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on Microeconomics |
| By: | Kym Pram; Burkhard C. Schipper |
| Abstract: | We study the design of efficient mechanisms under asymmetric awareness and information. Unawareness refers to the lack of conception rather than the lack of information. Assuming quasi-linear utilities and private values, we show that we can implement in conditional dominant strategies a social choice function that is utilitarian ex-post efficient when pooling all awareness of all agents without the need of the social planner being fully aware ex-ante. To this end, we develop novel dynamic versions of Vickrey-Clarke-Groves mechanisms in which types are revealed and subsequently elaborated at endogenous higher awareness levels. We explore how asymmetric awareness affects budget balance and participation constraints. We show that ex-ante unforeseen contingencies are no excuse for deficits. Finally, we propose a modified reverse second price auction for efficient procurement of complex incompletely specified projects. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.04382 |
| By: | Kunimoto, Takashi (Singapore Management University); Saran, Rene (University of Cincinnati, Cincinnati,); Serrano, Roberto (Brown University) |
| Abstract: | When the normative goals for a set of agents can be summarized in a set-valued rule and agents take actions that are rationalizable, a new theory of incentives emerges in which standard Bayesian incentive compatibility (BIC) is relaxed significantly. The paper studies the interim rationalizable implementation of social choice sets with a Cartesian product structure, a leading example thereof being ex-post efficiency. Setwise incentive compatibility (setwise IC), much weaker than BIC, is shown to be necessary for implementation. Setwise IC enforces incentives flexibly within the entire correspondence, instead of the pointwise enforcement entailed by BIC. Sufficient conditions, while based on the existence of SCFs in the correspondence that make truthful revelation a dominant strategy, are shown to be permissive to allow the implementation of ex-post efficiency in many settings where equilibrium implementation fails (e.g., bilateral trading, multidimensional signals). Furthermore, this success comes at little cost: all our mechanisms are well behaved, in the sense that best responses always exist. |
| Keywords: | rationalizability; implementation; correspondences; setwise incentive compatibility; setwise dominance; ex-post efficiency |
| JEL: | C72 D78 D82 |
| Date: | 2025–05–02 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:2025_002 |
| By: | Tanay Raj Bhatt |
| Abstract: | In a typical model of private information and choice under uncertainty, a decision maker observes a signal, updates her prior beliefs using Bayes rule, and maximizes her expected utility. If the decision maker's utility function satisfies the single crossing property, and the information structure is ordered according to the monotone likelihood ratio, then the comparative statics exhibit monotonicity with respect to signals. We consider the restrictions placed by this model of signal processing on state conditional stochastic choice data. In particular, we show that this model rationalizes a state conditional stochastic choice dataset if and only if the dataset itself is ordered according to the monotone likelihood ratio. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.03985 |
| By: | Kunimoto, Takashi (Singapore Management University); Zhang, Cuiling (Singapore Management University) |
| Abstract: | Efficient, voluntary bilateral trades are generally not implementable in an interdependent values environment where agents’ information is ex ante symmetric (i.e., both parties have private information and each party’s valuation depends on the other’s information in the same way). Thus, we seek more positive results by employing two-stage mechanisms in which (i) the outcome (e.g., allocation of the goods) is determined first; (ii) the agents partially learn the state via their own outcome-decision payoffs; and (iii) transfers are finally made. We propose the approximate shoot-the-liar (AS) mechanism and generalized shoot-the-liar (GS) mechanism and identify mild conditions for each mechanism to have the desired properties. The AS mechanism ensures “approximately” efficient, voluntary trades. We also establish that if we ensure (exactly) efficient, voluntary trades, there is no loss of generality in focusing on the GS mechanism. We then identify a necessary and sufficient condition for the GS mechanism to implement efficient, voluntary trades. |
| Keywords: | bilateral trade; interdependent values; two-stage mechanisms |
| JEL: | C72 D78 D82 |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:2025_001 |
| By: | Federico Weinschelbaum; David K. Levine; Felipe Zurita |
| Abstract: | Does the ability of the electorate to replace corrupt politicians deter corruption? This paper analyzes the limitations of electoral accountability. We show that if the electorate cannot commit elections offer no defense against corruption. However, when a commitment technology exists, the electorate can strategically choose to remove only those caught taking bribes. This incentivizes corrupt politicians to pass up bribe opportunities for which the value is small. We then examine how improved monitoring can impact outcomes and show that increasing information quality does not always benefit the electorate. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025_08 |
| By: | Henrique de Oliveira; Rohit Lamba |
