nep-mic New Economics Papers
on Microeconomics
Issue of 2024‒05‒06
24 papers chosen by
Jing-Yuan Chiou, National Taipei University

  1. Strategic Information Selection By Preker, Jurek; Karos, Dominik
  2. Unidirectional Incentive Compatibility By Daniel Krähmer; Roland Strausz
  3. Sequential dictatorship rules in multi-unit object assignment problems with money By Masahiro KAWASAKI; Ryosuke SAKAI; Tomoya KAZUMURA
  4. The hold-up problem with flexible unobservable investments By Daniel Krähmer
  5. Personalization and Privacy Choice By Rhodes, Andrew; Zhou, Jidong
  6. I want to tell you? Maximizing revenue in first-price two-stage auctions By Ashkenazi-Golan, Galit; Tsodikovich, Yevgeny; Viossat, Yannick
  7. Farkas' lemma and complete indifference By Herold, Florian; Kuzmics, Christoph
  8. Dynamic Screening with Verifiable Bankruptcy By Daniel Krähmer; Roland Strausz
  9. Chasing Contests By Zhuo Chen; Yun Liu
  10. Flexible moral hazard problems By Georgiadis, George; Ravid, Doron; Szentes, Balázs
  11. The profitability of mergers in symmetric Cournot oligopoly By Simon Cowan
  12. Discounted Subjective Expected Utility in Continuous Time By Lorenzo Bastianello; Vassili Vergopoulos
  13. The impossibility of non-manipulable probability aggregation By Franz Dietrich; Christian List
  14. An α-MaxMin Utility Representation for Close and Distant Future Preferences with Temporal Biases By Jean-Pierre Drugeon; Thai Ha-Hui
  15. Incentive Contracts and Peer Effects in the Workplace By Pau Milán; Nicolás Oviedo Dávila
  16. Call the Dentist! A (Con-)Cavity in the Value of Information By Mark Whitmeyer
  17. An Axiomatization of the Random Priority Rule By Christian Basteck
  18. Risk Management and Public Policies: How prevention challenges monopolistic insurance markets By François Pannequin; Anne Corcos
  19. Irrational Random Utility Models By Daniele Caliari; Henrik Petri
  20. Red herrings: A model of attention-hijacking by politicians By Margot Belguise
  21. Does Competition Increase Advertising? By Tat-kei Lai; Travis Ng
  22. Generalizing Better Response Paths and Weakly Acyclic Games By Bora Yongacoglu; G\"urdal Arslan; Lacra Pavel; Serdar Y\"uksel
  23. Learning Optimal Behavior Through Reasoning and Experiences By Cosmin Ilut; Rosen Valchev
  24. Designing Simple Mechanisms By Shengwu Li

  1. By: Preker, Jurek (Center for Mathematical Economics, Bielefeld University); Karos, Dominik (Center for Mathematical Economics, Bielefeld University)
    Abstract: Before choosing her action to match the state of the world, an agent observes a stream of messages generated by some unknown binary signal. The agent can either learn the underlying signal for free and update her belief accordingly or ignore the observed message and keep her prior belief. After each period the stream stops with positive probability and the final choice is made. We show that a Markovian agent with Gilboa-Schmeidler preferences learns and updates after confirming messages, but she ignores contradicting messages if her belief is sufficiently strong. Her threshold solely depends on the least precise signal. The agent has strictly higher anticipatory utility than an agent who uses every message to update. However, the latter has a higher chance to choose the correct outcome in the end. In a population of strategic agents, who only differ in their initial beliefs, polarization is inevitable.
    Keywords: Dynamic Decision Problem, Ambiguity, Gilboa-Schmeidler Preferences, Confirmation Bias, Polarization
    Date: 2024–04–09
  2. By: Daniel Krähmer; Roland Strausz
    Abstract: We study unidirectional incentive compatibility which incentivizes an agent to report truthfully when she can misrepresent private information in one direction only. In the canonical setting with continuous, one-dimensional private information, and quasi-linear utility, unidirectional incentive compatibility imposes no restrictions on the allocation rule and holds if and only if the change of the agent’s information rent function respects a lower bound that is based on the allocation rule’s monotone envelope. In monopolistic screening models with strong interdependent values or with countervailing incentives, optimal contracts differ from optimal bidirectionally incentive compatible contracts, possibly displaying non-monotone allocations.
