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on Microeconomics |
| By: | Jakub Steiner; Colin Stewart |
| Abstract: | We present a two-stage coordination game in which early choices of experts with special interests are observed by followers who move in the second stage. We show that the equilibrium outcome is biased toward the experts' interests even though followers know the distribution of expert interests and account for it when evaluating observed experts' actions. Expert influence is fully decentralized in the sense that each individual expert has a negligible impact. The bias in favor of experts results from a social learning effect that is multiplied through a coordination motive. We show that the total effect can be large even if the direct social learning effect is small. We apply our results to the diffusion of products with network externalities and the onset of social movements. |
| Keywords: | voting; coordination; experts |
| JEL: | D72 D82 D83 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp458&r=mic |
| By: | Martin Shubik (Cowles Foundation, Yale University) |
| Abstract: | An overview is given of the utilization of strategic market games in the development of a game theory based theory of money and financial institutions. |
| JEL: | C72 C73 E44 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1882&r=mic |
| By: | Itay Goldstein (University of Pennsylvania); Philip Bond (University of Minnesota) |
| Abstract: | Market prices are thought to contain a lot of useful information. Hence, government regulators (and other economic agents) are often urged to use market prices to guide decisions. An important issue to consider is the endogeneity of market prices and how they are affected by the prospect of government intervention. We show that if the government learns from the price when taking a corrective action, it might reduce the incentives of speculators to trade on their information, and hence reduce price informativeness. We show that transparency may reduce trading incentives and price informativeness further. Diametrically opposite implications hold for the alternative case in which the government's action amplifies the effect of underlying fundamentals. We derive implications for the optimal use of market information and for the government's incentives to produce its own information |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:225&r=mic |
| By: | Wilfredo L. Maldonado; José A. Rodrigues-Neto |
| Abstract: | We analyze a static game of public good contributions where finitely many anonymous players have heterogeneous preferences about the public good and heterogeneous beliefs about the distribution of preferences. In the unique symmetric equilibrium, the only individuals who make positive contributions are those who most value the public good and who are also the most pessimistic; that is, according to their beliefs, the proportion of players who value the most the public good is smaller than it would be according to any other possible belief. We predict whether the aggregate contribution is larger or smaller than it would be in an analogous game with complete information (and heterogeneous preferences), by comparing the beliefs of contributors with the true distribution of preferences. A tradeoff between preferences and beliefs arises if there is no individual who simultaneously has the highest preference type and the most pessimistic belief. In this case, there is a symmetric equilibrium, and multiple symmetric equilibria occur only if there are more than two preference types. |
| JEL: | C72 H41 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2012-599&r=mic |
| By: | Marian W. Moszoro; Pablo T. Spiller |
| Abstract: | The lack of flexibility in public procurement design and implementation reflects public agents' political risk adaptation to limit hazards from opportunistic third parties – political opponents, competitors, interest groups – while externalizing the associated adaptation costs to the public at large. Reduced flexibility limits the likelihood of opportunistic challenge lowering third parties' expected gains and increasing litigation costs. We provide a comprehensible theoretical framework with empirically testable predictions. |
| JEL: | D23 D72 D73 D78 H57 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18636&r=mic |
| By: | Ani Guerdjikova; Jürgen Eichberger (THEMA, Universite de Cergy-Pontoise and THEMA; University of Heidelberg) |
| Abstract: | In this paper we suggest a behavioral approach to decision making under ambiguity based on available information. A decision situation is characterized by a set of actions, a set of outcomes, and data consisting of action-outcome pairs. Decision-makers express preferences over actions and data sets. We derive a representation of preferences, which separates utility and beliefs. While the utility function is purely subjective, the beliefs of the decision maker combine objective characteristics of the data (number and frequency of observations) with subjective features of the decision maker (similarity of observations and perceived ambiguity). We identify the subjectively perceived degree of ambiguity and separate it into ambiguity due to a limited number of observations and ambiguity due to data heterogeneity. We also determine the decision maker’s attitude towards ambiguity. The special case of no ambiguity represents beliefs as similarity-weighted frequencies and provides a behavioral foundation for Billot, Gilboa, Samet and Schmeidler’s (2005) representation. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2012-45&r=mic |
