We study dynamic signaling when the informed party does not observe the signals generated by her actions. A long-run player signals her type continuously over time to a myopic second player who privately monitors her behavior; in turn, the myopic player transmits his private inferences back through an imperfect public signal of his actions. Preferences are linear-quadratic and the information structure is Gaussian. We construct linear Markov equilibria using belief states up to the long-run player's $textit{second-order belief}$. Because of the private monitoring, this state is an explicit function of the long-run player's past play. A novel separation effect then emerges through this second-order belief channel, altering the traditional signaling that arises when beliefs are public. Applications to models of leadership, reputation, and trading are examined.
{"title":"Signaling with Private Monitoring","authors":"Gonzalo Cisternas, Aaron M. Kolb","doi":"10.2139/ssrn.3663969","DOIUrl":"https://doi.org/10.2139/ssrn.3663969","url":null,"abstract":"We study dynamic signaling when the informed party does not observe the signals generated by her actions. A long-run player signals her type continuously over time to a myopic second player who privately monitors her behavior; in turn, the myopic player transmits his private inferences back through an imperfect public signal of his actions. Preferences are linear-quadratic and the information structure is Gaussian. We construct linear Markov equilibria using belief states up to the long-run player's $textit{second-order belief}$. Because of the private monitoring, this state is an explicit function of the long-run player's past play. A novel separation effect then emerges through this second-order belief channel, altering the traditional signaling that arises when beliefs are public. Applications to models of leadership, reputation, and trading are examined.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124743578","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}
E. Starkov, Eddie Dekel, Jeffrey C. Ely, Yingni Guo, N. Inostroza, J. Lagerlöf, W. Olszewski, Ludvig Sinander
This paper explores a model of dynamic signaling without commitment. It is known that separating equilibria do not exist if the sender cannot commit to future costly actions, since no single action can have enough weight to be an effective signal. This paper, however, shows that informative and payoff-relevant signaling can occur even without commitment and without resorting to unreasonable off-path beliefs. Such signaling can only happen through attrition, when the weakest type mixes between revealing own type and pooling with the stronger types. The possibility of full information revelation in the limit hence depends crucially on the assumptions about the state space. We illustrate the results by exploring a model of dynamic price signaling and show that prices may be informative of product quality even if the seller cannot commit to future prices, with both high and low prices being able to signal high quality.
{"title":"Only Time Will Tell: Credible Dynamic Signaling","authors":"E. Starkov, Eddie Dekel, Jeffrey C. Ely, Yingni Guo, N. Inostroza, J. Lagerlöf, W. Olszewski, Ludvig Sinander","doi":"10.2139/ssrn.3668132","DOIUrl":"https://doi.org/10.2139/ssrn.3668132","url":null,"abstract":"This paper explores a model of dynamic signaling without commitment. It is known that separating equilibria do not exist if the sender cannot commit to future costly actions, since no single action can have enough weight to be an effective signal. This paper, however, shows that informative and payoff-relevant signaling can occur even without commitment and without resorting to unreasonable off-path beliefs. Such signaling can only happen through attrition, when the weakest type mixes between revealing own type and pooling with the stronger types. The possibility of full information revelation in the limit hence depends crucially on the assumptions about the state space. We illustrate the results by exploring a model of dynamic price signaling and show that prices may be informative of product quality even if the seller cannot commit to future prices, with both high and low prices being able to signal high quality.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129770510","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}
Foreign holdings of sovereign debt in emerging markets (EMs) shift from foreign currency (FC) to local currency (LC), especially after the global financial crisis. We show that such a dissipation of original sin enlarges deviations from covered interest rate parity (CIP) in EMs, as FC debt is more important in transmitting global financial cycles to EMs than LC debt. We further provide evidence that FC debt is more efficient in tapering CIP deviations because it bypasses capital controls, circumvents high inflation, weak institution and asymmetric information, and enhances price discovery.
