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on Microeconomics |
| By: | Biais, Bruno (HEC Paris); Gersbach, Hans (ETH Zurich); Rochet, Jean-Charles (University of Toulouse Capitole); von Thadden, Ernst-Ludwig (Universitaet Mannheim); Villeneuve, Stéphane (University of Toulouse 1) |
| Abstract: | This paper analyzes dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. The state variables of the mechanism design problem are aggregate capital and the distribution of continuation utilities across agents. This gives rise to a Bellman equation in an infinite dimensional space, which we solve with mean-field techniques. We fully characterize the optimal mechanism and show that the level of risk agents must be exposed to for incentive reasons is decreasing in their initial reservation utility. We extend classical welfare theorems by showing that any incentive-constrained optimal allocation can be implemented as an equilibrium allocation, with appropriate transfers and wealth taxation by the principal. |
| Keywords: | Dynamic contract theory; mechanism design; large economies; allocative efficiency; incentive-compatibility; mean-field games; implementation |
| JEL: | C61 D82 D86 D92 E22 |
| Date: | 2024–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1516 |
| By: | Nieto Barthaburu Augusto |
| Abstract: | We present a model of a forecaster who must predict the future value of a variable that depends on an exogenous state and on the intervention of a policy-maker. Our focus is on the incentives of the forecaster to acquire costly private information to use in his forecasting exercise. We show that the policy-making environment plays a crucial role in determining the incentives of the forecaster to acquire information. Key parameters are the expected strength of policy intervention, the precision of the policy-maker’s private information, and the precision of public information. We identify conditions, which are plausible in applications, under which the forecaster optimally acquires little or no private information, and instead bases his forecast exclusively on information publicly known at the time the forecast is made. Furthermore we show that, also under plausible conditions, stronger policy intervention and more precise policy-maker’s information crowd-out forecaster’s information acquisition. |
| JEL: | D80 D82 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4749 |
| By: | Sergei Kichko; Alina Ozhegova; Alexander Tarasov |
| Abstract: | In this paper, we explore how heterogeneous firms decide on vertical and horizontal qualities of their products. We show that if increasing the product qualities appears to be relatively costly, more productive firms choose higher vertical quality but lower horizontal quality. We also document distortions that arise in our framework. Specifically, we find that in the market equilibrium, firms tend to underinvest in horizontal quality but overinvest in vertical quality compared to the first best allocation. Using data from pizzerias in Oslo, Norway, we provide a calibration exercise to estimate welfare losses due to the quality distortions. |
| Keywords: | monopolistic competition, vertical quality, horizontal quality, welfare |
| JEL: | D43 L13 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11472 |
| By: | Piazolo, David |
| Abstract: | This paper theoretically investigates the strategic implications of varying reliability of bargaining partners under unanimous and non-unanimous voting. Three players (one proposer, two responders) bargain over the distribution of a pie. One responder has private information about his valuation of finding an agreement, implying signaling values that differ substantially between voting rules and are affected by the other responder’s reliability. Under unanimity rule, the responder with private information benefits from voting “no” because this signals that he requires a larger compensation in a future period. In contrast, under majority rule, voting “no” is unattractive due to the fear of being excluded from a future coalition. Under both voting rules, one responder becoming less reliable negatively affects the other responder’s willingness to vote “yes”, making efficient agreements increasingly difficult to achieve. The presence of unreliable parties can under majority rule lead to more parties being included in the winning coalition, as demonstrated by an extension of the model. |
| Keywords: | bargaining; majority; unanimity; unreliability; private information |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:awi:wpaper:0756 |
| By: | Beltrametti, Luca (University of Genova); Cardullo, Gabriele (University of Genova) |
| Abstract: | This paper explores the economic effects of imperfect meritocracy in recruitment and career advancement. We compare two career promotion mechanisms: a fully meritocratic system and a "noisy" one, that allows less productive workers to advance. Our model shows that imperfect meritocracy in promotions can boost worker effort through the "hope effect, " potentially leading to higher aggregate output and total welfare compared to a strictly meritocratic system. Less skilled workers benefit most under this scenario, while the high skilled are worse off. We conclude that when perfect meritocracy in recruitment is unattainable, it may not be optimal to enforce it in career advancement, offering insights for economic policy. |
