Mechanisms and Markets
Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM
- Chair: Piotr Dworczak, University of Chicago
The Simple Economics of Optimal Persuasion (presentation cancelled)
AbstractConsider a Bayesian persuasion problem in which the Sender’s preferences depend only on the mean of posterior beliefs. We show that there exists a price schedule for posterior means such that the Sender’s problem becomes a consumer-like choice problem: The Sender purchases posterior means using the prior distribution as her endowment. Prices are determined in equilibrium of a Walrasian economy with the Sender as the only consumer and a single firm that has the technology to garble the state. Welfare theorems provide a verification tool for optimality of a persuasion scheme, and characterize the structure of prices that support the optimal solution. This price-theoretic approach yields a tractable solution method for persuasion problems with infinite state spaces. As an application, we provide a necessary and sufficient condition for optimality of a monotone partitional signal.
Markets versus Mechanisms
AbstractWe demonstrate constraints on usage of direct revelation mechanisms (DRMs) by corporations inhabiting economies with securities markets. We consider a corporation seeking to acquire decision relevant information. Posting a standard DRM in an environment with a securities market endogenously increases the outside option of the informed agent. If the informed agent rejects said DRM, then she convinces the market that she is uninformed, and she can trade aggressively sans price impact, generating large (off-equilibrium) trading gains. Due to this endogenous outside option effect, using a DRM to screen out uninformed agents may be impossible. Even when screening is possible, refraining from posting a mechanism and instead relying on markets for information is optimal if the endogenous change in outside option value is sufficiently large. Finally, even if posting a DRM dominates relying on markets, outcomes are improved by introducing a search friction, which randomly limits the agent's ability to observe the DRM, forcing the firm to sometimes rely on markets for information.
Test Design under Falsification
AbstractWe characterize a receiver-optimal test when manipulations are possible in the form of type falsification. Optimal design exploits the following manipulator trade-off: while falsification may lead to better grades, it devalues their meaning. We show that optimal tests can be derived among falsification-proof ones. Our optimal test has a single ‘failing’ grade, and a continuum of ‘passing’ grades. It makes the manipulator indifferent across all moderate levels of falsification. Good types never fail, but bad types may pass. An optimal test delivers at least half of the full-information value to the receiver. A three- grade optimal test also performs well.
- D4 - Market Structure, Pricing, and Design
- G2 - Financial Institutions and Services