nep-mic New Economics Papers
on Microeconomics
Issue of 2024‒04‒08
eighteen papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. Dynamic Contracting with Many Agents By Bruno Biais; Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden; Stéphane Villeneuve
  2. On the Relationship between Robust and Rationalizable Implementation By R Jain; M Lombardi
  3. Attraction Via Prices and Information By Pak Hung Au; Mark Whitmeyer
  4. Simultaneous Search and Adverse Selection By Auster, Sarah; Gottardi, Piero; Wolthoff, Ronald P.
  5. Target Setting in Contests with Sabotage By Chung, A.
  6. When is Trust Robust? By Luca Anderlini; Larry Samuelson; Daniele Terlizzese
  7. Informal Elections with Dispersed Information: Protests, Petitions, and Nonbinding Voting By Mehmet Ekmekci; Stephan Lauermann
  8. Welfare Implications of Personalized Pricing in Competitive Platform Markets: The Role of Network Effects By Qiuyu Lu; Noriaki Matsushima; Shiva Shekhar
  9. Shining with the stars: Competition, screening, and concern for coworkers’ quality By Francesca Barigozzi; Helmuth Cremer
  10. Red herrings: A theory of bad politicians hijacking media attention By Margot Belguise
  11. Ramsey pricing revisited: Natural monopoly regulation with evaders By Martin Besfamille; Nicolás Figueroa; León Guzmán
  12. Spatial Search By Cai, Xiaoming; Gautier, Pieter A.; Wolthoff, Ronald P.
  13. The Strategic Value of Data Sharing in Interdependent Markets By Hemant Bhargava; Antoine Dubus; David Ronayne; Shiva Shekhar
  14. Player Strength and Effort in Contests By Thomas Giebe; Oliver Gürtler
  15. Board Bias, Information, and Investment Efficiency By Martin Gregor; Beatrice Michaeli
  16. Ironing allocations By Filip Tokarski
  17. Political Pandering and Bureaucratic Influence By Simon Lodato; Christos Mavridis; Federico Vaccari
  18. Auctions with Frictions: Recruitment, Entry, and Limited Commitment By Stephan Lauermann; Asher Wolinsky

  1. By: Bruno Biais; Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden; Stéphane Villeneuve
    Abstract: We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. The state variables of the mechanism design problem are aggregate capital and the distribution of continuation utilities across agents. This gives rise to a Bellman equation in an infinite dimensional space, which we solve with mean-field techniques. We fully characterize the optimal mechanism and show that the level of risk agents must be exposed to for incentive reasons is decreasing in their initial outside utility. We extend classical welfare theorems by showing that any incentive-constrained optimal allocation can be implemented as an equilibrium allocation, with appropriate money issuance and wealth taxation by the principal.
    Keywords: Incomplete Financial Markets, Debt, Interest, Growth, Ponzi Games, Heterogeneous Agents, Political Economy
    JEL: E44 E62
    Date: 2024–03
  2. By: R Jain; M Lombardi
    Abstract: We introduce a notion of rationalizable implementation for social choice functions, termed s-rationalizable implementation, and show that it is equivalent to robust implementation.
    Keywords: Robust Implementation, Rationalizable Implementation, Social Choice Functions, Interim Best Response Property
    JEL: C79 D82
    Date: 2022–03
  3. By: Pak Hung Au; Mark Whitmeyer
    Abstract: We study the ramifications of increased commitment power for information provision in an oligopolistic market with search frictions. Although prices are posted and, therefore, guide search, if firms cannot commit to information provision policies, there is no active search at equilibrium so consumers visit (and purchase from) at most one firm. If firms can guide search by both their prices and information policies, there exists a unique symmetric equilibrium exhibiting price dispersion and active search. Nevertheless, when the market is thin, consumers prefer the former case, which features intense price competition. Firms always prefer the latter.