| By: | L. Bagnoli; G. Negroni |
| Abstract: | Two parties bargaining over a pie, the size of which is determined by their previous investment decisions. The bargaining rule is sensitive to investment behavior. Two games are considered. In both, bargaining proceeds according to the Nash Demand Game when a symmetric investments pro?le is observed. When, on the other hand, an asymmetric investments pro?le is observed, we assume that bargaining proceeds according to the Ultimatum Game in one case and according to a Dictator Game in the other. We hereby show that in both games when a unique stochastically stable outcome exists it supports an homogeneous behavior in the whole population both at the investment stage and at the distribution stage. A norm of investment and a norm of division must therefore coevolve in the two games, supporting both the efficient investment pro?le and the egalitarian distribution of the surplus, respectively. The two games differ depending on the conditions needed for the two norms to coevolve. The games are proposed to explain the social norms used in modern hunter-gatherer societies. |
| JEL: | C78 D83 L14 Z13 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp858&r=mic |
| By: | Nolan Miller; Alexander F. Wagner; Richard J. Zeckhauser |
| Abstract: | A principal provides budgets to agents (e.g., divisions of a firm or the principal's children) whose expenditures provide her benefits, either materially or because of altruism. Only agents know their potential to generate benefits. We prove that if the more "productive" agents are also more risk-tolerant (as holds in the sample of individuals we surveyed), the principal can screen agents and bolster target efficiency by offering a choice between a nonrandom budget and a two-outcome risky budget. When, at very low allocations, the ratio of the more risk-averse type's marginal utility to that of the other type is unbounded above (e.g., as with CRRA), the first-best is approached. -- A biblical opening enlivens the analysis. |
| JEL: | D82 G31 H12 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18634&r=mic |
| By: | Pascal Billand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Christophe Bravard (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Sudipta Sarangi (Department of Economics, Louisiana State University - Department of Economics, Louisiana State University) |
| Abstract: | We study the formation of mutual insurance networks in a model where every agent who obtains more resources gives a -xed amount of resources to all agents who have obtained less resources. The low resource agent must be directly linked to the high resource agent to receive this transfer. We identify the pairwise stable networks and e-cient networks. Then, we extend our model to situations where agents di-er in their generosity with regard to the transfer scheme. We show that there exist conditions under which in a pairwise stable network agents who provide the same level of transfers are linked together, while there are no links between agents who provide high transfers and agents who provide low transfers. |
| Keywords: | Mutual insurance networks; Pairwise stable networks; Effi cient networks |
| Date: | 2012–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00768430&r=mic |
| By: | Jianfeng Yu (University of Minnesota); Bin Wei (Federal Reserve Board); Zhiguo He (University of Chicago, Booth School of Business) |
| Abstract: | This paper introduces profitability uncertainty into an infinite-horizon variation of the classic Holmstrom and Milgrom (1987) model, and studies optimal dynamic contracting with endogenous learning. The agent's potential belief manipulation leads to the hidden information problem, which makes incentive provisions intertemporally linked in the optimal contract. We reduce the contracting problem into a dynamic programming problem with one state variable, and characterize the optimal contract with an ordinary differential equation. In the benchmark case of Holmstrom and Milgrom (1987) without learning, the optimal effort is constant, and the optimal contract is linear. In contrast, in our model with endogenous learning, the optimal effort policy becomes history dependent, and decreases over time on average. Moreover, we show that the optimal contract exhibits an option-like feature in that the incentives rise after good performance shocks. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:221&r=mic |
| By: | Zara Sharif (Erasmus University Rotterdam); Otto H. Swank (Erasmus University Rotterdam) |
| Abstract: | Decisions-makers often rely on information supplied by interested parties. In practice, some parties have easier access to information than other parties. In this light, we examine whether more powerful parties have a disproportionate influence on decisions. We show that more powerful parties influence decisions with higher probability. However, in expected terms, decisions do not depend on the relative strength of interested parties. When parties have not provided information, decisions are biased towards the less powerful parties. Finally, we show that compelling parties to supply information destroys incentives to collect information. |
