nep-mic New Economics Papers
on Microeconomics
Issue of 2024‒02‒05
sixteen papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. The Emergence of Enforcement By Luca Anderlini; Leonardo Felli; Michele Piccione
  2. Multi-unit auctions with uncertain supply and single-unit demand By Anderson, E.; Holmberg, P.
  3. Revenue maximization with partially verifiable information By Reuter, Marco
  4. Mechanism design for unequal societies By Groh, Carl-Christian; Reuter, Marco
  5. Bidder-Optimal Information Structures in Auctions By Dirk Bergemann; Tibor Heumann; Stephen Morris
  6. Community Enforcement with Endogenous Records By Harry Pei
  7. Strategic Use of Product Delays to Shape Word-of-Mouth Communication By Alexei Parahonyak; Nick Vikander
  8. Long Wars By Tomas Sjostrom
  9. Understanding markets with socially responsible consumers By Kaufmann, Marc; Andre, Peter; Kîoszegi, Botond
  10. Matching of Users and Creators in Two-Sided Markets with Departures By Daniel Huttenlocher; Hannah Li; Liang Lyu; Asuman Ozdaglar; James Siderius
  11. Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets By Loukas Balafoutas; Helena Fornwagner; Rudolf Kerschbamer; Matthias Sutter; Maryna Tverdostup
  12. Optimal Compellance By Tomas Sjostrom
  13. A Delegation Approach to Regulating Hiring Discrimination By Paolo Martellini; Guido Menzio
  14. A New Approach To Optimal Solutions Of Noncooperative Games: Accounting For Savage–Niehans Risk By Zhukovskiy, Vladislav; Zhukovskaya, Lidia; Mukhina, Yulia
  15. Subjective complexity under uncertainty By Valenzuela-Stookey, Quitzé
  16. A New Approach To Guaranteed Solutions Of Multicriteria Choice Problems: Pareto Consideration Of Savage–Niehans Risk And Outcomes By Zhukovskaya, Lidia; Zhukovskiy, Vladislav; Mukhina, Julia

  1. By: Luca Anderlini (Department of Economics, Georgetown University); Leonardo Felli (Faculty of Economics, University of Cambridge); Michele Piccione (London School of Economics)
    Abstract: How do mechanisms that enforce cooperation emerge in a society where none are available and agents are endowed with raw power, that allows a more powerful agent to expropriate a less powerful one? We study a model where expropriation is costly and agents can choose whether to engage in surplus-augmenting cooperation or engage in expropriation. While in bilateral relations, if cooperation is not overwhelmingly productive and expropriation is not too costly, the latter will prevent cooperation, when there are three or more agents, powerful ones can become enforcers of cooperation for agents ranked below them. In equilibrium they will expropriate smaller amounts from multiple weaker cooperating agents who in turn will not deviate for fear of being expropriated more heavily because of their larger expropriation proceeds. Surprisingly, the details of the power structure are irrelevant for the existence of equilibria with enforcement provided that enough agents are present and one is ranked above all others. These details are instead key to the existence of other highly non-cooperative equilibria that obtain in certain cases.
    Keywords: Jungle, Power Structures, Enforcement, Rule of Law
    JEL: C79 D00 D01 D31 K19 K40 K49
    Date: 2023–12–13
  2. By: Anderson, E.; Holmberg, P.
    Abstract: We study multi-unit auctions where bidders have single-unit demand and asymmetric information. For symmetric equilibria, we identify circumstances where uniform-pricing is better for the auctioneer than pay-as-bid pricing, and where transparency improves the revenue of the auctioneer. An issue with the uniform-price auction is that seemingly collusive equilibria can exist. We show that such outcomes are less likely if the traded volume of the auctioneer is uncertain. But if bidders are asymmetric ex-ante, then both a price floor and a price cap are normally needed to get a unique equilibrium, which is well behaved.
    Keywords: Multi-unit auction, single-unit demand, uniform pricing, pay-as-bid, asymmetric information, publicity effect
    JEL: C72 D44 D82
    Date: 2023–12–29
  3. By: Reuter, Marco
    Abstract: I consider a seller selling a good to bidders with two-dimensional private information: their valuation for a good and their characteristic. While valuations are non-verifiable, characteristics are partially verifiable and convey information about the distribution of a bidder's valuation. I derive the revenue-maximizing mechanism and show that it can be implemented by introducing a communication stage before an auction. I show that granting bidders a right to remain anonymous, i.e., to refuse participation in the communication stage, leaves the optimal mechanism unchanged and provides no benefits for the bidders.
    Keywords: Mechanism Design, Auctions, Partially Verifiable Types, Communication
    JEL: D44 D82 D83
    Date: 2023
  4. By: Groh, Carl-Christian; Reuter, Marco
    Abstract: We study optimal mechanisms for a utilitarian designer who seeks to assign a finite number of goods to a group of ex ante heterogeneous agents with unit demand. The agents have heterogeneous marginal utilities of money, which may naturally arise in environments where agents have different wealth levels or financing conditions. We show that the utilitarian optimal allocation rule deviates from the ex post efficient allocation rule in two ways, namely by (1) allocating the good to agents with lower willingnesses to pay in certain situations and (2) by potentially keeping some units of the good unallocated. We also highlight how our mechanism can be implemented as an auction with minimum bids and bidding subsidies.
