Independent Private Information Research Articles

Conflicting versus reinforcing private information, information aggregation, and the time series properties of asset prices

We study how the relationship between independent private information signals affects information aggregation in laboratory asset markets. We employ two mechanisms, a continuous double auction and a prediction market. Under both mechanisms, when information is reinforcing, partial information aggregation occurs. When information is in conflict, information aggregation lessens and attempts to profit from private information frequently harm informational efficiency. In both mechanisms, results become stronger with experience in previous experimental sessions, and provide a private information benchmark for studies of the implications of conflicting public information. Under reasonable assumptions, our results are consistent with both momentum effects and weak reversals.

Assignment Mechanisms with Public Preferences and Independent Types

The literature on delegation considers the problem of an uninformed decision maker and an informed but biased agent. I extend that analyis to the case of multiple agents under two assumptions: independent private information and public preferences. In the optimal mechanism, agents assign points to the various alternatives, which then get mapped into scores, so that the alternative with the largest score wins. Each alternative's score is the sum of points received plus an extra term that is larger when the agents who have a strong preference for that alternative assign points to the alternatives they like less.

Modeling Settlement Bargaining with Algorithmic Game Theory

Past computational models of settlement bargaining have lacked explicit game theoretic foundations. Algorithmic game theory, however, offers techniques that can nd perfect Bayesian equilibria even where closed-form mathematical solutions may be intractable. Some recent mathematical models tackle two-sided asymmetric information, including evidentiary signals models, in which the judgment is a sum of both shared and independent private information, and correlated signals models, in which both parties receive noisy signals about the same information. To relax assumptions inherent in these models, this paper employs several progressively more complicated techniques, including iterative elimination of dominated alternatives, no regret learning, and counterfactual regret minimization. Although these algorithms are not guaranteed to produce Nash equilibria in general-sum games like litigation, they nonetheless succeed in producing either exact or close approximate equilibria on discrete versions of the corresponding mathematical models. A single algorithmic game theory model can incorporate a number of features that state-of-the-art mathematical models cannot handle simultaneously, such as two-sided correlated signals of both liability and damages, risk aversion, and options to concede.

Public Disclosure and Price Fragility

I derive a firm’s optimal public disclosure policy aimed at minimizing its cost of raising capital from the equity market. Following the public disclosure, the institutional investors offer incentive contracts to their buy-side analysts to acquire independent private information. Due to the imperfections in evaluating the analysts' performance, the investors rationally demand less private information following good public news and demand more following bad ones. Heterogeneity in cost of information acquisition implies more demand for private information results in more information asymmetry among the investors. Therefore, the overall effect of more transparency on the cost of capital is ambiguous. Furthermore, depending on the public signal and the information structure of the signals available to the analysts, there is either complementarity or substitutability in private information acquisition among the investors. This strategic complementarity results in price discontinuity in the firm's choice of public message. Therefore, to avoid such sharp price drops, firms optimally smooth their earnings reports, as is empirically observed. Finally, there is a positive relationship between the shareholders' liquidity demand and the firm's level of transparency. It might provide a justification why bigger public firms are more transparent. This setting allows studying the effect of selective disclosure and the recent policy changes on the firm’s cost of capital.

Interdependent Value Multi-unit Auctions for Initial Allocation of Emission Permits

Auctions have been shown to be able to tackle the efficient allocation of initial emission permits, but most of existing works only consider the problem with private values. They can not deal with the information externalities that each polluter's value depends on his own private information as well as the information of other polluters. In this paper, we model the allocation problem of initial emission permits as a multi-unit auction with interdependent values and propose a mechanism. First, we give the assumptions, i.e., each polluter is allowed to submit a series of marginal value functions which are declining in the number of units allocated, each polluter's signal to marginal values is independent private information and his marginal values are interdependent. Second, we establish a designing model for efficient multi-unit auction mechanism with interdependent values according to above assumptions. Third, we get the auction mechanism by solving this model and give the detail steps to show how to implement the auction mechanism in practice. Finally, we give an application example to show the operability of the auction mechanism proposed by this paper. The conclusion can be drawn that our auction mechanism can prevent polluters from cheating in the auction, achieve the social welfare optimization, and provide the environmental management departments with the theoretical basis and reference methods to realize the fairness and effectiveness of initial allocation of emission permits.

