Essays in bargaining and auction theory
Massachusetts Institute of Technology. Department of Economics.
Glenn Ellison and Juuso Toikka.
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This dissertation consists of three chapters. Chapter 1 studies an infinite-horizon bilateral bargaining model with alternating offers and private correlated values. I characterize frequent-offer limits of common screening equilibria in which both parties make offers to screen the opponent's type, and all types of either party follow the same path of offers. Even in the limit when the correlation of values is nearly perfect, common screening equilibria exhibit two-sided screening dynamics and involve inefficient delay in contrast to the unique equilibrium outcome of the complete-information bargaining game. Segmentation equilibria, in which types partially separate themselves into segments by the initial offer, are also constructed. Most of the types in the segments trade in the first rounds, while types near the boundaries of the segments delay trade to convince the opponent that they belong to a segment with more favorable terms of trade. Segmentation equilibria are efficient in the limit as the correlation of values becomes nearly perfect, and establish the connection between the limit outcome of nearly perfect correlation and the complete information outcome. The model sheds light on the relative importance of various sources of inefficiency for different levels of correlation, the role of public and private information in bargaining, and the robustness of the complete information bargaining model to higher-order uncertainty about values. In Chapter 2, I analyze two frictions that are central to determine prices, liquidity, and efficiency in over-the-counter markets: the search friction reflected in how long it takes to find a trading opportunity and the bargaining friction reflected in how promptly gains from trade are realized once the opportunity is identified. Chapter 2 captures both frictions by introducing an asset-specific trade delay into a standard search-and-bargaining model. For both exogenous and endogenous specifications of delay, the set of traded assets and the dependence of asset prices and spreads on default risk, liquidity, and market conditions are determined in equilibrium. The proposed model with endogenous delay has several implications. First, it offers a novel testable prediction: for assets within the same credit rating class, the liquidity is U-shaped in quality. Assets closer to the extremes of the quality range are more liquid, while assets in the middle of the quality range may be not traded at all. This is in contrast with a monotone relation in models with asymmetric information. Second, this model shows that the reduction in search and bargaining frictions may have opposite effects on market liquidity which is reflected in the range of traded assets. Finally, it establishes a connection between market uncertainty about the asset payoff and market liquidity. This link sheds light on the role of transparency in over-the-counter markets and explains the occurrence of dried-up liquidity and flights-to-quality during periods of increased market uncertainty. Chapter 3 studies efficient and optimal auction design where bidders do not know their values and solicit advice from informed but biased advisors via a cheap-talk game. When advisors are biased toward overbidding, we characterize efficient equilibria of static auctions and equilibria of the English auction under the NITS condition (Chen, Kartik and Sobel (2008)). In static auctions, advisors transmit a coarsening of their information and a version of the revenue equivalence holds. In contrast, in the English auction, information is transmitted perfectly from types in the bottom of the distribution, and pooling happens only at the top. Under NITS, any equilibrium of the English auction dominates any efficient equilibrium of any static auction in terms of both efficiency and the seller's revenue. The distinguishing feature of the English auction is that information can be transmitted over time and bidders cannot submit bids below the current price of the auction. This results in a higher efficiency due to better information transmission and allows the seller to extract additional profits from the overbidding bias of advisors. When advisors are biased toward underbdding; there is an equilibrium of Dutch auction that is more efficient than any efficient equilibrium of any static auction, however, it can bring lower expected revenue.
Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2015.Cataloged from PDF version of thesis.Includes bibliographical references.
DepartmentMassachusetts Institute of Technology. Department of Economics.
Massachusetts Institute of Technology