    Date: 2024–02
  4. By: Auster, Sarah (University of Bonn); Gottardi, Piero (University of Essex); Wolthoff, Ronald P. (University of Toronto)
    Abstract: We study the effect of diminishing search frictions in markets with adverse selection by presenting a model in which agents with private information can simultaneously contact multiple trading partners. We highlight a new trade- off: facilitating contacts reduces coordination frictions but also the ability to screen agents' types. We find that, when agents can contact sufficiently many trading partners, fully separating equilibria obtain only if adverse selection is sufficiently severe. When this condition fails, equilibria feature partial pooling and multiple equilibria co-exist. In the limit, as the number of contacts becomes large, some of the equilibria converge to the competitive outcomes of Akerlof (1970), including Pareto-dominated ones; other pooling equilibria continue to feature frictional trade in the limit, where entry is inefficiently high. Our findings provide a basis to assess the effects of recent technological innovations that have made meetings easier.
    Keywords: search, adverse selection, information frictions, efficiency
    JEL: D82 D83 J64
    Date: 2024–02
  5. By: Chung, A.
    Abstract: We study a novel target prize contest between two heterogeneous contestants featuring sabotage. The contestants first choose a target prize should they win the contest, then exert two types of effort: (i) productive effort which directly enhances their performance; and (ii) destructive effort which reduces the opponent’s performance. While both types of effort incur constant marginal costs (in the respective levels of effort), the productive effort’s marginal cost is an increasing function of the target prize. We show that when contestants are allowed to choose their own target prize, they do not sabotage each other in any subgame perfect equilibrium.
    Keywords: Endogenous prize contest, target prize, productive and destructive effort, sabotage, Tullock contests, encouragement effect
    Date: 2024–02–29
  6. By: Luca Anderlini (Department of Economics, Georgetown University); Larry Samuelson (Yale University); Daniele Terlizzese (Einaudi Institute for Economics and Finance)
    Abstract: We examine an economy in which interactions are more productive if agents can trust others to refrain from cheating. Some agents are scoundrels, who always cheat, while others cheat only if the cost of cheating, a decreasing function of the proportion of cheaters, is sufficiently low. The economy exhibits multiple equilibria. As the proportion of scoundrels in the economy declines, the high-trust equilibrium can be disrupted by arbitrarily small perturbations or infusions of low-trust agents, while the low-trust equilibrium becomes impervious to perturbations and infusions of high-trust agents. The resilience of trust may thus hinge upon the prevalence of scoundrels.
    Keywords: Trust, Robustness, Fragility, Assimilation, Disruption
    JEL: C72 C79 D02 D80
    Date: 2024–03–18
  7. By: Mehmet Ekmekci (Boston College, Department of Economics); Stephan Lauermann (University of Bonn, Department of Economics)
    Abstract: We study information transmission through informal elections. Our leading example is that of protests in which there may be positive costs or benefits of participation. The aggregate turnout provides information to a policy maker. However, the presence of activists adds noise to the turnout. The interplay between noise and participation costs leads to strategic substitution and complementarity effects in citizens’ participation choices, and we characterize the implications for the informativeness of protests. In particular, we show that rather than being a friction, costs may facilitate information transmission by lending credibility to protest participation.
    Keywords: Political Institutions
    JEL: D72
    Date: 2024–03
  8. By: Qiuyu Lu; Noriaki Matsushima; Shiva Shekhar
    Abstract: This study explores the welfare impact of personalized pricing for consumers in a duopolistic two-sided market, with consumers single-homing and developers affiliating with a platform according to their outside option. Personalized pricing, which is private in nature, cannot influence expectations regarding the network sizes, inducing the platforms to offer lower participation fees for developers. Those lower fees increase network benefits for consumers, allowing the platforms to exploit these benefits through personalized pricing. Personalized prices are higher when the network value for developers is high, benefiting competing platforms at the expense of consumers. These findings offer policy insights on personalized pricing.
    Keywords: personalized pricing, uniform prices, two-sided market, content developers
    JEL: L13 D43
    Date: 2024
  9. By: Francesca Barigozzi (UNIBO - Alma Mater Studiorum Università di Bologna = University of Bologna); Helmuth Cremer (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We study how workers' concern for coworkers' ability (CfCA) affects competition in the labor market. Two firms offer nonlinear contracts to a unit mass of prospective workers. Firms may differ in their marginal productivity, while workers are heterogeneous in their ability (high or low) and their taste for being employed by any of the two firms. Workers receive a utility premium when employed by the firm hiring most high-ability workers and suffer a utility loss if hired by its competitor. These premiums/losses are endogenously determined. We characterize contracts and workers' sorting into the two firms under complete and private information on workers' ability. We show that CfCA is detrimental to firms, but it benefits high-ability workers, especially when their ability is observable. In addition, CfCA exacerbates the existing distortion in high-ability workers' sorting into the two firms.
