Shaping the beliefs of the majority. Pluralism and competition in mass information

This paper analyses a market where two sources of information sell reports to a population of readers. Sources care about the outcome of a two-party election where the readers vote according to the information received. The paper discusses whether or not pluralism matters as regards the truthfulness of information disclosures at an equilibrium, and whether we should expect the majority of the population to be less well informed than the minority. Given the definition adopted in the paper, pluralism is found to matter only to a limited extent: the minority source provides better information than the majority source, independently of whether they share or not the same political goals. On the other hand, the pattern with a well informed élite and a less informed majority turns out to be an equilibrium outcome when political choices are made exclusively by the winning party. The paper also compares the previous case with the one where political choices are influenced by both parties, to an extent which depends in a continuous way on their shares in the population. (JEL: L82, Z1, D72)     

Aggregation of expert opinions

Conflicts of interest arise between a decision maker and agents who have information pertinent to the problem because of differences in their preferences over outcomes. We investigate how the decision maker can extract the information by distorting the decisions that will be taken. We show that only slight distortions will be necessary when agents' signals are sufficiently accurate or when the number of informed agents becomes large. We argue that the particular mechanisms analyzed are substantially less demanding informationally than those typically employed in implementation and virtual implementation. Further, the mechanisms are immune to manipulation by small groups of agents.     

On the bad reputation of reputational concerns

Can reputational concerns do any good? Economists have shown how they lead agents to ignore valuable information, to herd, and to become overly risk averse. We explore how they may be a social blessing. An agent may exert effort to become informed about the uncertain benefits of a project. A smart agent's efforts make him better informed; a dumb agent's efforts are to no avail. If an agent does not know his type, reputational concerns are socially beneficial. If an agent knows his type, reputational concerns may be socially beneficial. A dumb agent takes inefficient, unconventional decisions to mimic a smart agent. The latter exerts more effort in order not to be mistaken for a dumb. This holds whether or not project rejection is a safe haven for the dumb.     

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.     

Information sharing between vertical hierarchies

When do principals independently choose to share the information obtained from their privately informed agents? Information sharing affects contracting within competing organizations and induces agentsʼ strategies to be correlated through the distortions imposed by principals to obtain information. We show that the incentives to share information depend on the nature of upstream externalities between principals and the correlation of agentsʼ information. With small externalities, principals share information when externalities and correlation have opposite signs, and do not share information when externalities and correlation have the same sign. In this second case, principals face a prisonersʼ dilemma since they obtain higher profits by sharing information.     

Opportunistic discrimination

Are minorities more vulnerable to opportunism? We find that individuals from a minority group face greater danger of being cheated because trade with them is less frequent and the value of a reputation for fairness toward them is correspondingly smaller. When the majority is sufficiently large it can only lose from a solidarity strategy of punishing opportunism against the minority, so a firm that cheats the minority can still continue business as usual with the majority. If there is a small chance that a firm might have an implicit or preference bias against either group, then the interaction with reputational incentives gives unbiased firms an incentive to cheat the minority but not the majority. The prediction that smaller groups are more susceptible to discrimination distinguishes the model from most other discrimination models.     

Environmental risk and welfare valuation under imperfect information

Consumers are often uninformed, or unsure, about the ambient level of environmental risk. An optimal policy must jointly determine efficient levels of self-protection, information provision, and public risk mitigation efforts. Unfortunately, conventional welfare measures are not amenable to welfare analysis in the presence of imperfect information. We develop a theoretical welfare measure, called quasi-compensating variation, that is a natural extension of compensating variation (CV). We show that this welfare measure offers not only a money metric of the “value of information,” but also a means to appropriately evaluate the welfare effects of various policies when consumers are imperfectly informed about ambient risk. This welfare measure allows us to obtain a number of results that the traditional CV measure fails to offer. In particular, we show that the consumer’s willingness to pay for a (small) environmental risk reduction is higher for those who underestimate ambient risk than for those who overestimate or are perfectly informed if the marginal return to self-protection increases with ambient risk.     

Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems

This paper analyses the sustainability of inter-generational transfers in Samuelson's consumption-loan model when agents are imperfectly informed about past events. We find that with mild informational constraints, transfers cannot be supported by pure-strategy equilibria. Mixed strategies allow transfers to be sustained even if agents have little information, so that a version of the Folk theorem holds. However, these equilibria are not robust. If each agent's utility function is subjected to a small random perturbation as in Harsanyi (1973), these mixed strategy equilibria unravel, and only the zero-transfer allocation survives as the unique rationalizable outcome. This result is an example of mixed strategy equilibrium of an extensive form game which cannot be purified.     

Does competitive pricing cause market breakdown under extreme adverse selection?

We study market breakdown in a finance context under extreme adverse selection with and without competitive pricing. Adverse selection is extreme if for any price there are informed agent types with whom uninformed agents prefer not to trade. Market breakdown occurs when no trade is the only equilibrium outcome. We present a necessary and sufficient condition for market breakdown. If the condition holds, then trade is not viable. If the condition fails, then trade can occur under competitive pricing. There are environments in which the condition holds and others in which it fails.     

Truthtelling in Matching Markets

We analyze a search and matching model with non‐transferable utility and asymmetric information. Randomly paired agents go through an evaluation phase, at the end of which they discover each other's types and choose to match or not. Before deciding to enter this phase, agents can communicate through cheap talk. We provide conditions for this communication to be informative, and we examine how it affects agents' welfare. We show that communication is Pareto‐improving only when the matching is assortative in the absence of communication and left unchanged by information transmission.     

