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Mechanisms and Markets

Paper Session

Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, International B
Hosted By: American Economic Association
  • Chair: Piotr Dworczak, University of Chicago

Information Aggregation in Dynamic Markets with Adverse Selection

William Fuchs
,
University of Texas-Austin and University Carlos III of Madrid
Vladimir Asriyan
,
CREI Barcelona
Brett Green
,
University of California-Berkeley

Abstract

How effectively does a decentralized marketplace aggregate information that is dispersed throughout the economy? We study this question in a dynamic setting where sellers have private information that is correlated with an unobservable aggregate state. A common feature of all equilibria is that each seller's trading behavior provides an informative and conditionally independent signal about the aggregate state. We ask whether the state is revealed as the number of informed traders grows large. Perhaps surprisingly, the answer is no; we provide generic conditions under which information aggregation necessarily fails. In another region of the parameter space, aggregating and non-aggregating equilibria can coexist. We then solve for the optimal information policy of a social planner who observes the trading behavior and chooses what information to communicate to the traders. We show that the information generated in a laissez-faire economy is always inefficient when aggregation fails. The optimal policy conceals favorable news from the traders in order to accelerate trade.

The Simple Economics of Optimal Persuasion (presentation cancelled)

Piotr Dworczak
,
University of Chicago
Giorgio Martini
,
Stanford University

Abstract

Consider 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

Raphael Boleslavsky
,
University of Miami
Christopher Hennessy
,
London Business School
David Kelly
,
University of Miami

Abstract

We 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

Vasiliki Skreta
,
University of Texas-Austin and University College London
Eduardo Perez-Richet
,
Sciences Po

Abstract

We 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.
Discussant(s)
Stephan Lauermann
,
University of Bonn
Glen Weyl
,
Microsoft and Yale University
Laura Doval
,
California Institute of Technology
Eliot Lipnowski
,
University of Chicago
JEL Classifications
  • D4 - Market Structure, Pricing, and Design
  • G2 - Financial Institutions and Services