nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒04‒10
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. Reform for Sale: a Common Agency Model with Moral Hazard Frictions By Lefebvre, Perrin; Martimort, David
  2. Delegation, Capture and Endogenous Information Structures By Lefebvre, Perrin; Martimort, David
  3. Persuasion with endogenous misspecified beliefs By Eliaz, Kfir; Spiegler, Ran; Thysen, Heidi C.
  4. Information Favoritism and Scoring Bias in Contests By Shanglyu Deng; Hanming Fang; Qiang Fu; Zenan Wu
  5. Designing Interrogations By Alessandro Ispano; Peter Vida
  6. Comparison Shopping: Learning Before Buying From Duopolists By Brian C. Albrecht; Mark Whitmeyer
  7. Dynamic Information Provision: Rewarding the Past and Guiding the Future By Ian Ball
  8. Efficient Public Good Provision in a Multipolar World By Chowdhury Mohammad Sakib Anwar; Jorge Bruno; Renaud Foucart; Sonali Sen Gupta
  9. Licensing a product innovation in a Cournot industry By Antelo, Manel; Bru, Lluís
  10. Distributionally Robust Principal-Agent Problems and Optimality of Contract Menus By Peter Zhang
  11. Product quality and product compatibility in network industries By Domenico Buccella; Luciano Fanti; Luca Gori
  12. Representation Theorems for Path-Independent Choice Rules By Koji Yokote; Isa E. Hafalir; Fuhito Kojima; M. Bumin Yenmez
  13. Artificial Intelligence and the Economics of Decision-Making By Naudé, Wim
  14. Optimal Insurance: Dual Utility, Random losses and Adverse Selection By Alex Gershkov; Benny Moldovanu; Philipp Strack; Mengxi Zhang

  1. By: Lefebvre, Perrin; Martimort, David
    Abstract: Lobbying competition is viewed as a delegated common agency game under moral hazard. Several interest groups try to influence a policy-maker who exerts effort to increase the probability that a reform be implemented. With no restriction on the space of contribution schedules, all equilibria perfectly reflect the principals’ preferences over alternatives. As a result, lobbying competition reaches efficiency. Unfortunately, such equilibria require that the policy-maker pays an interest group when the latter is hurt by the reform. When payments remain non-negative, inducing effort requires leaving a moral hazard rent to the decision-maker. Contributions schedules no longer reflect the principals preferences, and the unique equilibrium is inefficient. Free-riding across congruent groups arises and the set of groups active at equilibrium is endogenously derived. Allocative efficiency and redistribution of the aggregate surplus are linked altogether and both depend on the set of active principals, as well as on the groups size.
    Keywords: Pluralistic Politics; Lobbying; Common Agency; Moral Hazard
    JEL: D72 D82 H10
    Date: 2023–03–10
  2. By: Lefebvre, Perrin; Martimort, David
    Abstract: A substantial literature has been devoted to analyzing how legislators delegate regulatory power to a more knowledgeable agency. Yet, much less attention has been paid to understand how this delegation process is shaped by the environment in which this agency operates, and more specifically by the actions of interest groups. We propose a model of regula-tory capture to assess how the distribution of information across interest groups and agencies impacts optimal delegation. Whether an interest group and his agency share information or not determines the scope for capture and how much discretion should be left to this agency in response. Whether asymmetric information reduces or increases discretion depends on the biases of the group and the agency vis-`a-vis Congress. Groups that are more aligned with Congress collect politically relevant information, while more extreme groups remain poorly informed. The information structure that endogenously emerges increases discretion under broad circumstances.
    Keywords: Pluralistic Politics; Lobbying; Common Agency; Moral Hazard
    JEL: D82 D86 H10
    Date: 2023–03–10
  3. By: Eliaz, Kfir; Spiegler, Ran; Thysen, Heidi C.
    Abstract: We study a two-action, two-state pure persuasion game in which the receiver has non-rational expectations. The sender can add ambiguity to his message by pooling it with other messages. This can be likened to selective redaction of the original message. The receiver knows the sender's message strategy but not his redaction strategy, and uses only the former to draw inferences from the redacted message. We characterize the highest probability of persuasion attainable by the sender under these conditions.
