This paper explores whether rational herding can generate endogenous aggregate fluctuations. We embed a tractable model of rational herding into a business cycle framework. In the model, technological innovations arrive with unknown qualities and agents have dispersed information about how productive the technology really is. Rational investors decide whether to invest based on their private information and the investment behavior of others. Herd-driven boom-bust cycles arise endogenously in this environment when the technology is unproductive but investors' initial information is unusually optimistic. Their overoptimism leads to high investment rates, which investors mistakenly attribute to good fundamentals, leading to a self-reinforcing pattern of higher optimism and higher investment until the economy reaches a peak, followed by a crash when agents ultimately realize their mistake. We calibrate the model to the U.S. economy and show that it can explain boom-and-bust cycles in line with episodes like the dot-com bubble of the 1990s.
{"title":"Herding Through Booms and Busts","authors":"E. Schaal, Mathieu Taschereau-Dumouchel","doi":"10.2139/ssrn.3887718","DOIUrl":"https://doi.org/10.2139/ssrn.3887718","url":null,"abstract":"This paper explores whether rational herding can generate endogenous aggregate fluctuations. We embed a tractable model of rational herding into a business cycle framework. In the model, technological innovations arrive with unknown qualities and agents have dispersed information about how productive the technology really is. Rational investors decide whether to invest based on their private information and the investment behavior of others. Herd-driven boom-bust cycles arise endogenously in this environment when the technology is unproductive but investors' initial information is unusually optimistic. Their overoptimism leads to high investment rates, which investors mistakenly attribute to good fundamentals, leading to a self-reinforcing pattern of higher optimism and higher investment until the economy reaches a peak, followed by a crash when agents ultimately realize their mistake. We calibrate the model to the U.S. economy and show that it can explain boom-and-bust cycles in line with episodes like the dot-com bubble of the 1990s.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130350206","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Due to the switching behavior of online consumers, news outlets increasingly compete with each other to attract audience for each single news item they produce, rather than for complete editions of their newspapers: the so called unbundling of journalism. Using a standard Hotelling duopoly model with ideologically differentiated newspapers, I show that online competition unambiguously reduces news articles' quality, as compared to the scenario in which outlets compete to sell their newspapers (content bundles) to single-homing consumers. By contrast, the unbundling of journalism may foster outlets' newsgathering activities when their ideological positions are relatively important from consumers' viewpoint. These results are driven by significant differences in the role played by newsgathering and quality-improving activities as instruments to increase the readership (hence, ad-revenues) in the offline and the online market for news.
{"title":"The Unbundling of Journalism","authors":"Michele Bisceglia","doi":"10.2139/ssrn.3885251","DOIUrl":"https://doi.org/10.2139/ssrn.3885251","url":null,"abstract":"Due to the switching behavior of online consumers, news outlets increasingly compete with each other to attract audience for each single news item they produce, rather than for complete editions of their newspapers: the so called unbundling of journalism. Using a standard Hotelling duopoly model with ideologically differentiated newspapers, I show that online competition unambiguously reduces news articles' quality, as compared to the scenario in which outlets compete to sell their newspapers (content bundles) to single-homing consumers. By contrast, the unbundling of journalism may foster outlets' newsgathering activities when their ideological positions are relatively important from consumers' viewpoint. These results are driven by significant differences in the role played by newsgathering and quality-improving activities as instruments to increase the readership (hence, ad-revenues) in the offline and the online market for news.<br>","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124483687","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines how the introduction of a dark pool impacts price discovery, market quality, and aggregate welfare of traders. I use a four-period model where rational and risk-neutral agents choose the order type and the venue and obtain the equilibrium numerically. The comparative statics on the order submission probability suggests a U-shaped order migration to the dark pool. The overall effect of dark trading on market quality and aggregate welfare was found to be positive but limited in size and depended on market conditions. I find mixed results for the process of price discovery. Depending on the immediacy need of traders, price discovery may change due to the presence of the dark venue.
