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on Microeconomics |
| By: | Anja Prummer; Francesco Nava |
| Abstract: | We study a principal who allocates a good to agents with private, independently distributed values through an optimal mechanism. The principal can strategically shape these value distributions by modifying the good’s features, which affect agents’ valuations. Our analysis reveals that optimal designs are frequently divisive—creating goods that appeal strongly to specific agents or agent types while being less valued by others. These divisive designs reduce information rents and increase total surplus, at the expense of competition. Even when total surplus is constrained, some divisiveness in designs remains optimal. |
| Keywords: | Value Design, Mechanism Design, Di!erentiation |
| JEL: | D82 D46 L15 |
| Date: | 2025–07–23 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0069 |
| By: | Hyeonggyun Ko |
| Abstract: | We study a long-run persuasion problem where a long-lived Sender repeatedly interacts with a sequence of short-lived Receivers who may adopt a misspecified model for belief updating. The Sender commits to a stationary information structure, but suspicious Receivers compare it to an uninformative alternative and may switch based on the Bayes factor rule. We characterize when the one-shot Bayesian Persuasion-optimal (BP-optimal) structure remains optimal in the long run despite this switching risk. In particular, when Receivers cannot infer the state from the Sender's preferred action, they never switch, and the BP-optimal structure maximizes the Sender's lifetime utility. In contrast, when such inference is possible, full disclosure may outperform BP-optimal. Our findings highlight the strategic challenges of information design when the Receivers' interpretation of signals evolves over time. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.01662 |
| By: | Filip Tokarski |
| Abstract: | A welfare-maximizing designer allocates two kinds of goods using two wasteful screening instruments: ordeals, which enter agents' utilities additively, and damages, which harm agents in proportion to their values for the goods. If agents have common valuations for one of the goods, damages always lead to Pareto-dominated mechanisms: any allocation using damages can also be implemented with ordeals alone, while also leaving greater rents to inframarginal types. However, using damages can be optimal when agents' valuations for both goods are heterogeneous: with multidimensional types, the two devices differ in how they sort agents into available options, with the optimal sorting sometimes requiring the use of damages. I nevertheless identify distributional conditions under which using damages is not optimal. In those cases, the optimal mechanism produces an efficient allocation by posting "market-clearing" ordeals for each type of good. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.04456 |
| By: | Shitong Wang |
| Abstract: | This paper investigates the implementation and performance of a decentralized information transmission mechanism in complete information games. We propose a mediator-free mechanism that realizes mediator-free irrational correlated equilibria through a finite sequence of cheap talk. Designed for environments with at least five players, the mechanism leverages encryption techniques to safeguard private information and strategic choices. The core procedure involves three players decomposing and encrypting the equilibrium, while two other players securely randomize and deliver the encrypted recommendations to designated players. Our results demonstrate that all irrational correlated equilibria can be achieved through this mechanism, which is both strategically robust and practically implementable. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.01841 |
| By: | Yiling Chen; Tao Lin; Wei Tang; Jamie Tucker-Foltz |
| Abstract: | The optimal signaling schemes in information design (Bayesian persuasion) problems often involve non-explainable randomization or disconnected partitions of state space, which are too intricate to be audited or communicated. We propose explainable information design in the context of information design with a continuous state space, restricting the information designer to use $K$-partitional signaling schemes defined by deterministic and monotone partitions of the state space, where a unique signal is sent for all states in each part. We first prove that the price of explainability (PoE) -- the ratio between the performances of the optimal explainable signaling scheme and unrestricted signaling scheme -- is exactly $1/2$ in the worst case, meaning that partitional signaling schemes are never worse than arbitrary signaling schemes by a factor of 2. We then study the complexity of computing optimal explainable signaling schemes. We show that the exact optimization problem is NP-hard in general. But for Lipschitz utility functions, an $\varepsilon$-approximately optimal explainable signaling scheme can be computed in polynomial time. And for piecewise constant utility functions, we provide an efficient algorithm to find an explainable signaling scheme that provides a $1/2$ approximation to the optimal unrestricted signaling scheme, which matches the worst-case PoE bound. A technical tool we develop is a conversion from any optimal signaling scheme (which satisfies a bi-pooling property) to a partitional signaling scheme that achieves $1/2$ fraction of the expected utility of the former. We use this tool in the proofs of both our PoE result and algorithmic result. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.14196 |
| By: | Kun Zhang |
