nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒10‒02
eighteen papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. Regret-Minimizing Project Choice By Yingni Guo; Eran Shmaya
  2. Timing Decisions under Model Uncertainty By Sarah Auster; Christian Kellner
  3. Third-Degree Price Discrimination in Two-Sided Markets By Alexandre de Cornière; Andrea Mantovani; Shiva Shekhar; Alexandre de Cornière
  4. Privacy Regulation and Quality-Enhancing Innovation By Yassine Lefouili; Leonardo Madio; Ying Lei Toh
  5. Platform liability with reputational sanctions By Alessandro De Chiara; Juan José Ganuza; Fernando Gómez; Ester Manna; Adrián Segura
  6. Equity Pay In Networked Teams By Krishna Dasaratha; Benjamin Golub; Anant Shah
  7. Multivariate Majorization in Principal-Agents Models By Nicholas C Bedard; Jacob K Goeree; Ningyi Sun
  8. Market transparency in a mixed oligopoly By Xu, Lili; Matsumura, Toshihiro
  9. The Bright Side of the GDPR: Welfare-Improving Privacy Management By Chongwoo Choe; Noriaki Matsushima; Shiva Shekhar
  10. Startup Acquisitions: Acquihires and Talent Hoarding By Jean-Michel Benkert; Igor Letina; Shuo Liu
  11. Automated switching services By Garrod, Luke; Li, Ruochen; Wilson, Christopher
  12. “Fake news alert!”: A game of misinformation and news consumption behavior By Lodh, Rishab; Dey, Oindrila
  13. Seniority By DongIk Kang; Miles S. Kimball
  14. Segment and Rule: Modern Censorship in Authoritarian Regimes By Heo, Kun; Zerbini, Antoine
  15. The Changing Polarization of Party Ideologies: The Role of Sorting By Satyajit Chatterjee; Burcu Eyigungor
  16. Endowments, patience types, and uniqueness in two-good HARA utility economies By Andrea Loi; Stefano Matta
  17. The Effect of Punishment and Reward on Cooperation in a Prisoners' Dilemma Game By Alexander Kangas
  18. Collusion sustainability with a capacity constrained firm By Leonardo Madio; Aldo Pignataro

  1. By: Yingni Guo; Eran Shmaya
    Abstract: An agent observes the set of available projects and proposes some, but not necessarily all, of them. A principal chooses one or none from the proposed set. We solve for a mechanism that minimizes the principal's worst-case regret. We compare the single-project environment in which the agent can propose only one project with the multiproject environment in which he can propose many. In both environments, if the agent proposes one project, it is chosen for sure if the principal's payoff is sufficiently high; otherwise, the probability that it is chosen decreases in the agent's payoff. In the multiproject environment, the agent's payoff from proposing multiple projects equals his maximal payoff from proposing each project alone. The multiproject environment outperforms the single-project one by providing better fallback options than rejection and by delivering this payoff to the agent more efficiently.
    Date: 2023–08
  2. By: Sarah Auster (Department of Economics, University of Bonn and CEPR); Christian Kellner (Department of Economics, University of Southampton)
    Abstract: We study the effect of ambiguity on timing decisions. An agent faces a stopping problem with an uncertain stopping payoff and a stochastic time limit. The agent is unsure about the correct model quantifying the uncertainty and seeks to maximize her payoff guarantee over a set of plausible models. As time passes and the agent updates, the worst-case model used to evaluate a given strategy can change, creating a problem of dynamic inconsistency. We characterize the stopping behavior in this environment and show that, while the agent’s myopic incentives are fragile to small changes in the set of considered models, the best consistent plan from which no future self has incentives to deviate is robust.
    Keywords: Stopping problem, ambiguity, consistent planning
    JEL: C61 D81 D83
    Date: 2023–09
  3. By: Alexandre de Cornière; Andrea Mantovani; Shiva Shekhar; Alexandre de Cornière
    Abstract: We investigate the welfare effects of third-degree price discrimination by a two-sided platform that enables interaction between buyers and sellers. Sellers are heterogenous with respect to their per-interaction benefit, and, under price discrimination, the platform can condition its fee on sellers’ type. In a model with linear demand on each side, we show that price discrimination: (i) increases participation on both sides; (ii) enhances total welfare; (iii) may result in a strict Pareto improvement, with both seller types being better-off than under uniform pricing. These results, which are in stark contrast to the traditional analysis of price discrimination, are driven by the existence of cross-group network effects. By improving the firm’s ability to monetize seller participation, price discrimination induces the platform to attract more buyers, which then increases seller participation. The Pareto improvement result means that even those sellers who pay a higher price under discrimination can be better-off, due to the increased buyer participation.