{"title":"Original Sin and Deviations from Covered Interest Parity","authors":"Huanhuan Zheng","doi":"10.2139/ssrn.3661239","DOIUrl":"https://doi.org/10.2139/ssrn.3661239","url":null,"abstract":"Foreign holdings of sovereign debt in emerging markets (EMs) shift from foreign currency (FC) to local currency (LC), especially after the global financial crisis. We show that such a dissipation of original sin enlarges deviations from covered interest rate parity (CIP) in EMs, as FC debt is more important in transmitting global financial cycles to EMs than LC debt. We further provide evidence that FC debt is more efficient in tapering CIP deviations because it bypasses capital controls, circumvents high inflation, weak institution and asymmetric information, and enhances price discovery.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127117919","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}
In a simple static model of differentiated experience goods supplied by a single seller, we show that both a uniform price equilibrium and a price signalling equilibrium coexist. This is in contrast to the received wisdom that price signalling of quality is nonviable in static settings. We also show that the seller’s profit is always higher in the price signalling equilibrium than in the uniform price equilibrium, but the consumer surplus and social welfare may be higher in either equilibrium depending on the distribution of the consumers’ tastes for the differentiated goods.
{"title":"Price Signalling Differentiated Experience Goods: Are Uniform Movie Prices a Puzzle?","authors":"In-Uck Park","doi":"10.2139/ssrn.3640363","DOIUrl":"https://doi.org/10.2139/ssrn.3640363","url":null,"abstract":"In a simple static model of differentiated experience goods supplied by a single seller, we show that both a uniform price equilibrium and a price signalling equilibrium coexist. This is in contrast to the received wisdom that price signalling of quality is nonviable in static settings. We also show that the seller’s profit is always higher in the price signalling equilibrium than in the uniform price equilibrium, but the consumer surplus and social welfare may be higher in either equilibrium depending on the distribution of the consumers’ tastes for the differentiated goods.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125066885","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}
Abstract We design a laboratory experiment to test for behavioral differences due to observation within a novel arena: investment games. We find that fund managers are more risk-averse when investors can observe their investment allocations. This effect is more pronounced when investors, in addition to observing the allocations, can also observe the investment outcomes. Interestingly, allowing investors to observe how their investment is allocated does not impact how much they invest. Last, when the outcome of the risky investment is public knowledge, disclosing managers’ allocations leads them to return more tokens to investors and to expropriate fewer tokens for themselves at the end of the game, ceteris paribus. We discuss potential causes of these effects.
{"title":"Being Watched in an Investment Game Setting: Behavioral Changes when Making Risky Decisions","authors":"Z. Tingting Jia, M. McMahon","doi":"10.2139/ssrn.3376189","DOIUrl":"https://doi.org/10.2139/ssrn.3376189","url":null,"abstract":"Abstract We design a laboratory experiment to test for behavioral differences due to observation within a novel arena: investment games. We find that fund managers are more risk-averse when investors can observe their investment allocations. This effect is more pronounced when investors, in addition to observing the allocations, can also observe the investment outcomes. Interestingly, allowing investors to observe how their investment is allocated does not impact how much they invest. Last, when the outcome of the risky investment is public knowledge, disclosing managers’ allocations leads them to return more tokens to investors and to expropriate fewer tokens for themselves at the end of the game, ceteris paribus. We discuss potential causes of these effects.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131226932","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 the impact of uniform standards from an economy's perspective in the presence of capital crunches and economic shocks. We show that converting to uniform standards benefits some economies but may be detrimental to other economies, and the impact is determined by the joint effects of the difference in information quality, as well as capital endowments across economies. Our analysis indicates that economies with high information quality benefit from uniform standards when the capital crunch is severe, but may suffer if the capital crunch is relatively mild. We also show that a wealthy economy with a large capital endowment may be put at a disadvantage by converting to uniform standards. In addition, we find that improving information quality in one economy may have a positive or negative externality on other economies under uniform standards. Our analysis provides potential regulatory implications for standards setters and empirical implications for future research, and may help to inform the debates about uniform standards.
