nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒10‒10
eighteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Regret aversion and information aversion By Emmanuelle GABILLON
  2. Reputation for Toughness By Stefano Barbieri; Marco Serena
  3. Setting Interim Deadlines to Persuade By Maxim Senkov
  4. Attention Capture By Andrew Koh; Sivakorn Sanguanmoo
  5. Strategy-Proof and Envy-Free Random Assignment By Basteck, Christian; Ehlers, Lars
  6. Agency Problems in a Competitive Conglomerate with Production Constraints By Jose de Jesus Herrera-Velasquez
  7. Interactive Information Design By Frédéric Koessler; Marie Laclau; Tristan Tomala
  8. The swaps index for consumer choice By Mia Lu; Nick Netzer
  9. Learning by Consuming: Optimal Pricing with Endogenous Information Provision By Huiyi Guo; Wei He; Bin Liu
  10. Platform Liability and Innovation By Jeon, Doh-Shin; Lefouili, Yassine; Madio, Leonardo
  11. Stochastic Contracts and Subjective Evaluations By Lang, Matthias
  12. The Bargaining Trap By Schweighofer-Kodritsch, Sebastian
  13. The Emergence of Enforcement By Luca Anderlini; Leonardo Felli; Michele Piccione
  14. Colonel Blotto games with a head start By Leopold Aspect; Christian Ewerhart
  15. Strategic investments in multi-stage General Lotto games By Rahul Chandan; Keith Paarporn; Mahnoosh Alizadeh; Jason R. Marden
  16. All-Pay Competition with Captive Consumers By Foucart, Renaud; Friedrichsen, Jana
  17. Collective Brand Reputation By Nocke, Volker; Strausz, Roland
  18. Cooperation, Competition, and Welfare in a Matching Market By Bester, Helmut; Sákovics, József

  1. By: Emmanuelle GABILLON
    Abstract: Regret is a negative and counterfactual emotion that occurs when a decision maker believes her past decision, if changed, would achieve a better outcome. Regret is intrinsically related to the comparison of the chosen alternative outcome with the foregone alternative outcomes. The result of this comparison is influenced by the decision maker’s information about the foregone alternative outcomes (feedback structure). In this paper, we use Gabillon (2020)’s model, which generalizes regret theory to any feedback structure. We show that a regretful decision maker exhibits information aversion. The anticipation of learning about the payoffs of the foregone alternatives decreases her expected utility. We use the concept of statistical sufficiency in order to classify the feedback structures according to their informational content. We show that the less informative the feedback structure is, the higher the utility of a regretful decision maker. Regret, Emotion, Information
    JEL: D03 D81 D82
    Date: 2022
  2. By: Stefano Barbieri; Marco Serena
    Abstract: We study reputation for toughness in finitely repeated contests. Players are rational (payoff-maximizing), or "tough" (always exerting an exogenous high "tough effort"). In the unique symmetric equilibrium, a rational player has strictly positive payoff only if she is monopolizing reputation. In a reputational oligopoly, a fierce war of attrition to become the reputational monopolist may yield overdissipation. In a reputational monopolist, overdissipation never happens and the monopolist mixes between a non-tough effort to cash in on her reputation today and the tough effort to boost her reputation. In our main application, criminal groups build reputation for toughness in illegal markets.
    JEL: C72 D82 D83
    Date: 2021–09
  3. By: Maxim Senkov
    Abstract: This paper studies the optimal design of self-reporting on the progress of a project by a rent-seeking agent reporting to a principal who is concerned with accomplishing the project before an exogenous deadline. The project has two stages: completing the first stage serves as a milestone and completing the second stage accomplishes the project. I show that if the project is sufficiently promising ex ante, then the agent commits to provide only the good news that the project is accomplished. If the project is not promising enough ex ante, the agent persuades the principal to start the funding by committing to provide not only good news but also the bad news that the milestone of the project has not been reached by an interim deadline.
    Keywords: dynamic Bayesian persuasion; informational incentives; interim deadline; multistage project;
    JEL: D82 D83 G24
    Date: 2022–08
  4. By: Andrew Koh; Sivakorn Sanguanmoo
    Abstract: Consider a Bayesian decision maker (DM) who, at each time period, chooses to either continue paying attention to information about a state upon which her utility depends, or stop and take action based on her best available information. We show that any distribution of stopping times$\unicode{x2013}$the random times at which DM stops paying attention$\unicode{x2013}$achievable through any dynamic information structure can be replicated by simple structures which give the DM full information at random times, and the null message otherwise. We use this to characterize the distributions of stopping times which can be achieved through information. All distributions on the FOSD frontier can be implemented by simple structures which, conditional on not giving full information, progressively steers the DM's beliefs towards a basin of attraction at which her valuation for full information is maximized. We then introduce a designer whose value function is any increasing function of the DM's stopping time and characterize the designer's optimal structure. These results speak directly to the attention economy.
