Working Papers
Cheap Talk and Lie detection (with Hitoshi Sadakane)
Abstract: This study analyzes strategic interactions between cheap talk and lie detection to determine the optimal equilibrium for costly lie detection and its effectiveness. An informed sender wants to persuade an uninformed receiver to take higher actions, but the receiver wants to match the action with the true state. The sender makes a claim about the state, and the receiver decides whether to incur a cost to inspect the truthfulness of the claim. We show that the receiver-optimal equilibrium divides the state space into three intervals. Types in the top interval make precise and truthful claims about the state, which are mimicked by types in the bottom interval and randomly inspected. Types in the middle interval make a vague claim that is never inspected. We show that lie detection is more beneficial to the receiver than state verification because it provides incentives for moderate and high types to be truthful.
Screening Under Fixed Cost of Misrepresentation (with Sergei Severinov)
Abstract: This paper studies an optimal screening problem in which an agent incurs a fixed cost of lying when she misrepresents her private information. In this environment, local incentive constraints are not binding in the optimal mechanism, and standard techniques for solving screening problems are not applicable. Significantly, the problem can no longer be dichotomized into two parts solved sequentially: an implementability part which involves an envelope condition and the monotonicity of the allocation, and an optimization part. We develop a new methodology to tackle this problem, characterize the optimal mechanism and compute it in special cases. Our method involves a procedure that jointly solves for the binding non-local incentive constraints and the optimal allocation. The optimal mechanism has a number of novel qualitative properties, such as lack of exclusion and first-best efficient allocation at high- and low- ends of the spectrum of types. Also, bunching never occurs, as the optimal quantity allocation is always increasing in type irrespectively of type distribution.
Optimal Distribution of Contracts with Principal’s Expost Fairness Concern (with Meichen Chen and Shicheng Jiang)
Abstract: In an organization, the principal may care about both efficiency and fairness. In this paper, we study the optimal contracts between a principal and multiple agents when the principal favors a more even expost
wage distribution. We characterize the principal’s fairness concern by a convex dis-utility function and it is shown that the optimal contract is either a fixed wage contract or an incentive contract. Interestingly, under certain conditions both contracts would be provided though agents are exante homogeneous. Then we analyze the properties of the optimal distribution of contracts and show that the optimal contracts tend to be more hybrid if the dis-utility function becomes more convex and the fraction of incentive contract would decrease as the principal cares more about fairness.
On the Efficiency of Transactions with Misrepresentation Costs
Abstract: This research studies how different shapes of misrepresentation cost affect efficiency when the surplus of a transaction is privately known by the agent. We find that the outcome is Pareto efficient if and only if the misrepresentation costs of agents with medium surplus are large enough, and the misrepresentation costs for agents with high surplus are moderate.