Informed principal with correlation

In this paper we analyze an adverse selection model with one principal and one agent, who are both risk neutral and have private information. We assume that the private information of the principal is correlated with that of the agent. The main result of the paper is that the principal can extract a larger share of the surplus from the agent than in the case where her information is public. The principal can design such a contract because she exploits the fact that her type is an informative signal on the agent's one. We fully characterize the equilibrium of the game in which different types of principal offer the same menu of contracts that leaves the agent uninformed about the principal's type. This gives more freedom to the principal when setting the transfers because the agent's constraints need to hold only at an interim stage.     

Existence of nontrivial equilibria in repeated games with imperfect private monitoring

We consider finitely repeated games with imperfect private monitoring, and provide several sufficient conditions for such a game to have an equilibrium whose outcome is different from repetition of Nash equilibria of the stage game. Surprisingly, the conditions are consistent with uniqueness of the stage game equilibrium. A class of repeated chicken is shown to satisfy the condition.     

Approximate efficiency in repeated games with correlated private signals

This paper presents repeated games with hidden moves, in which players receive imperfect private signals and are able to communicate. We propose a conditional probability approach to solve the learning problem in repeated games with correlated private signals and delayed communication. We then apply this approach to symmetric n-player games to obtain an approximate efficiency result.     

Fashion statement

We study bilateral matching under private information about agents' characteristics. Assortative matching is the only equilibrium outcome in the absence of private information. When an information friction is present, the matching process can be improved if a payoff-irrelevant variable which we term “fashion” is introduced. Informed agents choose to adopt fashion as a signaling device. If success in matching is observed, other agents can imitate the signal. Thus, for fashion to be useful, it must constantly change. If there are more than two types of agents, both “high” and “low” fashion are needed to facilitate assortative matching.     

The social value of public information with costly information acquisition

In a beauty contest framework, public authorities decide the accuracy of public information evaluating how it affects individual actions and private information acquisition. More precise public information increases welfare whenever its marginal cost does not exceed that of private information.     

Bilateral Oligopoly,Private Information,and Pollution Permit Markets

We analyze the effects of strategic behavior and private information in pollution permit markets in which all firms have market power. The market is characterized by supply-function equilibria. Firms submit net supplies for permits and a market maker determines the market-clearing price. Net supplies depend on abatement cost functions, which in turn depend on private information parameters. We calculate the increase in aggregate abatement costs due to strategic behavior and private information and show that private information attenuates the effects of strategic behavior.      

The value of buyer's ignorance in monopoly

A non-linear pricing monopolist always prefers to sell to buyers with no private information about their tastes for the product if the marginal production cost is smaller than the marginal utility of consumption for all buyers.     

Entry and espionage with noisy signals

We analyze the effect of industrial espionage on entry deterrence. We consider a monopoly incumbent who may expand capacity to deter entry, and a potential entrant who owns an Intelligence System. The Intelligence System (IS) generates a noisy signal based on the incumbentʼs actions. The potential entrant uses this signal to decide whether or not to enter the market. The incumbent may signal-jam to manipulate the likelihood of the noisy signals and hence affect the entrantʼs decisions. If the precision of the IS is commonly known, the incumbent benefits from his rivalʼs espionage. Actually, he benefits more the higher is the precision of the IS while the spying entrant is worse off with an IS of relatively high quality. When the IS quality is private information of the entrant, the incumbent is better off with an IS of high expected precision while the entrant benefits from one of high quality. In this case espionage makes the market more competitive.     

The social value of information on product quality

In the context of a seller with private information about product quality, I show that revelation of information on product quality is sometimes, but not always, socially valuable. When it is socially valuable, there is generally a tradeoff between the acquisition and revelation of finer, but more costly information and the revelation of coarser, but less costly information. As a result, it can be socially optimal for firms to reveal only coarse private information.     

Price-setting power vs. private information: An experimental evaluation of their impact on holdup

This paper investigates the extent of the holdup problem in a buyer–seller relationship in which the seller has private information about his alternative opportunities. Theory predicts that, compared to a situation in which outside options are publicly observed, the seller obtains an informational rent whereas the buyer bears an informational loss. As a result the seller is predicted to invest more while the buyer is expected to invest less. In contrast to this, private information has no impact on the investment levels observed in the experiment. But actual investments do increase with the price-setting power of the investor. These findings are roughly consistent with a model in which agents are inequality-averse. Overall the results question some recent theoretical suggestions that private information rents might substitute for price-setting power in mitigating holdup.     

Garbling of signals and outcome equivalence

In a game with incomplete information players receive stochastic signals about the state of nature. The distribution of the signals given the state of nature is determined by the information structure. Different information structures may induce different equilibria.Two information structures are equivalent from the perspective of a modeler, if they induce the same equilibrium outcomes. We characterize the situations in which two information structures are equivalent in terms of natural transformations, called garblings, from one structure to another. We study the notion of ‘being equivalent to’ in relation with three equilibrium concepts: Nash equilibrium, agent normal-form correlated equilibrium and the belief invariant Bayesian solution.     

Private Information: Similarity as Compatibility

We introduce a new topology on information which evaluates the similarity between information fields taking into account their compatibility, that is, the events that are commonly observed. With this “topology of common information”, the Walrasian expectations equilibrium (Radner 1968) and the private core (Yannelis 1991) are upper semicontinuous     

Judgment aggregation in search for the truth

We analyze the problem of aggregating judgments over multiple issues from the perspective of whether aggregate judgments manage to efficiently use all voters' private information. While new in judgment aggregation theory, this perspective is familiar in a different body of literature about voting between two alternatives where voters' disagreements stem from conflicts of information rather than of interest. Combining the two bodies of literature, we consider a simple judgment aggregation problem and model the private information underlying voters' judgments. Assuming that voters share a preference for true collective judgments, we analyze the resulting strategic incentives and determine which voting rules efficiently use all private information. We find that in certain, but not all cases a quota rule should be used, which decides on each issue according to whether the proportion of ‘yes’ votes exceeds a particular quota.     

