nep-mic New Economics Papers
on Microeconomics
Issue of 2022‒11‒21
fifteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Obvious Manipulations of tops-only Voting Rules By R. Pablo Arribillaga; Agustin Bonifacio
  2. A Theory of Stable Market Segmentations By Nima Haghpanah; Ron Siegel
  3. Equilibrium (non-)Existence in Games with Competing Principals By Andrea Attar; Eloisa Campioni; Gwenaël Piaser
  4. Setting Interim Deadlines to Persuade By Maxim Senkov
  5. Costly Participation and Default Allocations in All-Pay Contests By Shelegia, Sandro; Wilson, Chris M.
  6. Foreclosure and Tunneling with Partial Vertical Ownership By Matthias Hunold; Vasilisa Petrishcheva
  7. Mixture-Dependent Preference for Commitment By Fernando Payró Chew
  8. An Axiomatic Characterization of Split Cycle By Yifeng Ding; Wesley H. Holliday; Eric Pacuit
  9. Preference purification in behavioural welfare economics: an impossibility result By Guilhem Lecouteux; Ivan Mitrouchev
  10. Efficient liability law when parties genuinely disagree By Luigi Alberto Franzoni
  11. Efficient Allocations under Ambiguous Model Uncertainty By Chiaki Hara; Sujoy Mukerji; Frank Riedel; Jean-Marc Marc Tallon
  12. Imperfect Competition with Costly Disposal By Lenhard, Severin
  13. The Newsroom Dilemma By Ayush Pant; Federico Trombetta
  14. An Axiomatic Approach to the Law of Small Numbers By Jawwad Noor; Fernando Payró Chew
  15. Optimal Intermediary Contracts By Nabi Arjmandi; Chao Gu; Joseph H. Haslag

  1. By: R. Pablo Arribillaga (Universidad Nacional de San Luis/CONICET); Agustin Bonifacio (Universidad Nacional de San Luis/CONICET)
    Abstract: In a voting problem with a finite set of alternatives to choose from, we study the manipulation of tops-only rules. Since all non-dictatorial (onto) voting rules are manipulable when there are more than two alternatives and all preferences are allowed, we look for rules in which manipulations are not obvious. First, we show that a rule does not have obvious manipulations if and only if when an agent vetoes an alternative it can do so with any preference that does not have such alternative in the top. Second, we focus on two classes of tops-only rules: (i) (generalized) median voter schemes, and (ii) voting by committees. For each class, we identify which rules do not have obvious manipulations on the universal domain of preferences.
    Keywords: obvious manipulations, tops-onlyness, (generalized) median voting schemes, voting by committees, voting by quota.
    JEL: D71 D72
    Date: 2022–11
  2. By: Nima Haghpanah; Ron Siegel
    Abstract: We consider a monopolistic seller in a market that may be segmented. The surplus of each consumer in a segment depends on the price that the seller optimally charges, which depends on the set of consumers in the segment. We study which segmentations may result from the interaction among consumers and the seller. Instead of studying the interaction as a non-cooperative game, we take a reduced-form approach and introduce a notion of stability that any resulting segmentation must satisfy. A stable segmentation is one that, for any alternative segmentation, contains a segment of consumers that prefers the original segmentation to the alternative one. Our main result characterizes stable segmentations as efficient and saturated. A segmentation is saturated if no consumers can be shifted from a segment with a high price to a segment with a low price without the seller optimally increasing the low price. We use this characterization to constructively show that stable segmentations always exist. Even though stable segmentations are efficient, they need not maximize average consumer surplus, and segmentations that maximize average consumer surplus need not be stable. Finally, we relate our notion of stability to solution concepts from cooperative game theory and show that stable segmentations satisfy many of them.
    Date: 2022–10
  3. By: Andrea Attar (CNRS - Centre National de la Recherche Scientifique, TSM - Toulouse School of Management Research - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - CNRS - Centre National de la Recherche Scientifique - TSM - Toulouse School of Management - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées); Eloisa Campioni; Gwenaël Piaser
    Abstract: We study competing-mechanism games, in which multiple principals contract with multiple agents. We reconsider the issue of non-existence of an equilibrium as first raised by Myerson (1982). In the context of his example, we establish the existence of a perfect Bayesian equilibrium. We clarify that Myerson (1982)'s non-existence result is an implication of the additional requirement he imposes, that each principal selects his preferred continuation equilibrium in the agents' game.
