Three essays in information and its acquisition

Abstract

This thesis consists of three essays in economic theory, two on search models with information acquisition and one on repeated games when precise information about discount factors is unavailable.

In the first essay, I develop a model in which optimal costly information acquisition by individual firms causes adverse selection in the market as a whole. Each firm’s information acquisition policy determines which customers it serves, which in turn affects the distribution of remaining customers and hence other firms’ incentives. I show that when information acquisition is ‘smooth’, the adverse selection externality due to each firm is dampened, and in equilibrium all firms make positive profits. By contrast, with lumpy information acquisition, only a limited number of firms are profitable. I establish that my results apply to a broad class of continuous-time information acquisition processes.

The second essay explores information acquisition in labor markets. Noting that African-Americans face shorter employment durations than similar whites, we hypothesize that employers discriminate in acquiring ability-relevant information. We construct a model with a binary information generating process, ‘monitoring’, at the disposal of firms. Monitoring black but not white workers is self-sustaining. This ‘bad’ equilibrium is not merely a matter of coordination; rather, it is determined by history and not easily reversed. The model’s additional predictions, lower lifetime incomes and longer unemployment durations for blacks, are both strongly empirically supported.

In the third essay, we investigate the possibility of repeated games equilibria that are robust to the discount factors. We prove a negative result which shows that a sizable part of the set of feasible individually rational payoffs can never be produced by such equilibria. We find the cutoff defining this region and interpret it as a limit on the ability to punish deviations when future rewards for randomization cannot be finely calibrated. Furthermore, we present a robust folk theorem to support payoffs in the complementary region with strategies that remain Subgame Perfect Nash Equilibria at all greater discount factors.