On the Welfare Effects of Adverse Selection in Oligopolistic Markets

Abstract : We consider a principal-agent relationship with adverse selection. Principals pay informational rents due to asymmetric information and sell their output in a homogeneous Cournot-oligopoly. We find that asymmetric information may mitigate or more than compensate for the welfare reducing impact of market power. We further show that welfare in a setting with adverse selection may be higher than the maximized welfare level attainable in a world with perfect observability.

---

Communication in the Shadow of Catastrophe

Abstract : We study the role of risk in strategic information transmission. Revisiting the choice between delegation and communication, we find that a uniform scaling of variance has no effect on the optimal choice of authority, and thus is no adequate measure of risk. We then consider the effect of the shape of the distribution, in particular, the weight in the tails. We find that a high risk of extreme events diminishes the quality of information sharing. As a result, delegation of authority becomes relatively more attractive compared to communication in environments with more weight in the tails.

---

Loss Aversion, Moral Hazard, and Stochastic Contracts

Abstract : I examine whether stochastic contracts benefit the principal in the setting of moral hazard and loss aversion. Incorporating that the agent is expectation-based loss averse and allowing the principal to add noise to performance signals, I find that stochastic contracts reduce the principal's implementation cost in comparison to deterministic contracts. The optimal stochastic contract pays a high wage whenever good signals are realized and with a positive probability when bad signals are realized. Surprisingly, if performance signals are highly informative about the agent's action, stochastic contracts strictly dominate the optimal deterministic contract for almost any degree of loss aversion. The findings have an important implication for designing contracts for loss-averse agents: the principal should insure the agent against wage uncertainty by employing stochastic contracts that increase the probability of a high wage.

---

Persuasion with Verifiable Information

Abstract : This paper studies how an informed sender with state-independent preferences persuades receivers to approve his proposal with verifiable information. I find that every equilibrium outcome is characterized by each receiver's set of approved states that satisfies this receiver's obedience and the sender's incentive-compatibility constraints. That allows me to describe the complete equilibrium set. In the sender-worst equilibrium, information unravels, and receivers act as if fully informed. The sender-preferred equilibrium outcome is the commitment outcome of the Bayesian persuasion game. In the leading application, I study targeted advertising in elections and show that by communicating with voters privately, a challenger may win elections that are unwinnable with public disclosure. The more polarized the electorate, the more likely it is that the challenger swings an unwinnable election with targeted advertising.

---