    Keywords: two-sided markets, price discrimination, network effects
    JEL: D42 D62 L11 L12
    Date: 2023
  4. By: Yassine Lefouili (Toulouse School of Economics); Leonardo Madio (University of Padova and CESifo); Ying Lei Toh (Federal Reserve Bank of Kansas City)
    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
    Date: 2023–07
  5. By: Alessandro De Chiara; Juan José Ganuza; Fernando Gómez; Ester Manna; Adrián Segura
    Abstract: This paper presents a framework where sellers, an online platform with monopoly power, and consumers transact. We aim to study the interaction between the imposition of liability on the platform, the reputational sanctions exerted by consumers, and the internal measures adopted by the platform to keep in check the sellers, whenever a product generates losses to consumers. We show that introducing direct legal liability of the platform may have both positive and negative effects for safety investments. Additionally, when sellers are heterogeneous (with respect to their sensitivity to the sanctions from consumers or from the platform), legal liability on the platform will have an impact on the selection of participating sellers, although the sign and size of the effect largely depend on paremeter values.
    Keywords: platform liability, third-party sellers, reputation
    JEL: K13 L15 L51
    Date: 2023–09
  6. By: Krishna Dasaratha; Benjamin Golub; Anant Shah
    Abstract: A group of agents each exert effort to produce a joint output, with the complementarities between their efforts represented by a (weighted) network. Under equity compensation, a principal motivates the agents to work by giving them shares of the output. We describe the optimal equity allocation. It is characterized by a neighborhood balance condition: any two agents receiving equity have the same (weighted) total equity assigned to their neighbors. We also study the problem of selecting the team of agents who receive positive equity, and show this team must form a tight-knit subset of the complementarity network, with any pair being complementary to one another or jointly to another team member. Finally, we give conditions under which the amount of equity used for compensation is increasing in the strength of a team's complementarities and discuss several other applications.
    Date: 2023–08
  7. By: Nicholas C Bedard; Jacob K Goeree; Ningyi Sun
    Abstract: We introduce a definition of multivariate majorization that is new to the economics literature. Our majorization technique allows us to generalize Mussa and Rosen's (1978) "ironing" to a broad class of multivariate principal-agents problems. Specifically, we consider adverse selection problems in which agents' types are one dimensional but informational externalities create a multidimensional ironing problem. Our majorization technique applies to discrete and continuous type spaces alike and we demonstrate its usefulness for contract theory and mechanism design. We further show that multivariate majorization yields a natural extension of second-order stochastic dominance to multiple dimensions and derive its implications for decision making under multivariate risk.
    Date: 2023–08
  8. By: Xu, Lili; Matsumura, Toshihiro
    Abstract: This study investigates the relationship between market transparency and economic welfare in a mixed duopoly in which a welfare-maximizing public firm competes with a profit-maximizing private firm. We find that the private firm’s market share, consumer surplus, and welfare increase with market transparency. Further, the relationship between the private firm’s profit and market transparency has an inverted U shape. This result suggests that profit-maximizing firms may have incentives to improve market transparency, especially when the degree of market transparency is low, which is in sharp contrast to the results under a private duopoly.
    Keywords: market transparency, mixed oligopoly, product differentiation, unconstrained Hotelling model, profit-enhancing market transparency, crowding out
    JEL: L13 L15 L32 L33
    Date: 2023–08–29
  9. By: Chongwoo Choe; Noriaki Matsushima; Shiva Shekhar
    Abstract: We study the GDPR’s opt-in requirement in a model with a firm that provides a digital service and consumers who are heterogeneous in their valuations of the firm’s service as well as the privacy costs incurred when sharing personal data with the firm. We show that the GDPR boosts demand for the service by allowing consumers with high privacy costs to buy the service without sharing data. The increased demand leads to a higher price but a smaller quantity of shared data. If the firm’s revenue is largely usage-based rather than data-based, then both the firm’s profit and consumer surplus increase after the GDPR, implying that the GDPR can be welfare-improving. But if the firm’s revenue is largely from data monetization, then the GDPR can reduce the firm’s profit and consumer surplus.
    Keywords: GDPR, opt-in, opt-out, privacy management, welfare
    JEL: D18 D61 K24 L12 L51 L86
    Date: 2023
  10. By: Jean-Michel Benkert; Igor Letina; Shuo Liu
    Abstract: We present a model of startup acquisitions, which may give rise to inefficient "talent hoarding." We develop a model with two competing firms that can acquire and integrate (or "acquihire") a startup operating in an orthogonal market. Such an acquihire improves the competitiveness of the acquiring firm. We show that even absent the classical competition effects, acquihires need not be benign but can be the result of oligopolistic behavior, leading to an inefficient allocation of talent. Further, we show that such talent hoarding may reduce consumer surplus and lead to more job volatility for acquihired employees.
    Date: 2023–08
  11. By: Garrod, Luke; Li, Ruochen; Wilson, Christopher
    Abstract: Automated switching services have recently emerged as online intermediaries that use algorithms to facilitate consumer switching. Unlike price comparison websites, these services i) act on behalf of consumers by actively switching them to the cheapest deals, ii) typically charge consumers directly, rather than charging suppliers commission, and iii) often survey across the entire market. We offer the first theoretical analysis of such services. In an oligopoly model with imperfect price information, we characterize an equilibrium with an auto-switching service, and analyze its impact on market outcomes and welfare.
    Keywords: Consumer Switching; Consumer Search; Price Information; Intermediary; Automated; Competition.
