Disclosure Game Research Articles

Full revelation of expertise before disclosure

We consider the communication of expertise in a disclosure game. A sender wants to persuade a receiver to take a high-value action. The sender has private information about her ability to acquire evidence, called her expertise. After the sender communicates her expertise through a cheap-talk message, she obtains some evidence that she can (partially) disclose or conceal. The receiver wants to take an action based on the true information. We demonstrate that the sender’s expertise can be fully revealed through pure cheap talk before the disclosure game. • A disclosure game in which a receiver does not know a sender’s expertise. • Before acquiring information, the sender communicates her expertise to the receiver. • The sender’s expertise can be fully revealed through pure cheap talk before the disclosure game.

Disclosure with unknown expertise

We study a disclosure game in which a sender privately knows how much information she possesses and can disclose verifiable information to persuade a receiver to provide a higher reward. The receiver may attribute any imprecise disclosure to the sender concealing unfavorable information. We show that the most unfavorable possibility contained in information possessed by the sender will be fully revealed to the receiver.

On Market Concentration and Disclosure

ABSTRACT Verrecchia (1983, 1990) introduced the proprietary cost hypothesis in which exogenous disclosure costs are a reduced-form interpretation of lost competitive advantage in product markets. We develop a micro-foundation for this disclosure cost in a Cournot game and explicitly derive the cost as a function of market structure. When the market is sufficiently competitive, this model has a reduced-form representation similar to a standard voluntary disclosure game with a partial disclosure equilibrium. Proprietary costs are increasing in the number of competitors, the degree of product substitution, overall uncertainty, and production costs. The analysis also offers new empirical predictions on the interaction between disclosure choice, managerial horizon, and entry. JEL Classifications: D82; L13; L50; M23; M4.

On Market Concentration and Disclosure

Verrecchia (1983, 1990) introduced the proprietary cost hypothesis in which exogenous disclosure costs are a reduced-form interpretation of lost competitive advantage in product markets. We develop a micro-foundation for this disclosure cost in a Cournot game and explicitly derive the cost as a function of market structure. When the market is sufficiently competitive, this model has a reduced-form representation similar to a standard voluntary disclosure game with a partial disclosure equilibrium. Proprietary costs are increasing in the number of competitors, the degree of product substitution, overall uncertainty and production costs. The analysis also offers new empirical predictions on the interaction between disclosure choice, managerial horizon and entry.

Mechanisms With Evidence: Commitment and Robustness

We show that in a class of I‐agent mechanism design problems with evidence, commitment is unnecessary, randomization has no value, and robust incentive compatibility has no cost. In particular, for each agent i, we construct a simple disclosure game between the principal and agent i where the equilibrium strategies of the agents in these disclosure games give their equilibrium strategies in the game corresponding to the mechanism but where the principal is not committed to his response. In this equilibrium, the principal obtains the same payoff as in the optimal mechanism with commitment. As an application, we show that certain costly verification models can be characterized using equilibrium analysis of an associated model of evidence.

The Role of Social Media in Promoting Information Disclosure on Environmental Incidents: An Evolutionary Game Theory Perspective

In recent years, social media has had a crucial role in promoting governments to act more responsibly. However, few studies have investigated whether social media use actually leads to increased disclosure during environmental incidents, or how social media influences regional governments’ information disclosure, even though delayed and insufficient disclosure on relevant incidents is often widespread in China. In this article, we model information disclosure during environmental incidents as an evolutionary game process between the central government and local governments, and examine the role of social media on game participants’ strategy selections in the information disclosure game. The results indicate that social media plays an active role in promoting the regional government to proactively disclose information during environmental incidents through two mechanisms: the top–down intervention mechanism, and the bottom–up reputation mechanism. More specifically, social media can provide efficient information channels for the central government to supervise local officials’ limited disclosure during environmental incidents, essentially sharing the central government’s supervision costs, and thus improving its supervision and intervention efficiency. Social media helps focus the public’s attention on the limited disclosure of local officials in environmental incidents, and actively mobilizes citizens to protest to maintain their interests, placing considerable pressure on the reputation of local governments.

