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on Microeconomics |
| By: | Olivier Bos; Martin Pollrich |
| Abstract: | We study optimal auctions in a symmetric private values setting, where bidders have signaling concerns: they care about winning the object and a receivers inference about their type. Signaling concerns arise in various economic situations such as takeover bidding, charity auctions, procurement and art auctions. We show that auction revenue can be decomposed into the standard revenue from the respective auction without signaling concern, and a signaling component. The latter is the bidders' ex-ante expected signaling value net of an endogenous outside option: the signaling value for the lowest type. The revenue decomposition restores revenue equivalence between different auction designs, provided that the same information about bids is revealed. Revealing information about submitted bids affects revenue via the endogenous outside option. In general, revenue is not monotone in information revelation: revealing more information about submitted bids may reduce revenue. We show that any bid disclosure rule allowing to distinguish whether a bidder submitted a bid or abstained from participation minimizes the outside option, and therefore maximizes revenue. |
| Keywords: | optimal auctions, revenue equivalence, Bayesian persuasion, information design |
| JEL: | D44 D82 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11723 |
| By: | Jeffrey Mensch |
| Abstract: | When is random choice generated by a decision maker (DM) who is Bayesian-persuaded by a sender? In this paper, I consider a DM whose state-dependent preferences are known to an analyst, yet chooses stochastically as a function of the state. I provide necessary and sufficient conditions for the dataset to be consistent with the DM being Bayesian persuaded by an unobserved sender who generates a distribution of signals to ex-ante optimize the sender's expected payoff. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.01829 |
| By: | Sebastian Schweighofer-Kodritsch; Roland Strausz |
| Abstract: | Casting mechanism design with evidence in the framework of Myerson (1982) implies that his generalized revelation principle directly applies, and we thus obtain standard notions of incentive compatible direct mechanisms. Their specific nature depends, however, on whether the presentation of evidence is controllable contractually. For deterministic implementation, we show that, in general, such control has value. We identify two independent conditions under which this value vanishes, one on evidence (WET) and another on preferences (TIWO). Allowing for fully stochastic mechanisms, we also characterize the (limited) extent to which the common assumption of evidentiary normality (NOR) negates any value of randomization. When NOR holds together with WET or TIWO, neither control nor randomization has any value. Many mechanism design settings satisfy these conditions naturally, implying that they are highly tractable. |
| Keywords: | mechanism design, revelation principle, evidence, verifiable iInformation, value of control, value of randomization. |
| JEL: | D82 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11794 |
| By: | Mario Ghossoub; Bin Li; Benxuan Shi |
| Abstract: | We consider a monopoly insurance market with a risk-neutral profit-maximizing insurer and a consumer with Yaari Dual Utility preferences that distort the given continuous loss distribution. The insurer observes the loss distribution but not the risk attitude of the consumer, proxied by a distortion function drawn from a continuum of types. We characterize the profit-maximizing, incentive-compatible, and individually rational menus of insurance contracts, show that equilibria are separating, and provide key properties thereof. Notably, insurance coverage and premia are monotone in the level of risk aversion; the most risk-averse consumer receives full insurance $(\textit{efficiency at the top})$; the monopoly absorbs all surplus from the least-risk averse consumer; and consumers with a higher level of risk aversion induce a higher expected profit for the insurer. Under certain regularity conditions, equilibrium contracts can be characterized in terms of the marginal loss retention per type of consumer, and they consist of menus of layered deductible contracts, where each such layered structure is determined by the risk type of the consumer. In addition, we examine the effect of a fixed insurance provision cost on equilibria. We show that if the fixed cost is prohibitively high, then there will be no $\textit{ex ante}$ gains from trade. However, when trade occurs, separating equilibrium contracts always outperform pooling equilibrium contracts, and they are identical to those obtained in the absence of fixed costs, with the exception that only part of the menu is excluded. The excluded contracts are those designed for consumers with relatively lower risk aversion, who are less valuable to the insurer. Finally, we characterize incentive-efficient menus of contracts in the context of an arbitrary type space. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.01095 |