UNIFORM PRICE AUCTION OF DIVISIBLE GOODS BASED ON MULTIPLE ROUNDS LINEAR BIDDING AND ITS EQUILIBRIUM ANALYSIS

In this paper, the auction problem of a kind of continuous homogeneous divisible goods is studied and a uniform price auction mechanism is presented based on three conditions, i.e. the auctioneer’s supply is variable, every bidder submits multiple rounds continuous linear bidding, and every bidder’s valuation to per unit of the goods is independent private information. Concretely, two key problems, i.e. the bidders’ asymptotic strategic behaviours and forming process and composition of equilibrium points are explored. The conclusion is drawn that different bidders’ bidding order and different starting points of initial bidding would not cause different local equilibrium points, and if the equilibrium points exist, then the equilibrium point is unique.

Multi-stage sequential uniform price auction mechanism for divisible goods

In this paper, we study the problem of auctioning a kind of continuous homogeneous divisible goods, and present a multi-stage sequential auction mechanism of divisible goods under uniform price. In this mechanism, the auction process is divided into multiple stages, all bidders satisfy the sequential rationality conditions, all bidders are asymmetric, every bidder is allowed to submit a nonincreasing continuous demand function in each round bidding, every bidder’s valuation to per unit of the goods is independent private information, and if a bidder does not obtain the quantity he wants in former stage auction, he still have another opportunity to obtain some quantity in the later stage auction. For this mechanism, we explore the formation process and composition of equilibrium points in each stage auction, and discuss the optimal strategy selection for bidders, then give the detail steps and an application example to show how to implement this multi-stage sequential auction mechanism. The conclusions can be drawn that our auction mechanism is an efficient incentive mechanism, and can effectively reduce many underpricing equilibrium and can yield higher expected income than a single uniform price auction for the auctioneer. It also can avoid the occurrence of failure auction (equilibrium does not exist), and effectively extend and improve the traditional single stage uniform price auction mechanism.

Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation

Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries.

Overconfidence, Under-Reaction, and Warren Buffett’s Investments

Warren Buffett is a long-term investor, but is required by law to disclose his trades on a quarterly basis. The market seems to under-react to the revelation of his trades. From 1980 to 2006, it has been possible to achieve investment results similar to Buffett’s own simply by following his trades disclosed by Berkshire Hathaway. We consider overconfidence by sophisticated market participants as a contributing factor to the apparent under reaction to information contained in public disclosures of changes in Berkshire Hathaway’s holdings of stocks. Net sales of corporate insiders of stocks held by Berkshire Hathaway tend to decrease when those holdings increase consistent with shared private information. However, financial analysts’ recommendations tend to downgrade and institutions tend to sell at those times. This behavior by analysts and fund managers is consistent with pejorative experts displaying overconfidence by over estimating their stock picking abilities or precision of their independent private information and, as a consequence, underweighting public information in making their decisions.

Conditionally independent private information in OCS wildcat auctions

In this paper, we consider the conditionally independent private information (CIPI) model which includes the conditionally independent private value (CIPV) model and the pure common value (CV) model as polar cases. Specifically, we model each bidder's private information as the product of two unobserved independent components, one specific to the auctioned object and common to all bidders, the other specific to each bidder. The structural elements of the model include the distributions of the common component and the idiosyncratic component. Noting that the above decomposition is related to a measurement error problem with multiple indicators, we show that both distributions are identified from observed bids in the CIPV case. On the other hand, identification of the pure CV model is achieved under additional restrictions. We then propose a computationally simple two-step nonparametric estimation procedure using kernel estimators in the first step and empirical characteristic functions in the second step. The consistency of the two density estimators is established. An application to the OCS wildcat auctions shows that the distribution of the common component is much more concentrated than the distribution of the idiosyncratic component. This suggests that idiosyncratic components are more likely to explain the variability of private information and hence of bids than the common component.

Common-value auctions with discrete private information

A first-price, sealed-bid, common-value auction with finite-valued, conditionally independent private information is studied. We show that the equilibrium in this auction game is characterized by all bidders using a symmetric mixed-strategy in which bids are randomized over intervals that are successive and non-overlapping for consecutively indexed signals. We also show that as the number of bidders grows, the winning bid (conditional on the true value of the object) converges to a non-degenerate random variable that is affiliated with the true value. Therefore, only partial information revelation is achieved in the limit.

Multi-period contracts between principal and agent with adverse selection

Multi-period contracts with adverse selection at the time of contracting are studied. With risk-neutrality and independent private information, all inefficiency arises in the first period only. With positive serial correlation, inefficiency is more pervasive but declines over time.