| Abstract: | An analyst observes an agent take a sequence of actions. The analyst does not have access to the agent's information and ponders whether the observed actions could be justified through a rational Bayesian model with a known utility function. We show that the observed actions cannot be justified if and only if there is a single deviation argument that leaves the agent better off, regardless of the information. The result is then extended to allow for distributions over possible action sequences. Four applications are presented: monotonicity of rationalization with risk aversion, a potential rejection of the Bayesian model with observable data, feasible outcomes in dynamic information design, and partial identification of preferences without assumptions on information. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.05251 |
| By: | Dongjin Hwang; Ilwoo Hwang |
| Abstract: | We study a model of competitive information design in an oligopoly search market with heterogeneous consumer search costs. A unique class of equilibria -- upper-censorship equilibria -- emerges under intense competition. In equilibrium, firms balance competitive pressure with local monopoly power granted by search frictions. Notably, firms disclose only partial information even as the number of firms approaches infinity. The maximal informativeness of equilibrium decreases under first-order shifts in the search cost distribution, but varies non-monotonically under mean-preserving spreads. The model converges to the full-disclosure benchmark as search frictions vanish, and to the no-disclosure benchmark as search costs become homogeneous. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.04659 |
| By: | Volker Nocke; Andrew Rhodes |
| Abstract: | This paper studies optimal merger remedies when an antitrust authority has a consumer surplus standard. Remedies are modeled as asset divestitures which make the firm receiving the assets more efficient, at the expense of the merged firm. If a merger affects only a single market, asset divestitures on their own are not sufficient for the merger to be implemented--synergies are also required. As the market becomes less competitive, it is less likely that any merger is implemented; conditional on implementing one, it is more likely that divestitures are used to create a new competitor. If instead a merger affects several different markets, and the authority cares about consumer surplus aggregated over all markets, then it is optimal to divest as many assets as feasible in some markets and no assets in all remaining markets. The optimal merger proposal is more likely to entail divestitures in more competitive markets. |
| Keywords: | Horizontal mergers, divestitures, Cournot, merger control |
| JEL: | L13 L40 D43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_680 |
| By: | Kensei Nakamura; Shohei Yanagita |
| Abstract: | When a collective decision maker presents a menu of uncertain prospects to her group members, each member's choice depends on their predictions about payoff-relevant states. In reality, however, these members hold different predictions; more precisely, they have different prior beliefs about states and predictions about the information they will receive. In this paper, we develop an axiomatic framework to examine collective decision making under such disagreements. First, we characterize two classes of representations: Bewley multiple learning (BML) representations, which are unanimity rules among predictions, and justifiable multiple learning (JML) representations, where a single prediction has veto power. Furthermore, we characterize a general class of representations called hierarchical multiple learning representations, which includes BML and JML representations as special cases. Finally, motivated by the fact that these representations violate completeness or intransitivity due to multiple predictions, we propose a rationalization procedure for constructing complete and transitive preferences from them. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.04368 |
| By: | Martin Meier (University of Bath); Andres Perea (EpiCenter and Department of Quantitative Economics, Maastricht University) |
| Abstract: | We propose a new rationalizability concept for dynamic games with imperfect information, forward and backward rationalizability , that combines elements from forward and backward induction reasoning. It proceeds by applying the forward induction concept of strong rationalizability (also known as extensive-form rationalizability ) in a backward inductive fashion: It first applies strong rationalizability from the last period onwards, subsequently from the penultimate period onwards, keeping the restrictions from the last period, and so on, until we reach the beginning of the game. We argue that, compared to strong rationalizability, the new concept provides a more compelling theory for how players react to surprises. We show that the new concept always exists, and is characterized epistemically by (a) first imposing common strong belief in rationality from the last period onwards, then (b) imposing common strong belief in rationality from the penultimate period onwards, keeping the restrictions imposed by (a), and so on. It turns out that in terms of outcomes, the concept is equivalent to the pure forward induction concept of strong rationalizability, but both concepts may differ in terms of strategies. In terms of strategies, the new concept provides a refinement of the pure backward induction reasoning as embodied by backward dominance and backwards rationalizability . In fact, the new concept can be viewed as a backward looking strengthening of the forward looking concept of backwards rationalizability. Combining our results yields that every strongly rationalizable outcome is also backwards rationalizable. Finally, it is shown that the concept of forward and backward rationalizability satisfies the principle of supergame monotonicity : If a player learns that the game was actually preceded by some moves he was initially unaware of, then this new information will only refine, but never completely overthrow, his reasoning. Strong rationalizability violates this principle. |
