ESSAYS IN BEHAVIORAL INFORMATION ECONOMICS: OVERCONFIDENCE, SOPHISTICATION, NAÏVETÉ

Abstract

This Dissertation comprises three chapters reconsidering questions of information economics in light of behavioral biases exhibited by workers and consumers.

In the first chapter, I analyze how firms design feedback and bonuses when workers are uncertain or even misguided about their own ability. I analyze a dynamic principal-agent setting in which both sides learn about the importance of effort. More precise performance evaluation reduces current agency costs but promotes learning, which is shown to increase future agency costs. The optimal evaluation technology is both imprecise and tough: a bad performance is always sanctioned, but a good one is not always recognized. We also study the case in which the agent has incorrect beliefs about his abilities. If the agent is overconfident, the principal uses a tough evaluation structure to preserve the agent’s profitable misperception.

In the second chapter, joint with Denis Shishkin, we analyze screening with frame-dependent valuations. A monopolist principal designs an extensive-form decision problem with frames at each stage. This allows the firm to induce dynamic inconsistency and thereby reduce information rents. The optimal extensive form has a simple three-stage structure and uses only the two highest frames (high-low-high). Some types buy in the first stage, others buy at the last stage. Sophisticated consumers correctly anticipate that if they deviated, they would choose a decoy, which they want to avoid in a lower frame. This eliminates incentive compatibility constraints into types who don't buy in the first stage. With naive consumers, the principal can perfectly screen by cognitive type and extract full surplus from naifs.

In the third chapter, I consider a market where some consumers neglect follow-up fees. Why would firms increase price transparency towards such naïve consumers? We show that exploiting consumer naïveté decreases profits if naïfs are more price sensitive than sophisticates. Firms desire to be transparent towards the marginal consumer, thereby increasing the equilibrium price, while leaving their own captured consumers in the dark. Increased transparency is most valuable to consumers when firms have the least incentives to engage in it, can increase aggregate welfare, but typically redistributes surplus from consumers to firms.