nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒10‒30
twelve papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. Learning News Bias: Misspecifications and Consequences By Lin Hu; Matthew Kovach; Anqi Li
  2. Common Agency with Non-Delegation or Imperfect Commitment By Seungjin Han; Siyang Xiong
  3. When can lotteries improve public procurement processes? By Estache, Antonio; Foucart, Renaud; Serebrisky, Tomás
  4. Organizational Change and Reference-Dependent Preferences By Klaus Schmidt; Jonas von Wangenheim
  5. Substitutability in Favor Exchange By Oguzhan Celebi
  6. Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets By Loukas Balafoutas; Helena Fornwagner; Rudolf Kerschbamer; Matthias Sutter; Maryna Tverdostup
  7. A duality between utility transforms and probability distortions By Peng Liu; Ruodu Wang
  8. Resilience in Vertical Supply Chains By Gene M. Grossman; Elhanan Helpman; Alejandro Sabal
  9. The Optimal Taxation of Network Goods By Hargaden, Enda; Hanson, Andrew; Harris, Matthew
  10. A Kripke-Lewis semantics for belief update and belief revision By Giacomo Bonanno
  11. Decreasing Impatience By Chambers, Christopher P; Echenique, Federico; Miller, Alan D
  12. Is Producer Surplus a Surplus to the Producer? By Wenli Cheng

  1. By: Lin Hu; Matthew Kovach; Anqi Li
    Abstract: We study how a decision maker (DM) learns about the bias of unfamiliar news sources. Absent any frictions, a rational DM uses known sources as a yardstick to discern the true bias of a source. If a DM has misspecified beliefs, this process fails. We derive long-run beliefs, behavior, welfare, and corresponding comparative statics, when the DM has dogmatic, incorrect beliefs about the bias of known sources. The distortion due to misspecified learning is succinctly captured by a single-dimensional metric we introduce. Our model generates the hostile media effect and false polarization, and has implications for fact-checking and misperception recalibration.
    Date: 2023–09
  2. By: Seungjin Han; Siyang Xiong
    Abstract: In classical contract theory, we usually impose two assumptions: delegated contracts and perfect commitment. While the second assumption is demanding, the first one suffers no loss of generality. Following this tradition, current common-agency models impose delegated contracts and perfect commitment. We first show that non-delegated contracts expand the set of equilibrium outcomes under common agency. Furthermore, the powerful menu theorem for common agency (Peters (2001) and Martimort and Stole (2002)}) fails for either non-delegated contracts or imperfect commitment. We identify canonical contracts in such environments, and re-establish generalized menu theorems. Given imperfect commitment, our results for common-agency models are analogous to those in Bester and Strausz (2001) and Doval and Skreta (2012) for the classical contract theory, which re-establish the revelation principle.
    Date: 2023–09
  3. By: Estache, Antonio; Foucart, Renaud; Serebrisky, Tomás
    Abstract: We study the potential benefits of adding a lottery component to cut the main risks associated with standard negotiated and rule-based auction procurement procedures. We show that adopting a two stage approach in which bureaucrats first negotiate with a small number of bidders to assess their eligibility and, next, rely on a lottery to award the contract reduces corruption risks often observed in negotiated procedures. For rule-based procedures, we show that a “third-price lottery” in which the two highest bidders are selected with equal probability and the project is contracted at a price corresponding to the third highest bid can reduce limited liability, renegotiation, bid rigging and collusion risks.
    Keywords: rules;discretion;lotteries
    JEL: D44 D73 H57
    Date: 2022–10
  4. By: Klaus Schmidt (LMU Munich); Jonas von Wangenheim (University of Bonn)
    Abstract: Reference-dependent preferences can explain several puzzling observations about organizational change. We introduce a dynamic model in which a loss-neutral firm bargains with loss-averse workers over organizational change and wages. We show that change is often stagnant or slow for long periods followed by a sudden boost in productivity during a crisis. Moreover, it accounts for the fact that different firms in the same industry often have significant productivity differences. The model also demonstrates the importance of expectation management even if all parties have rational expectations. Social preferences explain why it may be optimal to divide a firm into separate entities.
    Keywords: organizational change; productivity; reference points; loss aversion; social preferences;
    JEL: D23 D91 L2
    Date: 2023–10–04
  5. By: Oguzhan Celebi
    Abstract: I introduce a favor exchange model where favors are substitutable and study bilateral enforcement of cooperation. Without substitutability, the value of a relationship does not depend on the rest of the network, and in equilibrium there is either no cooperation or universal cooperation. When favors are substitutable, each additional relationship is less valuable than the previous, and intermediate levels of cooperation are observed. I extend the model to allow for transfers, heterogeneous players, and multilateral enforcement. My results can explain the stratification of social networks in post-Soviet states and the adoption of different enforcement mechanisms by different groups of medieval traders.
