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on Microeconomics |
| By: | Martimort, David; Stole, Lars |
| Abstract: | We study menu auction games in which several principals influence the choice of a privately-informed agent by simultaneously offering action-contingent payments; the agent is free to accept any subset of the offers. Building on tools from non-smooth optimal control with type-dependent participation constraints, we provide necessary conditions for any equilibrium allocation as the (constrained) maximizer of an endogenous aggregate virtual-surplus program. The aggregate maximand includes an information-rent component which captures how the principals’ rent-extraction motives combine. Although there is a large set of equilibria, including equilibrium allocations with discontinuities, we isolate one particular equilibrium allocation, the maximal allocation, which is the solution to an unconstrained maximization program. Under weak conditions, necessary conditions for a maximal allocation are also sufficient, and the corresponding equilibrium tariff offers are easily constructed. We illustrate our findings and derive some economic implications in several applications, with principals having either congruent interests (e.g., public goods collective action games), opposed interests (e.g., pork barrel politics, lobbying), and protection for sale in an international trade context. |
| Keywords: | Menu auctions;; delegated common agency;; screening contracts;; non-smooth optimization problems;; public goods games; ; collective action;; pork barrel politics; ; positive theory of regulation;; protection for sale |
| Date: | 2024–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129924 |
| By: | Jeon, Doh-Shin; Ichihashi, Shota; Kim, Byung-Cheol |
| Abstract: | We study a mechanism design problem of a monopoly platform that matches content of varying quality, ads with dierent ad revenues, and consumers with heterogeneous tastes for content quality. The optimal mechanism balances revenue from advertising and revenue from selling access to content: Increasing advertising revenue requires serving content to more consumers, which may reduce access revenue. Contrary to the standard monopolistic screening, the platform may serve content to consumers with negative virtual values while, to reduce information rents, limiting their access to higher-quality content. Then, an increase in ad protability reduces its incentive to invest in content quality. |
| JEL: | D42 D82 L15 O31 |
| Date: | 2024–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129923 |
| By: | Richard P. McLean (Rutgers University); Andrew Postlewaite (University of Pennsylvania) |
| Abstract: | Standard mechanism design begins with a statement of the problem, including knowledge on the designer's part about the distribution of the characteristics (preferences and information) of the participants who are to engage with the mechanism. There is a large literature on robust mechanism design, much of which aims to reduce the assumed information the designer has about the participants. In this paper we provide an auction mechanism that reduces the assumed information assumed of the seller, and, in addition, relaxes substantially the assumed information of the participants. In particular, the mechanism performs well when there are many buyers, even though there is no prior distribution over the accuracy of buyers' information on the part of the designer or the participants. |
| Keywords: | Robustness, Optimal auctions, Incentive Compatibility, Mechanism Design, Interdependent Values, Informational Size, Common Knowledge |
| JEL: | C70 D44 D60 D82 |
| Date: | 2024–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-035 |
| By: | Li, Jiangtao (Singapore Management University); Wang, Kexin (Singapore Management University) |
| Abstract: | We study the design of mechanisms when the mechanism designer faces local uncertainty about agents’ beliefs. Specifically, we consider a designer who does not know the exact beliefs of the agents but is confident that her estimate is within of the beliefs held by the agents (where reflects the degree of local uncertainty). Adopting the robust optimization approach, we design mechanisms that incentivize agents to truthfully report their payoff-relevant information regardless of their actual beliefs. For any fixed, we identify necessary and sufficient conditions under which requiring this sense of robustness is without loss of revenue for the designer. By analyzing the limiting case in which approaches 0, we provide two rationales for the widely studied Bayesian mechanism design framework. |
| Date: | 2024–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:2024_008 |
| By: | Ilya Hajiaghayi; MohammadTaghi Hajiaghayi; Gary Peng; Suho Shin |
