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on Microeconomics |
| By: | Grossman, Gene M.; Helpman, Elhanan |
| Abstract: | Misinformation pervades political competition. We introduce opportunities for political can- didates and their media supporters to spread fake news about the policy environment and perhaps about parties'positions into a familiar model of electoral competition. In the baseline model with full information, the parties'positions converge to those that maximize aggregate welfare. When parties can broadcast fake news to audiences that disproportionately include their partisans, policy divergence and suboptimal outcomes can result. We study a sequence of models that impose progressively tighter constraints on false reporting and characterize situa- tions that lead to divergence and a polarized electorate. |
| Keywords: | Electoral Competition; fake news; policy positions |
| JEL: | D78 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14210&r=all |
| By: | Armstrong, Mark; Zhou, Jidong |
| Abstract: | This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relaxing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens differentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly. |
| Keywords: | Bertrand Competition; information design; Online platforms; product differentiation |
| JEL: | D43 D47 D83 L13 L15 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14162&r=all |
| By: | Acemoglu, Daron; Makhdoumi, Ali; Malekian, Azarakhsh; Ozdaglar, Asuman |
| Abstract: | When a user shares her data with an online platform, she typically reveals relevant information about other users. We model a data market in the presence of this type of externality in a setup where one or multiple platforms estimate a user's type with data they acquire from all users and (some) users value their privacy. We demonstrate that the data externalities depress the price of data because once a user's information is leaked by others, she has less reason to protect her data and privacy. These depressed prices lead to excessive data sharing. We characterize conditions under which shutting down data markets improves (utilitarian) welfare. Competition between platforms does not redress the problem of excessively low price for data and too much data sharing, and may further reduce welfare. We propose a scheme based on mediated data-sharing that improves efficiency. |
| Keywords: | data; Informational Externalities; Online markets; privacy |
| JEL: | D62 D83 L86 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14225&r=all |
| By: | David Bounie; Antoine Dubus; Patrick Waelbroeck |
| Abstract: | We investigate the strategies of a data intermediary selling consumer information to firms for price discrimination purpose. We analyze how the mechanism through which the data intermediary sells information influences how much consumer information she will collect and sell to firms, and how it impacts consumer surplus. We consider three selling mechanisms tailored to sell consumer information: take it or leave it, sequential bargaining, and auctions. We show that the more information the intermediary collects, the lower consumer surplus. Consumer information collection is minimized, and consumer surplus maximized under the take it or leave it mechanism, which is the least profitable mechanism for the intermediary. We discuss two regulatory tools – a data minimization principle and a price cap – that can be used by data protection agencies and competition authorities to limit consumer information collection, increase consumer surplus, and ensure a fair access to information to firms. |
| Keywords: | market for information, competition, price discrimination, data collection, privacy, selling mechanisms |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8307&r=all |
| By: | Benjamin Balzer (University of Technology Sydney); Benjamin Young (University of Technology Sydney) |
| Abstract: | We introduce a model of intuition and contemplation in decision problems under uncertainty. Intuition is a garbling of true information and contemplation is the ability to recover the true informational content of signals. We define natural orders on the quality of intuition and on contemplative ability. In any non-strategic decision problem, the agentÕs utility increases as either the quality of her intuition or her contemplative ability improves. We derive versions of BlackwellÕs Informativeness Theorem for our intuitive agent and apply the model to the canonical Bayesian persuasion problem. |
| Date: | 2020–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2020/01&r=all |
| By: | Yanlin Chen (Nanjing Audit University); Jun Zhang (University of Technology Sydney) |
| Abstract: | This paper investigates how a privately informed seller could signal her type through Bayesian persuasion and pricing strategy. We find that it is generally impossible to achieve separation through one channel alone. Furthermore, the outcome that survives the intuitive criterion always exists and is unique. This outcome is separating, for which a closed-form solution is provided. The signaling concern forces the high-type seller to disclose inefficiently more information and charge a higher price, resulting in fewer sales and lower profit. Finally, we show that a regulation on minimal quality could potentially hurt social welfare, and private information hurts the seller. |
| Keywords: | Bayesian persuasion; signaling; information disclosure; informed principal |
| JEL: | D82 D83 L12 |
| Date: | 2019–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2019/14&r=all |
| By: | Ilias Boultzis (Department of Economics, Athens University of Economics and Business) |
