Screening and Signaling in Communication*

In this paper, we analyze a model of repeated strategic communication between a sender and a receiver. The sender has private information on a policy‐relevant variable but does not know the receiver's motives. Together with the desire of the sender to please the receiver and the desire of the receiver to be pleased, the two‐sided incomplete information creates an interesting communication problem in which players can choose to use information strategically. We analyze various modes of communication, which allow for information transmission, and we compare them in terms of both the quality of the policy implemented and the welfare of the players.     

Endogenous Alleviation of Overreaction Problem by Aggregate Information Announcement

It is well‐known that agents overreact to public information in markets characterized by strategic complementarities. We propose a simple and implementable method of alleviating the overreaction problem. Extending the beauty‐contest game of Morris and Shin to a multi‐region economy, we show that, under an aggregate information announcement, each agent converts purely public information into imperfect public information endogenously. This makes the agents’ beliefs dispersed and alleviates the overreaction problem. Moreover, we compare the welfare effect of the aggregate information announcement with that of a separate announcement. We find that there exist plausible situations where the aggregate information announcement is better than the separate information announcement despite reduced quality.     

MIMICKING THE WINNER LEADS TO WAR: AN EVOLUTIONARY ANALYSIS OF CONFLICT AND COOPERATION*

This note applies an evolutionary analysis to Skaperdas's (1992) static model of conflict and cooperation, in which agents are faced with trade‐offs between joint production and share competition. We adopt the stochastic evolution approach, and assume that each agent occasionally mimics the action of the winner of the stage. In contrast to Skaperdas's results that justify full or partial cooperation in productive activity, the long‐run equilibrium must exhibit total conflict; nobody engages in production at all.     

PERCEIVED INTENTIONALITY IN 2 × 2 EXPERIMENTAL GAMES

We test experimentally whether decisions in 2 × 2 games with mixed equilibria depend on the co‐player being nature or a human agent. Controlling for social preferences, we find differences in decisions in the chicken game and battle of the sexes but not for stag hunt and matching pennies. We attribute these to subjects' perception of the other's intentionality and disapproval avoidance in particular.     

Pigouvian pricing and stochastic evolutionary implementation

We study the implementation of efficient behavior in settings with externalities. A planner would like to ensure that a group of agents make socially optimal choices, but he only has limited information about the agents’ preferences, and can only distinguish individual agents through the actions they choose. We describe the agents’ behavior using a stochastic evolutionary model, assuming that their choice probabilities are given by the logit choice rule. We prove that there is a simple price scheme with the following property: regardless of the realization of preferences, a group of agents subjected to the price scheme will spend the vast majority of time in the long run behaving efficiently. The price scheme defines a game that may possess multiple equilibria, but we are able to obtain a unique and efficient selection from this set because of the stochastic nature of the agents’ choice rule. We conclude by comparing the performance of our price scheme with that of VCG mechanisms.     

Subjective Performance Evaluations and Reciprocity in Principal–Agent Relations

We conduct a laboratory experiment with agents working on, and principals benefiting from, a real effort task in which the agents' performance can only be evaluated subjectively. Principals give subjective performance feedback to agents, and agents have an opportunity to sanction principals. In contrast to existing models of reciprocity, we find that agents tend to sanction whenever the feedback of principals is below their subjective self‐evaluations even if agents' pay‐offs are independent of it. In turn, principals provide more positive feedback (relative to their actual performance assessment of the agent) if this does not affect their pay‐off.     

The Value of Information in the Hold-Up Problem

Abstract In the literature, the information structure of the hold‐up problem is typically assumed to be exogenous. In this paper, we introduce an additional stage at which the head office may grant individual divisions access to an information system before they undertake their specific investments. Although more information ceteris paribus enhances each divisions' profits, more information can reduce divisions' investments and destroy synergies for the other division that would have been generated by the investments. If this negative effect dominates, then information can be harmful for the entire company. Hence, information control can be a subtle force to deal with the hold‐up problem to a certain extent. In this paper we analyze those conditions under which information is either harmful or beneficial for central management.     

Conflict and the Social Contract*

We consider social contracts for resolving conflicts between two agents who are uncertain about each other's fighting potential. Applications include international conflict, litigation and elections. Even though only a peaceful agreement avoids a loss of resources, if this loss is small enough, then any contract must assign a positive probability of conflict. We show how the likelihood of conflict outbreak depends on the distribution of power between the agents and their information about each other.     

Communication, consensus and order. Who wants to speak first?

Parikh and Krasucki [R. Parikh, P. Krasucki, Communication, consensus and knowledge, J. Econ. Theory 52 (1990) 178-189] show that, in a group of rational agents, communication of the value of a function f leads to a consensus on the value of f, provided some conditions on the communication protocol and the function f hold. In this article, we address the issue of the influence of the protocol on the outcome of the communication process, when agents value information positively. We show that, if it is common knowledge in a group of agents that some of them disagree on two protocols, then the consensus value of f must be the same for both protocols.     

The role of private information in dynamic matching and bargaining: Can it be good for efficiency?

We consider a private information replica of the dynamic matching and bargaining model of Mortensen and Wright (2002). We find that private information typically deters entry. But, the welfare can actually be higher under private information.     

On the observational equivalence of random matching

Random matching is often used in economic models as a means of introducing uncertainty in sequential decision problems. We show that random matching processes that satisfy standard proportionality laws are not unique. We give conditions on the payoffs and transition functions of sequential decision models that insure that economic models are robust to the nonuniqueness of the matching process. Under these conditions, the information contained in the proportionality laws is all that is needed to know about the matching process to formulate the model.     

