Three Essays in Applied Microeconomic Theory.

Abstract

This dissertation consists of three essays studying various issues in applied microeconomic theory. The first essay proposes a model of two-party elections in which voters' preferences over candidates is affected by their perception on candidates' sincerity. In equilibrium, the following properties are observed. First, when candidates seek to maximize their winning- probability, higher baggage leads to more extreme platform choice from the median. Second, the equilibrium outcome is more sensitive to the change in voters' policy preference when candidates seek to maximize their chance of winning than their expected share of votes. Finally, in a tight electoral race between share-maximizing candidates, the equilibrium outcomes that obtain under simultaneous and sequential platform choice coincide and are completely insensitive to a small change in the voter distribution. The second essay considers optimal contracts when a principal obtains advice from experts who have conditionally uncorrelated signals about an unknown true state. Under a Gaussian specification of information, we show that there exists a compensation scheme which achieves the first best outcome. Further, the optimal contract is a linear function with respect to a convex function of the mean squared error. The optimal contract satisfies a single crossing property with respect to the fixed wage component of the compensation and the incentive component which depends on the prediction error. This result comes from the cheap talk feature of the professional advising, which implies that an agent's payoff solely depends on the transfer from a principal. The third essay considers the optimal employment problem faced by a monopolistic employer when potential employees are heterogeneous in ability and the marginal contribution of an expert depends not only on his own ability, but also on the abilities of the remaining employees. If an increasing submodular production function of indivisible employees shows increasing difference in marginal production and the reservation wage schedule is a fraction of the production by single employee, the optimal employment portfolio can be described by a cutoff element: all employees with greater ability than the cutoff level are hired and the rest are not. Moreover, the efficiency in employment is achieved through myopic decisions.