nep-mic New Economics Papers
on Microeconomics
Issue of 2024‒04‒29
sixteen papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. Mediated Renegotiation By Attar, Andrea; Bozzoli, Lorenzo; Strausz, Roland
  2. Robust Communication Between Parties with Nearly Independent Preferences By Alistair Barton
  3. Optimal Auction Design with Flexible Royalty Payments By Ian Ball; Teemu Pekkarinen
  4. Contracts with Interdependent Preferences By Debraj Ray; Marek Weretka
  5. How Information Design Shapes Optimal Selling Mechanisms By Pham, Hien
  6. Tournament Auctions By Luca Anderlini; GaOn Kim
  7. The Swing Voter’s Curse Revisited: Transparency’s Impact on Committee Voting By Bandyopadhyay, Siddhartha; Deb, Moumita; Lohse, Johannes; McDonald, Rebecca
  8. When is Trust Robust? By Luca Anderlini; Larry Samuelson; Daniele Terlizzese
  9. Can One Hear the Shape of a Decision Problem? By Mark Whitmeyer
  10. A new social welfare function with a number of desirable properties By Fujun Hou
  11. Tying with Network Effects By Jeon, Doh-Shin; Choi, Jay Pil; Whinston, Michael
  12. Matching and Information Design in Marketplaces By Elliott, M.; Galeotti, A.; Koh, A.; Li, W.
  13. Does Restricting Outsiders Always Lower Price and Benefit Insiders? By Tat-kei Lai; Travis Ng
  14. Fragile Stable Matchings By Kirill Rudov
  15. Symmetric mechanisms for two-sided matching problems By Daniela Bubboloni; Michele Gori; Claudia Meo
  16. When to Appease and When to Punish: Hitler, Putin, and Hamas By David K. Levine; Lee E. Ohanian

  1. By: Attar, Andrea; Bozzoli, Lorenzo; Strausz, Roland
    Abstract: We develop a new approach to contract renegotiation under informational frictions. Specically, we consider mediated mechanisms which cannot be contingent on any subsequent offer, but can generate a new source of asymmetric information between the contracting parties. Taking as a reference the canonical framework of Fudenberg and Tirole (1990), we show that, if mediated mechanisms are allowed, the corresponding renegotiation game admits only one equilibrium allocation, which coincides with the second-best one. Thus, the inefficiencies typically associated to the threat of renegotiation may be completely offset by the design of more sophisticated trading mechanisms.
    JEL: D43 D82 D86
    Date: 2024–03
  2. By: Alistair Barton
    Abstract: We study finite-state communication games in which the sender's preference is perturbed by random private idiosyncrasies. Persuasion is generically impossible within the class of statistically independent sender/receiver preferences -- contrary to prior research establishing persuasive equilibria when the sender's preference is precisely transparent. Nevertheless, robust persuasion may occur when the sender's preference is only slightly state-dependent/idiosyncratic. This requires approximating an `acyclic' equilibrium of the transparent preference game, generically implying that this equilibrium is also `connected' -- a generalization of partial-pooling equilibria. It is then necessary and sufficient that the sender's preference satisfy a monotonicity condition relative to the approximated equilibrium. If the sender's preference further satisfies a `semi-local' version of increasing differences, then this analysis extends to sender preferences that rank pure actions (but not mixed actions) according to a state-independent order. We apply these techniques to study (1) how ethical considerations, such as empathy for the receiver, may improve or impede comm
    Date: 2024–03
  3. By: Ian Ball; Teemu Pekkarinen
    Abstract: We study the design of an auction for a license. Each agent has a signal about his future profit from winning the license. If the license is allocated, the winner can be charged a flexible royalty based on the profits he reports. The principal can audit the winner, at a cost, and charge limited penalties. We solve for the auction that maximizes revenue, net auditing costs. In this auction, the winner pays linear royalties up to a cap, beyond which there is no auditing. A more optimistic bidder pays more upfront in exchange for a lower royalty cap.
    Date: 2024–03
  4. By: Debraj Ray; Marek Weretka
    Abstract: This paper studies contracting between a principal and multiple agents. The setup is classical except for the assumption that agents have interdependent preferences. We characterize cost effective contracts, and relate the direction of co-movement in rewards — “joint liability” (positive) or “tournaments” (negative) — to the assumed structure of preference interdependence. We also study the implications of preference interdependence for the principal’s payoffs. We identify two asymmetries. First, the optimal contract leans towards joint liability rather than tournaments, especially in larger teams, in a sense made precise in the paper. Second, when the mechanism-design problem is augmented by robustness constraints designed to eliminate multiple equilibria, the principal may prefer teams linked via adversarial rather than altruistic preferences.
