nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒07‒18
seventeen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Entry in first-price auctions with signaling By Bos, Olivier; Truyts, Tom
  2. Vague by Design: Performance Evaluation and Learning From Wages By Franz Ostrizek
  3. Credible equilibrium By Mehmet S. Ismail
  4. The art of brevity By Alonso, Ricardo; Rantakari, Heikki
  6. The Wrong Kind of Information By Aditya Kuvalekar; João Ramos; Johannes Schneider
  7. Credible, Strategyproof, Optimal, and Bounded Expected-Round Single-Item Auctions for all Distributions By Meryem Essaidi; Matheus V. X. Ferreira; S. Matthew Weinberg
  8. Common Agency with Non-Delegation or Imperfect Commitment By Seungjin Han; Siyang Xiong
  9. Social acceptability and the majoritarian compromise rule By Mostapha Diss; Clinton Gubong Gassi; Issofa Moyouwou
  10. Key players in bullying networks By Ata Atay; Ana Mauleon; Simon Schopohl; Vincent Vannetelbosch
  11. Incentivizing Brokers in Clientelist Parties By Agustin Casas; Daniel M. Kselman
  12. Advantageous Selection Without Moral Hazard (with an Application to Life Care Annuities) By Philippe De Donder; Marie-Louise Leroux; François Salanié
  13. Market effects of sponsored search auctions By Massimo Motta; Antonio Penta
  14. The Sale of Data :Learning Synergies Before M&As By Antoine Dubus; Patrick Legros
  15. Optimal Stopping Theory for a Distributionally Robust Seller By Pieter Kleer; Johan van Leeuwaarden
  16. Discrimination in Heterogeneous Games By Annick Laruelle; Andr\'e Rocha
  17. A Theory of Visionary Disruption By Joshua S. Gans

  1. By: Bos, Olivier; Truyts, Tom
    Abstract: We study the optimal entry fee in a symmetric private value first-price auction with signaling, in which the participation decisions and the auction outcome are used by an outside observer to infer the bidders' types. We show that this auction has a unique fully separating equilibrium bidding function. When the bidders' sensibility for the signaling concern is sufficiently strong, the expected revenue maximizing entry fee is the maximal fee that guarantees full participation. The larger is the bidder's sensibility, the higher is the optimal participation.
    Keywords: first-price auction,entry,monotonic signaling,social status
    JEL: D44 D82
    Date: 2022
  2. By: Franz Ostrizek
    Abstract: We study a dynamic principal-agent setting in which both sides learn about the importance of effort. The quality of the agent’s output is not observed directly. Instead, the principal jointly designs an evaluation technology and a wage schedule. More precise performance evaluation reduces current agency costs but promotes learning, which is shown to increase future agency costs. As a result, the optimal evaluation technology is both imprecise and tough: a bad performance is always sanctioned, but a good one is not always recognized. We also study the case in which principal and agent have different priors, for instance because the agent is overconfident. Then, the principal uses a tough evaluation structure to preserve the agent’s profitable misperception. For an underconfident agent, by contrast, she either uses a fully informative evaluation in order to promote learning and eliminate costly underconfidence, or is lenient if learning is too costly.
    Keywords: Moral Hazard, Performance Evaluation, Learning, Information Design
    JEL: D86 D83 M50
    Date: 2022–06
  3. By: Mehmet S. Ismail
    Abstract: Credible equilibrium is a solution concept that imposes a stronger credibility notion than subgame perfect equilibrium. A credible equilibrium is a refinement of subgame perfect equilibrium such that if a threat in a subgame g is "credible," then it must also be credible in every subgame g' that is "equivalent" to g. I show that (i) a credible equilibrium exists in multi-stage games, and (ii) if every stage game has a unique Nash equilibrium, then the credible equilibrium is unique even in infinite horizon multi-stage games. Moreover, in perfect information games, credible equilibrium is equivalent to subgame perfect equilibrium.
