nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒08‒28
sixteen papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. Indicator Choice in Pay-for-Performance By Majid Mahzoon; Ali Shourideh; Ariel Zetlin-Jones
  2. Price Equilibrium with Selling Constraints By José L. Moraga-González; Makoto Watanabe; José Luis Moraga Gonzalez
  3. Privacy Regulation and Quality-Enhancing Innovation By Yassine Lefouili; Leonardo Madio; Ying Lei Toh
  4. The Core of Bayesian Persuasion By Laura Doval; Ran Eilat
  5. Sharing Credit for Joint Research By Nicholas Wu
  6. Targeted product design By Bar-Isaac, Heski; Caruana, Guillermo; Cuñat, Vicente
  7. Contracting with Heterogeneous Researchers By Han Wang
  8. Winners and losers of gatekeeper-induced consumer preference distortion in promoting personalized pricing by asymmetric firms By Rosa-Branca Esteves; Nicolas Pasquier
  9. It's Not Always the Leader's Fault: How Informed Followers Can Undermine Efficient Leadership By Panagiotis Kyriazis; Edmund Lou
  10. Persuasion as Transportation By Itai Arieli; Yakov Babichenko; Fedor Sandomirskiy
  11. Unraveling Coordination Problems By Roweno J. R. K. Heijmans
  12. Garbling an evaluation to retain an advantage By Ascencion Andina-Diaz; Jose A. Garcia-Martinez
  13. Optimal Queue Design By Yeon-Koo Che; Olivier Tercieux
  14. The Strong Maximum Circulation Algorithm: A New Method for Aggregating Preference Rankings By Nathan Atkinson; Scott C. Ganz; Dorit S. Hochbaum; James B. Orlin
  15. Why Personal Ties (Still) Matter: Referrals and Congestion By Mylius, F.
  16. Competition and Career Advancement By Julian Johnsen; Hyejin Ku; Kjell G. Salvanes

  1. By: Majid Mahzoon; Ali Shourideh; Ariel Zetlin-Jones
    Abstract: We study the classic principal-agent model when the signal observed by the principal is chosen by the agent. We fully characterize the optimal information structure from an agent's perspective in a general moral hazard setting with limited liability. Due to endogeneity of the contract chosen by the principal, the agent's choice of information is non-trivial. We show that the agent's problem can be mapped into a geometrical game between the principal and the agent in the space of likelihood ratios. We use this representation result to show that coarse contracts are sufficient: The agent can achieve her best with binary signals. Additionally, we can characterize conditions under which the agent is able to extract the entire surplus and implement the first-best efficient allocation. Finally, we show that when effort and performance are one-dimensional, under a general class of models, threshold signals are optimal. Our theory can thus provide a rationale for coarseness of contracts based on the bargaining power of the agent in negotiations.
    Date: 2023–07
  2. By: José L. Moraga-González; Makoto Watanabe; José Luis Moraga Gonzalez
    Abstract: This paper studies how selling constraints, which refer to the inability of firms to attend to all the buyers who want to inspect their products, affect the equilibrium price and social welfare. We show that the price that maximizes social welfare is greater than the marginal cost. This is because with selling constraints, a higher price, despite reducing the probability of trade (fewer buyers are willing to pay a higher price) increases the value of trade (only trades generating positive surplus are consummated). We show that the equilibrium price is inefficiently high except in the limit when firms’ selling constraints vanish and consumers observe prices before they visit firms. Thus, selling constraints constitute a source of market power.
    Keywords: price competition, market power, capacity- and selling-constrained firms
    JEL: D40 J60 L10 L80 R30
    Date: 2023
  3. By: Yassine Lefouili; Leonardo Madio; Ying Lei Toh
    Abstract: We analyze how a privacy regulation taking the form of a cap on information disclosure affects quality-enhancing innovation incentives by a monopolist—who derives revenues solely from disclosing user data to third parties—and consumer surplus. If the share of privacy-concerned users is sufficiently small, privacy regulation has a negative effect on innovation and may harm users. However, if the share of privacy-concerned users is sufficiently large, privacy regulation has a positive effect on innovation. In this case, there is no trade-off between privacy and innovation and users always benefit from privacy regulation.
    Keywords: privacy regulation, data disclosure, innovation
    JEL: D83 L15 L51
    Date: 2023
  4. By: Laura Doval; Ran Eilat
    Abstract: An analyst observes the frequency with which an agent takes actions, but not the frequency with which she takes actions conditional on a payoff relevant state. In this setting, we ask when the analyst can rationalize the agent's choices as the outcome of the agent learning something about the state before taking action. Our characterization marries the obedience approach in information design (Bergemann and Morris, 2016) and the belief approach in Bayesian persuasion (Kamenica and Gentzkow, 2011) relying on a theorem by Strassen (1965) and Hall's marriage theorem. We apply our results to ring-network games and to identify conditions under which a data set is consistent with a public information structure in first-order Bayesian persuasion games.