Spin Doctors: A Model and an Experimental Investigation of Vague Disclosure

Unfavorable news are often delivered under the disguise of vagueness. But are people sufficiently naive to be fooled by such positive spin? We use a theoretical model and a laboratory experiment to study the strategic use of vagueness in a voluntary disclosure game. Consider a sender who aims at inflating a receiver’s estimate of her type and who may disclose any interval that contains her actual type. Theory predicts that when facing a possibly naive receiver, the sender discloses an interval that separates her from worse types but is upwardly vague. Senders in the experiment adopt this strategy and some (naive) receivers are systematically misled by it. Imposing precise disclosure leads to less, but more easily interpretable, disclosure. Both theory and experimental data further suggest that imposing precision improves overall information transmission and is especially beneficial to naive receivers. Our results have implications for the rules that govern the disclosure of quality-relevant information by firms, the disclosure of research findings by scientists, and testimonies in a court of law.

Evidence Games: Truth and Commitment

An evidence game is a strategic disclosure game in which an informed agent who has some pieces of verifiable evidence decides which ones to disclose to an uninformed principal who chooses a reward. The agent, regardless of his information, prefers the reward to be as high as possible. We compare the setup in which the principal chooses the reward after the evidence is disclosed to the mechanism-design setup where he can commit in advance to a reward policy, and show that under natural conditions related to the evidence structure and the inherent prominence of truth, the two setups yield the same outcome. (JEL C72, D82, D83, K41)

Game of Risk Communications—The Case of a Japanese Carmaker

In this paper, game models for risk information disclosure-which interpret user payoff structures according to March and Simon's theory of satisficing decision making and interpret a carmaker's payoff structures according to Tversky and Kahneman's cumulative prospect theory-are developed. This risk information disclosure game is used to analyze the recall of products by a carmaker. The transitions made from one game to another correspond to the carmaker's subjective risk assessment of the probability that nondisclosure will be discovered by the user. The user's claims hasten the carmaker's change from a nondisclosure game to another kind of game. The role of a guardian agent in fault information disclosure is examined. The presence of an agent caused the carmaker playing the game to change from nondisclosure to disclosure mode. From the viewpoint of operational cost, the risk information disclosure in an environment where a permanent guardian agent is always active is considered to be effective in achieving good risk communications.

Using Game Theory to Investigate Risk Information Disclosure by Government Agencies and Satisfying the Public—The Role of the Guardian Agent

Risk information disclosure by government agencies has recently been in the news in Japan. A government agency often has an incentive not to disclose such information. Moreover, there generally is a gap between the amount of risk information held by the government agency and the amount held by the public. A method is needed that will help the public to obtain sufficient information for making decisions. We model the interactions between a government agency and the public as games of risk information disclosure using game theory, interpret the public payoff structure using March and Simon's theory of satisficing decision making, and interpret the payoff structures of a government agency using Tversky and Kahneman's cumulative prospect theory. We classify the interactions between a government agency and the public into four games: a voluntary disclosure game, an assurance game, an information searching game, and a nondisclosure game. The nondisclosure game does not have a Pareto optimum in our formulation. However, for discussion, we consider that binding forces imposed by the administration of justice might compel government agencies to disclose. In the assurance and information searching games, the equilibrium is not the Pareto optimum but a second best. We propose using a guardian agent to reduce the information gap between a government agency and the public. We find that, as the power of the guardian agent to reduce the risk information gap increases, the possibility of approaching the Pareto optimum also increases. Therefore, the information gap between a government agency and the public would be greatly reduced with explanations and support from experts in related fields, such as facilitators and experts in nonprofit organizations.