| By: | Zikun Liu (Yale University); Jiwoong Shin (Yale University); Jidong Zhou (Yale University) |
| Abstract: | The growing availability of big data enables firms to predict consumer search outcomes and outside options more accurately than consumers themselves. This paper examines how a firm can utilize such superior information to offer personalized buy-now discounts intended to deter consumer search. However, discounts can also serve as signals of attractive outside options, potentially encouraging rather than discouraging consumer search. We show that, despite the firmÕs ability to tailor discounts across a continuum of consumer valuations, the firm-optimal equilibrium features a simple two-tier discount scheme, comprising a uniform positive discount when the consumer outside option is intermediate and no discount when the outside option is low or high. Furthermore, compared to a scenario where the firm lacks superior information, we find that the firm earns lower profits, consumers search more while their welfare remains unchanged, and total welfare declines. |
| Date: | 2025–04–22 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2440 |
| By: | Peter Achim; Jan Knoepfle |
| Abstract: | A principal continually decides whether to approve resource allocations to an agent, who exerts private effort to remain eligible. The principal must perform costly inspections to determine the agent's eligibility. We characterize Markov Perfect Equilibria and analyze the paths of trust and oversight that emerge from the dynamic interplay of effort and oversight. At high trust levels, effort is an intertemporal substitute to oversight, which leads to unique interior effort choices and random inspections. At low trust levels, effort is an intertemporal complement to oversight, which may create a coordination problem, leading to equilibrium multiplicity. Voluntary disclosure can mitigate this coordination issue. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.02696 |
| By: | Axel Gautier; Leonardo Madio; Shiva Shekhar |
| Abstract: | We consider a market in which a platform hosts third-party monopolistic complementors. Users are segmented into single-use and multi-use consumers, and services exhibit network externalities. In the agency model, the presence of multi-use consumers leads complementors to set inefficiently high prices, reducing demand and the platform’s profits. Platform entry can resolve these pricing inefficiencies by targeting multi-use consumers with a bundled offering, but it then fragments the market, diminishing network benefits for consumers. We find that the platform opts to enter only when it has committed to a low commission fee, and network benefits are modest. Integration with a complementor reduces prices for consumers and enhances network benefits, thereby improving consumer welfare, but the pricing inefficiency is only partially mitigated. |
| Keywords: | platform, network externalities, platform strategy, hybrid business model |
| JEL: | L22 L86 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11711 |
| By: | Burkhard C. Schipper; Tina Danting Zhang |
| Abstract: | We study dynamic decentralized two-sided matching in which players may encounter unanticipated experiences. As they become aware of these experiences, they may change their preferences over players on the other side of the market. Consequently, they may get ``divorced'' and rematch again with other agents, which may lead to further unanticipated experiences etc. A matching is stable if there is absence of pairwise common belief in blocking. Stable matchings can be destabilized by unanticipated experiences. Yet, we show that there exist self-confirming outcomes that are stable and do not lead to further unanticipated experiences. We introduce a natural decentralized matching process that, at each period assigns probability $1 - \varepsilon$ to the satisfaction of a mutual optimal blocking pair (if it exists) and picks any optimal blocking pair otherwise. The parameter $\varepsilon$ is interpreted as a friction of the matching market. We show that for any decentralized matching process, frictions are necessary for convergence to stability even without unawareness. Our process converges to self-confirming stable outcomes. Further, we allow for bilateral communication/flirting that changes the awareness and say that a matching is flirt-proof stable if there is absence of communication leading to pairwise common belief in blocking. We show that our natural decentralized matching process converges to flirt-proof self-confirming outcomes. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.01280 |
| By: | Ciamac C. Moallemi; Mallesh M. Pai; Dan Robinson |
