Aggregation of Information in Large Cournot Markets

Asymmetric Information and Imperfect Competition in Lending Markets

Information Acquisition and Mutual Funds

Monitoring and Learning by Institutional Investors: Theory and Evidence

This thesis consists of three independent studies. The first study works on the effect of confirmatory bias. The second study analyses the effect of ambiguity in the communication. The third study discusses two-sender cheap talk model with endogenous information acquisition.
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\nIn the first study, it develops formulations to capture the effects of confirmatory bias in two-sender models. In these models, the information obtained by the two senders is conditionally independent and endogenously determined by their investment choices. Based on the investment levels they choose, the senders strategically direct messages to the receiver. This studies main purpose is to explore the effects of confirmatory bias in different models by comparing the differences in senders' investment incentives with and without the existence of confirmatory bias. Rather than having an exclusively negative influence on the players, as commonly believed, the results of this study suggest that it is also possible for confirmatory bias to be beneficial.
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\nIn the second study, the term \\ambiguity" is narrowly defined as the phenomenon whereby a message is changed because of factors that cannot be controlled by the players. The results show that ambiguity has positive effects that can improve the truth-telling probability and utility of both players. These effects are observed when different cost types are applied. The positive effect of ambiguity generates a preference for ambiguity among the players. This strong effect on the improvement of truth-telling holds even when the sender's type is assumed to be uncertain. Overall, the results demonstrate the strong power of ambiguity in communication and that this power is beneficial for both players. This study provides theoretical support for making use of the inevitable ambiguity in communication, which can help people improve their payoffs.
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\nIn the third study, it examines a two-sender cheap talk model in a one-dimensional setting, in which two experts with either the same or opposite preferences choose their levels of investment in information, and communicate with an uninformed decision maker. The information obtained by the two experts is conditionally independent and affected by the investment levels chosen by the experts. After investing, the experts report favourable information and can cheat at some cost if unfavourable signals are observed. When the senders communicate with the receiver simultaneously, the original expert tends to increase his investment in information acquisition if the second non-strategic expert has the opposite bias, and decrease it if he is biased in the same direction. If the agents play a cheap talk game as described in this paper, the cheating decisions made by two oppositely biased senders are strategically complementary. Their investment levels are also strategically complementary as long as some strict conditions are satisfied. Conversely, when the two senders have the same preference, both their cheating decisions and their investment choices appear to be strategically complementary, with no further restrictions. The findings show that in the cheap talk model with endogenous information acquisition, the relationship between the two senders strategies is dependent on their preference relationship.

A Dynamic Model of the Transmission of Price Information in Auto Insurance Markets Abstract A model of the demand structure of auto insurance markets is constructed in which consumers learn about firms through friends and neighbors. Consumers firms when the price differential exceeds a certain threshold, the switch cost. Data from New York and Alberta auto insurance markets are used to measure costs and the effective speed of transmission of information in these markets. Introduction A dominant theme in the literature exploring the implications of imperfect knowledge on the part of market participants has been that the way in which information is transmitted among and processed by agents is a critical determinant of market dynamics and outcomes [Rothschild (1973), Holmstrom (1984), Rogerson (1983), Shapiro (1982)]. In discussing the consumer's problem of searching for the lowest price in markets with price dispersion, Rothschild (1974) noted that, although demand functions are determined by the rules which searchers follow, very little empirical work had been done to determine how consumers actually gather information in these markets. In this article, a model of the demand structure of auto insurance markets is constructed which is consistent with the observed process by which consumers gather price information in those markets. The model is static on the firm side with no entry or exit. At period t = 0 a given group of firms sets prices which do not vary over the remaining periods. Consumers gradually learn about these prices. Proceeding in this manner allows modelling in detail the dynamics of the demand structure, generating the market shares of all firms in each time period. The focus of the literature on price dispersion in markets has been on equilibrium outcome [Carlson and McAfee (1983), Pratt, Wise and Zeckhauser (1979)] which in real-world markets may be reached only after many years, or not at all, given the random events and structural changes in the institutional environment. Constructing a dynamic model of the demand structure allows measurement of the effective speed of transmission of information in the markets for auto insurance in Alberta from 1976 through 1980 and in New York State from 1977 through 1983. The result is a model in which markets slowly tend to an equilibrium as agents learn about the structure of the marketplace, rather than one in which markets are always in equilibrium, instantly adjusting to exogenous shocks. The focus is on only the demand side of the market. Equilibrium search models which illustrate the behavior of firms rely on simplifying assumptions regarding the demand structure. In this model the complexity of the demand structure precludes the use of analytical techniques on the firm side. Dahlby and West (1986) have recently used an extensive set of auto insurance data from Alberta to test Carlson and McAfee's equilibrium price dispersion model which makes the following assumptions: (1) consumers know the distribution of prices, (2) all firms are equally likely to be sampled in the search process, and (3) the market is in equilibrium. In the model presented in this article, on the other hand, consumers are not assumed to know the distribution of prices. More importantly, a key feature which is not present in other search models is that a firm with larger market share is more likely to be sampled in the search process because it will have more consumers disseminating information about the firm, and will generally have more marketing outlets facilitating contact with prospective consumers. The model is fitted to data from New York State and the Dahlby and West study, and the results are compared. The empirical evidence on consumer information acquisition patterns and the existence of price dispersion in auto insurance markets are first discussed. Then the model of consumer demand is developed and empirically tested, followed by a summary. …