    Keywords: misspecified beliefs; non-rational expectations; persuasion; Advanced Investigator grant no. 692995; 1779091
    JEL: J1
    Date: 2021–05–01
  4. By: Shanglyu Deng; Hanming Fang; Qiang Fu; Zenan Wu
    Abstract: Two potentially asymmetric players compete for a prize of common value, which is initially unknown, by exerting efforts. A designer has two instruments for contest design. First, she decides whether and how to disclose an informative signal of the prize value to players. Second, she sets the scoring rule of the contest, which varies the relative competitiveness of the players. We show that the optimum depends on the designer’s objective. A bilateral symmetric contest—in which information is symmetrically distributed and the scoring bias is set to offset the initial asymmetry between players—always maximizes the expected total effort. However, the optimal contest may deliberately create bilateral asymmetry—which discloses the signal privately to one player, while favoring the other in terms of the scoring rule—when the designer is concerned about the expected winner’s effort. The two instruments thus exhibit complementarity, in that the optimum can be made asymmetric in both dimensions even if the players are ex ante symmetric. Our results are qualitatively robust to (i) affiliated signals and (ii) endogenous information structure. We show that information favoritism can play a useful role in addressing affirmative action objectives.
    JEL: C72 D44 D82
    Date: 2023–03
  5. By: Alessandro Ispano; Peter Vida (Université de Cergy-Pontoise, THEMA)
    Abstract: We provide a model of interrogations with two-sided asymmetric information. The suspect knows his status as guilty or innocent and the likely strength of the law enforcer’s evidence, which is informative about the suspect’s status and may also disprove lies. We compare prosecution errors in the equilibrium of the one-shot interrogation and in the optimal mechanism under full commitment. We describe a “back and forth” interrogation with disclosure of the evidence and discretionary forgiveness of lies that implements the optimum in equilibrium without any commitment.
    Keywords: lie, evidence, questioning, confession, law, prosecution, disclosure, persuasion, two-sided asymmetric information
    JEL: D82 D83 C72 K40
    Date: 2023
  6. By: Brian C. Albrecht; Mark Whitmeyer
    Abstract: We explore a model of duopolistic competition in which consumers flexibly learn about the fit--both relative and absolute--of each competitor's product. When information is cheap, increasing the cost of information decreases consumer welfare; but when information is expensive, this relationship flips: cheaper information hurts consumers. As information frictions vanish, the limiting equilibrium is ex post efficient, in contrast to the monopoly model studied by Ravid, Roesler, and Szentes (2022).
    Date: 2023–02
  7. By: Ian Ball
    Abstract: I study the optimal provision of information in a long-term relationship between a sender and a receiver. The sender observes a persistent, evolving state and commits to send signals over time to the receiver, who sequentially chooses public actions that affect the welfare of both players. I solve for the sender's optimal policy in closed form: the sender reports the value of the state with a delay that shrinks over time and eventually vanishes. Even when the receiver knows the current state, the sender retains leverage by threatening to conceal the future evolution of the state.
    Date: 2023–03
  8. By: Chowdhury Mohammad Sakib Anwar; Jorge Bruno; Renaud Foucart; Sonali Sen Gupta
    Abstract: We model a public goods game with groups, position uncertainty, and observational learning. Contributions are simultaneous within groups, but groups play sequentially based on their observation of an incomplete sample of past contributions. We show that full cooperation between and within groups is possible with self-interested players on a fixed horizon. Position uncertainty implies the existence of an equilibrium where groups of players conditionally cooperate in the hope of influencing further groups. Conditional cooperation implies that each group member is pivotal, so that efficient simultaneous provision within groups is an equilibrium.
    Keywords: Public Goods, Groups, Position Uncertainty, Voluntary Contributions
    JEL: C72 D82 H41
    Date: 2023
  9. By: Antelo, Manel; Bru, Lluís
    Abstract: We study how a firm licenses a product improvement innovation to its rival in the final market. Contrary to what happens with fixed-fee licensing or per-unit royalty licensing, pure ad-valorem royalty licensing is optimal but is welfare reducing. On welfare grounds, fixed-fee licensing dominates per-unit royalty agreements, but has the disadvantage that firms sometimes fail to reach an agreement if licensing deals are restricted to feature fixed fees. A simple rule for a second-best optimal policy on technology licensing is proposed.
