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on Microeconomics |
| By: | Mehmet Ekmekci; Lucas Maestri; Dong Wei |
| Abstract: | We study a dynamic contracting problem with multiple agents and a lack of commitment. A principal who can only commit to one-period contracts wants to screen efficient agents over time. Once an agent reveals his type, the principal becomes tempted to revise contract terms, causing a "ratchet effect." Alterations of contracts are observable and, hence, whenever past promises are not honored future information revelation stops. We provide a necessary and sufficient condition under which the principal is able to foster information revelation. When players are sufficiently patient, the agents' private information is either never revealed or fully revealed in a sequential manner. Optimal contracts entail high-powered incentives after an agent's type is initially disclosed, and rewards for information revelation disappear in the long run. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.04468&r= |
| By: | Robert Akerlof (University of Warwick); Richard Holden (UNSW Business School); Hongyi Li (UNSW Business School) |
| Abstract: | In the early 20th century, Gestalt psychologists seriously challenged prevailing notions regarding human perception. They showed that there is a difference between seeing the pixels that make up a picture and understanding what a picture represents. We have all had that “aha” moment, for instance, where a scene suddenly becomes clear (e.g. “oh, it’s a smiley face”). The more general point is that people may have all of the information needed to draw a conclusion yet---in contrast to standard economic models---they fail to connect the dots. We build a model that conceptualizes this idea. An agent’s task is to learn whether a picture possesses some feature (such as whether it depicts a smiley face). They have a knowledge set consisting of “codewords” that they think apply to the picture. This set initially contains codewords for each pixel’s color, but no codewords describing the larger picture. The agent adds to their knowledge set by loading existing codewords into working memory and drawing conclusions. Importantly, the agent has limited working memory, which bounds their ability to draw conclusions. We show that the model captures a number of important phenomena, such as multi-stable perception, and provides a useful conceptualization of narratives as “big-picture statements.” We explore several applications, including to the politics of persuasion. |
| Keywords: | cognition, reasoning, perception, narratives |
| JEL: | D01 D80 D90 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2024-02&r= |
| By: | Giuseppe Dari-Mattiacci (University of Amsterdam); Sander Onderstal (University of Amsterdam); Francesco Parisi (University of Minnesota); Ram Singh (Department of Economics, Delhi School of Economics) |
| Abstract: | It is well known that sellers have a general obligation to disclose “negative” information about hidden defects of their products. In contrast, buyers usually do not have a binding obligation to disclose “positive” information about the hidden qualities of the products. The leading explanation for the asymmetric treatment of the two sides - buyers and sellers - is provided by appealing to incentives to invest in relevant information. It is argued that the imposition of disclosure duties on buyers would undermine their incentives to acquire socially useful but costly information ex-ante. This explanation is unsatisfactory. First, the failure to correct asymmetric information problems ex-post would cause, as we will show, an inverse adverse selection problem ex-ante. This would lead to the uninformed sellers’withdrawal from the market. Consequently, resources would not move to (informed)buyers with higher valuations. In this paper, we develop a model to balance the benefits of information acquisition, on the one hand, with the costs of asymmetric information, on the other hand. We use the framework to study the incentives created by different defaultdisclosure and non-disclosure - rules. We examine the optimum default rules by showing that the choice of alternative disclosure rules makes a difference when parties can contract around defaults at a moderate cost. Unlike disclosure rules, non-disclosure default rules yield partially separating equilibria that preserve the buyers’ incentives to acquire information and foster trade opportunities between expert and uninformed sellers. JEL Code: D44, D82, D86, K12 |
| Keywords: | asymmetric information, penalty default rules, inverse adverse selection |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:346&r= |
| By: | Qianjun Lyu |
| Abstract: | This paper studies the optimal refund mechanism when an uninformed buyer can privately acquire information about his valuation of a product over time. We consider a class of refund mechanisms based on stochastic return policies: if the buyer requests a return, the seller will issue a (partial) refund while allowing the buyer to keep the product with some probability. Such return policies can affect the buyer's learning process and thereby influence the return rate. Nevertheless, we show that the optimal refund mechanism is deterministic and takes a simple form: either the seller offers a sufficiently low price and disallows returns to deter buyer learning, or she offers a sufficiently high price with free returns to implement maximal buyer learning. The form of the optimal refund mechanism is non-monotone in the buyer's prior belief regarding his valuation. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.14927&r= |
| By: | Daniel Luo |
| Abstract: | I study a repeated binary-action supermodular game with endogenous exit where many short-lived agents attempt to coordinate a revolt against a regime. The regime undertakes costly actions to increase the short-run players' coordination frictions, though acts only after if the revolt is unsuccessful, inducing a lack-of-commitment problem. In the complete-information repeated game, a folk theorem holds, with payoff multiplicity arising due to both the regime's dynamic incentives and agents' stage-game strategic complementarities. Neither the regime's reputational incentives nor belief dispersion among agents (via global-games type uncertainty) alone meaningfully refine the equilibrium payoff set. Together, though, the interaction between these two forces uniquely select the regime's highest payoff in equilibrium. Furthermore, under a Markov refinement, they select a unique equilibrium where the regime plays their optimal commitment action. Methodologically, I develop tools to analyze repeated games with endogenous exit where the regime's commitment action flexibly varies with their discount rate. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.18884&r= |