    Date: 2023–09
  6. By: Loukas Balafoutas (University of Exeter, United Kingdom; University of Innsbruck, Austria); Helena Fornwagner (University of Exeter, United Kingdom; Austrian Institute of Economic Research (WIFO)); Rudolf Kerschbamer (University of Innsbruck, Austria); Matthias Sutter (University of Innsbruck, Austria; Max Planck Institute for Research on Collective Goods, IZA Bonn and CESifo Munich, Germany; University of Cologne, Germany); Maryna Tverdostup (Vienna Institute for International Economic Studies, Austria)
    Abstract: In markets for credence goods – such as health care or repair services – fraudulent behavior by better informed experts is a common problem. Our model studies how four common features shape experts’ provision behavior in credence goods markets: (i) diagnostic uncertainty of experts; (ii) insurance coverage of consumers; (iii) malpractice payments for treatment failure; and (vi) consumer-regarding preferences of experts. Diagnostic imprecision unambiguously leads to less efficient provision. Insurance coverage and malpractice payments have an ambiguous effect on efficient provision. The impact of consumer-regarding preferences on efficiency is positive without insurance but ambiguous in the presence of insurance.
    Keywords: Credence goods, diagnostic uncertainty, insurance coverage, social preferences
    JEL: D82 G22
    Date: 2023–10
  7. By: Peng Liu; Ruodu Wang
    Abstract: In this paper, we establish a mathematical duality between utility transforms and probability distortions. These transforms play a central role in decision under risk by forming the foundation for the classic theories of expected utility, dual utility, and rank-dependent utility. Our main results establish that probability distortions are characterized by commutation with utility transforms, and utility transforms are characterized by commutation with probability distortions. These results require no additional conditions, and hence each class can be axiomatized with only one property. Moreover, under monotonicity, rank-dependent utility transforms can be characterized by set commutation with either utility transforms or probability distortions.
    Date: 2023–08
  8. By: Gene M. Grossman; Elhanan Helpman; Alejandro Sabal
    Abstract: Forward-looking investments determine the resilience of firms' supply chains. Such investments confer externalities on other firms in the production network. We compare the equilibrium and optimal allocations in a general equilibrium model with an arbitrary number of vertical production tiers. Our model features endogenous investments in resilience, endogenous formation of supply links, and sequential bargaining over quantities and payments between firms in successive tiers. We derive policies that implement the first-best allocation, allowing for subsidies to input purchases, network formation, and investments in resilience. The first-best policies depend only on production function parameters of the pertinent tier. When subsidies to transactions are infeasible, the second-best subsidies for resilience and network formation depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are non-increasing along the chain.
    JEL: D21 D62
    Date: 2023–09
  9. By: Hargaden, Enda; Hanson, Andrew; Harris, Matthew
    Abstract: We derive optimal tax formulas for network goods. The solution trades-off contemporaneous revenue collection against the discounted future flows of reduced network growth. We provide conditions under which the optimal tax sequence is time-invariant, and show that the rates should in general change over time. A quantitative model with consumer heterogeneity highlights patterns in these optimal sequences, and underscores the equity trade-offs
    Keywords: Public Finance, Optimal taxation, network goods, consumption externalities, atmospheric externalities.
    JEL: H20 H21 H23
    Date: 2023–08–01
  10. By: Giacomo Bonanno (Department of Economics, University of California Davis)
    Abstract: We provide a new characterization of both belief update and belief revision in terms of a Kripke-Lewis semantics. We consider frames consisting of a set of states, a Kripke belief relation and a Lewis selection function. Adding a valuation to a frame yields a model. Given a model and a state, we identify the initial belief set K with the set of formulas that are believed at that state and we identify either the updated belief set or the revised belief set, prompted by the input represented by formula A, as the set of formulas that are the consequent of conditionals that (1) are believed at that state and (2) have A as antecedent. We show that this class of models characterizes both the Katsuno-Mendelzon (KM) belief update functions and the AGM belief revision functions, in the following sense: (1) each model gives rise to a partial belief function that can be completed into a full KM/AGM update/revision function, and (2) for every KM/AGM update/revision function there is a model whose associated belief function coincides with it. The difference between update and revision can be reduced to two semantic properties that appear in a stronger form in revision relative to update, thus confirming the finding by Peppas et al. (1996) that, "for a fixed theory K, revising K is much the same as updating K"
    Keywords: belief revision, belief update, indicative conditional, subjunctive conditional, belief relation, selection function, supposition, information.
    JEL: C0
    Date: 2023–10–17
  11. By: Chambers, Christopher P; Echenique, Federico; Miller, Alan D
    Abstract: We characterize decreasing impatience, a common behavioral phenomenon in intertemporal choice. Discount factors that display decreasing impatience are characterized through a convexity axiom for investments at fixed interest rates. Then we show that they are equivalent to a geometric average of generalized quasi-hyperbolic discount rates. Finally, they emerge through parimutuel preference aggregation of exponential discount factors.
    Keywords: Economics, Applied Economics, Banking, finance and investment, Applied economics, Economic theory
    Date: 2023–08–01
  12. By: Wenli Cheng (Department of Economics, Monash University)
    Abstract: This paper clarifies the concept of producer surplus in the short-run and the long-run contexts. It shows that in the short run, producer surplus is the sum of economic profit (or loss) to the firm and quasi-rent which goes to owners of fixed factors. In the long run, producer surplus is rent, which goes to owners of specialised factors of production. In either case, producer surplus is not necessarily a surplus to the producer which is commonly understood to be the firm.
    Keywords: Producer surplus, profit, rent
    JEL: F40
    Date: 2023–10

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