{"title":"Dark Pools and Price Discovery in Limit Order Markets","authors":"V. Levin","doi":"10.2139/ssrn.3880047","DOIUrl":"https://doi.org/10.2139/ssrn.3880047","url":null,"abstract":"This paper examines how the introduction of a dark pool impacts price discovery, market quality, and aggregate welfare of traders. I use a four-period model where rational and risk-neutral agents choose the order type and the venue and obtain the equilibrium numerically. The comparative statics on the order submission probability suggests a U-shaped order migration to the dark pool. The overall effect of dark trading on market quality and aggregate welfare was found to be positive but limited in size and depended on market conditions. I find mixed results for the process of price discovery. Depending on the immediacy need of traders, price discovery may change due to the presence of the dark venue.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131640443","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a dynamic model of banks whose insiders have superior information about the impact of a pending shock to the bank’s cash holdings and can signal the bank’s type through its dividend policy. Banks that will be adversely affected by the shock have incentives to pool with unaffected banks to increase their market value. To avoid being mimicked, the unaffected banks can credibly signal via a more aggressive payout strategy. Dividend payout restrictions have the potential to prevent a separating equilibrium from forming. This leads to the bad type adopting a more aggressive payout policy with a higher risk of default but mitigates the distortion of the good type's policy. We identify a number of scenarios where this trade-off presents an opportunity for regulatory intervention and some where it does not.
{"title":"Dividend Restrictions and Asymmetric Information","authors":"M. Nielsen, Suzanne Vissers","doi":"10.2139/ssrn.3850035","DOIUrl":"https://doi.org/10.2139/ssrn.3850035","url":null,"abstract":"We develop a dynamic model of banks whose insiders have superior information about the impact of a pending shock to the bank’s cash holdings and can signal the bank’s type through its dividend policy. Banks that will be adversely affected by the shock have incentives to pool with unaffected banks to increase their market value. To avoid being mimicked, the unaffected banks can credibly signal via a more aggressive payout strategy. Dividend payout restrictions have the potential to prevent a separating equilibrium from forming. This leads to the bad type adopting a more aggressive payout policy with a higher risk of default but mitigates the distortion of the good type's policy. We identify a number of scenarios where this trade-off presents an opportunity for regulatory intervention and some where it does not.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127741277","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I study the value of information in monotone decision problems where the action spaces are potentially multidimensional. In these general environments, there exist sensible partial orders on actions and higher actions are optimal for higher signal realizations. As a criterion for comparing information structures, I develop a condition called monotone quasi-garbling meaning that an information structure is obtained by adding reversely monotone noise (more noisy in a lower state and less noisy in a higher state) to another. It is shown that monotone quasi-garbling is a sufficient condition for decision makers to get a higher ex-ante expected payoff. This new criterion generally permits more comparisons than the garbling condition by Blackwell (1951, 1953) and the effectiveness condition by Lehmann (1988). To illustrate, I apply the result to an optimal insurance problem and a nonlinear monopoly pricing problem.
