This dissertation addresses the effect of information on firm and individual behavior. The first chapter examines the design of an optimal feedback mechanism by an informed principal and uses the results to explain why firms tend to assign coarse subjective ratings to their employees. When a firm has private information about an employee's ability, it can communicate this information through a subjective evaluation mechanism. I characterize the firm's optimal disclosure policy as a function of the worker's ability distribution and provide an algorithm to compute it. Further, I show that with some reasonable restrictions on the ability distribution, the firm's optimal strategy is always to reward the best workers, fire the worst ones, and assign one central rating to the rest. The second chapter investigates an informed principal's optimal feedback strategy in a dynamic setting. I first consider the case where both parties have non-binding outside options. In this case, if the principal ever wants to reveal any information, she will do so at the earliest possible stage. Moreover, the optimal disclosure policy can be characterized in the same way as in the static case. The same conclusion holds for the case where both parties have binding and constant outside options. I also discuss the case where both parties have binding and time-variant outside options. After incorporating firms' need to promote and/or to retain workers, the model is used to explain wage dynamics. The third chapter models a decision maker who "rationally" distorts his own belief to avoid the feeling of regret. People often suffer from regret when they realize that their previous choices were suboptimal. As a result, in a dynamic setting where information is revealed gradually, people are tempted to deny new negative information in order to avoid regret. At the same time, they are also aware of the economic cost of such belief distortions. A "rational" decision maker will optimally trade off these two concerns and choose his own belief accordingly. This tradeoff makes the past affect current decisions and hence can explain the sunk cost fallacy.

This thesis studies issues in auctions and contests. The seller of an object and the organizer of a contest have many instruments to improve the revenue of the auction or the efficiency of the contest. The three essays in this dissertation shed light on these issues. Chapter 2 investigates how a refund policy affects a buyer's strategic behavior by characterizing the equilibria of a second-price auction with a linear refund policy. I find that a generous refund policy induces buyers to bid aggressively. I also examine the optimal mechanism design problem when buyers only have private initial estimates of their valuations and may privately learn of shocks that affect their valuations later. When all buyers are \emph{ex-ante} symmetric, this optimal selling mechanism can be implemented by a first-price or second-price auction with a refund policy. Chapter 3 investigates how information revelation rules affect the existence and the efficiency of equilibria in two-round elimination contests. I establish that there exists no symmetric separating equilibrium under the full revelation rule and find that the non-existence result is very robust. I then characterize a partially efficient separating equilibrium under the partial revelation rule when players' valuations are uniformly distributed. I finally investigate the no revelation rule and find that it is both most efficient and optimal in maximizing the total efforts from the contestants. Within my framework, more information revelation leads to less efficient outcomes. Chapter 4 analyzes the signaling effect of bidding in a two-round elimination contest. Before the final round, bids in the preliminary round are revealed and act as signals of the contestants' private valuations. Compared to the benchmark model, in which private valuations are revealed automatically before the final round and thus no signaling of bids takes place, I find that strong contestants bluff and weak contestants sandbag. In a separating equilibrium, bids in the preliminary round fully reveal the contestants' private valuations. However, this signaling effect makes the equilibrium bidding strategy in the preliminary round steeper for high valuations and flatter for low valuations compared to the benchmark model. / Thesis (Ph.D, Economics) -- Queen's University, 2010-04-20 21:34:12.295