{"title":"Uniform Standards, Information Quality, and Capital Flows","authors":"Lin Nan, Chao Tang","doi":"10.2139/ssrn.3634671","DOIUrl":"https://doi.org/10.2139/ssrn.3634671","url":null,"abstract":"This paper examines the impact of uniform standards from an economy's perspective in the presence of capital crunches and economic shocks. We show that converting to uniform standards benefits some economies but may be detrimental to other economies, and the impact is determined by the joint effects of the difference in information quality, as well as capital endowments across economies. Our analysis indicates that economies with high information quality benefit from uniform standards when the capital crunch is severe, but may suffer if the capital crunch is relatively mild. We also show that a wealthy economy with a large capital endowment may be put at a disadvantage by converting to uniform standards. In addition, we find that improving information quality in one economy may have a positive or negative externality on other economies under uniform standards. Our analysis provides potential regulatory implications for standards setters and empirical implications for future research, and may help to inform the debates about uniform standards.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134108088","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 problem of firms that disclose verifiable information to each other publicly, in the form of Blackwell Experiments, before engaging in strategic decisions. The signals designed can be either interpreted as statistical reports or as slices of physical quantities, i.e. market segments. Before the state of the world is realized, firms choose a signal policy, an estimation technique, about a private individual payoff state and then are forced to publicize the results of the investigations to all other firms before engaging in price or quantity competition. Because signals are made public, when a firm tries to assess the firm's individual payoff, it also ends up revealing the same information to her opponents. Full Disclosure enables companies to adapt to local market fundamentals at the expense of releasing crucial information to the competitors. On the other hand, Partial Revelation makes companies loose optimality of the decisions with regards to the true state of the world but enable them to commit to an aggressive policy of preclusion that increases the frequency of a favorable distribution of players actions. Whereas Partial Revelation acts as a commitment device and preclude entry in otherwise competitive markets, inducing insensitivity of the decisions with respect to local fundamentals, decentralized decision making is a dominant strategy when the profile of competitors is constant across markets or when a company cannot influence the extensive margin entry decision of the competitor with more or less disclosure of information. Since decentralization acts as a way to correlate decisions with local market fundamentals, and running one single policy in multiple states of the world acts as a commitment device to avoid competitors, I describe a trade off between commitment over a distribution of actions versus correlation with states of the world.
{"title":"Information Design and Sensitivity to Market Fundamentals","authors":"Pedro Guinsburg","doi":"10.2139/ssrn.3649741","DOIUrl":"https://doi.org/10.2139/ssrn.3649741","url":null,"abstract":"I study the problem of firms that disclose verifiable information to each other publicly, in the form of Blackwell Experiments, before engaging in strategic decisions. The signals designed can be either interpreted as statistical reports or as slices of physical quantities, i.e. market segments. Before the state of the world is realized, firms choose a signal policy, an estimation technique, about a private individual payoff state and then are forced to publicize the results of the investigations to all other firms before engaging in price or quantity competition. Because signals are made public, when a firm tries to assess the firm's individual payoff, it also ends up revealing the same information to her opponents. Full Disclosure enables companies to adapt to local market fundamentals at the expense of releasing crucial information to the competitors. On the other hand, Partial Revelation makes companies loose optimality of the decisions with regards to the true state of the world but enable them to commit to an aggressive policy of preclusion that increases the frequency of a favorable distribution of players actions. Whereas Partial Revelation acts as a commitment device and preclude entry in otherwise competitive markets, inducing insensitivity of the decisions with respect to local fundamentals, decentralized decision making is a dominant strategy when the profile of competitors is constant across markets or when a company cannot influence the extensive margin entry decision of the competitor with more or less disclosure of information. Since decentralization acts as a way to correlate decisions with local market fundamentals, and running one single policy in multiple states of the world acts as a commitment device to avoid competitors, I describe a trade off between commitment over a distribution of actions versus correlation with states of the world.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130513095","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 Verifiability Approach is a lie detection method based on the insight that truth-tellers provide precise details whereas liars sometimes remain vague to avoid being exposed. We provide a game-theoretic foundation for the strategic effect that underlies this approach. We consider a speaker who wants to be acquitted and an investigator who prefers to find out the truth. The investigator can verify the speaker’s statement at some cost; verification gets more reliable the more details are provided. If, after a falsified statement, the investigator convicts, an additional penalty is imposed. Constructing precise but false statements is assumed to be cognitively costly. We derive all equilibria and thereby the conditions under which the investigator can infer valuable information from the speaker’s statement at face value. If cognitive costs are not prohibitively high, these require that liars are deterred from making false precise statements if always verified. Strategic information revelation by the speaker and verification by the investigator then necessarily work in tandem in a partially pooling equilibrium. Improvements in reliability result in more valuable information via the statements per se, whereas larger lying costs or a harsher penalty do not once the deterrence condition for the existence of this equilibrium is met.
