Skip to main content Accessibility help

We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.

Close cookie message
×
  1. Home
  2. Browse subjects
  3. Economics
  4. Microeconomics
  5. Content listing

Refine search

Refine search

Access:
Content type:
Publication date:
Apply   From and To filters
Subject: Show more
Journals Show more
Publishers: Show more
Societies Show more
Series: Show more
Collections: Show more

Actions for selected content:

Select all | Deselect all
  • View selected items
  • Export citations
  • Download PDF (zip)
  • Save to Kindle
  • Save to Dropbox
  • Save to Google Drive

Save Search

You can save your searches here and later view and run them again in "My saved searches".

Please provide a title, maximum of 40 characters.
Cancel
×

4324 results in Microeconomics

Page 47 of 217

  • 10 - Networks

  • Donald E. Campbell, College of William and Mary, Virginia
  • Book:
    Incentives
    Published online:
    06 August 2018
    Print publication:
    22 February 2018, pp 570-602

  • Summary

    Networks can be tiny – your circle of very close friends, for instance. They can be vast, as in the case of the individuals and institutions connected to you and to each other through the world wide web. The internet has not only given us an extraordinary increase in the number of sources from which we can obtain information. It has also increased the value of that information, in part because of the great increase in the number of sources of information available to the compilers of any web site that you visit. (Of course, the web has also greatly increased the number of sources of misinformation.) Until the arrival of the internet, an increase in the number of sources of information brought with it a substantial increase in the cost of widespread comparison shopping: one had to sacrifice a significant amount of time to visit rival retailers. By contrast, the web has vastly reduced the cost of acquiring information from any one source, and thus has made it possible to comparison shop extensively at almost no cost. (Transactions involving rare books have increased more than a hundred-fold since the advent of the internet, because search costs have virtually dropped to zero. In the previous century collectors of rare books had to wait for the arrival of annual catalogues. These catalogues were costly and infrequently updated because of the cost and the time commitment required of their compilers.)

    Nathan Rothschild added millions to his fortune when the news of Wellington's victory over Napoleon at Waterloo reached him, via carrier pigeon, before any other stock trader (Malkiel, 2003, p. 196). The installation of a telegraph cable on the ocean floor in the nineteenth century allowed London to communicate with Australia in four days. It had taken seventy days by surface mail (Fulcher, 2004, pp. 82–83).

    The internet may be the network that comes to mind first, but it is probably not the most important one. That is obviously the case in parts of the third world where there is no access to the web. Instead, networks that rely on information transmission by word-of-mouth are used to locate sources of safe drinking water, to provide access to birth control information, and for AIDS prevention campaigns, to name but a few crucial examples.

  • 9 - Matching

  • Donald E. Campbell, College of William and Mary, Virginia
  • Book:
    Incentives
    Published online:
    06 August 2018
    Print publication:
    22 February 2018, pp 504-569

  • Summary

    This chapter examines allocation problems for which the desired “commodities”, such as dormitory rooms, are only available in discrete units and each “consumer” wants one unit and only one unit. Moreover, allocating a desired object to the highest bidder is unacceptable, as it would be in the case of an offer of admission to a good university. The objective is to match each student with a room (or a university), or available kidneys with the patients on a transplant waiting list, and so forth.

    Suppose that an economics department has a given number of students (i.e., majors) and professors, and the objective is to assign each student a professoradvisor. In this case both sides of the match have preferences: students like some professors better than others, and the professors can rank the students. There are problems for which only one side of the match has preferences: students have preferences for dormitory rooms, but the rooms don't have preferences for students.

    We can also classify matching problems according to whether we can have outcomes at which an agent is paired with more than one agent of the opposite type, as in the case of college admissions. Each student is placed with only one college, but each college admits many students. Both types have preferences: each student can rank the colleges, and the colleges have preferences for students – if only for students with high test scores.

