Essays in applied theory
Author(s)Chen, Lizi,Ph. D.Massachusetts Institute of Technology.
Massachusetts Institute of Technology. Department of Economics.
Robert Gibbons and Alessandro Bonatti.
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In "Incomplete Contracting with Endogenous Competition," I consider a variant of the incomplete contracting with renegotiation model introduced by Hart and Moore (1988). I study a trading relation between a buyer and seller, where some ex-ante relationship specific investment on the part of the seller is needed to generate value for the buyer. Uncertainty is revealed ex post, in that prior to the investment stage, the buyer does not know which type of service she may need, and it is impossible to describe under what precise circumstances she needs a particular service. The contract can take only two broad forms: (1) a specification of the nature of a service to be provided under all circumstances, or (2) a general option contract, namely, a menu of services that the seller agrees to provide at predetermined terms.In addition to uncertainty regarding state realizations which was the focus of the literature thus far, I consider a different source of contracting friction, namely, uncertainty about downstream profitability. I show that depending on the specific assumptions, the competitor may invest in, produce and sell an imperfect substitute or free-ride on the incumbent supplier's investment and replicate a perfect substitute with positive probability. However, in a subgame-perfect equilibrium, the incumbent supplier will correctly anticipate potential entrants and change its ex-ante investment to account for downstream competition. It may also distort the level of its ex-ante investment to deter future entry. In this paper, information affects the outcome of economic transactions, but the presence and absence of information is exogenously given by assumptions about the form of competitions.In my paper "Selling Information: Multidimensional Oligopolistic Competition," I model the information structure as a variable endogenously chosen to optimally manage competition. Specifically, I consider a model of an economic transaction between an upstream monopolist and several downstream oligopolists. The downstream parties may be E-commerce retailers who compete over a heterogeneous customer base. Each party may have some prior assessment over the distribution of customer types, but would benefit from incremental knowledge on customer information. The upstream party, in this scenario, is an information vendor, who has access to technology required to develop a targeting device. Since information is valuable, to extract surplus the upstream party would like to improve the quality of information. Such motive is counterbalanced by the incentive to manage competition.The upstream monopolist supplies a menu of multi-dimensional intermediate goods from which the downstream oligopolists select. The oligopolists then use the previously purchased intermediate goods to produce the final products and compete with each other. The model enriches Bonatti (2015)'s multi-dimensional information product model by considering what the information product is used for (competing for heterogeneous customers by per information product. The key feature of the model is that the information good is intermediate, whose value is affected by the extent of ex post competition among the The model captures the indirect externalities conferred in the market for information. Specifically, the value of customer information to a given firm is no longer determined solely by the characteristics of that firm and the those customers. Instead, the value now also depends on the market competition structure among all downstream firms.For example, a model of competition of customer information has features similar to an arms race: having better information over the opponent allows one to better engage in better price discrimination, but it also increases the value of information to the opponent and induces more aggressive demand for information on the part of the opponents. In addition to economic transactions, in my third paper I study the role of information in managing and orienting actions beyond the market. In "Information Theory Foundation of Propaganda," I develop a model of strategic information signaling with an informed sender and a continuum of imperfectly informed receivers. The sender sends a costly signal to disrupt receivers' coordination action and to bias their aggregate action away from the true state towards the sender's desired state. The receivers want to match their actions to the true state and also seek to coordinate with each other.The leading application of the model is an authoritarian regime sending propaganda to its citizens to prevent them from learning the true strength of the regime and taking collective actions. In equilibrium the sender's manipulation does not succeed in changing the mean of the receivers' beliefs, but manipulation makes their interpretation of the signal noisier. This model helps resolve an empirical puzzle: since we observe propaganda, regimes apparently think it works, in some way, but can propaganda work, even if the citizens who see it know it is biased information? In the model, propaganda works not through changing beliefs per se, but through adding noise and confusion into the communication structure, so that citizens, who value coordination, are more likely to redirect their attention across various sources of information.
Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2019Cataloged from PDF version of thesis.Includes bibliographical references.
DepartmentMassachusetts Institute of Technology. Department of Economics
Massachusetts Institute of Technology