By Ma, Siyu; Sen, Debapriya; Tauman, Yair
  20. A Model of Cryptocurrencies By Michael Sockin; Wei Xiong

  1. By: Sarah Auster; Piero Gottardi; Ronald Wolthoff
    Abstract: We study the effect of diminishing search frictions in markets with adverse selection by presenting a model in which agents with private information can simultaneously contact multiple trading partners. We highlight a new trade-off: facilitating contacts reduces coordination frictions but also the ability to screen agents' types. We find that, when agents can contact sufficiently many trading partners, fully separating equilibria obtain only if adverse selection is sufficiently severe. When this condition fails, equilibria feature partial pooling and multiple equilibria co-exist. In the limit, as the number of contacts becomes large, some of the equilibria converge to the competitive outcomes of Akerlof (1970), including Pareto dominated ones; other pooling equilibria continue to feature frictional trade in the limit, where entry is inefficiently high. Our findings provide a basis to assess the effects of recent technological innovations which have made meetings easier.
    Keywords: Directed Search, Adverse Selection
    JEL: D82 D83
    Date: 2022–01
  2. By: Halpern, Joe; Heller, Yuval; Winter, Eyal
    Abstract: We study the strategic advantages of coarsening one’s utility by clustering nearby payoffs together (i.e., classifying them the same way). Our solution concept, coarse-utility equilibrium (CUE) requires that (1) each player maximizes her coarse utility, given the opponent’s strategy, and (2) the classifications form best replies to one another. We characterize CUEs in various games. In particular, we show that there is a qualitative difference between CUEs in which only one of the players clusters payoffs, and those in which all players cluster their payoffs, and that the latter type induce players to treat co-players better than in Nash equilibria in the large class of games with monotone externalities.
    Keywords: Categorization, language, indirect evolutionary approach, monotone externalities, strategic complements, strategic substitutes.
    JEL: C73 D83
    Date: 2022–01–25
  3. By: Mark Whitmeyer; Kun Zhang
    Abstract: A principal hires an agent to acquire a distribution over unverifiable posteriors before reporting to the principal, who can contract on the realized state. An agent's optimal learning and truthful disclosure completely specify the marginal incentives the principal must provide, which radically simplifies the principal's problem. When the agent i. is risk neutral, and iia. has a sufficiently high outside option, or iib. can face sufficiently large penalties, the principal can attain the first-best outcome. We also explore in detail the general problem of cheaply implementing distributions over posteriors with limited liability constraints and a risk-averse agent.
    Date: 2022–02
  4. By: Bayer, Peter; Guerdjikova, Ani
    Abstract: We analyze a model of endogenous two-sided network formation where players are affected by uncertainty in their opponents’ decisions. We model this uncertainty using the notion of equilibrium under ambiguity. Unlike the set of Nash equilibria, the set of equilibria under ambiguity does not always include underconnected and thus inefficient networks such as the empty network. On the other hand, it may include networks with unreciprocated, one-way links, which comes with an efficiency loss as linking efforts are costly. We characterize equilibria under ambiguity and provide conditions under which increased player optimism comes with an increase in connectivity and realized benefits in equilibrium. Next, we analyze network realignment under a myopic updating process with optimistic shocks, and derive a global stability condition of efficient networks. Under this condition, called ‘aligned preferences’, a subset of the Pareto optimal equilibrium networks is reached, specifically, networks that maximize the players’ total benefits of connections.
    Date: 2022–01–21
  5. By: Finn Schmieter
    Abstract: This paper analyses the role of timing in common-value elections. There are two voting periods where voters can decide for themselves when to publicly cast their votes after receiving private signals. In welfare-optimal equilibria, agents use their timing to communicate the strength of their private information to the other voters. This communication allows for better information aggregation than simultaneous voting or voting with exogenously fixed timing. In the case of a simple majority voting rule, a second voting period mitigates the Swing Voter’s Curse more effectively than abstention.
    Keywords: Elections, Pivotal Voting, Communication, Information
    JEL: D72 D82 D83
    Date: 2022–01
  6. By: Soumendu Sarkar (Department of Economics, Delhi School of Economics); Dhritiman Gupta (O.P. Jindal Global University,Sonipat, India.)
