Flexible Information Acquisition in Strategic Situations

Abstract

My dissertation focuses on flexible information acquisition in strategic environments. "Flexible" means that people choose not only the quantity but also the qualitative nature of their information. This is modeled by rational inattention where information acquisition incurs a cost proportional to reduction of entropy. Hence, people only collect information most relevant to their payoffs but be rationally inattentive to other aspects. In strategic environments, people's incentives to acquire information are shaped by their payoff structures, which depend on others' strategies. My dissertation addresses the key questions like what information is acquired and how it affects equilibrium outcomes.

Chapter 1 studies the optimality of securitized debt under flexible information acquisition. A seller designs an asset backed security and a buyer decides whether to buy it to provide liquidity. Rather than treating the seller as an insider endowed with information, we assume no information asymmetry before bargaining. The buyer has an expertise in flexibly acquiring information of the fundamental. She collects the most relevant information determined by the "shape" of the security, which may endogenously generate adverse selection. Hence, the seller deliberately designs the security in order to induce the buyer to acquire information least harmful to the seller's interest. Issuing securitized debt is uniquely optimal in raising liquidity regardless of the stochastic interdependence of underlying assets. Fixed aggregate risk and homogeneous information cost are the key factors driving the results.

Chapter 2 studies flexible information acquisition in a coordination game with binary actions. When information is cheap, this flexibility enables players to acquire information that makes efficient coordination possible, while also leads to multiple equilibria. This result contrasts with the global game literature, where information structure is less flexible and cheap information leads to unique equilibrium with inefficient coordination. Moreover, differing from decision problems with information acquisition, players could be strictly better off if they can throw away information. We also go beyond the entropic information cost to highlight the key aspects of flexibility and how they drive our results.

Chapter 3 examines flexible information acquisition in linear best-response games. Introducing capacity constraints on information acquisition dampens both people's responses and their incentives to acquire information. We show an equivalence between the games with capacity constraints and the games without such constraints but having lower strategic externalities.