Disclosure and choice

Elchanan Ben-Porath, Eddie Dekel, Barton L. Lipman

Research output: Contribution to journalArticlepeer-review

Abstract

An agent chooses among projects with random outcomes. His payoffis increasing in the outcome and in an observer's expectation of the outcome. With some probability, the agent will be able to disclose some information about the true outcome to the observer. We show that choice is inefficient in general. We illustrate this point with a characterization of the inefficiencies that result when the agent can perfectly disclose the outcome with some probability and can disclose nothing otherwise as in Dye (1985a). In this case, the agent favours riskier projects even with lower expected returns. On the other hand, if information can also be disclosed by a challenger who prefers lower beliefs of the observer, the chosen project is excessively risky when the agent has better access to information, excessively risk-averse when the challenger has better access, and efficient otherwise. We also characterize the agent's worst-case equilibrium payoff. We give examples of alternative disclosure technologies illustrating other forms the inefficiencies can take. For example, in a two-dimensional setting, we demonstrate a "hitting for the fences" effect where the agent systematically focuses on the "harder" dimension at the expense of success on the easier.

Original languageEnglish
Pages (from-to)1471-1501
Number of pages31
JournalReview of Economic Studies
Volume85
Issue number3
DOIs
StatePublished - 1 Jul 2018

Funding

FundersFunder number
Botond Koszegi
National Science FoundationSES–0820333
United States-Israel Binational Science Foundation
National Science Foundation

    Keywords

    • Disclosure
    • Evidence

    Fingerprint

    Dive into the research topics of 'Disclosure and choice'. Together they form a unique fingerprint.

    Cite this