Periodic Reporting for period 2 - InfoTrans (Information Transmission in Markets)
Période du rapport: 2022-08-01 au 2024-01-31
This proposal develops new theoretical tools to study price negotiations in dynamic markets. The focus is on one of the most primitive economic problems: a seller and a buyer bargain over the price of a good. Their cost and values are private information, and if they do not reach an agreement today, they may continue bargaining tomorrow.
Somewhat surprisingly, our knowledge about bargaining with two-sided asymmetric information is still quite limited. An important reason for this lack of knowledge is the lack of theoretical tools to properly analyze the theoretical models involving multiple competing forces. Intuitively, on the one hand, signaling forces induce the seller and the buyer to delay trade to obtain a higher share of the trade surplus. On the other hand, Coasian forces push prices down and make trade efficient. The balance between these two forces determines the efficiency of the market and how the trade surplus is shared between the seller and the buyer.
The main goal is to provide a new systematic analysis of markets with asymmetric information. The first aim is to develop new stability-based equilibrium concepts and the tools to use them in practice. The second aim is to use these tools to analyze simpler, yet not fully understood, settings and gain an understanding of their properties and use. The third aim is to expand dynamic pricing by privately informed sellers in different markets: Markets with independent and interdependent values, where traders transact once or multiple times. The final aim is to combine the tools and the knowledge of the bargaining markets to analyze bargaining with two-sided asymmetric information. Markets studied in this project include real estate markets, markets for durable goods, markets for intermediate goods, and financial markets. The results will provide guidance to assess the effect of currently debated privacy or confidentiality policies on social welfare or market efficiency.
Somewhat surprisingly, our knowledge about bargaining with two-sided asymmetric information is still quite limited. An important reason for this lack of knowledge is the lack of theoretical tools to properly analyze the theoretical models involving multiple competing forces. Intuitively, on the one hand, signaling forces induce the seller and the buyer to delay trade to obtain a higher share of the trade surplus. On the other hand, Coasian forces push prices down and make trade efficient. The balance between these two forces determines the efficiency of the market and how the trade surplus is shared between the seller and the buyer.
The main goal is to provide a new systematic analysis of markets with asymmetric information. The first aim is to develop new stability-based equilibrium concepts and the tools to use them in practice. The second aim is to use these tools to analyze simpler, yet not fully understood, settings and gain an understanding of their properties and use. The third aim is to expand dynamic pricing by privately informed sellers in different markets: Markets with independent and interdependent values, where traders transact once or multiple times. The final aim is to combine the tools and the knowledge of the bargaining markets to analyze bargaining with two-sided asymmetric information. Markets studied in this project include real estate markets, markets for durable goods, markets for intermediate goods, and financial markets. The results will provide guidance to assess the effect of currently debated privacy or confidentiality policies on social welfare or market efficiency.
The work performed from the beginning of the project has focussed on the first three aims. A first line of work has been devoted to developing new stability-based tools for analyzing games with incomplete information. The main contribution has been introducing a new equilibrium concept called "sequentially stable outcome." I have shown that such a concept is universal (i.e. can be applied to any game), has desirable properties (e.g. existence, forward induction, equilibrium dominance), and has a high selection power in extensive-form games (e.g. signaling games). I have also provided a valuable tool to characterize sequentially stable outcomes, which is based on the use of nonstandard analysis.
The second line of work has been devoted to using stability-based concepts in games with incomplete information. Here, I have defined robust outcomes in cheap talk games and shown that they are the outcomes of equilibria where most information is transmitted. The concept overcomes previous negative results that showed that stability had no power in selecting equilibria in cheap-talk games.
The third line of work has been devoted to analyzing bargaining in different dynamic settings. My work has studied the effect of savings in relational contracts between employers and employees, where the contract terms are negotiated over time. I have also analyzed small dynamic markets with permanent entry and exit of traders and shown that trade delay may occur even when the delay is inefficient, and there is no private information. I have also analyzed the effect of privacy regulations in online markets and shown that more information about previous transactions may benefit buyers in the presence of signaling motives.
The second line of work has been devoted to using stability-based concepts in games with incomplete information. Here, I have defined robust outcomes in cheap talk games and shown that they are the outcomes of equilibria where most information is transmitted. The concept overcomes previous negative results that showed that stability had no power in selecting equilibria in cheap-talk games.
The third line of work has been devoted to analyzing bargaining in different dynamic settings. My work has studied the effect of savings in relational contracts between employers and employees, where the contract terms are negotiated over time. I have also analyzed small dynamic markets with permanent entry and exit of traders and shown that trade delay may occur even when the delay is inefficient, and there is no private information. I have also analyzed the effect of privacy regulations in online markets and shown that more information about previous transactions may benefit buyers in the presence of signaling motives.
The work performed from the beginning of the project has provided progress beyond the state of the art. Each project provides new economic insights or tools that advance our ability to study markets and the effect of regulations. Here, I summarize two of them.
Before the project on relational contracts, it was not known how the observability of workers' savings affects their employment relationships with their employees. This is an important topic: many employment relationships are based on contractible and non-contractible agreements. The project shows (i) how savings affect employment dynamics and (ii) how these dynamics are affected by the observability of the savings by the employer. For example, it is obtained that employers will tend to induce their employees to undertake high-consumption behavior to lower their savings and lower their future salaries. The findings have implications for regulation: benefits and payments in kind may have adverse effects on workers, as they give employees higher control over their consumption and savings.
The project on sequentially stable outcomes is more theoretical but not less important. This project advances in the pursuit of broad and powerful selection criteria, which help obtain predictions consistently across a large number of applications. Such tools are necessary as new models are increasingly complex and incorporate different effects, so classic refinement criteria applied to specific classes of models is impossible. The socio-economic impact of these theoretical advances is not immediate, but they solidify the conceptual basis necessary for doing well-founded and consistent policy analysis.
Before the project on relational contracts, it was not known how the observability of workers' savings affects their employment relationships with their employees. This is an important topic: many employment relationships are based on contractible and non-contractible agreements. The project shows (i) how savings affect employment dynamics and (ii) how these dynamics are affected by the observability of the savings by the employer. For example, it is obtained that employers will tend to induce their employees to undertake high-consumption behavior to lower their savings and lower their future salaries. The findings have implications for regulation: benefits and payments in kind may have adverse effects on workers, as they give employees higher control over their consumption and savings.
The project on sequentially stable outcomes is more theoretical but not less important. This project advances in the pursuit of broad and powerful selection criteria, which help obtain predictions consistently across a large number of applications. Such tools are necessary as new models are increasingly complex and incorporate different effects, so classic refinement criteria applied to specific classes of models is impossible. The socio-economic impact of these theoretical advances is not immediate, but they solidify the conceptual basis necessary for doing well-founded and consistent policy analysis.