    The first allocation problem that we study is a marriage model, for which there are two types of agents: there is a set ofWtypes and a set ofMtypes. Each member of each type has a preference ordering for the members of the other type, and each agent is matched with at most one member of the other type. The problem of matching students and advisors can be a marriage model. A student will have at most only one advisor, and if there is a department rule limiting a professor to at most one advisee then we have a marriage model. Our objective is not to classify allocation problems, however, but to solve them by designing satisfactory allocation procedures.

  • 11 - General Competitive Equilibrium

  • Donald E. Campbell, College of William and Mary, Virginia
  • Book:
    Incentives
    Published online:
    06 August 2018
    Print publication:
    22 February 2018, pp 603-653

  • Summary

    This chapter takes an economy-wide perspective and seeks a mechanism that elicits private information about individual preferences and firm production recipes to deliver an efficient allocation of private goods and services. We assume away all other hidden information problems. In particular, every consumer is assumed to know the quality of every firm's output, every employer knows the abilities of every prospective employee, every lender knows the probability of default of every creditor, and so on. Every manager can be relied on to maximize profit. In fact there is no shirking by anyone.

    The economy faces an impressive challenge – to induce truthful revelation of the remaining hidden information, specifically preferences and production functions. In fact, three of the five sections even assume away this hidden information problem, highlighting instead the transmission of information. Recall that an outcome is efficient if there is no other arrangement of production and consumption activities that makes one person better off without lowering the utility of anyone else. Identification of an efficient outcome would seem to require an enormous amount of information about all of the private characteristics. Therefore, even with most of the hidden information problems assumed away, identification of an efficient outcome by the market system is a remarkable accomplishment. Social cost pricing is the key.

    In a private ownership market economy the consumer maximizes utility subject to a budget constraint, and this results in a chosen consumption plan at which the marginal rate of substitution (MRS) for each pair of commodities equals the price ratio for those goods. Therefore, the price ratio transmits information about one consumer's MRS to every other consumer and every firm. The budget constraint gives consumers the incentive to employ that information in their utility maximization calculations, as Section 11.1.4 demonstrates. Profit maximization by a firm in a competitive environment results in the equilibrium price of a commodity that is also equal to the marginal cost of producing that good. Therefore, prices transmit marginal information about consumer preferences and firm production recipes.

    In spite of the fact that prices transmit only marginal information, we demonstrate in Sections 11.2 and 11.3 that this allows an efficient outcome to be identified in a wide range of circumstances.

Incentives
  • Motivation and the Economics of Information
  • 3rd edition
  • Donald E. Campbell
  • Published online:
    06 August 2018
    Print publication:
    22 February 2018
  • When incentives work well, individuals prosper. When incentives are poor, the pursuit of self-interest is self-defeating. This book is wholly devoted to the topical subject of incentives from individual, collective, and institutional standpoints. This third edition is fully updated and expanded, including a new section on the 2007–08 financial crisis and a new chapter on networks as well as specific applications of school placement for students, search engine ad auctions, pollution permits, and more. Using worked examples and lucid general theory in its analysis, and seasoned with references to current and past events, Incentives: Motivation and the Economics of Information examines: the performance of agents hired to carry out specific tasks, from taxi drivers to CEOs; the performance of institutions, from voting schemes to medical panels deciding who gets kidney transplants; a wide range of market transactions, from auctions to labor markets to the entire economy. Suitable for advanced undergraduate and graduate students studying incentives as part of courses in microeconomics, economic theory, managerial economics, political economy, and related areas of social science.