| Date: | 2024–01–19 |
| URL: | https://d.repec.org/n?u=RePEc:eid:wpaper:58183 |
| By: | Niloufar Mirzavand Boroujeni; Krishnamurthy Iyer; William L. Cooper |
| Abstract: | We study a system composed of multiple distinct service locations that aims to convince customers to join the system by providing information to customers. We cast the system's information design problem in the framework of Bayesian persuasion and describe centralized and decentralized signaling. We provide efficient methods for computing the system's optimal centralized and decentralized signaling mechanisms and derive a performance guarantee for decentralized signaling when the locations' states are independent. The guarantee states that the probability that a customer joins under optimal decentralized signaling is bounded below by the product of a strictly positive constant and the probability that a customer joins under optimal centralized signaling. The constant depends only on the number of service locations. We provide an example that shows that the constant cannot be improved. We consider an extension to more-general objectives for the system and establish that the same guarantee continues to hold. We also extend our analysis to systems where the locations' states are correlated, and again derive a performance guarantee for decentralized signaling in that setting. For the correlated setting, we prove that the guarantee's asymptotic dependence upon the number of locations cannot be substantially improved. A comparison of our guarantees for independent locations and for correlated locations reveals the influence of dependence on the performance of decentralized signaling. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.14163 |
| By: | Chengfeng Shen (Peking University); Felix Kubler (University of Zurich); Yucheng Yang (University of Zurich; Swiss Finance Institute); Zhennan Zhou (Westlake University) |
| Abstract: | We develop a new method to efficiently solve for optimal lotteries in models with non-convexities. In order to employ a Lagrangian framework, we prove that the value of the saddle point that characterizes the optimal lottery is the same as the value of the dual of the deterministic problem. Our algorithm solves the dual of the deterministic problem via sub-gradient descent. We prove that the optimal lottery can be directly computed from the deterministic optima that occur along the iterations. We analyze the computational complexity of our algorithm and show that the worst-case complexity is often orders of magnitude better than the one arising from a linear programming approach. We apply the method to two canonical problems with private information. First, we solve a principal-agent moral-hazard problem, demonstrating that our approach delivers substantial improvements in speed and scalability over traditional linear programming methods. Second, we study an optimal taxation problem with hidden types, which was previously considered computationally infeasible, and examine under which conditions the optimal contract will involve lotteries. |
| Keywords: | Private Information, Adverse Selection, Moral Hazard, Non-Convexities, Lotteries, Lagrangian Iteration |
| JEL: | C61 C63 D61 D82 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2548 |
| By: | Elizabeth Maggie Penn |
| Abstract: | I consider the problem of classifying individual behavior in a simple setting of outcome performativity where the behavior the algorithm seeks to classify is itself dependent on the algorithm. I show in this context that the most accurate classifier is either a threshold or a negative threshold rule. A threshold rule offers the "good" classification to those individuals whose outcome likelihoods are greater than some cutpoint, while a negative threshold rule offers the "good" outcome to those whose outcome likelihoods are less than some cutpoint. While seemingly pathological, I show that a negative threshold rule can be the most accurate classifier when outcomes are performative. I provide an example of such a classifier, and extend the analysis to more general algorithm objectives, allowing the algorithm to differentially weigh false negatives and false positives, for example. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.06127 |
| By: | Eric Darmon; Thomas LE TEXIER; Zhiwen LI; Thierry Pénard |
| Abstract: | Antitrust authorities are concerned with the dominant market position of Tech Giants such as Google, Meta, or Amazon. These digital conglomerates are characterized by platform-based business models and multimarket contact (MMC). In traditional one-sided markets, theory and empirical evidence show that MMC tends to relax competition. In this paper, we revisit this result in the context of platform competition with competitive bottleneck and cross-market externalities, and provide new insights into the impact of MMC on platform competition. In this context, when platforms charge the two groups of users (bilateral pricing), we find that MMC always decreases the profitability of platforms regardless of the nature and magnitude of cross-market externalities. Then we consider the case in which platforms can only charge one group of users (unilateral pricing). When platforms charge the side on which they are not directly competing for users (i.e. the side that is not the competitive bottleneck), MMC may relax competition only if cross-group externalities and cross-market externalities are both sufficiently small. From a competition policy perspective, our paper provides insights into how antitrust authorities should review conglomerate mergers in digital markets and assesses the effects of the diversification strategies of digital platforms in the context of cross-market externalities and competitive bottleneck. |
