Theory, Organization and Markets (TOM) lunch seminar

We develop a market model in which products generate state-dependent potential hidden charges. Firms differ in their ability to realize this potential. Unlike firms, consumers do not observe the state. They try to infer hidden charges from market prices, using idiosyncratic subjective models. We show that an interior competitive equilibrium is uniquely given by what is formally a Bellman equation. Using this representation, we show that relative to rational expectations, equilibrium add-on charges are lower whereas headline prices and social welfare are higher. Market responses to shocks display patterns that are impossible under rational expectations. For example, although fully revealing, equilibrium prices can vary with consumers’ private information.

A principal wishes to allocate an item to an agent if and only if he is suitable, while the latter wants the item regardless. The agent’s suitability is determined by the match quality of the principal’s and the agent’s type, which are their own private information. We study how the principal optimally allocates the item when monetary transfers are not feasible but misreporting is costly for the agent. In doing so, we provide conditions such that the principal is optimally transparent or opaque about her preferences with the agent. We discuss applications to regulatory transparency, allocation of public benefits and recruiting.

We develop an evolutionary approach to endogenize the choice of analogy partitions in the analogy-based expectation equilibrium in environments consisting of multiple (possibly many) symmetric normal form games with the same action spaces. A categorization or analogy partition with more classes is associated with a larger fitness cost, and in an Evolutionary Stable ABEE we require that analogy partitions and strategies are such that given an analogy partition the associated strategy is a best-response to the corresponding analogy-based expectations and analogy partitions that arise with positive probability induce the highest overall fitness among all possible analogy partitions. We show that an ESABEE always exists in finite environments. While a Nash equilibrium always prevails when there is no fitness cost associated to categorizations, we observe through an example that sometimes only coarse partitions may emerge even if some finer partitions induce no larger fitness cost. We next apply the approach to different families of games. When chicken games are considered, we observe that mixing over analogy partitions necessarily arise in any ESABEE when there are sufficiently many such games and the fitness cost of having two categories is not infinite. We also provide a full characterization of ESABEE when there are two chicken games and observe that a significant share of coarse analogy partitions must arise no matter what the fitness cost of the fine partition is. We also apply the approach to beauty contest games with varying fundamentals and/or varying coordination motives and observe that different ESABEE with different overall fitness performance can emerge in this case. We finally apply the approach to ultimatum-like games with varying outside options, and make some observations about the optimal categories that emerge there.

We study optimal labor income taxation. We first prove that there is no loss of generality to assume that the planner’s objective is egalitarian, provided the utility representation of individuals’ identical preferences is type specific and depends on wages. From a normative viewpoint, the latter proviso captures the idea that individuals are entitled to a utility bonus that is increasing in their own wage, an idea that is consistent with the notion of private property of self. We then argue, through examples, that discussing the utility bonus function within an egalitarian framework is more convenient for making normative judgments than discussing cardinalization and inequality aversion in a utilitarian framework.

We conduct an experimental analysis of selective disclosure in communication. In our model, an informed sender aims to influence a receiver by disclosing verifiable evidence that is selected from a larger pool of available evidence. Our experimental design leverages the rich comparative statics predictions of this model, enabling a systematic test of the relative importance of evidence selection versus evidence concealment in communication. Our findings confirm the key qualitative predictions of the theory, suggesting that selection, rather than concealment, is often the dominant distortion in communication. We also identify deviations from the theory: A minority of senders overcommunicate relative to predictions, while some receivers partially neglect the selective nature of the evidence they observe.

We empirically study the consideration and choice behaviors of individuals under uncertainty. Our experiment elicits these functions by repeatedly questioning the decision makers in a rich lottery domain and, hence, allows them to reveal their stochastic or deterministic consideration and choice. The subjects consider more options on larger menus. 93% of the decision-makers have stochastic considerations on at least one menu and the randomization is more frequent when similar options are jointly presented. About 24% have (almost) deterministic choice behavior and they are all consistent with the Weak Axiom of Revealed Preferences. Our data allows us to further investigate the stochastic consideration and choice properties

Conveying private information to interested parties is central to many economic activities. In such interactions, the sender may lie by misreporting the truth, but may also deceive by inducing inaccurate beliefs about the payoff-relevant state. While a huge experimental literature documents aversion to lying, there is little evidence regarding aversion to deception. In this paper, we introduce a game in which the sender, after privately observing state 1 and state 2, sends a message concerning state 1 to influence the receiver’s beliefs over state 2. The sender lies if the message does not correspond to state 1, and the sender deceives if she sends a message that (she believes) will induce inaccurate beliefs about state 2. We show theoretically how to identify deception aversion with minimal assumptions on the sender’s second-order beliefs. We run a laboratory experiment and find strong support for deception aversion that is robust to several natural variations of the game. Many subjects lie in order to avoid deception. Structural estimates imply that 28% of subjects are averse to deception.