    Date: 2023–07
  5. By: Nicholas Wu
    Abstract: I consider a model of strategic experimentation where agents partake in risky research with payoff externalities; a breakthrough grants the discoverer (winner) a different payoff than the non-discoverers (losers). I characterize the first-best solution and show that the noncooperative game is generically inefficient. Simple contracts sharing payoffs between winner and losers restore efficiency, even when actions are unobserved. Alternatively, if the winner's identity is not contractible, contracting on effort only at the time of breakthrough also restores efficiency. These results suggest that although strategic experimentation generically entails inefficiency, sharing credit is a robust and effective remedy.
    Date: 2023–07
  6. By: Bar-Isaac, Heski; Caruana, Guillermo; Cuñat, Vicente
    Abstract: We propose an intuitive representation of product design in which firms locate inside a circle and consumers in its outer circumference. Designs trade off horizontal and vertical transport costs. Our setting encompasses all linear demand rotations. Firms with lower quality or higher marginal costs choose niche designs that cater to specific consumers at the expense of alienating the rest. Firms choose intermediate designs or more polarized ones, instead, depending on the convexity of the vertical transport cost. We examine such design choices in monopoly, duopoly, and monopolistic competition settings.
    JEL: D24 D21 D42 D43
    Date: 2023–05–01
  7. By: Han Wang
    Abstract: We study the design of contracts that incentivize a researcher to conduct a costly experiment, extending the work of Yoder (2022) from binary states to a general state space. The cost is private information of the researcher. When the experiment is observable, we find the optimal contract and show that higher types choose more costly experiments, but not necessarily more Blackwell informative ones. When only the experiment result is observable, the principal can still achieve the same optimal outcome if and only if a certain monotonicity condition with respect to types holds. Our analysis demonstrates that the general case is qualitatively different than the binary one, but that the contracting problem remains tractable.
    Date: 2023–07
  8. By: Rosa-Branca Esteves (NIPE/Center for Research in Economics and Management, University of Minho, Portugal); Nicolas Pasquier (Bordeaux School of Economics (BSE) and Grenoble Applied Economics Lab (GAEL))
    Abstract: We present a model of duopoly competition in a marketplace with a Hotelling segment of consumers, where two business users (firms) have access to raw consumer data. The firms can choose between personalized prices (PP), using a costly personalized program device provided by the marketplace, or uniform prices at no additional cost. One firm has a higher level of experience in utilizing consumer data, resulting in a lower cost of price personalization (PP device cost). In order to promote its personalized program device, the marketplace may have an incentive to distort consumer preferences from a uniform to a triangular distribution. Our findings indicate that the marketplace is more likely to distort consumer preferences under specific conditions. This occurs when there is moderate asymmetry in experience between the firms and a high tariff for the program, or when there is weak asymmetry and a moderate program tariff. In these parameter regions, the distortion of consumer preferences negatively impact the profits of the sellers while benefiting the consumers. These insights contribute to a better understanding of the dynamics of digital marketplaces and have implications for policymakers and competition authorities.
    Keywords: Competitive price discrimination; Uniform and triangular distribution of consumer preferences; Digital markets, Platform cloud services, European Digital Market Act.
    JEL: D43 D80 L13 L40
    Date: 2023
  9. By: Panagiotis Kyriazis; Edmund Lou
    Abstract: Coordination facilitation and efficient decision-making are two essential components of successful leadership. In this paper, we take an informational approach and investigate how followers' information impacts coordination and efficient leadership in a model featuring a leader and a team of followers. We show that efficiency is achieved as the unique rationalizable outcome of the game when followers possess sufficiently imprecise information. In contrast, if followers have accurate information, the leader may fail to coordinate them toward the desired outcome or even take an inefficient action herself. We discuss the implications of the results for the role of leaders in the context of financial fragility and crises.
    Date: 2023–07
  10. By: Itai Arieli; Yakov Babichenko; Fedor Sandomirskiy
    Abstract: We consider a model of Bayesian persuasion with one informed sender and several uninformed receivers. The sender can affect receivers' beliefs via private signals, and the sender's objective depends on the combination of induced beliefs. We reduce the persuasion problem to the Monge-Kantorovich problem of optimal transportation. Using insights from optimal transportation theory, we identify several classes of multi-receiver problems that admit explicit solutions, get general structural results, derive a dual representation for the value, and generalize the celebrated concavification formula for the value to multi-receiver problems.
    Date: 2023–07
  11. By: Roweno J. R. K. Heijmans
    Abstract: This paper studies policy design in coordination problems. In coordination games, a subsidy raises player $i$'s incentive to play the subsidized action. This raises $j$'s incentive to play the same action, which further incentivizes $i$, and so on. Building upon this ``unraveling effect'', we characterize the subsidies that implement a given outcome of the game as its unique equilibrium. Among other properties, we establish that subsidies are: (i) symmetric for identical players; (ii) globally continuous in model parameters; (iii) increasing in opportunity costs; and (iv) decreasing in spillovers. Applications of the model include joint investment problems, participation decisions, and principal-agent contracting.