| Abstract: | When introducing a novel product, a seller sets a price and decides how much information to provide to a buyer, who may incur a search cost to discover an outside option. The buyer knows the outside option distribution; the seller knows only its mean and bounds. Seeking "robustness, " the seller evaluates strategies based on guaranteed profits, balancing search deterrence against surplus extraction. Providing information can deter search and boost demand but requires offering the buyer a higher payoff via a lower price. Results help explain the variations in information provision among new products and suggest that lower search costs can raise prices and lead to noisier information, potentially harming consumers. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.04134 |
| By: | D. Carlos Akkar |
| Abstract: | I study the optimal voting mechanism for a committee that must decide whether to enact or block a policy of unknown benefit. Information can come both from committee members who can acquire it at cost, and a strategic lobbyist who wishes the policy to be enacted. I show that the dictatorship of the most-demanding member is a dominant voting mechanism: any other voting mechanism is (i) less likely to enact a good policy, (ii) more likely to enact a bad policy, and (iii) burdens each member with a greater cost of acquiring information. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.21699 |
| By: | Johannes Johnen; Shiva Shekhar |
| Abstract: | This paper proposes a simple yet useful framework for evaluating vertical mergers in digital markets by distinguishing between product-specific and ecosystem-specific network effects. Vis-a-vis no network effects, product-specific network effects amplify foreclosure and steering incentives, as a rival’s growth directly undermines the platform’s product value. Conversely, ecosystem-specific effects dampen foreclosure incentives, since rivals contribute to the overall value of the platform ecosystem. We develop a formal model illustrating how this distinction shapes platform behavior and competitive outcomes. We apply this distinction to real-world examples to illustrate its potential usefulness. Our distinction implies that regulators may want to adopt a stricter standard with no presumption of efficiencies where product-specific effects dominate. In contrast, when ecosystem-specific effects prevail, merger evaluation should mirror traditional vertical merger analysis. Thus, offering a more nuanced approach to merger evaluation by presenting a practical screening tool to identify problematic vertical mergers in markets featuring network effects. |
| Keywords: | network externalities, platforms, vertical integration |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12040 |
| By: | Gamal Atallah; Aggey Simons (Department of Economics, University of Ottawa, Canada) |
| Abstract: | We analyze innovation incentives under price cap regulation by examining scenarios with endogenous price caps, both with and without regulatory commitment. In a setting without informational imperfections, our analysis reveals two principal conclusions. First, there is no trade-off between static and dynamic efficiency. Strengthening firm incentives by allowing it to charge higher prices, and thus realize greater profits, leads to less innovation because it reduces output. The optimal strategy to boost innovation and maximize welfare is to set a low price (and thus, a low profit) target, as innovation incentives are proportional to output. Second, the benefits of regulatory commitment for innovation and welfare are not unambiguously clear: commitment neither consistently outperforms nor underperforms non-commitment. Under demand uncertainty, when the firm is risk-averse, the static-dynamic efficiency trade-off reappears, and the firm may prefer non-commitment due to risk-shielding. Under asymmetric information about firm demand type, the trade-off between static and dynamic efficiency becomes inherent (due to information rents and contract distortions), and commitment becomes unambiguously crucial for fostering innovation by preventing the ratchet effect. |
| Keywords: | Price cap regulation; Regulation, Innovation, R&D, Dynamic efficiency; Commitment. |
| JEL: | D42 L12 L43 L51 O31 O38 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ott:wpaper:2504e |
| By: | Sumana Kundu (Indira Gandhi Institute of Development Research) |
| Abstract: | Undertreatment, i.e., providing a minor treatment for a serious problem, may provide a partial benefit or may further worsen the actual condition. This paper studies the implications of undertreatment on a credence goods expert's pricing and treatment strategies and on the social welfare under two different liability regimes: strict liability rule and no liability rule. We characterize conditions under which a no liability rule is more socially efficient compared to a strict liability rule. When an expert's diagnosis is accurate, a no liability rule is efficient compared to a strict liabilit y rule unless the cost of serious treatment is relatively low or there is sufficient loss from undertreatment. Consequently, if undertreatment increases the loss from the serious problem, the strict liability rule results in higher social welfare than the no liability rule. In the presence of diagnosis errors, the strict liability rule leads to no trade, and the no liability rule is more efficient than the strict liability rule when the probability of the serious problem is low. This holds irrespective of whether undertreatment results in benefit or harm to the serious problem. |
