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on Microeconomics |
| By: | Rosina Rodríguez Olivera |
| Abstract: | I study the incentives of an informed firm to share its private information with its competitor and the incentives of a regulator to constrain or enforce disclosure in order to benefit consumers. Firms offer differentiated goods, compete a là Bertrand and one firm has an information advantage about demand over its competitor. I show that full disclosure of information is optimal for the informed firm, because it increases price correlation and surplus extraction from consumers. A regulator can increase expected consumer surplus and welfare by restricting disclosure, but consumers can benefit from the regulator privately disclosing some information to the competitor. Disclosure increases the ability of firms to extract surplus from consumers, but private disclosure creates a coordination failure in firm pricing. The optimal disclosure policy is chosen to induce goods to be closer substitutes and intensify the competition across firms. |
| Keywords: | Competition, Information |
| JEL: | D18 D43 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_578 |
| By: | Park, Hyungmin (University of Warwick); Squintani, Francesco (University of Warwick) |
| Abstract: | We study the choice of multiple advisors, balancing political alignment, competence, and diverse perspectives. An imperfectly informed leader can consult one or two advisors. One has views closely aligned with the leader’s, but his information is imprecise or correlated with the leaders own. The other is more biased but has independent or more precise information. We identify a trade-off between consulting the more aligned or the better informed expert, even when this entails small costs. Subtle comparative statics emerge : When the leader consults both advisors, increasing the bias of the more biased expert may result in the dismissal of the other advisor. The leader may opt to delegate consulting and decision-making, but only to the advisor who collects superior information in equilibrium. We then study the uncertain trade-off case where the most informed advisor is not necessarily also more biased. We find that reducing the probability that the better-informed expert is more biased may lead to hiring also the other advisor. The leader may delegate to the advisor with uncertain bias, although he is more biased in expectation, because he more easily aggregates information in equilibrium. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1507 |
| By: | Sharma, Shashidharan |
| Abstract: | This paper aims to address a gap in literature at the intersection of cheating in auctions and emotional responses. In a second price auction with a cheating seller, we model the bidder's dislike for the possibility of cheating by drawing upon the idea of reference point-based utility. A symmetric increasing equilibrium strategy is characterised and comparative statics are analysed. A comparison of expected payoffs to honest and dishonest sellers is made. We find that if reference points are low enough then the cheating seller's payoff is lower than what a seller earns in a regular first-price auction. Our results show that even with bidders disliking cheating, honest sellers lose out due to bidders shading their bids to accommodate for the possibility of being cheated. |
| Keywords: | Second Price Auctions, Reference Dependence, Emotional Responses |
| JEL: | D44 D89 |
| Date: | 2022–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121492 |
| By: | Jose M. Betancourt; Ali Hortaçsu; Aniko Öry; Kevin R. Williams |
| Abstract: | We study dynamic price competition between sellers offering differentiated products with limited capacity and a common sales deadline. In every period, firms simultaneously set prices, and a randomly arriving buyer decides whether to purchase a product or leave the market. Given remaining capacities, firms trade off selling today against shifting demand to competitors to obtain future market power. We provide conditions for the existence and uniqueness of pure-strategy Markov perfect equilibria. In the continuous-time limit, prices solve a system of ordinary differential equations. We derive properties of equilibrium dynamics and show that prices increase the most when the product with the lowest remaining capacity sells. Because firms do not fully internalize the social option value of future sales, equilibrium prices can be inefficiently low such that both firms and consumers would benefit if firms could commit to higher prices. We term this new welfare effect the Bertrand scarcity trap. |
| JEL: | C7 D04 D6 L0 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32673 |
| By: | Biais, Bruno (HEC Paris); Gersbach, Hans (ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)); Rochet, Jean Charles (University of Geneva); von Thadden, Ernst-Ludwig (Universitaet Mannheim; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)); Villeneuve, Stéphane (University of Toulouse 1) |
