Browsing by Author "Sadowski, Philipp"

This dissertation consists of three essays in decision theory. The first chapter is an introduction. The second chapter studies individual decision making when deadlines are random. Since the quality of any decision relies on information and it takes time to gather information, a decision maker should have a preference over deadlines as well as over menus. Past research studies rationally inattentive decision making without deadlines. It is established that a decision maker’s informational constraint is revealed by her distaste for contingent planning. This paper extends the analysis to random deadlines and establishes the relationship between a decision maker’s preference over timed choice problems and the set of information acquisition paths she has available.

It is demonstrated that if a decision maker’s preference over random deadlines satisfies the von Neumann-Morgenstern independence axiom, then it is as if the decision maker’s optimal way to acquire information depends only on the menu she is presented with and is independent of the deadline. Moreover, if no information is lost along any path then the decision maker’s distaste for contingent planning becomes weaker as she is allowed more time to decide. The third chapter studies strategic situations where a population of heterogeneous players are randomly matched with each other to play games with strategic substitutes and players have incomplete information about their opponents' private types. If players hold type-independent beliefs about their opponents' types, then in equilibrium players' actions are monotonic with respect to their types. Since players' private types are often not observable to the analyst, to understand what kind of observable behavior can be explained by this model, a representation result is established for this model when the analyst observes how the population behaves on an aggregate level. Of course, a model with type-independent beliefs may not be justified, since types could be correlated in many applications. Moreover, in experiments where individuals are randomly matched to play games with strategic substitutes, they report systematically heterogeneous conjectures about their opponents' actions: Players who act more aggressively also conjecture that their opponents would act more aggressively. This not only contradicts the type-independent belief model, but is also counterintuitive because in games with strategic substitutes, opponents' aggressive behavior discourages players from playing aggressively. A model is then proposed where players have self-similar beliefs. It captures the intuition that higher types believe that their opponents are also of higher types and fits the experimental observations. One important and surprising result is that models with type-independent beliefs and self-similar beliefs are observationally equivalent for many payoff parameters, that is they have identical behavioral implications.

This dissertation consists of three main chapters - chapter 2, 3, and 4. These are different research problems studying the use of information. In chapter 2, we study a mechanism design problem where the Principal hires two agents to inspect a product, the quality of which is uncertain. The main research question we ask is the comparison of the inspection protocols. We found the optimality of sequential inspection among the protocols considered. We then extend the analysis to allow agents to differ and try to understand which is the better to order the agents when using the sequential protocol. In chapter 3, we study an information design problem where a present biased agent could commit to an information choice to help herself to save more that she would have. We provide a full characterization of the optimal information choice for a risk averse present biased agent. After that, as an effort to further understand the interaction between risk aversion and present bias, we introduce the EZKP framework and find a counterexample where risk aversion itself has no impact on the form of the information choice in a special case where the elasticity of the intertemporal substitution is fixed. In chapter 4, we study an information design in games problem where a designer chooses information for the agents to induce joint effort. We provide two examples illustrating the relative strength of two prominent constructions of the optimal information structure in the literature.

This dissertation explores the theory of constrained information acquisition and its application. I will provide theoretical models to study how economic agents who are facing limited ability to process information acquire information and how the information acquisition affects the trade mechanism in binary trades.

First, I study a dynamic information acquisition problem of an individual who faces a limited ability to process information. The individual acquires information to predict a payoff-relevant state such as the market condition in two periods. I characterize the optimal information structure and discuss how we can identify the discount factor and the information capacity. Under the optimal information acquisition, he uses three types of learning strategies depending on how certain he is about the state. In addition, I will provide two ways to identify the discount factor and the information capacity from the observed data.

Second, I will explore an application of the costly information acquisition model. I study a trade model where buyers costly acquire information about a good and a seller offers menus of an upfront fee and a strike price to screen the buyers’ ability to process information in order to differentiate the buyers. I first provide the buyer's optimal information acquisition problem and then the seller's optimal selling mechanism. The willingness to pay for the strike price depends on the ability to process information. The seller offers a higher strike price to a buyer with higher ability and a higher participation fee to extract the surplus.

This dissertation explores the implications of endognenizing the times decisions are faced for intertemporal decision-making in a variety of contexts. Chapter 1 considers a standard, expected-utility maximizer whose preferences are inferred using standard protocols that influence the decisions that the agent considers. The treatment shows how these induced decision points," if unaccounted for, can produce illusions of well-known preference anomalies. Capturing the endowment effect, if receiving a good compels the agent to consider the decision to consume it, then the willingness-to-accept (WTA) in exchange for the received good exceeds the willingness-to-pay (WTP) prior to its receipt. If eliciting time-preferences -- i.e. being asked to evaluate an intertemporal tradeoff involving different quantities of the good -- likewise compels the agent to consider the consumption decision, present bias arises in the form of a measured quasi-hyperbolic discount function with present bias factor less than one. While reconciling the preference anomalies with core principles of standard utility theory, the results also suggest that the endowment effect and present bias | generally treated as distinct phenomena | are actually manifestations of an identical decision-purview effect. In fact, the elicited present bias equals WTP/WTA.

Chapter 2 introduces a framework for bad habits (namely, addiction) based on endogenous decision points -- i.e. the times a recurring decision is faced. Cravings are interruptive decision points that force an individual to consider consumption while inflicting a small opportunity cost. By extinguishing the craving, addictive consumption brings a brief vacation from unwanted decision points. The development of a habit is jointly characterized by a rising frequency and a rising per-decision level of consumption, matching behavioral patterns that standard habit-formation models do not address. Integrating external cues, modeled as random decision points, consumption routines become regimented as addiction develops. Occasional users are most responsive to cues, while addicts are comparatively immune. With peer consumption as a decision point, the group model predicts synchronized consumption, homogeneous self-sorting, and herd behavior | including imitation of a stray peer.

Chapter 3 complements the endogenous decision points theory of addiction of the previous chapter with a multidisciplinary survey of addiction research, organized and interpreted through the lens of the theory. In particular, I present evidence to support formalizations and results for the three decision point representations: internal cravings, external cues, and peer consumption. This chapter also discusses how the theory may help integrate key addiction concepts from other elds into economic formalism. For instance, I examine the physiological microfoundations of the interval function for cravings, and explain why it can be dierent for two products (e.g. cigarettes and chewing tobacco) that deliver the same product (nicotine). Further, I describe how transitions between abstinence and addiction can be motivated solely in terms of the endogenous interval function." Finally, I propose that the formal notion of cravings as decision points may shed light on three prominent symptoms of

This dissertation concerns methods to test whether or not self-control

is costly, the form of temptation, and the affects different assumptions

about costly self-control and temptation have on optimal borrowing

and saving mechanisms. The second chapter shows that costly self-control

and temptation can be differentiated from changing impatience in a

stochastic income consumption-savings environment. The third chapter

describes an experiment to test whether subjects have time inconsistent

preferences, whether self-control is costly, and if so, whether the

cost of self-control is time dependent. The fourth chapter describes

the affects on the optimal borrowing and savings mechanisms that assumptions

about the myopia of temptation and the strength of costly self-control

have.