nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒03‒21
thirteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Electoral Competition with Fake News By Gene M. Grossman; Elhanan Helpman
  2. Behavior based price personalization under vertical product differentiation By Paolo Garella; Didier Laussel; Joana Resende
  3. Matching with Recall By Yann Bramoullé; Brian W. Rogers; Erdem Yenerdag
  4. Group Corruption via Sequential Bargaining in a Hierarchical Organization By Fan-chin Kung; Ping Wang; Quan Wen
  5. Bayesian Privacy By Ran Eilat; Kfir Eliaz Eliaz; Xiaosheng Mu
  6. Coasian Dynamics under Informational Robustness By Jonathan Libgober; Xiaosheng Mu
  7. Razor Thin Elections By David K Levine; Cesar Martinelli
  8. A Solomonic Solution to Ownership Disputes: An Application to Blockchain Front-Running By Joshua S. Gans; Richard T. Holden
  9. Efficiency with(out) intermediation in repeated bilateral trade By Rohit Lamba
  10. Mitigating Ambiguity Aversion via Counterfactual Priors: A Resolution of Ellsberg's Paradox By Phoebe Koundouri; Nikitas Pittis; Panagiotis Samartzis
  11. Competitive search with two-sided risk aversion By Jerez, Belén
  12. Multi-Leader-Common-Follower games with pessimistic leaders: approximate and viscosity solutions By M. Beatrice Lignola; Jacqueline Morgan
  13. Dominance Solvability in Random Games By Noga Alon; Kirill Rudov; Leeat Yariv

  1. By: Gene M. Grossman (Princeton University); Elhanan Helpman (Harvard University)
    Abstract: Misinformation pervades political competition. We introduce opportunities for political candidates and their media supporters to spread fake news about the policy environment and perhaps about parties’ positions into a familiar model of electoral competition. In the baseline model with full information, the parties’ positions converge to those that maximize aggregate welfare. When parties can broadcast fake news to audiences that disproportionately include their partisans, policy divergence and suboptimal outcomes can result. We study a sequence of models that impose progressively tighter constraints on false reporting and characterize situations that lead to divergence and a polarized electorate.
    Keywords: policy formation, probabilistic voting, misinformation, polarization, fake news
    JEL: D78
    Date: 2020–10
  2. By: Paolo Garella (Department of Economics, Management and Quantitative Methods (DEMM) - UNIMI - Università degli Studi di Milano [Milano]); Didier Laussel (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); Joana Resende (Cef.up, Economics Department, University of Porto)
    Abstract: We study price personalization in a two period duopoly with vertically differentiated products. In the second period, a firm not only knows the purchase history of all customers, as in standard Behavior Based Price Discrimination models, but it also collects detailed information on its old customers, using it to engage in price personalization. The analysis reveals that there exists a natural market for each firm, defined as the set of customers that cannot be poached by the rival in the second period. The equilibrium is unique, except when firms are ex-ante almost identical. In equilibrium, only the firm with the largest natural market poaches customers from the rival. This firm has highest profits but not necessarily the largest market share. Aggregate profits are lower than under uniform pricing. All consumers gain, total welfare is higher herein than under uniform pricing if firms' natural markets are sufficiently asymmetric. The low quality firm chooses the minimal quality level and a quality differential arises, though the exact choice for the high quality depends upon the cost specification.
    Date: 2021–05
  3. By: Yann Bramoullé (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.); Brian W. Rogers (Department of Economics, Washington University in St. Louis); Erdem Yenerdag (Department of Economics, Washington University in St. Louis)
    Abstract: We study a two-period one-to-one dynamic matching environment in which agents meet randomly and decide whether to match early or defer. Crucially, agents can match with either partner in the second period. This "recall" captures situations where, e.g., a firm and worker can conduct additional interviews before contracting. Recall has a profound impact on incentives and on aggregate outcomes. We show that the likelihood to match early is nonmonotonic in type: early matches occur between the good-but-not-best agents. The option value provided by the first-period partner provides a force against unraveling, so that deferrals occur under small participation costs.