| Abstract: | We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. Incentive compatibility requires that agents bear part of their idiosyncratic risk. The larger the agents' risk exposure, the larger the rents the principal can extract from them. The optimal mechanism can be implemented as the equilibrium of a market where agents exchange goods for money, needed to pay taxes. Inflation affects agents' portfolio choice between risky capital and safe money. To implement the optimal mechanism, the principal targets an inflation rate such that agents' risk exposure is the same in equilibrium and in the mechanism. |
| Keywords: | Money; Taxes; Mechanism Design; Incentive Compatibility; Inflation |
| JEL: | D50 D80 E50 G11 |
| Date: | 2023–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1490 |
| By: | Ohnishi, Kazuhiro |
| Abstract: | This paper explores a price-setting oligopoly game where labor-managed firms have the option to provide lifetime employment as a strategic commitment. The game unfolds in two stages. In the first stage, each firm independently and simultaneously decides whether to provide lifetime employment as a strategic commitment. If a firm provides lifetime employment, then it chooses an output level and establishes a lifetime employment agreement with the required number of employees to reach the output level. In the second stage, each firm independently and simultaneously selects a price level to maximize its objective function value. At the conclusion of the second stage, the market opens, and each firm sells at its own price. The paper delves into the equilibrium of the labor-managed Bertrand oligopoly game. The analysis reveals that the equilibrium aligns with the Bertrand solution when no lifetime employment is offered. Consequently, the paper concludes that using lifetime employment as a strategic commitment device is not advantageous for labor-managed firms in the price-setting competition. |
| Keywords: | Labor-managed firm; Lifetime employment; Price-setting model; Substitute goods |
| JEL: | C72 D21 L13 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121486 |
| By: | Robin Ng |
| Abstract: | Free and Open-Source Software (FOSS) are developed by a community of developers led by a coordinator. Coordinators balance the following trade-off: (i) more developers improve FOSS quality—a positive vertical differentiation effect; (ii) more developers lead to more diverse views, driving FOSS characteristics away from the preferences of existing developers—a negative horizontal differentiation effect. FOSS are able to attract more developers when coordinators improve their level of coordination, increasing the marginal vertical network effect, or by having a more permissive Open-Source license, increasing the marginal horizontal network effect. More permissive Open-Source licenses can intensify competition between FOSS and proprietary software, resulting in lower prices. However permissive licenses may reduce the incentives to coordinate FOSS, leading to lower quality FOSS that only serve niche markets. I explore coordinators who may have different motivations—self-interested Founders, volunteering Altruists, and profit-driven Managers—discussing when and how they choose to coordinate FOSS. |
| Keywords: | Open-Source Software, Network effects, Software Licensing |
| JEL: | D21 D26 L14 L17 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_585 |
| By: | Joshua S. Gans |
| Abstract: | When AI prediction substantially resolves trial uncertainty, a party purchasing AI prediction will disclose it if it is in their favour and not otherwise, signalling the outcome to the other party. Thus, the trial outcome becomes common knowledge. However, this implies that the parties will settle rather than purchase the AI prediction. When parties have differing prior beliefs regarding trial outcomes, these differences are only resolved if the AI prediction is purchased and utilised. In this case, AI will be purchased in equilibrium. Different trial cost allocation rules awarding all costs to the losing party (the English Rule) or having each party bear their own costs (the American Rule) can impact the demand for AI for settlement negotiations, but how this occurs interacts with the expectations regarding whether a settlement will occur or not in AI's absence. |
| JEL: | K41 O31 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32685 |
| By: | Fabienne Schneider (Study Center Gerzensee); Remo Taudien (Study Center Gerzensee) |
| Abstract: | It is commonly believed that borrowers cannot be anonymous in unsecured credit rela- tions because anonymity heavily reduces the scope for punishment and therefore makes credit unfeasible except for very special circumstances. However, we demonstrate that credit is generally feasible even if borrowers are anonymous. In particular, we construct equilibria where borrowers use potentially multiple pseudonyms (such as usernames or wallet addresses) to interact with lenders. We assume that the complete history of past actions committed by a pseudonym is public but not the identity behind that pseudonym. While borrowers cannot be directly punished due to their anonymity, there is still scope for punishment. One possibility is based on the loss of reputation accumulated by a pseudonym over time. Another involves charging a fee to create pseudonyms. Although credit and anonymity are not mutually exclusive, we also show that maintaining a borrower’s anonymity is costly. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:szg:worpap:2404 |
