Accept or Reject? An Organizational Perspective

This paper compares the relative performance of different organizational structures for the decision of accepting or rejecting a project of uncertain quality. When the principal is uninformed and relies on the advice of an informed and biased agent, cheap-talk communication is persuasive and it is equivalent to delegation of authority, provided that the agent's bias is small. When the principal has access to additional private information, cheap-talk communication dominates both (conditional) delegation and more democratic organizational arrangements such as voting with unanimous consensus

Non-Exclusive Financial Advice

We propose a simple model of non-exclusive financial advice in which two households rely on a self-interested (common) expert to make their investment choices. There is only one source of risk, and the expert is privately informed about the risky asset's volatility. When monetary transfers are unenforceable, we show that investors may delegate their investment decisions to the expert. When doing so, however, they impose restrictions on her choices which crucially depend on whether the expert perceives investors' asset allocations as complements or as substitutes. Finally, we analyze the implications of non-exclusivity in financial advice on investment behavior and welfare, and highlight a set of novel testable implications

Optimal delegation via a strategic intermediary

This paper studies the optimal design of delegation rule in a three-tier principal-intermediary-agent hierarchy. In this hierarchy, monetary transfer is not feasible, delegation is made sequentially, and all players are strategic. We characterize the optimal delegation mechanism. It is shown that the single-interval delegation a la Holmstrom is optimal only when the intermediary is moderately biased. Otherwise, as responses to the distortion caused by a biased intermediary, the optimal delegation set may involve a hole. Thus, multi-interval delegation set would arise when subordinates have opposing biases. This result sheds some light on policy threshold effects: "slight" changes in the underlying state cause a jump in the policy responses

Three Essays on Information Economics

This dissertation is a collection of three essays on information economics. The first essay, “Budget Constraint and Information Transmission in Multidimensional Decision Making,” illustrates how a constraint on a receiver’s actions impedes information transmission from multiple senders. The constraint causes an endogenous conflict of interest between the senders and the receiver, preventing truthful revelation. Nevertheless, information can be at least partially transmitted in terms of grids in perfect Bayesian equilibrium. The second essay, “Delegation and Retention of Authority in Organizations under Con- strained Decision Making,” analyzes the relationship between constraints on decision making and optimal decision making structure–centralized or decentralized decision making. Con- straints on feasible decisions induce a conflict of interest between a principal and agents even if they have common preferences. The centralized decision is beneficial to the principal when the constraints weakly restrictive. However, delegation can more than compensate the principal for loss of control by exploiting the agents’ information when different prior beliefs disrupt information revelation or the agents have difference preferences. The third essay, “Tenure Reform and Quality Gap between Schools,” discusses tenure reform for primary and secondary education in the United State from a game-theoretical point of view. To analyze the effect of the reform, a continuing contract (tenure) is compared with a non-continuing contract (non-tenure) based on performance evaluation. The welfare is improved after the reform, but the gap between a good and bad school becomes wider. This increased gap is caused by a unilateral transfer of qualified teachers from the good school to bad school

Essays on strategic communication

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2012.Cataloged from PDF version of thesis.Includes bibliographical references (p. 105-108).The first chapter studies optimal information revelation with one-sided asymmetric information. A sender chooses ex ante how her information will be revealed ex post. A receiver obtains both public information and information revealed by the sender, and then takes one of two actions. The sender wishes to maximize the probability that the receiver takes the desired action. The sender optimally reveals only whether the receiver's utility is above a cutoff. The cutoff is such that the receiver is indifferent between the two actions when he learns that his utility is above the cutoff. The sender's welfare increases and the receiver's welfare does not change with the precision of the sender's information. The sender's welfare decreases and the receiver's welfare increases with the precision of public information. The second chapter studies optimal information revelation with two-sided asymmetric information. A sender chooses ex ante how her information will be revealed ex post with the goal of persuading an informed receiver to take one of two actions. The sender faces a tradeoff between the frequency and the persuasiveness of messages: sending positive messages more often (in terms of the sender's private information) makes it less likely that the receiver will take the desired action (in terms of the receiver's private information). Under the optimal mechanism, the sender's and receiver's welfare is not monotone in the precision of the receiver's private information. I provide necessary and sufficient conditions when the full information revelation is optimal and when the no information revelation is optimal. The third chapter (co-authored with Li Hao and Wei Li) studies a principal-agent problem where the only commitment for the uninformed principal is to restrict the set of decisions she makes following a report by the informed agent. Compared to no commitment, the principal improves the quality of communication from the agent. An ex ante optimal equilibrium for the principal corresponds to a finite partition of the state space, and each retained decision is suboptimal for the principal, biased toward the agent's preference. Generally an optimal equilibrium does not maximize the number of decisions the principal can credibly retain.by Anton Kolotilin.Ph.D