    Keywords: Concern for coworkers’ quality, Competition, Screening, Sorting
    Date: 2024–03
  10. By: Margot Belguise
    Abstract: Politicians are sometimes accused of sending “red herrings”, irrelevant information meant to distract their audience from other information. When do they succeed in fooling voters? How is this affected by the media? This paper proposes a model of election with red herring. An incumbent running for re-election may send an irrelevant ”tale” to distract voters from a scandal. Some politicians may simply enjoy telling irrelevant tales, making it difficult for voters to recognize red herrings. Red herrings can thus be ”successful” in that the incumbent is re-elected despite the scandal. Equilibrium characterization sheds light on two non-trivial results. First, the game sometimes has multiple equilibria: society may coordinate on equilibria with no or some successful red herring through a self-fulfilling social norm of tale-telling. However, high media attention to tales may discipline scandal-free politicians due to voter suspicion of tales, leaving a unique equilibrium with no successful red herring. A dynamic extension introduces feedbacks between the pool of politicians and media attention. Polar cases in which red herring is predicted to increase over time or on the contrary disappear are highlighted. A second extension shows that voter polarization is predicted to have ambiguous effects on politician discipline and thereby on screening.
    Date: 2023
  11. By: Martin Besfamille; Nicolás Figueroa; León Guzmán
    Abstract: We consider a model featuring a single-product natural monopoly, which faces evaders, i.e., individuals that may not pay the price. By exerting a costly effort, the firm can deter evasion. To maximize the total surplus, a regulator sets the price, the level of deterrence effort, and socially costly transfers to ensure the monopoly’s participation. We obtain a modified Ramsey formula, which clearly shows that the mere existence of evaders dampens the use of the price as a mean to finance the firm’s deficit. The regulated price is always below the monopoly price and, under sufficient conditions, also below marginal cost. Then, we generalize the model to incorporate moral hazard. Finally, we undertake an empirical application of our results, which shows quantitatively that the downward tendency of regulated prices in a context of high evasion is significant.
    Keywords: regulation, natural monopoly, evasion and marginal cost of public funds
    JEL: D42 H2 L43 L51
    Date: 2023
  12. By: Cai, Xiaoming (Peking University); Gautier, Pieter A. (Vrije Universiteit Amsterdam); Wolthoff, Ronald P. (University of Toronto)
    Abstract: This paper considers a random search model where some locations provide sellers with better chances of meeting many buyers than other locations (for example popular shopping streets or the first page of a search engine). When sellers are heterogeneous in terms of the quality of their product and/or the probability that a given buyer likes their product, it is desirable that sellers of high-quality niche products sort into the best locations. We show that this does not always happen in a decentralized market. Finally, we allow for endogenous location distributions and show that more trades are realized when locations are similar (in which case the aggregate matching function is urn-ball) but that quality weighted trade can be higher when locations are heterogeneous.
    Keywords: search frictions, spatial equilibrium, sorting
    JEL: C78 D44 D83
    Date: 2024–02
  13. By: Hemant Bhargava; Antoine Dubus; David Ronayne; Shiva Shekhar
    Abstract: Large, generalist, technology firms—so-called “big-tech” firms—powerful in their primary market, routinely enter secondary markets consisting of specialist firms. Naturally, one might expect a specialist firm to be fiercely protective of its data as a way to maintain its market position in the secondary market. Counter to this intuition, we demonstrate that a specialist firm willingly shares its market data with an intruding tech generalist. We do so by developing a model of cross-market competition in which data collected via consumer usage in each market is a factor of product quality in both markets. We show that a specialist firm shares its data to strategically create co-dependence between the two firms, thereby softening competition and transforming the generalist firm from a traditional competitor into a co-opetitor. For the generalist intruder, data from the specialist firm substitute for its own investments in product quality in the secondary market. As such, the act of sharing data makes the intruder a stakeholder in the valuable data collected by the specialist, and consequently in the specialist’s continued success. Moreover, while the firms benefit from data sharing, consumers can be worse off from the weaker price competition and lower investments in innovation. Our results have managerial and policy implications, notably on account of backlash against data collection and the market power of big tech firms.