  • Preface to the Third Edition

  • Donald E. Campbell, College of William and Mary, Virginia
  • Book:
    Incentives
    Published online:
    06 August 2018
    Print publication:
    22 February 2018, pp xi-xii

  • Summary

    My greatest debt is to Emily Martell, an undergraduate at William and Mary. She was my research assistant for the last eight months of work on the book. Her love of learning, her ability to write good prose, and her extraordinary intellect redounded to my great benefit and to the benefit of anyone who reads this book. Emily contributed to a few of the topics – the Enron debacle among them – and read the new network chapter and some others, each with great care. She responded to requests for help with alacrity and skill. Both her research and her critique of the manuscript were exemplary. She not only identified glitches, she drew my attention to passages that were not sufficiently clear. (“Glitch” is an understatement. She saved me from a horrible blunder in Chapter 4.) Emily even corrected my prose. I am deeply grateful for her help, and blessed to have had her as a colleague. Any defects that remain can be put down to the fact that I did not give her enough time to read the entire manuscript.

    I am also thankful for the input of Steven Williams of the Department of Economics, University of Illinois, Lauren Merrill of the Boston Consulting Group, and my longtime colleague Jerry Kelly.

    Over the last eight years I have benefitted from the excellent research assistance of Jennifer Boardman, Anthony Guth, Sarah Turner, and Gefoffrey Zinden. They were students in William and Mary's Masters in Public Policy program and my research assistants during their time here. The fruits of their labor can be found in the gray boxes containing the snippets that complement the formal analysis.

    A number of William and Mary undergraduates have contributed to the third edition by suggesting improvements to its predecessor. I'm happy to be able to publicly thank Fasil Alemante, Daniel Byler, Bryan Callaway, Jimmy Cao, Sarah Gault, You-Suk Kim, Shane Mangin, Ruoyan Sun, Richard Uhrig, and especially Theresa Long. I'malso grateful to Simon Fung who, as a student at the University of London, drew my attention to an error in the second edition.

    I salute my Cambridge University Press editors, Karen Maloney and Stephen Acerra, and editorial assistant Kristina Deusch. Their encouragement and guidance are much appreciated.

  • 7 - Voting and Preference Revelation

  • Donald E. Campbell, College of William and Mary, Virginia
  • Book:
    Incentives
    Published online:
    06 August 2018
    Print publication:
    22 February 2018, pp 423-458

  • Summary

    This chapter examines decision making by a community (or any group) in a simple model: the community must choose from a finite set of mutually exclusive alternatives. (The next chapter endows the model with much more structure by specifying individual utility functions and a production function – and resource constraints. The utility functions will have classical economic properties.)

    We look at situations in which a groupmust make a decision that will be binding on all of its members. For example, a class has to determine a time for a review session, a town has to decide whether to build a new school, a nation has to elect a legislature. The resulting choice will have no other implications for personal consumption – in this chapter. Suppose for instance that X, Y, Z, etc. denote alternative ways of spending a fixed amount of government revenue, with the same individual tax burdens in each case. In this setting we can't rule out any ranking of the available options as a possible preference scheme for a member of the group. This makes it very difficult to induce truthful revelation of the hidden characteristic, which in this chapter and the next is the individual's true preference scheme. We want the individuals to reveal enough information about their preferences to enable the system to select the outcome that best reflects those individual preferences.

    Clearly, one could write an entire book on the criteria for determining the alternative that “best” reflects individual preferences. Indeed, hundreds of volumes have been written on that theme. In this chapter we set that issue aside and simply determine which selection rules elicit truthful information about individual preferences. Aselection rule is essentially amapping from individual preferences into a social choice, and it must be defined for each possible specification of individual preferences.

    VOTING RULES

    Although this section examines voting procedures, you are encouraged to think of the candidates standing for election not as individuals seeking careers in government but as alternative packages of public projects. Candidate (or alternative) X may, for example, be a proposal to reduce expenditure on space exploration by a specific amount and to use the proceeds to fund research on the production of energy by nuclear fusion.