{"title":"Comparing Information in General Monotone Decision Problems","authors":"Yonggyun Kim","doi":"10.2139/ssrn.3218450","DOIUrl":"https://doi.org/10.2139/ssrn.3218450","url":null,"abstract":"I study the value of information in monotone decision problems where the action spaces are potentially multidimensional. In these general environments, there exist sensible partial orders on actions and higher actions are optimal for higher signal realizations. As a criterion for comparing information structures, I develop a condition called monotone quasi-garbling meaning that an information structure is obtained by adding reversely monotone noise (more noisy in a lower state and less noisy in a higher state) to another. It is shown that monotone quasi-garbling is a sufficient condition for decision makers to get a higher ex-ante expected payoff. This new criterion generally permits more comparisons than the garbling condition by Blackwell (1951, 1953) and the effectiveness condition by Lehmann (1988). To illustrate, I apply the result to an optimal insurance problem and a nonlinear monopoly pricing problem.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125569037","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Regulatory disclosures, such as supervisory bank stress tests, are pre-scheduled and conducted on a regular basis to improve transparency and enhance market discipline. We build a dynamic model with asymmetric information to investigate the effectiveness of such regulatory disclosures. We find that banks and bank creditors strategically respond to the anticipated information from pre-scheduled disclosure by shortening debt maturity and requesting higher interest rates, thereby intensifying rollover risk. This negative consequence can outweigh the positive effect from screening out bad investments and make the regulatory disclosure ineffective in promoting stability and efficiency, especially when the improvement of transparency is only moderate and when the market possesses little information about individual banks' financial soundness. Our study highlights the limited effectiveness of pre-scheduled disclosure during a crisis time, provides a rationale for the BOE's and EBA's suspension of regular supervisory stress tests during the COVID-19 pandemic outbreak, and sheds light on a better design of regulatory disclosure.
{"title":"Dynamic Transparency and Rollover Risk","authors":"Xuan Wei, Zhen Zhou","doi":"10.2139/ssrn.3866986","DOIUrl":"https://doi.org/10.2139/ssrn.3866986","url":null,"abstract":"Regulatory disclosures, such as supervisory bank stress tests, are pre-scheduled and conducted on a regular basis to improve transparency and enhance market discipline. We build a dynamic model with asymmetric information to investigate the effectiveness of such regulatory disclosures. We find that banks and bank creditors strategically respond to the anticipated information from pre-scheduled disclosure by shortening debt maturity and requesting higher interest rates, thereby intensifying rollover risk. This negative consequence can outweigh the positive effect from screening out bad investments and make the regulatory disclosure ineffective in promoting stability and efficiency, especially when the improvement of transparency is only moderate and when the market possesses little information about individual banks' financial soundness. Our study highlights the limited effectiveness of pre-scheduled disclosure during a crisis time, provides a rationale for the BOE's and EBA's suspension of regular supervisory stress tests during the COVID-19 pandemic outbreak, and sheds light on a better design of regulatory disclosure.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124840754","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Motivated by widespread outsourcing practices, this paper studies how a pre-outsourcing client facing uncertain operating costs selects an outsourcing contract between two contract types (the fixed-price contract and the cost-plus contract) proposed by two vendors, who offer contracts only if the expected profits of the contracts satisfy their reservation values. We propose a real options model to determine the optimal policy structure from both the client’s and the vendors’ perspectives, and we investigate comparative statics of the client’s or vendors’ optimal policy with respect to key system inputs. Our results help managers gain a better understanding of the closely intertwined relationship between the client’s contract selection policy and the vendors’ contract participation policies.
{"title":"Strategic Outsourcing Contract Participation and Selection under Cost Uncertainty","authors":"Mike Mingcheng Wei, Susan H. Xu, Tao Yao","doi":"10.2139/ssrn.3521837","DOIUrl":"https://doi.org/10.2139/ssrn.3521837","url":null,"abstract":"Motivated by widespread outsourcing practices, this paper studies how a pre-outsourcing client facing uncertain operating costs selects an outsourcing contract between two contract types (the fixed-price contract and the cost-plus contract) proposed by two vendors, who offer contracts only if the expected profits of the contracts satisfy their reservation values. We propose a real options model to determine the optimal policy structure from both the client’s and the vendors’ perspectives, and we investigate comparative statics of the client’s or vendors’ optimal policy with respect to key system inputs. Our results help managers gain a better understanding of the closely intertwined relationship between the client’s contract selection policy and the vendors’ contract participation policies.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121123934","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Whom should an interest group lobby in a legislature? I develop a model of informational lobbying in which a legislature must decide on the allocation of district-specific goods and projects. An interest group chooses to search and provide information on districts' valuations of the goods. The setting is one of distributive politics with an allocation of goods and projects that is endogeneous to the information provided by the interest group. I characterize the information search strategy of the interest group. I determine who gains and who loses from lobbying, identifying circumstances in which legislators would unanimously prefer to ban informational lobbying. I also identify two empirical and institutional implications. First, I establish a relationship between informational lobbying and legislative majority requirement. Second, I provide an informational rationale for friendly lobbying (that is, the interest group lobbying legislative allies).