    Date: 2022–09
  5. By: Basteck, Christian (WZB Berlin); Ehlers, Lars (Université de Montréal)
    Abstract: We study the random assignment of indivisible objects among a set of agents with strict preferences. We show that there exists no mechanism which is unanimous, strategy-proof and envy-free. Weakening the first requirement to q-unanimity – i.e., when every agent ranks a different object at the top, then each agent shall receive his most-preferred object with probability of at least q – we show that a mechanism satisfying strategy-proofness, envy-freeness and ex-post weak non-wastefulness can be q-unanimous only for q ≤ n2 (where n is the number of agents). To demonstrate that this bound is tight, we introduce a new mechanism, Random-Dictatorship-cum-Equal-Division (RDcED), and show that it achieves this maximal bound when all objects are acceptable. In addition, for three agents, RDcED is characterized by the first three properties and ex-post weak efficiency. If objects may be unacceptable, strategy-proofness and envy-freeness are jointly incompatible even with ex-post weak non-wastefulness.
    Keywords: random assignment; strategy-proofness; envy-freeness; q-unanimity;
    JEL: D63 D70
    Date: 2021–12–22
  6. By: Jose de Jesus Herrera-Velasquez (Graduate School of Economics, Kyoto University)
    Abstract: This study explores the reciprocal effects between agency problems and market competition. We develop an adverse selection model of a competing conglomerate with production constraints. The conglomerate participates as the leader in two different duopolistic markets with a Stackelberg-Cournot framework and heteroge- neous goods. The conglomerate is run by its headquarters and two division man- agers. The agency problem arises because the market demand size is a manager's private information, which the headquarters try to elicit by a contract mechanism. We fully characterize a first and a second-best contract. When the production constraints make the first best outcome unattainable, the second-best contract is either separating or pooling, depending on the severity of the constraints. The sep- arating second-best contract sometimes improves the ex-ante welfare in comparison to a symmetric information benchmark. The pooling second-best contract never improves the ex-ante welfare. We also find that at an intermediate level of substi- tutability, the second-best contract is most likely to coincide with the first-best one, and any departure from that level toward either substitutability or complementarity makes the attainment of the first-best outcome less likely.
    Keywords: Adverse Selection; Contract Mechanism; Multimarket Competition; Stackelberg Oligopoly; Production Constraint
    JEL: C70 D21 D43 D82 D86 L13
    Date: 2022–09
  7. By: Frédéric Koessler (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Marie Laclau (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Tristan Tomala (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, HEC Paris - Ecole des Hautes Etudes Commerciales)
    Abstract: We study the interaction between multiple information designers who try to influence the behavior of a set of agents. When each designer can choose information policies from a compact set of statistical experiments with countable support, such games always admit subgame perfect equilibria. When designers produce public information, every equilibrium of the simple game in which the set of messages coincides with the set of states is robust in the sense that it is an equilibrium with larger and possibly infinite and uncountable message sets. The converse is true for a class of Markovian equilibria only. When designers produce information for their own corporation of agents, robust pure strategy equilibria exist and are characterized via an auxiliary normal form game in which the set of strategies of each designer is the set of outcomes induced by Bayes correlated equilibria in her corporation.
    Keywords: Statistical experiments,Splitting games,Sharing rules,Information design,Bayesian persuasion
    Date: 2022
  8. By: Mia Lu; Nick Netzer
    Abstract: We extend the swaps index of rationality, introduced by Apesteguia and Ballester (2015) for a finite set of alternatives, to the standard consumer choice setting with infinite commodity spaces. Applications include consumer demand from competitive budget sets and the state-space approach to choice under uncertainty. We are primarily interested in Apesteguia and Ballester's result that the swaps index recovers the decision-maker's true preference from choice data for a large class of boundedly rational behavioral models. We show that this result still holds in the consumer choice setting under a suitably defined monotonicity condition. This condition is satisfied for various models of interest but violated for others.
