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on Microeconomics |
| By: | Aleksandrs Slivkins |
| Abstract: | How to incentivize self-interested agents to explore when they prefer to exploit? Consider a population of self-interested agents that make decisions under uncertainty. They "explore" to acquire new information and "exploit" this information to make good decisions. Collectively they need to balance these two objectives, but their incentives are skewed toward exploitation. This is because exploration is costly, but its benefits are spread over many agents in the future. "Incentivized Exploration" addresses this issue via strategic communication. Consider a benign ``principal" which can communicate with the agents and make recommendations, but cannot force the agents to comply. Moreover, suppose the principal can observe the agents' decisions and the outcomes of these decisions. The goal is to design a communication and recommendation policy which (i) achieves a desirable balance between exploration and exploitation, and (ii) incentivizes the agents to follow recommendations. What makes it feasible is "information asymmetry": the principal knows more than any one agent, as it collects information from many. It is essential that the principal does not fully reveal all its knowledge to the agents. Incentivized exploration combines two important problems in, resp., machine learning and theoretical economics. First, if agents always follow recommendations, the principal faces a multi-armed bandit problem: essentially, design an algorithm that balances exploration and exploitation. Second, interaction with a single agent corresponds to "Bayesian persuasion", where a principal leverages information asymmetry to convince an agent to take a particular action. We provide a brief but self-contained introduction to each problem through the lens of incentivized exploration, solving a key special case of the former as a sub-problem of the latter. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.17086 |
| By: | Davide Bosco; Mario Gilli; Andrea Sorrentino |
| Abstract: | In this paper we introduce incomplete information à la global games into a max-min two-group contest with binary actions and we characterize the set of equilibria. Depending on whether the complete information assumption is relaxed on the value of the prize or on the cost of providing effort, we obtain different results in terms of equilibrium selection: in the first case, there exist both an equilibrium in (monotonic) switching strategies and an equilibrium robust to incomplete information in the sense of Kajii and Morris [1997], in which no player exerts effort in both groups, whereas in the second one there exists a unique equilibrium in (monotonic) switching-strategies. |
| Keywords: | Group contests, incomplete information, global games. |
| JEL: | D74 D71 C72 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:545 |
| By: | Onuchic, Paula; Ray, Debraj |
| Abstract: | A sender sells an object of unknown quality to a receiver who pays his expected value for it. Sender and receiver might hold different priors over quality. The sender commits to a monotone categorization of quality. We characterize the sender's optimal monotone categorization, the optimality of full pooling or full separation, and make precise a sense in which pooling is dominant relative to separation. As an application, we study the design of a grading scheme by an educational institution that seeks to signal student qualities and simultaneously incentivize students to learn. We show how these incentive constraints are embedded as a distortion of the school's prior over student qualities, generating a monotone categorization problem with distinct sender and receiver priors. |
| Keywords: | D82; D83; heterogeneous priors; information design; Monotonic categorization |
| JEL: | J1 |
| Date: | 2023–11–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125653 |
| By: | Hammond, Peter J (University of Warwick) |
| Abstract: | A decision-making agent is usually assumed to be Bayesian rational, or to maximize subjective expected utility, in the context of a completely and correctly specified decision model. Following the discussion in Hammond (2007) of Schumpeter's (1911, 1934) concept of entrepreneurship, and of Shackle's (1953) concept of potential surprise, this paper considers enlivened decision trees whose growth over time cannot be accurately modelled in full detail. An enlivened decision tree involves more severe limitations than model mis-specification, unforeseen contingencies, or unawareness, all of which are typically modelled with reference to a universal state space large enough to encompass any decision model that an agent may consider. We consider three motivating examples based on : (i) Homer's classic tale of Odysseus and the Sirens; (ii) a two-period linear-quadratic model of portfolio choice; (iii) the game of Chess. Though our novel framework transcends standard notions of risk or uncertainty, a form of Bayesian rationality is still possible. Instead of subjective probabilities of different models of a classical finite decision tree, we show that Bayesian rationality and continuity imply subjective expected utility maximization when some terminal nodes have attached real-valued subjective evaluations instead of consequences. Moreover, subjective evaluations lie behind, for example, the kind of Monte Carlo tree search algorithm that has been used by some powerful chess-playing software packages. |
