Periodic Reporting for period 4 - INFORMATIVEPRICES (Market Selection, Frictions, and the Information Content of Prices)
Période du rapport: 2020-11-01 au 2021-04-30
Our work on common-value auctions demonstrates how frictions in one auction can hinder information aggregation in another frictionless auction, even in circumstances where information is aggregated in both markets under complete information. In particular, we show that frictionless markets attract uninformed bidders while frictional markets attract informed bidders, and this pattern of market selection precludes information aggregation in both markets.
Our work on costly information acquisition in auctions establishes that the information content of the auction price is completely characterized by the cost-benefit ratio of information as the amount of information acquired by an agent converges to zero. Moreover, we show that information is aggregated in the auction if this cost-benefit ratio converges to zero.
In addition to investing in information, an economic decision-maker can acquire information by consulting informed experts. However, conflicts of interest between experts and the decision-maker frequently hinder effective communication. Our work on communication shows that a decision-maker can elicit truthful information from an expert by gradually increasing the stakes in the relationship. In other words, starting small and progressively increasing the stakes facilitates truthful communication between an expert and a decision-maker. Furthermore, if the decision-maker has multiple experts to consult, our results show that she can again obtain truthful information from the experts. This is because the decision-maker can check the veracity of her advice by comparing one expert’s recommendation with another’s.
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.
This project also makes several contributions to the communication and cheap-talk literature: (1) Previous work showed that truthful communication is not possible between a decision-maker and an expert in a one-shot cheap-talk game. In contrast, we show that truthful communication is possible if the cheap-talk game is repeated and the stakes in the relationship gradually increase. (2) Prior work on persuasion characterized the most preferred information structure for an expert who faces a decision-maker that chooses the course of action. However, past work also found that the expert cannot communicate this information structure to the decision-maker in a cheap-talk game. In contrast, we show that if the decision-maker faces two experts instead of one, then truthful communication is possible.