nep-mic New Economics Papers
on Microeconomics
Issue of 2023‒12‒04
seven papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. Persuasion and Matching: Optimal Productive Transport By Anton Kolotilin; Roberto Corrao; Alexander Wolitzky
  2. Foreign Competition and Innovation By Elhanan Helpman
  3. Privacy and Polarization: An Inference-Based Approach By Tommaso Bondi; Omid Rafieian
  4. Improving Robust Decisions with Data By Xiaoyu Cheng
  5. Partisan Traps By Ethan Bueno de Mesquita; Wioletta Dziuda
  6. Some coordination problems are harder than others By Argyrios Deligkas; Eduard Eiben; Gregory Gutin; Philip R. Neary; Anders Yeo
  7. Contract Design With Safety Inspections By Alireza Fallah; Michael I. Jordan

  1. By: Anton Kolotilin; Roberto Corrao; Alexander Wolitzky
    Abstract: We consider general Bayesian persuasion problems where the receiver's utility is single-peaked in a one-dimensional action. We show that a signal that pools at most two states in each realization is always optimal, and that such pairwise signals are the only solutions under a non-singularity condition (the twist condition). Our core results provide conditions under which riskier prospects induce higher or lower actions, so that the induced action is single-dipped or single-peaked on each set of nested prospects. We also provide conditions for the optimality of either full disclosure or negative assortative disclosure, where all prospects are nested. Methodologically, our results rely on novel duality and complementary slackness theorems. Our analysis extends to a general problem of assigning one-dimensional inputs to productive units, which we call optimal productive transport. This problem covers additional applications including club economies (assigning workers to firms, or students to schools), robust option pricing (assigning future asset prices to price distributions), and partisan gerrymandering (assigning voters to districts).
    Date: 2023–11
  2. By: Elhanan Helpman
    Abstract: Empirical studies have found that enhanced foreign competition can encourage or discourage innovation. To address this relationship, I examine a market structure in which a small number of large multi-product oligopolists compete with a large number of small single-product firms in the same industry. The single-product firms are short-lived while the multi-product firms live forever, and the large firms invest in innovation in order to enlarge their product spans. All firms export. I show that an increase in the competitiveness of foreign firms can increase or reduce innovation efforts of a large multi-product firm. Moreover, changes in the incentives to innovate can be different for more-productive and less-productive oligopolists. As a result, aggregate sectoral innovation may rise or decline, depending on the productivity distribution of the oligopolists. I also show that changes in short-term operating profits may not be aligned with changes in the incentives to invest in innovation.
    JEL: D43 F1 L1
    Date: 2023–11
  3. By: Tommaso Bondi (Cornell Tech, 2 West Loop Road, 10044 New York, NY); Omid Rafieian (Cornell Tech, 2 West Loop Road, 10044 New York, NY)
    Abstract: Advances in behavioral targeting allow news publishers to monetize based on advertising. However, behavioral targeting requires consumer tracking, which has heightened privacy concerns among consumers and regulators. In this paper, we examine how stricter privacy regulations that ban consumer tracking affect news publishers' content strategies. We develop a theoretical framework that captures a change in privacy policies as a shift in publishers' inference about consumer types. We consider a model where news publishers choose the content and advertising, and ideologically heterogeneous consumers select their preferred content based on their ideology and idiosyncratic shocks. We compare two salient informational environments: (1) behavioral targeting, where perfect inference about consumers is allowed, and (2) contextual targeting, where consumer tracking is banned due to privacy regulations, and publishers can only infer consumer types based on their content choice. We show that privacy regulations that ban behavioral targeting incentivize publishers to shift towards more extreme and polarizing content in both monopoly and duopoly settings, even though the shift to more extreme content can hurt both demand and consumer welfare. In summary, our research uncovers a previously unexplored relationship between privacy and polarization, shedding light on the potential unintended consequences of privacy regulations in media markets.
