This project developed a game-theoretic model to study information aggregation in an economy where bidders choose between a frictionless common-value auction and an outside option based on their private information. The outside option is also an auction market subject to frictions resulting from a positive reserve price. (“Market Selection and the Information Content of Prices,” joint with Mehmet Ekmekci, Econometrica, forthcoming.) This framework allowed us to highlight the interplay between self-selection into an auction, bidding behavior, and the information content of prices. Our main finding shows no equilibrium aggregates information in either market if the object-to-bidder ratio in the frictionless market exceeds a certain cutoff. If, on the other hand, the object-to-bidder ratio is less than the cutoff, then we show that information is aggregated in every equilibrium. Furthermore, if the market is comprised only of perfectly informed and uninformed bidders, then only very few informed bidders select the frictional market. The pattern of market selection into the two markets ensures that the expected prices are equalized across markets and precludes information aggregation.
Market participants often need to invest in information before deciding whether to trade. To investigate the incentive to invest in information, we studied a common-value auction in which a large number of identical, indivisible objects are sold to a large number of ex-ante identical bidders with unit demand. Before the auction, potential bidders can choose to buy information from various sources at a cost. (“Price Discovery in a Large Auction with Costly Information” with Mehmet Ekmekci.) This framework allowed us to derive the limit price distribution as a closed-form function of the costs and benefits of information. This price distribution implies that information is aggregated if the cost of information converges to zero faster than the benefit of information as the amount of information acquired converges to zero.
An economic agent can also acquire information by communicating with an expert. As part of this project, we studied communication between an informed expert and an uninformed decision-maker, whose incentives are not aligned, by constructing a repeated-cheap talk game. ( “Starting Small to Communicate,” with Levent Kockesen and Elif Kubilay, Games and Economic Behavior, 2020). Either the decision-maker or the expert controls the stakes involved in their relationship. In both cases, if the potential conflict of interest is large, then the stakes increase over time in a truthful equilibrium. Moreover, as the potential conflict of interest increases, the extent to which the stakes are back-loaded increases, i.e. stakes are initially smaller but grow faster.
This project also studied communication between a decision-maker and multiple agents by constructing a cheap-talk game where two experts first choose what information to acquire and then offer advice to a decision-maker whose actions affect the welfare of all. ("Cross-verification and Persuasive Cheap Talk" with Mehmet Ekmekci and Ludovic Renou.) In our framework, the experts cannot commit to reporting strategies. Yet, we show that the decision-maker’s ability to cross-verify the experts’ advice acts as a commitment device for the experts. In particular, we construct an equilibrium, where an expert’s equilibrium payoff is equal to what he would obtain if he could commit to truthfully revealing his information.
