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.     

Price Competition and Consumer Externalities in a Vertically Differentiated Duopoly with Information Disparities

In this paper, we extend the model of vertical product differentiation to consider information disparities about quality differences and their effects on price competition. If uninformed consumers overestimate vertical differentiation, asymmetric information is a source of market power and informed consumers exert positive externalities on high quality product purchasers and negative externalities on low quality product purchasers. Such a result is consistent with the fact that information undermines brand. If uninformed consumers are skeptical, adverse selection issues arise and market demands may be perfectly inelastic to prices. With elastic demands equilibrium prices may be either distorted downwards or reflect real quality if the share of informed consumers is suffciently high. Therefore, with skeptical consumers firms may want either to signal quality or subsidize information provision.     

Dynamic signaling and market breakdown

We consider the effects a public revelation of information (e.g. rating, grade) has on trading in a dynamic signaling model. Competing buyers offer prices to a privately informed seller who can reject them and delay trade. Delay is costly and the seller has no commitment to its duration. The external public information allows for signaling in equilibrium. More interestingly, we characterize the dynamics of trade and prices. If signals are noisy, no trade takes place just before the revelation of external information. If signals are fully revealing, then trade occurs even close to revelation, however, transaction prices are discontinuous.     

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.     

An equilibrium analysis of information aggregation and fluctuations in markets with discrete decisions

This paper shows how the interaction between decentralized information gathering and discreteness of investment decisions at the individual level can generate random fluctuations in aggregate investment that involve occasionally large allocation errors. This interaction is illustrated in a model in which private information is costly to acquire and prices reveal information. The unique rational expectations equilibrium outcome of the model is shown to always be noisy and characterized by investment levels which may be high simply because uninformed investors are buying under the impression that the high price is a signal of good investment opportunities.     

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.     

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.     

SCREENING ETHICS WHEN HONEST AGENTS CARE ABOUT FAIRNESS*

A principal faces an agent with private information who is either honest or dishonest. Honesty involves revealing private information truthfully if the probability that the equilibrium allocation chosen by an agent who lies is small enough. Even the slightest intolerance for lying prevents full ethics screening whereby the agent is given proper incentives if dishonest and zero rent if honest. Still, some partial ethics screening may allow for taking advantage of the potential honesty of the agent, even if honesty is unlikely. If intolerance for lying is strong, the standard approach that assumes a fully opportunistic agent is robust.     

Price dispersion in a directed search model

This paper investigates a directed search model in which some buyers are uninformed about prices. We find that sellers' strategies are given by discrete distributions in any symmetric pricing equilibrium. When the proportion of uninformed buyers is sufficiently high, the unique symmetric pricing equilibrium involves a countably infinite number of atoms.     

Credulity, lies, and costly talk

This paper studies a model of strategic communication by an informed and upwardly biased sender to one or more receivers. Applications include situations in which (i) it is costly for the sender to misrepresent information, due to legal, technological, or moral constraints, or (ii) receivers may be credulous and blindly believe the sender's recommendation. In contrast to the predictions obtained in the benchmark cheap talk model, our model admits a fully separating equilibrium, provided that the state space is unbounded above. The language used in equilibrium is inflated and naive receivers are deceived.     

Rationing rule, imperfect information and equilibrium

Summary. The impact of imperfect information on the price setting behaviour of firms is analysed. Specifically, consumers support an information cost to become informed about prices. Firms are endowed with U-shaped average cost curves. If a firm does not supply more than its competitive supply as determined by its marginal cost schedule, then we show that the existence of a pure strategy equilibrium is conditional on the rationing rule employed. If uninformed consumers are served first then the monopoly price is the sole equilibrium whenever consumers' information costs are high enough. Otherwise, a pure strategy equilibrium fails to exist contrary to the results of Salop and Stiglitz (1977) or Braverman (1980) who implicitly suppose that firms supply all the demand at a given price. Received: May 17, 1999; revised version: September 15, 2000     

Auction and the informed seller problem

A seller possessing private information about the quality of a good attempts to sell it through a second-price auction with announced reserve price. The choice of a reserve price transmits information to the buyers. We characterize the equilibria with monotone beliefs of the resulting signaling game and show that they lead to a reduced probability of selling the good compared to the symmetric information situation. We compare the unique separating equilibrium of this signaling game to the equilibrium of a screening game in which an uninformed monopoly broker chooses the trading mechanism. We show that the ex ante expected probability of trade may be larger with a monopoly broker, as well as the ex ante total expected surplus.     