The communication requirements of efficient allocations and supporting prices

We show that any communication finding a value-maximizing allocation in a private-information economy must also discover supporting prices (in general personalized and nonlinear). In particular, to allocate L indivisible items between two agents, a price must be revealed for each of the 2^L-1 bundles. We prove that all monotonic prices for an agent must be used, hence exponential communication in L is needed. Furthermore, exponential communication is needed just to ensure a higher share of surplus than that realized by auctioning all items as a bundle, or even a higher expected surplus (for some probability distribution over valuations). When the utilities are submodular, efficiency still requires exponential communication (and fully polynomial approximation is impossible). When the items are identical, arbitrarily good approximation is obtained with exponentially less communication than exact efficiency.     

Two-sided matching with interdependent values

We introduce and study two-sided matching with incomplete information and interdependent valuations on one side of the market. An example of such a setting is a matching market between colleges and students in which colleges receive partially informative signals about students. Stability in such markets depends on the amount of information about matchings available to colleges. When colleges observe the entire matching, a stable matching mechanism does not generally exist. When colleges observe only their own matches, a stable mechanism exists if students have identical preferences over colleges, but may not exist if students have different preferences.     

Learning by investing

We test for learning among heterogeneous individuals who are engaged in bidding and who possess limited information about the auctioned assets. We use an extensive dataset taken from an auction through which state‐owned enterprises were privatized in the Czech Republic in 1993–94. To test for learning, we develop new measures of individual performance to accommodate the varying prices of assets available in six successive stages of bidding. We present evidence that learning took place among heterogeneous agents during a large‐scale multi‐stage auction that is unique in terms of its size, incentives and variation. The auction’s design, with multiple market periods, allowed agents to learn based on accumulated experience. As individuals had to pay a fee to participate, and as the potential gain was in the magnitude of several months’ salary, we conclude that large incentives were driving our results.     

When mandatory disclosure hurts: Expert advice and conflicting interests

We study the quality of advice that an informed and biased expert gives to an uninformed decision maker. We compare two scenarios: mandatory disclosure of the bias and nondisclosure, where information about the bias can only be revealed through cheap-talk. We find that in many scenarios nondisclosure allows for higher welfare for both parties. Hiding the bias allows for more precise communication for the more biased type and, if different types are biased in different directions, may allow for the same for the less biased type. We identify contexts where equilibrium revelation allows but mandatory disclosure prevents meaningful communication.     

Acquisition of Information and Share Prices: An Empirical Investigation of Cognitive Dissonance

Abstract. This paper deals with the determinants of agents' acquisition of information. Our econometric evidence shows that the general index of Italian share‐prices and the series of Italy's financial newspaper sales are cointegrated, and the former series Granger‐causes the latter, thereby giving support to the cognitive dissonance hypothesis: (non‐professional) agents tend to buy the newspaper when share prices are high and not to buy it when share prices are low. Instead, we do not find support for the hypothesis that the agents acquire information in order to trade in the stock market: we find no relationship between quantities exchanged in the market and newspaper sales, nor between stock market volatility and newspaper sales.     

Uncertainty, co-ordination and path dependence

Our objective is to assess whether dynamics hinder or assist co-ordination in a game with strategic complementarities. We study two dynamic aspects: different agents make decisions at different points in time; and extra information about a payoff-relevant state of nature becomes available over time. We find that the dynamic resolution of information matters most for uniqueness of equilibrium. This is demonstrated by showing that the condition for uniqueness is weaker when learning occurs. We also analyse how successfully agents co-ordinate when there is a unique equilibrium. Finally, we show that path dependence occurs: the order in which signals arrive matters, as well as the total amount of information received.     

Viewpoint: Measuring the well‐being of the poor with income or consumption: a Canadian perspective

Abstract There is a long tradition of using consumption measures derived from Statistics Canada's household expenditures surveys to study material well‐being, inequality, and poverty. We offer an introduction to this research. Income and consumption measures give different pictures of the patterns of material well‐being in Canada, but the differences are not as large as in the US. We also provide a comparison to Meyer and Sullivan's results on data quality. Canadian expenditure surveys are of high quality. Unique aspects of these surveys (variation in quality control measures over time and the possibility of comparing to income tax data) provide important insights into the quality of survey data on income and consumption.     

The roommates problem revisited

One of the oldest matching problems is Gale and Shapley's (1962) [8] “roommates problem”: is there a stable way to assign 2N students into N roommate pairs? Unlike the classic marriage problem or college admissions problem, there need not exist a stable solution to the roommates problem. However, stability ignores the key physical constraint that roommates require a room and is therefore too restrictive. This motivates a new matching problem: matching agents subject to an initial assignment. A particularly important example is kidney exchange where after an assignment has been made, subsequent tests may determine that a patient and donor are incompatible. This paper introduces an efficient algorithm for finding a Pareto improvement starting from any status quo roommates assignment.     

Limited observability as a constraint in contract design

Limited observability is the assumption that economic agents can only observe a finite amount of information. Given this constraint, contracts among agents are necessarily finite and incomplete in comparison to the ideal complete contract that we model as infinite in detail. We consider the extent that finite contracts can approximate a complete contract. The objectives of the paper are: (i) to identify properties of agents’ preferences that determine whether or not finiteness of contracts causes significant inefficiency; (ii) to evaluate the performance of finite contracts against the ideal optimal contract in a bilateral bargaining model.