    Keywords: advertising, targeting, privacy, polarization
    JEL: M37 L82 L13 D83
    Date: 2023–10
  4. By: Xiaoyu Cheng
    Abstract: A decision-maker (DM) faces uncertainty governed by a data-generating process (DGP), which is only known to belong to a set of sequences of independent but possibly non-identical distributions. A robust decision maximizes the DM's expected payoff against the worst possible DGP in this set. This paper studies how such robust decisions can be improved with data, where improvement is measured by expected payoff under the true DGP. In this paper, I fully characterize when and how such an improvement can be guaranteed under all possible DGPs and develop inference methods to achieve it. These inference methods are needed because, as this paper shows, common inference methods (e.g., maximum likelihood or Bayesian) often fail to deliver such an improvement. Importantly, the developed inference methods are given by simple augmentations to standard inference procedures, and are thus easy to implement in practice.
    Date: 2023–10
  5. By: Ethan Bueno de Mesquita; Wioletta Dziuda
    Abstract: Electoral incentives may lead policymakers to eschew opportunities for common-interest reform, focusing instead on zero-sum, partisan policymaking. By forgoing opportunities for common-interest reforms, incumbents may convince their constituents that such reforms are rarely feasible, so that policymaking is primarily about zero-sum, partisan conflict. Voters with such beliefs vote based on ideological alignment, rather than factors such as quality or honesty. This is electorally beneficial for incumbents, who are typically ideologically aligned with their constituents. We capture this logic in an infinite horizon model and characterize the resulting dynamics of politics and policymaking. Equilibrium exhibits partisan traps---voters are pessimistic about common-interest opportunities, politicians behave in a purely partisan manner that shuts down voter learning, and ideologically aligned incumbents are consistently reelected. Partisan traps often occur in equilibrium even when common-interest reforms are in fact frequently feasible. The model shows how elite and mass polarization are intertwined, with politicians engaging in strategically polarized and polarizing behavior which leads to pessimistic beliefs among voters, who come to perceive there to be little political common ground.
    JEL: D0 P0
    Date: 2023–11
  6. By: Argyrios Deligkas; Eduard Eiben; Gregory Gutin; Philip R. Neary; Anders Yeo
    Abstract: In order to coordinate successfully individuals must first identify a target pattern of behaviour. In this paper we investigate the difficulty of identifying prominent outcomes in two kinds of binary action coordination problems in social networks: pure coordination games and anti-coordination games. For both environments, we determine the computational complexity of finding a strategy profile that (i) maximises welfare, (ii) maximises welfare subject to being an equilibrium, and (iii) maximises potential. We show that the complexity of these objectives can vary with the type of coordination problem. Objectives (i) and (iii) are tractable problems in pure coordination games, but for anti-coordination games are NP-hard. Objective (ii), finding the best Nash equilibrium, is NP-hard for both. Our results support the idea that environments in which actions are strategic complements facilitate successful coordination more readily than those in which actions are strategic substitutes.
    Date: 2023–11
  7. By: Alireza Fallah; Michael I. Jordan
    Abstract: We study the role of regulatory inspections in a contract design problem in which a principal interacts separately with multiple agents. Each agent's hidden action includes a dimension that determines whether they undertake an extra costly step to adhere to safety protocols. The principal's objective is to use payments combined with a limited budget for random inspections to incentivize agents towards safety-compliant actions that maximize the principal's utility. We first focus on the single-agent setting with linear contracts and present an efficient algorithm that characterizes the optimal linear contract, which includes both payment and random inspection. We further investigate how the optimal contract changes as the inspection cost or the cost of adhering to safety protocols vary. Notably, we demonstrate that the agent's compensation increases if either of these costs escalates. However, while the probability of inspection decreases with rising inspection costs, it demonstrates nonmonotonic behavior as a function of the safety action costs. Lastly, we explore the multi-agent setting, where the principal's challenge is to determine the best distribution of inspection budgets among all agents. We propose an efficient approach based on dynamic programming to find an approximately optimal allocation of inspection budget across contracts. We also design a random sequential scheme to determine the inspector's assignments, ensuring each agent is inspected at most once and at the desired probability. Finally, we present a case study illustrating that a mere difference in the cost of inspection across various agents can drive the principal's decision to forego inspecting a significant fraction of them, concentrating its entire budget on those that are less costly to inspect.
    Date: 2023–11

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.
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