    Keywords: Product innovation, licensing, Cournot competition, welfare
    JEL: D43 D45
    Date: 2023–01–10
  10. By: Peter Zhang
    Abstract: We propose a distributionally robust principal-agent formulation, which generalizes some common variants of worst-case and Bayesian principal-agent problems. With this formulation, we first construct a theoretical framework to certify whether any surjective contract menu is optimal, and quantify its sub-optimality. The framework and its proofs rely on a novel construction and comparison of several related optimization problems. Roughly speaking, our framework transforms the question of contract menu optimality into the study of duality gaps. We then operationalize the framework to study the optimality of simple -- affine and linear -- contract menus. By our framework, the optimality gap of a contract menu is broken down into an adjustability gap and an information rent. We show that, with strong geometric intuition, these simple contract menus tend to be close to optimal when the social value of production is convex in production cost and the conversion ratio is large at the agent's highest effort level. We also provide succinct and closed-form expressions to quantify the optimality gap when the social value function is concave. With this systematic analysis, our results shed light on the technical root of a higher-level question -- why are there more positive results in the literature in terms of a simple menu's optimality in a \emph{robust} (worst-case) setting rather than in a \emph{stochastic} (Bayesian) setting? Our results demonstrate that the answer relates to two facts: the sum of quasi-concave functions is not quasi-concave in general; the maximization operator and the expectation operator do not commute in general. Overall, our study is among the first to cross-pollinate the contract theory and optimization literature.
    Date: 2023–03
  11. By: Domenico Buccella; Luciano Fanti; Luca Gori
    Abstract: Making use of an appropriate game-theoretic approach, this article develops a two-stage game in a Cournot duopoly in network industries, in which firms strategically choose whether to produce compatible goods. Quality differentiation significantly affects the sub-game perfect Nash equilibrium (SPNE) of the game: (i) the network effect acts differently between low- and high-quality firms depending on their compatibility choice; (ii) the unique SPNE is to produce compatible (resp. incompatible) goods if the network externality is positive (resp. negative); however, this equilibrium can be Pareto inefficient, and the high-quality firm is worse off; (iii) there is room for a side payment from the high- to the low-quality firm to deviate towards incompatibility (resp. compatibility) under positive (resp. negative) network externality. The social welfare outcomes corresponding to the SPNE are also pinpointed.
    Keywords: Network externality, Product compatibility, Cournot duopoly, Quality differential
    JEL: L1 L2 D4
    Date: 2023–03–01
  12. By: Koji Yokote; Isa E. Hafalir; Fuhito Kojima; M. Bumin Yenmez
    Abstract: Path independence is arguably one of the most important choice rule properties in economic theory. We show that a choice rule is path independent if and only if it is rationalizable by a utility function satisfying ordinal concavity, a concept closely related to concavity notions in discrete mathematics. We also provide a representation result for choice rules that satisfy path independence and the law of aggregate demand.
    Date: 2023–03
  13. By: Naudé, Wim (RWTH Aachen University)
    Abstract: Artificial Intelligence (AI) scientists are challenged to create intelligent, autonomous agents that can make rational decisions. In this challenge, they confront two questions: what decision theory to follow and how to implement it in AI systems. This paper provides answers to these questions and makes three contributions. The first is to discuss how economic decision theory – Expected Utility Theory (EUT) – can help AI systems with utility functions to deal with the problem of instrumental goals, the possibility of utility function instability, and coordination challenges in multi-actor and human-agent collectives settings. The second contribution is to show that using EUT restricts AI systems to narrow applications, which are "small worlds" where concerns about AI alignment may lose urgency and be better labelled as safety issues. This papers third contribution points to several areas where economists may learn from AI scientists as they implement EUT. These include consideration of procedural rationality, overcoming computational difficulties, and understanding decision-making in disequilibrium situations.
    Keywords: economics, artificial intelligence, expected utility theory, decision-theory
    JEL: D01 C60 C45 O33
    Date: 2023–03
  14. By: Alex Gershkov; Benny Moldovanu; Philipp Strack; Mengxi Zhang
    Abstract: We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz [1977]) where we allow for a random distribution of losses, possibly correlated with the agent’s risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs, or menus of insurance with coverage limits-premium pairs. The main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari [1987]).
    Keywords: digital platforms, Big Tech, market definition, multi-markets approach, German Competition Act, 19a designations, competition law
    JEL: K21
    Date: 2023–03

This nep-mic issue is ©2023 by Jing-Yuan Chiou. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.