Essays on microeconomic theory
Keywords: game theory
industrial organisation
cultural economics
information economics
microeconomic theory
handmade effect
first impression bias
behavioural economics
signalling
heuristic decision-making

In three distinct, yet interrelated essays I examine real-world phenomena at the intersection of microeconomic theory and behavioural economics. To do so, I modify longstanding concepts in information economics, including signalling and games of incomplete information, to include non-standard preferences, non-standard beliefs, and non-standard decision-making. As a result, I obtain novel theoretical predictions that provide insights for policy.
In the first essay, I develop a game-theoretic framework to study the repercussions of an evaluator’s bias against a specific group of applicants. The evaluator wants to hire a highly able applicant who delivers a high-quality performance; at the same time, he prefers hiring a male over a female. The evaluator decides upfront between holding an informed or a blind audition. In the latter, the evaluator learns neither the applicant’s ability nor the gender. I show that, above a threshold bias, the evaluator prefers a blind audition to provide high effort incentives exclusively for high-ability applicants. Consequently, committing to no information can be beneficial for the evaluator. I also show that a highly biased evaluator's preferences align with those of a highly able female. I extend the framework to performance uncertainty and gender-blind CVs, and compare blind auditions to affirmative action. The framework is relevant for auditory-based applications: my results can explain why blind auditions have increased the probability of a female orchestra musician being hired via taste-based discrimination and challenge explanations grounded in statistical discrimination.
Although online marketplaces for handmade products persist, little theoretical research has been undertaken to explain why firms choose a handmade strategy. In the second essay, I develop a model that can explain the persistence through a handmade effect on the consumer side. I show that when consumers are willing to pay a sufficiently high handmade premium, the monopolistic firm chooses production by hand over superior machine production. When the firm is part of a duopoly, the existence of consumers who care about the conditions under which a product is manufactured can explain the firms' specialisation and, thus, the observed co-existence of handmade and machine-made products in the economy. Such specialisation is efficient, and can be robust to collusion. The presence of shoppers who are uncertain about the appropriate behaviour may enable the monopolist to use a handmade strategy to signal a social norm of conscious consumption.
In the third essay, we study heuristic decision-making in social settings without communication. Players trade off conforming to the average action and matching their private type, which is correlated with the state of the world. We contrast individual and aggregate behaviour under two heuristics as well as rationality: credulous players posit others truthfully reveal their types whilst sceptical players reflect on predecessors' actions, discounting any action in the history of play that could be a falsification; in contrast, rational players take into account the extent to which others wish to conform and may, thus, not choose to truthfully reveal. We apply our results to organisational decision-making and social engineering, and show that, by making a credulous player sceptical, a policy maker can increase truth telling. Making a player rational, in contrast, does not guarantee that more players truthfully reveal. At the aggregate level, rationality is not only necessary to incentivise players to adopt the action matching the state, but also preferable given a utilitarian objective. Making the state common knowledge can be a viable alternative whenever a policy maker prefers truth telling if and only if a player's type matches the state.