(Pro-)Social Learning and Strategic Disclosure

In this paper, we experimentally investigate a social learning model with endogenous timing. Specifically, we focus on a model, in which two subjects are supposed to make a binary decision. One alternative is a safe action with a fixed payoff, while the other alternative is a risky action. The subjects can make their decisions in three stages. The safe action is reversible, but the risky action is not. A subject who delays his decision can observe the decision of the other subject in the earlier stages, and as a result, acquire more information. We show that players do delay their decisions in order to obtain more information. Furthermore, they delay especially when their private information does not particularly support the risky action. We also find evidence which suggests that risk aversion plays an important role in timing decisions, often leading to ex post inefficient outcomes.

Risk attitudes and the stag-hunt game

Game theorists typically assume that changing a game's payoff levels—by adding the same constant to, or subtracting it from, all payoffs—should not affect behavior. Although this invariance is an implication of the theory when payoffs mirror expected utilities, it is an empirical question when “payoffs” are actually money amounts.Loss avoidanceis a phenomenon where payoff‐level changes matter when they change the signs of payoffs: gains become losses or vice versa. We report the results of a human‐subjects experiment designed to test for two types of loss avoidance:certain‐loss avoidance(avoiding a strategy leading to a sure loss, in favor of an alternative that might lead to a gain) andpossible‐loss avoidance(avoiding a strategy leading to a possible loss, in favor of an alternative that leads to a sure gain). Subjects in the experiment play three versions of Stag Hunt, which are identical up to the level of payoffs, under a variety of treatments. We find strong evidence of behavior consistent with certain‐loss avoidance in the experiment. We also find evidence of possible‐loss avoidance, although weaker than that for certain‐loss avoidance. Our results carry implications for theorists modeling real‐life situations with game theory and for experimenters attempting to test theory and interpret observed behavior in terms of theory.(JELD81, C72, C73)

Effects of time-pressure on decision-making under uncertainty: changes in affective state and information processing strategy

I develop a simple model of social learning in which players observe others’ outcomes but not their actions. A continuum of players arrives continuously over time, and each player chooses once-and-for-all between a safe action (which succeeds with known probability) and a risky action (which succeeds with fixed but unknown probability, depending on the state of the world). The actions also differ in their costs. Before choosing, a player observes the outcomes of K earlier players. There is always an equilibrium in which success is more likely in the good state, and this alignment property holds whenever the initial generation of players is not well informed about the state. In the case of an outcome-improving innovation (where the risky action may yield a higher probability of success), players take the correct action as K → ∞. In the case of a cost-saving innovation (where the risky action involves saving a cost but accepting a lower probability of success), inefficiency persists as K → ∞ in any aligned equilibrium. Whether inefficiency takes the form of under-adoption or over-adoption also depends on the nature of the innovation. Convergence of the population to equilibrium may be nonmonotone. (JEL D81, D83, O32, Q12, Q16)

We examine factors influencing firms' strategic disclosure of executive pay in Korea. In Korea, executive pay is disclosed through directors' pay disclosure in a firm's annual report. Because the disclosure rules in Korea do not mandate but only recommend that firms distinguish between inside executive directors and outside nonexecutive directors when reporting the average pay of directors, this regulatory policy provides a unique opportunity to examine managers' incentives to opportunistically manage the disclosed levels of average executive pay. We find that strategic disclosure for cloaking executive pay prevails when firms have weak corporate governance and high (low) political costs of disclosing high levels of executive pay (making strategic disclosures), but that such disclosure is not associated with proprietary costs. Furthermore, using the subsample of firms that can choose between different types of strategic disclosures, we examine whether firms base their choice on the political costs of making the strategic disclosures. In our data setting, there are two major ways of strategically managing the disclosed average executive pay downward: (1) deliberate aggregation of inside and outside director pay in the calculation of average director pay, and (2) inclusion of part-time inside directors who receive a minimal or substantially low level of pay (which, of the two schemes, is the less visible). Our results suggest that the higher the political costs of a firm's strategic disclosures are, the less visible the firm's cloaking of executive pay will be. Data Availability: Data are available from public sources identified in the text.