  • 4 - Corporate Governance

  • Donald E. Campbell, College of William and Mary, Virginia
  • Book:
    Incentives
    Published online:
    06 August 2018
    Print publication:
    22 February 2018, pp 219-283

  • Summary

    This chapter investigates incentives in firms. We explore the hidden action problems of a modern corporation. Section 4.1 compares firms in several leading industrialized countries. Section 4.2 examines the relationship between two senior executives who share the firm's profits and is followed by a brief look at the relationship between the owner and employees in an owner-managed firm (Section 4.3). The rest of the chapter is devoted to the hidden action problem confronting a widely dispersed group of shareholders whose objective is to have the firm that they jointly own maximize the value of their shares. Can they rely on the board of directors to provide the appropriate incentives to the company's management team, even though it is extremely costly for the shareholders to monitor the management and the board members as well?

    A BRIEF TOUR OF SEVERAL COUNTRIES

    We are primarily concerned with the attempt of a firm's owners to obtain a satisfactory return on the capital they supply to the firm. The owners provide financing when they purchase shares in the firm. They also contribute passively every time the firm uses retained earnings to purchase equipment. Firms also borrow financial capital, and in many industrialized countries bank loans are a much more important source of finance than in the United States. All the suppliers of finance want management to function in a way that brings them a high return. However, a chief executive may act in a way that benefits himself or herself at the expense of the suppliers of capital. We refer to this as the agency problem.

    DEFINITION: The Modern Corporation's Agency Problem

    The firm's owners and creditors seek a high return on their investments but the daily decisions that determine that rate of return are made by the firm'smanagement team, and themanagersmay be assumed to have their own welfare at heart.

    One striking difference between the pattern of ownership across countries lies in the role of the financial sector. US banks were prohibited from holding equity in corporations until the repeal of the Glass-Steagall Act in 1999.

  • 3 - Hidden Action

  • Donald E. Campbell, College of William and Mary, Virginia
  • Book:
    Incentives
    Published online:
    06 August 2018
    Print publication:
    22 February 2018, pp 148-218

  • Summary

    This chapter and the next investigate the extent to which an agent can be motivated to act in the principal's interest when the principal cannot determine whether the agent has in fact taken the appropriate action. Agents’ behavior is problematic because their goal is to maximize their own utility. The next chapter is devoted to the specific hidden action problem of motivating workers and management in a firm, with the top executives receiving most of our attention. This chapter examines a wide variety of other issues. In many of these the principal is a surrogate for society as a whole, and the principal's utility is maximized when the agents – the producers and consumers – are all motivated to do their part in contributing to an efficient outcome.

    As with all hidden information problems, there are hidden characteristic elements as well as the hidden action element. In fact, some of the topics could have been presented as hidden characteristic problems. For instance, we could study resource allocation from the standpoint of inducing consumers to reveal their hidden preferences and firms to reveal their hidden production technologies so that an efficient outcome can be identified. However, the approach taken in the first section is that of inducing each individual to choose a bundle of goods and services at which his or her marginal rate of substitution equals that of the other consumers. Similarly, when discussing pollution abatement in Section 2, we begin with the fact that the adjustment cost of an individual firm – the firm's characteristic – is hidden from the government. If the firm were simply asked to report its adjustment cost we would have a hidden characteristic problem, belonging in Chapter 5. However, we instead look at an incentive scheme that harnesses the profit motive to induce firms to coordinate their actions so that the adjustment burden falls on the firms that can reduce pollution at the lowest cost to consumers.

    Hidden action problems are complicated by the presence of uncertainty. If your car breaks down a week after you bring it home from the repair shop you do not know whether you are the victim of bad luck or shirking by the mechanic.