Efficiency, Leverage and Exit: The Role of Information Asymmetry in Concentrated Industries This paper develops a real options model of imperfect competition with asymmetric information that analyzes firms' exit decisions. Optimal exit decision is linked to firm characteristics such as financial leverage and efficiency. The model shows that informational asymmetries can lead more efficient and less leveraged firms to leave the product market prematurely. It also demonstrates how firm efficiency can increase debt capacity relative to rival firms. The model also has implications for firm risk and asset returns. Specifically, the paper shows that, when there is information asymmetry among rivals, rival actions can have a "news effect" that change a firm's dynamic risk structure. Human Capital Investment and the Completion of Risky R&D Projects We consider a firm that employs human capital to make a technological breakthrough. Since the probability of success of the breakthrough depends on the current stock of human capital the firm has an incentive to expand its human capital stock. The present value of the patent is stochastic but can be observed during the R\&D phase of the project. The exogenous value of the patent determines the firm's decisions to invest in human capital, to abandon the project if necessary, and to invest in marketing the new product. We study the corresponding optimal stopping times, determine their value and risk consequences, and derive optimal investment in the stock of human capital. While optimal investment in human capital is very sensitive to its productivity do increase the probability of a breakthrough it is insensitive to changes in the volatility of the present value of the patent. The value of the firm is driven by fixed labor costs that occur until the breakthrough is made, the call option to invest in human capital and market the product, and the put option to abandon the project. These options together with labor costs' based operating leverage determine the risk dynamics. Risk varies non-monotonically with the stochastic value of the patent and is U-shaped. Migration Options for Skilled Labor and Optimal Investment in Human Capital This paper develops a model of optimal education choice of an agent who has an option to emigrate. Using a real options framework, we analyze the time evolution of human capital in the country of origin and investigate the role of migration possibilities in the accumulation of different types of human capital. The analysis shows that the accumulation of human capital depends crucially on the level of uncertainty and the transferability of human capital across countries. Government subsidies are an important determinant of the composition of different types of human capital and can be crucial in alleviating the brain drain problem. (author's abstract)

Cette thèse commence, en théorie, avec le caractère informatif de signaux lorsque l'information est imparfaite, suivis par les applications sur les marchés du crédit et du travail. Dans le chapitre 2 nous montrons que le critère de Blackwell peut impliquer la dispersion des espérances conditionnelles -le critère de « supermodular dispersion » proposé par Ganuza et Penalva (2010), uniquement lorsque le signal est binaire. Les liens entre la dispersion des espérances conditionnelles et le critère de Persico peuvent être construits mais avec des restrictions fortes. Dans le chapitre 3, nous considérons une relation prêteur-emprunteur où les emprunteurs peuvent choisir de divulguer l'information en payant un coût non négligeable. La décision de la révélation d'informations est endogénisée. Nous montrons qu'il existe seulement équilibre opaque (transparent) lorsque le taux d'intérêt sans risque est assez faible (élevé); il y a des équilibres multiples lorsque le taux d'intérêt est intermédiaire et resserrement du crédit peut résulter. Le modèle est ensuite étendu à un contexte OLG et nous montrons que le marché peut converger soit à un état stationnaire opaque ou transparent, et peut avoir des oscillations permanentes entre les états différents pour certaines configurations de paramètres. Dans le chapitre 4, nous étudions l'impact de la discrimination à l'embauche sur les compétences de la décision d'investissement de travailleurs dans un modèle de recherche dirigée. Le groupe discriminé ou le groupe favorisé peut sous-investir dans les compétences à l'équilibre. Chaque fois qu'un groupe de travailleurs sous-investit, l'autre groupe reste hautement qualifié et le profit des entreprises est inférieur par rapport au niveau à l'économie où la discrimination est absente. / This thesis starts, theoretically, with the informativeness of signals when information is imperfect, followed by the applications on the credit and tabor markets. In chapter 2 we show that Blackwell's informativeness criterion can imply the dispersion of the conditional expectations - the supermodular dispersion criterion proposed by Ganuza and Penalva (2010), only when the signal is binary. Links between the dispersion of the conditional expectations and Persico's accuracy criterion can be built up but with strong restrictions. In chapter 3, we consider a lender-borrower relationship where borrowers can choose to disclose their private information by paying a non-negligible cost. The decision of information revelation is endogenized, and so is the market opacity. We show that there exists only opaque (transparent) equilibrium when the safe interest rate is low (high) enough; there are multiple equilibrium when interest rate is intermediate and credit crunch may happen. The model is then extended to an OLG context and we show that the market may converge either to an opaque or a transparent stationary state, or, for some configurations of parameters, have permanent oscillations between different states. In chapter 4 we study the impact of hiring discrimination on workers' skill investment decision in a directed search model. Both the discriminated and favored group can underinvest in skills in equilibrium. Whenever one group underinvest, the other remain high skilled and firms suffer from lower profit compared to the economy where discrimination is absent.