nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒06‒27
23 papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Bayesian Persuasion with Lie Detection By Florian Ederer; Weicheng Min
  2. Communicating with Anecdotes By Nika Haghtalab; Nicole Immorlica; Brendan Lucier; Markus Mobius; Divyarthi Mohan
  3. Sequential Elimination Contests with All-Pay Auctions By Fupeng Sun; Yanwei Sun; Chiwei Yan; Li Jin
  4. Information-Robust Optimal Auctions By Wanchang Zhang
  5. A type-adjustable mechanism where the designer may obtain more payoffs by optimally controlling distributions of agents' types By Wu, Haoyang
  6. Optimal delegated search with learning and nomonetary transfers By Elnaz Bajoori; Julia Wirtz
  7. Deceptive Features on Platforms By Johnen, Johannes; Somogyi, Robert
  8. Efficiency effects on coalition formation in contests By Saish Nevrekar
  9. Interaction in Prevention: A General Theory and an Application to COVID-19 Pandemic By P. Battiston; M. Menegatti
  10. Interim Rationalizable (and Bayes-Nash) Implementation of Functions: A full Characterization By Ritesh Jain and; Michele Lombardi
  11. Information Design of Dynamic Mechanisms By Soo Hong Chew; Wenqian Wang
  12. Social learning via actions in bandit environments By Aroon Narayanan
  13. Information acquisition with heterogeneous valuations By Rahi, Rohit
  14. The Value of Information in Stopping Problems By Ehud Lehrer; Tao Wang
  15. Distracted from Comparison: Product Design and Advertisement with Limited Attention By Johnen, Johannes; Leung, Benson Tsz Kin
  16. The Limits of Commitment By Jacopo Bizzotto; Toomas Hinnosaar; Adrien Vigier
  17. Incentives of a Monopolist for Innovation under Regulatory Threat By Saglam, Ismail
  18. Two-sided matching with firms' complementary preferences By Chao Huang
  19. Fair Shares: Feasibility, Domination and Incentives By Moshe Babaioff; Uriel Feige
  20. Advantageous selection without moral hazard (with an application to life care annuities) By Philippe De Donder; Marie-Louise Leroux; François Salanié
  21. On the Political Economy of Nonlinear Income Taxation By Berliant, Marcus; Gouveia, Miguel
  22. Institutional Foundations of the Power to Persuade By Prato, Carlo; Turner, Ian R
  23. Rawls’s difference principle and maximin rule of allocation: a new analysis By Philippe Mongin; Marcus Pivato

  1. By: Florian Ederer; Weicheng Min
    Abstract: How does lie detection constrain the potential for one person to persuade another to change her action? We consider a model of Bayesian persuasion in which the Receiver can detect lies with positive probability. We show that the Sender lies more when the lie detection probability increases. As long as this probability is sufficiently small, the Sender's and the Receiver's equilibrium payoffs are unaffected by the presence of lie detection because the Sender simply compensates by lying more. However, when the lie detection probability is sufficiently high, the Sender's equilibrium payoff decreases and the Receiver's equilibrium payoff increases with the lie detection probability.
    JEL: D72 D82 D83 K40 M31
    Date: 2022–05
  2. By: Nika Haghtalab; Nicole Immorlica; Brendan Lucier; Markus Mobius; Divyarthi Mohan
    Abstract: We study a communication game between a sender and receiver where the sender has access to a set of informative signals about a state of the world. The sender chooses one of her signals, called an ``anecdote'' and communicates it to the receiver. The receiver takes an action, yielding a utility for both players. Sender and receiver both care about the state of the world but are also influenced by a personal preference so that their ideal actions differ. We characterize perfect Bayesian equilibria when the sender cannot commit to a particular communication scheme. In this setting the sender faces ``persuasion temptation'': she is tempted to select a more biased anecdote to influence the receiver's action. Anecdotes are still informative to the receiver but persuasion comes at the cost of precision. This gives rise to ``informational homophily'' where the receiver prefers to listen to like-minded senders because they provide higher-precision signals. In particular, we show that a sender with access to many anecdotes will essentially send the minimum or maximum anecdote even though with high probability she has access to an anecdote close to the state of the world that would almost perfectly reveal it to the receiver. In contrast to the classic Crawford-Sobel model, full revelation is a knife-edge equilibrium and even small differences in personal preferences will induce highly polarized communication and a loss in utility for any equilibrium. We show that for fat-tailed anecdote distributions the receiver might even prefer to talk to poorly informed senders with aligned preferences rather than a knowledgeable expert whose preferences may differ from her own. We also show that under commitment differences in personal preferences no longer affect communication and the sender will generally report the most representative anecdote closest to the posterior mean for common distributions.