    Keywords: Screening, Verifiability, Implementability, Optimal Contracting
    JEL: D82
    Date: 2024–04
  3. By: Masahiro KAWASAKI; Ryosuke SAKAI; Tomoya KAZUMURA
    Abstract: We study consistency in multi-unit object allocation problems with money. Objects are identical and each agent has a multi-demand and quasi-linear preferences. We consider the class of weak object monotonic preferences and that of single-peaked preferences. We first show that on those domains, if a rule satisfies consistency, strategyproofness, individual rationality, no subsidy, non-wasteful tie-breaking, and minimal tradability, then it is a sequential dictatorship rule. Since not all sequential dictatorship rule are strategy-proof and consistent, we then focus on a specific class of sequential dictatorship rules which we call sequential dictatorship rules with lowest tie-breaking. On the weakly object monotonic domain, when the reservation prices are increasing in the number of objects, sequential dictatorship rules with lowest tie-breaking satisfy consistency and independence of unallocated objects if and only if there is a common priority ordering for more than one object and this is an acyclic ordering of the priority ordering for one object. We also show that this condition is a necessary and sufficient condition for a sequential dictatorship rule with lowest tie-breaking to satisfy consistency and independence of unallocated objects on the single-peaked domain. Keywords. Consistency, Strategy-proofness, sequential dictatorship rule, serial dictatorship rule, weakly object monotonic preferences, single-peaked preferences, acyclicity.
    Keywords: Consistency, Strategy-proofness, sequential dictatorship rule, serial dictatorship rule, weakly object monotonic preferences, single-peaked preferences, acyclicity.
    JEL: D44 D71 D61 D82
  4. By: Daniel Krähmer
    Abstract: The paper studies the canonical hold-up problem with one-sided investment by the buyer and full ex post bargaining power by the seller. The buyer can covertly choose any distribution of valuations at a cost and privately observes her valuation. The main result shows that in contrast to the well-understood case with linear costs, if investment costs are strictly convex in the buyer’s valuation distribution, the buyer’s equilibrium utility is strictly positive and to- tal welfare is strictly higher than in the benchmark when valuations are public information, thus alleviating the hold-up problem. In fact, when costs are mean-based or display decreas- ing risk, the hold-up problem may disappear completely. Moreover, the buyer’s equilibrium utility and total welfare might be non-monotone in costs. The paper utilizes an equilibrium characterization in terms of the Gateaux derivative of the cost function.
    Keywords: Information Design, Hold-Up Problem, Unobservable Information
    JEL: C61 D42 D82
    Date: 2024–04
  5. By: Rhodes, Andrew; Zhou, Jidong
    Abstract: This paper studies consumers’ privacy choices when firms can use their data to make personalized offers. We first introduce a general framework of personalization and privacy choice, and then apply it to personalized recommendations, personalized prices, and personalized product design. We argue that due to firms’ reaction in the product market, consumers who share their data often impose a negative externality on other consumers. Due to this privacy-choice externality, too many consumers share their data relative to the consumer optimum; moreover, more competition, or improvements in data security, can lower consumer surplus by encouraging more data sharing.
    Keywords: personalization; consumer data; privacy; personalized pricing; personalized recommendations; personalized product design
    JEL: D43 D82 L13
    Date: 2024–04–16
  6. By: Ashkenazi-Golan, Galit; Tsodikovich, Yevgeny; Viossat, Yannick
    Abstract: A common practice in many auctions is to offer bidders an opportunity to improve their bids, known as a best and final offer stage. This improved bid can depend on new information either about the asset or about the competitors. This paper examines the effects of new information regarding competitors, seeking to determine what information the auctioneer should provide assuming the set of allowable bids is discrete. The rational strategy profile that maximizes the revenue of the auctioneer is the one where each bidder makes the highest possible bid that is lower than his valuation of the item. This strategy profile is an equilibrium for a large enough number of bidders, regardless of the information released. We compare the number of bidders needed for this profile to be an equilibrium under different information structures. We find that it becomes an equilibrium with fewer bidders when less additional information is made available to the bidders regarding the competition. It follows that when the number of bidders is a priori unknown, there are some advantages to the auctioneer not revealing information and conducting a one-stage auction instead.