    JEL: D43 D83 L13
    Date: 2023–09–01
  12. By: Lodh, Rishab; Dey, Oindrila
    Abstract: This paper examines the impact of behavioral factors in propagation of fake news. Using Spence (1978) framework, we find that the perfect Bayesian Nash equilibrium is pooling equilibrium, i.e., fake news producers to mimic actions of true news producer, which is influenced by factors like ideology, awareness, informational utility and fear of missing out information of news- consumers. Interestingly, the chain of fake news can be broken iff degree of awareness is significantly high. A threshold level of awareness level is determined using simulation, beyond which pooling breaks despite of high influence of other factors, which throws light on possible policy interventions.
    Keywords: Fake news, Asymmetric Information, Bayesian games, Signaling, Fact checking
    JEL: D82 L20
    Date: 2023–08–05
  13. By: DongIk Kang; Miles S. Kimball
    Abstract: This paper studies the optimal wage structure of a firm with imperfect monitoring of worker effort. We find that when firms can commit to (implicit) long-term contracts, imperfect monitoring leads to optimal wage profiles that reflect worker seniority. We provide a precise measure of seniority as a ratio of co-state variables and illustrate how this measure of seniority evolves over the worker’s tenure with the firm and how it affects wages, effort, monitoring intensity and separation rates. We also show how earnings loss from unemployment reflects seniority and how optimal monitoring intensity, amenities and on-the-job training evolve with seniority.
    JEL: J0 J31 J32
    Date: 2023–08
  14. By: Heo, Kun; Zerbini, Antoine
    Abstract: The internet provides citizens with a large range of foreign outlets to choose from. To discourage access to foreign outlets, authoritarian regimes appear to rely primarily on the firewall, which millions bypass everyday. Crucially, in equilibrium, the regime ensures that only a specific segment of the population self-selects into bypassing the firewall: regime opponents. In turn, opponents are occasionally swayed to comply by positive reporting about the regime of banned foreign outlets. Supporters exclusively consume content from domestic outlets; their compliance is secured via the regime propaganda. We label such a strategy one of segment-and-rule and show how it maximizes compliance. We also explain how authoritarian regimes can engineer segment-and-rule by making local outlets parrot the party line, investing in domestic entertainment or strategically banning foreign entertainment.
    Date: 2023–09–08
  15. By: Satyajit Chatterjee; Burcu Eyigungor
    Abstract: U.S. congressional roll-call voting records show that as polarization of the two parties along the economic dimension changes, polarization along the social/cultural dimension tends to change in the opposite direction. A model of party competition within a two-dimensional ideology space is developed in which party platforms are determined by voters who compose the party. It is shown that if distribution of voter preferences is radially symmetric, polarization of party ideologies along the two dimensions are inversely related, as observed. The model gives a remarkably good quantitative account of the historically observed movements in polarization along the two dimensions.
    Keywords: Polarization; Primaries; partisanship; partisan politics; Political Economy; partisan sorting
    Date: 2023–02–28
  16. By: Andrea Loi; Stefano Matta
    Abstract: This paper establishes a link between endowments, patience types, and the parameters of the HARA Bernoulli utility function that ensure equilibrium uniqueness in an economy with two goods and two impatience types with additive separable preferences. We provide sufficient conditions that guarantee uniqueness of equilibrium for any possible value of $\gamma$ in the HARA utility function $\frac{\gamma}{1-\gamma}\left(b+\frac{a}{\gamma}x\right)^{1-\gamma}$. The analysis contributes to the literature on uniqueness in pure exchange economies with two-goods and two agent types and extends the result in [4].
    Date: 2023–08
  17. By: Alexander Kangas
    Abstract: This work studies the effect of incentives (in the form of punishment and reward) on the equilibrium fraction of cooperators and defectors in an iterated n-person prisoners' dilemma game. With a finite population of players employing a strategy of nice tit-for-tat or universal defect, an equilibrium fraction of each player-type can be identified from linearized payoff functions. Incentives take the form of targeted and general punishment, and targeted and general reward. The primary contribution of this work is in clearly articulating the design and marginal effect of these incentives on cooperation. Generalizable results indicate that while targeted incentives have the potential to substantially reduce but never entirely eliminate defection, they exhibit diminishing marginal effectiveness. General incentives on the other hand have the potential to eliminate all defection from the population of players. Applications to policy are briefly considered.
    Date: 2023–09
  18. By: Leonardo Madio (University of Padova); Aldo Pignataro (Italian Regulatory Authority for Energy, Networks and Environment)
    Abstract: We study an infinitely repeated oligopoly game in which firms compete on quantity and one of them is capacity constrained. We show that collusion sustainability is non-monotonic in the size of the capacity constrained firm, which has little incentive to deviate from a cartel. We also present conditions for the emergence of a partial cartel, with the capacity constrained firm being excluded by the large firms or self-excluded. In the latter case, we show under which circumstances the small firm induces a partial conspiracy that is Pareto-dominant. Implications for cartel identification and enforcement are finally discussed.
    Keywords: Antitrust, capacity constraints, collusion, partial cartel.
    Date: 2022–12

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