Strategic truth and deception

We study strategic communication in a sender-receiver gamein which the sender sends a message about the observed quality ofthe good to the receiver who may accept or reject the good without knowing the true quality or the sender's type. The game has infinitely many perfect Bayesian Nash equilibria. An equilibrium refinement identifies a unique class of equilibria that are outcome equivalent to the equilibrium in which the neutral sender always tells the truth and the biased sender adopts a feigning strategy to disguise himself by not fully exaggerating about the quality of the good.Cheap Talk, Feigning Strategy, Strategic Information Transmission.

Price discrimination through refund contracts in airlines

This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand. Highlights • We show how an airline screens consumers who are uncertain about their travel. • The theory explains how an airline sets refundable and non-refundable prices. • The difference between the two fares declines as consumers learn about their travel. • We use an original airlines data set to find strong evidence supporting the theory. • Price discrimination decreases as departure date approaches

Essays on risk aversion

This dissertation contains three essays on risk aversion. In the first essay, we an- alyze comparative risk aversion in a new way, through a comparative statics problem in which, for a cost, agents can shift from an initial probability distribution toward a preferred distribution. The Ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary, and the Arrow-Pratt characterization arises when the original distribution differs from the preferred distribution by a simple mean-preserving spread and the cost is a utility cost. Higher-order increases in risk lead to higher-order generalizations, and the com- parative statics method yields a unified approach to the problem of comparative risk attitudes. In the second essay, we analyze decisions made by a group of terrorists and a government in a zero-sum game in which the terrorists minimize a representative citizen's expected utility and the government maximizes it. The terrorists' strategy balances the probability and the severity of the attack while the government chooses the level of investment reducing the probability and/or mitigating the severity. We find that if the representative citizen is risk neutral, the terrorists' response is not associated with the government's action and the representative citizen's risk attitudes affect the strategies of the government and the terrorists. Risk aversion always in- creases equilibrium severity but does not always increase equilibrium expenditure of the government. In the last essay, we consider a situation in which an individual has to pay for a good before he realizes the state-dependent surplus of the good. This ex-ante willingness to pay is called the option price and the difference between the option price and the expected surplus is the option value. We find that the option value actually is the buying price for a fixed payment of the expected surplus, and there is a special case in which the option value equals the negative of the compensating risk premium. We also find the effects on the option price and the option value when the expected utility assumption is replaced by a rank-dependent expected utility

Bundling in advance sales: Theory and evidence from round-trip vs two one-way tickets

We develop a model to derive an optimal price for a bundle of two goods when buyers are risk averse and uncertain about the valuation of each good. In theory, the optimal bundle price depends not only on the probability of a positive valuation of each good, but also on the correlation between the two valuations. We analyze a unique airlines dataset in which we directly observe the prices of both bundled (round trip ticket) and unbundled items (two one-way tickets) for identical itineraries. We find that airlines offer bundle discounts, and that these discounts increase when the correlation between outbound and inbound demands is higher. Moreover, higher certainty about demand decreases bundling discounts. We also find that bundling discounts decrease with competition

Price Discrimination through Refund Contracts in Airlines

This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand

Ambiguity and Ambiguity Attitudes across Auctions

Studies of ambiguity perceptions and attitudes are moving beyond the Ellsberg urn to examine people’s responses to ambiguity in naturally occurring events, games, and financial markets. In this study, we measure ambiguity perceptions and attitudes for market prices and allocations in four classical auction formats (first-price and second-price sealed bid auctions, English and Dutch clock auctions). We find ambiguity attitudes, representing individual preferences, are stable across auctions. However, the perceived ambiguity surrounding auction prices is lowest for English clock auctions which are obviously strategyproof (OSP), followed by second-price auctions which are strategyproof (SP), followed by a tie between first-price and Dutch clock auctions which are not strategyproof. Viewing OSP mechanisms as strategically simpler than SP mechanisms, and SP as strategically simpler than non-strategyproof mechanisms, our findings suggest ambiguity increases with strategic complexity. For allocations, we find perceived ambiguity is high for all four auction formats

Prudence probability premium

Prudence probability premium is defined in the risk apportionment model (Eeckhoudt and Schlesinger, 2006). For an increase in downside risk, we show sufficient conditions for comparing the probability premiums between two individuals when the apportioned risk is small and large.Probability premium Risk aversion Downside risk Prudence Risk apportionment

Persuasive communication when the sender's incentives are uncertain

We study persuasion in a modified Crawford-Sobel sender-receiver game in which the receiver makes a binary decision to accept or reject a good recommended by the sender. The good's quality and the sender's type (neutral or biased) are not observable to the receiver. These alterations yield a simple model and a unique truth-telling equilibrium in which neutral senders who observe different qualities fully separate but can only communicate low quality levels accurately. Biased senders adopt a mixed strategy that can successfully persuade the receiver to accept the good most of the time. When the sender's degree of bias is continuously distributed, a truth-telling equilibrium does not exist. Nonetheless, a partition equilibrium exists for any given number of partitions on the message space