nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒03‒14
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Renegotiation and Dynamic Inconsistency: Contracting with Non-Exponential Discounting By Doruk Cetemen; Felix Zhiyu Feng; Can Urgun
  2. Strategic Communication with a Small Conflict of Interest By Francesc Dilmé
  3. Inflated Recommendations By Martin Peitz; Anton Sobolev
  4. Random Evolving Lotteries and Intrinsic Preference for Information By Faruk Gul; Paulo Natenzon; Wolfgang Pesendorfer
  5. Collective Progress: Dynamics of Exit Waves By Doruk Cetemen; Can Urgun; Leeat Yariv
  6. Obstructive Monitoring By Aaron Finkle
  7. Dynamically Aggregating Diverse Information By Annie Liang; Xiaosheng Mu; Vasilis Syrgkanis
  8. Sequential Choice with Incomplete Preferences By Xiaosheng Mu
  9. Retrospective Search: Exploration and Ambition on Uncharted Terrain By Can Urgun; Leeat Yariv
  10. Who Cares More? Allocation with Diverse Preference Intensities By Pietro Ortoleva; Evgenii Safonov; Leeat Yariv
  11. Restless Contracting By Can Urgun
  12. Voter conformism and inefficient policies By Aubert, Cécile; Ding, Huihui
  13. Lindahl Equilibrium as a Collective Choice Rule By Faruk R. Gul; Wolfgang Pesendorfer
  14. Conditions for efficient entry and clustering By Smirnov, Vladimir; Waity, Andrew

  1. By: Doruk Cetemen (Collegio Carlo Alberto); Felix Zhiyu Feng (University of Washington); Can Urgun (Princeton University)
    Abstract: This paper studies a continuous-time, finite-horizon contracting problem with renegotiation and dynamic inconsistency arising from non-exponential discounting. The problem is formulated as a dynamic game played among the agent, the principal and their respective future "selves", each with their own discount function. We identify the principal optimal renegotiation-proof contract as a Markov Perfect Equilibrium (MPE) of the game, prove such a MPE exists, and characterize the optimal contract via an extended Hamilton-Jacobi-Bellman system. We solve the optimal contract in closed-form when the discount functions of the selves are related by time difference, a property that is satisfied by common forms of non-exponential discounting such as quasi-hyperbolic discounting and anticipatory utility. In particular, quasi-hyperbolic discounting leads to a U-shaped action path and anticipatory utility leads to a humshaped path, both are qualitatively different from the monotonic action path that would arise under exponential discounting.
    Keywords: continuous-time contracting, dynamic inconsistency, renegotiation, extended HJB system, non-atomic games
    JEL: D82 D86 D91
    Date: 2021–02
  2. By: Francesc Dilmé (University of Bonn)
    Abstract: This paper analyzes strategic information transmission between a sender and a receiver with similar objectives. We provide a first-order approximation of the equilibrium behavior in the general version of the Crawford and Sobel’s (1982) model with a small bias. Our analysis goes beyond the usual uniform-quadratic setting: we uncover how the state-dependent bias and the non-uniform state distribution influence the precision with which each state of the world is communicated. We illustrate the approach by providing novel comparative statics results in different applications.
    Keywords: Strategic Communication, Small Bias
    JEL: C72 D82 D83
    Date: 2022–02
  3. By: Martin Peitz; Anton Sobolev
    Abstract: Biased recommendations arise naturally in a market with heterogeneous consumers: A seller o ers a product to a mix of "picky" and "flexible" consumers who can purchase through an intermediary or directly from the seller. A picky consumer either encounters a good or a bad match, while a "flexible" consumer is indifferent about the product design. Consumers know whether they are picky or flexible, but picky consumers observe match quality only after purchase and, therefore, rely on the intermedi- ary's recommendation. We provide conditions under which the intermediary decides to recommend a welfare-reducing bad match with positive probability, resulting in inflated recommendations. A regula- tory intervention that prohibits recommending bad matches may backfire. The optimal regulation that limits the rate at which the product can be recommended performs better than the laissez-faire.