| Keywords: | Credence Goods; Undertreatment; Diagnosis Error; Liability Rule; Social Welfare |
| JEL: | D40 D80 D82 D83 L10 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-015 |
| By: | Engin Iyidogan; Ali I. Ozkes |
| Abstract: | We model a competitive market where AI agents buy answers from upstream generative models and resell them to users who differ in how much they value accuracy and in how much they fear hallucinations. Agents can privately exert effort for costly verification to lower hallucination risks. Since interactions halt in the event of a hallucination, the threat of losing future rents disciplines effort. A unique reputational equilibrium exists under nontrivial discounting. The equilibrium effort, and thus the price, increases with the share of users who have high accuracy concerns, implying that hallucination-sensitive sectors, such as law and medicine, endogenously lead to more serious verification efforts in agentic AI markets. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.19183 |
| By: | Sreedurga Gogulapati; Yadati Narahari; Souvik Roy; Soumyarup Sadhukhan |
| Abstract: | We study the classical assignment problem with initial endowments in a probabilistic framework. In this setting, each agent initially owns an object and has strict preferences over the entire set of objects, and the goal is to reassign objects in a way that satisfies desirable properties such as strategy-proofness, Pareto efficiency, and individual rationality. While the celebrated result by Ma (1994) shows that the Top Trading Cycles (TTC) rule is the unique deterministic rule satisfying these properties, similar positive results are scarce in the probabilistic domain. We extend Ma's result in the probabilistic setting, and as desirable properties, consider SD-efficiency, SD-individual rationality, and a weaker notion of SD-strategy-proofness -- SD-top-strategy-proofness -- which only requires agents to have no incentive to misreport if doing so increases the probability of receiving their top-ranked object. We show that under deterministic endowments, a probabilistic rule is SD-efficient, SD-individually rational, and SD-top-strategy-proof if and only if it coincides with the TTC rule. Our result highlights a positive possibility in the face of earlier impossibility results for fractional endowments (Athanassoglou and Sethuraman (2011)) and provides a first step toward reconciling desirable properties in probabilistic assignments with endowments. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.09550 |
| By: | Arthur Paul Pedersen; Samuel Allen Alexander |
| Abstract: | We advance a general theory of coherent preference that surrenders restrictions embodied in orthodox doctrine. This theory enjoys the property that any preference system admits extension to a complete system of preferences, provided it satisfies a certain coherence requirement analogous to the one de Finetti advanced for his foundations of probability. Unlike de Finetti's theory, the one we set forth requires neither transitivity nor Archimedeanness nor boundedness nor continuity of preference. This theory also enjoys the property that any complete preference system meeting the standard of coherence can be represented by utility in an ordered field extension of the reals. Representability by utility is a corollary of this paper's central result, which at once extends H\"older's Theorem and strengthens Hahn's Embedding Theorem. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.00294 |
| By: | Claus-Jochen Haake (Paderborn University); Thomas Streck (Paderborn University) |
| Abstract: | We study the impact on outcomes from modeling asymmetric bargaining power in two-person bargaining problems in two different ways. For the Nash and the Kalai-Smorodinsky solutions, we compare application of the asymmetric version of the solution to the outcome from the symmetric version with an upfront modification of the disagreement point. We identify a systematic distortion of the final payoff for each bargaining solution, which is different across the two solutions. While for the Kalai-Smorodinsky solution a player with small power always benefits from modifying the disagreement point, the situation is reversed for the Nash bargaining solution. There, weak players are better off in the asymmetric bargaining solution. When comparing the application of the asymmetric versions of the Nash and the Kalai-Smorodinsky solutions, we demonstrate that there is a threshold weight for a player to be better off with the Nash bargaining solution. This threshold is determined by the relative utilitarian bargaining solution. |
| Keywords: | Asymmetric bargaining power, Nash bargaining solution, Kalai-Smorodinsky bargaining solution |
| JEL: | C78 D63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:pdn:dispap:143 |
| By: | Papatya Duman (Universität Bielefeld); Claus-Jochen Haake (Universität Paderborn); Alexander Koch (Universität Paderborn); Sarah Kühn (Universität Paderborn); Simon Hemmrich (Universität Paderborn); Daniel Beverungen (Universität Paderborn) |
| Abstract: | We examine the problem faced by a buyer seeking to purchase an experience good without prior knowledge of its stochastic quality. An expert who owns the product can be paid to provide a signal about its quality. Our analysis explores the impact of introducing a credible signaling mechanism for the buyer. Specifically, we propose using blockchain technology, which ensures immutability, decentralization, privacy, and transparency, to store the signal. Our findings reveal that this approach reduces the number of possible equilibria while preserving the “good equilibrium”, in which information is both acquired and accurately transmitted. Consequently, the use of blockchain tech-nology mitigates the equilibrium coordination problem and improves the provision of credible information. |