We ask when additional data collection by a monopolist to engage in price discrimination monotonically increases or decreases weighted surplus. To answer this question, we develop a model to study endogenous market segmentation subject to residual uncertainty. We give a complete characterization of when data collection is good or bad for surplus, which consists of a reduction of the problem to one with only two demand curves, and a condition for the two-demand-curves case that highlights three distinct effects of information on welfare. These results provide insights into when data collection and usage for price discrimination should be allowed.

This paper considers settings where individuals benefit from choosing the same behaviors as others but, due to difference in identities, backgrounds, or tastes, also suffer or incur costs to do so. We show that the only equilibrium exhibits “tyranny of the majority” when the preferences of counterparts are not known; minority members who have low costs to do so adopt the majority-preferred action which creates additional incentives for higher cost minority member to adopt the majority action. In a game where agents can commit to an action, however, there exist multiple equilibria including one where minority members impose their behavior. We show that minority members and moderate majority members are always better off in an equilibrium where commitment is possible, but not extremist majority members. We also study a game where players are embedded in a social network and one player (the selector) chooses her partner among a set of competitors (the contenders). We show that, as the number of contenders increases, the selector is more likely to commit to an action, but the contenders are more likely to remain flexible.

In this paper, I study a model of a streaming platform (for instance YouTube or Netflix) with a catalog of items whose quality are unknown. Short-lived users arrive in sequence and browse the catalog, paying a small cost each time they want to examine a new alternative. The platform observes their behavior and uses it to deduce information about the items’ quality so as to enhance future user’s experience. I show that the platform is able to distinguish high-quality items if and only if a condition linking the cost of browsing and the thickness of the tail of the distribution from which the quality of the items is drawn holds true. This condition relates to the ability of the platform to incentivize users to explore new items using the information gathered with the previous users. I pin down an easily implementable policy that guarantees efficient learning.

In this paper we investigate the potential of deliberation to create consensus among fully informed citizens. Our approach relies on two cognitive assumptions: i. citizens need a thinking frame (or perspective) to consider an issue; and ii. citizens cannot consider all relevant perspectives simultaneously, they are incompatible in the mind. These assumptions imply that opinions are intrinsically contextual. Formally, we capture contextuality in a simple quantum-like cognitive model. We consider a binary voting problem, in which two citizens with incompatible thinking frames and initially opposite voting intentions deliberate under the guidance of a benevolent facilitator. We find that when citizens consider alternative perspectives, their opinion may change. When the citizens’ perspectives are two-dimensional and maximally uncorrelated, the probability for consensus after two rounds of deliberation reaches 75%; and this probability increases proportionally with the dimensionality (namely, the richness) of the perspectives. When dealing with a population of citizens, we also elaborate a novel rationale for working in subgroups. The contextuality approach delivers a number of insights. First, the diversity of perspectives is beneficial and even necessary for deliberations to overcome initial disagreement. Second, successful deliberation demand the active participation of citizens in terms of “putting themselves in the other’s shoes”. Third, well-designed procedures managed by a facilitator are necessary to secure increased probability for consensus. A last insight is that the richness of citizens’ thinking frames is beneficial, while the optimal strategy entails focusing deliberation on a properly reduced problem.

I work on a principal-agent model where a long lived- perfectly informed- sender interacts with two short lived- partially informed- cohorts of receivers. The sender offers sequentially a unique contract inducing a more favourable lottery (FOSD) to the receivers, but the exact stochastic dominance magnitude is unknown to them. Second period receivers employ the observations generated by the first period to estimate the sender type- by an MLE procedure. I show that, when receivers rely on a representative large dataset, the optimal sender strategy need not to converge to the optimal one under perfect estimation. In case of perfect estimation, I give a sufficient condition for the uniquely optimal strategy to be pooling. I discuss an extension with Bayesian receivers.

We initiate the study of how auction design affects the division of surplus among buyers. We propose a parsimonious measure for equity and apply it to the family of standard auctions for homogeneous goods. Our surplus-equitable mechanism is efficient, Bayesian-Nash incentive compatible, and achieves surplus parity among winners ex-post. The uniform-price auction is equity-optimal if and only if buyers have a pure common value. Against intuition, the pay-as-bid auction is not always preferred in terms of equity if buyers have pure private values. In auctions with price mixing between pay-as-bid and uniform prices, we provide prior-free bounds on the equity-preferred pricing rule under a common regularity condition on signals