Inflation,growth and exchange rate regimes in small open economies

Summary. This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Endogenously arising volatility may be observed independently of the exchange rate regime. Private information - with high rates of domestic inflation - increases the scope for indeterminacy and economic fluctuations.Received: 26 March 2002, Revised: 29 October 2002JEL Classification Numbers: E32, E44, F33.P.L. Hernandez-Verme: I would like to thank Leonardo Auernheimer, Valerie Bencivenga, Dean Corbae, Scott Freeman, Todd Keister, Beatrix Paal, and Maxwell Stinchcombe for very helpful comments and suggestions. Very special thanks are due to Bruce D. Smith. The paper also benefited from the discussions in the seminars in CIDE, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, Indiana University, ITAM, Purdue University, the Second Annual Missouri Economics Conference, Texas A&M, the University of Missouri and the University of Texas at Austin.     

In search of stars: Network formation among heterogeneous agents

This paper reports results from a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the Bala–Goyal [Bala, V., Goyal, S., 2000. A non-cooperative model of network formation, Econometrica 68, 1131–1230] model of network formation with decay and two-way flow of benefits by introducing agents with lower linking costs or higher benefits to others. Furthermore, agents' types may be common knowledge or private information. In all treatments, the (efficient) equilibrium network has a “star” structure. While equilibrium predictions fail completely with homogeneous agents, star networks frequently occur with heterogeneous agents. Stars are not born but rather develop: with a high-value agent, the network's centrality, stability, and efficiency all increase over time. A structural econometric model based on best response dynamics and other-regarding preferences is used to analyze individual linking behavior. Maximum-likelihood estimates of the underlying structural parameters, obtained by pooling data from several treatments, allow us to explain the main treatment effects.     

Credibility and commitment of monetary policy in open economies

We study the delegation of monetary policy to independent central bankers in a two-country world with monetary spillovers. It is shown that, under the hypotheses of imperfect commitment and private information, the equilibrium degree of commitment depends on the correlation structure of the shocks hitting the economies. When the correlation is negative (as when the variance of output depends mainly on shocks to the terms of trade) there is strategic complementarity in the degree of commitment in the two countries. When the correlation is positive (common technological or demand shocks) there is strategic substitutability. In this latter case, the degree of commitment is shown to be increasing in the correlation among shocks. Common components in the international business cycle have been shown in several studies to be relatively more relevant in developed countries. Therefore, our results may contribute to explaining why the institutional solution to the inflationary bias has been adopted in the most advanced countries.     

Recursive structure and equilibria in games with private monitoring

Summary. In each stage of a repeated game with private monitoring, the players receive payoffs and privately observe signals which depend on the players' actions and the state of world. I show that, contrary to a widely held belief, such games admit a recursive structure. More precisely, I construct a representation of the original sequential problem as a sequence of static games with incomplete information. This establishes the ground for a characterization of strategies and, hence, of behavior in interactive-decision settings where private information is present. Finally, the representation is used to give a recursive characterization of the equilibrium payoff set, by means of a multi-player generalization of dynamic programming. Received: February 11, 2002; revised version: July 22, 2002 RID="*" ID="*" I am very grateful to In-Koo Cho, Larry Epstein, Denis Gromb, Stephen Morris, Paolo Siconolfi, Lones Smith and Max Stinchcombe for several insights and suggestions. A referee's comments helped improving the exposition. Finally, I wish to thank the participants to the seminars at MEDS, NYU, Columbia University, Caltech, UCLA, University of Rochester, University of Texas-Austin, Northwestern Summer Microeconomics Conference 98, Summer in Tel Aviv 98, and NASM98.     

Learning with noiseless information and payoff-relevant signals

Summary. In models of active learning or experimentation, agents modify their actions to affect the distribution of a signal that provides information about future payoffs. A standard result in the experimentation literature is that agents experiment, if at all, to increase information. This finding is a direct consequence of Blackwell's theorem: one experiment is more informative than another if and only if all expected utility maximizers prefer to observe the first. Blackwell's theorem presupposes, however, that the observed signal only conveys information and does not directly affect future payoffs. Often, however, signals are directly payoff relevant, a phenomenon that we call signal dependence. For example, if a firm is uncertain about its demand and uses today's sales as a signal of tomorrow's demand, then that signal may also directly affect tomorrow's profit if the good is durable or if consumers form consumption habits. Datta, Mirman and Schlee [9] and Bertocchi and Spagat [4] show that, if the signal is payoff relevant, experimentation may indeed reduce information. Here we show that, despite the inapplicability of Blackwell's Theorem, agents always experiment to increase information if the information structure is noiseless: given the true value of the unknown parameter, the signal realization is deterministic. We then apply our framework to analyze Lazear's [16] model of retail clearance sales, a model with both signal dependence and noiseless information. Received: February 19, 1999; revised version: August 11, 1999     

关于中国人民银行独立性的研究--来自独立性指数和政策反应函数的证据

本文的目的在于 :(1 )根据GMT和CWN的方法 ,将中国人民银行有关法律指数化 ,并通过独立性指数的纵向和跨国家比较来分析中国人民银行在法律层面上的独立性变化和独立性程度 ;(2 )构建中国人民银行政策反应函数 (policyreactionfunction) ,并通过政策工具变量 (instrumentvariables)和政治事件虚拟变量 (dummyvariables)的变化来反映中国人民银行的实际独立性。