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Essays in Information Economics The London School of Economics and Political Science Essays in information economics Clement Minaudier A thesis submitted to the Department of Economics of the London School of Economics and Political Science for the degree of Doctor in Philosophy London, April 2019 Declaration I certify that the thesis I have presented for examination for the PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgment is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of approximately 39,000 words. 2 Acknowledgments I am deeply grateful to my supervisor Gilat Levy for her invaluable guidance and constant support, and to my advisors Ricardo Alonso and Stephane Wolton for precious advice and encouragement throughout my PhD. I would also like to thank the microeconomic theory group: Andrew Ellis, Erik Eyster, Mathew Levy, Francesco Nava, Ronny Razin, and Balazs Szentes for encouraging me to pursue the topics I studied in this thesis and for their advice. I am grateful to the Political Science and Political Economy group for welcoming me to present my research in their seminars and for providing valuable advice. This includes in particular Ali Cirone, Torun Dewan, Marco Giani, Rafael Hortalla-Valve, Valentino Larcinese, Janne Tukiainen, Thomas Leeper, and Tinghua Yu. I am equally indebted to my fellow research students in both the economics and gov- ernment departments not only for their academic advice but also for their friendship and support. In particular, I would like to thank Shan Aman-Rana, Thomas Brzustowski, Weihan Ding, Simon Franklin, Alkis Georgiadis-Harris, Selina Hofstetter, Federica Izzo, Krittanai Laohakunakorn, Claudia Robles-Garcia, Marcus Roel, Nelson Ruiz, Francesco Sannino, Greg Sheen, Xuezhu Shi, Manuel Staab, Kostas Tokis, Arduino Tomasi, Heidi Thysen, and Lisa Windsteiger. I also thank researchers outside the LSE with whom I have had the chance to discuss some of these projects, including Andy Guess, Yingni Guo, Niall Hughes, Anton Kolotilin, and Chris Tyson. Finally, I would like to thank Mark Wilbor and Deborah Adams, for their invaluable help throughout my time as a PhD student. My family and friends have been a source of constant support, and I am grateful to all of them beyond words. This thesis would not have been possible without the support and encouragement of my fianc´eeVanessa. Financial support from the Economic and Social Research Council (grant number ES/J500070/1) is gratefully acknowledged. 3 Abstract These essays examine how economic agents strategically choose to produce, manipulate, or disclose information, when that information can influence the behaviour of others. By theoretically modelling these choices, it seeks to contribute to debates about the optimal design of policies such as transparency rules, the regulation of lobbying, or the concen- tration of ownership among information providers such as media groups. The models developed in these essays also provide a framework to interpret and evaluate empirical assessments of how information influences behaviour. The first chapter looks at how interest groups choose to generate information to in- fluence policies. It innovates on the literature by explicitly modelling the choice of policy makers to obtain their own confidential internal information ahead of interactions with these groups. This approach reveals unintended consequences of transparency policies and the subtle role that institutions such as congressional research agencies can have on the quality of policy making. The second chapter studies how agents choose to produce new information, for instance by running experiments, in the presence of competing information providers. In particular, it examines whether these agents produce more information when they compete than when they collude. The existing literature has established that when these agents possess no existing information, competition always increases the amount of new information produced. I show that when agents do possess prior information, this conclusion does not necessarily hold. The third chapter analyses how policy choices are affected when voters have a limited capacity to correctly interpret information about policy performance. In a situation where policy performance provides information about the competence of policy makers, and where voters decide whether to re-elect incumbents based on that information, voters may benefit from these cognitive limitations as they can induce policy makers to choose better policies. 4 Contents 1 The value of confidential policy information: persuasion, transparency, and influence9 1.1 Introduction.................................... 10 1.2 Model....................................... 17 1.3 The role of confidential policy information................... 21 1.3.1 Transparency............................... 21 1.3.2 Confidentiality.............................. 23 1.4 The value of confidentiality and its effect on influence............ 31 1.4.1 Value of confidentiality to policy maker................ 31 1.4.2 Effect of confidential information on influence............. 35 1.5 Discussion..................................... 39 1.6 Conclusion.................................... 43 2 Competition in persuasion between privately informed senders 45 2.1 Introduction.................................... 46 2.2 Model....................................... 50 2.3 Conditions for collusion to reveal more information than competition.... 55 2.3.1 Alternative combinations of equilibria................. 58 2.4 Sufficient conditions for selected payoff functions............... 59 2.4.1 Conditions on payoffs for the existence of a collusion-preferred pair of equilibria................................ 61 2.4.2 Existence of more informative collusive equilibrium.......... 66 2.5 Comparative statics............................... 68 2.5.1 Role of private information....................... 68 2.5.2 Welfare effects.............................. 69 2.6 Conclusion.................................... 71 5 3 Overconfidence, political accountability and politician selection 73 3.1 Introduction.................................... 74 3.2 Model....................................... 79 3.3 Equilibrium strategies.............................. 82 3.3.1 Second period effort and voter's problem................ 82 3.3.2 First-period effort and re-election threshold.............. 84 3.4 Comparing the welfare of overconfident voters and of voters with correct beliefs....................................... 90 3.5 Discussion..................................... 97 Appendices 102 A Proofs of results and extensions in Chapter 1................. 102 A.1 Commitment to confidentiality or transparency............ 102 A.2 Availability of more complex preliminary investigations....... 105 A.3 Proofs of Propositions in the text.................... 107 B Proofs of results in Chapter 2.......................... 129 C Proofs of results in Chapter 3.......................... 146 D Formal definition of the rationalisable conjectural equilibrium........ 158 Bibliography 162 6 List of Figures 1.1 Lobbying resources (LHS) and Congressional Research Service budget (RHS), inflation-adjusted. Sources: CRS annual report and Center for Responsive Politics....................................... 14 1.2 Policy maker and lobbyist's expected utilities................. 21 1.3 In equilibrium, the lobbyist only chooses one of two strategies with binary signals....................................... 25 1.4 Set of interim beliefs and incentive and expertise constraints......... 26 1.5 Distribution of posterior beliefs when the policy maker's information is pub- lic (left) and when it is confidential and the lobbyist chooses πG (right)... 28 r r0 1.6 Reducing µ 0 to µ 0 forces the lobbyist to provide more evidence to induce µr0 = 1 . This increases µr1 and the policy maker's expected utility...... 29 s1 2 s1 1.7 Sceptical belief µr0 induced in equilibrium as a function of expertise B ... 30 1.8 Value of confidentiality with respect to expertise B and ideological align- ment µ0 ...................................... 33 1.9 Influence, welfare and expertise B ....................... 37 1.10 Influence, welfare and alignment µ0 ....................... 38 1.11 Lobbying expenditures (solid line) vs. probability of policy x = 1 (dashed line)........................................ 41 2.1 Join of two experiments πI and πN ....................... 52 2.2 Payoff functions.................................. 61 2.3 Competitive equilibrium............................. 65 2.4 Collusive equilibrium............................... 66 3.1 Equilibrium effort when voter is rational aR and perceived effort when voter is overconfident aV ................................ 94 7 8 Chapter 1 The value of confidential policy information: persuasion, transparency, and influence 9 1.1 Introduction Transparent policy making is often considered a defining feature of democracy.1 When the information available to policy makers is easily accessible, the public can scrutinise policy decisions and hold elected representatives accountable. While
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