We analyze a dynamic principal-agent problem with moral hazard and private learning. Each period the agent faces a choice between two actions: a safe action with known returns (exploitation) and a costly risky action with unknown returns (experimentation). We explicitly characterize the cheapest time-dependent wage contracts implementing an action sequence by the agent consisting of a mix of risky and safe actions. We show that the wages for experimentation must be increasing to compensate for the agent's pessimistic beliefs whereas the wages for exploitation are driven by distinct upper bounds. The model's predictions have some empirical support.

We study multi-period salesforce incentive contracting when sales agents can dynamically choose between a safe action and a bold or risky action, where the bold action has higher expected sales but also higher polarization in sales and higher effort cost. Using a two-period model with ex-ante independent time periods, we show that a two-period contract is (weakly) optimal and that the firm determines the optimal contract by trading off the number of bold actions taken with the expected compensation per bold action. Under different conditions, the optimal contract is an “account-balance” contract that ignores failure and pays according to the number of periods with a high sales outcome (i.e., it simply gives a reward for every successful outcome), an “extreme” contract that penalizes failure and pays only if there is a high sales outcome in every period (i.e., it sets a very high bar for reward), or an “early-polarization” contract that rewards early failure only if the early sales outcome is either high or low (but not intermediate) followed by a high sales outcome. Specifically, in the early-polarization contract, a reward may be given in spite of early failure purely to make effort levels inter-temporally dependent to reduce the overall cost of motivating effort; this adds to existing explanations, based on career concerns and learning, for tolerating failure. Overall, for moderate levels of increased return from the bold action relative to the safe action, the account-balance contract is optimal, otherwise one of the extreme contract and the early-polarization contract is optimal.

Optimal dynamic information provision

We interpret recent developments in the field of artificial intelligence (AI) as improvements in prediction technology. In this paper, we explore the consequences of improved prediction in decision-making. To do so, we adapt existing models of decision-making under uncertainty to account for the process of determining payoffs. We label this process of determining the payoffs ‘judgment.’ There is a risky action, whose payoff depends on the state, and a safe action with the same payoff in every state. Judgment is costly; for each potential state, it requires thought on what the payoff might be. Prediction and judgment are complements as long as judgment is not too difficult. We show that in complex environments with a large number of potential states, the effect of improvements in prediction on the importance of judgment depend a great deal on whether the improvements in prediction enable automated decision-making. We discuss the implications of improved prediction in the face of complexity for automation, contracts, and firm boundaries.

We propose the use of experimental economics as an innovative tool to introduce economic issues. The basic game of the experiment is a simple beauty contest model by Morris and Shin. Precisely, the paper contributes to the continuous debate on the effect of transparency in a context of a speculative attack using an experimental approach. In the spirit of subsequent protocols of Heinemann et al. and Cornand such as a laboratory experiment is designed to test theoretical predictions of static coordination games, players have access to heterogeneous information sets and according to which they have to decide between a risky action whose payoff depends on the decision made by the other players, and a safe action that generates a fixed gain. Results indicate perfect coordination in 61.75% of the total situations. However, non-parametric tests reveal no evidence that players really differentiate between public and private information, and of a destabilizing effect of public information due to self-fulfilling beliefs. The findings have policy implications regarding optimal tools for information disclosure. We performed the experiment on students who do not have any previous knowledge about game theory or the context.

We interpret recent developments in the field of artificial intelligence (AI) as improvements in prediction technology. In this paper, we explore the consequences of improved prediction in decision-making. To do so, we adapt existing models of decision-making under uncertainty to account for the process of determining payoffs. We label this process of determining the payoffs ‘judgment.’ There is a risky action, whose payoff depends on the state, and a safe action with the same payoff in every state. Judgment is costly; for each potential state, it requires thought on what the payoff might be. Prediction and judgment are complements as long as judgment is not too difficult. We show that in complex environments with a large number of potential states, the effect of improvements in prediction on the importance of judgment depend a great deal on whether the improvements in prediction enable automated decision-making. We discuss the implications of improved prediction in the face of complexity for automation, contracts, and firm boundaries.