| Keywords: | information collection; communication; interest groups; decision-making |
| JEL: | D72 D78 D82 H39 |
| Date: | 2012–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120134&r=mic |
| By: | Braz Camargo; Elena Pastorino |
| Abstract: | We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability to produce output. The ability of a worker is initially unknown to both the worker and the firm, and a worker's effort affects the information on ability that is conveyed by performance. We characterize equilibria and show that they display commitment to employment only when effort has a persistent but delayed impact on output. In this case, by providing insurance against early termination, commitment encourages workers to exert effort, thus improving the firm's ability to identify their talent. We argue that the incentive value of commitment to retention helps explain the use of fixed probationary appointments in environments in which there exists uncertainty about ability. |
| Keywords: | Employment |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:475&r=mic |
| By: | Mikel Berdud (Departamento de Economía-UPNA); Juan M. Cabasés (Departamento de Economía-UPNA); Jorge Nieto (Departamento de Economía-UPNA) |
| Abstract: | This paper explores optimality of contracts and incentives when the principal (public organisation) can undertake investments to change agents’ (public workers) identity. In the model, workers within the organisation can have different identities. We develop a principal-agent dynamical model with moral hazard, which captures the possibility of affecting this workers’ identity through contracts offered by the firm. In the model, identity is a motivation source which reduces agents’ isutility from effort. We use the term identity to refer to a situation in which the worker shares the organisational objectives and views herself as a part of the organisation. Contrary, we use the term conflict to refer to a ituation in which workers behave self-interested and frequently in the opposite way of the organisation. We assume that identity can be achieved when principal include mission-sense developing investments in contracts. By mission we mean a single culture that is shared by all the members of an organization. We discuss the conditions under which spending resources in changing workers’ identity and invest in this kind of motivational capital is optimal for organisations. Our results may help to inform public firms’ managers about the optimal design of incentive schemes and policies. For instance, we conclude that investing in motivational capital is the best option in the long run whereas pure monetary incentives works better in the short run. |
| Keywords: | contracts, moral hazard, identity, socialization, mission, motivational capital. |
| JEL: | D03 D86 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nav:ecupna:1214&r=mic |
| By: | Paulina Restrepo-Echavarria (The Ohio State University); Antonella Tutino (Federal Reserve Bank of Dallas); Anton Cheremukhin (Federal Reserve Bank of Dallas) |
| Abstract: | We present a model where information processing constraints on workers and firms lead to an endogenous matching function. We provide conditions under which the matching process has a unique equilibrium computable in closed-form. The main ÃÂfinding is that equilibrium matching is generally inefficient. This result does not depend on the form of heterogeneity, the distribution of surplus or bargaining rules. It is driven by information processing constraints which weaken the strategic complementarities and enhance the negative externalities in search efforts of workers and firms. A closed-form solution of the model provides a bound on the size of this inefficiency. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:164&r=mic |
| By: | Ying Chen; Hülya Eraslan |
| Abstract: | We analyze a legislative bargaining game over an ideological and a distributive issue. Legislators are privately informed about their ideological positions. Communication takes place before a proposal is offered and majority rule voting determines the outcome. We compare the outcome of the ``bundled bargaining" game in which the legislators negotiate over both issues together to that of the ``separate bargaining" game in which the legislators negotiate over the issues one at a time. Although bundled bargaining allows the proposer to use transfers as an instrument for compromise on the ideological issue, we identify two disadvantages of bundled bargaining under asymmetric information: (i) risk of losing the surplus (failure to reach agreement on ideology results in the dissipation of the surplus under bundled bargaining, but not under separate bargaining); (ii) informational loss (the legislators may convey less information in the bundled bargaining game). Even when there is no risk of losing the surplus, the informational loss from bundling can be sufficiently large that it makes the proposer worse off. |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:605&r=mic |
| By: | John Asker; Heski Bar-Isaac |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ste:nystbu:12-20&r=mic |