| Keywords: | meritocracy, efficiency, recruitment, career advancement |
| JEL: | A13 D61 D63 J20 M51 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17532 |
| By: | Anastasia Antsygina; Ekaterina Kazakova; Alexander Tarasov |
| Abstract: | We develop a model of spatial competition with two heterogeneous in their market access chains, choosing between third-degree price discrimination in their local markets (flexible pricing) and a unified chain-level price (uniform pricing). The markets are interconnected with each other via consumers who commute between them and can make purchases in locations where they do not reside. Our model supports an asymmetric equilibrium, in which the two pricing strategies co-exist: the larger chain uses uniform pricing, while the smaller chain employs flexible pricing. We also find that the chains never choose the pricing strategies that maximize the total consumer surplus. |
| Keywords: | spatial competition, price discrimination, uniform pricing, commuters |
| JEL: | D21 L11 L20 R32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11576 |
| By: | Hao Chung; Ke Wu; Elaine Shi |
| Abstract: | Today, many auctions are carried out with the help of intermediary platforms like Google and eBay. We refer to such auctions as platform-assisted auctions.Traditionally, the auction theory literature mainly focuses on designing auctions that incentivize the buyers to bid truthfully, assuming that the platform always faithfully implements the auction. In practice, however, the platforms have been found to manipulate the auctions to earn more profit, resulting in high-profile anti-trust lawsuits. We propose a new model for studying platform-assisted auctions in the permissionless setting. We explore whether it is possible to design a dream auction in thisnew model, such that honest behavior is the utility-maximizing strategy for each individual buyer, the platform, the seller, as well as platform-seller or platform-buyer coalitions.Through a collection of feasibility and infeasibility results, we carefully characterize the mathematical landscape of platform-assisted auctions. We show how cryptography can lend to the design of an efficient platform-assisted auction with dream properties. Although a line of works have also used MPC or the blockchain to remove the reliance on a trusted auctioneer, our work is distinct in nature in several dimensions.First, we initiate a systematic exploration of the game theoretic implications when the service providers are strategic and can collude with sellers or buyers. Second, we observe that the full simulation paradigm is too stringent and leads to high asymptotical costs. Specifically, because every player has a different private outcomein an auction protocol, running any generic MPC protocol among the players would incur at least $n^2$ total cost. We propose a new notion of simulation calledutility-dominated emulation.Under this new notion, we showhow to design efficient auction protocols with quasilinear efficiency. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.03141 |
| By: | Guido Menzio |
| Abstract: | I study the equilibrium and the welfare effects of international trade when product markets are imperfectly competitive due of search frictions—as in Burdett and Judd (1983)—rather than product differentiation—as in Dixit and Stiglitz (1977). Markups are positive, even though there are multiple firms producing identical goods. Markups depend negatively on the number of firms producing identical goods, which, in turn, determines the extent of competition in the market. Markups may be increasing, constant, decreasing or non-monotonic in firm's size, depending on the extent of competition and on the distribution of marginal costs. The entry of firms and the quantity of output produced by each firm are efficient, even though the market is imperfectly competitive. International trade increases the measure of firms in the market, intensifies competition, lowers markups, and unambiguously increases welfare. These "natural" effects of trade emerge generically in the Burdett-Judd model of imperfect competition. In the Dixit-Stiglitz model of imperfect competition, these effects are an artifact of particular specifications of preferences. |
| JEL: | D43 D83 F12 L16 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33253 |
| By: | Marc Bourreau; Axel Gautier |
| Abstract: | In this paper, we consider two platforms that compete for the development of a new product to integrate into their ecosystems. The new product can be developed either inhouse by the platforms or by an independent startup active only in the technology market. The presence of the startup affects the platforms’ R&D efforts through an insurance effect, which reduces the cost of failure in innovation, and a competition effect, which diminishes the returns to innovation. The magnitude of these effects depends on the attitude of the competition authorities towards the acquisition of the startup by one of the platforms. We show that allowing acquisitions stimulates platform innovation, but at the cost of a more concentrated market structure. We also compare the funding of the startup by independent venture capitalists or by the platforms themselves, and investigate how the merger regime influences the direction of the startup’s innovation. |