    Keywords: intermediation, digital platforms, recommendation bias, recommender system, asymmetric information, experience good, e-commerce
    JEL: L12 L15 D21 D42 M37
    Date: 2022–02
  4. By: Faruk Gul (Princeton University); Paulo Natenzon (Washington University in St. Louis); Wolfgang Pesendorfer (Princeton University)
    Abstract: We introduce random evolving lotteries to study preference for non-instrumental information. Each period, the agent enjoys a flow payoff from holding a lottery that will resolve at the terminal date. We provide a representation theorem for non-separable risk consumption preferences and use it to characterize information seeking and its opposite, information aversion. To address applications, we characterize peak-trough utilities that aggregate trajectories of flow utilities linearly but, in addition, put weight on the best (peak) and worst (trough) lotteries along each path. We identify conditions for the ostrich effect, decision makers’ tendency to prefer information after good news to information after bad news. Our model permits savoring (enjoying the gradual arrival of good and sudden arrival of bad news) and dread (disliking the gradual arrival of bad and sudden arrival of good news) and a preference for skewed information
    Keywords: Information; Lotteries; Lottery; Preference
    JEL: D11 D44 D83
    Date: 2020–10
  5. By: Doruk Cetemen (Collegio Carlo Alberto); Can Urgun (Princeton University); Leeat Yariv (Princeton University, CEPR, and NBER)
    Abstract: We study a model of collective search by teams. Discoveries beget discoveries and correlated search results are governed by a Brownian path. Search results’ variation at any point—the search scope—is jointly controlled. Agents individually choose when to cease search and implement their best discovery. We characterize equilibrium and optimal policies. Search scope is constant and independent of search outcomes as long as no member leaves. It declines after departures. A simple drawdown stopping boundary governs each agent’s search termination. We show the emergence of endogenous exit waves, whereby possibly heterogeneous agents cease search all at once.
    Keywords: Retrospective Search, Optimal Stopping, Collective Action, Exit Waves
    JEL: C73 D81 D83 O35
    Date: 2021–06
  6. By: Aaron Finkle (Department of Economics, Davidson College)
    Abstract: This paper considers a principal-agent relationship in which the principal's monitoring can be obstructive to the agent, reducing the agent's productivity. We find that, when monitoring is obstructive, the optimal output schedule is distorted in all directions - the efficient agent produces more and the inefficient agent produces less than the first-best level. Moreover, if the principal has a choice, she will make monitoring deliberately obstructive in the optimal contract as a penalty device, even though it reduces the agent's productivity. Publication Status: working paper
    Keywords: Principal-Agent, Obstruction, Monitoring Creation Date: 2014
    JEL: D82 D86
  7. By: Annie Liang (Northwestern University); Xiaosheng Mu (Princeton University); Vasilis Syrgkanis (Microsoft Research)
    Abstract: An agent has access to multiple information sources, each modeled as a Brownian motion whose drift provides information about a different component of an unknown Gaussian state. Information is acquired continuously—where the agent chooses both which sources to sample from, and also how to allocate attention across them—until an endogenously chosen time, at which point a decision is taken. We demonstrate conditions on the agent’s prior belief under which it is possible to exactly characterize the optimal information acquisition strategy. We then apply this characterization to derive new results regarding: (1) endogenous information acquisition for binary choice, (2) the dynamic consequences of attention manipulation, and (3) strategic information provision by biased news sources.
    Keywords: information aggregation
    JEL: D83
    Date: 2021–06
  8. By: Xiaosheng Mu (Princeton University)
    Abstract: We study the outcome of a sequential choice procedure based on a potentially incomplete preference relation. A decision maker evaluates alternatives in a list and iteratively updates her choice by comparing the status quo to the next alternative. She favors the status quo whenever the two alternatives are incomparable according to her underlying preference. Developing a revealed preference approach, we characterize all choice functions that can arise from such a procedure, as well as all possible preferences that can rationalize given choices.
    Keywords: Choice from lists; Status quo bias; Revealed preference
    JEL: D11
    Date: 2021–07
  9. By: Can Urgun (Princeton University); Leeat Yariv (Princeton University, CEPR, NBER)
    Abstract: We study a model of retrospective search in which an agent—a researcher, an online shopper, or a politician—tracks the value of a product. Discoveries beget discoveries and their observations are correlated over time, which we model using a Brownian motion. The agent, a standard exponential discounter, decides the breadth and length of search. We fully characterize the optimal search policy. The optimal search scope is U-shaped, with the agent searching most ambitiously when approaching a breakthrough or when nearing search termination. A drawdown stopping boundary is optimal, where the agent ceases search whenever current observations fall a constant amount below the maximal achieved alternative. We also show special features that emerge from contracting with a retrospective searcher.
