Discussion Paper No. 53
November 4, 2021
Consumer-Optimal Information Design
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Abstract:
In many trade environments - such as online markets - buyers fully learn their valuation for goods only after contracting. I characterize the buyer-optimal ex-ante information in such environments. Employing a classical sequential screening framework, I find that buyers prefer to remain partially uninformed, since such an information structure induces the seller to set low prices. For the optimal information signal, trade is efficient, and the seller only extracts the static monopoly profit. Further, I fully characterize all possible surplus divisions that can arise in sequential screening for a given prior.
Keywords:
information disclosure; sequential screening; strategic learning; bayesian persuasion; mechanism design;
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Discussion Paper No. 48
November 3, 2021
English versus Vickrey Auctions with Loss Averse Bidders
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Abstract:
Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectation-based loss aversion [Ko ̋szegi and Rabin (2006, 2009)] in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that—even with independent private values—the Vickrey auction yields strictly higher revenue than the En- glish auction, violating the well known revenue equivalence. Thus, dynamic loss aversion offers a novel explanation for empirically observed differences between these auction formats.
Keywords:
vickrey auction; english auction; expectation-based loss aversion; revenue equivalence; dynamic loss aversion; personal equilibrium;
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Discussion Paper No. 45
Mechanism Design with Partially Verifiable Information
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In mechanism design with (partially) verifiable information, the revelation principle holds if allocations are modelled as the Cartesian product of outcomes and verifiable information, giving rise to evidence-contingent mechanisms. Consequently, incentive constraints characterize the implementable set. The revelation principle does not hold when an allocation is modelled as only an outcome so that mechanisms are non-contingent. Yet, any outcome implementable by an evidence-contingent mechanism is implementable by a non-contingent mechanism, provided it can both extend and restrict reporting information. A type-independent bad outcome implies the latter property.
Keywords:
revelation principle; mechanism design; verifiable information;
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Discussion Paper No. 44
Politically Induced Regulatory Risk and Independent Regulatory Agencies
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Abstract:
Uncertainty in election outcomes generates politically induced regulatory risk. For monopoly regulation, political parties’ risk attitudes towards such risk depend on a fluctuation effect that hurts both parties and an output–expansion effect that benefits at least one party. Irrespective of the parties’ risk attitudes, political parties have incentives to negotiate away regulatory risk by pre-electoral bargaining. Pareto-efficient bargaining outcomes fully eliminate regulatory risk and are attainable through institutionalizing independent regulatory agencies with a specific objective. Key aspects of the regulatory overhaul of the US Postal system in 1970 are argued to be consistent with these results.
Keywords:
regulation; independent regulatory agency; regulatory risk; electoral uncertainty;
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Discussion Paper No. 39
Trading under Market Impact
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Abstract:
We use a model with agency frictions to analyze the structure of a dealer market that faces competition from a crossing network. Traders are privately informed about their types (e.g. their portfolios), which is something the dealer must take into account when engaging his counterparties. Instead of participating in the dealer market, the traders may take their business to a crossing network. We show that the presence of such a network results in more trader types being serviced by the dealer and that, under certain conditions, the book's spread shrinks. We allow for the pricing on the dealer market to determine the structure of the crossing network and show that the same conditions that lead to a reduction of the spread imply the existence of an equilibrium book or crossing network pair.
Keywords:
asymmetric information; crossing networks; dealer markets; non-linear pricing; principal-agent games;
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Discussion Paper No. 28
Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency?
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Abstract:
We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hid- den liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illus- trate that hidden liquidity is higher if bid-ask spreads are smaller and relative tick sizes are higher.
Keywords:
hidden liquidity; trade synchronization; trading frictions; counterparty attraction; limit order book;
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Discussion Paper No. 17
Sender-Receiver Games with Cooperation
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We consider generalized sender-receiver games in which the sender also has a decision to make, but this decision does not directly a§ect the receiver. We introduce speciÖc perfect Bayesian equilibria, in which the players agree on a joint decision after that a message has been sent (ìtalk and cooperate equilibrium,î TCE). We establish that a TCE exists provided that the receiver has a ìuniform punishment decisionî (UPD) against the sender.
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Discussion Paper No. 22
Mean Field Games with Singular Controls
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This paper establishes the existence of relaxed solutions to mean field games (MFGs for short) with singular controls. As a by-product, we obtain an existence of relaxed solutions results for McKean-Vlasov stochastic singular control problems. Finally, we prove approximations of solutions results for a particular class of MFGs with singular controls by solutions, respectively control rules, for MFGs with purely regular controls. Our existence and approximation results strongly hinge on the use of the Skorokhod M1 topology on the space of càdlàg functions.
Keywords:
mean field game; singular control; relaxed control; Skorokhod M1 topology;
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Discussion Paper No. 24
Sequential versus Static Screening: an Equivalence Result
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Abstract:
We show that every sequential screening model is equivalent to a standard text book static screening model. We use this result and apply well-established techniques from static screen- ing to obtain solutions for classes of sequential screening models for which standard sequen- tial screening techniques are not applicable. Moreover, we identify the counterparts of well– understood features of the static screening model in the corresponding sequential screening model such as the single-crossing condition and conditions that imply the optimality of deter- ministic schedules.
Keywords:
sequential screening; static screening; stochastic mechanisms;
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Discussion Paper No. 3
November 2, 2021
Certification and Market Transparency
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Abstract:
In markets with quality unobservable to buyers, third-party certification is often the only instrument to increase transparency. While both sellers and buyers have a demand for certification, its role differs fundamentally: sellers use it for signaling, buyers use it for inspection. Seller induced certification leads to more transparency, because it is informative – even if unused. By contrast, buyer induced certification incentivizes certifiers to limit transparency, as this raises demand for inspection. Whenever transparency is socially beneficial, seller certification is preferable. It also yields certifiers larger profits, so that regulating the mode of certification is redundant.
Keywords:
market transparency; certification; information and product quality; asymmetric information;
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