    Date: 2023–07
  12. By: Ascencion Andina-Diaz; Jose A. Garcia-Martinez
    Abstract: We study the effects of introducing interpersonal comparisons on the decisions made by career concerned experts. We consider competition between two experts who may differ in their initial reputation. We obtain that whereas full transmission of experts' private information is an equilibrium when experts have the same initial reputation, this is not necessarily the case when they are heterogenous. In this case, we identify an incentive for the stronger expert to deliberately misreport her signal, aiming at garbling the evaluation of the principal to retain her advantage. In equilibrium, this expert may even completely contradict her signal and the other experts' decision. We discuss the implications of our results to different contexts, such as reaching consenses in a society, competition for attention, and misconception of the market's evaluation system.
    Keywords: Interpersonal comparisons; heterogenous expertise; career concerns; probability of feedback.
    Date: 2023
  13. By: Yeon-Koo Che; Olivier Tercieux
    Abstract: We study the optimal method for rationing scarce resources through a queue system. The designer controls agents' entry into a queue and their exit, their service priority -- or queueing discipline -- as well as their information about queue priorities, while providing them with the incentive to join the queue and, importantly, to stay in the queue, when recommended by the designer. Under a mild condition, the optimal mechanism induces agents to enter up to a certain queue length and never removes any agents from the queue; serves them according to a first-come-first-served (FCFS) rule; and provides them with no information throughout the process beyond the recommendations they receive. FCFS is also necessary for optimality in a rich domain. We identify a novel role for queueing disciplines in regulating agents' beliefs and their dynamic incentives and uncover a hitherto unrecognized virtue of FCFS in this regard.
    Date: 2023–07
  14. By: Nathan Atkinson; Scott C. Ganz; Dorit S. Hochbaum; James B. Orlin
    Abstract: We present a new optimization-based method for aggregating preferences in settings where each decision maker, or voter, expresses preferences over pairs of alternatives. The challenge is to come up with a ranking that agrees as much as possible with the votes cast in cases when some of the votes conflict. Only a collection of votes that contains no cycles is non-conflicting and can induce a partial order over alternatives. Our approach is motivated by the observation that a collection of votes that form a cycle can be treated as ties. The method is then to remove unions of cycles of votes, or circulations, from the vote graph and determine aggregate preferences from the remainder. We introduce the strong maximum circulation which is formed by a union of cycles, the removal of which guarantees a unique outcome in terms of the induced partial order. Furthermore, it contains all the aggregate preferences remaining following the elimination of any maximum circulation. In contrast, the well-known, optimization-based, Kemeny method has non-unique output and can return multiple, conflicting rankings for the same input. In addition, Kemeny's method requires solving an NP-hard problem, whereas our algorithm is efficient, based on network flow techniques, and runs in strongly polynomial time, independent of the number of votes. We address the construction of a ranking from the partial order and show that rankings based on a convex relaxation of Kemeny's model are consistent with our partial order. We then study the properties of removing a maximal circulation versus a maximum circulation and establish that, while maximal circulations will in general identify a larger number of aggregate preferences, the partial orders induced by the removal of different maximal circulations are not unique and may be conflicting. Moreover, finding a minimum maximal circulation is an NP-hard problem.
    Date: 2023–07
  15. By: Mylius, F.
    Abstract: The internet has reduced search costs significantly, making it much easier to apply for a large number of jobs. In spite of that, the share of jobs found through personal contacts has remained stable over the past decades. My theoretical framework explores a new channel that makes referred candidates favorable for firms: a higher likelihood to accept a job offer. This trait becomes particularly advantageous whenever firms face large uncertainty over whether their candidates would accept their job offer. As we see, if search barriers vanish and workers apply to more firms, a referred candidate expects to face more competitors. On the other hand, with more applications being sent out, workers are, on average, less interested in each firm they apply to, which makes referred candidates stand out more. This means the chances of getting a job offer through a referral can increase if competing workers send out more applications.
    Keywords: Matching theory, networks, winner’s curse, informal labor market
    JEL: C78 D83 D85 J46
    Date: 2023–08–07
  16. By: Julian Johnsen; Hyejin Ku; Kjell G. Salvanes
    Abstract: In standard promotion tournaments, contestants are ranked based on their output or productivity. We argue that workers’ career progression may also depend on their relative rankings in dimensions a priori unrelated to their job performance, such as visibility or in-person presence. Such implicit tournaments may rationalize a variety of seemingly counterproductive practices in the workplace, including long working hours, low uptake of statutory leave, and presenteeism. We illustrate the significance of implicit tournaments using the case of paternity leave among new fathers, where we exogenously vary a focal worker’s ranking within a contest, not via his own leave status but that of his competitors, exploiting a policy reform. We show that the focal worker is put on a better earnings trajectory than otherwise when a larger share of his competitors take leave because of the reform. The focal worker’s own absolute leave, however, has no direct effect on his earnings path as long as his own and his competitors’ leave statuses are symmetric. With effective coordination, it should thus be possible for all fathers to utilize paternity leave without incurring unwarranted career costs. This has implications for statutory leave policies, flexible work arrangements, and gender equality.
    Keywords: implicit tournaments, relative rank, promotion, parental leave, flexible work arrangements, gender differences
    JEL: M51 M52 J16 J22 J24 J31
    Date: 2023

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