    Date: 2022–06
  4. By: Alonso, Ricardo; Rantakari, Heikki
    Abstract: We analyze a class of sender-receiver games with quadratic payoffs, which includes the communication games in Alonso et al. (2008) and Rantakari (2008) as special cases, for which the sender's or the receiver's maximum expected payoff when players have access to arbitrary, mediated communication protocols is attained in one round of face-to-face, unmediated cheap talk. This result is based on the existence for these games of a communication equilibrium with an infinite number of partitions of the state space. We provide explicit expressions for the maximum expected payoff of the sender and the receiver, and illustrate its use by deriving new comparative statics of the quality of optimal communication. For instance, a shift in the underlying uncertainty that reduces expected conflict can worsen the quality of communication.
    Keywords: communication equilibrium; information transmission; mediation; one-shot cheap talk; Elsevier deal
    JEL: C72 D70 D83
    Date: 2022–03–01
  5. By: Emerson Melo (Indiana University, Department of Economics)
    Abstract: In this paper we study a Rational Inattention model in environments where the decision maker faces uncertainty about the true prior distribution over states. The decision maker seeks to select a stochastic choice rule over a finite set of alternatives that is robust to prior ambiguity. Following the robust stochastic optimization literature, we fully characterize the distributional robustness of the Rational Inattention model in terms of a tractable concave program. Exploiting this structure we establish necessary and sufficient conditions to construct robust consideration sets that account for the fact that the prior distribution is unknown. Finally, we quantify the impact of prior uncertainty, by introducing the notion of Worst-Case Sensitivity, which is defined as the worst-case rate of decrease in the expected utility of a robust decision maker when the degree of prior uncertainty vanishes. We show that this quantity is proportional to the standard deviation associated to the decision maker’s expected utility.
    Keywords: Rational Inattention, prior uncertainty, misspecified models, Robust Optimization, o-divergences, Shannon Entropy, Risk Measures.
    Date: 2022–07
  6. By: Aditya Kuvalekar; João Ramos; Johannes Schneider
    Abstract: Agents, some with a bias, decide between undertaking a risky project and a safe alternative based on information about the project's efficiency. Only a part of that information is verifiable. Unbiased agents want to undertake only efficient projects, while biased agents want to undertake any project. If the project causes harm, a court examines the verifiable information, forms a belief about the agent's type, and decides the punishment. Tension arises between deterring inefficient projects and a chilling effect on using the unverifiable information. Improving the unverifiable information always increases overall efficiency, but improving the verifiable information may reduce efficiency.
    Keywords: deterrence, chilling effect, screening
    JEL: D01 K13 L51
    Date: 2022–06
  7. By: Meryem Essaidi; Matheus V. X. Ferreira; S. Matthew Weinberg
    Abstract: We consider a revenue-maximizing seller with a single item for sale to multiple buyers with i.i.d. valuations. Akbarpour and Li (2020) show that the only optimal, credible, strategyproof auction is the ascending price auction with reserves which has unbounded communication complexity. Recent work of Ferreira and Weinberg (2020) circumvents their impossibility result assuming the existence of cryptographically secure commitment schemes, and designs a two-round credible, strategyproof, optimal auction. However, their auction is only credible when buyers' valuations are MHR or $\alpha$-strongly regular: they show their auction might not be credible even when there is a single buyer drawn from a non-MHR distribution. In this work, under the same cryptographic assumptions, we identify a new single-item auction that is credible, strategyproof, revenue optimal, and terminates in constant rounds in expectation for all distributions with finite monopoly price.
    Date: 2022–05
  8. By: Seungjin Han; Siyang Xiong
    Abstract: Inspired by Szentes' critique (Szentes (2009)), we study common agency models with non-delegated contracts. In such a setup, we prove that the menu theorem in Peters (2001) holds partially only under some particular information structure, and we use examples to show that it fails generally. Furthermore, we prove a menu-of-menu-with-recommendation theorem in our models. Finally, we show that our results can beeasily extended to common agency with imperfect commitment a la Bester and Strausz (2000, 2001, 2007).