    Keywords: auctions; BAFO; information utilization; multistage auctions; NSFC-ISF; China Grant #2510/17. Y
    JEL: D44 D82
    Date: 2023–11–01
  7. By: Herold, Florian; Kuzmics, Christoph
    Abstract: In a finite two player game consider the matrix of one player's payoff difference between any two consecutive pure strategies. Define the half space induced by a column vector of this matrix as the set of vectors that form an obtuse angle with this column vector. We use Farkas' lemma to show that this player can be made indifferent between all pure strategies if and only if the union of all these half spaces covers the whole vector space. This result leads to a necessary (and almost sufficient) condition for a game to have a completely mixed Nash equilibrium. We demonstrate its usefulness by providing the class of all symmetric two player three strategy games that have a unique and completely mixed symmetric Nash equilibrium.
    Keywords: completely mixed strategies, mixed Nash equilibria, Farkas’, lemma
    JEL: C72
    Date: 2024
  8. By: Daniel Krähmer; Roland Strausz
    Abstract: We consider a dynamic screening model, where the agent may go bankrupt due to, for example, cash constraints. We model bankruptcy as a verifiable event that occurs whenever the agent makes a per period loss. This leads to less stringent truth-telling constraints than those considered in the existing literature. We show that, for serially independent types, the weaker constraints do not affect optimal contracting, however. Moreover, we develop a novel method to study private values settings with continuous types and show that a regularity condition that has analogues in the literature on multi-dimensional screening ensures that the optimal contract is deterministic.
    Keywords: Dynamic Screening, Bankruptcy, Verifiability, Mean Preserving Spread
    JEL: D82 H57
    Date: 2024–04
  9. By: Zhuo Chen; Yun Liu
    Abstract: This paper proposes a dynamic research contest, namely the chasing contest, in which two asymmetric contestants exert costly effort to accomplish two breakthroughs in a continuous-time framework. The contestants are asymmetric in that one of them is present-biased and has already achieved one breakthrough (the leader), while the other is time-consistent and needs to achieve two breakthroughs to win (the chaser). The principal can choose between two disclosure policies, which either immediately announces the first breakthrough of the chaser (public chasing contest), or only announces the contest results until its terminus (hidden chasing contest). We fully characterize the unique x-start and y-stop equilibrium of the chasing contest with the two disclosure policies, in which the leader starts working from an instant x to the end while the chaser stops exerting effort by the instant y. We further compare the asymmetric incentives of the two disclosure policies. Our results imply that the chaser will never stop earlier in the hidden chasing contest compared to its public chasing counterpart, whereas the leader works longer in the public chasing contest only if the contest permits a late deadline.
    Date: 2024–04
  10. By: Georgiadis, George; Ravid, Doron; Szentes, Balázs
    Abstract: This paper considers a moral hazard problem where the agent can choose any output distribution with a support in a given compact set. The agent's effort-cost is smooth and increasing in first-order stochastic dominance. To analyze this model, we develop a generalized notion of the first-order approach applicable to optimization problems over measures. We demonstrate each output distribution can be implemented and identify those contracts that implement that distribution. These contracts are characterized by a simple first-order condition for each output that equates the agent's marginal cost of changing the implemented distribution around that output with its marginal benefit. Furthermore, the agent's wage is shown to be increasing in output. Finally, we consider the problem of a profit-maximizing principal and provide a first-order characterization of principal-optimal distributions.
    Keywords: principle-agent; moral hazard; contract theory
    JEL: J1
    Date: 2024–03–19
  11. By: Simon Cowan
    Abstract: General conditions that are sufficient for mergers in symmetric Cournot industries to be profitable or unprofitable are found and applied. If inverse demand curvature is weakly higher than the number of firms then all mergers are profitable. The same condition implies that outputs are strategic complements locally. If demand is log-concave, so inverse demand curvature is at most 1, two-firm mergers are unprofitable. Log-concavity of demand implies that outputs are strategic substitutes. The issue of the profitability of mergers in Cournot was first addressed by Salant, Switzer, and Reynolds (1983) in a model with linear demand.
    Date: 2024–02–28
  12. By: Lorenzo Bastianello; Vassili Vergopoulos
    Abstract: By embedding uncertainty into time, we obtain a conjoint axiomatic characterization of both Exponential Discounting and Subjective Expected Utility that accommodates arbitrary state and outcome spaces. In doing so, we provide a novel and simple time-interpretation of subjective probability. The subjective probability of an event is calibrated using time discounting.