    Date: 2022–05
  3. By: Fupeng Sun; Yanwei Sun; Chiwei Yan; Li Jin
    Abstract: By modeling contests as all-pay auctions, we study two-stage sequential elimination contests (SEC) under incomplete information, where only the players with top efforts in the first stage can proceed to the second and final stage to compete for prizes. Players have privately held type/ability information that impacts their costs of exerting efforts. We characterize players' Perfect Bayesian Equilibrium strategies and discover a somewhat surprising result: all players exert weakly lower efforts in the final stage of the SEC compared to those under a one-round contest, regardless of the number of players admitted to the final stage. This result holds under any multi-prize reward structure, any type distribution and cost function. As a consequence, in terms of the expected highest effort or total efforts of the final stage, the optimal SEC is equivalent to a one-round contest by letting all players proceed to the final stage.
    Date: 2022–05
  4. By: Wanchang Zhang
    Abstract: A single unit of a good is sold to one of two bidders. Each bidder has either a high prior valuation or a low prior valuation for the good. Their prior valuations are independently and identically distributed. Each bidder may observe an independently and identically distributed signal about her prior valuation. The seller knows the distribution of the prior valuation profile and knows that signals are independently and identically distributed, but does not know the signal distribution. In addition, the seller knows that bidders play undominated strategies. I find that a second-price auction with a random reserve maximizes the worst-case expected revenue over all possible signal distributions and all equilibria in undominated strategies.
    Date: 2022–05
  5. By: Wu, Haoyang
    Abstract: In a mechanism, a designer may reveal some information to influence agents' private types in order to obtain more payoffs. In the literature, the information is usually represented as random variables, the value of which are realized by the nature. However, this representation of information may not be proper in some practical cases. In this paper, we propose a type-adjustable mechanism where the information sent by the designer is modeled as a solution of her optimization problem. From the designer's perspective, the probability distributions of agents' private types may be optimally controlled. By constructing a type-adjustable first-price sealed-bid auction, we show that the seller may obtain more expected payoffs than what she could obtain at most in the traditional optimal auction model. Interestingly, to the satisfaction of all, each agent's \emph{ex-ante} expected payoffs may be increased too. In the end, we compare the type-adjustable mechanism with other relevant models.
    Keywords: Mechanism design; Optimal auction; Bayesian implementation.
    JEL: D71
    Date: 2022–05–19
  6. By: Elnaz Bajoori; Julia Wirtz
    Abstract: A principal delegates the search for the cheapest price to an agent with private information about the price distribution. We do not allow for any monetary transfers to incentivize the agent. The optimal pooling search rule features strictly increasing thresholds, which reflect the principal’s updated belief about the price distribution. We show that the pooling rule can be improved upon by a separating menu of search rules with fixed thresholds and a minimum number of offers. Then, we find conditions under which either rule is preferred. Finally, we characterize the optimal separating search rule with a minimum number of offers.
    Date: 2022–05–23
  7. By: Johnen, Johannes (Université catholique de Louvain, LIDAM/CORE, Belgium); Somogyi, Robert (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: Many products sold on online platforms have additional features. Platforms can deliberately shroud these features from consumers, e.g. by revealing them only late in the purchase process. For example, platforms often reveal fees for shipping, handling, extra luggage or hotel services only late in the purchase process. We study when a two-sided platform discloses (a.k.a unshrouds) additional fees when some buyers naively ignore shrouded fees. We uncover a novel mechanism to explain why platforms shroud: platforms shroud or unshroud to manipulate cross-group externalities between buyers and sellers. Exploring this mechanism, we highlight two results suggesting online marketplaces lead to more shrouded features. First, we ask when a platform shrouds seller fees on its marketplace. Driven by cross-group network externalities to attract buyers and appear cheap, the platform has stronger incentives to shroud seller fees than sellers themselves. Second, we investigate when the platform shrouds its own additional fees and uncover a perverse effect of seller competition: fiercer competition between sellers encourages the platform to shroud its own fees. Both results hold even though the platform earns no commission to shroud seller fees and does not sell its own brands, so banning these practices will not induce a transparent marketplace. We discuss further policy implications and connect to common practices like drip pricing, steering, and rebate design.