    Keywords: dynamic matching, unraveling, recall
    JEL: C78 D47 D82 D83
    Date: 2022–03
  4. By: Fan-chin Kung; Ping Wang; Quan Wen
    Abstract: We develop a framework of group corruption via back-door negotiations between an outside initiator and an authority of decision-makers in a hierarchical organization. We examine the role played by the architecture of a multi-tier authority and determine under such a structure how bargaining proceeds, in what order, and when it breaks down. We verify that equilibrium bargaining sequence proceeds as a chain through decision-making agents, regardless of the hierarchy of the organization. We prove the existence of a compromised equilibrium, where the decision of the authority is compromised, and establish sufficient conditions under which the most natural bottom-up bargaining configuration arises in equilibrium where a proposer negotiates with an immediately higher ranked respondent, starting with the initiator bargaining with the lowest ranked decision-maker in the organization. We then show the circumstances under which a top-down or a non-monotonic equilibrium configuration may emerge, and those under which the deal may break down. This enables us to capture a rich array of group corruptive configurations as observed. We conclude by investigating the extension to multi-tier authorities with multiple agents of the same rank in each tier, such as in a tree hierarchy.
    JEL: C78 D23 D73 L22
    Date: 2022–02
  5. By: Ran Eilat (University of the Negev); Kfir Eliaz Eliaz (Tel-Aviv University and the University of Utah); Xiaosheng Mu (Princeton University)
    Abstract: Modern information technologies make it possible to store, analyze and trade unprecedented amounts of detailed information about individuals. This has led to public discussions on whether individuals’ privacy should be better protected by restricting the amount or the precision of information that is collected by commercial institutions on their participants. We contribute to this discussion by proposing a Bayesian approach to measure loss of privacy in a mechanism. Specifically, we define the loss of privacy associated with a mechanism as the difference between the designer’s prior and posterior beliefs about an agent’s type, where this difference is calculated using Kullback-Leibler divergence, and where the change in beliefs is triggered by actions taken by the agent in the mechanism. We consider both ex-post (for every realized type, the maximal difference in beliefs cannot exceed some threshold k) and ex-ante (the expected difference in beliefs over all type realizations cannot exceed some threshold k) measures of privacy loss. Using these notions we study the properties of optimal privacy-constrained mechanisms and the relation between welfare/profits and privacy levels.
    Keywords: Privacy, mechanism-design, relative entropy, social networks
    JEL: D47 D82
    Date: 2021–01
  6. By: Jonathan Libgober; Xiaosheng Mu
    Abstract: This paper studies durable good monopoly without commitment under an informationally robust objective. A seller cannot commit to future prices and does not know the information arrival process available to a representative buyer. We consider the case where the seller chooses prices to maximize her profit guarantee against a time-consistent worst-case information structure. In the gap case, the solution to this model is payoff-equivalent to a particular known-values environment, immediately delivering a sharp characterization of the equilibrium price paths. Furthermore, for a large class of environments, arbitrary (possibly time-inconsistent) information arrival processes would not lower the seller's profit as long as these prices are chosen. We call a price path with this property a reinforcing solution. As certain versions of the informationally robust objective under limited commitment may very well involve time-inconsistency, we posit that the notion of a reinforcing solution may be useful for researchers seeking to tractably analyze these settings. To highlight the non-triviality of these conclusions, we comment that while the analogy to known values can hold under an equilibrium selection in the no-gap case, it does not hold more generally.
    Date: 2022–02
  7. By: David K Levine; Cesar Martinelli
    Date: 2022–03–03
  8. By: Joshua S. Gans; Richard T. Holden
    Abstract: Blockchain front-running involves multiple agents, other than the legitimate agent, claiming a payment from performing a contract. It arises because of the public nature of blockchain transactions and potential network congestion. This paper notes that disputes over payments are similar to classic ownership disputes (such as King Solomon's dilemma). We propose a simultaneous report mechanism that resolves Solomon's dilemma (using only ordinal preference information) and also eliminates blockchain front-running. In each case, the mechanism relies on threats to remove ownership from all claimants and preferences from the legitimate claimant over allocations to other agents.
