Disclosure and choice

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

Research output: Contribution to journalArticlepeer-review

20 Scopus citations

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

Bibliographical note

Publisher Copyright:
© The Author 2017. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.

Keywords

  • Disclosure
  • Evidence

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