    Date: 2022–04–13
  8. By: Saish Nevrekar
    Abstract: This paper studies the problem of endogenous coalition formation in contests: how players organize themselves in groups when faced with the common objective of securing a prize by exerting costly effort. The model presented adopts an axiomatic approach by assuming certain properties for the winning probability that imply efficiency gains from cooperation in contest settings. Efficiency gains are said to be generated if any coalition experiences increasing marginal returns with aggregate effort until a threshold. These properties identify a wide class of generalised Tullock contest success functions. We analyse a sequential coalition formation game for an arbitrary number of symmetric players and exogenous effort. If coalitions generate sufficient efficiency gains, then any equilibrium always consists of two or more coalitions where at least two coalitions are of unequal size. This result extends to endogenous efforts if the cost functions are sufficiently convex.
    Keywords: Noncooperative games, coalition formation, contest success function
    JEL: C72 D74
    Date: 2022–05
  9. By: P. Battiston; M. Menegatti
    Abstract: Prevention efforts often involve spillovers, positive or negative, on other individuals, but this is neglected by standard models of risk prevention. We analyze strategic interaction between decision makers whose effort affects each other's risk. We characterize response functions and Nash equilibria, providing proof of existence and analyzing the Pareto efficiency and possible multiplicity of equilibria. We then analyze the optimal effort level from a social point of view, finding conditions under which Nash equilibria are characterized by under- or over-provision of effort, which calls for policy interventions. Finally, we specialize our model to describe the risk of COVID-19 infection. The features of contagion are consistent with the existence of asymmetric equilibria where the high effort exerted by one decision maker pushes another to exert low effort. Moreover, socially optimal mandatory policies, for instance concerning face masks, can cause a decision maker to decrease exerted effort.
    Keywords: prevention, interaction, COVID-19, contagion
    JEL: D81 C72 I12
    Date: 2022
  10. By: Ritesh Jain and (Institute of Economics, Academia Sinica.); Michele Lombardi (University of Liverpool Management School, Università di Napoli Federico II, and CSEF)
    Abstract: Interim Rationalizable Monotonicity, due to Oury and Tercieux (2012), fully characterizes the class of social choice functions that are implementable in interim correlated rationalizable (and Bayes-Nash equilibrium) strategies.
    Keywords: temporary contracts, young workers, flexibility, institutional reforms, employment protection legislation.
    JEL: C79 D82
    Date: 2022–05–11
  11. By: Soo Hong Chew; Wenqian Wang
    Abstract: Two dynamic game forms are said to be behaviorally equivalent if they share the "same" profiles of structurally reduced strategies (Battigalli et al., 2020). In the context of dynamic implementation, behaviorally equivalent game forms are interchangeable under a wide range of solution concepts for the purpose of implementing a social choice function. A gradual mechanism (Chew and Wang, 2022), which designs a procedure of information transmission mediated by a central administrator, enables a formal definition of information flow. We provide a characterization of behavioral equivalence between gradual mechanisms in terms of their informational equivalence -- each agent is designed the "same" information flow. Information flow also helps in defining an intuitive notion of immediacy for gradual mechanisms which is equivalent to their game structures being minimal. Given that the class of gradual mechanisms serves as a revelation principle for dynamic implementation (Li, 2017; Akbarpour and Li, 2020; Mackenzie, 2020; Chew and Wang, 2022), the class of immediate gradual mechanisms provides a refined revelation principle.
    Date: 2022–05
  12. By: Aroon Narayanan
    Abstract: I study a game of strategic exploration with private payoffs and public actions in a Bayesian bandit setting. In particular, I look at cascade equilibria, in which agents switch over time from the risky action to the riskless action only when they become sufficiently pessimistic. I show that these equilibria exist under some conditions and establish their salient properties. Individual exploration in these equilibria can be more or less than the single-agent level depending on whether the agents start out with a common prior or not, but the most optimistic agent always underexplores. I also show that allowing the agents to write enforceable ex-ante contracts will lead to the most ex-ante optimistic agent to buy all payoff streams, providing an explanation to the buying out of smaller start-ups by more established firms.
    Date: 2022–05
  13. By: Rahi, Rohit
    Abstract: We study the market for a risky asset with uncertain heterogeneous valuations. Agents seek to learn about their own valuation by acquiring private information and making inferences from the equilibrium price. As agents of one type gather more information, they pull the price closer to their valuation and further away from the valuations of other types. Thus they exert a negative learning externality on other types. This in turn implies that a lower cost of information for one type induces all agents to acquire more information. Private information production is typically not socially optimal. In the case of two types who differ in their cost of information, we can always find a Pareto improvement that entails an increase in the aggregate amount of information, with a higher proportion produced by the low-cost type.