Privacy concerns,voluntary disclosure of information,and unraveling: An experiment

We study the voluntary revelation of private information in a labor-market experiment where workers can reveal their productivity at a cost. While rational revelation improves a worker׳s payoff, it imposes a negative externality on others and may trigger further revelation. Such unraveling can be observed frequently in our data although less often than predicted. Equilibrium play is more likely when subjects are predicted to conceal their productivity than when they should reveal. This tendency of under-revelation, especially of low-productivity workers, is consistent with the level-k model. A loaded frame where the private information concerns the workers׳ health status leads to less revelation than a neutral frame.     

Unraveling in first-price auction

In a private values first-price auction with random number of bidders, the auctioneer has to decide whether to announce or not the actual number of bidders. If the auctioneer cannot commit to any particular announcement policy, then he would like to reveal when the number of bidders is high in order to increase bidding competition. By the same logic, the auctioneer should like to conceal if the number turns out to be small. When bidders' types are independent, full revelation by the auctioneer is shown to be a unique equilibrium with ‘skeptical belief’ as the unique equilibrium belief.     

Strategic Cost Reduction and Cost Revelation

Strategic cost reduction requires cost transparency. When unilateral cost revelation is feasible, strategic cost reduction indeed arises as equilibrium. If it is not feasible, however, credible revelation has to be organized, possibly by a trade association. Then, firms face a prisoners' dilemma: in Cournot duopoly, cost revelation arises as an equilibrium, but hurts firms; in Bertrand duopoly, cost concealing is the equilibrium, while firms would be better off with cost revelation. Since cost revelation is socially desirable (undesirable) in Cournot (Bertrand) competition, it should be encouraged (discouraged).     

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.     

Signal Jamming in Pretrial Negotiation with Multiple Defendants

This article analyzes the pretrial settlement process among an uninformed plaintiff and multiple defendants who share information about the winning chances of their cases. We show that when the chances are negatively correlated, cross-type subsidization occurs to circumvent the possibility of signal jamming, that is, the settlement offer of a strong defendant (a weak defendant) is distorted upward (downward), as far as the no-distortion equilibrium is not viable. In this equilibrium, the plaintiff settles with defendants with probability one.     

Cheap talk with two senders and complementary information

This paper studies a cheap talk model in which two senders having partial and non-overlapping private information simultaneously communicate with an uninformed receiver. The sensitivity of the receiverʼs ideal action to one senderʼs private information depends on the other senderʼs private information. We show that the sendersʼ information transmissions exhibit strategic complementarity: more information transmitted by one sender leads to more information being transmitted by the other sender.     

Tariffs,Quotas, and Forward Contracts under Asymmetric Information*

We consider optimal trade policy for a large country with private information. We show that the optimal tariff leads to a signaling equilibrium with higher tariffs and lower welfare than under complete information, whereas the optimal import quota replicates the complete information equilibrium and thus is superior to the tariff. We also show that, with the tariff, the country may be better off being uninformed. Finally, we show that if the importing nation cannot commit to its tariff, the use of futures contracts together with the dynamically consistent tariff leads to the same equilibrium as under complete information with commitment.     

FROM RATIONALITY TO BOUNDED RATIONALITY*

We investigate the role of bounded rationality in asset pricing and information efficiency. We show that the market stays between the weak‐form efficiency and the semi‐strong‐form efficiency in a market with a single asymmetric information and without noise supply. We show the existence of an overall equilibrium in which the publicly available information can be priced and is ‘almost free’, and the majority of the agents choose to stay uninformed. We show the existence of a Nash competitive equilibrium in an information game.