| Abstract: | We study bilateral trade with a broker, where a buyer and seller interact exclusively through the broker. The broker strategically maximizes her payoff through arbitrage by trading with the buyer and seller at different prices. We study whether the presence of the broker interferes with the mechanism's gains-from-trade (GFT) achieving a constant-factor approximation to the first-best gains-from-trade (FB). We first show that the GFT achieves a $1 / 36$-approximation to the FB even if the broker runs an optimal posted-pricing mechanism under symmetric agents with monotone-hazard-rate distributions. Beyond posted-pricing mechanisms, even if the broker uses an arbitrary incentive-compatible (IC) and individually-rational (IR) mechanism that maximizes her expected profit, we prove that it induces a $1 / 2$-approximation to the first-best GFT when the buyer and seller's distributions are uniform distributions with arbitrary support. This bound is shown to be tight. We complement such results by proving that if the broker uses an arbitrary profit-maximizing IC and IR mechanism, there exists a family of problem instances under which the approximation factor to the first-best GFT becomes arbitrarily bad. We show that this phenomenon persists even if we restrict one of the buyer's or seller's distributions to have a singleton support, or even in the symmetric setting where the buyer and seller have identical distributions. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.17444 |
| By: | Mustapha Nyenye Issah |
| Abstract: | We explore how dynamic entry deterrence operates through feedback strategies in markets experiencing stochastic demand fluctuations. The incumbent firm, aware of its own cost structure, can deter a potential competitor by strategically adjusting prices. The potential entrant faces a one-time, irreversible decision to enter the market, incurring a fixed cost, with profits determined by market conditions and the incumbent's hidden type. Market demand follows a Chan-Karolyi-Longstaff-Sanders Brownian motion. If the demand is low, the threat of entry diminishes, making deterrence less advantageous. In equilibrium, a weak incumbent may be incentivized to reveal its type by raising prices. We derive an optimal equilibrium using path integral control, where the entrant enters once demand reaches a high enough level, and the weak incumbent mixes strategies between revealing itself when demand is sufficiently low. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16203 |
| By: | Emir Kamenica; Xiao Lin |
| Abstract: | When does a Sender, in a Sender-Receiver game, strictly value commitment? In a setting with finite actions and finite states, we establish that, generically, Sender values commitment if and only if he values randomization. In other words, commitment has no value if and only if a partitional experiment is optimal under commitment. Moreover, if Sender's preferred cheap-talk equilibrium necessarily involves randomization, then Sender values commitment. We also ask: how often (i.e., for what share of preference profiles) does commitment have no value? For any prior, any independent, atomless distribution of preferences, and any state space: if there are $\left|A\right|$ actions, the likelihood that commitment has no value is at least $\frac{1}{\left|A\right|^{\left|A\right|}}$. As the number of states grows large, this likelihood converges precisely to $\frac{1}{\left|A\right|^{\left|A\right| }}$. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.17503 |
| By: | Sergei Mikhalishchev (Durham University Business School); Vladimir Novak (National Bank of Slovakia) |
| Abstract: | We study a model with rationally inattentive voters and investigate how an office-seeking challenger designs a policy platform in the presence of the incumbent who offers a simple stability-providing policy that preserves the status quo. We show that the incumbent’s simple policy, while not in the best interest of the electorate, creates negative externalities by encouraging the challenger to propose a more moderate platform, which is sub-optimal for the voter. The model also explains why and when the incumbent benefits from the high uncertainty and intermediate cost of information. |
| JEL: | H0 P16 D72 D83 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1112 |
| By: | Dana Sisak; Philipp Denter |
| Abstract: | We study how social image concerns affect information sharing patterns between peers. An individual receives a signal ("news") about the state of the world and can either share it with a peer or not. This signal has two attributes: a headline -- e.g., arguing for or against human-induced climate change -- and a veracity status, indicating if the signal is based on facts or made-up. The headline is observable at no cost by everyone, while observing the veracity status is costly and the cost depends on an individual's type. We study the sharing patterns induced by two different types of social image concern: wanting to be perceived as talented, which implies being able to distinguish proper from fake news, and wanting to signal one's worldview. Our model can rationalize the empirical finding that fake news may be shared with a higher propensity than proper news (e.g., Vosoughi et al., 2018). We show that both a veracity and a worldview concern may rationalize this finding, though sharing patterns are empirically distinguishable and welfare implications differ. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.19557 |
| By: | Daehyun Kim; Ichiro Obara |