{"title":"Legislative Informational Lobbying","authors":"Arnaud Dellis","doi":"10.2139/ssrn.3686620","DOIUrl":"https://doi.org/10.2139/ssrn.3686620","url":null,"abstract":"Whom should an interest group lobby in a legislature? I develop a model of informational lobbying in which a legislature must decide on the allocation of district-specific goods and projects. An interest group chooses to search and provide information on districts' valuations of the goods. The setting is one of distributive politics with an allocation of goods and projects that is endogeneous to the information provided by the interest group. I characterize the information search strategy of the interest group. I determine who gains and who loses from lobbying, identifying circumstances in which legislators would unanimously prefer to ban informational lobbying. I also identify two empirical and institutional implications. First, I establish a relationship between informational lobbying and legislative majority requirement. Second, I provide an informational rationale for friendly lobbying (that is, the interest group lobbying legislative allies).","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114400400","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The literature on delegation considers the problem of an uninformed decision maker and an informed but biased agent. I extend that analyis to the case of multiple agents under two assumptions: independent private information and public preferences. In the optimal mechanism, agents assign points to the various alternatives, which then get mapped into scores, so that the alternative with the largest score wins. Each alternative's score is the sum of points received plus an extra term that is larger when the agents who have a strong preference for that alternative assign points to the alternatives they like less.
{"title":"Assignment Mechanisms with Public Preferences and Independent Types","authors":"Francisco Silva","doi":"10.2139/ssrn.3868560","DOIUrl":"https://doi.org/10.2139/ssrn.3868560","url":null,"abstract":"The literature on delegation considers the problem of an uninformed decision maker and an informed but biased agent. I extend that analyis to the case of multiple agents under two assumptions: independent private information and public preferences. In the optimal mechanism, agents assign points to the various alternatives, which then get mapped into scores, so that the alternative with the largest score wins. Each alternative's score is the sum of points received plus an extra term that is larger when the agents who have a strong preference for that alternative assign points to the alternatives they like less.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"53 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123807887","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I analyze the optimal information disclosure problem under commitment of a “contest designer” in a class of binary action contests with incomplete information about the abilities of the players. If the contest designer wants to incentivize the players to play in equilibrium a particular strategy profile, she can design an information disclosure rule, formally a stochastic communication mechanism, to which she will commit and then use to “talk” with the players. The main tool to carry out the analysis is the concept of Bayes Correlated Equilibrium recently introduced in the literature. I find that the optimal information disclosure rules involve private information revelation (manipulation), which is also cost-effective for the designer. Furthermore, the optimal disclosure rule involves asymmetric and in most cases correlated signals that convey only partial information about the abilities of the players.
{"title":"The Secret Behind The Tortoise and the Hare: Information Design in Contests","authors":"Alejandro Melo Ponce","doi":"10.2139/ssrn.3904755","DOIUrl":"https://doi.org/10.2139/ssrn.3904755","url":null,"abstract":"I analyze the optimal information disclosure problem under commitment of a “contest designer” in a class of binary action contests with incomplete information about the abilities of the players. If the contest designer wants to incentivize the players to play in equilibrium a particular strategy profile, she can design an information disclosure rule, formally a stochastic communication mechanism, to which she will commit and then use to “talk” with the players. The main tool to carry out the analysis is the concept of Bayes Correlated Equilibrium recently introduced in the literature. I find that the optimal information disclosure rules involve private information revelation (manipulation), which is also cost-effective for the designer. Furthermore, the optimal disclosure rule involves asymmetric and in most cases correlated signals that convey only partial information about the abilities of the players.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124756258","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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