    Date: 2024–03
  13. By: Franz Dietrich (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Christian List (LMU - Fakultät für Physik - Ludwig-Maximilians-Universität [München/Munich] - LMU - Ludwig-Maximilians University [Munich])
    Abstract: A probability aggregation rule assigns to each profile of probability functions across a group of individuals (representing their individual probability assignments to some propositions) a collective probability function (representing the group's probability assignment). The rule is "non-manipulable" if no group member can manipulate the collective probability for any proposition in the direction of his or her own probability by misrepresenting his or her probability function ("strategic voting"). We show that, except in trivial cases, no probability aggregation rule satisfying two mild conditions (non-dictatorship and consensus preservation) is non-manipulable.
    Date: 2024–01
  14. By: Jean-Pierre Drugeon (Paris School of Economics and Centre National de la Recherche Scientifique); Thai Ha-Hui (Université Paris-Saclay, Univ Evry, EPEE)
    Abstract: This paper provides a framework for understanding preferences over utility streams across different time periods. We analyze preferences for the close future, for the distant future, and a synthesis of both, establishing a representation involving weights over time periods. Examining scenarios where two utility streams cannot be robustly compared to each other, we introduce notions in which one has more "potential" to be preferred over another, which lead to MaxMin, MaxMax, and α-MaxMin representations. Finally, we consider temporal bias in the form of violations of stationarity. For close future preferences, we obtain a generalization of quasi-hyperbolic discounting. For distant future preferences, we obtain Banach limits and discuss the relationship with exponential discounting.
    Keywords: Axiomatisation, Myopia, Multiple Discounts, α-MaxMin Citeria, Temporal Biases, Banach Limits, Infinite Dimensional Topologies
    JEL: D11 D15 D90
    Date: 2023
  15. By: Pau Milán; Nicolás Oviedo Dávila
    Abstract: Risk-averse workers in a team exert effort to produce joint output. Workers’ incentives are connected via chains of productivity spillovers, represented by a network of peer-effects. We study the problem of a principal offering wage contracts that simultaneously incentivize and insure agents. We solve for the optimal linear contract for any network and show that optimal incentives are loaded more heavily on workers that are more central in a specific way. We conveniently link firm profits to network structure via the networks spectral properties. When firms can’t personalize contracts, better connected workers ex- tract rents. In this case, a group composition result follows: large within-group differences in centrality can decrease firm’s profits. Finally, we find that modular production has important implications for how peer structures distribute incentives.
    Keywords: moral hazard, Networks, Incentives, Organizations, contracts
    JEL: D11 D52 D53 G52
    Date: 2024–04
  16. By: Mark Whitmeyer
    Abstract: A natural way of quantifying the ``amount of information'' in decision problems yields a globally concave value for information. Another (in contrast, adversarial) way almost never does.
    Date: 2024–04
  17. By: Christian Basteck (WZB Berlin)
    Abstract: We study the problem of assigning indivisible objects to agents where each is to receive one object. To ensure fairness in the absence of monetary compensation, we consider random assignments. Random Priority, also known as Random Serial Dictatorship, is characterized by symmetry, ex-post efficiency and probabilistic (Maskin) monotonicity -- whenever preferences change so that a given deterministic assignment is ranked weakly higher by all agents, the probability of that assignment being chosen should be weakly larger. Probabilistic monotonicity implies strategy-proofness for random assignment problems and is equivalent on a general social choice domain; for deterministic rules it coincides with Maskin monotonicity.
    Keywords: random assignment; random priority; random serial dictatorship; ex-post efficiency ; probabilistic monotonicity; maskin monotonity ;
    JEL: C70 C78 D63
    Date: 2024–04–09
  18. By: François Pannequin (CEPS, ENS Paris-Saclay, Université Paris-Saclay); Anne Corcos (CURAPP-ESS UMR 7319, CNRS, Université de Picardie Jules Verne)
    Abstract: Using a principal-agent framework, we extend the insurance monopoly model (Stiglitz, 1977) to self-insurance opportunities. Relying on a two-part tariff contract as an analytical tool, we show that an insurance monopoly can achieve the same equilibrium as a competitive insurer. However, in the monopoly situation, the insurer captures all the insurance market surplus. Yet, compared to a monopoly market with insurance only, self-insurance opportunities act as a threat to the insurer, resulting in a cut of the insurer's market power and an increase in the policyholders' welfare. Moreover, within our principal-agent framework, we show that while insurance and self-insurance are substitutes, compulsory self-insurance, and compulsory insurance have non-equivalent effects. Although compulsory self-insurance reduces the market size of the insurer, it has no impact on the policyholder's well-being. On the other hand, mandatory insurance favors the insurer and makes policyholders worse off. The implications of these public policies are discussed.