| Abstract: | We introduce and develop an information order for experiments based on a generalized notion of garbling called weighted garbling. An experiment is more informative than another in this order if the latter experiment is obtained by a weighted garbling of the former. This notion can be shown to be equivalent to a regular garbling conditional on some event for the former experiment. We also characterize this order in terms of posterior beliefs and show that it only depends on the support of posterior beliefs, not their distribution. Our main results are two characterizations of the weighted-garbling order based on some decision problems. For static Bayesian decision problems, one experiment is more informative than another in the weighted-garbling order if and only if a decision maker's value of information (i.e., the difference in the optimal expected payoffs with and without an experiment) from the former is guaranteed to be some fraction of the value of information from the latter for any decision problem. When the weighted garbling is a regular garbling, this lower bound reduces to the value of information itself as the fraction becomes one, thus generalizing the result in Blackwell (1951, 1953). We also consider a class of stopping time problems where the state of nature changes over time according to a hidden Markov process, and a patient decision maker can conduct the same experiment as many times as she wants without any cost before making a one-time decision. We show that an experiment is more informative than another in the weighted-garbling order if and only if the decision maker achieves a weakly higher expected payoff for any problem with a regular prior belief in this class. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.21694 |
| By: | Hu, Gaoji (Shanghai University of Finance and Economics); Li, Jiangtao (Singapore Management University); Quah, John K.-H (National University of Singapore); Tang, Rui (Hong Kong University of Science and Technology) |
| Abstract: | We propose a novel concept of rationalization, called coarse rationalization, tailored for the analysis of datasets where an agent’s choices are imperfectly observed. We characterize those datasets which are rationalizable in this sense and present an efficient algorithm to verify the characterizing condition. We then demonstrate how our results can be applied through a duality approach to test the rationalizability of datasets with perfectly observed choices but imprecisely observed linear budget sets. For datasets that consist of both perfectly observed feasible sets and choices but are inconsistent with perfect rationality, our results could be used to measure the extent to which choices or prices have to be perturbed to recover rationality |
| Keywords: | Coarse dataset; rationalization; revealed preference; Afriat’s Theorem; perturbation index; price misperception index |
| Date: | 2024–07–06 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:2024_007 |
| By: | Flores-Szwagrzak, Karol (Department of Economics, Copenhagen Business School); Østerdal, Lars Peter (Department of Economics, Copenhagen Business School) |
| Abstract: | A partnership can yield a return—a loss or a profit relative to the partners’ investments. How should the partners share the return? We identify the shar-ing rules satisfying classical properties (symmetry, consistency, and continuity) and avoiding arbitrary bounds on a partner’s share. We show that any such rule can be rationalized in the sense that its recommendations are aligned with those maximizing a separable welfare function. Among these rules, we charac-terize those formalizing different notions of proportionality and, in particular, a convenient subclass specified by a single inequality aversion parameter. We also explore when a rule can be rationalized by a more general welfare function. Our central results extend to a wider class of resource allocation problems. |
| Keywords: | Sharing; Consistency; Axioms; Welfare maximization |
| JEL: | D63 D70 D71 |
| Date: | 2024–11–11 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:cbsnow:2024_017 |
| By: | Nicolas Lagios; Pierre-Guillaume Méon |
| Abstract: | We study how experts influence consumer behavior and welfare by focusing on the Booker Prize. Leveraging the discontinuity created by the attribution of the prize, we show that readers receive the signal sent by the jury of the Booker and are persuaded to buy the awarded book but experience lower satisfaction due to a misalignment between their tastes and those of the jury. Calibrating a structural model of demand, we find that the prize reduces consumer surplus by $70, 039 annually, meaning that a consumer buying an awarded book experiences a loss in surplus of 8% of the book’s average price. |
| Keywords: | awards, prizes, welfare, sales, experts, books, consumer surplus |
| JEL: | D12 D83 L15 L82 Z11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11298 |
| By: | Hatsor, Limor; Jelnov, Artyom |
| Abstract: | In a world of experience goods, two costly ex-post disciplinary actions can be used against malpractice of firms: consumer lawsuits and government investigation. We distinguish between government exectiveness in detecting 'bad behavior' vs. 'good behavior' of firms - both play a key role in the model. Our results suggest that while an exective government eliminates malpractice completely, the intervention of an ineffective government may backfire, failing to protect the product safety. The reason is that on top of its inexectiveness, the government may deter consumers from pursuing lawsuits (crowding-out), augmenting the malpractice of firms compared to an equilibrium without government intervention. Additionally, an improvement in government ability to detect 'bad behavior' should be complemented by a reduction of lawsuit cost or an improvement in the ability to detect 'good behavior' in order to restore consumer incentive to pursue lawsuits. |
| Keywords: | Managerial Decision Economics |
| JEL: | K13 L15 |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122433 |