| Keywords: | two-sided markets, platform competition, digital markets, multimarket contact, cross-market externalities, competitive bottleneck, competition policy |
| JEL: | D43 L13 L41 L86 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-22 |
| By: | Benoît Chevalier-Roignant (EM - EMLyon Business School); Stéphane Villeneuve (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Fabien Delpech (INSA Toulouse - Institut National des Sciences Appliquées - Toulouse - INSA - Institut National des Sciences Appliquées - UT - Université de Toulouse); May-Line Grapotte (INSA Toulouse - Institut National des Sciences Appliquées - Toulouse - INSA - Institut National des Sciences Appliquées - UT - Université de Toulouse) |
| Abstract: | There are many business situations in which investments by a supplier and a producer ("coinvest-ments") are both necessary for either of them to grasp a business opportunity. For instance, better quality tanks are needed to manufacture reliable hydrogen-powered vehicles. One of these two firms, typically the one facing a lower cost, may be more willing to invest, but the cautionary attitude of the other delays the coinvestment. We model supply-chain interactions in a classical tractable way to derive the firms' net present values (NPVs) upon coinvestment and determine their Nash equilibrium investment (timing) strategies. Firms coinvest when the real options of the weaker firm is ‘deep in the money.' These business situations are likely to be affected by evolving market circumstances, in particular due to changes in the demand dynamics or endogenous decision (by, say, the supplier) to conduct research and development (R&D). We investigate related model extensions, which confirm the robustness of our key result. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05033712 |
| By: | Florian Mudekereza |
| Abstract: | This paper analyzes a society composed of individuals who have diverse sets of beliefs (or models) and diverse tastes (or utility functions). It characterizes the model selection process of a social planner who wishes to aggregate individuals' beliefs and tastes but is concerned that their beliefs are misspecified (or distorted). A novel impossibility result emerges: a utilitarian social planner who seeks robustness to misspecification never aggregates individuals' beliefs but instead behaves systematically as a dictator by selecting a single individual's belief. This tension between robustness and aggregation exists because aggregation yields policy-contingent beliefs, which are very sensitive to policy outcomes. Restoring possibility of belief aggregation requires individuals to have heterogeneous tastes and some common beliefs. This analysis reveals that misspecification has significant economic implications for welfare aggregation. These implications are illustrated in treatment choice, asset pricing, and dynamic macroeconomics. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.07401 |
| By: | Gian Luigi Albano (Consip S.p.A. and LUISS Guido Carli University); Walter Ferrarese (Universitat de les Illes Balears); Alberto Iozzi (DEF & CEIS, University of Rome "Tor Vergata"); Roberto Pezzuto (DEF, University of Rome "Tor Vergata") |
| Abstract: | Many real-world public-sector purchases involve a combination of verifiable and non-verifiable dimensions of quality, leading to a classical incomplete-contracting problem. This paper analyses how public buyers may use debarment lists — in essence, blacklists of under-performing contractors — to incentivize quality provision in repeated procurement tenders. A key question is whether debarment lists should be shared among multiple agencies or maintained separately. Sharing multiplies the punishment for bad performance (an under-performing firm loses access to all agencies, not just one), which might strongly deter shirking. However, this paper shows that sharing debarment lists backfires when mistakes may occur in judging quality ex-post: if one agency erroneously penalizes a cooperative contractor, that error propagates to every agency, potentially discouraging contractors from exerting high quality in the first place. By modelling repeated interactions and allowing for observational errors, we show the implicit costs stemming from a shared debarment list, and draw policy lessons for designing blacklists in public procurement. |
| Keywords: | Public procurement, Relational contracts, Unverifiable quality, Debarment |
| JEL: | H57 |
| Date: | 2025–04–29 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:598 |
| By: | Peng Liu; Huaxia Zeng |
| Abstract: | New fairness notions in align with the merit principle are proposed for designing exchange rules. We show that, for an obviously strategy-proof, efficient and individually rational rule, an upper bound of fairness attainable is that, if two agents possess objects considered the best by all others, then at least one receives her favorite object. Notably, it is not possible to guarantee them both receiving favorites. Our results thus indicate an unambiguous trade-off between incentives and fairness in the design of exchange rules. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.05678 |