| Keywords: | Prerationality ; consequentialist decision theory ; entrepreneurship ; potential surprise ; enlivened decision trees ; subjective evaluation of continuation ; subtrees ; Monte Carlo tree search. JEL Codes: D81 ; D91 ; D11 ; D63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:wcreta:89 |
| By: | Mauleon, Ana (Université catholique de Louvain, LIDAM/CORE, Belgium); Nanumyan, Mariam (Bielefeld University); Vannetelbosch, Vincent (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | We study a network game on a fixed multi-layer network of two types of relationships. The social interactions in the first layer carries a pressure to conform with the social norm within the layer. The second layer provides additional strategic complementarities from players’ interaction. Players are endowed with personal ideal efforts and are heterogeneous in their ideal efforts and productivity. Each player repeatedly chooses her effort level in the network game and updates her ideal effort based on the new effort choice. Each player suffers disutility when her effort differs from her neighbors’ efforts or is inconsistent with her ideal effort. We find the pure Nash equilibrium of the game in each period and provide conditions for the convergence of efforts and ideals to a steady state. Furthermore, we provide conditions for emerging long-run consensus about ideals in groups of players and the entire network. |
| Keywords: | Multi-layer networks ; network games ; personal norms ; social norms ; strategic complementarities |
| JEL: | A14 C72 D85 |
| Date: | 2024–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2024023 |
| By: | Alessandro Dovis; Paolo Martellini |
| Abstract: | This paper studies optimal information disclosure in dynamic insurance economies with income risk in which an incumbent firm acquires more information about a consumer's persistent type than the rest of the market does. We find that if the incumbent can commit to long-term contracts but the consumer can walk away, the optimal disclosure prescribes no information revelation to maximize cross-subsidization. However, if the incumbent lacks commitment, no cross-subsidization of low-income consumers is feasible for any public information disclosure because of adverse selection. We show that partial information disclosure is typically optimal and it aims at implementing intertemporal consumption smoothing between the first period and the high-state in the second period, generating an inverse of the back-loading result in Harris and Holmstrom (1982). Lastly, we show that, without commitment, banning long-term relations can be beneficial to consumers. Our results can be used to analyze the consequences of policy proposals such as open banking and consumer data ownership. |
| JEL: | E0 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33051 |
| By: | J. Aislinn Bohren (University of Pennsylvania); Daniel N. Hauser (Aalto University) |
| Abstract: | We link two approaches to biased belief formation: non-Bayesian updating and misspecified models. The former parameterizes a bias with an updating rule mapping signals to posterior beliefs or a belief forecast describing anticipated beliefs; the latter is an incorrect model of the signal generating process. Our main result derives necessary and sufficient conditions for an updating rule and belief forecast to have a misspecified model representation, shows that these two components uniquely pin down a representation, and constructs it. This clarifies the belief restrictions implicit in the misspecified model approach. It also allows leveraging of the distinct advantages of each approach by decomposing a model into empirically identifiable components, showing these components isolate the two forms of bias that the model encodes—the retrospective bias after information arrives and the prospective bias beforehand, and rendering off-the-shelf tools to characterize asymptotic learning and equilibrium predictions in misspecified models applicable to non-Bayesian updating. |
| Keywords: | Model misspecification, belief formation, learning, non-Bayesian updating, heuristics |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-032 |
| By: | Muhammed Ceesay; Nicola Doni; Domenico Menicucci |
