Browsing by Subject "Information design"

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 studies the use of information design to reduce the spread of an infection. In particular, I investigate whether central planners (senders) with more information can leverage the information advantage to improve social welfare. In the first chapter, I analyze a single sender's best information revelation policy when individuals (receivers) have heterogeneous social activity levels and decide their binary protection levels, which further determine a transmission network over which the infection spreads. I establish that it is optimal to obfuscate information only for intermediate transmission rates and for small initial infection probabilities. In the second chapter, I further explore the use of information when there are multiple senders, each caring their own population. I characterize the population's equilibrium actions given any information and the equilibrium information disclosure policies between two senders. I establish that the two senders will disclose no information when they are either heavily economically concerned with high economic costs and a low prior belief about the disease, or health concerned with low economic costs. The senders will disclose partial information when one sender is heavily economically concerned with high economic costs and a high prior belief about the disease, while the other sender is either heavily economically concerned with high economic costs or health concerned with low economic costs. The senders will disclose full information when at least one sender is either concerned but not extremely concerned about the economy or health concerned with high economic costs.

Bank stress test has become a centerpiece of post crisis bank supervision. Current studies have thus far examined the optimal policies on stand-alone single banks, but financial systems are interconnected in practice, and disclosure about banks influences the counterparty risks of other banks. This dissertation studies the optimal stress test design in a financial network, where banks' endogenous default outcomes are determined by a fixed point payment problem that accounts for both project qualities and interbank contagion.

The first part examines the joint stress test design on all banks in the financial network. In addition to the cross-state risk sharing in models of single banks, this model highlights the novel cross-bank risk sharing that arises from the spillover effects of disclosures via interbank payments. When expected bank profitability is high or counterparty exposures are large, disclosure is non-discriminatory, and either all banks pass or all banks fail the stress tests; otherwise only less impaired banks may pass. For network structures, I find: (i) in a ring network, banks at least a specific distance away from the nearest bank with asset impairment may pass; (ii) a more connected network is not necessarily more stable under the optimal disclosure; (iii) typically more connected banks receive preferred treatment.

The second part studies a selective stress test in a financial network, where the regulator selects an optimal subset of banks for stress tests and accordingly design the optimal disclosures only on these banks. Compared with the first part, systemic risk becomes more important as the regulator is less able to fine tune beliefs about contagion and needs to contain the risks from unselected banks. For network structures, I find: (i) in a ring network, stress test is either "balanced'' on banks positioned evenly and disclosure is non-discriminatory, or on "connected'' banks and disclosure is truth-telling on potential shocks; (ii) in a star network, stress test is conducted on the center bank when counterparty exposure is either sufficiently small or sufficiently large.