Disclosure and Choice

Elchanan Ben-Porath (), Eddie Dekel and Barton Lipman ()
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Elchanan Ben-Porath: Department of Economics and Center for Rationality, Hebrew University

No WP2017-002, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: An agent chooses among projects with random outcomes. His payo is 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 inecient in general. We illustrate this point with a characterization of the ineciencies 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 favors 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 payo . We give examples of alternative disclosure technologies illustrating other forms the inefficiencies can take.

Pages: 46 pages
Date: 2014-12, Revised 2017-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Disclosure and Choice (2018)
Working Paper: Disclosure and Choice (2016)
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