    Keywords: heterogeneous valuations;; information acquisition; learning externalities; strategic complementarities; welfare
    JEL: D82 G14
    Date: 2021–01–01
  14. By: Ehud Lehrer; Tao Wang
    Abstract: We consider stopping problems in which a decision maker (DM) faces an unknown state of nature and decides sequentially whether to stop and take an irreversible action; pay a fee and obtain additional information; or wait without acquiring information. We discuss the value and quality of information. The former is the maximal discounted expected revenue the DM can generate. We show that among all history-dependent fee schemes, the upfront scheme (as opposed, for instance, to pay-for-use) is optimal: it generates the highest possible value of information. The effects on the optimal strategy of obtaining information from a more accurate source and of having a higher discount factor are distinct, as far as expected stopping time and its distribution are concerned. However, these factors have a similar effect in that they both enlarge the set of cases in which the optimal strategy prescribes waiting.
    Date: 2022–05
  15. By: Johnen, Johannes (Université catholique de Louvain, LIDAM/CORE, Belgium); Leung, Benson Tsz Kin
    Abstract: We study how firms choose designs—of their products or product information—to divert consumers’ limited attention away from price comparison or towards it. Firms choose designs to affect the dispersion of product match values and thereby how consumers allocate their limited attention. Consumers with limited attention trade off breadth and depths of search: they either study fewer products in detail to learn their match value, or superficially browse and compare prices of more products. We highlight a novel distraction effect of designs. Firms combine larger prices with designs that disperse match values to distract consumers from price-comparison. We show that more-detailed product information disperse match values and allows firms to distract consumers more effectively from price comparison. This way, interventions that allow firms to disclose more-detailed product information weaken competition and decrease consumer surplus. In turn, interventions that make information coarser and more easily-available information—like energy-efficiency labels and front-package food labels like nutriscores—increases competition and consumer surplus. These findings connect evidence of various informational interventions in the context of pension funds, advertisements, and food labels.
    Keywords: Limited Attention ; Product Design ; Information Design ; Market Competition
    JEL: D83 L13 L15
    Date: 2022–04–12
  16. By: Jacopo Bizzotto; Toomas Hinnosaar; Adrien Vigier
    Abstract: We parameterize commitment in leader-follower games by letting the leader publicly choose her action set from a menu of options. We fully characterize for a large class of settings the set of equilibrium outcomes obtained when varying the degree of commitment that the leader has. We identify conditions under which giving more commitment power to the leader could end up making her worse off. Moreover, with partial commitment, the follower might obtain a larger payoff than the leader even in settings where the latter possesses a first-mover advantage under full commitment. We explore the implications of our analysis for oligopolies.
    Date: 2022–05
  17. By: Saglam, Ismail
    Abstract: In this paper, we investigate whether a natural monopoly with private cost information can reduce the likelihood of regulatory threat by investing, in the ex-ante stage, in cost-reducing R&D to generate process innovations and whether such an investment can yield Pareto gains in welfare. We model the regulatory process using a sequential game where a benevolent regulator makes the first move by announcing the probability that the monopolist will be optimally regulated. The monopolist, hearing this announcement, chooses the optimal level of its R&D investment. We numerically compute the subgame-perfect Nash equilibrium of this game for a wide range of model parameters. Our results show that the monopolist invests more in R&D if the regulatory threat is less certain. Anticipating this response, the regulator makes her threat less certain if she puts more weight on the monopolist's welfare. Moreover, we find that regulation with uncertainty can be Pareto superior to regulation with certainty if the welfare weight of the monopolist is sufficiently, but not extremely, high or if the cost of R&D is sufficiently small.
    Keywords: Monopoly; regulatory threat, R&D investment.
    JEL: D42 D82 L51 O30
    Date: 2022–05–21
  18. By: Chao Huang
    Abstract: This paper studies two-sided many-to-one matching in which firms have complementary preferences. We show that stable matchings exist under a balancedness condition that rules out a specific type of odd-length cycles formed by firms' acceptable sets. We also provide a class of preference profiles that satisfy this condition. Our results indicate that stable matching is compatible with a wide range of firms' complementary preferences.