    Keywords: common agency; non-delegation; imperfect commitment; menu theorem; menu of menus with recommendation
    JEL: C79 D82
    Date: 2022–06
  9. By: Mostapha Diss (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France); Clinton Gubong Gassi (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France & Department of Mathematics - University of Yaounde I. BP 47 Yaounde, Cameroon); Issofa Moyouwou (Ecole Normale Supérieure - Department of Mathematics - University of Yaounde I. BP 47 Yaounde, Cameroon)
    Abstract: We study the relationships between two well-known social choice concepts, namely the principle of social acceptability introduced by Mahajne and Volij (2018), and the majoritarian compromise rule introduced by Sertel (1986) and studied in detail by Sertel and Yılmaz (1999). The two concepts have been introduced separately in the literature in the spirit of selecting an alternative that satisfies most individuals in single-winner elections. Our results in this paper show that the two concepts are so closely related that the interaction between them cannot be ignored. We show that the majoritarian compromise rule always selects a socially acceptable alternative when the number of alternatives is even and we provide a necessary and sufficient condition so that the majoritarian compromise rule always selects a socially acceptable alternative when the number of alternatives is odd. Moreover, we show that when we restrict ourselves to the three well-studied classes of single-peaked, single-caved, and single-crossing preferences, the majoritarian compromise rule always picks a socially acceptable alternative whatever the number of alternatives and the number of voters.
    Keywords: Voting, Single-winner elections, Social acceptability, Majoritarian compromise rule
    JEL: D71 D72
    Date: 2022–06
  10. By: Ata Atay (Universitat de Barcelona and BEAT); Ana Mauleon (CEREC, UCLouvain Saint-Louis Brussels and CORE/LIDAM, UCLouvain, Belgium); Simon Schopohl (CEREC, UCLouvain Saint-Louis Brussels, Belgium); Vincent Vannetelbosch (CORE/LIDAM, UCLouvain, Belgium)
    Abstract: Individuals are embedded in a network of relationships and they can be victims, bystanders, or perpetrators of bullying and harassment. Each individual decides noncooperatively how much effort to exert in preventing misbehavior. Each individual's optimal effort depends on the contextual effect, the social multiplier effect and the social conformity effect. We characterize the Nash equilibrium and we derive an inter-centrality measure for finding the key player who once isolated increases the most the aggregate effort. An individual is more likely to be the key player if she is influencing many other individuals, she is exerting a low effort because of her characteristics, and her neighbors are strongly influenced by her. The key player policy increases substantially the aggregate effort and the targeted player should never be selected randomly. The key player is likely to remain the key player in presence of social workers except if she is becoming much less influential due to her closeness to social workers. Finally, we consider alternative policies (e.g. training bystanders for helping victims) and compare them to the policy of isolating the key player.
    Keywords: Social networks, bullying, harassment, peer effects, key player, conformity,
    JEL: A14 C72 D85 Z13
    Date: 2022
  11. By: Agustin Casas (Department of Economics/CUNEF); Daniel M. Kselman (School Global and Public Affairs/IE University)
    Abstract: Local brokers are essential in the implementation of clientelist politics, but their efforts on parties’ behalf are not fully observable. A growing literature studies how parties address this agency problem, highlighting two distinct reward schemes:allocating promotions or prizes based on observed vote shares, or doing so based on inferred effort allocations. This paper develops a formal model to examine the conditions under which one or the other of these reward schemes is optimal forminimizing brokers’ rent-seeking. Intuitively, the effort-based reward mechanism is optimal when broker effort is inferred with relative precision. Less intuitively, the vote-based mechanism will tend to be optimal when a party’s supporters are evenly distributed across regions, and when the prize ß adopts intermediate values, which together lead to high levels of inter-broker competition. When brokers must compete with one another over valued prizes, parties can often minimize rent seeking without directly monitoring broker effort.