| Abstract: | In financial applications, latency advantages - the ability to make decisions later than others, even without the ability to see what others have done - can provide individual participants with an edge by allowing them to gather additional relevant information. For example, a trader who is able to act even milliseconds after another trader may receive information about changing prices on other exchanges that lets them make a profit at the expense of the latter. To better understand the economics of latency advantages, we consider a common-value auction with a reserve price in which some bidders may have more information about the value of the item than others, e.g., by bidding later. We provide a characterization of the equilibrium strategies and study the welfare and auctioneer revenue implications of the last-mover advantage. We show that the auction does not degenerate completely and that the seller is still able to capture some value. We study comparative statics of the equilibrium under different assumptions about the nature of the latency advantage. Under the assumptions of the Black-Scholes model, we derive formulas for the last mover's expected profit, as well as for the sensitivity of that profit to their timing advantage. We apply our results to the design of blockchain protocols that aim to run auctions for financial assets on-chain, where incentives to increase timing advantages can put pressure on the decentralization of the system. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.02077 |
| By: | Emma Kroell; Sebastian Jaimungal; Silvana M. Pesenti |
| Abstract: | We consider the problem of an agent who faces losses over a finite time horizon and may choose to share some of these losses with a counterparty. The agent is uncertain about the true loss distribution and has multiple models for the losses. Their goal is to optimize a mean-variance type criterion with model ambiguity through risk sharing. We construct such a criterion by adapting the monotone mean-variance preferences of Maccheroni et al. (2009) to the multiple models setting and exploit a dual representation to mitigate time-consistency issues. Assuming a Cram\'er-Lundberg loss model, we fully characterize the optimal risk sharing contract and the agent's wealth process under the optimal strategy. Furthermore, we prove that the strategy we obtain is admissible and prove that the value function satisfies the appropriate verification conditions. Finally, we apply the optimal strategy to an insurance setting using data from a Spanish automobile insurance portfolio, where we obtain differing models using cross-validation and provide numerical illustrations of the results. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.02987 |
| By: | Motoki Otsuka |
| Abstract: | Graphon games are a class of games with a continuum of agents, introduced to approximate the strategic interactions in large network games. The first result of this study is an equilibrium existence theorem in graphon games, under the same conditions as those in network games. We prove the existence of an equilibrium in a graphon game with an infinite-dimensional strategy space, under the continuity and quasi-concavity of the utility functions. The second result characterizes Nash equilibria in graphon games as the limit points of asymptotic Nash equilibria in large network games. If a sequence of large network games converges to a graphon game, any convergent sequence of asymptotic Nash equilibria in these large network games also converges to a Nash equilibrium of the graphon game. In addition, for any graphon game and its equilibrium, there exists a sequence of large network games that converges to the graphon game and has asymptotic Nash equilibria converging to the equilibrium. These results suggest that the concept of a graphon game is an idealized limit of large network games as the number of players tends to infinity. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.01944 |
| By: | Yiyin Cao; Chuangyin Dang |
| Abstract: | The concept of Nash equilibrium in behavioral strategies (NashEBS) was formulated By Nash~\cite{Nash (1951)} for an extensive-form game through global rationality of nonconvex payoff functions. Kuhn's payoff equivalence theorem resolves the nonconvexity issue, but it overlooks that one Nash equilibrium of the associated normal-form game can correspond to infinitely many NashEBSs of an extensive-form game. To remedy this multiplicity, the traditional approach as documented in Myerson~\cite{Myerson (1991)} involves a two-step process: identifying a Nash equilibrium of the agent normal-form representation, followed by verifying whether the corresponding mixed strategy profile is a Nash equilibrium of the associated normal-form game, which often scales exponentially with the size of the extensive-form game tree. In response to these challenges, this paper develops a characterization of NashEBS through the incorporation of an extra behavioral strategy profile and beliefs, which meet local sequential rationality of linear payoff functions and self-independent consistency. This characterization allows one to analytically determine all NashEBSs for small extensive-form games. Building upon this characterization, we acquire a polynomial system serving as a necessary and sufficient condition for determining whether a behavioral strategy profile is a NashEBS. An application of the characterization yields differentiable path-following methods for computing such an equilibrium. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.00529 |
| By: | Raffaele Berzi; Daniela Bubboloni; Michele Gori |