    Keywords: Competing Mechanisms,Equilibrium Existence
    Date: 2022–09–28
  4. By: Maxim Senkov
    Abstract: A principal funds a multistage project and retains the right to cut the funding if it stagnates at some point. An agent wants to convince the principal to fund the project as long as possible, and can design the flow of information about the progress of the project in order to persuade the principal. If the project is sufficiently promising ex ante, then the agent commits to providing 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 a project milestone has not been reached by an interim deadline. I demonstrate that the outlined structure of optimal information disclosure holds irrespective of the agent's profit share, benefit from the flow of funding, and the common discount rate.
    Date: 2022–10
  5. By: Shelegia, Sandro; Wilson, Chris M.
    Abstract: Some important forms of contests have participation costs and `default allocations’ where the contest prize is still awarded even when no-one actively competes. We solve a general, all-pay contest model that allows for flexible forms of these features under arbitrary asymmetry. We then use our framework to better connect the literatures on contests and sales price competition, and use this connection to solve some long-standing problems. Finally, we analyze how participation costs and default allocations can be used as novel, practical tools in contest design. Throughout, the combined presence of participation costs and default allocations often reverse otherwise familiar intuitions.
    Keywords: All-Pay Contests; Participation Costs; Default Allocations; Clearinghouse; Sales; Contest Design
    JEL: C72 D43 L13
    Date: 2022–10–17
  6. By: Matthias Hunold (University of Siegen); Vasilisa Petrishcheva (University of Potsdam)
    Abstract: We demonstrate how the incentives of firms that partially own their suppliers or customers to foreclose rivals depend on how the partial owner can extract profits from the target (tunneling). Compared to a fully vertically integrated firm, a partial owner may obtain only a share of the target’s profit but influence the target’s strategy significantly. We show that the incentives for customer and input foreclosure can be higher, equal, or even lower with partial ownership than with a vertical merger, depending on how the protection of minority shareholders and transfer price regulations affect the scope for profit extraction.
    Keywords: Backward ownership, Entry deterrence, Foreclosure, Minority shareholdings, Partial ownership, Uniform pricing, Vertical integration
    JEL: G34 L22 L40
    Date: 2022–11
  7. By: Fernando Payró Chew
    Abstract: The literature on temptation and self-control is motivated by evidence of a preference for commitment. This literature has typically put forth models for preferences over menus of lotteries that satisfy the Independence axiom. Independence requires that the ranking of two menus is not affected if each is mixed (probabilistically) with a common third menu. In particular, the preference for commitment is invariant under Independence. We argue that intuitive behavior may require that the preference for commitment be affected by such mixing, and hence be mixture-dependent. To capture such behavior, we generalize Gul and Pesendorfer (2001) by replacing their Independence axiom with a suitably adapted version of the Mixture-Betweenness axiom of Chew (1989)- Dekel (1986). Axiomatizing the model involves a novel extension of the Mixture Space Theorem to preferences that satisfy Mixture-Betweenness.
    Keywords: temptation, self-control, mixture space, independence
    JEL: D11
    Date: 2022–09
  8. By: Yifeng Ding; Wesley H. Holliday; Eric Pacuit
    Abstract: A number of rules for resolving majority cycles in elections have been proposed in the literature. Recently, Holliday and Pacuit (Journal of Theoretical Politics 33 (2021) 475-524) axiomatically characterized one such cycle-resolving rule, dubbed Split Cycle: in each majority cycle, discard the majority preferences with the smallest majority margin. They showed that any rule satisfying five standard axioms, plus a weakening of Arrow's Independence of Irrelevant Alternatives (IIA) called Coherent IIA, is refined by Split Cycle. In this paper, we go further and show that Split Cycle is the only rule satisfying the axioms of Holliday and Pacuit together with two additional axioms: Coherent Defeat and Positive Involvement in Defeat. Coherent Defeat states that any majority preference not occurring in a cycle is retained, while Positive Involvement in Defeat is closely related to the well-known axiom of Positive Involvement (as in J. P\'{e}rez, Social Choice and Welfare 18 (2001) 601-616). We characterize Split Cycle not only as a collective choice rule but also as a social choice correspondence, over both profiles of linear ballots and profiles of ballots allowing ties.
    Date: 2022–10
  9. By: Guilhem Lecouteux (UCA - Université Côte d'Azur, GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Ivan Mitrouchev (IESEG School of Management Lille)
    Abstract: We propose a precise definition of the notion of ‘context' in behavioural economics, and identify four axioms characterising the strategies implemented in standard and behavioural welfare economics to define welfare: (1) normative individualism, (2) behavioural context-independence, (3) normative contextindependence, and (4) consumer sovereignty. We then review the different approaches in behavioural normative economics in the light of those axioms. We highlight that the key distinction between those approaches is the axiom which is chosen as a way to infer normative preferences from behavioural preferences, with either normative context-independence or consumer sovereignty. We argue that preference purification requires the axiom of normative context-independence, whose justification is however limited when individual behaviour is contextdependent. This suggests that it might be impossible to offer a general strategy to infer true/normative preferences from possibly incoherent behavioural preferences.