    Abstract: An assembly problem refers to a situation where a buyer wants to purchase a fixed number of complementary items from sellers holding an item each. We model complementarity using graphs where nodes represent items, and edges between two nodes represent a complementary relationship between these items. The buyer wants to purchase a feasible path in the graph, i.e., a path of desired length, where the sum of valuations of the sellers owning the items do not exceed buyer’s own valuation. A seller is critical if he lies on every feasible path. We examine subgame perfect equilibria of an infinite horizon alternate-offer bargaining game between the buyer and the sellers. We show that there exist equilibria where the buyer can extract full surplus within two periods if and only if (a) there are no critical sellers and (b) there exist at least two feasible paths with minimum sum of seller valuations. We also characterize the upper bounds on buyer’s surplus when she cannot extract full surplus. Thus we characterize the trade-off between complementarity and competition in terms of buyer’s equilibrium surplus share in assembly problems. Key Words: Assembly, Bargaining, Competition, Complementarity, Contiguity, Holdout JEL Codes: C78
    Date: 2022–01
  7. By: Pablo Amorós (Departamento de Teoría e Historia Económica, Universidad de Málaga.)
    Abstract: We consider the problem of a group of experts who have to rank a set of candidates. Society's optimal choice relies on experts?honest judgments about the deserving ranking. However, experts' judgments are impossible to verify. Moreover, experts' judgments do not entirely determine their preferences. Then, experts might want to misreport their judgments if, by doing so, some ranking that they like best is selected. To solve this problem, we have to design a mechanism where the experts interact so that the socially optimal ranking is implemented. Whether this is possible depends on (1) how experts' judgments are aggregated to determine the socially optimal ranking and (2) how experts' preferences relate to their judgments. We state necessary and su¢ cient conditions on these two elements for the socially optimal ranking to be implementable in dominant strategies and Nash equilibrium. Then, we study the implementability of some widely used judgment aggregation rules, including extensions of scoring and Condorcet consistent voting rules. Finally, we propose a non-trivial judgment aggregation rule that is Nash implementable.
    Keywords: Evaluation; impartiality; manipulability; ranking of candidates; mechanism design; voting rules.
    JEL: C72 D71 D78
    Date: 2022–02
  8. By: Ohnishi, Kazuhiro
    Abstract: This paper considers a two-stage game model with a nonlinear concave demand function where two socially concerned firms compete with each other. In the first stage, each firm decides simultaneously and independently whether to offer lifetime employment as a strategic commitment device. In the second stage, after observing the rival’s choice in the first stage, each firm chooses simultaneously and independently an actual output level. Each socially concerned firm maximizes its own profit plus a fraction of consumer surplus. The paper discusses the equilibrium outcomes of the model.
    Keywords: Concave demand function; Cournot duopoly model; Lifetime employment; Socially concerned firms
    JEL: C72 D21 L20
    Date: 2022–01–22
  9. By: Petrakis, Emmanuel; Skartados, Panagiotis
    Abstract: We consider a vertically related market where an upstream monopolist supplies two downstream Cournot competitors. We allow the vertical contract terms to be either interim observable or secret. We address a dichotomy in the literature by endogenizing the disclosure regime of contract terms. The latter could be set via a Non-Disclosure Agreement. Firms bargain over both the disclosure regime and the contract terms. Our results indicate that when firms trade over two-part tariffs, universal interim observability is the unique equilibrium no matter the bargaining power distribution or the product differentiation. Yet, when firms trade over linear tariffs there may be a multiplicity of equilibria. We also show that under competing vertical chains we get universal interim observability as a unique equilibrium no matter the upstream structure. Our results qualitatively hold under Bertrand competition too. Our welfare analysis indicates that universal interim observability and two-part tariffs yield the highest consumer surplus and total welfare.
    Keywords: Bilateral Contracting; Vertical Relations; Two-Part Tariffs; Bargaining; Nondisclosure Agreements; Secret Contracts
    JEL: D43 L13 L14
    Date: 2022–02–16
  10. By: Finn Schmieter
    Abstract: We construct a frictional search-and-matching model with on-the-match learning and rematching. Agents are ex-ante homogeneous, have idiosyncratic preferences, and receive news about the profitability of their current match following a Poisson process. We provide an infinite number of pointwise balance conditions and a finite number of aggregate balance conditions and prove their equivalence. We show that agents follow cutoff strategies in the unique steady-state equilibrium. If the profitability types inside a match have a strong positive (negative) correlation, then a faster learning rate is ex-ante welfare-increasing (decreasing) for the agents.