| Abstract: | In this paper I discuss truthful equilibria in common agency models. Specifically, I provide general conditions under which truthful equilibria are plausible, easy to calculate and efficient. These conditions generalize similar results in the literature and allow the use of truthful equilibria in novel economic applications. Moreover, I provide two such applications. The first application is a market game in which multiple sellers sell a uniform good to a single buyer. The second application is a lobbying model in which there are externalities in contributions between lobbies. This last example indicates that externalities between principals do not necessarily prevent efficient equilibria. In this regard, this paper provides a set of conditions, under which, truthful equilibria in common agency models with externalities are efficient. |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2007.15942&r=all |
| By: | Nicolas Quérou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Antoine Soubeyran (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Raphael Soubeyran (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | We consider a contracting relationship where the agent's effort induces monetary costs, and limits on the agent's resource restrict his capability to exert effort. We show that, the principal finds it best to offer a sharing contract while providing the agent with an up-front financial transfer only when the monetary cost is neither too low nor too high. Thus, unlike in the limited liability literature, the principal might find it optimal to fund the agent. Moreover, both incentives and the amount of funding are non-monotonic functions of the monetary cost. These results suggest that an increase in the interest rate may affect the form of contracts differently , depending on the initial level of the former. Using the analysis, we provide and discuss several predictions and policy implications. |
| Keywords: | moral hazard,funding,wealth constraint,contract theory |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02866383&r=all |
| By: | Jorge Lemus (University of Illinois Urbana-Champaign); Emil Temnyalov (University of Technology Sydney) |
| Abstract: | We study information disclosure and diversification in contests with techno- logical uncertaintyÑwhere agents can pursue different technologies to compete in the contest, but there is uncertainty regarding which is the right one. The principal can credibly reveal information about the technologies to affect the agentsÕ choices. Information revelation may prompt agents to work on the right technology, which is valuable for the principal, but it can also reduce technological diversification, which may be detrimental for the principal in a setting with technological uncertainty. We characterize the optimal information disclosure policy and show that it can be maximally or partially revealing, or completely uninformative, depending on: (i) the value of diversification; (ii) the quality of the principalÕs information; and (iii) the extent of technological uncertainty. Our results apply to various managerial settings such as innovation contests, tournaments within organizations, and procurement. |
| Keywords: | information disclosure; contests; variety; diversification |
| JEL: | O32 C72 D62 D72 D83 |
| Date: | 2019–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2019/12&r=all |
| By: | Franz Dietrich (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Can a group be a standard rational agent? This would require the group to hold aggregate preferences which maximise expected utility and change only by Bayesian updating. Group rationality is possible, but the only preference aggregation rules which support it (and are minimally Paretian and continuous) are the linear-geometric rules, which combine individual tastes linearly and individual beliefs geometrically. |
| Keywords: | Bayesian aggregation,preference aggregation under uncertainty,expected utility hypothesis for groups,Bayesian revision,rational group agents,linear versus geneometric opinion pooling |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-02905409&r=all |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Cowles Foundation, Yale University) |
| Abstract: | A single seller faces a sequence of buyers with unit demand. The buyers are forwardlooking and long-lived but vanish (and are replaced) at a constant rate. The arrival time and the valuation is private information of each buyer and unobservable to the seller. Any incentive compatible mechanism has to induce truth-telling about the arrival time and the evolution of the valuation. We derive the optimal stationary mechanism in closed form and characterize its qualitative structure. As the arrival time is private information, the buyer can choose the time at which he reports his arrival. The truth-telling constraint regarding the arrival time can be represented as an optimal stopping problem. The stopping time determines the time at which the buyer decides to participate in the mechanism. The resulting value function of each buyer cannot be too convex and must be continuously differentiable everywhere, reflecting the option value of delaying participation. The optimal mechanism thus induces progressive participation by each buyer: he participates either immediately or at a future random time. |
| Keywords: | Dynamic Mechanism Design, Observable Arrival, Unobservable Arrival, Repeated Sales, Interim Incentive Constraints, Interim Participation Constraints, Stopping Problem, Option Value, Progressive Participation |
| JEL: | D44 D82 D83 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2189r2&r=all |