  • 2 - Game-Theoretical Basics

  • from Part I - Microeconomic Fundamentals
  • Martin Bichler, Technische Universität München
  • Book:
    Market Design
    Published online:
    08 December 2017
    Print publication:
    21 December 2017, pp 11-29

  • Summary

    Part I (Microeconomic Fundamentals) of this book provides a succinct introduction to methods and models from microeconomics. In this chapter we introduce and define basic concepts and terminology from game theory will be used throughout the rest of the book. Game theory is the mathematical study of interactions among independent selfinterested agents or players in a game.We limit ourselves to non-cooperative game theory and refer the interested reader to more extensive treatments such as Osborne (2004) or Shoham and Leyton-Brown (2009), whose notation we share. Non-cooperative game theory focuses on situations where self-interested agents have conflicting goals. This chapter will introduce different types of games and central solution concepts, i.e., methods to predict the outcomes of a game played by rational agents. In some parts of the book we will also draw on cooperative game theory, which focuses on predicting which coalitions will form among a group of players, the joint actions that groups take, and the resulting collective payoffs. A cooperative game is a game with competition between groups of players or coalitions. However, we introduce the respective concepts later where needed, in order to keep the chapter concise.

    Normal-Form Games

    Let us start with a basic type of game description. In normal-form games, players’ actions are simultaneous. In other types of games, called extensive-form games, actions take place sequentially.

    Definition 2.1.1 (Normal-form games) A finite normal-form game with n players can be described as a tuple (I, A, u).

  • • I is a finite set of n players indexed by i.

  • • A = A1 ×…×An, where Ai is a finite set of actions available to player i. A vector a = (a1, …, an) ∈ A is referred to as an action profile.

  • • u = (u1,… , un), where ui : A ↦ R is a payoff or utility function for player i.

    • In definition 2.1.1, finite means that there is a finite set of players and each has a finite set of strategies. Typically, a utility function maps the set of outcomes of a game to a real-valued utility or payoff. Here, the actions possible for an agent also describe the outcomes, which is why we use A in the description of a normal-form game.

  • 9 - The Combinatorial Clock Auction Formats

  • from Part II - Multi-Object Auction Design
  • Martin Bichler, Technische Universität München
  • Book:
    Market Design
    Published online:
    08 December 2017
    Print publication:
    21 December 2017, pp 167-186

  • Summary

    Combinatorial clock auctions (CCAs) have been adopted in spectrum auctions (Bichler and Goeree, 2017) and in other applications for their simple price-update rules. There are single-stage and two-stage versions, which have been used in spectrum auctions worldwide. We devote a chapter to CCAs because of their practical relevance, as for chapter 6 on the SMRA. We will discuss both versions and a practical example of a market mechanism that includes a discussion of activity rules, which are sometimes ignored in theoretical treatments.

    The Single-Stage Combinatorial Clock Auction

    The single-stage combinatorial clock auction (SCCA) is easy to implement and has therefore found application in spectrum auctions and in procurement. In this section we provide a more detailed discussion of the SCCA, as introduced by Porter et al. (2003), and give an algorithmic description in algorithm 3.

    Auction Process

    In this type of action, prices for all items are initially zero or at a reserve price r. In every round bidders identify a package of items, or several packages, which they offer to buy at current prices. If two or more bidders demand an item then its price is increased by a fixed bid increment in the next round. This process iterates. The bids which correspond to the current ask prices are called standing bids, and a bidder is standing if she has at least one standing bid. In a simple scenario in which supply equals demand, the auction terminates and the items are allocated according to the standing bids.

    If at some point there is an excess supply of at least one item and no item is overdemanded, the auctioneer determines the winners to find an allocation of items that maximizes his revenue by considering all submitted bids. If the solution displaces a standing bidder, the prices of items in the corresponding standing bids rise by the bid increment and the auction continues. The auction ends when no prices are increased and bidders finally pay their bid prices for the winning packages. We will analyze a version that uses an XOR bidding language.

  • 8 - Open Multi-Object Auctions

  • from Part II - Multi-Object Auction Design
  • Martin Bichler, Technische Universität München
  • Book:
    Market Design
    Published online:
    08 December 2017
    Print publication:
    21 December 2017, pp 126-166

  • Summary

    The revelation principle (see theorem 3.3.1) suggests that if a social-choice function can be implemented by an arbitrary indirect mechanism (e.g., an open auction) then the same function can be implemented by a truthful direct revelation mechanism. Analyzing direct mechanisms is often more convenient, and the revelation principle allows one to argue that this restriction is without loss of generality. Yet there are cases where one prefers to implement and model the indirect version of a mechanism rather than its direct counterpart.

