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on Microeconomics |
| By: | Biais, Bruno; Gersbach, Hans; Rochet, Jean-Charles; von Thadden, Ernst-Ludwig; Villeneuve, Stéphane |
| Abstract: | We analyze 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 outside utility. We extend classical welfare theorems by showing that any incentive- constrained optimal allocation can be implemented as an equilibrium allocation, with appropriate money issuance and wealth taxation by the principal. |
| Date: | 2025–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130553 |
| By: | Auriol, Emmanuelle; Bonneton, Nicolas; Polborn, Mattias |
| Abstract: | We present a moral hazard model of electoral accountability that challenges the common view of the populist vote as mere frustration with the elite. Rational voters use the threat of electing outsiders to incentivize more competent insiders whose policy preferences diverge from those of voters. Their optimal retention strategy involves differentiated punishment for failing incumbents, replacing them either with other elite politicians or with outsiders. The latter only occurs when the incumbent’s policy is both perceived as a failure and as benefiting the elite. This strategic voting behavior explains why outsider electoral success is often volatile: rational voters may back an outsider in one election and an establishment candidate in another, without changing their fundamental preferences. |
| Date: | 2025–05–26 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130565 |
| By: | Enrico Mattia Salonia (Toulouse School of Economics) |
| Abstract: | Why are investors overconfident and trade excessively? Why do patients at health risk avoid testing? Why are voters polarised? Possibly because their beliefs directly influence their well-being, i.e., they have belief-dependent preferences. However, existing theories of belief-dependent preferences struggle to generate testable predictions or to identify simultaneously beliefs and preferences. This paper addresses these issues by providing an axiomatic characterization of a class of preferences and belief-updating rules that deviate from Bayesian updating. Preferences, beliefs, and updating rules are identified from choices over contingent menus, each entailing a menu of acts available at a later time contingent on an uncertain state of the world. The results provide a theory-based approach to experimental designs to test information avoidance, distortion, and other behaviours consistent with beliefdependent preferences. |
| Keywords: | Belief-dependent preferences, Non-Bayesian updating, Information avoidance, Belief distortion, Contingent menus |
| JEL: | D03 D81 D83 D91 |
| Date: | 2025–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:599 |
| By: | Enache, Andreea; Rhodes, Andrew |
| Abstract: | We consider a setting in which a platform matches buyers and sellers, who then wish to transact with each other multiple times. The platform charges fees for hosting transactions, but also offers convenience benefits. We consider two scenarios. In one scenario, all transactions must occur on the platform; in the other scenario, buyers and sellers can disintermediate the platform after the first transaction, and do subsequent transactions offline. We find that the platform reacts to disintermediation by using a “front-loaded” pricing scheme, whereby it charges more for earlier transactions. We also show that sometimes the platform is better off when disintermediation is possible—because it can use disintermediation to screen users’ private information about their convenience benefits. Buyers are not necessarily better off when they can disintermediate, due to the way in which the platform adjusts its fees. |
| Keywords: | Platforms; disintermediation; convenience benefits; repeat transactions |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130557 |
| By: | Kumar, Ujjwal; Roy, Souvik |
| Abstract: | We consider a model in which outcomes are bundles of alternatives, each of size at most a fixed (but arbitrary) number. Each agent's type is a strict preference over individual alternatives, which is then lexicographically extended to induce a strict preference over outcomes. A social choice function assigns an outcome to each type profile of agents. A social choice function is said to be locally strategy-proof if no agent can benefit by misreporting her type to another type that the designer considers plausible. The main departure from existing literature lies in the asymmetry of type misreports, which is captured using a directed graph that encodes the designer’s beliefs about feasible misreports. An environment is said to satisfy Directed-Local-Global Equivalence (DLGE) property if every locally strategy-proof social choice function defined on it is, in fact, (globally) strategy-proof. In this paper, we provide a complete characterization of DLGE environments via a property we refer to as Property Strong DL. Additionally, we derive necessary and sufficient conditions for DLGE under several specific notions of locality, such as adjacent, k-push-up, k-push-down, and k_1-push-up and k_2-push-down (some of which were studied in Altuntaș et al. (2023)) both in the setting where outcomes are individual alternatives and where any subset of alternatives may constitute a feasible outcome. Our analysis also extends to single-peaked domains as well. The main result in Cho and Park (2023) and several main results in Altuntaș et al. (2023) follow as corollaries of our framework. |
| Keywords: | Local strategy-proofness; (global) strategy-proofness; directed-local-global-equivalence; lexicographic preference extension function |
| JEL: | D71 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124676 |
| By: | David Levine (Royal Holloway University of London); Federico Weinschelbaum (UTDT-CONICET); Felipe Zurita (Pontificia Universidad Católica de Chile) |
| Abstract: | Does the ability of the electorate to replace corrupt politicians deter corruption? This paper analyzes the limitations of electoral accountability. Weshow that if the electorate cannot commit elections offer no defense against corruption. However, when a commitment technology exists, the electoratecan strategically choose to remove only those caught taking bribes. This incentivizes corrupt politicians to pass up bribe opportunities for which the valueis small. We then examine how improved monitoring can impact outcomes and show that increasing information quality does not always benefit the electorate. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:362 |
| By: | Michiko Ogaku |