| By: | Rene Kirkegaard (Department of Economics and Finance, University of Guelph, Guelph ON Canada) |
| Abstract: | A general mixture model of contests is introduced. The contest combines multivariate adverse selection with moral hazard in the form of stochastic per-formance. Incomplete information does not add to the dimensionality of the problem, and actions are unambiguously strategic substitutes when technolo-gies are homogenous. These properties facilitate tractable comparative statics with respect to changes in the multivariate type distribution. Hence, the role of the dependence structure between di¤erent characteristics can be explored. To illustrate, if valuations and budgets become more positively dependent, then each type’s expenditure decreases but expected performance increases. With asymmetric agents, the exclusion principle can be reversed. |
| Keywords: | Contests, exclusion principle, supermodular order. |
| JEL: | C72 D72 D82 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2024-02&r= |
| By: | Fabio Bellini; Tiantian Mao; Ruodu Wang; Qinyu Wu |
| Abstract: | We introduce a novel axiom of co-loss aversion for a preference relation over the space of acts, represented by measurable functions on a suitable measurable space. This axiom means that the decision maker, facing the sum of two acts, dislikes the situation where both acts realize as losses simultaneously. Our main result is that, under strict monotonicity and continuity, the axiom of co-loss aversion characterizes preference relations represented by a new class of functionals, which we call the duet expectiles. A duet expectile involves two endogenous probability measures, and it becomes a usual expectile, a statistical quantity popular in regression and risk measures, when these two probability measures coincide. We discuss properties of duet expectiles and connections with fundamental concepts including probabilistic sophistication, risk aversion, and uncertainty aversion. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.17751&r= |
| By: | Luke Snow; Vikram Krishnamurthy |
| Abstract: | This paper constructs an algorithmic framework for adaptively achieving the mechanism design objective, finding a mechanism inducing socially optimal Nash equilibria, without knowledge of the utility functions of the agents. We consider a probing scheme where the designer can iteratively enact mechanisms and observe Nash equilibria responses. We first derive necessary and sufficient conditions, taking the form of linear program feasibility, for the existence of utility functions under which the empirical Nash equilibria responses are socially optimal. Then, we utilize this to construct a loss function with respect to the mechanism, and show that its global minimization occurs at mechanisms under which Nash equilibria system responses are also socially optimal. We develop a simulated annealing-based gradient algorithm, and prove that it converges in probability to this set of global minima, thus achieving adaptive mechanism design. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.15391&r= |
| By: | Xiaoyu Cheng; Yonggyun Kim |
| Abstract: | A Blackwell-monotone information cost function assigns higher costs to Blackwell more informative experiments. This paper provides simple necessary and sufficient conditions for Blackwell monotonicity over finite experiments. The key condition is a system of linear differential inequalities that are convenient to check given an arbitrary cost function. When the cost function is additively separable across signals, our characterization implies that Blackwell monotonicity is equivalent to sublinearity. This identifies a wide range of practical information cost functions. Finally, we apply our results to bargaining and persuasion problems with costly information. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.15158&r= |
| By: | Claus-Jochen Haake (Paderborn University); Thomas Streck (Paderborn University) |
| Abstract: | We consider two-person bargaining problems and provide axioms for a mapping that assigns to each bargaining problem a number in the unit interval that reflects how hard it is to find an agreement. We term this notion the contestedness of a bargaining problem and show that there is one and only one mapping satisfying the axioms. Furthermore, the axioms are shown to be logically independent. The mapping is based on the standard traveling time used in Perles and Maschler (1981) to define the bargaining solution therein. |
| Keywords: | Bargaining Problem, Contestedness, Perles-Maschler bargaining solutio |
| JEL: | C78 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:ciepap:160&r= |
| By: | Joshua S. Gans |
| Abstract: | Mobile app commissions paid by app developers to a monopolist device maker/app store operator are examined. Three results are demonstrated. First, unregulated app commissions are set at a level that maximises consumer surplus. Second, eliminating app commissions will lead to higher device prices. Third, requiring a menu of options for consumers as to how device makers receive subsidies from app developers constrains app commissions in a way that provides a more equal balance between consumer versus app developer interests. |
| JEL: | L11 L40 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32339&r= |
| By: | Daniel Lu |
| Abstract: | This paper is an original attempt to understand the foundations of economic reasoning. It endeavors to rigorously define the relationship between subjective interpretations and objective valuations of such interpretations in the context of theoretical economics. This analysis is substantially expanded through a dynamic approach, where the truth of a valuation results in an updated interpretation or changes in the agent's subjective belief regarding the effectiveness of the selected action as well as the objective reality of the effectiveness of all other possible actions (i.e. consequence realization). Complications arise when the economic agent is presented with a set of actions that render ambiguous preference, or when the effectiveness of an action cannot be perceived upon its selection, thereby necessitating a different theory of choice and consequence realization. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.16061&r= |