    Keywords: self-insurance, insurance, monopoly, compulsory insurance, public regulation
    JEL: D86 D42 G22
    Date: 2023
  19. By: Daniele Caliari; Henrik Petri
    Abstract: We show that the set of aggregate choices of a population of rational decision-makers - random utility models (RUMs) - can be represented by a population of irrational ones if, and only if, their preferences are sufficiently uncorrelated. We call this representation: Irrational RUM. We then show that almost all RUMs can be represented by a population in which at least some decision-makers are irrational and that under specific conditions their irrational behavior is unconstrained.
    Date: 2024–03
  20. By: Margot Belguise
    Abstract: Politicians often use “red herrings” to distract voters from scandals. When do such red herrings succeed? I develop a model in which an incumbent runs for re-election and potentially faces a scandal. Some incumbents enjoy telling “tales” (attention-grabbing stories) while others use tales to distract voters from the scandal. Multiple equilibria can arise: one with a norm of tale-telling in which red herrings succeed and another with a norm against tale-telling in which they fail. Increased media attention to tales has a non-monotonic effect, facilitating red herrings at low attention levels, but serving a disciplinary function at high levels.
    Date: 2024
  21. 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: In Milgrom-Roberts (1986)’s model, introducing the possibility to die before customers’ repurchase alters the firm’s advertising incentive to signal hidden product quality. Two opposing forces result, one mechanical and the other strategic. Depending on their relative strengths, the equilibrium advertising can either rise or fall. To the extent that competition threatens firms’ survival, our result explains the mixed findings on the causal effects of competition on advertising. Introducing firm deaths in their model offers a new test of whether advertising signals quality, still an unsettled empirical question since Nelson (1974) first articulates advertising as a signal.
    Keywords: Advertising; Signaling; Competition; Product Quality; Introductory pricing
    Date: 2023–11
  22. By: Bora Yongacoglu; G\"urdal Arslan; Lacra Pavel; Serdar Y\"uksel
    Abstract: Weakly acyclic games generalize potential games and are fundamental to the study of game theoretic control. In this paper, we present a generalization of weakly acyclic games, and we observe its importance in multi-agent learning when agents employ experimental strategy updates in periods where they fail to best respond. While weak acyclicity is defined in terms of path connectivity properties of a game's better response graph, our generalization is defined using a generalized better response graph. We provide sufficient conditions for this notion of generalized weak acyclicity in both two-player games and $n$-player games. To demonstrate that our generalization is not trivial, we provide examples of games admitting a pure Nash equilibrium that are not generalized weakly acyclic. The generalization presented in this work is closely related to the recent theory of satisficing paths, and the counterexamples presented here constitute the first negative results in that theory.
    Date: 2024–03
  23. By: Cosmin Ilut; Rosen Valchev
    Abstract: We develop a novel framework of bounded rationality under cognitive frictions that studies learning over optimal behavior through both deliberative reasoning and accumulated experiences. Using both types of information, agents engage in Bayesian non-parametric estimation of the unknown action value function. Reasoning signals are produced internally through mental deliberation, subject to a cognitive cost. Experience signals are the observed utility outcomes at previous actions. Agents' subjective estimation uncertainty, which evolves through information accumulation, modulates the two modes of learning in a state- and history-dependent way. We discuss how the model draws on and bridges conceptual, methodological and empirical insights from both economics and the cognitive sciences literature on reinforcement learning.
    Date: 2024–03
  24. By: Shengwu Li
    Abstract: Which mechanisms are simple to play? When is it easy for participants to see that a mechanism is incentive-compatible? I will start by explaining how and why economists came to ask these questions. Then I will discuss three recent answers, that capture different aspects of what makes a mechanism simple.
    Date: 2024–03

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