A key policy argument in favor of emissions markets (relative to command-and-control types of regulation) is their ability to aggregate dispersed information and generate price signals to guide firms' trading and abatement decisions. We investigate this argument in a multi-period model where firms receive noisy private signals about their current period emissions and privately observe their previous period emissions before this information is made public to the rest of the market. Firms respond to information by trading and abating emissions. We show that there exists a rational expectations equilibrium that fully aggregates firms' private information, justifying the policy argument in favor of emissions markets, in the absence of other frictions. We also derive predictions about how prices should be reacting to new private or public information and show that the possibility of abatement dampens the impact of shocks on prices. Finally, we show that the information aggregation result breaks down if firms' abatement costs are also private information.

We analyze demand function competition with a finite number of agents and private information. We show that the nature of the private information determines the market power of the agents and thus price and volume of equilibrium trade. We provide a characterization of the set of all joint distributions over demands and payoff states that can arise in equilibrium under any information structure. In demand function competition, the agents condition their demand on the endogenous information contained in the price. We compare the set of feasible outcomes under demand function to the feasible outcomes under Cournot competition. We find that the first and second moments of the equilibrium distribution respond very differently to the private information of the agents under these two market structures. The first moment of the equilibrium demand, the average demand, is more sensitive to the nature of the private information in demand function competition, reflecting the strategic impact of private information. By contrast, the second moments are less sensitive to the private information, reflecting the common conditioning on the price among the agents.(This abstract was borrowed from another version of this item.)

The Social Value of Public Information When Not Everyone is Privately Informed

Costly information acquisition. Is it better to toss a coin?

This paper studies information production in a model where both entry of analysts and their optimal information quality is endogenous. We show existence of the Bayesian–Nash equilibrium and solve for it in closed form. The model displays rich behavior. In particular, we find that the precision of an individual signal will always be bounded from above by the precision of the prior belief on payoff uncertainty. Furthermore, we give examples that contradict the naive intuition about information acquisition. For instance, we show how a change in the cost structure that makes information cheaper decreases price informativeness, while at the same time market liquidity and the amount of resources society spends on information acquisition can change either way. The model gives a simple, fully rational explanation on why the number of analysts following a stock can be quite large. Endogenizing the cost of information by allowing the manager to choose an optimal informational policy, we find a variety of optima that depend discontinuously on the model parameters. As a consequence, among two similar firms, one may find it optimal to attract many analysts, the other will cooperate with only a few.

This paper provides a test of a theory of social learning through endogenous information acquisition. A group of subjects face a decision problem under uncertainty. Subjects are endowed with private information about the fundamentals of the problem and make decisions sequentially. The key feature of the experiment is that subjects can observe the decisions of predecessors by forming links at a cost. The model predicts that the average welfare is enhanced in the presence of a small cost. Our experimental results support this prediction. When the informativeness of signals changes across treatments, behavior changes in accordance with the theory. However, within treatments, there are important deviations from rationality such as a tendency to conform and excessive link formation. Given these biases, our results indicate that subjects would, except when faced with a small cost, have been better off not forming any links. This paper was accepted by Teck Ho, behavioral economics.