| Keywords: | Blockchain, Signaling, Asymmetric Information |
| JEL: | C72 D82 D47 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pdn:dispap:152 |
| By: | Ellis, Andrew |
| Abstract: | In many choice problems, the interaction between several distinct variables determines the payoff of each alternative. I propose and axiomatize a model of a decision maker who recognizes that she may not accurately perceive the correlation between these variables, and who takes this into account when making her decision. She chooses as if she calculates each alternative's expected outcome under multiple possible correlation structures, and then evaluates it according to the worst expected outcome. |
| JEL: | J1 |
| Date: | 2025–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129044 |
| By: | Onuchic, Paula |
| Abstract: | An advisor discloses evidence about an object to a potential buyer, who doesn't know the object's value or the profitability of its sale (the advisor's motives). I characterize optimal disclosure rules that balance two goals: maximizing the overall probability of sale, and steering sales from lower- to higher-profitability objects. I consider the implications of a regulation that forces the advisor to always reveal her motives to the buyer. I show that whether such policies induce the advisor to disclose more evidence about the object's value hinges on the curvature of the buyer's demand for the object. This result refines our understanding of effective regulation of advisor-advisee communication with and without commitment. |
| JEL: | J1 |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129091 |
| By: | Claus-Jochen Haake (Paderborn University); Thomas Streck (Paderborn University) |
| Abstract: | Since Nash's (1950) seminal paper on the cooperative bargaining problem, the discipline has concentrated on the design of and solutions for bargaining problems. Nothing was said about how simple or difficult it is to find an agreement. We consider two-person bargaining problems and provide axioms for a mapping that assigns to each bargaining problem a number that quantifies the severeness of the conflict. We term this number the contestedness of a bargaining problem and show that there is one and only one mapping satisfying the axioms. Moreover, the axioms are shown to be logically independent, so that none of them can be dismissed. The contestedness is a normalized version of the standard traveling time introduced by Perles and Maschler (1981) to define a superadditive bargaining solution. Recognizing the payoff set reflects players' preferences our approach can also be utilized to measure similarity of diversity of preferences. |
| Keywords: | Bargaining problem, Contestedness, Perles-Maschler bargaining solution |
| JEL: | C78 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:pdn:dispap:144 |
| By: | Yuhang Guo; Dong Hao; Bin Li; Mingyu Xiao; Bakh Khoussainov |
| Abstract: | Strategyproofness in network auctions requires that bidders not only report their valuations truthfully, but also do their best to invite neighbours from the social network. In contrast to canonical auctions, where the value-monotone allocation in Myerson's Lemma is a cornerstone, a general principle of allocation rules for strategyproof network auctions is still missing. We show that, due to the absence of such a principle, even extensions to multi-unit network auctions with single-unit demand present unexpected difficulties, and all pioneering researches fail to be strategyproof. For the first time in this field, we identify two categories of monotone allocation rules on networks: Invitation-Depressed Monotonicity (ID-MON) and Invitation-Promoted Monotonicity (IP-MON). They encompass all existing allocation rules of network auctions as specific instances. For any given ID-MON or IP-MON allocation rule, we characterize the existence and sufficient conditions for the strategyproof payment rules, and show that among all such payment rules, the revenue-maximizing one exists and is computationally feasible. With these results, the obstacle of combinatorial network auction with single-minded bidders is now resolved. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.14472 |
| By: | Giorgio Ferrari; Anna Pajola |
| Abstract: | We study a mean-field game of optimal stopping and investigate the existence of strong solutions via a connection with the Bank-El Karoui's representation problem. Under certain continuity assumptions, where the common noise is generated by a countable partition, we show that a strong randomized mean-field equilibrium exists, in which the mean-field interaction term is adapted to the common noise and the stopping time is randomized. Furthermore, under suitable monotonicity assumptions and for a general common noise, we provide a comparative statics analysis of the set of strong mean-field equilibria with strict equilibrium stopping times. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.19123 |
| By: | Ying Bao; Jessie Liu |
