nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒03‒28
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Information Design in Concave Games By Alex Smolin; Takuro Yamashita
  2. Competing Models By José Luis Montiel Olea; Pietro Ortoleva; Mallesh Pai; Andrea Prat
  3. An Iterative Approach to Rationalizable Implementation By Ritesh Jain; Ville Korpela; Michele Lombardi
  4. Tournaments with reserve performance By Mikhail Drugov; Dmitry Ryvkin; Jun Zhang
  5. Prizes versus Contracts as Incentives for Innovation By Yeon-Koo Che; Elisabetta Iossa; Patrick Rey
  6. Inverse Selection By Markus Brunnermeier; Rohit Lamba; Carlos Segura-Rodriguez
  7. On Risk and Time Pressure: When to Think and When to Do By Christoph Carnehl; Johannes Schneider
  8. Dynamic Consistency and Rectangularity for the Smooth Ambiguity Model By Andrei Savochkin; Alexander Shklyaev; Alexey Galatenko
  9. Organizing Competition for the Market By Elisabetta Iossa; Patrick Rey; Michael Waterson
  10. Narratives, Imperatives, and Moral Persuasion By Roland Bénabou; Armin Falk; Jean Tirole
  11. Competitive effects of horizontal mergers with asymmetric firms By Edmond Baranes; Hung Cuong Vuong
  12. Strategic Behavior in a Serial Newsvendor By Nicole Perez Becker; Benny Mantin; Joachim Arts
  13. Stochastic Impatience and the Separation of Time and Risk Preferences By David Dillenberger; Daniel Gottlieb; Pietro Ortoleva
  14. Market Design and Walrasian Equilibrium By Faruk R. Gul; Wolfgang Pesendorfer; Mu Zhang
  15. A Combinatorial Topology Approach to Arrow's Impossibility Theorem By Rajsbaum, Sergio; Raventós-Pujol, Armajac
  16. Relative Performance Contracts versus Group Contracts with Hidden Savings By Archawa Paweenawat
  17. The Emergence of Market Structure By Maryam Farboodi; Gregor Jarosch; Robert Shimer

  1. By: Alex Smolin; Takuro Yamashita
    Abstract: We study information design in games with a continuum of actions such that the players' payoffs are concave in their own actions. A designer chooses an information structure--a joint distribution of a state and a private signal of each player. The information structure induces a Bayesian game and is evaluated according to the expected designer's payoff under the equilibrium play. We develop a method that facilitates the search for an optimal information structure, i.e., one that cannot be outperformed by any other information structure, however complex. We show an information structure is optimal whenever it induces the strategies that can be implemented by an incentive contract in a dual, principal-agent problem which aggregates marginal payoffs of the players in the original game. We use this result to establish the optimality of Gaussian information structures in settings with quadratic payoffs and a multivariate normally distributed state. We analyze the details of optimal structures in a differentiated Bertrand competition and in a prediction game.
    Date: 2022–02
  2. By: José Luis Montiel Olea (Columbia University); Pietro Ortoleva (Princeton University); Mallesh Pai (Rice University); Andrea Prat (Columbia University)
    Abstract: Different agents compete to predict a variable of interest related to a set of covariates via an unknown data generating process. All agents are Bayesian, but may consider different subsets of covariates to make their prediction. After observing a common dataset, who has the highest confidence in her predictive ability? We characterize it and show that it crucially depends on the size of the dataset. With small data, typically it is an agent using a model that is small-dimensional, in the sense of considering fewer covariates than the true data generating process. With big data, it is instead typically large-dimensional, possibly using more variables than the true model. These features are reminiscent of model selection techniques used in statistics and machine learning. However, here model selection does not emerge normatively, but positively as the outcome of competition between standard Bayesian decision makers. The theory is applied to auctions of assets where bidders observe the same information but hold different priors.
    Keywords: Models. Low-dimensional Model, High-dimensional Model
    JEL: C20 C30
    Date: 2021–11
  3. By: Ritesh Jain (Institute of Economics, Academia Sinica); Ville Korpela (Turku School of Economics); Michele Lombardi (University of Liverpool Management School, Università di Napoli Federico II, and CSEF)
    Abstract: We study rationalizable implementation of social choice functions. Iterative Monotonicity is both necessary and sufficient for implementation when there are two or more players.
