Dynamic Mechanism Design, Game Theory, Information Economics
“Dynamic Communication with Commitment,” (Nov 2017), Job Market Paper
Abstract: I study the optimal communication problem in a dynamic principal-agent model. The agent observes the evolution of an imperfectly persistent state, and makes unverifiable reports of the state over time. The principal takes actions based solely on the agent’s reports, with commitment to a dynamic contract without transfers. Interests are misaligned: while the agent always prefers higher levels of action to lower, the principal’s ideal action is state-dependent.
In a one-shot interaction, the agent’s information can never be utilized by the principal. In contrast, I show that communication can be effective in dynamic interactions, and I find a new channel, the information sensitivity, that makes dynamic communication effective. Moreover, I derived a closed-form solution for the optimal contract. I find that the optimal contract can display two properties new to the literature: contrarian resource allocation, and delayed allocation response. I also provide a necessary and sufficient condition under which the properties arise. The results can be applied to practical problems such as capital budgeting between a headquarters and a division manager, or between a local and central government.
“Strategic Experimentation on a Common Threshold,” (Aug 2016), Journal of Economic Theory (Revise and Resubmit)
Abstract: High effort is costly, but often it is worth maintaining an adequate level of effort if effort levels below an unknown threshold triggers a loss. Examples abound in environment preservation and quality maintenance. In this chapter a dynamic experimentation game is used to explore the dynamic informational interactions among players who search for a common but unknown threshold. Players contribute to the rate of decline in the common effort level, and the game ends with a costly breakdown once the effort falls below the threshold. In the unique symmetric pure-strategy stationary Markov equilibrium, effort decreases gradually over time and settles asymptotically at a cutoff level, conditional on no breakdown. The cutoff depends on patience, the cost of the breakdown, and the prior distribution of the threshold but not on the number of players. The equilibrium outcome of the continuous-time model is approached by the outcome of a discrete time model when period length tends toward zero.
“Private Search for a Common Threshold,” (Jul 2016), Working Paper
Abstract: I present a dynamic game between two players who strategically and privately experiment with different effort levels. Higher effort is more costly, but effort levels below an unknown threshold trigger breakdowns with lumpy cost. The threshold is the same for both players, and the occurrence of breakdown is public information. I show that effort paths are continuous and non-increasing in equilibrium. Pure strategy Nash equilibrium does not exist, and all mixed strategy Nash equilibria lead to the same distribution over outcomes. In particular, players must randomize over an initial period of “effort maintenance” where the effort stays at its initial high level, before starting to decrease effort towards an asymptotic level settled above zero.
“Straight Talk” with M.Goltsman, J.Hörner, and G.Pavlov, (Jun 2016), Working Paper
Abstract: We revisit the Sender-Receiver game of Crawford and Sobel (1982) (where the cheap talk is one-shot and the Sender’s preferences are biased), and examine whether allowing for long cheap talk increases the set of payoffs. We show that it does, for Sender’s biases of intermediate size, and explicitly derive the best equilibrium within some class. We show that the payoff increases with the length of the cheap talk phase, although there is no discontinuity at infinity. Because only finitely many messages (and two rounds) suffice for lower biases, this shows that the number of messages necessary to implement the best equilibrium is not increasing in the congruence of the players’ preferences, unlike what the static cheap talk game suggests.
“Initiation of Merger and Acquisition Negotiation with Two-Sided Private Information” with Z.Wang, (Sep 2015), Working Paper
Abstract: With a dynamic signaling and bargaining model under two-sided private information, we investigate what determines the timing of initiation in merger and acquisition, which party initiates, and why bidder-initiated deals have higher bid premia than those in target-initiated deals. The driving force for the results is that the timing of initiation can reveal information about the initiator’s private information, i.e. the target’s stand-alone value or the bidder’s valuation. In the separating PBE of the game, weaker types (high-valued bidder or low-valued target) initiate earlier and whoever initiates suffers information disadvantage in the bargaining stage. Consistent with the empirical findings, the model predicts lower bid premium if the target, rather than the bidder, initiates the transaction; the loss in bid premium increases with the uncertainty of the target firm.
“Endogenous Asset Creation and Liquidity-Quality Cycles,” (Jul 2014), Working Paper
Abstract: I study the interaction between search frictions and adverse selection in financial markets by introducing the possibility of creating new assets. A good asset is more costly to create than a bad asset, and the cost difference plays a central role in equilibrium properties. On one hand, trading motive hinges critically on the severity of adverse selection, and the choice of good or bad asset for creation depends on the probability of trading, i.e., the market liquidity. On the other hand, the choice of asset creation determines the severity of adverse selection in the long run and affects trading motives. I show that steady state equilibrium is generically unique for any cost difference. There is an interval of cost differences such that the equilibrium is unstable, and the economy undergoes a non-stop liquidity-quality cycle. For other cost difference levels, the equilibrium is globally stable.