| By: | Makoto Watanabe (VU University Amsterdam) |
| Abstract: | This paper studies an intermediated market operated by middlemen with high inventory holdings. I present a directed search model in which middlemen are less likely to experience a stockout because they have the advantage of inventory capacity, relative to other sellers. The model explains why popular items are sold at a larger premium, and everyday items at a larger discount, by large-scaled intermediaries. The concentration of middlemen's market, i.e., few middlemen, each with large capacity, can lead to a higher matching efficiency, but with a lower total welfare, compared to having many middlemen, each with small capacity. |
| Keywords: | Directed Search; Intermediation; Inventory holdings |
| JEL: | D4 F1 G2 L1 L8 R1 |
| Date: | 2012–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120138&r=mic |
| By: | Todd Keister (Federal Reserve Bank of New York); Huberto Ennis (Richmond Fed) |
| Abstract: | We study a finite-depositor version of the Diamond-Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the (constrained) efficient allocation of resources in closed-form and show that this allocation provides liquidity insurance to depositors. The contractual arrangement that decentralizes this allocation has debt-like features and resembles the type of demand deposits commonly offered by banking institutions. We provide examples where this arrangement admits another equilibrium in which some depositors run on the bank, withdrawing funds regardless of their liquidity needs. A bank run in our setting is always partial, with only those depositors who can withdraw sufficiently early participating. Depositors who are late to withdraw during a run suffer significant discounts from the face value of their deposits. The run, while partial, may involve a large number of depositors and result in significant inefficiencies. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:179&r=mic |
| By: | Artashes Karapetyan (Norges Bank (Central Bank of Norway)); Bogdan Stacescu (BI Norwegian Business School,) |
| Abstract: | Lending is often associated with significant asymmetric information issues between suppliers of funds and their potential borrowers. Banks can screen their borrowers, or can require them to post collateral in order to select creditworthy projects. We find that the potential for longer-term relationships increases banks' preference for screening. This is because posting collateral only provides the information that the current project of a given borrower is of good quality, whereas screening provides information that can be used in evaluating future projects as well as the current ones. |
| Keywords: | Collateral, Screening, Bank relationships |
| JEL: | G21 L13 |
| Date: | 2012–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_18&r=mic |
| By: | Artashes Karapetyan (Norges Bank (Central Bank of Norway)); Bogdan Stacescu (BI Norwegian Business School,) |
| Abstract: | Information sharing and collateral reduce adverse selection costs, but are costly for lenders. When a bank learns more about the types of its rival's borrowers through information sharing (e.g., credit bureaus), it might seem that this information should substitute the role of collateral in screening their types. We instead show that information sharing may increase, rather than decrease, the role of collateral, which can be required in loans to high-risk borrowers in cases when it is not in the absence of information sharing. We extend to show that ex ante screening can substitute both collateral and information sharing. |
| Keywords: | Bank competition, Information sharing, Collateral |
| JEL: | G21 L13 |
| Date: | 2012–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_19&r=mic |
| By: | Rosa-Branca Esteves (Universidade do Minho - NIPE) |
| Abstract: | This paper investigates the competitive and welfare effects of information accuracy improvements in markets where firms can price discriminate after observing a private and noisy signal about a consumer’s brand preference. It shows that firms charge more to customers they believe have a brand preference for them, and that this price has an inverted-U shaped relationship with the signal’s accuracy. In contrast, the price charged after a disloyal signal has been observed falls as the signal’s accuracy rises. While industry profit and overall welfare fall monotonically as price discrimination is based on increasingly more accurate information, the reverse happens to consumer surplus. |
| Keywords: | Competitive Price Discrimination, Imperfect Customer Recognition, Imperfect Information |
| JEL: | D43 D80 L13 L40 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:12/2012&r=mic |
| By: | Bouckaert, J.M.C.; Degryse, H.A.; Dijk, T. van (Tilburg University, Tilburg Law and Economics Center) |
| Abstract: | Abstract: We study the competitive and welfare consequences when only one firm must commit to uniform pricing while the competitor’s pricing policy is left unconstrained. The asymmetric no-discrimination constraint prohibits both behaviour-based price discrimination within the competitive segment and third-degree price discrimination across the monopolistic and competitive segments. We find that an asymmetric no-discrimination constraint only leads to higher profits for the unconstrained firm if the monopolistic segment is large enough. Therefore, a regulatory policy objective of encouraging entry is not served by an asymmetric no-discrimination constraint if the monopolistic segment is small. Only when the monopolistic segment is small and rivalry exists in the competitive segment does the asymmetric no-discrimination constraint enhance welfare. |