| By: | Anne-Christine Barthel (West Texas A&M University West Texas A&M University Canyon, TX, 79016, USA); Eric Hoffmann (West Texas A&M University West Texas A&M University Canyon, TX, 79016, USA); Tarun Sabarwal (Department of Economics, University of Kansas) |
| Abstract: | In game theory, p-dominance and p-best response sets serve as important robustness solution concepts by allowing for deviations from the stringent common knowledge requirements of Nash equilibrium. However, solving for such sets remains largely intractable beyond the simplest of settings. The contributions of this paper are twofold: First, in monotone games, (which include the broad class of supermodular games, submodular games, and their combinations,) we show that these concepts can be characterized in terms of pure strategy Nash equilibria in an auxiliary game of complete information. This makes it considerably easier to compute such sets, facilitating their broader use. Second, these characterizations lead to new results about the structure of entire classes of such solution concepts, including minimal p-best response (p-MBR) sets, which generalize wellknown results for pure strategy Nash equilibria. In games with strategic complements, these classes are complete lattices. More generally, they are totally unordered. Several examples highlight the results. |
| Keywords: | Strategic complements, Strategic substitutes, Monotone games, p-dominance, p-best response set |
| JEL: | C60 C70 C72 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:202012&r=all |
| By: | Jorge Lemus (University of Illinois Urbana-Champaign); Emil Temnyalov (University of Technology Sydney); John L. Turner (University of Georgia) |
| Abstract: | In liability lawsuits (e.g. product liability or patent infringement), a third party demands compensation from a firm. Verifying that the firm harmed the third party requires a costly lawsuit, so parties often negotiate a settlement agreement. Liability insurance improves the firmÕs bargaining leverage when negotiating this settlement. We study this leverage effect of insurance and characterize equilibrium contracts under symmetric and asymmetric information: in a competitive market, only a pooling equilibrium with under-insurance may exist; in a monopolistic setting, the insurer offers at most two contracts which under-insure low-risk types and may inefficiently induce high-risk types to litigate. |
| Keywords: | liability; insurance; litigation; bargaining; adverse selection; competitive equilibrium; monopoly |
| JEL: | C7 D82 G22 K1 K41 |
| Date: | 2019–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2019/11&r=all |
| By: | Satoru Fujishige; Zaifu Yang |
| Abstract: | We propose a new and general dynamic design for efficiently auctioning multiple heterogeneous indivisible items. The auction applies to all unimodular demand types of Baldwin and Klemperer (2019) which are a necessary and sufficient condition for the existence of competitive equilibrium in economies with indivisible goods and accommodate a variety of substitutes, complements, gross substitutes and complements, strong substitutes, and other kinds. Every bidder has private valuation on each of his interested bundles of items and the seller has a reserve price for every bundle of items. The auctioneer announces the current prices for all items, bidders respond by reporting their demands at these prices, and then the auctioneer adjusts the prices of items. The trading rules are simple, transparent, and detail-free. Although bidders are not assumed to be price-takers so they can strategically exercise their market power, this auction induces bidders to bid truthfully and yields an efficient outcome. Bidding sincerely is an ex post perfect Nash equilibrium. The auction is also privacy-preserving and independent of any probability distribution assumption. |
| Keywords: | Dynamic Auction, Incentive-Compatibility, Competitive Equilibrium, Unimodular Demand Types, Substitute, Complement, Indivisibility, Dynamic Auction Game of Incomplete Information. |
| JEL: | D44 C78 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:20/08&r=all |
| By: | Martin Obradovits; Philipp Plaickner |
| Abstract: | In many (online) markets, consumers can readily observe prices, but need to examine individual products at positive cost in order to assess how well they match their needs. We propose a tractable model of price-directed sequential search in a market where firms compete in prices. Each product meets consumers' basic needs, however they are only fully satisfied with a certain probability. In our setup, four types of pricing equilibria emerge, some of which entail inefficiencies as not all consumers are (always) served. We then lend our model to analyze collusion. We find that for any number of firms, there exists a parameter region in which the payoff-dominant symmetric collusive equilibrium gives rise to a higher expected total social welfare than the repeated one-shot Nash equilibrium. In other regions, welfare is identical under collusion and merely consumer rents are transferred, or both welfare and consumer rents are reduced. An all-inclusive cartel maximizing industry profit increases welfare for an even larger set of parameters, but may also be detrimental to it. |
| Keywords: | Consumer Search, Directed Search, Price Competition, Mixed-Strategy Pricing, Collusion, Cartels |
| JEL: | D43 D83 L13 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2020-24&r=all |
| By: | Guilmi, Corrado Di (Economics Discipline Group, University of Technology Sydney, Australia, and Centre for Applied Macroeconomic Analysis, Australian National University, Canberra, Australia.); Galanis, Giorgos (Goldsmiths, University of London, UK, and Centre for Applied Macroeconomic Analysis, Australian National University.) |