| Abstract: | This paper investigates how content moderation affects content creation in an ideologically diverse online environments. We develop a model in which users act as both creators and consumers, differing in their ideological affiliation and propensity to produce toxic content. Affective polarization - users’ aversion to ideologically opposed content - interacts with moderation in unintended ways. Even ideologically neutral moderation that targets only toxicity can suppress non-toxic content creation, particularly from ideological minorities. Our analysis reveals a content-level externality: when toxic content is removed, non-toxic posts gain exposure. While majority-group creators sometimes benefit from this exposure, they do not internalize the negative spillovers, i.e., increased out-group hostility toward minority creators. This discourages minority expression and polarizes the content supply, ultimately leaving minority users in a more ideologically imbalanced environment: a mechanism reminiscent of the “spiral of silence.” Modeling creation as a strategic response to moderation, we underscore the importance of eliciting whether user engagement reflects toxicity or ideological disagreement in guiding platform governance. |
| Keywords: | content moderation, toxicity, polarization |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12008 |
| By: | Thomas Streck (Paderborn University) |
| Abstract: | This paper studies the distortion of the asymmetric Nash and Kalai-Smorodinsky bargaining solutions that arise from differences in the shape of the bargaining set. In a two-person bargaining framework, we compare outcomes across different feasible sets for fixed bargaining power and repeat this for all possible power constellations between the players. Two arbitrary bargaining sets are selected, and the distortion of the asymmetric Nash solution, the symmetric Kalai-Smorodinsky solution, and the Nash solution with a shifted disagreement point is measured relative to the asymmetric Kalai-Smorodinsky solution, which serves as a reference. We compare pairs of bargaining problems that differ only in curvature and analyze how outcomes vary across solutions. This yields a quantitative measure of relative distortion and shows how sensitive bargaining solutions are to changes in set structure. For all solutions under observation, a weaker (stronger) player always prefers the more (less) curved bargaining set, as the distortion increases (decreases) in their favor. Indifference between two sets occurs when the distortion is equal for a given power constellation. For the asymmetric Nash and Kalai-Smorodinsky solutions, indifference occurs exactly when the solution points exhibit the same slope on their respective Pareto frontiers. Finally, the number of indifference points is always odd if one bargaining set contains the other. The results highlight how the shape of the Pareto frontier can introduce additional distortion in already unequal situations, suggesting that the structure of the bargaining set plays a crucial role in determining the fairness of outcomes. |
| Keywords: | Asymmetric bargaining power, Nash bargaining solution, Kalai-Smorodinsky bargaining solution |
| JEL: | C78 D63 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pdn:dispap:145 |
| By: | Gopakumar Achuthankutty (Indira Gandhi Institute of Development Research); Ayushi Choudhary (Indira Gandhi Institute of Development Research); Rupyan Pal (Indira Gandhi Institute of Development Research) |
| Abstract: | We examine whether rent-seeking incentives shape a central planner's decision to reorganise administrative units. In a two-stage group contest, risk-neutral administrative units compete for shares of a perfectly divisible public fund, with inter-unit and intra-unit contests occurring in Stages 1 and 2, respectively. We identify the conditions under which the planner prefers reorganisation and analyse its impact on aggregate and stage-wise rent accumulation. We show that total rent accumulation depends on the interplay between changes in fractionalisation, population inequality, and the scale effect from changes in the total population of active units following a reorganisation. While a proliferatory reorganisation (i.e., increasing the number of administrative units), when all administrative units remain active, increases the planner's rent accumulation, it can overturn the loss in social welfare under certain conditions. Furthermore, when some units become inactive, then under mild conditions on population changes, this outcome persists if the reorganisation is effectively expansive. |
| Keywords: | Rent-seeking, Administrative unit reorganisation, Contest theory, Fractionalisation, Population inequality |
| JEL: | C72 D72 H73 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-019 |
| By: | Tom Demeulemeester; Bettina Klaus |
| Abstract: | We consider object allocation problems with capacities (see, e.g., Abdulkadiroglu and Sonmez, 1998; Basteck, 2025) where objects have to be assigned to agents. We show that if a lottery rule satisfies ex-post non-wastefulness and probabilistic (Maskin) monotonicity, then ex-post pairwise efficiency is equivalent to ex-post Pareto efficiency. This result allows for a strengthening of various existing characterization results, both for lottery rules and deterministic rules, by replacing (ex-post) Pareto efficiency with (ex-post) pairwise efficiency, e.g., for characterizations of the Random Serial Dictatorship rule (Basteck, 2025), Trading Cycles rules (Pycia and Unver, 2017), and Hierarchical Exchange rules (Papai, 2000). |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.05340 |
| By: | Michael Greinecker; Michael Nielsen |
| Abstract: | There exists a preference relation on infinite utility streams that does not discriminate between different periods, satisfies the Pareto criterion, and so that almost all pairs of utility streams are strictly comparable. Such a preference relation provides a counterexample to a claim in [Zame, William R. ``Can intergenerational equity be operationalized?'' Theoretical Economics 2.2 (2007): 187-202.] |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.20567 |