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Social and Information Sciences Laboratory (SISL) Seminar

Friday, October 11, 2019
12:00pm to 1:00pm
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Baxter 125
Dynamic Information Design with Diminishing Sensitivity Over News
Kevin He, Linde Institute Postdoctoral Fellow in Economics, Caltech,

Abstract: A benevolent sender communicates non-instrumental information over time to a Bayesian receiver who experiences gain-loss utility over changes in beliefs (“news utility”). We show how to inductively compute the optimal dynamic information structure for arbitrary news-utility functions. With diminishing sensitivity over the magnitude of news, unlike in two-part linear news-utility models, one-shot resolution of uncertainty is strictly suboptimal under commonly used functional forms. We identify additional conditions that imply the sender optimally releases good news in small pieces but bad news in one clump. By contrast, information structures that deliver bad news gradually are never optimal. When the sender lacks commitment power, good-news messages confront a credibility problem given the receiver’s diminishing sensitivity. Without loss aversion, the babbling equilibrium is essentially unique. More loss-averse receivers may enjoy higher equilibrium news-utility, contrary to the commitment case.

Written with Jetlir Duraj.

For more information, please contact Mary Martin by phone at 626-395-4571 or by email at mmartin@caltech.edu.