    JEL: D21 D90
    Date: 2024–03
  5. By: Pham, Hien
    Abstract: A monopolistic seller jointly designs allocation rules and (new) information about a pay-off relevant state to a buyer with private types. When the new information flips the ranking of willingness to pay across types, a screening menu of prices and threshold disclosures is optimal. Conversely, when its impact is marginal, bunching via a single posted price and threshold disclosure is (approximately) optimal. While information design expands the scope for random mechanisms to outperform their deterministic counterparts, its presence leads to an equivalence result regarding sequential versus. static screening.
    Keywords: mechanism design, information design, sequential screening, random mechanisms, bunching.
    JEL: D42 D82 D86 L15
    Date: 2023–04–30
  6. By: Luca Anderlini; GaOn Kim
    Abstract: We examine ``tournament'' second-price auctions in which $N$ bidders compete for the right to participate in a second stage and contend against bidder $N+1$. When the first $N$ bidders are committed so that their bids cannot be changed in the second stage, the analysis yields some unexpected results. The first $N$ bidders consistently bid above their values in equilibrium. When bidder $N+1$ is sufficiently stronger than the first $N$, overbidding leads to an increase in expected revenue in comparison to the standard second-price auction when $N$ is large.
    Date: 2024–03
  7. By: Bandyopadhyay, Siddhartha; Deb, Moumita; Lohse, Johannes; McDonald, Rebecca
    Abstract: Majority voting is considered an efficient information aggregation mechanism in committee decision-making. We examine if this holds in environments where voters first need to acquire information from sources of varied quality and cost. In such environments, efficiency may depend on free-riding incentives and the ‘transparency’ regime - the knowledge voters have about other voters’ acquired information. Intuitively, more transparent regimes should improve efficiency. Our theoretical model instead demonstrates that under some conditions, less transparent regimes can match the rate of efficient information aggregation in more transparent regimes if all members cast a vote based on the information they hold. However, a Pareto inferior swing voter’s curse (SVC) equilibrium arises in less transparent regimes if less informed members abstain. We test this proposition in a lab experiment, randomly assigning participants to different transparency regimes. Results in less transparent regimes are consistent with the SVC equilibrium, leading to less favourable outcomes than in more transparent regimes. We thus offer the first experimental evidence on the effects of different transparency regimes on information acquisition, voting, and overall efficiency.
    Keywords: Information acquisition; Voting; Transparency; Swing voter
    Date: 2024–03–07
  8. By: Luca Anderlini; Larry Samuelson; Daniele Terlizzese
    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.
    Date: 2024–03
  9. By: Mark Whitmeyer
    Abstract: We explore the connection between an agent's decision problem and her ranking of information structures. We find that a finite amount of ordinal data on the agent's ranking of experiments is enough to identify her (finite) set of undominated actions (up to relabeling and duplication) and the beliefs rendering each such action optimal. An additional smattering of cardinal data, comparing the relative value to the agent of finitely many pairs of experiments, identifies her utility function up to an action-independent payoff.
    Date: 2024–03
  10. By: Fujun Hou
    Abstract: By relaxing the dominating set in three ways (e.g., from "each member beats every non-member" to "each member beats or ties every non-member, with an additional requirement that at least one member beat every non-member"), we propose a new social welfare function, which satisfies a number of desirable properties including Condorcet winner principle, Condorcet loser principle, strong Gehrlein-stability (hence Smith set principle), anonymity, neutrality, weak Pareto, strong Pareto, non-dictatorship, and [independence of irrelevant alternatives (IIA) when the pairwise majority relation is an ordering on the alternative set]. If the pairwise majority relation is complete and transitive, the proposed method yields a collective preference relation that coincides with the input majority relation. It thus shares the same collective preference function on the dichotomous domain with the approval voting and the majority voting. It runs in polynomial time and thus possesses a competitive advantage over a number of computationally intractable voting rules such as the Dodgson's rule, the Kemeny's rule, the Slater's rule, the Banks rule, and the Schwartz's tournament equilibrium set (TEQ) rule. When it is used in tournaments, its winner belongs to the uncovered set, the top cycle set, the Smith set, and the Schwartz set. In addition, in a tournament where the number of alternatives is not more than 4, its winner set is a subset, sometimes proper, of the Copeland winner set. Whether this attractive argument is still valid in four-more-alternative tournaments remains an open question.
    Date: 2024–03
  11. By: Jeon, Doh-Shin; Choi, Jay Pil; Whinston, Michael
    Abstract: We develop a leverage theory of tying in markets with network effects. When a monopolist in one market cannot perfectly extract surplus from consumers, tying can be a mechanism through which unexploited consumer surplus is used as a demand-side leverage to create a “quasi-installed base” advantage in another market characterized by network effects. Our mechanism does not require any precommitment to tying; rather, tying emerges as a best response that lowers the quality of tied-market rivals. While tying can lead to exclusion of tied-market rivals, it can also expand use of the tying product, leading to ambiguous welfare effects.
