Marco Ottaviani

Credulity, Lies, and Costly Talk

This paper studies a model of strategic communication by an informed and upwardly biased sender to one or more receivers. Applications include situations in which (i) it is costly for the sender to misrepresent information, due to legal, technological, or moral constraints, or (ii) receivers may be credulous and blindly believe the sender’s recommendation. In contrast to the predictions obtained in Crawford and Sobel’s [9] benchmark cheap talk model, our model admits a fully separating equilibrium, provided that the state space is unbounded above. The language used in equilibrium is in∞ated and naive receivers are deceived.

The Promise of Prediction Markets

The ability of groups of people to make predictions is a potent research tool that should be freed of unnecessary government restrictions.

Information aggregation in debate: who should speak first?

Abstract Privately informed individuals speak openly in front of other members of a committee about the desirability of a public decision. Each individual wishes to appear well informed. For any given order of speech, committee members may herd by suppressing their true information. With individuals of heterogeneous expertise, optimizing over the order of speech can improve the extraction of information, but not perfectly so. It is not always optimal to use the common anti-seniority rule whereby experts speak in order of increasing expertise. A committee with more able experts may be afflicted by greater herding problems, yielding a worse outcome.

Naive audience and communication bias

We introduce the possibility that the receiver naively believes the sender’s message in a game of information transmission with partially aligned objectives. We characterize an equilibrium in which the communication language is inflated, the action taken is biased, and the information transmitted is more precise than in the benchmark fully-strategic model. We provide comparative statics results with respect to the amount of asymmetric information, the proportion of naive receivers, and the size of the sender’s bias. As the state space grows unbounded, the equilibrium converges to the fully-revealing equilibrium that results in the limit case with unbounded state space.

The Favorite-Longshot Bias: An Overview of the Main Explanations

In betting markets, the expected return on longshot bets tends to be systematically lower than on favorite bets. This favorite-longshot bias is a widely documented empirical fact, often perceived to be an important deviation from the market efficiency hypothesis. This chapter presents an overview of the main theoretical explanations for this bias proposed in the literature.

Mergers with Product Market Risk

This paper studies the causes and the consequences of horizontal mergers among risk-averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk-sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty.

Contracts and Competition in the Pay-TV Market

This paper analyses how contractual arrangement for the sale and resale of premium programming effect competition in the pay-TV market. Competition is less effective when resale contracts specify per-subscriber fees rather than lump-sum payments. When premium programming is sold at terms similar to those observed in the UK, consumers can be made worse off than in the absence of premium programming. A number of potential remedies are considered. A ban on exclusive vertical contracts would intensify downstream competition and transfer the benefits of premium programming to consumers.

Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets

In a binary prediction market in which risk-neutral traders have heterogeneous prior beliefs and are allowed to invest a limited amount of money, the static rational expectations equilibrium price is demonstrated to underreact to information. This effect is consistent with a favorite-longshot bias, and is more pronounced when prior beliefs are more heterogeneous. Relaxing the assumptions of risk neutrality and bounded budget, underreaction to information also holds in a more general asset market with heterogeneous priors, provided traders have decreasing absolute risk aversion. In a dynamic asset market, the underreaction of the first period price is followed by momentum.

Information Sharing in Common Agency: When is Transparency Good?

When should principals dealing with a common agent share their individual performance measures about the agents unobservable effort for producing a public good? In a model with two principals who offer linear incentive schemes, we show that information sharing always increases total expected welfare if the principal who is less informed about the agents effort also cares more about the agents output. If the less-informed principal cares somewhat (but not too much) less than the other principal about the agents output, information sharing reduces total expected welfare. In our model the efficient information regime emerges as an equilibrium outcome. (JEL: D82, D86, M52) (c) 2009 by the European Economic Association.

Chapter 12 – Forecasters’ Objectives and Strategies

Abstract This chapter develops a unified modeling framework for analyzing the strategic behavior of forecasters. The theoretical model encompasses reputational objectives, competition for the best accuracy, and bias. Also drawing from the extensive literature on analysts, we review the empirical evidence on strategic forecasting and illustrate how our model can be structurally estimated.