Essays in Information Economics

Abstract

Three main chapters of this dissertation, Chapters 2, 3, and 4, are written as separate papers. Below, a short summary of each chapter is provided. Chapter 2 studies optimal pricing strategy of a monopolist who faces consumers that have heterogeneous valuations, have reference-dependent preferences, and are subject to loss aversion. There is asymmetric information in that the monopolist does not observe the consumers? valuations. Assuming that the monopolist can make consumers expect to buy the desired variety of the good, and that these expectations determine the consumers? reference points, we obtain two main results. First, with expectation-based loss aversion, menu pricing is possible even if the single-crossing property is violated (i.e., high-valuation consumers do not have a larger marginal utility of quality than low-valuation consumers). Second, when firms face consumers with expectation-based loss aversion, menu pricing may become more desirable to the monopolist compared to selling only to high-valuation consumers. Chapter 3 develops a model of signaling with senders who have reference-dependent preferences and are subject to loss aversion. As is well known, the single-crossing property, saying that high types have lower marginal cost of signaling, is a necessary condition for the existence of separating equilibria in signaling games. However, the single-crossing property is a restrictive condition. In this paper, assuming that expectations form the sender?s reference point, we show that with expectation-based loss aversion, the single-crossing property is no longer a necessary condition for separating equilibria to exist. In Chapter 4, we develop a model of repeated microcredit lending to study how group size affects optimal group-lending contracts with joint liability. In the setting being studied, a benevolent lender provides microcredit to a group of borrowers to invest in projects. The outcome of each risky project is not observable by the lender; therefore, if some borrowers default on their loan repayments, the lender cannot identify strategic default. The group will be entitled to a subsequent loan if total loan obligation is met. We characterize the optimal contract and determine the optimal size of the borrowers? group endogenously. We find that, although joint liability contracts are feasible under a smaller set of parameter values than individual liability contracts, joint liability has positive effects on the borrowers? repayment amount and welfare. Our analysis also suggests that group size should increase with project risk. Furthermore, in this chapter we analyze the effect of less severe punishment and project correlation on the feasibility and characteristics of joint liability contracts. Our results show that, less severe punishment does not affect the borrowers? repayment amount or welfare, but decreases the loan ceiling of joint liability. However, this negative effect can be offset by forming larger groups. Second, we also found that project correlation allows a higher loan ceiling in larger groups.