    Keywords: optimal mechanism design, redistribution, inequality, auctions
    JEL: D44 D47 D61 D63 D82
    Date: 2023
  5. By: Dirk Bergemann (Yale University); Tibor Heumann (Pontificia Universidad Catolica de Chile); Stephen Morris (Massachusetts Institute of Technology)
    Abstract: We characterize the bidders' surplus maximizing information structure in an optimal auction for a single unit good and related extensions to multi-unit and multi-good problems. The bidders seeks to find a balance between participation (and the avoidance of exclusion) and efficiency. The information structure that maximizes the bidders surplus is given by a generalized Pareto distribution at the center of demand distribution, and displays complete information disclosure at either end of the Pareto distribution.
    Date: 2023–12–22
  6. By: Harry Pei
    Abstract: I study repeated games with anonymous random matching where players can erase signals from their records. When players are sufficiently long-lived and have strictly dominant actions, they will play their dominant actions with probability close to one in all equilibria. When players' expected lifespans are intermediate, there exist purifiable equilibria with a positive level of cooperation in the submodular prisoner's dilemma but not in the supermodular prisoner's dilemma. Therefore, the maximal level of cooperation a community can sustain is not monotone with respect to players' expected lifespans and the complementarity in players' actions can undermine their abilities to sustain cooperation.
    Date: 2024–01
  7. By: Alexei Parahonyak; Nick Vikander
    Abstract: This paper investigates the advantages a seller can gain by strategically creating product scarcity to manipulate consumer word-of-mouth communication. The seller offers a product of uncertain quality and sets a service speed that determines whether opinion leaders are immediately served or delayed when attempting to purchase the product. Opinion leaders subsequently share their experiences with other consumers, influencing these consumers’ beliefs about product quality and their purchase de cisions. We show that delaying opinion leaders can significantly impact consumer learning by altering both the content and level of word-of-mouth communication. Specifically, the content effect alone can incentivize the seller to delay opinion leaders, except in niche markets where private information is highly accurate. In settings where information about purchased products spreads more easily than information about delays, the level effect limits the potential for suppressing service speed, particularly in markets with high expected product quality and many opinion leaders.
    Date: 2023–01–12
  8. By: Tomas Sjostrom (Rutgers University; Kellogg School of Management, Northwestern University)
    Abstract: We study whether the Coase conjecture holds in a model of bargaining during conflict due to Powell and Fearon. Two players, A and B, contest a divisible resource. At any time during the conflict, they can make a binding agreement to share the resource. The conflict continues until they make an agreement or one side collapses. Player B privately knows w hether he is a strong or a weak type, with a greater probability of collapse if he is weak. The "lemons condition" says that player A would rather fight to the end than make a generous offer at the beginning of the conflict that both types of player B would accept. If this condition holds then the expected length of the conflict is bounded away from zero, even if negotiations are frictionless. Thus, the Coase conjecture does not hold. We study how the minimum length of conflict depends on the parameters, and the impact of third party intervention.
    Keywords: Conflict, Bargaining
    JEL: C7
    Date: 2023–10–24
  9. By: Kaufmann, Marc; Andre, Peter; Kîoszegi, Botond
    Abstract: Many consumers care about climate change and other externalities associated with their purchases. We analyze the behavior and market effects of such "socially responsible consumers" in three parts. First, we develop a flexible theoretical framework to study competitive equilibria with rational consequentialist consumers. In violation of price taking, equilibrium feedback nontrivially dampens a consumer's mitigation efforts, undermining responsible behavior. This leads to a new type of market failure, where even consumers who fully "internalize the externality" overconsume externality-generating goods. At the same time, socially responsible consumers change the relative effectiveness of taxes, caps, and other policies in lowering the externality. Second, since consumer beliefs about and preferences over dampening play a crucial role in our framework, we investigate them empirically via a tailored survey. Consistent with our model, consumers are predominantly consequentialist, and on average believe in dampening. Inconsistent with our model, however, many consumers fail to anticipate dampening. Third, therefore, we analyze how such "naive" consumers modify our theoretical conclusions. Naive consumers behave more responsibly than rational consumers in a single-good economy, but may behave less responsibly in a multi-good economy with cross-market spillovers. A mix of naive and rational consumers may yield the worst outcomes.