Inattentive agents and disagreement about economic activity

This paper evaluates empirically the (in)consistency of disagreement in survey forecasts with the prediction of sticky information models à la Mankiw-Reis, in which only a fraction of agents update their information sets at every period. To address this issue, a dynamic stochastic general equilibrium (DSGE) model that features agents’ infrequent information updating as well as nominal rigidities is fit to U.S. data. We find that the survey disagreement shares two pivotal characteristics with its model-based counterparts: (i) disagreement can be predicted by agents’ average forecast revisions reflecting the arrival of shocks; and (ii) disagreement exhibits a U-shaped relationship against the deviation of output growth from its steady state. These features arise because the arrival of new information elevates disagreement among informed and uninformed agents. Our findings indicate a substantial degree of infrequent information updating in the survey disagreement. The existing literature often uses survey disagreement as a proxy for macroeconomic uncertainty, but our finding suggests that it is unlikely to be an appropriate measure.     

Convergence Results for Unanimous Voting

This paper derives a necessary condition for unanimous voting to converge to the perfect information outcome when voters are only imperfectly informed about the alternatives. Under some continuity assumptions, the condition is also sufficient for the existence of a sequence of equilibria that exhibits convergence. The requirement is equivalent to that found by Milgrom [1979, Econometrica47, 679-688] for information aggregation in single-prize auctions. An example illustrates that convergence may be reasonably fast for small committees. However, if voters have common preferences, unanimity is not the optimal voting rule. Unanimity rule makes sense only as a way to ensure minority views are respected. Journal of Economic Literature Classification Numbers: D72, D82, D44.     

Information acquisition and welfare effect in a model of competitive financial markets

We analyze welfare effect of information acquisition for a model of competitive financial markets with diverse information and rational expectations. We show that in the fully revealing rational expectations equilibrium, each agent’s gain from trade in ex ante utility decreases as more agents become informed. An implication of the result is that market efficiency and ex ante Pareto optimality are not compatible in competitive financial markets with diverse information and rational expectations. Our result can be viewed as complementary to the Grossman paradox, which shows that market efficiency and individuals’ incentives to acquire information are not compatible. This paper is the first step in a projected exploration of welfare effect of information acquisition in models with diverse information.     

GOVERNMENT‐MANDATED DISCRIMINATORY POLICIES: THEORY AND EVIDENCE*

We study an economy with private and public sectors in which workers invest in imperfectly observable skills that are important to the private sector but not to the public sector. Government regulation allows native majority workers to be employed in the public sector with positive probability while excluding the minority from it. We show that even when the public sector offers the highest wage rate, it is still possible that the discriminated group is, on average, economically more successful. The widening Chinese/Malay wage gap in Malaysia since the adoption of its New Economic Policy in 1970 supports our model.     

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.     

Intraday trade in dealership markets

We develop and test a structural asymmetric information transaction model to characterize the price impact of information when markets are thin. Since orders are accepted individually, the model allows for transaction costs and brokerage fees. Equilibrium demands mixed entry strategies on the part of potentially informed traders. Estimation of the structural parameters is performed using a maximum likelihood procedure on NYSE data. The structural model is rejected primarily because the nonlinear restrictions do not allow for sufficient correlation between price movements and pricing errors. This leads to unreasonably low estimates of the probability of informed trade relative to an unrestricted alternative. The price impact of information is found to be positive and significant, but economically small. This is because although the amount of private information is substantial, the quality of the information signals is poor, particularly in the middle of the trading day. Informed agents do not trade small quantities, which suggests that their ability to divide orders is limited by transaction costs.     

The relative contributions of private information sharing and public information releases to information aggregation

We calculate learning rates when agents are informed through public and private observation of other agents' actions. We characterize the evolution of the distribution of posterior beliefs. If the private learning channel is present, convergence of the distribution of beliefs to the perfect-information limit is exponential at a rate equal to the sum of the mean arrival rate of public information and the mean rate at which individual agents are randomly matched with other agents. If, however, there is no private information sharing, then convergence is exponential at a rate strictly lower than the mean arrival rate of public information.     

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.     

Formation and persistence of oppositional identities

We develop a dynamic model of identity formation that explains why ethnic minorities may choose to adopt oppositional identities (i.e. some individuals may reject or not the dominant culture) and why this behavior may persist over time. We first show that the prevalence of an oppositional culture in the minority group cannot always be sustained in equilibrium. Indeed, because the size of the majority group is larger, there is an “imposed” process of exposition to role models from the majority group that favors the diffusion of mainstream values in the minority community. In spite of this, an oppositional culture in the minority group can nevertheless be sustained in steady state if there is enough cultural segmentation in terms of role models, or if the size of the minority group is large enough, or if the degree of oppositional identity it implies is high enough. We also demonstrate that the higher the level of harassment and the number of racist individuals in the society, the more likely an oppositional minority culture will emerge. We finally show that ethnic identity and socialization effort can be more intense in mixed rather than segregated neighborhoods.     

Approximate equilibria in microeconomic rational expectations models

For general equilibrium models in which prices transmit information among asymmetrically informed traders, strict rational expectations approximate equilibria are defined. A state-dependent price function is an ε-equilibrium if, when agents use their own information and that conveyed by prices, aggregate excess demand (in each state of the world) does not exceed ε. For any positive ε, existence requires only very mild assumptions—continuity and compact support. Moreover, there are revealing ε-equilibria for all smooth economies satisfying a dimensionality condition. In an open neighborhood of this case, existence of maximally revealing ε-equilibria holds.