| Abstract: | The original formulation of the median voter theorem predicts parties’ political convergence in a static setup, under two key assumptions : voters preferences being fixed and parties being opportunistic (purely office-motivated). Drawing on recent empirical findings about the evolution of voters’ political preferences, this paper verifies whether the median voter theorem’s results hold when (i) the control variables that influence voters’ preferences endogenously evolve over time, and (ii) parties are not opportunistic. We present a dynamic two-party voting model in which voters’ preferences evolve over time depending on observable common factors and unobservable idiosyncratic characteristics. In such a setting, the convergence of parties’ platforms to the centre is a special case within a range of results that include instability and equilibria at one of the extremes. Moreover, convergence of parties’ platforms is achieved not as the result of electoral strategies, but when neither party has enough support to pursue its agenda. |
| Keywords: | median voter ; dynamic voting ; political preferences JEL codes: C62 ; D72 ; E71 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:61&r=all |
| By: | Jin Yeub Kim (Yonsei Univ) |
| Abstract: | This paper studies Myerson's neutral bargaining solution for a class of Bayesian bargaining problems in which the solution is unique. For this class of examples, I consider a noncooperative mechanism-selection game. I find that all of the interim incentive efficient mechanisms can be supported as sequential equilibria. Further, standard refinement concepts and selection criteria do not restrict the large set of interim Pareto-undominated sequential equilibria. I provide a noncooperative foundation of the neutral bargaining solution by characterizing the solution as a unique coherent equilibrium allocation. |
| Keywords: | Neutral bargaining solution, mechanism-selection game, equilibrium refinement, equilibrium selection criterion, credibility, coherent plan |
| JEL: | C71 C72 C78 D82 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2020rwp-175&r=all |
| By: | Alessandro Sontuoso (Smith Institute for Political Economy and Philosophy, Chapman University; Center for Social Norms and Behavioral Dynamics, University of Pennsylvania); Christina Bicchieri (Center for Social Norms and Behavioral Dynamics, University of Pennsylvania); Alexander Funcke (Center for Social Norms and Behavioral Dynamics, University of Pennsylvania); Einav Hart (Center for Social Norms and Behavioral Dynamics, University of Pennsylvania) |
| Abstract: | We study games where the impact of strategic uncertainty (i.e., ambiguity arising from uncertainty about other players’ actions and beliefs) is compounded by the simultaneous presence of risky prospects (chance moves with commonly-known conditional probabilities). We embed such games in an experimental environment that allows us to test if risk-taking behavior is affected by information that reduces the extent of strategic uncertainty. In doing so, we test some implications of expected utility theory, while making minimal assumptions about individual-level (risk or ambiguity) attitudes. Our analysis provides evidence for an effect of the information: notably, we find that the effect on choice behavior is triggered in some cases by a rational belief revision about others’ actions, and in other cases by a reversal in risk preferences. |
| Keywords: | Strategic Uncertainty; Risk Preferences; Belief Revision; Mixed-Motive games; Network |
| JEL: | C72 C92 D81 D83 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:20-23&r=all |
| By: | Benjamin Balzer (University of Technology Sydney); Antonio Rosato (University of Technology Sydney); Jonas von Wangenheim (University of Bonn, Germany) |
| Abstract: | We study the behavior of expectations-based loss-averse bidders in Dutch and first-price auctions with independent private values. With loss-averse preferences, the strategic equivalence between these formats no longer holds. Intuitively, as the Dutch auction unfolds, a bidder becomes more optimistic about her chances of winning; this stronger "attachment" effect pushes her to bid more aggressively than in the first-price auction. Thus, Dutch auctions raise more revenue than first-price ones. Indeed, we show that the Dutch auction raises the most revenue among standard auction formats. Our results imply that with expectations- based reference-dependent preferences sequential mechanisms might outperform static ones. |
| Keywords: | Reference-Dependent Preferences; Loss Aversion; Dutch Auctions; Revenue Equivalence; Personal Equilibrium |
| JEL: | D44 D81 D82 |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2020/05&r=all |
| By: | Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yves Le Yaouanq (Ludwig-Maximilians-Universit‰t, Munich) |
| Abstract: | We show how incorporating Gilboa, Maccheroni, Marinacci, and Schmeidler’s (2010) notion of objective rationality into the alpha-MEU model of choice under ambiguity (Hurwicz, 1951) can overcome several challenges faced by the baseline model without objective rationality. The decision-maker (DM) has a subjectively rational preference $\succsim^\wedge$, which captures the complete ranking over acts the DM expresses when forced to make a choice; in addition, we endow the DM with a (possibly incomplete) objectively rational preference $\succsim^*$, which captures the rankings the DM deems uncontroversial. Under the objectively founded alpha-MEU model, $\succsim^\wedge$ has an alpha-MEU representation and $\succsim^*$ has a unanimity representation à la Bewley (2002), where both representations feature the same utility index and set of beliefs. While the axiomatic foundations of the baseline alpha-MEU model are still not fully understood, we provide a simple characterization of its objectively founded counterpart. Moreover, in contrast with the baseline model, the model parameters are uniquely identiï¬ ed. Finally, we provide axiomatic foundations for prior-by-prior Bayesian updating of the objectively founded alpha-MEU model, while we show that, for the baseline model, standard updating rules can be ill-deï¬ ned. |