| By: | Davide Carpentiere; Alfio Giarlotta; Angelo Petralia; Ester Sudano |
| Abstract: | We introduce the novel setting of joint choices, in which options are vectors with components associated to different dimensions. In this framework, menus are multidimensional, being vectors whose components are one-dimensional menus, that is, nonempty subsets of elements associated to each dimension. We provide a natural notion of separability, requiring that selections from some dimensions are never affected by those performed on the remaining dimensions. Stability of separability across dimensions is throughly investigated. Moreover, we analyze rationalizable joint choices, which are those explained by the maximization of a revealed preference. The interplay between rationalizability e separability of joint choices allows to show that latter extends the classical definition of separability of discrete preference relations, and to assess the consistency of the former across dimensions. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.03056 |
| By: | Paolo Pin |
| Abstract: | We develop a model in which country-specific tariffs shape trade flows, prices, and welfare in a global economy with one homogeneous good. Trade flows form a Directed Acyclic Graph (DAG), and tariffs influence not only market outcomes but also the structure of the global trade network. A numerical example illustrates how tariffs may eliminate targeted imports, divert trade flows toward third markets, expose domestic firms to intensified foreign competition abroad, reduce consumer welfare, and ultimately harm the country imposing the tariff. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.04816 |
| By: | Grenadier, Brian M. (Stanford U); Grenadier, Steven R. (Stanford U) |
| Abstract: | Deferred prosecution agreements (DPAs) are now a standard tool used by prosecutors to punish corporate crime. Under a DPA, the defendant escapes prosecution by living up to the terms of the contract. However, if the prosecutor declares a breach, the defendant may face immediate prosecution. We present an equilibrium theoretical model of the terms of a DPA, highlighting a little-recognized, yet potentially valuable benefit accorded the defendant: the option to breach. While at the initiation of the agreement, a breach might likely be seen as a much more painful outcome than adhering to the DPA, over time this situation could change. Using the tools of real option analysis, we demonstrate that DPAs may embed valuable optionality, particularly for longer-term agreements with significant uncertainty over future prosecution outcomes. Since DPA penalties must price in such optionality, naïve comparisons to agreements without optionality, such as plea bargains, will mistakenly conclude that DPA terms are overly onerous and oppressive. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4231 |
| By: | Maria Saez Marti (Cowles Foundation, Yale University) |
| Abstract: | I propose a model in which workers experience fatigue over time and can restore productivity by taking breaks. Optimal schedules feature evenly spaced, full-recovery breaks; when breaks are costless, they should occur frequently, but switching costs make the optimal number finite. The model is embedded in a principal-agent framework with contractual frictions. When employers control the schedule, workers overwork; when workers self-manage, they overrest. Both lead to inefficiencies. These results shed light on the trade-offs in remote work arrangements, especially following COVID-19. The analysis highlights how control rights, incentive design, and recovery constraints interactÑand why neither rigid supervision nor full autonomy guarantees efficiency. |
| Keywords: | Labor supply, fatigue, rest breaks, productivity, remote work, principal-agent problem, control rights, incomplete contracts, time allocation. |
| JEL: | D13 J22 D86 M54 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2268r1 |
| By: | Joshua S. Gans |
| Abstract: | This paper examines the role of artificial intelligence as a strategist in organizational decision-making by extending van den Steen's formal theory of strategy. A mathematical model is developed comparing AI and human strategists across different decision contexts, focusing on how each type generates confidence, achieves agreement, and implements decisions through control versus influence. The analysis presumes that AI excels in data-rich domains but faces credibility challenges in judgment-intensive contexts, creating a counterintuitive result where AI requires less formal authority precisely where it demonstrates superior analytical capabilities. The paper identifies distinct mechanisms through which strategic value is created: direct decision quality improvement and enhanced coordination. The authors propose domain-contingent approaches to AI integration, including differentiated authority systems across decision types and progressive control models that evolve as AI demonstrates effectiveness. These findings contribute to strategy theory while providing practical guidance for organizations seeking to effectively integrate AI into strategic processes, highlighting that organizations must adapt to their strategists' capabilities as much as strategists must match their organizations. |
| JEL: | D81 L20 O32 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33650 |