Optimal Delegation, Unawareness, and Financial Intermediation

We study the delegation problem between an investor and a financial intermediary. The intermediary has private information about the state of the world that determines the return of the investment. Moreover, he has superior awareness of the available investment opportunities and decides whether to reveal some of them to the investor. We show that the intermediary generally has incentives to make the investor aware of investment opportunities at the extremes, e.g. very risky and very safe projects, while leaving the investor unaware of intermediate investment options. We study how the extent to which the intermediary reveals available investment opportunities to the investor depends on the investor's initial awareness and the degree of competition between intermediaries in the market.Universidad de Málaga. Campus de Excelencia Internacional Andalucía Tech

Competing mechanisms in markets for lemons

We study directed search equilibria in a decentralized market with adverse selection, where uninformed buyers post general trading mechanisms and informed sellers select one of them. We show that this has differing and significant implications with respect to the traditional approach, based on bilateral contracting between the parties. In equilibrium, all buyers post the same mechanism and low‐quality sellers receive priority in any meeting with a buyer. Also, buyers make strictly higher profits with low‐ than with high‐type sellers. When adverse selection is severe, the equilibrium features rationing and is constrained inefficient. Compared to the equilibrium with bilateral contracting, the equilibrium with general mechanisms yields a higher surplus for most, but not all, parameter specifications

The zoo of models of deliberate ignorance

This chapter looks at deliberate ignorance from a modeling perspective. Standard economic models cannot produce deliberate ignorance in a meaningful way; if there were no cost for acquisition and processing, data could be looked at privately and processed perfectly. Here the focus is on cases where the standard assumptions are violated in some way. Cases are considered from an individual’s perspective, without game-theoretic (strategic) aspects. Different classes of “not wanting to know” something are identified: aside from the boring case of the cost of information acquisition being too high, an individual may prefer to not know some information (e.g., when knowledge would reduce the enjoyment of other experiences) or may want to not use some information (e.g., relating to a lack of self-control). In addition, strategic cases of deliberate ignorance are reviewed, where obtaining information would also signal to others that information acquisition has occurred, and thus it may be better to remain ignorant. Finally, the possibility of deliberate ignorance emerging in population-level models is discussed, where there seems to be a relative dearth of models of the phenomenon at present. Throughout, the authors make use of examples to summarize different classes of models, ideas for how deliberate ignorance can make sense, and gaps in the literature for future modeling

Recovery of a temperate reef assemblage in a marine protected area following the exclusion of towed demersal fishing.

Marine Protected Areas MPA have been widely used over the last 2 decades to address human impacts on marine habitats within an ecosystem management context. Few studies have quantified recovery of temperate rocky reef communities following the cessation of scallop dredging or demersal trawling. This is critical information for the future management of these habitats to contribute towards conservation and fisheries targets. The Lyme Bay MPA, in south west UK, has excluded towed demersal fishing gear from 206 km(2) of sensitive reef habitat using a Statutory Instrument since July 2008. To assess benthic recovery in this MPA we used a flying video array to survey macro epi-benthos annually from 2008 to 2011. 4 treatments (the New Closure, previously voluntarily Closed Controls and Near or Far Open to fishing Controls) were sampled to test a recovery hypothesis that was defined as 'the New Closure becoming more similar to the Closed Controls and less similar to the Open Controls'. Following the cessation of towed demersal fishing, within three years positive responses were observed for species richness, total abundance, assemblage composition and seven of 13 indicator taxa. Definitive evidence of recovery was noted for species richness and three of the indicator taxa (Pentapora fascialis, Phallusia mammillata and Pecten maximus). While it is hoped that MPAs, which exclude anthropogenic disturbance, will allow functional restoration of goods and services provided by benthic communities, it is an unknown for temperate reef systems. Establishing the likely timescales for restoration is key to future marine management. We demonstrate the early stages of successful recruitment and link these to the potential wider ecosystem benefits including those to commercial fisheries

Competing mechanisms in markets for lemons

We study the competitive equilibria in a market with adverse selection and search frictions. Uninformed buyers post general direct mechanisms and informed sellers choose where to direct their search. We demonstrate that there exists a unique equilibrium allocation and characterize its properties: all buyers post the same mechanism and a low quality object is traded whenever such object is present in a meeting. Sellers are thus pooled at the search stage and screened at the mechanism stage. If adverse selection is sufficiently severe, this equilibrium is constrained inefficient. Furthermore, the properties of the equilibrium differ starkly from the case where meetings are restricted to be bilateral, in which case in equilibrium sellers sort across different mechanisms at the search stage. Compared to such sorting equilibria, our equilibrium yields a higher surplus for most, but not all, parameter specifications

