Abstract: In a principal-agent interaction I characterize when the agent can benefit from the ability to covertly acquire hard evidence. The same condition determines whether the principal's payoff is monotone or U-shaped in the cost of evidence acquisition. I derive implications for aggregate welfare.
Abstract: I consider a model of monopoly insurance contracting where the consumer has access to endogenous, costly evidence of his risk type (such as a test result). I characterize when the consumer is worse off if the insurer is allowed to condition contracts on evidence and when the ability to contract on evidence leads to a Pareto improvement. I also show that allowing contracting on evidence has the potential to either increase or decrease aggregate welfare. I fully characterize the optimal mechanism in the monopoly case, which features 'low powered’ contracts. I compare the results to an analogous setting with perfect competition: Under perfect competition, when evidence acquisition costs are low, the ability to contract on evidence is always Pareto improving. For intermediate costs, I uncover a new source of unraveling. The results are relevant to policy debates over the use of genetic information in health and life insurance.
Abstract: I consider a broad class of economic environments where a principal contracts with an agent under adverse selection and the agent can credibly disclose information to the principal. I show that there is an equilibrium that interim Pareto dominates the equilibrium without evidence if and only if the optimal mechanism without evidence assigns the outside option to a set of types satisfying a ‘gains from trade’ property. The results apply to a range of economic environments including insurance markets, financial markets and goods markets with quality-based price discrimination.
Abstract: I define Weak Implementation under incomplete information. A social choice set is weakly implementable if the set of equilibrium outcomes of some mechanism is a nonempty subset of the social choice set. Weak implementation is a more natural objective than either full or partial implementation in many cases. I show that there are social choice sets where every subset can be weakly implemented yet the set cannot be fully implemented. I give a complete characterization of the weakly implementable social choice sets under a weak restriction on preferences. As a corollary, I show that in independent private values environments the set of interim efficient social choice functions is weakly implementable whenever it is partially implementable. Using similar techniques I also extend existing characterizations of full implementation.
Abstract: A target equilibrium in a game of complete information is called robust to incomplete information when all nearby games of incomplete information have equilibria which generate similar ex-ante distributions over actions as the distribution generated by the target equilibrium. Robustness to canonical elaborations considers only nearby games with a special structure. I show that robustness to incomplete information and robustness to canonical elaborations are equivalent when the equilibrium concept in the nearby incomplete information games is agent normal form correlated equilibrium.
Abstract: We study the design of efficient mechanisms under asymmetric awareness and information. Unawareness refers to the lack of conception rather than the lack of information. Assuming quasi-linear utilities and private values, we show that we can implement in conditional dominant strategies a social choice function that is utilitarian ex-post efficient when pooling all awareness of all agents without the need of the social planner being fully aware ex-ante. To this end, we develop novel dynamic versions of Vickrey-Clarke-Groves mechanisms in which types are revealed and subsequently elaborated at endogenous higher awareness levels. We explore how asymmetric awareness affects budget balance and participation constraints. We show that ex-ante unforeseen contingencies are no excuse for deficits. Finally, we propose a modified reverse second price auction for efficient procurement of complex incompletely specified projects
Abstract: In recent years, many colleges have made standardized tests optional in their admissions’
process. To study the equilibrium effects of making tests optional, we develop a matching
model with pre-match investments and disclosure in which a large number of heterogeneous
students can incur the cost of taking the SAT and learn its score, and then decide whether
to disclose its value to colleges before both sides match. We compare the amount of pre-
match investment and disclosure in this setting (voluntary regime) with the regime in which
it is mandatory to take the test and disclose its value (mandatory regime), and also with an
intermediate regime in which it is voluntary to take the test but disclosure is mandatory (semi-
mandatory regime). We show that low types students strictly prefer the voluntary regime to
the mandatory regime and that at most one interval of types prefers the mandatory regime.
There is an interval of low types of students who strictly prefer the semi-mandatory regime
to the voluntary regime, and the opposite is true for high types in certain cases. We discuss
how our results fit with several stylized facts uncovered by the recent empirical literature on
optional SAT.
Abstract: Startups are a key driver of innovation but are frequently the target of acquisition by incumbent firms. How does this affect the types of products that are developed? We study a model in which an entrant decides whether to develop either a product that is a partial substitute for an incumbent’s product or an unrelated product. After the product is developed, the incumbent may choose either to buy out the entrant or to engage in Bertrand competition. We show that when buyouts are possible, the entrant is more likely to develop the substitute product. Moreover, this effect reduces aggregate welfare compared to a counterfactual where buyouts are not possible.
Abstract: I explore the welfare consequences of costly evidence acquisition in a broad class of contracting environments. An initially uninformed agent contracts with a principal. Before choosing whether to participate in a mechanism, the agent can observe, at a cost, a payoff-relevant signal which can be credibly disclosed to the principal. The principal may commit to a mechanism in which allocations are contingent on disclosure of a signal realization. I find that the principal's expected payoff is either non-increasing or U-shaped in the cost of evidence, and derive a condition that precisely distinguishes the two cases. In contrast, the agent's payoff is maximized at intermediate costs of evidence. Applications include insurance and labor markets, and public procurement.
Abstract: I consider environments in which an agent with private information can acquire arbitrary hard evidence about his type before interacting with a principal. In a broad class of screening models, I show that there is always an evidence structure which interim Pareto-improves over the no-evidence benchmark whenever some types of the agent take an outside option in the benchmark case, and additional weak conditions, including either a single-crossing condition or state-independence of the principal's payoffs, are satisfied. I show that the sufficient conditions are tight and broadly applicable. Addressing concerns about multiple equilibria, I show how a planner can restrict the available evidence to ensure that an equilibrium which interim Pareto-improves over the benchmark case is obtained. Furthermore, I show that Pareto-improving evidence can arise endogenously when agents choose what evidence to acquire (and disclose).