Information in Mechanism Design

We survey the recent literature on the role of information for mechanism design. We specifically consider the role of endogeneity of and robustness to private information in mechanism design. We view information acquisition of and robustness to private information as two distinct but related aspects of information management important in many design settings. We review the existing literature and point out directions for additional future work.Mechanism Design, Information Acquisition, Ex Post Equilibrium, Robust Mechanism Design, Interdependent Values, Information Management

Trade disclosure and price dispersion

This paper determines the effects of post-trade opaqueness on market performance. We find that the degree of market transparency has important effects on market equilibria. In particular, we show that dealers operating in a transparent structure set regret-free prices at each period making zero expected profits in each of the two trading rounds, whereas in the opaque market dealers invest in acquiring information at the beginning of the trading day. Moreover, we obtain that if there is no trading activity in the first period, then market makers only change their quotes in the opaque market. Additionally, we show that trade disclosure increases the informational efficiency of transaction prices and reduces volatility. Finally, concerning welfare of market participants, we obtain ambiguous results

Trade disclosure and price dispersion

This paper studies the implications of trade reporting in a two-stage trade model similar to Journal of Financial Economics 14, 71–100. We find that the degree of market transparency has important effects on market equilibria. In particular, we show that dealers operating in a transparent structure set regret-free prices at each period. In contrast, dealers in an opaque market invest in acquiring information at the beginning of the trading day. Moreover, we show that in equilibrium there is price dispersion in the opaque market, whereas this is not the case if orders are reported. Additionally, we show that trade disclosure increases the informational efficiency of transaction prices and reduces volatility. Finally, concerning the welfare of market participants, we obtain ambiguous results.Publicad

Liquidity and Economic Fluctuations

This paper shows that private information may be crucial in explaining the relationship between liquidity, investment and economic fluctuations. First, it defines liquidity in a way that is clearly connected to investment and output. Second, it models economies where privately informed entrepreneurs issue debt to fund their investment opportunities and identifies a theoretically based, empirically usable, and macroeconomic relevant measure of liquidity of the economy: the cross-firm dispersion in debt yields. Finally, it rationalizes one novel stylized fact regarding the US corporate bond market: the positive relationship between the proposed meaure of liquidity - the cross-firm dispersion in the "yields to maturity" on newly issued publicly traded debt - and subsequent aggregate economic activity.Liquidity; private information; robust pooling equilibrium; bond yield

Expectational coordination failures and Market outcomes' volatility

The first part of this text reviews the standard economic viewpoint on expectational coordination, a viewpoint that the recent events have challenged. The second part reviews different existing directions assessments of the rational expectations hypothesis that have been made to-date. The third part shows how such a critical assessment, along the lines of the so-called "eductive" learning approach, radically modifies our view of three key problems : the economic role of speculation, the informational efficiency of markets and, last but not least, the ability of agents with long horizon to anticipate the future. The fourth part stresses what has been achieved so far well as the future challenges of the approaches advocated in this paper.expectational coordination ; rational expectations hypothesis

Efficiency of competition in insurance markets with adverse selection

There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad when there is adverse selection. Using the dual theory of choice under risk, we are able to fully characterize both the competitive and the monopoly market outcomes. When there are two types of risk, the monopoly dominates competition if and only if competition leads to market unravelling. When there are a continuum of types the efficiency of competition is less trivial. In effect monopoly is shown to provide better insurance but at the cost of driving out some agents from the market. Performing simulation for different distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. The reason is that the monopolist can exploit its market power to relax the incentive constraints

On the Failure of Core Convergence in Economies with Asymmetric Information

In interim economies with asymmetric information, we show a robust failure of the core convergence theorem. We begin by showing that the coarse core of Wilson (1978) does not converge to any set of price equilibrium allocations considered in the literature. To prove our main point we construct a simple example of a replicated sunspot economy with strictly convex and monotonic preferences. We also show that the coarse core may not satisfy the equal treatment property. Moreover, coarse core allocations satisfying the equal treatment property may not converge to price equilibrium allocations. The result applies to any notion of price equilibrium (including rational expectations equilibria, Radner equilibria, sunspot equilibria) in which fully informed consumers receive a consumption plan maximizing ex-post utility over the ex-post budget set. The non-convergence result holds for several different notions of the interim core proposed in the literature, including the fine core (Wilson (1978)), the private core (Yannelis (1991)), the core in the pooling case (Ichiishi and Idzik (1996), Goenka and Shell (1997)), the incentive compatible core (Vohra (1999)), the coarse+ core (Lee and Volij (forthcoming)), the core with endogenous communication (Volij (forthcoming)). This failure of core convergence is a basic consequence of asymmetric information, which at the interim stage, imposes important restrictions on coalition formation. (Informational constraints may rule out many coalitions of types of consumers that would be present in the standard Debreu and Scarf (1963) complete information framework.) In particular, our negative results do not rely on the lack of `informational smallness' of agents (at least in the sense in which this term has recently been formalized in McLean and Postlewaite (1999)).

Predatory mortgage lending

Regulators express growing concern over predatory loans, which we take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, we identify the circumstances in which it arises both with and without competition. We find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. We use our model to analyze the effects of legislative interventions.Predatory lending