The real puzzle of blackmail: An informational approach

The “puzzle” of blackmail is that threats to reveal private information that would be harmful to someone in exchange for money are illegal, but revelation is not. The resolution is that concealment of information about product quality impedes the efficient operation of markets, whereas revelation promotes it. The real puzzle is why possessors are not naturally inclined to sell to uninformed parties, who value the information more than would-be blackmail victims. The answer has to do with the public good qualities of information, which create an appropriability problem in transactions with uninformed parties. The paper also discusses incentives to acquire compromising information.     

Aggregation of multiple prior opinions

Experts are asked to provide their advice in a situation of uncertainty. They adopt the decision maker?s utility function, but each has a potentially different set of prior probabilities, and so does the decision maker. The decision maker and the experts maximize the minimal expected utility with respect to their sets of priors. We show that a natural Pareto condition is equivalent to the existence of a set Λ of probability vectors over the experts, interpreted as possible allocations of weights to the experts, such that (i) the decision maker?s set of priors is precisely all the weighted-averages of priors, where an expert?s prior is taken from her set and the weight vector is taken from Λ; (ii) the decision maker?s valuation of an act is the minimal weighted valuation, over all weight vectors in Λ, of the experts? valuations.     

After you—endogenous sequencing in voluntary contribution games

We examine contributions to a public good when some donors do not know the true value of the good. If donors in such an environment determine the sequence of moves, two contribution orders may arise as equilibria. Either the uninformed and informed donors contribute simultaneously or the informed contribute prior to the uninformed. Sequential moves result in a larger provision of the public good, because the follower mimics the action of the leader, and in accounting for this response the leader chooses to contribute when it is efficient to do so. An experimental investigation of the game shows that the donors predominantly choose to contribute sequentially, and that the resulting contributions are larger than those of the simultaneous-move game. Although the gain from sequential moves is smaller when the sequence is set exogenously, our results suggest that the involved parties would benefit from having sequential moves imposed upon them.     

Information in conflicts

We consider two-player contests for a prize of common but uncertain value. For settings where one player knows the value of the prize, while the other only knows its prior distribution, we give conditions for when the uninformed agent is ex ante strictly more likely to win the prize than is the informed agent. In the special case of a lottery contest, equilibrium expenditures are lower under asymmetric information than if either both agents are informed or neither agent is informed.     

Communication via a strategic mediator

This paper investigates communication between an informed expert and an uninformed principal via a strategic mediator. We demonstrate that, for any bias in the parties' preferences, there exists a strategic mediator that provides the highest expected payoff to the principal, as if the players had communicated through an optimal non-strategic mediator.     

Countervailing Power and Price Transparency*

We investigate whether improved transparency about prices may increase the countervailing power exercised by buyers of an intermediate good. In a model with an informed manufacturer that sells to both informed and uninformed firms, we show that full transparency cannot be part of equilibrium due to the strategic effect of the resulting informational spillover. Transparency policies introduce a distortion for informed segments and are unsuccessful in completely removing the distortion from the uninformed segment. Welfare effects are hence ambiguous and depend on the weight assigned to uninformed markets. Our results thus cast further doubt on the value of transparency.     

Testing theories with learnable and predictive representations

We study the problem of testing an expert whose theory has a learnable and predictive parametric representation, as do standard processes used in statistics. We design a test in which the expert is required to submit a date T by which he will have learned enough to deliver a sharp, testable prediction about future frequencies. We show that this test passes an expert who knows the data-generating process and cannot be manipulated by a uninformed one. Such a test is not possible if the theory is unrestricted.     

Informed trading and the ‘leakage’ of information

This paper examines the effect of ‘leakage’ of information, private information becoming available to uninformed traders at a later date, on information acquisition and revelation. Using a Shapley-Shubik market game framework it is shown that (a) if information acquisition by the informed traders is costless, this leads to faster revelation of information; (b) if information acquisition is costly, there may be no acquisition of information; (c) information leakage leads to a fall in value of information but does not affect the incentive for informed traders to sell the information.     

ASYMMETRIC INFORMATION AND EXCHANGE OF INFORMATION ABOUT PRODUCT DIFFERENTIATION

We introduce asymmetric information about consumers’ transportation costs (i.e., the degree of product differentiation) in the model of Hotelling. When transportation costs are high, both firms have lower profits with asymmetric information than with perfect information. Contrarily, if transportation costs are low, both firms may prefer the asymmetric information scenario (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information exchange is ex‐ante advantageous for both firms, but ex‐post damaging if transportation costs turn out to be low. If the information is unverifiable, the informed firm does not represent a reliable source of information, since it always prefers to announce that transportation costs are high and there is no contract that induces truthful revelation.     

The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.     

Informational control and organizational design

This paper focuses on issues of allocating authority between an uninformed principal and an informed expert. We analyze the benefits of informational control—restricting the precision of the expert's information (without learning its content). In this case, the result of Dessein (2002) [8] that delegating decisions to a perfectly informed expert is better than communication when preferences between the expert and the principal are not too far apart is reversed. We demonstrate that these organizational forms—informational control and delegation—can be either complements or substitutes, depending on the principal's ability to affect the expert's discretion about the set of allowed policies.     