    Date: 2022–09–29
  10. By: Luigi Alberto Franzoni
    Abstract: This article compares the classic liability rules, negligence and strict liability, under the hypothesis that injurers and victims formulate subjective beliefs about the probabilities of harm. Parties may reasonably disagree in their assessment of the precautionary measures available: a measure regarded as safe by one party may be regarded as not safe by the other. By relying on the notions of Pareto efficiency and "No Betting" Pareto efficiency, the article shows that negligence is the optimal liability rule when injurers believe that the probability of harm is always higher than the victims do, while strict liability with overcompensatory damages is the optimal rule in the opposite case. The same results apply to bilateral accidents and, specifically, to product-related harms in competitive markets. Overcompensatory ("punitive") damages provide consumers with insurance against their own pessimism.
    JEL: K13 D83 D62
    Date: 2022–10
  11. By: Chiaki Hara (Kyoto University [Kyoto]); Sujoy Mukerji (QMUL - Queen Mary University of London); Frank Riedel (University of Bielefeld); Jean-Marc Marc Tallon (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, 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)
    Abstract: We investigate consequences of ambiguity on efficient allocations in an exchange economy. Ambiguity is embodied in the model uncertainty perceived by the consumers: they are unsure what would be the appropriate probability measure to apply to evaluate consumption and keep in consideration a set P of alternative probabilistic laws. Consumers are heterogeneously ambiguity averse with smooth
    Date: 2022–10
  12. By: Lenhard, Severin
    JEL: D04 L11 L13 L50
    Date: 2022
  13. By: Ayush Pant; Federico Trombetta
    Abstract: Conventional wisdom suggests that competition in the modern digital environment is pushing media outlets towards early release of less accurate information. We show that this is not necessarily the case. We argue that two opposing forces determine the resolution of the speed-accuracy trade-off: preemption and reputation. More competitive environments may be more conducive to reputation building. Therefore, it is possible to have better reporting in a more (Internet-driven) competitive world. However, we show that the audience may be worse-off due to another consequence of the Internet – outlets’ better initial information. Finally, we show how a source may exploit the speed-accuracy trade-off to get “unverified facts” out to the audience quickly.
    JEL: D43 D83 L82
    Date: 2022
  14. By: Jawwad Noor; Fernando Payró Chew
    Abstract: With beliefs over the outcomes of coin-tosses as our primitive, we formalize the Law of Small Numbers (Tversky and Kahneman (1974)) by an axiom that expresses a belief that the sample mean of any sequence will tend towards the coin’s perceived bias along the entire path. The agent is represented by a belief that the bias of the coin is path-dependent and self-correcting. The model is consistent with the evidence used to support the Law of Small Numbers, such as the Gambler’s Fallacy. In the setting of Bayesian inference, we show how learning is affected by the interplay between two potentially opposing forces: a belief in the absence of streaks and a belief that the sample mean will tend to the true bias. We show that, unlike other learning results in the literature (Rabin (2002), Epstein, Noor and Sandroni (2010)), the latter force ensures that the agent at least admits the true parameter as possible in the limit, if not learn with certainty that it is true. In an evolutionary setting, we show that agents who believe in the Law of Small Numbers are never pushed out of the evolutionary race by “standard” agents who correctly understand randomness.
    Keywords: law of small numbers, belief biases, heuristics, gambler’s fallacy, learning, misspecified beliefs, evolution
    JEL: D01 D9
    Date: 2022–09
  15. By: Nabi Arjmandi (Department of Economics, University of Missouri-Columbia); Chao Gu (Department of Economics, University of Missouri-Columbia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia)
    Abstract: Financial intermediaries simultaneously engage in two separate relationships: they accept deposits and they make loans. Yet, researchers have focused either on deposit contracts or loan contracts. In this paper, we develop a theory in which deposit contracts and loan contracts are determined in equilibrium. Borrowers have limited commitment and the banks have access to a direct, safe long-term investment. We then study how changes in the borrower’s creditworthiness affects deposit and loan contracts. We study this relationship across different trading protocols. With deteriorating credit conditions, we find that loan rates can decline (declining spreads) and loan quantities can increase. This is the opposite direction used when constructing things like credit indicators. This relationship is not robust to changes in market structures. Lastly, we show how an aggregate fundamental shock can induce bank runs. However, the bank run is less likely in the worst credit-condition category.
    Keywords: deposit contracts, loan contracts, credit conditions, financial indicators
    JEL: D53 E44 G21
    Date: 2022–11

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