Essays in Information Economics

Abstract

This thesis consists of three chapters and studies how information, or the lack thereof, affects the decision making of economic agents. By studying the theoretical implications of different information structures, it seeks to contribute to the understanding of how economic agents interact and what optimal decision making implies in situations of uncertainty.

Chapter 1 studies the strategic interaction between two agents/countries deciding whether to take climate action. A climate action is successful in restoring the environment if a critical mass of agents participate, providing a public good. The critical mass needed for a success is interpreted as the current state of the environment and modelled as a continuous variable. Depending on the state, agents may face either free ridding or coordination incentives. If one agent's action is sufficient to restore the environment, actions exhibit strategic substitutes and free riding incentives prevail. If the state is above a critical value, actions exhibit strategic complements; both agents need to coordinate for a success allowing for the possibility of a coordination failure. In a complete information environment, there always exists an equilibrium that exhibits a coordination failure. On the contrary, if agents face some uncertainty about the needed participation, under conditions on their utilities, a coordination failure will be avoided whenever the participation of both agents is needed. We show that risk-dominant actions can be strictly dominant at signals around the parameter value where actions change discontinuously from strategic substitutes to complements, even if they are nowhere strictly dominant in the underlying complete information game, and iteratively strictly dominant in the whole range of signals at which they are risk-dominant. We provide conditions on agents' utilities that warrant this outcome.

Chapter 2 generalizes the insight of chapter 1 in general two-player, two-action environments where agents' payoffs may change discontinuously. In particular, we extend global games `a la Carlsson and van Damme (1993) to environments where the risk-dominant equilibrium is selected even if there is no dominance solvable game in the underlying class of complete information games. Strict dominance can emerge in the incomplete information game from strategic uncertainty due to discrete payoff changes in underlying games, and we provide sufficient conditions on payoff changes that warrant iterated dominance of the risk-dominant equilibrium. Thus, strategic uncertainty creates strictly dominant actions as well as fostering iterated dominance, in contrast to global games hitherto where strategic uncertainty does only the latter. Discrete payoff changes tend to arise, in particular, in situations where a public good can be provided with varying degrees of coordination depending on the state, so that coordinating actions can be strategic substitutes and free-riding incentives present. We illustrate our findings in a stylized regime change model.

Chapter 3 studies whether information provided from a better than the agents informed central bank allows the latter to control inflation. We study this question in a monetary economy with asymmetric information and rational expectations. The central bank follows an expected inflation targeting rule and has private, noisy information about the future state of the economy, which communicates to market participants through its forecast about expected inflation (Delphic Guidance). Agents update their beliefs in a Bayesian way and infer the noisy signal for which the central bank has been informed about. Through this mechanism the central bank can shape agents’ beliefs about the future state of the economy which affect current realised inflation, and control the stochastic path of inflation. Crucially, conventional inflation targeting policies, without explicit guidance, do not suffice to control the stochastic path of inflation. We characterise situations where a more comprehensive communication policy is called for, where the central bank needs to communicate its forecast about expected inflation as well as its forecasts about expected output.

Date of Award	20 Jun 2023
Original language	English
Awarding Institution	University of Bristol
Supervisor	Tai-Wei Hu (Supervisor) & In-Uck Park (Supervisor)