How can the details of who observes what affect the outcomes of economic, social, and political interactions? Our thesis is that outcomes do not depend merely on the status quo and the available (noisy) information on it; they also crucially depend on how the available pieces of information are allocated among strategic agents. We study the dependence of coordination outcomes on local information sharing. In the economic literature, common knowledge of the fundamentals leads to the standard case of multiple equilibria due to the self-fullling nature of agents' beliefs. The global-games framework has been used extensively as a toolkit for arriving at a unique equilibrium selection in the context of coordination games, which can model bank runs, currency attacks, and social uprisings, among others. Yet, there is a natural mechanism through which multiplicity can reemerge, while keeping information solely exogenous: the (exogenous) information structure per se, namely, the details of who observes what noisy observation. The aim of this paper is to understand the role of the exogenous information structure in the determination and characterization of equilibria in the coordination game. We answer the question of how the equilibria of the coordination game depend on the details of local information sharing. Our main contribution is to provide conditions for uniqueness and multiplicity that pertain solely to the details of information sharing. The findings in the present paper give an immediate answer as to the determinacy of equilibria using only the characterization of what agent observes what pieces of information. We build on the standard global game framework for coordination games with incomplete and asymmetric information and consider a coordination game in which each of a collection of agents decides whether to take a risky action (whose payoff depends on how many agents made the same decision, and the fundamentals) or a safe action, based on their noisy observations regarding the fundamentals. Generalizing away from the standard practice of considering only private and public signals, we allow for signals that are observed by arbitrary subsets of the agents. We refer to signals that are neither private nor public as local signals. We pose the following question: how do the equilibria of the coordination game depend on the information locality, i.e., on the details of local information sharing. Our key finding is that the number of equilibria is highly sensitive to the details of information locality. As a result, a new dimension of indeterminacy regarding the outcomes is being introduced: not only may the same fundamentals well lead to different outcomes in different societies, due to different realizations of the noisy observations; the novel message of this work is that the same realization of the noisy observations is compatible with different equilibrium outcomes in societies with different structures of local information sharing. In particular, we show that as long as a collection of agents share the same observations, and no other agent's observations overlap with their common observations, multiple equilibria arise. Identical observations is not, nevertheless, a necessary condition for multiplicity: we show that as long as the observations of a collection of agents form a cascade of containments, and no other agent's observations overlap with the observations of the collection, then multiplicity emerges. This is not to say however that common knowledge of information at the local level necessarily implies multiplicity: in particular, in the absence of identical observations or cascade of containments of observations, or if the condition of no overlap of information is violated, then, despite the presence of some signals that are common knowledge between agents, a unique equilibrium may be selected. In the case where each agent observes exactly one signal, we characterize the set of equilibria as a function of the details of the information structure. We show how the distance between the largest and smallest equilibria depends on how information is locally shared among the agents. In particular, the more equalized the sizes of the sets of agents who observe the same signal, the more diverse the information of each group becomes, heightening inter-group strategic uncertainty, and leading to a more refined set of equilibria. We use our characterization to study the set of equilibria in large coordination games. We show that as the number of agents grows, the game exhibits a unique equilibrium if and only if the largest set of agents with access to a common signal grows sublinearly in the number of agents, thus identifying a sharp threshold for uniqueness versus multiplicity.

HAL is a multi-disciplinary open access archive for the deposit and dissemination of scientific research documents, whether they are published or not. The documents may come from teaching and research institutions in France or abroad, or from public or private research centers. L'archive ouverte pluridisciplinaire HAL, est destinée au dépôt et à la diffusion de documents scientifiques de niveau recherche, publiés ou non, émanant des établissements d'enseignement et de recherche français ou étrangers, des laboratoires publics ou privés.

HAL is a multi-disciplinary open access archive for the deposit and dissemination of scientific research documents, whether they are published or not. The documents may come from teaching and research institutions in France or abroad, or from public or private research centers. L'archive ouverte pluridisciplinaire HAL, est destinée au dépôt et à la diffusion de documents scientifiques de niveau recherche, publiés ou non, émanant des établissements d'enseignement et de recherche français ou étrangers, des laboratoires publics ou privés.