    Keywords: Retrospective Search, Drawdown Stopping Boundary, Contracting
    JEL: C61 C73 D25 D83
    Date: 2021–07
  10. By: Pietro Ortoleva (Princeton University); Evgenii Safonov (Princeton University); Leeat Yariv (Princeton University)
    Abstract: Goods and services—public housing, medical appointments, schools—are often allocated to individuals who rank them similarly but differ in their preference intensities. We characterize optimal allocation rules when individual preferences are known and when they are not. Several insights emerge. First-best allocations may involve assigning some agents "lotteries" between high- and low-ranked goods. When preference intensities are private information, second-best allocations always involve such lotteries and, crucially, may coincide with first-best allocations. Furthermore, second-best allocations may entail disposal of services. We discuss a market-based alternative and show how it differs.
    Keywords: : Market Design, Mechanism Design, Allocation Problems
    JEL: C78 D02 D47
    Date: 2021–08
  11. By: Can Urgun (Princeton University)
    Abstract: I explore how a principal dynamically chooses among multiple agents to utilize for production. The principal chooses at most one agent to utilize in every period affecting the states of the agents. A utilized agent changes its state because it is utilized, but the nonutilized agents do not remain at rest: they also change their state. The analysis requires a novel methodological approach: the agency problem that the principal faces with each agent is shown to be an appropriately designed restless bandit, creating a multiarmed restless bandit. The optimal contract is characterized by an index rule for the restless bandit.
    Keywords: Relational Contracts, Restless Bandits, Dynamic Contracting
    JEL: D21 D86 L14 L24
    Date: 2021–04
  12. By: Aubert, Cécile; Ding, Huihui
    Abstract: A reelection-seeking politician makes a policy decision that can reveal her private information on whether her political orientation and capabilities will be a good fit to future circumstances. We study how she may choose inappropriate policies to hide her information, even in the absence of specific conflicts of interests, and how voters’ conformism affects her incentives to do so. Conformism is independent from policies and from voters’ perceptions; yet we identify a ‘conformism advantage’ for the incumbent that exists only when there is also an incumbency advantage. Conformism changes the incentives of the incumbent and favors the emergence of an efficient, separating equilibrium. It may even eliminate the pooling equi-librium (that can consist in inefficient persistence). Conformism has a mixed impact on social welfare however: it improves policy choices and the information available to independent vot-ers, but fosters inefficient reelection in the face of a stronger opponent. When the incumbent is ‘altruistic’ and values social welfare even when not in power, she partly internalizes this latter effect. The impact of conformism is then non monotonous.
    JEL: D72 D82
    Date: 2022–02–15
  13. By: Faruk R. Gul (Princeton University); Wolfgang Pesendorfer (Princeton University)
    Abstract: A collective choice problem is a finite set of social alternatives and a finite set of economic agents with vNM utility functions. We associate a public goods economy with each collective choice problem and establish the existence and efficiency of (equal income) Lindahl equilibrium allocations. We interpret collective choice problems as cooperative bargaining problems and define a set-valued solution concept, the equitable solution (ES).We provide axioms that characterize ES and show that ES contains the Nash bargaining solution. Our main result shows that the set of ES payoffs is the same a the set of Lindahl equilibrium payoffs. We consider two applications: in the first, we show that in a large class of matching problems without transfers the set of Lindahl equilibrium payoffs is the same as the set of (equal income) Walrasian equilibrium payoffs. In our second application, we show that in any discrete exchange economy without transfers every Walrasian equilibrium payoff is a Lindahl equilibrium payoff of the corresponding collective choice market. Moreover, for any cooperative bargaining problem, it is possible to define a set of commodities so that the resulting economy’s utility possibility set is that bargaining problem and the resulting economy’s set of Walrasian equilibrium payoffs is the same as the set of Lindahl equilibrium payoffs of the corresponding collective choice market.
    Keywords: collective choice
    JEL: D70 D71
    Date: 2021–04
  14. By: Smirnov, Vladimir; Waity, Andrew
    Abstract: We outline the conditions for efficient entry order and clustering in a triopoly preemption game in which firms differ in their sunk costs of entry. The critical factor turns out to be how symmetric the potential entrants are. If the cost asymmetry between the firms is sufficiently large, entry is always in the efficient order. On the other hand, if firms are relatively symmetric, entry order can be inefficient in that the firm with the second-lowest entry cost enters first. Furthermore, if there is any difference in entry costs between the two most efficient firms, there is never clustering (which is when firms enter the market at the same time). Lastly, in contrast to the case with relatively symmetric firms, when the cost asymmetry between firms is large, the leader's entry time in the triopoly is always earlier than it is in a duopoly.
    Keywords: timing games; asymmetric firms; clustering; inefficient entry
    Date: 2021–11

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