| By: | Miguel Risco; Manuel Lleonart-Anguix |
| Abstract: | This paper builds a theoretical model of communication and learning on a social media platform, and describes the algorithm an engagement-maximizing platform implements in equilibrium. Such algorithm excessively exploits similarity, locking users in echo chambers. Moreover, learning vanishes as platform size grows large. As this is far from ideal, we explore alternatives. The reverse-chronological algorithm the DSA mandated to reincorporate turns out to be not good enough, so we build the "breaking echo chambers" algorithm, a modification of the platform-optimal algorithm that improves learning by promoting opposite thoughts. Additionally, we seek a natural implementation path for the utilitarian optimal algorithm. This is why we advocate for horizontal interoperability, which interoperability compels platforms to compete based on algorithms. In the absence of platform-specific network effects that entrench users within dominant platforms, the retention of user bases hinges on implementing algorithms that outperform those of competitors. |
| Keywords: | personalized feed, social learning, network effects, interoperability |
| JEL: | D43 D85 L15 L86 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_580 |
| By: | Alessandro Chiusolo; Emma Hubert |
| Abstract: | The recent work by Cvitani\'c, Possama\"i, and Touzi (2018) [9] presents a general approach for continuous-time principal-agent problems, through dynamic programming and second-order backward stochastic differential equations (BSDEs). In this paper, we provide an alternative formulation of the principal-agent problem, which can be solved simply by relying on the theory of BSDEs. This reformulation is strongly inspired by an important remark in [9], namely that if the principal observes the output process in continuous-time, she can compute its quadratic variation pathwise. While in [9], this information is used in the contract, our reformulation consists in assuming that the principal could directly control this process, in a `first-best' fashion. The resolution approach for this alternative problem actually follows the line of the so-called `Sannikov's trick' in the literature on continuous-time principal-agent problems, as originally introduced by Sannikov (2008) [28]. We then show that the solution to this `first-best' formulation is identical to the solution of the original problem. More precisely, using the contract form introduced in [9] as `penalisation contracts', we highlight that this `first-best' scenario can be achieved even if the principal cannot directly control the quadratic variation. Nevertheless, we do not have to rely on the theory of 2BSDEs to prove that such contracts are optimal, as their optimality is ensured by showing that the `first-best' scenario is achieved. We believe that this more straightforward approach to solve continuous-time principal-agent problems with volatility control will facilitate the dissemination of these problems across many fields, and its extension to even more intricate problems. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.09471 |
| By: | Joshua S. Gans |
| Abstract: | This paper examines the impact of Generative AI (GAI) on communication through the lens of salience and signalling models. It explores how GAI affects both senders' ability to create salient messages and receivers' costs of absorbing them. The analysis reveals that while GAI can increase communication by reducing costs, it may also disrupt traditional signalling mechanisms. In a salience model, GAI generally improves outcomes but can potentially reduce receiver welfare. In a pure signalling model, GAI may hinder effective communication by making it harder to distinguish high-quality messages. This suggests that GAI's introduction necessitates new instruments and mechanisms to facilitate effective communication and quality assessment in this evolving landscape. |
| JEL: | D83 O31 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32690 |
| By: | Joshua S. Gans |
| Abstract: | This paper examines and finds that the answer is likely to be no. The environment examined starts with users who contribute based on their motives to create a public good. Their own actions determine the quality of that public good but also embed a free-rider problem. When AI is trained on that data, it can generate similar contributions to the public good. It is shown that this increases the incentive of human users to provide contributions that are more costly to supply. Thus, the overall quality of contributions from both AI and humans rises compared to human-only contributions. In situations where platform providers want to generate more contributions using explicit incentives, the rate of return on such incentives is shown to be lower in this environment. |
| JEL: | D70 H44 O31 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32686 |