    One argument used in the literature refers to interdependent valuations. The linkage principle implies that open auctions generally lead to higher expected revenue than sealed-bid auctions, with interdependent bidder valuations. Milgrom and Weber (1982) wrote: “One explanation of this inequality is that when bidders are uncertain about their valuations, they can acquire useful information by scrutinizing the bidding behavior of their competitors during the course of an (ascending) auction. That extra information weakens the winner's curse and leads to more aggressive bidding in the (ascending) auction, which accounts for the higher expected price.”

    Another argument for open auctions is that the winners of an ascending auction do not need to reveal their true valuation to the auctioneer, only that it is above the secondhighest bid. With respect to multi-object auctions, Levin and Skrzypacz (2017) write that economists think of open auctions as having an advantage because bidders can discover gradually how their demands fit together. Most spectrum auctions are open auctions, largely for these reasons.

    As a result, much recent research has focused on ascending multi-object auctions, i.e., generalizations of the single-object English auction where bidders can outbid each other iteratively. The models can be considered as algorithms, and we will try to understand the game-theoretical properties of these algorithms. In particular, we want to understand if there is a generalization of the English auction to ascending combinatorial auctions that also has a dominant strategy or ex post equilibrium. Unfortunately, the answer is negative for general valuations. However, there are positive results for restricted preferences.

    A strong restriction of preferences is found in assignment markets, where bidders bid on multiple items but want to win at most one. This restriction allows us to formulate the allocation problem as an assignment problem, and there exists an ascending auction where truthful bidding is an ex post equilibrium.

  • 3 - Mechanism Design

  • from Part I - Microeconomic Fundamentals
  • Martin Bichler, Technische Universität München
  • Book:
    Market Design
    Published online:
    08 December 2017
    Print publication:
    21 December 2017, pp 30-52

  • Summary

    Mechanism design studies the construction of economic mechanisms in the presence of rational agents with private information. It is sometimes called reverse game theory, as mechanism designers search for mechanisms which satisfy game-theoretical solution concepts and achieve good outcomes. For example, an auctioneer might want to design an auction mechanism which maximizes social welfare of the participants and exhibits dominant strategies for bidders to reveal their true valuations. We mostly discuss market mechanisms in this book, but mechanism design is not restricted to markets and the basic principles can be applied to various types of interactive decision making.

    Mechanism design has relations to social choice theory, which is a field in economics focusing on the aggregation of individual preferences to reach a collective decision or social welfare. Social choice theory depends upon the ability to aggregate individual preferences into a combined social welfare function. Therefore, individual preferences are modeled in terms of a utility function. The ability to sum the utility functions of different individuals, as is done in auction theory in chapter 4, depends on the utility functions being comparable with each other; informally, individuals’ preferences must be measured with the same yardstick. The mechanism design literature on auctions typically assumes cardinal utility functions and interpersonal utility comparisons, as in the early social choice literature such as Bergson (1938) and Samuelson (1948). Note that Arrow (1950) and much of the subsequent literature assumes only ordinal preferences and rejects the idea of interpersonal utility comparisons. This means that utility cannot be measured and compared across individuals. The auction design literature as discussed in this book is an exception and assumes quasi-linear utility functions, where bidders have cardinal values for an allocation and maximize their payoff on the basis of prices in the market. Also, utility is comparable across agents. Cardinal preferences allow agents to express intensities, which is not possible with ordinal preferences only. For example, an agent might much prefer a diamond to a rock, but this information about intensity will be ignored if only ordinal preferences (diamond ≻ rock) are expressed.

Page 47 of 217