Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process

We examine a model of long-term contracting in which the buyer is privately informed about the stochastic process by which her value for a good evolves. In addition, her realized values are also her private information. We characterize the profit-maximizing long-term contract offered by a monopolist in this setting. This optimal contract consists of a menu of deterministic sequences of static contracts. Within each sequence, higher real- ized values lead to greater quantity provision; however, an increasing proportion of buyer types are excluded over time (eventually leading to inefficient early termination of the re- lationship). Moreover, the menu choices differ by future generosity, with more costly (up- front) plans guaranteeing greater quantity provision in the future. Thus, the seller screens buyers in the initial period, and then progressively screens additional buyers so as to re- duce the information rents paid in future periods.Asymmetric information, Dynamic mechanism design, Long-term contracts, Term life insurance, Sequential screening.

Learning more by doing less

Self-interested agents (e.g., interest groups, researchers) produce verifiable evidence in an attempt to convince a principal (e.g., legislator, funding organization) to act on their behalf (e.g., introduce legislation, fund research). Agents provide less informative evidence than the principal prefers since doing so maximizes the probability the principal acts in their favor. If the principal faces budget or other constraints that limit the number of agents whose proposals she can support, then agents produce more-accurate evidence as they compete for priority. Under reasonable conditions, the principal is better off when her capacity to act is limited.strategic search, evidence production, persuasion, lobbying

Dynamic Regulation Design Without Payments: Timing is Everything

We consider a two period model of optimal regulation of a firm subject to marginal compliance cost shocks. The regulator faces an asymmetric information problem: the firm knows current compliance costs, but the regulator does not. Both the regulator and the firm are uncertain about future costs. In our basic framework, the regulator may not offer payments to the firm; we show that the regulator can vary the strength of regulation over time to induce the firm to reveal its costs and increase welfare. In the optimal mechanism, the regulator offers stronger (weaker) regulation in the first period and weaker (stronger) regulation in the second period if the firm reports low (high) compliance costs in the first period. Low cost firms expect compliance costs to rise in the future, and thus prefer weaker regulation in the second period. High cost firms expect costs to fall in the future and thus prefer regulation which becomes more strict over time. Thus the regulator offers the low (high) cost firms slightly weaker (stronger) regulation in the second period in exchange for much stronger (weaker) regulation in the first period. We refer to our dynamic mechanism as “timing” the regulation. If the regulator can make payments, then the optimal mechanism to some degree times the regulation as long as a positive cost of funds exists. If the cost of funds is high enough, then under the optimal mechanism the regulator will not use payments and only use our timing mechanismregulation design, environmental regulation design, hybrid policies, dynamic contracts.

Advocacy and Dynamic Delegation

An advocate for a special interest provides information to an uninformed planner for her to consider in making a sequence of important decisions. Although the advocate may have valuable information for the planner, it is is also known that the advocate is biased and will distort his advice if necessary to influence the planner's decision. Each time she repeats the problem, however, the planner learns about the accuracy of the advocate's recommendation, mitigating some of the advocate's incentive to act in a self-serving manner. We propose a theory of dynamic delegation to explain why planners do sometimes rely on information provided by advocates in making decisions. The interaction takes place in two phases, a communication phase, followed by a sequence of decisions and learning by the planner. We ∑first establish that the capability to delegate dynamically is a necessary condition for influential communication in this setting, and characterize the optimal dynamic delegation policy. Next, we show that a planner may prefer to consult an an advocate rather than a neutral adviser. Finally, we demonstrate how an advocate gains influence with a decision maker by making his preferences for actions unpredictable. Our results have implications for a variety of real world interactions including regulation, organization, and whistleblowing.Delegation, Advocates, Cheap Talk

A Theory of Advocates: Trading Advice for Inuence

An advocate for a special interest provides information to an uninformed planner for her to consider in making a sequence of important decisions. Although the advocate may have valuable information for the planner, it is is also known that the advocate is biased and will distort her advice if necessary to ináuence the plannerís decision. Each time she repeats the problem, however, the planner learns about the accuracy of the advocateís recommendation, mitigating some of the advocateís incentive to act in a self-serving manner. We propose a theory of advocacy to explain why planners do sometimes rely on information provided by advocates in making decisions. The interaction takes place in two stages, a cheap talk recommendation from the advocate, followed by decisions and learning by the planner. The theory predicts conditions under which an advocateís advice will be ignored and when it will ináuence a plannerís decision, when planners will prefer the advice of an advocate to the advice of a neutral adviser and, Önally, how an advocate gains ináuence with a decision maker by making his preferences for action unpredictable. Applications of our theory are used to explain why regulated enterprises are sometimes delegated authority to determine how they are monitored and why some consumers of Önancial services give Önancial advisors who beneÖt from their business such great latitude in managing their investments and Önances.Advocates, Advocacy, Learning, Cheap Talk, Dynamic Contract

Waiting for Fake News

This paper studies a dynamic model of information acquisition, in which information might be secretly manipulated. A principal must choose between a safe action with known payoff and a risky action with uncertain payoff, favoring the safe action under the prior belief. She may delay her decision to acquire additional news that reveals the risky action's payoff, without knowing exactly when such news will arrive. An uninformed \aaa{} with a misaligned preference may have the capability to generate a false arrival of news, which is indistinguishable from a real one, distorting the information content of news and the principal's search. The analysis characterizes the positive and normative distortions in the search for news arising from such manipulation, and it considers three remedies that increase the principal's payoff: a commitment to naive search, transfer of authority to the agent, and delegation to an intermediary who is biased in the agent's favor

Does the Individual Mandate Coerce?

The Patient Protection and Affordable Care Act includes an individual mandate that penalizes individuals who do not purchase health insurance. Critics of the individual mandate, including a majority of justices on the Supreme Court, contend that Congress cannot use its Commerce Clause power to coerce individuals to buy a product. Supporters concede that the mandate coerces but argue that it is otherwise permissible under the Commerce Clause. This article questions whether the individual mandate coerces. It uses a simple economic model to show that, under certain conditions, the individual mandate induces insurers to sell health insurance at a price each individual would voluntarily pay. Accordingly, the article concludes that the premise underlying the debate over the constitutionality of the individual mandate under the Commerce Clause should not be taken for granted

Learning More by Doing Less

A principal must decide whether to implement each of two independent proposals (e.g., earmark requests, policy reforms, grant funding) of unknown quality. Each proposal is represented by an agent who advocates by producing evidence about quality. Although the principal prefers the most-informative evidence, agents strategically choose less-informative evidence to maximize the probability the principal implements their proposals. In this setting, we show how limited capacity (i.e., the ability of the principal to implement at most one of the two proposals) can motivate agents to produce more-informative evidence in an effort to convince the principal that their proposal is better than the alternative. We derive reasonable conditions under which the principal prefers limited capacity to unlimited capacity.Strategic search, Evidence production, Persuasion, Lobbying.

Grade Inflation and Education Quality

We consider a game in which schools compete to place graduates in two distinct ways: by investing in the quality of education, and by strategically designing grading policies. In equilibrium, schools issue grades that do not perfectly reveal graduate abilities. This leads evaluators to have less-accurate information when hiring or admitting graduates. However, compared to fully-revealing grading, strategic grading motivates greater investment in educating students, increasing average graduate ability. Allowing grade inflation and related grading strategies can increase the probability evaluators select high-ability graduates