| Keywords: | Ambiguity, Alpha-MEU, Objective rationality, Updating |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2244&r=all |
| By: | Boissonnet, Niels; Ghersengorin, Alexis; Gleyze, Simon |
| Abstract: | We propose a model of chosen preferences together with conditions on choice data that falsify and identify our model. Preferences on alternatives are defined on attributes—e.g. candidates for a job may be experienced or inexperienced. Choice behavior is driven by a subset of attributes. Whenever an attribute becomes salient, the decision maker chooses to make it relevant or irrelevant for her future choices—e.g. employers may deliberately ignore race in the future to prevent discrimination. We identify when this decision is based on the maximization of a meta-preference, implying that preference changes are deliberate. This shows that theories of endogenous preferences, motivated reasoning, evolving attention, changing awareness, etc. can be empirically founded. Moreover, the model can rationalize heterogeneity in choice behavior even under the testable hypothesis that agents' preferences and meta-preferences are identical. |
| Keywords: | Revealed Preference Theory, Reason-Based Choice, Endogenous Preferences, Awareness, Inattention, Changing Tastes |
| JEL: | D80 |
| Date: | 2020–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:101756&r=all |
| By: | Ersin Kšrpeoglu (University College London, UK); C. Gizem Korpeoglu (Bilkent University, Turkey); Isa Hafalir (University of Technology Sydney) |
| Abstract: | We study multiple parallel contests where contest organizers elicit solutions to innovation-related problems from a set of solvers. Each solver may participate in multiple contests and exert effort to improve her solution for each contest she enters, but the quality of her solution at each contest also depends on an output uncertainty. We first analyze whether an organizerÕs profit can be improved by discouraging solvers from participating in multiple contests. We show, interestingly, that organizers benefit from solversÕ participation in multiple contests when the solverÕs output uncertainty in these contests is sufficiently large. A managerial insight from this result is that when all organizers elicit innovative solutions rather than low-novelty solutions, organizers may benefit from solversÕ participation in multiple contests. We also show that organizersÕ average profit increases with solversÕ participation in multiple contests even when some contests seek low-novelty solutions as long as other contests seek cutting-edge innovation. We further show that an organizerÕs profit is unimodal in the number of contests, and the optimal number of contests increases with the solverÕs output uncertainty. This finding may explain why many organizations run multiple contests in practice, and it prescribes running a larger number of contests when the majority of these organizations seek innovative solutions rather than low-novelty solutions. |
| Keywords: | Competition; Crowdsourcing; Platform; Tournament |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2020/06&r=all |
| By: | Thomas Demuynck; Clément Staner |
| Abstract: | We develop a revealed preference approach for the maxmin expected utility model. In contrast to the existing tests in the literature, our revealed preference test can be efficiently implemented and does not rely on a grid search over the set of possible priors. We illustrate the usefulness of our results by implementing our revealed preference tests on two experimental datasets from the literature and we compare the empirical fit of the max-min expected utility model with the subjective expected utility model. |
| Keywords: | Revealed preference theory; Maxmin expected utility; Subjective expected utility |
| JEL: | C14 C60 D11 D12 D81 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/310013&r=all |
| By: | Dyotona Dasgupta (Delhi School of Economics); Dilip Mookherjee (Boston University) |
| Abstract: | We characterize Pareto efficient long term ‘relational’ lending contracts with one-sided lender commitment, to finance specific investments and smooth intertemporal consumption of a borrower who cannot commit to repaying loans. The borrower can save and accumulate assets, and has strictly concave preferences over consumption. For borrowers with initial wealth above a threshold, the first-best is sustainable with a stationary contract. For poorer agents, there is perpetual but shrinking underinvestment which disappears in the long run. Borrowing, investment and wealth grow and converge to the first-best threshold. Optimal allocations can be implemented by backloaded ‘progressive’ lending: a sequence of one period loans of growing size. Increased borrower bargaining power raises short run consumption and investment, with no long term effects. We discuss extensions to incorporate random productivity shocks. |
| Keywords: | Dynamic Contracts, Progressive Lending, Microfinance |
| JEL: | O16 G21 D86 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-348&r=all |