Costly Expertise

In many environments, expertise is costly. Costs can manifest themselves in numerous ways, ranging from the time that is required for a financial consultant to study companies’ performances, to the resources necessary for academic referees to produce knowledgeable reports, to the attention and thought needed for jurors to construct informed convictions. The current paper asks a natural question germane to such contexts: how should a committee of potential experts be designed, in terms of the number of participants, their a priori preferences, as well as the rules by which their recommendations are aggregated into a collective policy? We consider a model in which a principal makes a binary decision (e.g., continue or abort a project), the value of which depends on the realization of some underlying state that is unknown (say, whether the project is great or inferior). The principal can hire a committee of experts from a pool varying in their preferences. All experts have access to an information technology providing (public) information regarding the underlying state. Information comes at a private cost to the experts, who care both about the final decision the principal takes, and about the amount they had personally spent on information acquisition

Committee Design in the Presence of Communication

The goal of this paper is to introduce communication in a collective choice environment with information acquisition. We concentrate on decision panels that are comprised of agents sharing a common goal and having a joint task. Members of the panel decide whether to acquire costly information or not, preceding the communication stage. We take a mechanism design approach and consider a designer who can choose the size of the decision panel, the procedure by which it selects the collective choice, and the communication protocol by which its members abide prior to casting their individual action choices. We characterize the solution of this extended design problem. We find that the optimal communication protocol in such an environment balances a tradeoff between inducing players to acquire information and extracting the maximal amount of information from them. In particular, the optimal device may lead to suboptimal aggregation of information from a statistical point of view. Furthermore, groups producing the optimal collective decisions are bounded in size. Comparative statics results shed light on the regularities the design solution exhibits. For example, the expected utility of all agents decreases with the cost of private information and increases with its accuracy, but the optimal panel size is not monotonic in the signals' accuracy.Communication, Collective Choice, Mechanism Design, Strategic Voting, Information Acquisition

I'll See It When I Believe It - A Simple Model of Cognitive Consistency

Psychological experiments demonstrate that people exhibit a taste for consistency. Individuals are inclined to interpret new evidence in ways that confirm their pre-existing beliefs. They also tend to change their beliefs to enhance the desirability of their past actions. I present a model that incorporates these effects into an agent's utility function and allows me to characterize when: (i) agents become under- and over-confident, (ii) agents exhibit excess stickiness in action choices, (iii) agents prefer less accurate signals, and (iv) agents are willing to pay in order to forgo signals altogether. Applications to political campaigns and investment decisions are explored.Belief utility, cognitive dissonance, confirmatory bias, overconfidence, selective exposure

Information Acquisition in Committees

The goal of this paper is to illustrate the significance of information acquisition in mechanism design. We provide a stark example of a mechanism design problem in a collective choice environment with information acquisition. We concentrate on committees that are comprised of agents sharing a common goal and having a joint task. Members of the committee decide whether to acquire costly information or not at the outset and are then asked to report their private information. The designer can choose the size of the committee, as well as the procedure by which it selects the collective choice, i.e., the correspondence between agents’ reports and distributions over collective choices. We show that the ex-ante optimal device may be ex-post inefficient, i.e., lead to suboptimal aggregation of information from a statistical point of view. For particular classes of parameters, we describe the full structure of the optimal mechanisms.Collective choice, Mechanism design, Information acquisition

Diffusion of Behavior and Equilibrium Properties in Network Games

Situations in which agents’ choices depend on choices of those in close proximity, be it social or geographic, are ubiquitous. Selecting a new computer platform, signing a political petition, or even catching the flu are examples in which social interactions have a significant role. While some behaviors or states propagate and explode within the population (e.g., Windows OS, the HIV virus) others do not (e.g., certain computer viruses). Our goal in this paper is twofold. First, we provide a general dynamic model in which agents’ choices depend on the underlying social network of connections. Second, we show the usefulness of the model in determining when a given behavior expands within a population or disappears as a function of the environment’s fundamentals. We study a framework in which agents face a choice between two actions, 0 and 1 (e.g., whether to pursue a certain level of education, switch to Linux OS, etc.). Agents are linked through a social network, and an agent’s payoffs from each action depend on the number of neighbors she has and her neighbors’ choices. The diffusion process is defined so that at each period, each agent best responds to the actions taken by her neighbors in the previous period, assuming that her neighbors follow the population distribution of actions (a mean-field approximation). Steady states correspond to equilibria of the static game. Under some simple conditions, equilibria take one of two forms. Some are stable, so that a slight perturbation to any such equilibrium would lead the diffusion process to converge back to that equilibrium point. Other equilibria are unstable, so that a slight change in the distribution of actions leads to a new distribution of actions and eventually to a stable steady state. We call such equilibria tipping points. We analyze how the environment’s fundamentals (cost distribution, payoffs, and network structure) affect the set of equilibria, and characterize the adoption patterns within the network. The paper relates to recent work on network games and network diffusion, including work by Stephen Morris (2000); Pastor-Satorras and Vespignani (2000); Mark E. J. Newman (2002); Dunia López-Pintado (2004); Jackson and Brian W. Rogers (2007); Jackson and Yariv (2005); and Andrea Galeotti et al. (2005, henceforth GGJVY). Its contribution is in characterizing diffusion of strategic behavior and analyzing the stability properties of equilibria, and employing methods that allow us to make comparisons across general network structures and settings. Given that social networks differ substantially and systematically in structure across settings (e.g., ethnic groups, professions, etc.), understanding the implications of social structure on diffusion is an important undertaking for a diverse set of applications

Experiments on Decisions under Uncertainty: A Theoretical Framework

The analysis of lab data entails a joint test of the underlying theory and of subjects' conjectures regarding the experimental design itself, how subjects frame the experiment. We provide a theoretical framework for analyzing such conjectures. We use experiments of decision making under uncertainty as a case study. Absent restrictions on subjects' framing of the experiment, we show that any behavior is consistent with standard updating ("anything goes"), including those suggestive of anomalies such as overconfidence, excess belief stickiness, etc. When the experimental protocol restricts subjects' conjectures (plausibly, by generating information during the experiment), standard updating has nontrivial testable implications

Committee Design in the Presence of Communication

The goal of this paper is to introduce communication in a collective choice environment with information acquisition. We concentrate on decision panels that are comprised of agents sharing a common goal and having a joint task. Members of the panel decide whether to acquire costly information or not, preceding the communication stage. We take a mechanism design approach and consider a designer who can choose the size of the decision panel, the procedure by which it selects the collective choice, and the communication protocol by which its members abide prior to casting their individual action choices. We characterize the solution of this extended design problem. We find that the optimal communication protocol in such an environment balances a tradeoff between inducing players to acquire information and extracting the maximal amount of information from them. In particular, the optimal device may lead to suboptimal aggregation of information from a statistical point of view. Furthermore, groups producing the optimal collective decisions are bounded in size. Comparative statics results shed light on the regularities the design solution exhibits. For example, the expected utility of all agents decreases with the cost of private information and increases with its accuracy, but the optimal panel size is not monotonic in the signals’ accuracy

Homophily in Peer Groups

The focus of this paper is the endogenous formation of peer groups. In our model agents choose peers before making contributions to public projects, and they differ in how much they value one project relative to another. Thus, the group's preference composition affects the type of contributions made. We characterize stable groups and find that they must be sufficiently homogeneous. We also provide conditions for some heterogeneity to persist as the group size grows large. In an application in which the projects entail information collection and sharing within the group, stability requires more similarity among extremists than among moderate individuals