{"title":"Lie Detection: A Strategic Analysis of the Verifiability Approach","authors":"K. Ioannidis, T. Offerman, R. Sloof","doi":"10.2139/ssrn.3620710","DOIUrl":"https://doi.org/10.2139/ssrn.3620710","url":null,"abstract":"\u0000 The Verifiability Approach is a lie detection method based on the insight that truth-tellers provide precise details whereas liars sometimes remain vague to avoid being exposed. We provide a game-theoretic foundation for the strategic effect that underlies this approach. We consider a speaker who wants to be acquitted and an investigator who prefers to find out the truth. The investigator can verify the speaker’s statement at some cost; verification gets more reliable the more details are provided. If, after a falsified statement, the investigator convicts, an additional penalty is imposed. Constructing precise but false statements is assumed to be cognitively costly. We derive all equilibria and thereby the conditions under which the investigator can infer valuable information from the speaker’s statement at face value. If cognitive costs are not prohibitively high, these require that liars are deterred from making false precise statements if always verified. Strategic information revelation by the speaker and verification by the investigator then necessarily work in tandem in a partially pooling equilibrium. Improvements in reliability result in more valuable information via the statements per se, whereas larger lying costs or a harsher penalty do not once the deterrence condition for the existence of this equilibrium is met.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125360982","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 consider the problem of dynamic information design with one sender and one receiver where the sender observers a private state of the system and takes an action to send a signal based on its observation to a receiver. Based on this signal, the receiver takes an action that determines rewards for both the sender and the receiver and controls the state of the system. In this technical note, we show that this problem can be considered as a problem of dynamic game of asymmetric information and its perfect Bayesian equilibrium (PBE) and Stackelberg equilibrium (SE) can be analyzed using the algorithms presented in [1], [2] by the same author (among others). We then extend this model when there is one sender and multiple receivers and provide algorithms to compute a class of equilibria of this game.
{"title":"Dynamic Information Design","authors":"Deepanshu Vasal","doi":"10.2139/ssrn.3597020","DOIUrl":"https://doi.org/10.2139/ssrn.3597020","url":null,"abstract":"We consider the problem of dynamic information design with one sender and one receiver where the sender observers a private state of the system and takes an action to send a signal based on its observation to a receiver. Based on this signal, the receiver takes an action that determines rewards for both the sender and the receiver and controls the state of the system. In this technical note, we show that this problem can be considered as a problem of dynamic game of asymmetric information and its perfect Bayesian equilibrium (PBE) and Stackelberg equilibrium (SE) can be analyzed using the algorithms presented in [1], [2] by the same author (among others). We then extend this model when there is one sender and multiple receivers and provide algorithms to compute a class of equilibria of this game.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"96 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114586520","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 study a design problem for an effort-maximizing principal in a two-player contest with two dimensions of asymmetry. Players have different skill levels and an information gap exists, as only one player knows the skill difference. The principal has two policy instruments to redress the lack of competitive balance due to asymmetry; she can commit to an information-revealing mechanism, and she can discriminate one of the players by biasing his effort. We characterize the optimal level of discrimination to maximize aggregate effort, showing how this is in turn inextricably linked to the choice of information revelation. Applications are found in newcomer-incumbent situations in an internal labor market, sales-force management, and research contests.
{"title":"Competitive Balance: Information Disclosure and Discrimination in an Asymmetric Contest","authors":"Derek J. Clark, Tapas Kundu","doi":"10.2139/ssrn.3543378","DOIUrl":"https://doi.org/10.2139/ssrn.3543378","url":null,"abstract":"We study a design problem for an effort-maximizing principal in a two-player contest with two dimensions of asymmetry. Players have different skill levels and an information gap exists, as only one player knows the skill difference. The principal has two policy instruments to redress the lack of competitive balance due to asymmetry; she can commit to an information-revealing mechanism, and she can discriminate one of the players by biasing his effort. We characterize the optimal level of discrimination to maximize aggregate effort, showing how this is in turn inextricably linked to the choice of information revelation. Applications are found in newcomer-incumbent situations in an internal labor market, sales-force management, and research contests.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"126 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132538233","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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