| Keywords: | Dominant firms;price discrimination;competition policy;regulation. |
| JEL: | D11 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubtil:2012004&r=mic |
| By: | Stefan Arping (University of Amsterdam) |
| Abstract: | In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates. |
| Keywords: | Banking Competition; Soft Budget Constraint Problem; Moral Hazard |
| JEL: | G2 G3 |
| Date: | 2012–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120146&r=mic |
| By: | V. Sasidevan; Deepak Dhar |
| Abstract: | We study a variation of the minority game, in which each agent uses a probabilistic strategy, and tries to optimize her total expected weighted future payoff, the weight of the payoff after $\tau$ days being $(1 - \lambda) \lambda^\tau$, with $\lambda < 1$. We show that standard Nash equilibrium concept is unsatisfactory in this case, and propose an alternative, called co-action equilibrium. We study the co-action equilibrium steady state of the system as $\lambda$ is varied from 0 to 1, and show that it gives a higher expected payoff than the Nash equilibrium for all agents. Parameters of the optimal strategy depend on $\lambda$, and can change discontinuously as $\lambda$ is varied, even for a finite number of agents. We analyse in detail the optimal strategies when the number of agents $N \leq 7$, and they decide selfishly, using only previous day's outcome. |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1212.6601&r=mic |
| By: | Holmberg, Pär (Research Institute of Industrial Economics (IFN)); Philpott, Andrew (Department of Engineering Science) |
| Abstract: | Transport constraints limit competition and arbitrageurs' possibilities of exploiting price differences between goods in neighbouring markets, especially when storage capacity is negligible. We analyse this in markets where strategic producers compete with supply functions, as in wholesale electricity markets. For networks with a radial structure, we show that existence of supply function equilibria (SFE) is ensured if demand shocks are suffciently evenly distributed, and solve for SFE in symmetric radial networks with uniform multi-dimensional nodal demand shocks. An equilibrium offer in such networks is identical to an SFE offer in an isolated node where the symmetric number of firms has been scaled by a market integration factor, the expected number of nodes that are completely integrated with a node in the symmetric network. The analysis can be extended to mesh networks (as in electricity systems) although the resulting models do not simplify as in the radial case. |
| Keywords: | Transmission network; Graph theory; Market integration; Wholesale electricity markets |
| JEL: | C72 D43 D44 L91 |
| Date: | 2012–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0945&r=mic |
| By: | Takuya Masuzawa (Faculty of Economics, Keio University) |
| Abstract: | In this note, we demonstrate, in a simpler and more direct manner than done in existing literature, the existence of an equilibrium in a market whose excess demand function has the gross substitute property. |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:kei:dpaper:2012-022&r=mic |
| By: | Laszlo Goerke (Institute for Labour Law and Industrial Relations in the EU, University of Trier); Frederik Herzberg; Thorsten Upmann |
| Abstract: | Applying a framework of perfect competition under uncertainty, we contribute to the discussion of whether or not ad valorem taxes and specific taxes are equivalent. While this equivalence holds without price uncertainty, we show that ad valorem taxes and specific taxes are “almost never” equivalent in the presence of uncertainty if we demand equivalence to hold pathwise. Since we obtain this result under perfect competition, our analysis also provides a further rationale for why the equivalence must fail under imperfect competition. |
| Keywords: | ad valorem taxes and specific taxes, revenue neutrality, price uncertainty, concept of pathwise neutrality |
| JEL: | H20 H21 H61 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:iaa:dpaper:201205&r=mic |
| By: | Vetter, Henrik |
| Abstract: | A digressive tax like a variable rate sales tax or a tax on price gives firms an incentive for expanding output. Thus, unlike unit and ad valorem taxes which amplify the harm from monopoly, a digressive tax lessens the harm. We analyse a tax on price with respect to efficiency and practical policy appeal. Using a tax on price in combination with ad valorem taxation it is possible to achieve the Ramsey solution. That is, the combination of the two taxes secures tax revenue in the least distortive way. We also show how tax reforms based only on observation of price and quantity can make use of a tax on price in order to improve welfare. That is, it is practical to use a tax on price. -- |
| Keywords: | tax on price,ad valorem tax,tax incidence |
| JEL: | H21 L31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201260&r=mic |