    Keywords: socially responsible consumers, social preferences, climate change, externalities, competitive equilibrium, regulation, taxes, caps
    JEL: D01 D11 D50 D62 D64 D91
    Date: 2023
  10. By: Daniel Huttenlocher; Hannah Li; Liang Lyu; Asuman Ozdaglar; James Siderius
    Abstract: Many online platforms of today, including social media sites, are two-sided markets bridging content creators and users. Most of the existing literature on platform recommendation algorithms largely focuses on user preferences and decisions, and does not simultaneously address creator incentives. We propose a model of content recommendation that explicitly focuses on the dynamics of user-content matching, with the novel property that both users and creators may leave the platform permanently if they do not experience sufficient engagement. In our model, each player decides to participate at each time step based on utilities derived from the current match: users based on alignment of the recommended content with their preferences, and creators based on their audience size. We show that a user-centric greedy algorithm that does not consider creator departures can result in arbitrarily poor total engagement, relative to an algorithm that maximizes total engagement while accounting for two-sided departures. Moreover, in stark contrast to the case where only users or only creators leave the platform, we prove that with two-sided departures, approximating maximum total engagement within any constant factor is NP-hard. We present two practical algorithms, one with performance guarantees under mild assumptions on user preferences, and another that tends to outperform algorithms that ignore two-sided departures in practice.
    Date: 2023–12
  11. By: Loukas Balafoutas (University of Exeter, United Kingdom, University of Innsbruck, Austria); Helena Fornwagner (University of Exeter, Austrian Institute of Economic Research (WIFO)); Rudolf Kerschbamer (University of Innsbruck, Austria); Matthias Sutter (Max Planck Institute for Research on Collective Goods, IZA Bonn, CESifo Munich, University of Cologne); 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: 2023–09
  12. By: Tomas Sjostrom (Rutgers University; Kellogg School of Management, Northwestern University)
    Abstract: In many scenarios, a protagonist tries to compel a political leader (the antagonist) to cooperate. The protagonist can impose targeted measures (e.g., "smart" sanctions) that hurt the antagonist directly, and comprehensive measures (e.g., trade embargoes) aimed at provoking a popular uprising against the antagonist. However, there is no uprising if the citizens think the antagonist is defending their interests against a hostile protagonist: the rally-'round-the-flag effect. The effectiveness of the protagonist's compellent policy depends on the complex ways in which it influences the rally-`round-the-flag effect. First, there is the direct impact on costs and benefits. Second, the policy may signal the protagonist's level of hostility. Third, the policy influences the antagonist's "political bias", i.e., the misalignment between his interests and those of the representative citizen. We study the optimal mix of targeted and comprehensive measures, and whether the different measures are substitutes or complements.
    Keywords: Conflict, Sanctions
    JEL: F51
    Date: 2023–10–24
  13. By: Paolo Martellini; Guido Menzio
    Abstract: We approach the design of anti-discriminatory labor market regulation as a delegation problem. A private firm (the agent) is repeatedly faced with the opportunity of hiring one among several applicants to fill its vacancies. The firm is biased against applicants from some demographic group, and it is neutral towards applicants from some other group. Applicants differ not only with respect to their demographic characteristics, but also with respect to the idiosyncratic quality of their match with firm. A benevolent and unbiased labor market authority (the principal) enacts a hiring regulation (a direct-revelation mechanism without transfers) in order to reduce the impact of the firm's bias on its hiring behavior. The hiring regulation is constrained by the fact that the quality of the match between any particular applicant and the firm is privately observed by the firm. We characterize the optimal mechanism.
    JEL: D82 J71
    Date: 2024–01
  14. By: Zhukovskiy, Vladislav; Zhukovskaya, Lidia; Mukhina, Yulia
    Abstract: The novelty of the approach presented below is that each person in a conflict (player) seeks not only to increase his payoff but also to reduce his risk, taking into account a possible realization of any uncertainty from a given admissible set. A new concept, the so-called strongly-guaranteed Nash equilibrium in payoffs and risks, is introduced and its existence in mixed strategies is proved under standard assumptions of the theory of noncooperative games, i.e., compactness and convexity of the sets of players’ strategies and continuity of the payoff functions.
    Keywords: Savage–Niehans risk, minimax regret, uncertainties, oncooperative game, optimal solution
    JEL: C00 C02
    Date: 2023–06–23
  15. By: Valenzuela-Stookey, Quitzé
    Keywords: Economics, Applied Economics, Economic Theory, Drug Abuse (NIDA only), Substance Misuse, Complexity, Uncertainty, Bounded rationality, Ambiguity, Mathematical Sciences, Studies in Human Society, Human society, Mathematical sciences
    Date: 2023–11–01
  16. By: Zhukovskaya, Lidia; Zhukovskiy, Vladislav; Mukhina, Julia
    Abstract: This article considers three new approaches to important problems of mathematical game theory and multicriteria choice.The first approach ensures payoff increase with simultaneous risk reduction in the Savage–Niehans sense in multicriteria choice problem and noncooperative games. The second approach allow us to stabilize coalitional structures in cooperative games without side payments under uncertainty. The third approach serves to integrate the selfish Nash equilibrium with the altruistic Berge equilibrium. Note that the investigations involve a special Germeier convolution of criteria and calculation of its saddle point in mixed strategies.
    Keywords: Savage–Niehans risk, minimax regret, uncertainties, multicriteria choice, Pareto consideration
    JEL: C00
    Date: 2023–06–26

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