| Abstract: | We study the manipulability of social choice correspondences in situations where individuals have incomplete information about others' preferences. We propose a general concept of manipulability that depends on the extension rule used to derive preferences over sets of alternatives from preferences over alternatives, as well as on individuals' level of information. We then focus on the manipulability of social choice correspondences when the Kelly extension rule is used, and individuals are assumed to have the capability to anticipate the outcome of the collective decision. Under these assumptions, we introduce some monotonicity properties of social choice correspondences whose combined satisfaction is sufficient for manipulability, prove a result of manipulability for unanimous positional social choice correspondences, and present a detailed analysis of the manipulability properties for the Borda, the Plurality and the Negative Plurality social choice correspondences. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2503.23141 |
| By: | Gadi Barlevy; Inês Xavier |
| Abstract: | We develop a model of Ponzi schemes with asymmetric information to study Ponzi frauds. A long-lived agent offers to save on behalf of short-lived agents at a higher rate than they can earn themselves. The long-lived agent may genuinely have a superior savings technology, but may be an imposter trying to steal from short-lived agents. The model identifies when a Ponzi fraud can occur and what interventions can prevent it. A key feature of Ponzi frauds is that the long-lived agent builds trust over time and improves their reputation by keeping the scheme going. |
| Keywords: | Ponzi scheme; Asymmetric information; Reputation; Fraud |
| JEL: | C73 D82 G51 K42 L14 |
| Date: | 2025–03–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-20 |
| By: | Sophie Bade |
| Abstract: | Roommate problems with convex preferences always have stable matchings. Efficiency and individual rationality are, moreover, compatible with strategyproofness in such convex roommate problems. Both of these results fail without the assumption of convexity. In the environment under study, preferences are convex if and only if they are single peaked. Any individually rational and convex roommate problem is homomorphic to a marriage market where an agent's gender corresponds to the direction of the agent's top-ranked partner. The existence of stable matchings then follows from the existence of stable matchings in marriage markets. To prove the second existence result, I define an efficient, individually rational, and strategyproof mechanism for convex roommate problems. To calculate outcomes, this mechanism starts with all agents being single and then gradually reassigns agents to better partners by performing minimal Pareto improvements. Whenever it becomes clear that some agent cannot be part of any further Pareto improvement, such an agent is matched. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2503.24010 |
| By: | Alfred A. B. Mayaki |
| Abstract: | Prior literature on two-firm two-market and two-stage extended dynamic models has introduced what Guth (2016) succinctly terms a social dilemma. A state in which conglomerate firms competing in a Bertrand duopoly consider jointly optimizing profits under a tacit self-enforcing agreement to deter market entry. This theoretical article reinterprets the social dilemma highlighted by Guth (2016) not only in the context of allocation but also through the lens of competition where entry must legally be permitted even if cooperative signalling would otherwise sustain joint profitability. This study explores the significance of a sufficiency condition on each firms non-instantaneous reaction function requiring the maintenance of a stable long-run equilibrium through retaliative restraint characterized by either two negative eigenvalues or a saddle-path trajectory. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2503.22825 |
| By: | Martin Vaeth |
| Abstract: | This paper studies how imprecision in noisy signals attenuates Bayesian updating toward the prior. This phenomenon is well-known under a normal prior and normal noise, where less precise signals yield posterior means closer to the prior mean. We show this effect extends to any symmetric, log-concave prior and any symmetric, quasi-concave location experiment, using a newly introduced precision order. Our main result is that for any such prior and any signal realization, the posterior mean under location experiment S is closer to the prior mean than is the posterior mean S', if and only if S is less precise than S'. We discuss applications to cognitive imprecision, prior precision, and overconfidence. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.02238 |
| By: | Canoy, Marcel; Kamphorst, Jurjen J.A.; Tichem, Jan |