    Keywords: Implementation, iterative monotonicity, rationalizability, complete information.
    JEL: C79 D82
    Date: 2022–03–17
  4. By: Mikhail Drugov (New Economic School and CEPR); Dmitry Ryvkin (Department of Economics, Florida State University); Jun Zhang (Economics Discipline Group, School of Business, University of Technology Sydney)
    Abstract: We study tournaments where winning a rank-dependent prize requires passing a reserve---a minimum performance standard. Agents' performance is determined by effort and noise. For log-concave noise distributions the optimal reserve is at the modal performance, and the optimal prize scheme is winner-take-all. In contrast, for log-convex noise distributions the optimal reserve is at the lower bound of the distribution of performance, which is passed with probability one in equilibrium, and it is optimal to award equal prizes to all qualifying agents. These pay schemes are optimal in a general class of symmetric monotone contracts that may depend on cardinal performance.
    Keywords: tournament, reserve performance, prize sharing
    JEL: C72 D72 D82
    Date: 2022–03
  5. By: Yeon-Koo Che (Columbia University [New York]); Elisabetta Iossa (University of Rome TorVergata); Patrick Rey (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unveriable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the trade-off via two instruments: a cash prize and a follow-on contract. It primarily uses the latter, by favoring the innovator at the implementation stage when the value of the innovation is above a certain threshold and handicapping the innovator when the value of the innovation is below that threshold. A cash prize is employed as a supplementary incentive only when the value of innovation is sufficiently high. These features are consistent with current practices in the procurement of innovation and the management of unsolicited proposals.
    Keywords: Contract rights,Innovation,Prizes,Procurement and R&D
    Date: 2021–01–23
  6. By: Markus Brunnermeier (Princeton University); Rohit Lamba (Pennsylvania State University); Carlos Segura-Rodriguez (Banco Central de Costa Rica)
    Abstract: Big data, machine learning and AI inverts adverse selection problems. It allows insurers to infer statistical information and thereby reverses information advantage from the insuree to the insurer. In a setting with two-dimensional type space whose correlation can be inferred with big data we derive three results: First, a novel tradeoff between a belief gap and price discrimination emerges. The insurer tries to protect its statistical information by offering only a few screening contracts. Second, we show that forcing the insurance company to reveal its statistical information can be welfare improving. Third, we show in a setting with naive agents that do not perfectly infer statistical information from the price of offered contracts, price discrimination significantly boosts insurer’s profits. We also discuss the significance our analysis through three stylized facts: the rise of data brokers, the importance of consumer activism and regulatory forbearance, and merits of a public data repository.
    Keywords: Insurance, Big Data, Informed Principal, Belief Gap, Price Discrimination
    JEL: G22 D82 D86 C55
    Date: 2020–04
  7. By: Christoph Carnehl; Johannes Schneider
    Abstract: We study the tradeoff between fundamental risk and time. A time-constrained agent has to solve a problem. She dynamically allocates effort between implementing a risky initial idea and exploring alternatives. Discovering an alternative implies progress that has to be converted to a solution. As time runs out, the chances of converting it in time shrink. We show that the agent may return to the initial idea after having left it in the past to explore alternatives. Our model helps explain so-called false starts. To finish fast, the agent delays exploring alternatives reducing the overall success probability.
    Keywords: dynamic problem solving, endogenous bandits, time pressure
    JEL: D01 D83 O31
    Date: 2022–03
  8. By: Andrei Savochkin (New Economic School); Alexander Shklyaev (Moscow State University); Alexey Galatenko (Moscow State University)
    Abstract: We study the Smooth Ambiguity decision criterion in the dynamic setting to understand when it can satisfy the Dynamic Consistency and Consequentialism properties. Our result characterizes the possibility to have these properties through a condition that has the spirit of the rectangularity condition introduced by Epstein and Schneider (2003) for the maxmin model. Rectangularity enables specifying preferences recursively and solving applied models by Dynamic Programming. At the same time, we show that Dynamic Consistency and Consequentialism can be achieved for Smooth Ambiguity preferences in a narrower set of scenarios than one could expect.