| Abstract: | This paper investigates whether an ex-ante welfare-maximising risk allocation rule can be implemented among many participants. Specifically, we investigate the applicability of the price and choose mechanism proposed by Echenique and N\'u\~nez(2025) to risk allocation problems. While their mechanism implements Pareto optimal allocations in finite choice sets, we consider extending it to an infinite choice set of feasible risk-sharing allocations. This paper asks whether an ex-ante welfare-maximising risk allocation rule can indeed be implemented for a large group. Specifically, we study the price and choose (P&C) mechanism of Echenique and N\'u\~nez(2025) in a risk-sharing setting. In P&C, players sequentially set prices for each possible alternative; the last player chooses an alternative, provided that all previous players receive the prices they set. Echenique and N\'u\~nez(2025) show that, for finite choice sets, the mechanism implements any Pareto optimal allocation in the subgame-perfect Nash equilibrium. Our setting differs in one crucial respect: the choice set is infinite. Each alternative is a feasible allocation of total risk, and each player sets a Lipschitz-continuous price function on this infinite set. We show that the P&C mechanism can still be extended to implement the allocation that maximises the sum of players' utilities, even with an infinite choice set. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.04122 |
| By: | Kyohei Okumura |
| Abstract: | This paper investigates the robustness of online learning algorithms when learners possess private information. No-external-regret algorithms, prevalent in machine learning, are vulnerable to strategic manipulation, allowing an adaptive opponent to extract full surplus. Even standard no-weak-external-regret algorithms, designed for optimal learning in stationary environments, exhibit similar vulnerabilities. This raises a fundamental question: can a learner simultaneously prevent full surplus extraction by adaptive opponents while maintaining optimal performance in well-behaved environments? To address this, we model the problem as a two-player repeated game, where the learner with private information plays against the environment, facing ambiguity about the environment's types: stationary or adaptive. We introduce \emph{partial safety} as a key design criterion for online learning algorithms to prevent full surplus extraction. We then propose the \emph{Explore-Exploit-Punish} (\textsf{EEP}) algorithm and prove that it satisfies partial safety while achieving optimal learning in stationary environments, and has a variant that delivers improved welfare performance. Our findings highlight the risks of applying standard online learning algorithms in strategic settings with adverse selection. We advocate for a shift toward online learning algorithms that explicitly incorporate safeguards against strategic manipulation while ensuring strong learning performance. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.05341 |
| By: | Joseph Abadi; Markus K. Brunnermeier |
| Abstract: | develop a model to compare the governance of traditional shareholder-owned plat forms to that of platforms that issue tokens. The owners of a traditional platform have incentives to implement policies that extract rents from users. If the platform’s owners can commit to future policies, they can implement a more efficient outcome by issuing a token that offers claims on the platform’s services. Such a token alleviates conflicts of interest between the platform’s owners and its users, mitigating inefficiencies: a policy that benefits users increases the value of tokens and therefore the platform’s seignorage revenue. If the platform’s owners cannot commit to policies ex ante, however, they can achieve the same outcome by issuing a token that bundles claims on the platform’s ser vices with an ownership share (i.e., cash flow claims and voting rights). |
| Keywords: | Utility Tokens; Platforms; Decentralized Finance; Corporate Governance |
| JEL: | D4 D18 E40 G30 |
| Date: | 2025–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:100006 |
| By: | Keith Paarporn; Adel Aghajan; Jason R. Marden |
| Abstract: | The allocation of resources plays an important role in the completion of system objectives and tasks, especially in the presence of strategic adversaries. Optimal allocation strategies are becoming increasingly more complex, given that multiple heterogeneous types of resources are at a system planner's disposal. In this paper, we focus on deriving optimal strategies for the allocation of heterogeneous resources in a well-known competitive resource allocation model known as the General Lotto game. In standard formulations, outcomes are determined solely by the players' allocation strategies of a common, single type of resource across multiple contests. In particular, a player wins a contest if it sends more resources than the opponent. Here, we propose a multi-resource extension where the winner of a contest is now determined not only by the amount of resources allocated, but also by the composition of resource types that are allocated. We completely characterize the equilibrium payoffs and strategies for two distinct formulations. The first consists of a weakest-link/best-shot winning rule, and the second considers a winning rule based on a weighted linear combination of the allocated resources. We then consider a scenario where the resource types are costly to purchase, and derive the players' equilibrium investments in each of the resource types. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.02860 |
| By: | Yves Le Yaouanq; Peter Schwardmann; Joël J. van der Weele; Yves Le Yaouanq |
| Abstract: | We present a self- and social-signaling model formalizing findings in political psychology that moral and political judgments stem primarily from intuition and emotion, while reasoning serves to rationalize these intuitions to maintain an image of impartiality. In social interactions, agents’ rationalizations are strategic complements: others’ rationalizations weaken their ability to judge critically and make their actions less revealing of (inconvenient) truths. When agents are naive about their own rationalizations, our model predicts ideological and affective polarization, with each side assigning inappropriate motives to the other. Cross-partisan exchanges of narratives reduce polarization but are avoided by the agents. In within-group exchanges agents favor skilled speakers, whose narratives worsen polarization. Our model explains partisan disagreements over policy consequences, aligns with empirical polarization trends, and offers insights into efforts to disrupt echo chambers. |
| Keywords: | esteem, moral behavior, self-deception, group decisions, polarization |
| JEL: | D72 D83 D91 P16 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11897 |
| By: | Lovo, Stefano (HEC Paris); Olivier, Jacques (HEC Paris) |
| Abstract: | We model how a profit-maximizing agency decides whether to sell ESG ratings to issuers or investors. For firms in sufficiently green sectors or when the proportion of socially responsible investors is large enough, ESG ratings increase expected stock prices and the “issuer pays” business model is more profitable than “investors pay”. When all investors are socially responsible, the model coincides with a model of credit ratings, explaining why credit ratings are sold to issuers while most ESG ratings are sold to investors. Ratings boost equilibrium investment in ESG but their impact on welfare is ambiguous, even for socially responsible investors. |
| Keywords: | ESG; Rating agencies; Investors pay; Issuer pays; emission abatement; incentives; responsible investors |
| JEL: | G14 G18 G24 |
| Date: | 2025–02–22 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1547 |