| Abstract: | True pricing has progressed from an abstract notion to a real life phenomenon as a way to make consumers aware of the genuine costs to society of products. Our paper analyzes the impact of true prices on competition. Our model uses a straightforward differentiated Bertrand set-up where consumers can choose to pay the true price or the normal price. There are consumers who strongly prefer not to cause externalities. These consumers will opt to pay the true price. Other consumers receive less disutility of causing externalities. They will pay the normal price. Our findings are that setting the true price can be an equilibrium strategy for one or both firms. True prices can be welfare enhancing, but it comes at a cost. True prices harm consumers that do not value external effects as it raises the normal price. A comparison of true prices with taxation of the external effect shows that both can be socially optimal. Taxation is better because it covers both types of consumers, and worse because it overcorrects in the presence of market power. The paper demonstrates the value of analyzing competitive effects of environmental initiatives. |
| Keywords: | True Price, Sustainability, Industrial Organization |
| JEL: | D62 D64 Q56 |
| Date: | 2025–03–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124417 |
| By: | YOSHIHARA, Naoki |
| Abstract: | This paper studies the structure of the set of steady-state competitive equilibria defined in a quite generalized von Neumann economic model. First, it is shown that in any von Neumann production economy, there exists an admissible domain of non-negative interest rates such that for every interest rate within the domain, there exists an associated steady state equilibrium. Second, for almost all interest rates within the domain, the associated steady state equilibrium is indeterminate. Thus, in summary, for any von Neumann production economy, there is a dense subset of the admissible domain over which the set of steady state equilibria consists of a finite number of one-dimensional continuums of those equilibria. This property is observed regardless of whether the underlying economy is regular or not, which contrasts sharply with the finite and discrete properties of the other types of Walrasian equilibria in both static and intertemporal regular economies. These main results suggest, as a new, future research agenda, the need to study an appropriate equilibrium selection mechanism that should be applied prior to market competition. |
| Keywords: | generic indeterminacy of Walras-von Neumann steady state equilibria, von Neumann production economies, a finite number of one-dimensional continuums of Walras-von Neumann steady state equilibria |
| JEL: | B51 D33 D50 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hituec:766 |
| By: | Nirjhor, Sams Afif; Liu, Fangyue; Nakamaru, Mayuko |
| Abstract: | A general supply chain is a division of labor of an arbitrary number of subtasks, which has asymmetric interactions among the subtask-holder groups. To sustain a supply chain, cooperation among the subtask-holders is a must. We construct a general network model of supply chain with a finite number of roles with a single output, where the supply of faulty products is possible and a supply chain never stops on the way. We consider that cooperators and defectors exist in each subtask-holder group in a supply chain; cooperators of a subtask-holder group pay a cost of cooperation to maintain and upgrade the quality of the product, defectors however do not pay any cost, and thus the product quality reduces. In some supply chains, more cooperators upgrade the quality of the product more, and players can obtain a better reputation defined as a bonus that is given to all players. We found that the supply chain with a bonus confronts the social dilemma. We make replicator equations of asymmetric games to investigate the evolution of cooperation in a supply chain. We found that not the benefit from supply but the cost of cooperation influences the dynamics. As a result, the network structure of the supply chain never influences the dynamics. Sanction on the defectors induces the evolution of cooperation and non-linear bonus functions promote co-existences of cooperator groups and defector groups. The bonus functions determine whether the length of the supply chain promotes the evolution of cooperation or not. |
| Date: | 2025–04–24 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:3679n_v1 |
| By: | Eric Langlais; Ken Yahagi |
| Abstract: | This paper presents a theoretical framework for analyzing agency problems in the law enforcement process and governance of law enforcement organizations. Self-interested law enforcement agents, motivated by the desire to lower crime rates, may engage in inappropriate investigations to secure more convictions, often harming individuals in the process (e.g., through aggressive policing or unlawful practices). Meanwhile, a government driven by rent-seeking motives such as maximizing fine revenues may fail to implement effective liability rules to properly discipline these agents. As a result, law enforcement policies may become distorted, leading to enforcement levels that are excessive when dealing with minor harms and insufficient when addressing more serious offenses. |
| Keywords: | police officers' liability, misconduct, rent-seeking government. |
| JEL: | K42 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-21 |