    Keywords: data-driven quality improvements, externalities, co-opetition, data sharing
    Date: 2024
  14. By: Thomas Giebe (Department of Economics and Statistics, School of Business and Economics, Linnaeus University, Sweden); Oliver Gürtler (Department of Economics, University of Cologne, Germany)
    Abstract: In competitive settings, disparities in player strength are common. It is intuitively unclear whether a stronger player would opt for larger or smaller effort compared to weaker players. Larger effort could leverage their strength, while lower effort might be justified by their higher probability of winning regardless of effort. We analyze contests with three or more players, exploring when stronger players exert larger or lower effort. To rank efforts, it suffices to compare marginal utilities in situations where efforts are equal. Effort ranking depends on differences in hazard rates (which are smaller for stronger players) and reversed hazard rates (which are larger for stronger players). Compared to weaker players, stronger players choose larger effort in winner-takes-all contests and lower effort in loser-gets-nothing contests. Effort rankings can be non-monotonic in contests with several identical prizes, and they depend on the slopes of players’ pdfs in contests with linear prize structure.
    Keywords: contest theory, heterogeneity, player strength
    JEL: C72 D74 D81
    Date: 2024–03
  15. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University); Beatrice Michaeli (UCLA Anderson School of Management)
    Abstract: We study how interest alignment between CEOs and corporate boards influences investment efficiency and identify a novel force behind the benefit of misaligned preferences. Our model entails a CEO who encounters a project, gathers investment-relevant information, and decides whether or not to present the project implementation for approval by a sequentially rational board of directors. The CEO may be able to strategically choose the properties of the collected information---this happens, for instance, if the project is ``novel" in the sense that it explores new technology, business concept, or market and directors are less knowledgeable about it. We find that only sufficiently conservative and expansion-cautious directors can discipline the CEO's empire-building tendency and opportunistic information collection. Such directors, however, underinvest in projects that are not novel. From the shareholders' perspective, the board that maximizes firm value is either conservative or neutral (has interests aligned with those of the shareholders) and always overinvests in innovations. Boards with greater expertise are more likely to be conservative, but their bias is less severe. Our analysis shows that board's commitment power and bias are substitutes.
    Keywords: Empire-building, biased board, underinvestment, overinvestment, endogenous information
    JEL: D83 D86 G30 G31 G34
    Date: 2024–03
  16. By: Filip Tokarski
    Abstract: I propose a new approach to solving standard screening problems when the monotonicity constraint binds. A simple geometric argument shows that when virtual values are quasi-concave, the optimal allocation can be found by appropriately truncating the solution to the relaxed problem. I provide a simple algorithm for finding this optimal truncation when virtual values are concave.
    Date: 2024–02
  17. By: Simon Lodato; Christos Mavridis; Federico Vaccari
    Abstract: This paper examines the impact of bureaucracy on policy implementation in environments where electoral incentives generate pandering. A two-period model is developed to analyze the interactions between politicians and bureaucrats, who are categorized as either aligned -- sharing the voters' preferences over policies -- or intent on enacting policies that favor elite groups. The findings reveal equilibria in which aligned politicians resort to pandering, whereas aligned bureaucrats either support or oppose such behavior. The analysis further indicates that, depending on parameters, any level of bureaucratic influence can maximize the voters' welfare, ranging from scenarios with an all-powerful to a toothless bureaucracy.
    Date: 2024–02
  18. By: Stephan Lauermann (The University of Bonn, Department of Economics); Asher Wolinsky (Northwestern University, Department of Economics)
    Abstract: Auction models are convenient abstractions of informal price-formation processes that arise in markets for assets or services. These processes involve frictions such as bidder recruitment costs for sellers, participation costs for bidders, and limitations on sellers' commitment abilities. This paper develops an auction model that captures such frictions. We derive several novel predictions; in particular, we find that outcomes are often inefficient, and the market sometimes unravels.
    Keywords: Auctions
    JEL: D44
    Date: 2024–03

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