Browsing by Subject "Behavioral economics"

This dissertation consists of three chapters. Chapter one is a study in decision theory that analyzes regret and information avoidance. Chapter two is a study in information theory that characterizes the comparison of ambiguous information. Chapter three discusses a persuasion model with a constrained sender.

In chapter one, we study regret and information avoidance. Empirical evidence suggests that individuals selectively avoid information, depending on a relevant past choice or lack thereof. We address these findings by studying an agent whose choice behavior can be modeled as if she trades off two conflicting effects of information. The first is a psychological cost from the regret about past choices that are revealed to be suboptimal by the information, whereas the second is the instrumental value of information for making better-informed choices in the future. The primitive of our study is the agent's preference over pairs consisting of a set of menus and an information structure. A set of menus captures a three-period decision problem. Our main axioms reflect the agent's desire to limit her options in period one and to have more flexibility in period two. We posit axioms that connect the agent's consumption choice and information choice. A subjective version of the model is examined where the agent's information choice is not observable. We show that all parameters in both versions of the model can be uniquely identified from the choice behavior.

In chapter two, we study informativeness orders over ambiguous information structures. We generalize Blackwell (1951)'s informativeness order to ambiguous experiments. The ambiguity in experiments is rooted in a lack of understanding about their probabilistic content. Formally, an ambiguous experiment is modeled as a mapping from an auxiliary state space to the set of unambiguous experiments. We show that one ambiguous experiment is preferred to another by every decision maker for every decision problem if and only if they are related by a condition called prior-by-prior dominance, which states that for any first-order belief the decision maker entertains on the auxiliary state space, the expected experiment resulting from this belief for the first experiment is Blackwell more informative than that of the second. This equivalence is robust across a wide range of ambiguity preferences. Comparisons of sets of experiments evaluated using the maxmin criterion are studied as a special case and are shown to result in a weaker informativeness order called Wald-more-informative, which states that for any Blackwell experiment in the convex hull of the first set of experiments, there exists another in the convex hull of the second set that is Blackwell less informative.

In chapter three, we study a Bayesian persuasion problem where the persuader's choices of signals are constrained. Specifically, we model this constraint as an alpha-constraint: Probabilities of any signal realization being sent out conditional on any state of the world are bounded by alpha and one minus alpha. Under this constraint, we extend the revelation principle style result in persuasion games by showing that considering the signal realization space to be subsets of the action space is without loss of generality. But it is possible that recommending a proper subset of all actions is uniquely optimal. This possibility contrasts the existing result that having the signal realization space equal to the action space can always be optimal. Based on the revelation principle, we give an algorithm to solve the general constrained persuasion problems. We also provide a characterization of feasible distribution over posterior beliefs for the binary-state-binary-action case, and a comparison of the alpha-constraint and other existing constraints on the signal space.

This dissertation collects work concerning the way individuals deal with imperfect information, both related to their knowledge of themselves and of others. The second chapter shows that bounded rationality, in the form of limited knowledge of utility, is an explanation for common stylized facts of prospect theory like loss aversion, status quo bias and non-linear probability weighting. Locally limited utility knowledge is considered within a classical demand model framework, suggesting that costs of inefficient search for optimal consumption will produce a value function that obeys the loss aversion axiom of Tversky and Kahneman (1991). Moreover, since this adjustment happens over time, new predictions are made that explain why the status quo bias is reinforced over time. This search can also describe the behavior of a consumer facing an uncertain future wealth level. The search cost justifies non-linear forms of probability weighting. The effects that have been observed in experiments will follow as a consequence.

The third chapter looks to understand how firms create and maintain long term relationships with consumers, or how procurement relations evolve over time, by studying a dynamic variant of the classical two-type-buyer contract in mechanism design. It is less trivial and more interesting if the utility determinant (or utility type) is not fixed or completely random, and fair assumptions are that it is either stochastic, or given by a distribution whose parameters are common knowledge. The first approach is that of Battaglini (2005), while the second is pursued in this paper. With two possible types of buyers, the buyer more likely to have a high utility type will receive the first-best allocations, while the other will receive the first best only if he has the high utility type.

The last chapter analyzes a dynamic procurement setting with promise keeping, where two firms (agents) with private information on their costs contract competitively with a principal. To this end, two models are proposed and the optimal allocations are determined. The agents face liquidity constraints, which induce distortions when high marginal costs are reported. We deduce that the principal uses promised utilities to incentivize the agents, which act as state variables in the recursive maximization problem. High cost types are allocated less than efficient quantities and the inefficiency of the allocation is relieved as the promised utilities increase.

The increased use of information disclosure in environmental policy raises questions of whether and how provision of information motivates changes in behavior. Accurate assessment of the value of information provision in reducing environmental risks requires understanding how actors respond to risk information. Chapter two examines the effects of disclosure of information on risk perception, knowledge about risks, and actions to mitigate risk from arsenic in private drinking well water. We conduct an experiment where we manipulate how information about the health risks posed by arsenic in drinking water is presented to users of private wells. This is one of the first field experiments to look at framing effects for long-term, latent environmental health risks. In contrast to much of the existing literature, we find that information frame does not affect risk perception or actions taken to address risk for low level of risk.

Chapter three examines how risk perceptions are affected by variations in risk communication, specifically addressing questions raised in the field experiment. We conduct an experiment about the health risks posed by arsenic in drinking water and introduce four manipulations in communication with experimental subjects: arsenic level, information framing, bright lines and relative risk. Chapter three suggests careful consideration must be taken in designing the disclosure of moderate levels of risk to ensure that information disclosure programs effectively convey health-based recommendations. Without these considerations, information disclosure programs may unwittingly and unnecessarily heightening concern among people facing moderate levels of risk. We consider this finding especially important because a broad number of environmental and environmental health risks that are currently unregulated pose moderate levels of risk.

The final chapter asks if the act of disclosing information changes the behavior of those who provide the information. Chapter four seeks to determine the degree to which information disclosure, in the form of TRI, results in improvements in environmental performance. Our work isolates the effect of information disclosure by using changes in the TRI reporting requirements to help identify the causal effect of disclosure from other potential explanations of changes in environmental performance. We find limited evidence that facilities newly reporting for a chemical have greater proportional decreases in total releases. The policy implications of Chapter 4 suggest that information disclosure should not be considered a substitute for regulation of toxic chemicals.