    Keywords: Measures of rationality, revealed preference, behavioral welfare economics
    JEL: D01 D11 D60 D90
    Date: 2022–08
  9. By: Huiyi Guo; Wei He; Bin Liu
    Abstract: We study the revenue-maximizing mechanism when a buyer's value evolves endogenously because of learning-by-consuming. A seller sells one unit of a divisible good, while the buyer relies on his private, rough valuation to choose his first-stage consumption level. Consuming more leads to a more precise valuation estimate, after which the buyer determines the second-stage consumption level. The optimum is a menu of try-and-decide contracts, consisting of a first-stage price-quantity pair and a second-stage per-unit price for the remaining quantity. In equilibrium, a higher first-stage valuation buyer pays more for higher first-stage consumption and enjoys a lower second-stage per-unit price. Methodologically, we deal with the difficulty that due to the failure of single-crossing condition, monotonicity in allocation plus the envelope condition is insufficient for incentive compatibility. Our results help to understand contracts about sequential consumption with the learning feature; e.g., leasing contracts for experience goods and trial sessions for certain courses.
    Date: 2022–09
  10. By: Jeon, Doh-Shin; Lefouili, Yassine; Madio, Leonardo
    Abstract: We study a platform’s incentives to delist IP-infringing products and the effects of holding the platform liable for the presence of such products on innovation and consumer welfare. For a given number of buyers on the platform, platform liability increases innovation by reducing the competitive pressure that innovative products face from IP-infringing products. However, platform liability can have unintended consequences, which can overturn this intended effect on innovation. Moreover, there can be a misalignment of interests between innovators and buyers as platform liability reduces consumer surplus for a given number of innovators. We also analyze how different types of cross-group network effects affect the impact of platform liability on innovation and consumer welfare.
    Keywords: Platform, Liability, Intellectual Property, Innovation.
    JEL: K40 K42 K13 L13 L86
    Date: 2022–09–19
  11. By: Lang, Matthias (LMU Munich)
    Abstract: Subjective evaluations are widely used, but call for different contracts from classical moral-hazard settings. Previous literature shows that contracts require payments to third parties. I show that the (implicit) assumption of deterministic contracts makes payments to third parties necessary. This paper studies incentive contracts with stochastic compensation, like payments in stock options or uncertain arbitration procedures. These contracts incentivize employees without the need for payments to third parties. In addition, stochastic contracts can be more efficient and can make the principal better off compared to deterministic contracts. My results also address the puzzle about the prevalence of labor contracts with stochastic compensation.
    Keywords: subjective evaluations; stochastic contracts; stochastic compensation; budget-balanced contracts; moral hazard; subjective performance measures; incentives;
    JEL: D80 J33 J41 J70
    Date: 2022–05–18
  12. By: Schweighofer-Kodritsch, Sebastian (HU Berlin)
    Abstract: I revisit the Rubinstein (1982) model for the classic problem of price haggling and show that bargaining can become a “trap,” where equilibrium leaves one party strictly worse off than if no transaction took place (e.g., the equilibrium price exceeds a buyer’s valuation). This arises when one party is impatient about capturing zero surplus (e.g., Rubinstein’s example of fixed bargaining costs). Augmenting the protocol with unilateral exit options for responding bargainers generally removes the trap.
    Keywords: alternating offers; bargaining; time preferences; haggling costs; outside options;
    JEL: C78 D03 D74
    Date: 2021–12–27
  13. By: Luca Anderlini (Department of Economics, Georgetown University); Leonardo Felli (Department of Economics, University of Cambridge); Michele Piccione (Department of Economics, London School of Economics)
    Abstract: We ask how enforcement can endogenously emerge in a landscape in which only raw power iron fists, govern the interaction of agents. If two agents are ranked in terms of power, the more powerful one can expropriate, at a cost, the less powerful one. Alternatively, both agents can engage in surplus-augmenting cooperation (e.g. trade). If expropriation is not too costly and cooperation is not overwhelmingly productive, for any pair of ranked agents the possibility of expropriation prevents cooperation. The more powerful agent finds it profitable to expropriate the less powerful one. However, if expropriating agents who are net expropriators of others is cheaper, then a more powerful agent may endogenously become an ``enforcer" for lower ranked agents. In equilibrium, the more powerful agent expropriates the less powerful ones by smaller amounts, and the less powerful ones cooperate and refrain from expropriating agents below them. This is because if they do not the more powerful agent will find it cheaper to expropriate only them by a larger amount. Surprisingly, the details of the power structure are irrelevant for enforcement to emerge as an equilibrium phenomenon provided that the original jungle is inhabited by a sufficiently large number of agents and by one that dominates all others.