| Abstract: | We examine a two-bidder auction setting in which the distributions for the bidders’ valuations are asymmetric over a support consisting of three elements. For the first price auction we derive the unique Bayes Nash Equilibrium in closed form, which allows to obtain more precise results with respect to the classical results in the literature on how asymmetries affect equilibrium bidding. Then we compare the revenue in the first price auction with the revenue in the second price auction. The latter is often superior to the former and we determine precisely, given a distribution for the value of the weak bidder, when a distribution for the value of the strong bidder exists such that the first price auction is superior to the second auction. For two particular asymmetries, shift and stretch, we show that in our setting the results are quite different from the results which are well-known in the literature. |
| Keywords: | Asymmetric auctions, First price auction, Second price auction, Revenue ranking |
| JEL: | D44 D82 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_20.rdf |
| By: | Sayantan Ghosal; Lukasz Woźny |
| Abstract: | Although a Condorcet winner commands a majority in its favor, there is no guarantee of unanimity. In a Lindahl equilibrium, a suitably chosen system of personalized transfers and prices ensures unanimity, but there is no guarantee of a majority vote in its favor. Do Lindahl equilibria decentralize Condorcet winners? In a setting where voters’ preferences are satiated, characterized by bliss points, this paper proposes a new balancedness condition which is satisfied when a Condorcet winner lies within the interior of the convex hull of voters’ bliss points. We show that such a political compromise between the most preferred policies of different voter types can be decentralized as Lindahl equilibria. |
| Keywords: | Bliss points; Condorcet winner; Lindahl equilibria, balancedness. |
| JEL: | D50 D61 D71 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_08 |
| By: | Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University) |
| Abstract: | Using the framework of a Hotelling linear market, we consider the impact of network connectivity (horizontal interoperability) between network goods on strategic R&D competition and profits. We first demonstrate that in the case of a fully covered (mature) market, as network connectivity increases, R&D activities decrease, but profits increase. Then, relaxing the assumption of market coverage, we demonstrate that in the case of a partially covered and uncovered (immature) market, as network connectivity increases, R&D activities at first decrease, and then increase given strong network externalities. Otherwise, the R&D activities monotonically increase. However, regardless of the strength of the network externalities, profits increase. Regarding quantity competition in the immature market, we obtain the same results in the case of price competition. We also consider the implication of network connectivity for market competitiveness. |
| Keywords: | innovation, Network externality, Connectivity, interoperability, R&D competition, Hotelling linear market, Fulfilled expectations, Lerner index |
| JEL: | L13 L15 L31 L32 D43 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:280 |
| By: | Mao Fabrice Djete |
| Abstract: | In this paper, we address three Principal--Agent problems in a moral hazard context and show that they are connected. We start by studying the problem of Principal with multiple Agents in cooperation. The term cooperation is manifested here by the fact that the agents optimize their criteria through Pareto equilibria. We show that as the number of agents tends to infinity, the principal's value function converges to the value function of a McKean--Vlasov control problem. Using the solution to this McKean--Vlasov control problem, we derive a constructive method for obtaining approximately optimal contracts for the principal's problem with multiple agents in cooperation. In a second step, we show that the problem of Principal with multiple Agents turns out to also converge, when the number of agents goes to infinity, towards a new Principal--Agent problem which is the Principal--Agent problem with Mckean--Vlasov dynamics. This is a Principal--Agent problem where the agent--controlled production follows a Mckean-Vlasov dynamics and the contract can depend of the distribution of the production. The value function of the principal in this setting is equivalent to that of the same McKean--Vlasov control problem from the multi--agent scenario. Furthermore, we show that an optimal contract can be constructed from the solution to this McKean--Vlasov control problem. We conclude by discussing, in a simple example, the connection of these problems with the multitask Principal--Agent problem which is a situation when a principal delegates multiple tasks that can be correlated to a single agent. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.15818 |
| By: | J. Aislinn Bohren (University of Pennsylvania); Josh Hascher (University of Chicago); Alex Imas (University of Chicago); Michael Ungeheuer (Aalto University); Martin Weber (University of Mannheim) |
