Job Market Paper|
How Competition Shapes Information in Auctions with Simon Gleyze.
We consider auctions where buyers can acquire costly information about their valuations and those of others, and investigate how competition between buyers shapes their learning incentives. In equilibrium, buyers find it cost-efficient to acquire some information about their competitors so as to only learn their valuations when they have a fair chance of winning. We show that such learning incentives make competition between buyers less effective: losing buyers often fail to learn their valuations precisely and, as a result, compete less aggressively for the good. This depresses revenue, which remains bounded away from what the standard model with exogenous information predicts, even when information costs are negligible. It also undermines price discovery. Finally, we examine the implications for auction design. First, setting an optimal reserve price is more valuable than attracting an extra buyer, which contrasts with the seminal result of Bulow and Klemperer (1996). Second, the seller can incentivize buyers to learn their valuations, hence restoring effective competition, by maintaining uncertainty over the set of auction participants.
Published and Forthcoming Papers
Informationally Simple Incentives with Simon Gleyze.
Forthcoming in the Journal of Political Economy.
We consider a mechanism design setting in which agents can acquire costly information on their preferences as well as others'. The choice of the mechanism generates informational incentives as it affects what information is acquired before play begins. A mechanism is informationally simple if agents have no incentive to learn about others' preferences. This property is of interest for two reasons: First, the extended game has an equilibrium in dominant strategies only if it is informationally simple. Second, this endogenizes an "independent private value" property of the interim information structure. Our main result is that a mechanism is informationally simple only if it is de facto dictatorial. This holds for generic environments and any smooth cost function which satisfies an Inada condition. Hence even interim strategy-proof mechanisms incentivize agents to learn about others, and do not admit dominant strategies at the ex-ante stage. Moreover, the Independent Private Value assumption is unlikely to arise endogenously, though we show that full surplus extraction is infeasible.
Systemic Risk in Financial Networks: A Survey with Matthew Jackson.
Annual Review of Economics, Vol. 13:171-202, 2021.
We provide an overview of the relationship between financial networks and systemic risk. We present a taxonomy of different types of systemic risk, differentiating between direct externalities between financial organizations (e.g., defaults, correlated portfolios, fire sales), and perceptions and feedback effects (e.g., bank runs, credit freezes). We also discuss optimal regulation and bailouts, measurements of systemic risk and financial centrality, choices by banks regarding their portfolios and partnerships, and the changing nature of financial networks.
Credit Freezes, Equilibrium Multiplicity and Optimal Bailouts in Financial Networks with Matthew Jackson.
Revise and Resubmit at the Review of Financial Studies.
We analyze how interdependencies in financial networks can lead to self-fulfilling insolvencies and multiple possible equilibrium outcomes. We show that multiplicity arises if and only if there exists a certain type of dependency cycle in the network, and characterize banks' solvency in any equilibrium. We use this analysis to understand how to inject capital into banks so as to ensure solvency of all at minimum cost. We show that finding the cheapest bailout policy that prevents self-fulfilling insolvencies is computationally hard (and hard to approximate), but that the problem has intuitive solutions in specific network structures. Bailouts have an indirect value as making a bank solvent improves its creditors' balance-sheets and reduces their bailout costs, and we show how a simple algorithm that leverages these indirect benefits ensures systemic solvency at a total cost that never exceeds half of the total overall shortfall. In core-periphery networks, indirect bailouts—whereby the regulator bails out peripheral banks first as opposed to targeting core banks directly—are optimal.
Investment Incentives and Regulation in Financial Networks with Matthew Jackson.
In a model of financial networks that admits both debt and equity interdependencies, we show that financial organizations have incentives to choose excessively risky portfolios, and overly correlate their portfolios with those of their counterparties. We show how optimal regulation differs as a function of an organization's financial centrality and its available investment opportunities. We discover that optimal regulation depends non-monotonically on the correlation of banks' investments, with maximal restrictions for intermediate levels of correlation. Moreover, in standard core-periphery networks it can be uniquely optimal to treat banks asymmetrically: restricting the investments of one core bank while allowing an otherwise identical core bank (in all aspects, including in network centrality) to invest freely.
The Value of Model Misspecification in Communication with Simon Gleyze.
How do subjective models of the world affect communication? In this paper, we argue that holding a misspecified model can have value in strategic communication. We introduce a cheap-talk game in which Receiver faces uncertainty on models, i.e., which variables cause some outcome of interest, as well as uncertainty on states, i.e., the realization of these variables. First, we show that holding a simple, monocausal model can increase the informativeness of equilibrium communication on states.
The intuition is that monocausal models reduce the number of individually rational actions for Receiver, which limits the extent of information manipulation in equilibrium. Then, we show that a Principal who is informed of the true model benefits from delegating decision-making to a Receiver who holds a monocausal model, even if such a model is misspecified.
Work in Progress
Culture, Norms, and Systemic Corruption with Daron Acemoglu and Matthew Jackson.