Endogenous order and information aggregation

Privately informed experts with heterogeneous expertise decide when to give advice and what advice to give. Each expert’s utility depends upon that expert’s own message as well as those of the other experts. Under different forms of payoff externalities, we find varying results for the optimal order in which messages are sent and the existence of herd behavior. Under negative payoff externalities, all experts send a message together without any delay and a herd never arises. This leads to truthful revealing of all private information. Without forcing any order of speech, we obtain a result similar to the ‘anti-seniority rule’. This, however, goes in the opposite direction when positive payoff externalities are induced. An incentive structure with positive payoff externalities gives rise to a herd led by the most precise expert with a delay in the disclosure of information. Next, we test for the nature of payoff externalities in the remuneration of forecasters listed with I/B/E/S. We find that the underlying payoff externalities are negative, i.e. the benefit from making dissimilar forecasts is higher than that from making similar ones.     

Rent-seeking with uncertain discriminatory power

We consider a two-player Tullock rent-seeking contest with uncertain discriminatory power in the contest success function. We examine the cases where both players are either informed or uninformed about the size of the discriminatory power, as well as the case where only one player has private information about it. We show that in all three cases the contest has a unique (Bayesian) Nash equilibrium. In each case we characterize key properties of the equilibrium.     

Trade and revelation of information

We consider an economy with asymmetric information and two types of agents, fully informed and uninformed. Uninformed agents update their information observing equilibrium prices and the equilibrium levels of other agents’ excess demand. We show that, for a generic set of economies, there are rational expectations equilibria which are partially revealing on an open, dense set of signals of positive Lebesgue measure, provided that the dimension of the signal space is sufficiently larger than the dimension of the commodity space.     

Estimating loss functions of experts

We propose a new and simple methodology to estimate the loss function associated with experts’ forecasts. Under the assumption of conditional normality of the data and the forecast distribution, the asymmetry parameter of the lin–lin and linex loss function can easily be estimated using a linear regression. This regression also provides an estimate for potential systematic bias in the forecasts of the experts. The residuals of the regression are the input for a test for the validity of the normality assumption. We apply our approach to a large data set of SKU-level sales forecasts made by experts, and we compare the outcomes with those for statistical model-based forecasts of the same sales data. We find substantial evidence for asymmetry in the loss functions of the experts, with underprediction penalized more than overprediction.     

Network architecture, salience and coordination

This paper reports the results of an experimental investigation of dynamic games in networks. In each period, the subjects simultaneously choose whether or not to make an irreversible contribution to the provision of an indivisible public good. Subjects observe the past actions of other subjects if and only if they are connected by the network. Networks may be incomplete so subjects are asymmetrically informed about the actions of other subjects in the same network, which is typically an obstacle to the attainment of an efficient outcome. For all networks, the game has a large set of (possibly inefficient) equilibrium outcomes. Nonetheless, the network architecture makes certain strategies salient and this in turn facilitates coordination on efficient outcomes. In particular, asymmetries in the network architecture encourage two salient behaviors, strategic delay and strategic commitment. By contrast, we find that symmetries in the network architecture can lead to mis-coordination and inefficient outcomes.     

Informational size and incentive compatibility with aggregate uncertainty

In McLean and Postlewaite (Econometrica 56, 1992, p. 2421), we analyzed pure exchange economies with asymmetrically informed agents. We defined a notion of informational size and showed that, when the aggregate information of all agents resolves nearly all the uncertainty regarding the state of nature, the conflict between incentive compatibility and (ex post) efficiency can be made small if agents have sufficiently small informational size. This paper investigates the relationship between informational size and efficiency for the case in which nontrivial aggregate uncertainty is present, i.e., when significant uncertainty about the world persists even when the information of all agents is known.     

Modeling internal commitment mechanisms and self-control: A neuroeconomics approach to consumption–saving decisions

We provide a new model of consumption–saving decisions which explicitly allows for internal commitment mechanisms and self-control. Agents have the ability to invoke either automatic processes that are susceptible to the temptation of ‘over-consuming,’ or alternative control processes which require internal commitment but are immune to such temptations. Standard models in behavioral economics ignore such internal commitment mechanisms. We justify our model by showing that much of its construction is consistent with dynamic choice and cognitive control as they are understood in cognitive neuroscience.The dynamic consumption–saving behavior of an agent in the model is characterized by a simple consumption–saving goal and a cut-off rule for invoking control processes to inhibit automatic processes and implement the goal. We discuss empirical tests of our model with available individual consumption data and we suggest critical tests with brain-imaging and experimental data.     

Aggregate information cascades

We introduce a new model of aggregate information cascades where only one of two possible actions is observable to others. Agents make a binary decision in sequence. The order is random and agents are not aware of their own position in the sequence. When called upon, they are only informed about the total number of others who have chosen the observable action before them. This informational structure arises naturally in many applications. Our most important result is that only one type of cascade arises in equilibrium, the aggregate cascade on the observable action. A cascade on the unobservable action never arises.