    Date: 2022–05
  19. By: Moshe Babaioff; Uriel Feige
    Abstract: We consider fair allocation of a set $M$ of indivisible goods to $n$ equally-entitled agents, with no monetary transfers. Every agent $i$ has a valuation $v_i$ from some given class of valuation functions. A share $s$ is a function that maps a pair $(v_i,n)$ to a value, with the interpretation that if an allocation of $M$ to $n$ agents fails to give agent $i$ a bundle of value at least equal to $s(v_i,n)$, this serves as evidence that the allocation is not fair towards $i$. For such an interpretation to make sense, we would like the share to be feasible, meaning that for any valuations in the class, there is an allocation that gives every agent at least her share. The maximin share was a natural candidate for a feasible share for additive valuations. However, Kurokawa, Procaccia and Wang [2018] show that it is not feasible. We initiate a systematic study of the family of feasible shares. We say that a share is \emph{self maximizing} if truth-telling maximizes the implied guarantee. We show that every feasible share is dominated by some self-maximizing and feasible share. We seek to identify those self-maximizing feasible shares that are polynomial time computable, and offer the highest share values. We show that a SM-dominating feasible share -- one that dominates every self-maximizing (SM) feasible share -- does not exist for additive valuations (and beyond). Consequently, we relax the domination property to that of domination up to a multiplicative factor of $\rho$ (called $\rho$-dominating). For additive valuations we present shares that are feasible, self-maximizing and polynomial-time computable. For $n$ agents we present such a share that is $\frac{2n}{3n-1}$-dominating. For two agents we present such a share that is $(1 - \epsilon)$-dominating. Moreover, for these shares we present poly-time algorithms that compute allocations that give every agent at least her share.
    Date: 2022–05
  20. By: Philippe De Donder; Marie-Louise Leroux; François Salanié
    Abstract: Advantageous (or propitious) selection occurs when an increase in the premium of an insurance contract induces high-cost agents to quit, thereby reducing the average cost among remaining buyers. Hemenway (1990) and many subsequent contributions motivate its advent by differences in risk-aversion among agents, implying different prevention efforts. We argue that it may also appear in the absence of moral hazard, when agents only differ in riskiness and not in (risk) preferences. We first show that profit-maximization implies that advantageous selection is more likely when markup rates and the elasticity of insurance demand are high. We then move to standard settings satisfying the single-crossing property and show that advantageous selection may occur when several contracts are offered, when agents also face a non-insurable background risk, or when agents face two mutually exclusive risks that are bundled together in a single insurance contract. We exemplify this last case with life care annuities, a product which bundles long-term care insurance and annuities, and we use Canadian survey data to provide an example of a contract facing advantageous selection.
    Keywords: Propitious selection, positive or negative correlation property, contract bundling, long-term care insurance, annuity.
    JEL: D82 I13
    Date: 2022
  21. By: Berliant, Marcus; Gouveia, Miguel
    Abstract: The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are drawn on here to address the problem of voting over income taxes and a public good. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget; the tax system must be robust. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.
    Keywords: Voting; Income taxation; Public good; Robustness
    JEL: D72 D82 H21 H41
    Date: 2022–05–20
  22. By: Prato, Carlo; Turner, Ian R (Yale University)
    Abstract: We study how legislative oversight shapes intra-executive politics. We develop a theory in which the president can shape information available to lower-level bureaucrats via both overt, legitimate actions (e.g., through appointments or policy directives) but also via covert, illegitimate interventions (i.e., interference, which can be uncovered by oversight). We show that the president's ability to persuade bureaucrats to act in line with her policy goals requires (i) some degree of bureaucratic insulation and (ii) sufficiently aggressive legislative oversight. Both factors contribute to the overall credibility of presidential directives. When legislative oversight is not sufficiently aggressive (e.g., under unified government), the president might actually lack the necessary credibility influence the bureaucrat and her best course of action is to provide unbiased information.
    Date: 2022–05–21
  23. By: Philippe Mongin (CNRS - Centre National de la Recherche Scientifique, HEC Paris - Ecole des Hautes Etudes Commerciales, LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas); Marcus Pivato (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: If Rawls's A Theory of Justice has achieved fame among economists, this is due to his Difference Principle, which says that inequalities of resources should be to the benefit of the less fortunate, or more operationally, that allocations of resources should be ranked by the maximin criterion. We extend the Rawlsian maximin in two ways: first, by resorting to the more general min-of-means formula of decision theory, second, by addressing the case where the resources accruing to each individual are uncertain to society. For the latter purpose, we resort to the ex ante versus ex post distinction of welfare economics. The paper axiomatically characterizes the ex ante and ex post forms of the Rawlsian maximin and compares them in terms of egalitarian criteria. It finally recommends and axiomatizes a compromise egalitarian theory that mixes the two forms.
    Date: 2021

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