    JEL: D82 D86
    Date: 2022–02
  9. By: Rohit Lamba
    Abstract: This paper analyzes repeated version of the bilateral trade model where the independent payoff relevant private information of the buyer and the seller is correlated across time. Using this setup it makes the following five contributions. First, it derives necessary and sufficient conditions on the primitives of the model as to when efficiency can be attained under ex post budget balance and participation constraints. Second, in doing so, it introduces an intermediate notion of budget balance called interim budget balance that allows for the extension of liquidity but with participation constraints for the issuing authority interpreted here as an intermediary. Third, it pins down the class of all possible mechanisms that can implement the efficient allocation with and without an intermediary. Fourth, it provides a foundation for the role of an intermediary in a dynamic mechanism design model under informational constraints. And, fifth, it argues for a careful interpretation of the "folk proposition" that less information is better for efficiency in dynamic mechanisms under ex post budget balance and observability of transfers.
    Date: 2022–02
  10. By: Phoebe Koundouri (Dept. of International and European Economic Studies, Athens University of Economics and Business); Nikitas Pittis (University of Piraeus, Greece); Panagiotis Samartzis
    Abstract: Ellsberg-type preferences violate one of the principles for Bayesian rationality, namely Savage's Sure Thing Principle, and are among the main empirical results against Subjective Expected Utility theory. In this paper, we propose a novel strategy for dealing with ambiguity aversion and the resulting Ellsberg-type choices. First, we identify the presence of "asymmetric information" as the main cause of ambiguity aversion. Second, we develop a solution for Ellsberg's paradox which emerges as a direct application of counterfactual thinking, implemented to the specific choice problem described by Ellsberg. Third we analyze the psychological, methodological and logical merits of the developed counterfactual strategy, and show that its application solves the problems of "error correction" and "unconceived alternatives", two of the main complaints about Bayesian Confirmation Theory.
    Keywords: counterfactual priors, ambiguity, ellsberg paradox
    JEL: C44 D81 D83 D89
    Date: 2022–03–15
  11. By: Jerez, Belén
    Abstract: We analyze a static competitive search model where risk-averse individuals with different wealth levels trade an indivisible good. The real estate market is a particularly relevant application. We show that the equilibrium is constrained efficient. Other properties of the equilibrium are derived, including the generalized version of the Hosios (1990) rule for this environment. Under risk aversion, buyers and sellers evaluate the trade-off between prices and trading probabilities differently as their wealth increases. As they become richer, buyers are relatively less concerned about paying higher prices and more concerned about increasing their trading probability. Conversely, richer sellers care less about increasing the probability of a sale than poorer sellers, and they care more about trading at a higher price. This results in positive sorting inequilibrium, that is, wealthier (poorer) buyers and sellers trading with each other. As transactions among wealthier agents involve higher prices, the equilibrium features frictional price dispersion. By contrast, with transferable utility, all individuals would trade at the same price, irrespectively of their wealth.
    Keywords: Sorting; Competitive/Directed search; Risk aversion; Wealth heterogeneity; Constrained efficiency
    JEL: D50 D61 D83
    Date: 2022–03–15
  12. By: M. Beatrice Lignola (Università di Napoli Federico II); Jacqueline Morgan (Università di Napoli Federico II and CSEF)
    Abstract: We consider a two-stage game with k leaders having pessimistic attitude and one follower common to all leaders. Such a game, called CF game, may fail to have pessimistic solutions, even if the leader payoffs are linear and the optimal reaction of the follower to the leaders strategies is unique. So, we introduce two classes of games, called weighted value-potential and weighted potential CF games, and we illustrate their inherent difficulties and properties. For the more tractable class of weighted potential CF games, suitable approximate and viscosity solutions are introduced and are proven to exist under appropriate conditions, in line with what done for one-leader-one-follower games.
    Date: 2022–03–10
  13. By: Noga Alon (Princeton University); Kirill Rudov (Princeton University); Leeat Yariv (Princeton University)
    Abstract: We study the effectiveness of iterated elimination of strictly dominated actions in random two-player games. We show that dominance solvability of games is vanishingly small as the number of at least one player’s actions grows. Furthermore, conditional on dominance solvability, the number of iterations required to converge to Nash equilibrium grows rapidly as action sets grow. Nonetheless, at least when one of the players has a small action set, iterated elimination simplifies the game substantially by ruling out a sizable fraction of actions. This is no longer the case as both players’ action sets expand. With more than two players, iterated elimination becomes even less potent in altering the game players need to consider. Technically, we illustrate the usefulness of recent combinatorial methods for the analysis of general games.
    Keywords: Random Games, Dominance Solvability, Iterated Elimination
    JEL: C70 C79
    Date: 2021–05

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