    Date: 2024–04–11
  12. By: Elliott, M.; Galeotti, A.; Koh, A.; Li, W.
    Abstract: There are many markets that are networked in these sense that not all consumers have access to (or are aware of) all products, while, at the same time, firms have some information about consumers and can distinguish some consumers from some others (for example, in online markets through cookies). With unit demand and price-setting firms we give a complete characterization of all welfare outcomes achievable in equilibrium (for arbitrary buyer-seller networks and arbitrary information structures), as well as the designs (networks and information structures) which implement them.
    Date: 2023–02–04
  13. By: Tat-kei Lai (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie Management, France); Travis Ng (The Chinese University of Hong Kong, Hong Kong)
    Abstract: Policies that restrict outsiders are common. Some justifications include protecting insiders from high price and leaving more of the concerned products to insiders. Sometimes these policies fail to work because outsiders can get around the restrictions. In a model in which a policy of restricting outsiders is anticipated, we find that if the policy works, it only sometimes lowers the price. When the price does decrease, the product quality decreases too. Not every insider would benefit equally; those insiders who likely suffer are identified. While restricting outsiders may or may not reduce insiders’ consumer surplus, outsiders and the producer are always worse off. They therefore would find ways to get around the restrictions. Evaluating these policies must (a) take into account the possibility that they might not work at all, (b) check their effects beyond just price if they do work.
    Keywords: Product quality; Customer restrictions; Vertical restraints; Foreign restrictions; Discrimination
    JEL: K25 K29 L25 L51 R38
    Date: 2024–02
  14. By: Kirill Rudov
    Abstract: We show how fragile stable matchings are in a decentralized one-to-one matching setting. The classical work of Roth and Vande Vate (1990) suggests simple decentralized dynamics in which randomly-chosen blocking pairs match successively. Such decentralized interactions guarantee convergence to a stable matching. Our first theorem shows that, under mild conditions, any unstable matching -- including a small perturbation of a stable matching -- can culminate in any stable matching through these dynamics. Our second theorem highlights another aspect of fragility: stabilization may take a long time. Even in markets with a unique stable matching, where the dynamics always converge to the same matching, decentralized interactions can require an exponentially long duration to converge. A small perturbation of a stable matching may lead the market away from stability and involve a sizable proportion of mismatched participants for extended periods. Our results hold for a broad class of dynamics.
    Date: 2024–03
  15. By: Daniela Bubboloni; Michele Gori; Claudia Meo
    Abstract: We focus on the basic one-to-one two-sided matching model, where there are two disjoint sets of agents of equal size, and each agent in a set has preferences on the agents in the other set, modelled by linear orders. The goal is to find a matching that associates each agent in one set with one and only one agent in the other set based on the agents' preferences. A mechanism is a rule that associates a set of matchings to each preference profile. Stability, which refers to the capability to select only stable matchings, is an important property a mechanism should fulfill. Another crucial property, especially useful for applications, is resoluteness, which requires that the mechanism always selects a unique matching. The two versions of the deferred acceptance algorithm are examples of stable and resolute mechanisms. However, these mechanisms are severely unfair since they strongly favor one of the two sides of the market. In this paper, we introduce a property that mechanisms may meet which relates to fairness. Such property, called symmetry, is formulated in a way able to capture different levels of fairness within and across the two sets of agents and generalize existing notions. We prove several possibility and impossibility results, mainly involving the most general notion of symmetry, known as gender fairness: among others, a resolute and gender fair mechanism exists if and only if each side of the market consists of an odd number of agents; there exists no resolute, stable and gender fair mechanism.
    Date: 2024–04
  16. By: David K. Levine; Lee E. Ohanian
    Abstract: Much has been written about deterrence, the process of committing to punish an adversary to prevent an attack. But in sufficiently rich environments where attacks evolve over time, formulating a strategy involves not only deterrence but also appeasement, the less costly process of not responding to an attack. This paper develops a model that integrates these two processes to analyze the equilibrium time paths of attacks, punishment, and appeasement. We study an environment in which a small attack is launched and can be followed by a larger attack. There are pooling and separating equilibria. The pooling equilibrium turns the common intuition that appeasement is a sign of weakness, inviting subsequent attacks, on its head, because appeasement is a sign of strength in the pooling case. In contrast, the separating equilibrium captures the common intuition that appeasement is a sign of weakness, but only because deterrence in this equilibrium fails. We interpret several episodes of aggression, appeasement, and deterrence: Neville Chamberlain's responses to Hitler, Putin's invasion of Ukraine, Israel's response to Hamas, Turkey's invasion of Cyprus, and Serbia's attacks in Kosovo.
    JEL: D0 D82 F0
    Date: 2024–03

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