    Keywords: Jungle, Power Structures, Enforcement, Rule of Law
    JEL: C79 D00 D01 D31 K19 K40 K49
    Date: 2022–09–21
  14. By: Leopold Aspect; Christian Ewerhart
    Abstract: This paper studies Colonel Blotto games with two battlefi elds where one player has a head start in the form of additional troops on one of the battlefi elds. Such games arise naturally in marketing, electoral competition, and military conflict. Sion and Wolfe (1957) have shown that, if the strategy space is continuous, a mixed-strategy Nash equilibrium need not exist. Therefore, we consider a fi nite approximation. Using the iterated elimination of (weakly) dominated strategies, we identify an equilibrium for all parameter constellations and discuss its uniqueness properties. In equilibrium, resource decisions are typically not uniform but tend to concern units that roughly correspond in size to multiples of the head start. Moreover, competition takes the form of a hide- and-seek game, where the favorite tries to outguess the number of units that the underdog commits to the balanced battlefi eld. Somewhat unexpectedly, equilibrium payoffs of finite approximations of the Sion-Wolfe game accumulate around precisely three values. We also discuss the relation to the model with heterogeneous budgets but no head start.
    Keywords: Colonel Blotto games, head start, Nash equilibrium, finite approximation
    JEL: C62 C72 D72
    Date: 2022–08
  15. By: Rahul Chandan; Keith Paarporn; Mahnoosh Alizadeh; Jason R. Marden
    Abstract: In adversarial interactions, one is often required to make strategic decisions over multiple periods of time, wherein decisions made earlier impact a player's competitive standing as well as how choices are made in later stages. In this paper, we study such scenarios in the context of General Lotto games, which models the competitive allocation of resources over multiple battlefields between two players. We propose a two-stage formulation where one of the players has reserved resources that can be strategically pre-allocated across the battlefields in the first stage. The pre-allocation then becomes binding and is revealed to the other player. In the second stage, the players engage by simultaneously allocating their real-time resources against each other. The main contribution in this paper provides complete characterizations of equilibrium payoffs in the two-stage game, revealing the interplay between performance and the amount of resources expended in each stage of the game. We find that real-time resources are at least twice as effective as pre-allocated resources. We then determine the player's optimal investment when there are linear costs associated with purchasing each type of resource before play begins, and there is a limited monetary budget.
    Date: 2022–09
  16. By: Foucart, Renaud (Lancaster University); Friedrichsen, Jana (HU Berlin)
    Abstract: We study a game in which two firms compete in quality to serve a market consisting of consumers with different initial consideration sets. If both firms invest below a certain threshold, they only compete for those consumers already aware of their existence. Above this threshold, a firm is visible to all and the highest investment attracts all consumers. On the one hand, the existence of initially captive consumers introduces an anti-competitive element: holding fixed the behavior of its rival, a firm with a larger captive segment enjoys a higher payoff from not investing at all. On the other hand, the fact that a firm’s initially captive consumers can still be attracted by very high quality introduces a pro-competitive element: a high investment becomes more profitable for the underdog when the captive segment of the dominant firm increases. The share of initially captive consumers therefore has a non-monotonic effect on the investment levels of both firms and on consumer surplus. We relate our findings to competition cases in digital markets.
    Keywords: consideration set; regulation; all-pay auction; endogenous prize; digital markets;
    JEL: D04
    Date: 2021–01–12
  17. By: Nocke, Volker (Mannheim University); Strausz, Roland (HU Berlin)
    Abstract: We develop a theory of collective brand reputation for markets in which product quality is jointly determined by local and global players. In a repeated game of imperfect public monitoring, we model collective branding as an aggregation of quality signals generated in different markets. Such aggregation yields a beneficial informativeness effect for incentivizing the global player. It however also induces harmful free-riding by local, market-specific players. The resulting tradeoff yields a theory of optimal brand size and revenue sharing that applies to platform markets, franchising, licensing, umbrella branding, and firms with team production.
    Keywords: collective branding; reputation; free-riding; repeated games; imperfect monitoring;
    Date: 2022–04–19
  18. By: Bester, Helmut (HU Berlin and FU Berlin); Sákovics, József (University of the Balearic Islands and University of Edinburgh)
    Abstract: We investigate the welfare effect of increasing competition in an anonymous two-sided matching market, where matched pairs play an infinitely repeated Prisoner’s Dilemma. Higher matching efficiency is usually considered detrimental as it creates stronger incentives for defection. We point out, however, that a reduction in matching frictions also increases welfare because more agents find themselves in a cooperative relationship. We characterize the conditions for which increasing competition increases overall welfare. In particular, this is always the case when the incentives for defection are high.
    Keywords: cooperation; prisoner's dilemma; competition; welfare; matching; trust building;
    JEL: C72 C73 C78
    Date: 2022–07–21

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