State aid and tacit collusion

Both literature and policy debate on State aid or government subsidies have focused on the trade-off between the potential ine¢ ciencies caused by state intervention (inefficient allocation of resources, moral hazard) and the potential gains from intervention (whether related to the resolution of market failures or to the achievement of some dimension of social equity). The debate however has ignored another important negative e¤ect of State aid: governments, by setting up aid schemes to ailing firms, may increase the likelihood of (tacit) collusion in an industry characterised by idiosyncratic shocks. Indeed, in a repeated-game setting, a systematic bailout regime increases the expected profits of a firm from cooperation and simultaneously raises the probability that competitors will still be in business to carry out punishment against cheaters. Despite the generality of the model and of its key insight, we study this problem through an application to the banking sector, as it has recently been subject of much attention within the context of the ongoing economic crisis.Subsidies, dynamic oligopoly, government policy, banking

The (Human) Sampler's Curses

We present a cheap talk model in which a receiver (R) sequentially consults multiple experts who are either unbiased or wish to maximize R's action, bias being unobservable. Consultation is costly and R cannot commit to future consultation behavior. We find that individual expert informativeness negatively relates to consultation extensiveness and expert trustworthiness due to biased experts' incentive to discourage further consultation by mimicking unbiased experts. We identify three (sampler's) curses: R may lose from an increase in the number or in the trustworthiness of experts as well as from a decrease in consultation costs

Modes of ambiguous communication

We study cheap talk communication in a simple two actions-two states model featuring ambiguous priors. First, we find that in equilibrium, S often mixes between messages triggering different beliefs and behavior by R while R also occasionally randomizes. We interpret randomization by respectively S and R as embodying two different modes of ambiguous communication. Second, we find that for sufficiently high ambiguity, more than two messages are often necessary to implement the optimal decision rule of S. If only two messages are available and S faces his preference twin, S may be unable to implement his optimal decision rule and influential communication may be altogether impossible. We stress the non replicability of these results within an expected utility environment. Third, we show that the addition of a little ambiguity may generate influential communication that is unambiguously advantageous to S

Communication and voting in heterogeneous committees: An experimental study

We study experimentally the drivers of behavior in committees featuring publicly known diverse preference who engage in voting preceded by one shot cheap talk communication. On the aggregate, we find low lying levels and different preference types using decision rules biased towards the majority heuristic which consists in following the majority of announced signals. Our results are inconsistent with the predictions derived from the standard model as well as models of social preferences and homogeneous naive behavior. Results are instead consistent with the predictions of a model of cognitive heterogeneity, in which a large majority of unsophisticated subjects truth-tells and uses the majority decision heuristic, while a minority of sophisticated agents lies strategically and applies its payoff-maximizing decision rule, albeit with noise

Consistency and communication in committees

We generalize the classical binary Condorcet jury model by introducing a richer state and signal space, thereby generating a concern for consistency in the evaluation of aggregate information. We analyze truth-telling incentives in simultaneous pre-vote communication in heterogeneous committees and find that full pooling of information followed by sincere voting is compatible with a positive probability of ex post conflict in the committee

Reacting to ambiguous messages: An experimental analysis

Ambiguous language is ubiquitous and often deliberate. Recent theoretical work (See Bose and Renou (2014), Kellner and Le Quement (2018), Beauchene et al. (2019)) has shown how language ambiguation can improve outcomes by mitigating conflict of interest. Our experiment finds a significant effect of language ambiguation on subjects who are proficient at Bayesian updating. For ambiguity averse subjects within this population, a significant part of this effect operates via the channel of subjects' desire to reduce ambiguity. For both ambiguity averse and neutral subjects within this population, an additional behavioral channel is also present

Subgroup deliberation and voting

We consider three mechanisms for the aggregation of information in heterogeneous committees voting by Unanimity rule: Private Voting and voting preceded by either Plenary or Subgroup Deliberation. While the first deliberation protocol imposes public communication, the second restricts communication to homogeneous subgroups. We find that both protocols allow to Pareto improve on outcomes achieved under private voting. Furthermore, we find that when focusing on simple equilibria under Plenary Deliberation, Subgroup Deliberation Pareto improves on outcomes achieved under Plenary Deliberation

Systematic Bailout Guarantees and Tacit Coordination

Both the academic literature and the policy debate on systematic bailout guarantees and Government subsidies have ignored an important effect: in industries where firms may go out of business due to idiosyncratic shocks, Governments may increase the likelihood of (tacit) coordination if they set up schemes that rescue failing firms. In a repeated-game setting, we show that a systematic bailout regime increases the expected profits from coordination and simultaneously raises the probability that competitors will remain in business and will thus be able to “punish” firms that deviate from coordinated behaviour. These effects make tacit coordination easier to sustain and have a detrimental impact on welfare. While the key insight holds across any industry, we study this question with an application to the banking sector, in light of the recent financial crisis and the extensive use of bailout schemes

Expert information and majority decisions

This paper shows theoretically and experimentally that hearing expert opinions can be a double-edged sword for decision making committees. We study a majoritarian voting game of common interest where committee members receive not only private information, but also expert information that is more accurate than private information and observed by all members. In theory, there are Bayesian Nash equilibria where the committee members ’ voting strategy incorporates both types of information and access to expert information enhances the efficiency of the majority decision. However, there is a class of potentially inefficient equilibria where a supermajority always follow expert information and the majority decision does not aggregate private information. In the laboratory, too many subjects voted according to expert information compared to the predictions from the efficient equilibria. We found a large efficiency loss due to the presence of expert information when the committee size was large. We suggest that it may be desirable for expert information to be revealed only to a subset of committee members