Costly miscalibration

Yingni Guo () and Eran Shmaya ()
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Yingni Guo: Department of Economics, Northwestern University
Eran Shmaya: Department of Economics, Stony Brook University

Theoretical Economics, 2021, vol. 16, issue 2

Abstract: We consider a platform which provides probabilistic forecasts to a customer using some algorithm. We introduce a concept of miscalibration, which measures the discrepancy between the forecast and the truth. We characterize the platform's optimal equilibrium when it incurs some cost for miscalibration, and show how this equilibrium depends on the miscalibration cost: when the miscalibration cost is low, the platform uses more distant forecasts and the customer is less responsive to the platform's forecast; when the miscalibration cost is high, the platform can achieve its commitment payoff in an equilibrium, and the only extensive-form rationalizable strategy of the platform is its strategy in the commitment solution. Our results show that miscalibration cost is a proxy for the degree of the platform's commitment power, and thus provide a microfoundation for the commitment solution.

Keywords: Calibration; miscalibration; cheap talk; commitment; Bayesian persuasion; e-commerce platform (search for similar items in EconPapers)
JEL-codes: D81 D82 D83 (search for similar items in EconPapers)
Date: 2021-05-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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