    Keywords: smooth ambiguity, dynamic consistency, rectangularity JEL Classifications: D81
    Date: 2022–03
  9. By: Elisabetta Iossa (Unknown); Patrick Rey (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Michael Waterson (Unknown)
    Abstract: The paper studies competition for the market in a setting where incumbents (and, to a lesser extent, neighboring incumbents) benefit from a cost advantage. The paper first compares the outcome of staggered and synchronous tenders, before drawing the implications for market design. We find that the timing of tenders should depend on the likelihood of monopolization. When monopolization is expected, synchronous tendering is preferable, as it strengthens the pressure that entrants exercise on the monopolist. When instead other firms remain active, staggered tendering is preferable, as it maximizes the competitive pressure that comes from the other firms.
    Keywords: Dynamic procurement,incumbency advantage,local monopoly,competition,asymmetric auctions,synchronous contracts,staggered contracts
    Date: 2021–10–13
  10. By: Roland Bénabou (Princeton University); Armin Falk (University of Bonn); Jean Tirole (University of Toulouse Capitole)
    Abstract: We study the production and circulation of arguments justifying actions on the basis of morality. By downplaying externalities, exculpatory narratives allow people to maintain a positive image while acting selfishly. Conversely, responsibilizing narratives raise both direct and reputational stakes, fostering prosocial behavior. These rationales diffuse along a linear network, through both costly signaling and strategic disclosure. The norms that emerge reflect local correlation in agents’ incentives (reputation versus influence concerns), with low mixing generating both a polarization of beliefs across groups and less moral behavior on average. Imperatives (general precepts) constitute an alternative mode of moral influence. We analyze their costs and benefits relative to those of narratives, and when the two will be used as substitutes or complements.
    Keywords: Moral behavior, narratives, imperatives, rules, excuses, responsibility, networks, viral transmission, influence, reputation, disclosure, communication, social norms
    JEL: D62 D64 D78 D83 D85 D91 H41 K42 L14 Z13
    Date: 2020–04
  11. By: Edmond Baranes (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier); Hung Cuong Vuong (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)
    Abstract: This paper aims at investigating the impacts of introducing cost asymmetry in horizontal merger analysis. In the absence of efficiency gains, previous literature states the negative competitive effects of a merger between symmetric firms. We go beyond the literature and show that the result is only likely to hold for a low level of asymmetry. In particular, we build a tractable model with three firms in which one of them has a different cost structure. After merging two symmetrical firms, the outsider always reduces (increases) price (investments), while the insiders choose the opposite strategies. In particular, if the outsider's cost is sufficiently low, the increase in its investment could outweigh the decreases in those of the merged entity, leading to higher total investments post-merger. Similarly, consumer surplus could be improved thanks to the decrease in the outsider's price.
    Date: 2021–04–11
  12. By: Nicole Perez Becker (LCL, Université du Luxembourg); Benny Mantin (LCL, Université du Luxembourg); Joachim Arts (LCL, Université du Luxembourg)
    Abstract: We study the interaction between an upstream seller and an intermediate buyer, both of whom face uncertainty related to downstream demand, over a two-period horizon. The buyer replenishes every period, whereas the seller has only one ordering opportunity at the beginning of the horizon. Since both agents make quantity decisions before demand realizes, they face demand mismatch risks and have incentives to limit these risks through their quantity decisions. We study the effects of varying degrees of buyer strategic behavior on inventory decisions and seller profitability
    Keywords: Strategic consumers; multi-unit purchases; inventory games.
    JEL: C73 D24 M11
    Date: 2022
  13. By: David Dillenberger (University of Pennsylvania); Daniel Gottlieb (London School of Economics); Pietro Ortoleva (Princeton University)
    Abstract: We study how the separation of time and risk preferences relates to a behavioral property that generalizes impatience to stochastic environments: Stochastic Impatience. We show that, within a broad class of models, Stochastic Impatience holds if and only if risk aversion is "not too high" relative to the inverse elasticity of intertemporal substitution. This result has implications for many known models. For example, for those of Epstein and Zin (1989) and Hansen and Sargent (1995), Stochastic Impatience is violated for all commonly used parameters.