Part B (Chapters 5 through 10) considers the impact of public information in competitive capital markets in which all investors receive the same information and are price takers. Part C (Chapters 11 and 12) considers the impact of private investor information and non-price taking behavior. Why are we interested in private investor information? As accounting researchers we are not interested in private information per se, but we have a particular interest in the interactive effect of public reports and private investor information. For example, it is widely recognized that investors often know much of the information content in an accounting report before it is released. One reason for this is that investors may have acquired that information privately before it is released. The major gain from private information comes from going long or short in a firm’s shares immediately before the release of a public report that causes the price to increase or decrease (and then reversing the position after the information is impounded in the price). Thus, intuitively, one expects investor demand for private information to increase immediately prior to an anticipated public report. Hence, a key question is how the informativeness of the accounting system affects the prior acquisition of private information. In addition, the timely release of earnings forecasts and other management information may reduce the incremental informativeness of a private signal and, thus, reduce the incentive to acquire the private signal.

Subsidy on transport adaptation investment-modeling decisions under incomplete information and ambiguity

Leveraging the knowledge of an organization is an ongoing challenge that has given rise to the field of knowledge management. Yet, despite spending enormous sums of organizational resources on Information Technology (IT) systems, executives recognize there is much more knowledge to harvest. Prediction markets are emerging as one tool to help extract this tacit knowledge and make it operational. Yet, prediction markets, like other markets, are subject to pathologies (e.g., bubbles and crashes) which compromise their accuracy and may discourage organizational use. The techniques of experimental economics were used to study the characteristics of prediction markets. Empirical data was gathered from an on-line asynchronous prediction market. Participants allocated tickets based on private information and, depending on the market type, public information indicative of how prior participants had allocated their tickets. The experimental design featured three levels of feedback (no-feedback, percentages of total allocated tickets and frequency of total allocated tickets) presented to the participants. The research supported the hypothesis that information assimilation in feedback markets is composed of two mechanisms - information collection and aggregation. These are defined as: Collection - The compilation of dispersed information - individuals using their own private information make judgments and act accordingly in the market. Aggregation - The market's judgment on the implications of this gathered information - an inductive process. This effect comes from participants integrating public information with their private information in their decision process. Information collection was studied in isolation in no feedback markets and the hypothesis that markets outperform the average of their participants was supported. The hypothesis that with the addition of feedback, the process of aggregation would be present was also supported. Aggregation was shown to create agreement in markets (as measured by entropy) and drive market results closer to correct values (the known probabilities). However, the research also supported the hypothesis that aggregation can lead to information mirages, creating a market bubble. The research showed that the presence and type of feedback can be used to modulate market performance. Adding feedback, or more informative feedback, increased the market's precision at the expense of accuracy. The research supported the hypotheses that these changes were due to the inductive aggregation process which creates agreement (increasing precision), but also occasionally generates information mirages (which reduces accuracy). The way individual participants use information to make allocations was characterized. In feedback markets the fit of participants' responses to various decision models demonstrated

This paper shows experimentally that hearing expert opinions can be a double-edged sword for collective decision making. We present a majoritarian voting game of common interest where committee members receive not only private information, but also expert information that is more accurate than private information and observed by all members. In theory, there are Bayesian Nash equilibria where the committee members' voting strategy incorporates both types of information and access to expert information enhances the efficiency of the majority decision. However, in the laboratory, expert information had excessive influence on the voting behaviour and prevented efficient aggregation of individual information. We find a large efficiency loss due to the presence of expert information especially when the committee size is large. Using an incentivized questionnaire, we find that many subjects severely underestimate the efficiency gain from information aggregation and they follow expert information much more frequently than efficiency requires. This suggests that those who understand the efficiency gain from information aggregation and perceive the game correctly might nonetheless be “stuck” in an inefficient outcome.