    Date: 2022–06
  12. 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
  13. By: Massimo Motta; Antonio Penta
    Abstract: We investigate the market effects of brand search advertising, within a model where two firms simultaneously choose the price of their (differentiated) product and the bids for the advertising auction which is triggered by own and rival's brand keywords search; and where there exist sophisticated/attentive consumers (who look for any available information on their screen) and naive/inattentive consumers (who only look at the top link of their screen), both aware of either brand's characteristics and price. Relative to a benchmark where only organic search exists, in any symmetric equilibrium each firm wins its own brand auction, and advertising has detrimental effects on welfare: (i) the sponsored link crowds out the rival's organic link, thus reducing competition and choice, and leading to price increases; (ii) the payment of the rival's bid (may) raise marginal cost, also contributing to raise market prices. Under extreme asymmetry (there is an incumbent and an unknown new entrant), we do find that the market effect of brand bidding might be beneficial, if the search engine does not list the entrant's link in organic search, and the share of the sophisticated consumers in the economy is large enough for an equilibrium in which the entrant wins the advertising auction on the search for the incumbent's brand to exist.
    Keywords: digital advertising, auctions, oligopoly, search engines, brands, horizontal agreements
    JEL: D44 L13 L4
    Date: 2022–06
  14. By: Antoine Dubus; Patrick Legros
    Abstract: Firms may share information to discover potential synergies between their data sets and algorithms, which eventually may lead to more efficient mergers and acquisitions (M&A) decisions. However, as pointed out by Arrow, information sharing also modifies the competitive balance when companies do not merge, and a firm may be reluctant to share information with potential rivals. Under general conditions, we show that firms benefit from (partially) sharing information. Because more sharing of information may increase industry expected profits both when there is head-to-head competition and when there is an M&A, the presence of a regulator who can prevent or allow the M&A can decrease or increase the level of information sharing, as well as consumer surplus, with respect to the no-regulator case. A regulator who can also control the level of information sharing will allow firms to share information.
    Keywords: synergies, mergers, sale of data, incomplete information, antitrust, privacy
    Date: 2022–06
  15. By: Pieter Kleer; Johan van Leeuwaarden
    Abstract: Sellers in online markets face the challenge of determining the right time to sell in view of uncertain future offers. Classical stopping theory assumes that sellers have full knowledge of the value distributions, and leverage this knowledge to determine stopping rules that maximize expected welfare. In practice, however, stopping rules must often be determined under partial information, based on scarce data or expert predictions. Consider a seller that has one item for sale and receives successive offers drawn from some value distributions. The decision on whether or not to accept an offer is irrevocable, and the value distributions are only partially known. We therefore let the seller adopt a robust maximin strategy, assuming that value distributions are chosen adversarially by nature to minimize the value of the accepted offer. We provide a general maximin solution to this stopping problem that identifies the optimal (threshold-based) stopping rule for the seller for all statistical information structures. We then perform a detailed analysis for when the seller knows the common mean, dispersion (variance or mean absolute deviation) and support of the distributions. We show for this information structure that the seller's stopping rule consists of decreasing thresholds converging to the common mean, and that nature's adversarial response, in the long run, is to always create an all-or-nothing scenario. The maximin solutions also reveal what happens as dispersion or the number of offers grows large.
    Date: 2022–06
  16. By: Annick Laruelle; Andr\'e Rocha
    Abstract: In this paper, we consider coordination and anti-coordination heterogeneous games played by a finite population formed by different types of individuals who fail to recognize their own type but do observe the type of their opponent. We show that there exists symmetric Nash equilibria in which players discriminate by acting differently according to the type of opponent that they face in anti-coordination games, while no such equilibrium exists in coordination games. Moreover, discrimination has a limit: the maximum number of groups where the treatment differs is three. We then discuss the theoretical results in light of the observed behavior of people in some specific psychological contexts.
    Date: 2022–06
  17. By: Joshua S. Gans
    Abstract: Exploitation of disruptive technologies often requires resource deployment that creates conflict if there are divergent beliefs regarding the efficacy of a new technology. This arises when a visionary agent has more optimistic beliefs about a technological opportunity. Exploration in the form of experiments can be persuasive when beliefs differ by mitigating disagreement and its costs. This paper examines experimental choice when experiments need to persuade as well as inform. It is shown that, due to resource constraints, persuasion factors more highly for entrepreneurial than incumbent firms. However, incumbent firms, despite being able to redeploy resources using authority, are constrained in adoption as exploration cannot mitigate the costs of disagreement
    JEL: L26 M1 O32
    Date: 2022–05

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