| Keywords: | innovation, startup acquisitions, mergers, digital, big tech, competition policy |
| JEL: | D43 G34 K21 L40 L86 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11569 |
| By: | J. Atsu Amegashie |
| Abstract: | I study a model of procurement with moral hazard and adverse selection. The procurer is either corrupt or honest and can choose between sole-sourcing and competitive tender. I compare two procurement regulations: no sole-sourcing is allowed (rigid regulation) and sole-sourcing is allowed in an emergency (flexible regulation). Sole-sourcing in an emergency is efficient. Whether there is an emergency that justifies sole-sourcing is the procurer’s private information. A regulator may fire the procurer depending on his belief that the procurer is corrupt. I find the counterintuitive result that if the gain to corruption is big, a flexible procurement regulation may be better than a rigid procurement regulation. If the gain to corruption is sufficiently small, the flexible regulation may be worse or better than the rigid regulation. Interestingly, although the inefficient choice of sole-sourcing is not always penalized, there exists a perfect Bayesian Nash equilibrium in which a corrupt procurer could be given discretion and incentivized to use sole-sourcing efficiently but without an explicit monetary incentive contract. In this case, the flexible regulation is better than the rigid regulation. The results are driven by three sources of inefficiency that are discussed in the paper. |
| Keywords: | competitive tender, procurement, private information, sole sourcing |
| JEL: | D73 D78 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11489 |
| By: | Yu Awaya; Hiroki Fukai; Makoto Watanabe |
| Abstract: | We compare Transparency and Privacy in credit markets. A long-lived borrower, who has a risky investment opportunity, seeks loans from a sequence of short-lived lenders. Under Transparency, all the information about the past investment outcomes is shared among the future lenders, which helps the lenders learn the borrower’s type. In contrast, no information is shared under Privacy. We first show that under both Transparency and Privacy, the iterated elimination of dominated strategies leaves unique outcomes. We then show that trade stops earlier under Transparency than under Privacy. A higher social welfare is achieved under Privacy than under Transparency. |
| Keywords: | credit market, transparency, privacy, strategic experimentation |
| JEL: | C73 D83 G20 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11528 |
| By: | De, Parikshit; Sharma, Aditi |
| Abstract: | Restricting domain had always been an approach to find out strategy proof social choice function in a voting setup where the society would choose one alternative from the individual preferences. By restricting the domain to a single peaked domain, Moulin (1980) found strategy-proof non-dictatorial social choice functions however, Sato (2010) shows that there does not exist any strategy-proof non-dictatorial choice function on a circular domain. Further restricting the circular domain to a clockwise circular domain, here we attempt to find all non-dictatorial social choice functions that are strategy proof on a clockwise circular domain. Many well-known social choice functions like majority rule, plurality rule, Instant runoff, Condorcet winner turns out to be manipulable whereas we find Borda count rule is strategy proof on a such domain for any number of agents and alternatives. We have defined two new SCF pairwise universal winner (PUW) rule and pairwise winner using plurality (PWP) rule which shows interesting properties. Both PUW and PWP are based on pairwise competition between alternatives, but the way a pairwise winner is decided is quite different. We found for two agents, PUW is strategy proof on clockwise circular domain. And PWP satisfies the monotone property on the clockwise circular domain for any number of agents and alternatives. |
| Keywords: | Social Choice Theory, Strategy-proof, Dictatorial rule, Borda count rule, Majority rule, Clockwise-circular domain, Plurality rule |
| JEL: | D71 |
| Date: | 2024–11–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122827 |
| By: | Dominik Bruckner; Marco Sahm |
| Abstract: | Intra-party contests, such as the US primaries, are often used to select a candidate for a subsequent cross-party election. A more accurate selection may improve the quality of the candidate but detract more resources from the subsequent campaign. We model this trade-off as a problem of contest design and show that extreme accuracy levels are optimal: maximum accuracy if the potential candidates are sufficiently heterogeneous, and a highly random selection otherwise. In an extension of our model, the heterogeneity between potential candidates reflects the degree of political polarization within a party. Our results explain varying primary designs within and between countries and shed light upon the paradox of limited competition within democratic parties. |
| Keywords: | contest design, accuracy, elections, intra-party competition, political polarization |
| JEL: | C72 D72 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11474 |