    Keywords: Search frictions, matching, on-the-job search, learning
    JEL: C78 D83 J64
    Date: 2022–01
  11. By: Devansh Jalota
    Abstract: We study two-sided many-to-one matching markets with transferable utilities, e.g., labor and rental housing markets, in which money can exchange hands between agents, subject to distributional constraints on the set of feasible allocations. In such markets, we establish the efficiency of equilibrium arrangements, specified by an assignment and transfers between agents on the two sides of the market, and study the conditions on the distributional constraints and agent preferences under which equilibria exist. To this end, we first consider the setting when the number of institutions (e.g., firms in a labor market) is one and show that equilibrium arrangements exist irrespective of the nature of the constraint structure or the agents' preferences. However, equilibrium arrangements may not exist in markets with multiple institutions even when agents on each side have linear (or additively separable) preferences over agents on the other side. Thus, for markets with linear preferences, we study sufficient conditions on the constraint structure that guarantee the existence of equilibria using linear programming duality. Our linear programming approach not only generalizes that of Shapley and Shubik (1971) in the one-to-one matching setting to the many-to-one matching setting under distributional constraints but also provides a method to compute market equilibria efficiently.
    Date: 2022–02
  12. By: Siyang Xiong
    Abstract: We provide a necessary and sufficient condition for rationalizable implementation of social choice functions, i.e., we offer a complete answer regarding what social choice functions can be rationalizably implemented.
    Date: 2022–02
  13. By: Henry Thille (Department of Economics and Finance, University of Guelph, Guelph ON Canada); Sebastien Mitraille (Toulouse Business School)
    Abstract: We examine the e?ects of ?rm heterogeneity when ?rms can compete in advance for future demand by either entering forward contracts or by selling to agents that store the good to meet future demand. Firms’ sales in the second period are reduced by aggregate advance sales, so high-cost ?rms may produce zero output in equilibrium if aggregate advance sales induce a price below their marginal cost. The endogenous number of active ?rms leads to the possibility of a deterrence equilibrium in which lower-cost ?rms act to deter the activity of higher-cost ?rms. In this case, the presence of inactive higher-cost ?rms in the market results in a lower price than would otherwise obtain. In addition, the advance sales equilibrium with heterogeneous ?rms has higher market shares for relatively e?cient ?rms compared to that in both the heterogeneous ?rm Cournot equilibrium and the homogeneous ?rm advance sales equilibrium. Consequently, the equilibrium outcome results in industry output produced at a lower average cost, which represents an additional welfare gain associated with the pro-competitive e?ects of strategic advance sales even though the reallocation of market shares leads to higher measured concentration.
    Keywords: Advance sales, oligopoly, quantity competition
    JEL: C72 D43 L13
    Date: 2022
  14. 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
  15. By: Paolo Bertoletti
    Abstract: The quantity-setting (Cournot) oligopoly with perfect complements is dual to the price-setting (Bertrand) oligopoly with homogeneous goods. Under mild technical conditions, the former setting has a unique (pure strategy) Nash equilibrium with null quantities.
    Keywords: Cournot duopoly; Bertrand duopoly; perfect complements; homogeneous products.
    JEL: D11 D43 D61
    Date: 2022–02
  16. By: Sen, Neelanjan; Minocha, Priyansh; Dutta, Arghya
    Abstract: This paper considers the possibility of technology licensing and tacit collusion between firms that produce homogeneous goods under asymmetric cost structures and compete in quantities. We discuss the possibility of collusion under Grim-Trigger strategies when technology may be licensed via fixed fee or royalty or two-part tariff. Irrespective of the type of licensing contract, the possibility that a stable cartel is formed is the same. In the no-licensing stage, the cartel formation is more likely if the cost difference between the firms is higher. In contrast to Lin (1996), all forms of licensing facilitate (obstruct) collusion, if the initial cost difference between the firms is less (more). Technology will always be licensed in the first stage and the optimal form of licensing is either fixed-fee or royalty or two-part tariff. The cartel will be formed if the firms are relatively patient and welfare either increases or decreases in the post-licensing stage.
