nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒09‒11
seven papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. Political correctness and elite prestige By Esther Hauk; Javier Ortega
  2. Cursed Consumers and the Effectiveness of Consumer Protection Policies By Alessandro Ispano; Peter Schwardmann
  3. The Central Influencer Theorem: Spatial Voting Contests with Endogenous Coalition Formation By Subhasish M. Chowdhury; Sang-Hyun Kim
  4. An impossibility theorem on truth-telling in fully decentralised systems By Rodney Garratt; Cyril Monnet
  5. Fine-Tuning Games: Bargaining and Adaptation for General-Purpose Models By Benjamin Laufer; Jon Kleinberg; Hoda Heidari
  6. Product Liability: Detecting Potential Risks in New Products By Andrea Castellano; Gustavo Ferro; Maximiliano Miranda Zanetti
  7. Trade with Search Frictions: Identifying New Gains from Trade By ARA Tomohiro

  1. By: Esther Hauk; Javier Ortega
    Abstract: Consider a society where the prestige of orthodox views is linked to the prestige of the elite. Heterodox individuals are less likely to express their views if other peers refrain from doing so and if the elite is prestigious. In turn, corruption by the elite is less easily detected if orthodox views dominate. We characterize equilibrium self-denial and corruption and show that an exogenous increase in the range of orthodox views may result in a decrease in the total number of individuals truthfully expressing their views. Some features of the model are shown to be compatible with U.S. data.
    Keywords: political correctness, Overton window, social pressure, conformity, preference falsification.
    Date: 2023
  2. By: Alessandro Ispano (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Peter Schwardmann (LMU - Ludwig-Maximilians-Universität München)
    Abstract: We model firms' quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, that is, mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve welfare, they often lead to a reduction in consumer surplus. Our conclusions hold in extensions with endogenous quality and horizontal differentiation.
    Keywords: naive, cursed, disclosure, consumer protection, labeling
    Date: 2023
  3. By: Subhasish M. Chowdhury (Department of Economics, University of Sheffield, Sheffield S1 4DT, UK); Sang-Hyun Kim (School of Economics, Yonsei University, Seoul 03722, South Korea)
    Abstract: We introduce a spatial voting contest without the ‘one person, one vote’ restriction. Players exert costly effort to influence the policy and the outcome is obtained through an adjustment function. Players are heterogeneous in terms of the position in the policy line, disutility function, and the effort cost. In equilibrium, two groups endogenously emerge: players in one group try to implement more leftist policy, while those in the other group try more rightist one. Since the larger group suffers a more severe free-riding problem, the equilibrium policy converges to the center only when the larger group has a cost advantage. We demonstrate how the location of the center (i.e., the steady-state point) can be either median, or a mean of all points, or a mean of the extreme points, depending on the convexities of the utility and cost functions. This reflects some well-known results as special cases. We extend the model to an infinite horizon setting and show that the median outcome can be reached only under certain conditions.
    Keywords: Spatial Competition; Contest; Lobbying; Median Voter Theorem
    JEL: C72 D72 D74 D78
    Date: 2023–08
  4. By: Rodney Garratt; Cyril Monnet
    Abstract: We show that truthful reporting about the realization of a publicly observed event cannot be implemented as a unique equilibrium in a completely decentralized environment. Our work provides a theoretical underpinning of the need for oracles and the related "oracle problem".
    Keywords: decentralized systems, smart contracts, truth-telling, oracle problem
    JEL: C72 D72 D86 O33
    Date: 2023–08
  5. By: Benjamin Laufer; Jon Kleinberg; Hoda Heidari
    Abstract: Major advances in Machine Learning (ML) and Artificial Intelligence (AI) increasingly take the form of developing and releasing general-purpose models. These models are designed to be adapted by other businesses and agencies to perform a particular, domain-specific function. This process has become known as adaptation or fine-tuning. This paper offers a model of the fine-tuning process where a Generalist brings the technological product (here an ML model) to a certain level of performance, and one or more Domain-specialist(s) adapts it for use in a particular domain. Both entities are profit-seeking and incur costs when they invest in the technology, and they must reach a bargaining agreement on how to share the revenue for the technology to reach the market. For a relatively general class of cost and revenue functions, we characterize the conditions under which the fine-tuning game yields a profit-sharing solution. We observe that any potential domain-specialization will either contribute, free-ride, or abstain in their uptake of the technology, and we provide conditions yielding these different strategies. We show how methods based on bargaining solutions and sub-game perfect equilibria provide insights into the strategic behavior of firms in these types of interactions, and we find that profit-sharing can still arise even when one firm has significantly higher costs than another. We also provide methods for identifying Pareto-optimal bargaining arrangements for a general set of utility functions.
    Date: 2023–08
  6. By: Andrea Castellano; Gustavo Ferro; Maximiliano Miranda Zanetti
    Abstract: The central hypothesis of this article is that liability regulation can foster firms’ incentives to study the (potential) dangers of their products. We discuss alternative views and develop a formal model to analyze a firm´s incentive structure under the application of hindsight liability. We find a new role for liability regulation: to foster voluntary investment in research aimed at detecting potential risks in new products. The model allows us to analyze the firm´s investment decisions in research under different scenarios, each of which has varying expected costs. We offer some alternatives for institutional design seeking incentive compatibility with the aim proposed.
    Keywords: risk, regulation, product liability, incentives, asymmetric information
    JEL: K12 K22
    Date: 2023–08
  7. By: ARA Tomohiro
    Abstract: This paper develops a dynamic industry model to study the effect of search frictions on industry structure and aggregate welfare. We consider a search-theoretic setting with two types of agents, firms and suppliers. To customize inputs, each firm needs to find a supplier but search is costly and does not always end in success. Matched firms use customized inputs obtained from matched suppliers to enhance production efficiency, while unmatched firms use generic inputs obtained from a competitive input market. In equilibrium the number of unmatched and matched firms is endogenous. We use this model to contrast the implications of two forms of economic integration: integration of final-good markets allowing firms to export varieties to another market, and integration of matching markets allowing firms to seek suppliers from another market. We show that the former form of integration can amplify the welfare gains from trade by improving firms’ matching frequency associated with resource reallocations from unmatched firms to matched firms. In contrast, the latter might cause welfare losses by hindering the resource-reallocation process of firms.
    Date: 2023–08

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