Game Theoretic Modeling of Risk Communications in Company : Functions and Effectiveness of Guardian Agent

Risk information disclosure by companies has recently become headline news in Japan. In risk communication situations, companies must disclose risk information to customers. However, there are incentives not to do so. Moreover, a gap lies between the amount of risk information known by the companies and the amount of risk information given to the customers. Using game theory, Umehara and Ohta (2005) develops game models for risk information disclosure interactions between government agencies and the public that interpret the public's payoff structures using March and Simon's theory of satisficing decision-making, and that interpret government agencies' payoff structures using Tversky and Kahneman's cumulative prospect theory. We use this risk information disclosure game model to analyze the recall of products by an automobile maker and classify the interactions between the company and its customers into five games: a voluntary disclosure game, risk information searching games (1, 2, 3), and a compulsory disclosure game. The transitions that a company manager makes from one game to another correspond to that manager's subjective risk-assessment of the probability that non-disclosure would be discovered by the customer. If the probability of discovery is deemed to be low, managers play a compulsory disclosure game, and if it is deemed high, they play a voluntary disclosure game. Customers searching activities increase the risk-probability assessment and hasten a manager's change from a compulsory disclosure game to a risk information searching game. Thus, if there are a lot of customers searching for information, managers will be pressed to disclose risk information. Next, we use the risk information disclosure game as a model to assess methods for reducing the information gap between companies and customers. The role of a guardian agent in this is examined. We find that the presence of the agent causes managers playing the game to change from non-disclosure to disclosure. Finally, from an operation-cost viewpoint, risk information disclosure in an environment where a guardian agent is always active is considered. On the basis of this study, we believe that the information gap between government agencies and the public would be far smaller if explanations and support are provided from experts in related fields, such as government agencies or facilitators.JEL Classification: C72, D81, D82, M14

Disclosures and Asset Returns

Public information in financial markets often arrives through the disclosures of interested parties who have a material interest in the reactions of the market to the new information. When the strategic interaction between the sender and the receiver is formalized as a disclosure game with verifiable reports, equilibrium prices can be given a simple characterization in terms of the concatenation of binomial pricing trees. There are a number of empirical implications. The theory predicts that the return variance following a poor disclosed outcome is higher than it would have been if the disclosed outcome were good. Also, when investors are risk averse, this leads to negative serial correlation of asset returns. Other points of contact with the empirical literature are discussed.

Forcing Firms to Talk: Financial Disclosure Regulation and Externalities

We analyze a model of voluntary disclosure by firms and the desirability of disclosure regulation. In our model disclosure is costly, it has private and social value, and its precision is endogenous. We show that (i) a convexity in the value of disclosure can lead to a discontinuity in the disclosure policy; (ii) the Nash equilibrium of a voluntary disclosure game is often socially inefficient; (iii) regulation that requires a minimal precision level sometimes but not always improves welfare; (iii) the same is true for subsidies that change the perceived cost of disclosures; and (iv) neither regulation method dominates the other. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The gamesmanship of sex: a model based on African American adolescent accounts.

This article examines adolescent understanding of the social context of sexual behavior. Using grounded theory to interpret interviews with 39 African American male and female adolescents, the article builds a model of sex-related behavior as a set of interrelated games. A courtship game involves communication of sexual or romantic interest and, over time, formation of a romantic relationship. A duplicity game draws on conventions of a courtship game to trick a partner into having sex. A disclosure game spreads stories about one's own and other's sex-related activities to peers in a gossip network. Finally, a prestige game builds social reputation in the eyes of peers, typically based on gender-specific standards. The article concludes by examining the meanings that sex-related behavior may have for adolescents and the potential use of social knowledge for facilitating adolescent health.

Strategic spillovers in patent races

This paper investigates whether there might exist individual incentives for firms to disclose the scientific knowledge obtained by their laboratories. In plausible conditions, the only non-cooperative equilibrium of the two-firm disclosure game considered is such that both firms do indeed disclose this knowledge. For other parameter combinations the only industry equilibrium is such that one firm discloses its findings, the other keeps them secret.