Optimal contracts with non-bayesian agents

Defence date: 25 September 2014Examining Board: Prof. Piero Gottardi, EUI, Supervisor Prof. Árpád Ábrahám, EUI Prof. Ludovic Renou, University of Essex Prof. Jean Marc Tallon, Paris School of EconomicsThis thesis investigates how the theoretical predictions of traditional economic models change when the assumption of Bayesian decision making is relaxed. Bayesian decision theory assumes that decision makers are able to perfectly describe their state space and assign a single prior to every possible event. The theory of unawareness relaxes the first assumption by allowing decision makers to be aware of some contingencies and unaware of others. The theory of ambiguity relaxes the second assumption and allows decision makers to prefer known risks over unknown risks. The first chapter of this thesis analyzes the effect of ambiguity on bilateral trade in the presence of private information. It demonstrates that in an environment with adverse selection as in Akerlof's (1970) market for lemons, screening the informed party hedges against ambiguity. It further shows that the presence of ambiguity can be both beneficial or harmful for trade. If the adverse selection problem is sufficiently severe, more ambiguity surprisingly leads to more trade and thereby increase surplus. Using these results, a financial market application demonstrates that ambiguity may help to explain why some assets are optimally traded over-the-counter rather than on traditional exchanges, and suggests that opacity may be essential to sustain such trade. The second chapter of this thesis introduces asymmetric awareness into a classical principal-agent model with moral hazard, and shows how unawareness can give rise to incomplete contracts. The paper investigates the optimal contract between a fully aware principal and an unaware agent, where the principal can enlarge the agent's awareness strategically. When proposing the contract, the principal faces a tradeoff between participation and incentives: leaving the agent unaware allows the principal to exploit the agent's incomplete understanding of the world, relaxing the participation constraint, while making the agent aware enables the principal to use the revealed contingencies as signals about the agent's action choice, relaxing the incentive constraint. The optimal contract reveals contingencies that have low probability but are highly informative about the agent's effort

Asymmetric awareness and moral hazard

Received 8 June 2012 Available online 10 September 2013This paper introduces asymmetric awareness into the classical principal–agent model and discusses the optimal contract between a fully aware principal and an unaware agent. The principal enlarges the agent's awareness strategically when proposing a contract and faces a tradeoff between participation and incentives. Leaving the agent unaware allows the principal to exploit the agent's incomplete understanding of the world, relaxing the participation constraint, while making the agent aware enables the principal to use the revealed contingencies as signals about the agent's action choice, relaxing the incentive constraint. The optimal contract reveals contingencies that have low probability but are highly informative about the agent's effort

Robust contracting under common value uncertainty

First published: 01 February 2018This is an open access article licensed under the Creative Commons Attribution-NonCommercial License 4.0 (http://econtheory.org)A buyer makes an offer to a privately informed seller for a good of uncertain quality. Quality determines both the seller's valuation and the buyer's valuation, and the buyer evaluates each contract according to its worst-case performance over a set of probability distributions. This paper demonstrates that the contract that maximizes the minimum payoff over all possible probability distributions of quality is a screening menu that separates all types, whereas the optimal contract for any given probability distribution is a posted price, which induces bunching. Using the epsilon-contamination model, according to which the buyer's utility is a weighted average of his single prior expected utility and the worst-case scenario, the analysis further shows that for intermediate degrees of confidence, the optimal mechanism combines features of both of these contracts

Robust bidding and revenue in descending price auctions

We study the properties of Dutch auctions in an independent private value setting, where bidders face uncertainty over the type distribution of their opponents and evaluate their payoffs by the worst case from a set of probabilistic scenarios. In contrast to static auction formats, participants in the Dutch auction gradually learn about the valuations of other bidders. We show that the transmitted information can lead to changes in the worst-case distribution and thereby shift a bidder's payoff maximizing exit price over time. We characterise the equilibrium bidding function in this environment and show that the arriving information leads bidders to exit earlier at higher prices. As a result, the Dutch auction systematically generates more revenue than the first-price auction

Optimal delegation and limited awareness, with an application to financial intermediation

We study the delegation problem between an investor and a financial intermediary, who not only has better information about the performance of the different investments but also has superior awareness of the available investment opportunities. The intermediary decides which of the feasible investments to reveal and which ones to hide. We show that the intermediary finds it optimal to make the investor aware of investment opportunities at the extremes, e.g. very risky and very safe projects, but leaves the investor unaware of intermediate options. We further study the role of competition between intermediaries and allow for investors with different levels of awareness to coexist in the same market. Self-reported data from customers in the Italian retail investment sector support the key predictions of the model: more knowledgeable investors receive richer menus that are nevertheless perceived to have less products at the extremes