    Keywords: Technology licensing; Oligopoly; Cartel; Grim-Trigger Strategy; Cournot Competition
    JEL: D24 L13 L24
    Date: 2022–02–23
  17. By: Murat Iyigun (University of Colorado [Boulder]); Jared Rubin (Chapman University); Avner Seror (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Why do some societies have political institutions that support productively inefficient outcomes? And why does the political power of elites vested in these outcomes often grow over time, even when they are unable to block more efficient modes of production? We propose an explanation centered on the interplay between political and cultural change. We build a model in which cultural values are transmitted inter-generationally. The cultural composition of society, in turn, determines public-goods provision as well as the future political power of elites from different cultural groups. We characterize the equilibrium of the model and provide sufficient conditions for the emergence of cultural revivals. These are characterized as movements in which both the cultural composition of society as well as the political power of elites who are vested in productively inefficient outcomes grow over time. We reveal the usefulness of our framework by applying it to two case studies: the Jim Crow South and Turkey's Gülen Movement.
    Keywords: Institutions,Cultural beliefs,Cultural transmission,Institutional change
    Date: 2021–06
  18. By: Sergey Kovbasyuk (New Economic School); Marco Pagano (University of Naples Federico II,)
    Abstract: An arbitrageur with short investment horizon gains fr om accelerating price discovery by advertising his private information. However, advertising many assets may overload investors' attention, reducing the number of informed traders per asset and slowing price discovery. So the arbitrageur optimally concentrates advertising on just a few assets, unless his trades have significant price impact. The arbitrageur's gain from advertising is increasing in the assets' mispricing and in the precision of his private information, and is decreasing in its complexity. If several arbitrageurs have private information, inefficient equilibria can arise, where substantial mispricing persists or investors' attention is overloaded.
    Keywords: limits to arbitrage, advertising, price discovery, limited attention. JEL Classifications: G11, G14, G2, D84.
    Date: 2022–02
  19. By: Ma, Siyu; Sen, Debapriya; Tauman, Yair
    Abstract: We consider the licensing of a cost-reducing innovation in a Cournot oligopoly where an outside innovator uses three part tariffs that are combinations of upfront fees, per unit royalties and ad valorem royalties. The key insight of our analysis is per unit royalties have a location effect and ad valorem royalties have a scale effect on marginal costs. Using these two effects, we show that the same market outcome (price, quantities, operating profits) can be sustained by multiple combinations of per unit and ad valorem royalties. In the monopoly case, under three part tariffs it is optimal to set a pure upfront fee while the unique optimal two part royalty is a pure ad valorem royalty. In the case of a general oligopoly with linear demand, for relatively insignificant innovations, it is optimal to set a pure upfront fee; otherwise there is a continuum of optimal policies and there always exists an optimal policy consisting of a positive per unit royalty and upfront fee but no ad valorem royalty. For intermediate innovations, provided the demand intercept is relatively large, there exists an optimal policy that has both kinds of royalties but no fees. Finally in a Cournot duopoly it is illustrated that when the innovator is one of the incumbent firms rather than an outsider, market outcomes separately depend on two kinds of royalties and a pure ad valorem royalty is optimal among all three part tariffs.
    Keywords: patent licensing; per unit royalties; ad valorem royalties; three part tariffs; acceptability and feasibility constraints
    JEL: D43 D45 L13 L14
    Date: 2022–01–21
  20. By: Michael Sockin (University of Texas, Austin); Wei Xiong (Princeton University)
    Abstract: This paper develops a model to examine decentralization of online platforms through tokenization as an innovation to resolve the conflict between platforms and users. By delegating control to a collection of preprogrammed smart contracts, tokenization creates commitment devices that prevent a platform from abusing its users. This commitment comes at the cost of not having an owner with an equity stake who, in conventional platforms, would subsidize user participation to maximize the platform’s network effect. This trade-off makes utility tokens a more appealing funding scheme than equity for platforms with weak fundamentals. Our analysis further highlights that token prices are determined by the marginal user’s convenience yield, in contrast to equity, whose payoff is determined by the average user.
    Keywords: Cryptocurrencies
    JEL: G19
    Date: 2021–01

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