| Abstract: | We propose a framework where perceptions of uncertainty are driven by the interaction between cognitive constraints and the way that people learn about it—whether information is presented sequentially or simultaneously. People can learn about uncertainty by observing the distribution of outcomes all at once (e.g., seeing a stock return distribution) or sampling outcomes from the relevant distribution sequentially (e.g., experiencing a series of stock returns). Limited attention leads to the overweighting of unlikely but salient events—the dominant force when learning from simultaneous information—whereas imperfect recall leads to the underweighting of such events—the dominant force when learning sequentially. A series of studies show that, when learning from simultaneous information, people are overoptimistic about and are attracted to assets that mostly underperform, but sporadically exhibit large outperformance. However, they overwhelmingly select more consistently outperforming assets when learning the same information sequentially, and this is reflected in beliefs. The entire 40-percentage point preference reversal appears to be driven by limited attention and memory; manipulating these factors completely eliminates the effect of the learning environment on choices and beliefs, and can even reverse it. Our results have implication for the design of policy and the recovery of preferences from choice data. |
| Keywords: | Choice Under Risk, Bounded Rationality, Perceptions of Uncertainty, Information, Beliefs, Attention, Memory, Description-Experience Gap |
| Date: | 2024–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-031 |
| By: | Jose Correa; Andres Cristi; Laura Vargas Koch |
| Abstract: | A fundamental economic question is that of designing revenue-maximizing mechanisms in dynamic environments. This paper considers a simple yet compelling market model to tackle this question, where forward-looking buyers arrive at the market over discrete time periods, and a monopolistic seller is endowed with a limited supply of a single good. In the case of i.i.d. and regular valuations for the buyers, Board and Skrzypacz (2016) characterized the optimal mechanism and proved the optimality of posted prices in the continuous-time limit. Our main result considers the limit case of a continuum of buyers, establishing that for arbitrary independent buyers' valuations, posted prices and capacity rationing can implement the optimal anonymous mechanism. Our result departs from the literature in three ways: It does not make any regularity assumptions, it considers the case of general, not necessarily i.i.d., arrivals, and finally, not only posted prices but also capacity rationing takes part in the optimal mechanism. Additionally, if supply is unlimited, we show that the rationing effect vanishes, and the optimal mechanism can be implemented using posted prices only, \`a la Board (2008). |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.11738 |
| By: | Onuchic, Paula; Ray, Debraj |
| Abstract: | We study collaborative work in pairs when potential collaborators are motivated by the reputational implications of (joint or solo) projects. In equilibrium, individual collaboration strategies both influence and are influenced by the public assignment of credit for joint work across the two partners. We investigate the fragility of collaboration to small biases in the public’s credit assignment. When collaborators are symmetric, symmetric equilibria are often fragile, and in nonfragile equilibria individuals receive asymmetric collaborative credit based on payoff-irrelevant “identities.” We study payoff distributions across identities within asymmetric equilibria, and compare aggregate welfare across symmetric and asymmetric equilibria. (JEL A11, D82, I23). |
| JEL: | J1 |
| Date: | 2023–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125652 |
| By: | Emanuel Ornelas |
| Abstract: | I study how political competition affects the feasibility of free trade agreements (FTAs). I show that the possibility of political turnover creates strategic motivations for the formation of FTAs. Specifically, a government facing a high enough probability of losing power will have an incentive to form a trading bloc to “tie the hands” of its successor. This incentive mitigates inefficiencies in the incumbent’s decision to form FTAs, regardless of its bias toward special interests. An FTA can affect the likelihood of political turnover as well. Accounting for that effect, I show that an incumbent party with a known bias toward special interests could seek an FTA as a commitment device toward less distortionary policies, thereby enhancing its own electoral prospects. Overall, the analysis reveals the importance of considering the time horizon of policymakers when studying their decision to enter in FTAs. |
| Keywords: | regionalism, free trade agreements, political competition, lobbying |
| JEL: | F15 F13 D72 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11403 |