    Keywords: Stochastic Impatience, Epstein-Zin preferences, Separation of Time and Risk preferences, Risk Sensitive preferences, Non-Expected Utility
    JEL: D81 D90 G11 E7
    Date: 2020–04
  14. By: Faruk R. Gul (Princeton University); Wolfgang Pesendorfer (Princeton University); Mu Zhang (Princeton University)
    Abstract: We establish the existence of Walrasian equilibrium for economies with many discrete goods and possibly one divisible good. Our goal is not only to study Walrasian equilibria in new settings but also to facilitate the use of market mechanisms in resource allocation problems such as school choice or course selection. We consider all economies with quasilinear gross substitutes preferences but allow agents to have limited quantities of the divisible good (limited transfers economies). We also consider economies without adivisible good (nontransferable utility economies). We show the existence and efficiency of Walrasian equilibrium in limited transfers economies and the existence and efficiency of strong (Walrasian) equilibrium in nontransferable utility economies. Finally, we show that various constraints on minimum and maximum levels of consumption and aggregate constraints of the kind that are relevant for school choice/course selection problems can be accommodated by either incorporating these constraints into individual preferences or by incorporating a suitable production technology into nontransferable utility economies
    Keywords: Walrasian equilibrium
    JEL: D50 D59
    Date: 2020–06
  15. By: Rajsbaum, Sergio; Raventós-Pujol, Armajac
    Abstract: Baryshnikov presented a remarkable algebraic topology proof of Arrow's impossibility theorem trying to understand the underlying reason behind the numerous proofs of this fundamental result of social choice theory. We present here a novel combinatorial topology approach that does not use advance mathematics, while giving a geometric intuition of the impossibility. This exposes a remarkable connection with distributed computing techniques. We show that Arrow's impossibility is closely related to the index lemma, and expose the geometry behind prior pivotal arguments to Arrow's impossibility. We explain why the case of two voters, n=2, and three alternatives, |X|=3, is where this interesting geometry happens, by giving a simple proof that this case implies Arrow's impossibility for any finite n>= 2,|X|>= 3. Finally, we show how to reason about domain restrictions using combinatorial topology.
    Keywords: Social choice; Arrow impossibility theorem; Combinatorial topology; Distributed computing; Topological social choice; Simplicial complexes; Domain restriction; Index lemma
    JEL: D71
    Date: 2022
  16. By: Archawa Paweenawat
    Abstract: This paper studies the effects of hidden savings on the relative benefits of two optimal incentive contracts, namely, relative performance contracts and group contracts. As an analysis framework, this paper develops a dynamic moral hazard model in which agents can secretly save. The results from the model suggest that hidden savings affect relative performance contracts more than they affect group contracts. In addition, under group contracts, agents rely more on risk-sharing networks and less on own savings than they do under relative performance contracts. To test the model’s predictions, this paper uses a unique data set with detailed information on households’ characteristics, their choices of loans, and their responses to liquidity shocks. The empirical results confirm that, in the areas where hidden savings problem is likely to be more severe, households are more likely to choose group loans. In addition, the results also show that households with group loans rely more on networks to prevent themselves from future liquidity shocks.
    Keywords: Incentive contracts; Unobserved savings; Relative performance; Group lending; Microfinance
    JEL: D86 G21 G51
    Date: 2022–03
  17. By: Maryam Farboodi (MIT); Gregor Jarosch (Princeton University); Robert Shimer (University of Chicago)
    Abstract: What market structure emerges when market participants can choose the rate at which they contact others? We show that traders who choose a higher contact rate emerge as intermediaries, earning profits by taking asset positions that are misaligned with their preferences. Some of them, middlemen, are in constant contact with other traders and so pass on their position immediately. As search costs vanish, traders still make dispersed investments and trade occurs in intermediation chains, so the economy does not converge to a centralized market. When search costs are a differentiable function of the contact rate, the endogenous distribution of contact rates has no mass points. When the function is weakly convex, faster traders are misaligned more frequently than slower traders. When the function is linear, the contact rate distribution has a Pareto tail with parameter 2 and middlemen emerge endogenously. These features arise not only in the (inefficient) equilibrium allocation, but also in the optimal allocation. Moreover, we show that intermediation is key to the emergence of the rest of the properties of this market structure.
    Keywords: Over-the-Counter Markets, Intermediation, Middlemen, Random Matching, Endogenous Search Intensity, Network Formation, Pareto Distribution, Welfare
    JEL: E44 G12 G20
    Date: 2020–05

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