This award funds four different projects in economic theory. The first part proposes to study the basic decision problem of optimal evaluation of a multi-attribute object whose attributes are not all readily observable and have to be discovered at a cost. As an example, one may think of the purchase decision of a fairly complex good (say, a computer). Typically, a prospective buyer cannot easily assess the importance and meaning of all the different attributes. The process of researching them is costly and often the final decision is made without evaluating all the attributes. This is obviously a fundamental decision problem. It is reminiscent of the classical search problem (think of the decision maker as sampling the different attributes), but it differs from that problem in the specification of the payoff (here the payoff depends on all attributes whereas in the search problem it depends only on the item that was selected). For this reason, the familiar analysis of the classical search problem cannot be used here and this problem requires new analysis. As a first step, the PI will seek to understand how optimal evaluation process depends on the nature of the uncertainty concerning the different attributes and the nature of the discovery costs. While the analysis of this problem is an interesting exercise in its own right, its main importance is in the implications that it might have in broader economic scenarios. The second part of this proposal would indeed attempt to explore such implications. It proposes to embed this sort of decision concerning a multi-attribute object in the context of market models and investigate the resulting equilibrium outcomes. The intellectual merit of these two parts is in identifying a very natural and fundamental problem that seems relevant for many situations, might be amenable to analysis but has not been analyzed directly before. The understandings achieved by the proposed analysis would generate insights into the behavior of prospective buyers and presentation of products by sellers in markets for fairly complex goods. Naturally, such insights could inform the regulation of such markets.
The third part proposes to analyze a common values trading environment in which a privately informed principal samples at a cost imperfectly informed bidders. The objective is to focus on a class of realistic situations that commonly arise in the procurement of services (say, a renovation of a building) and sale of assets (say, a sale of a company). In these situations the auctioneer (the procurer of the service or the seller of an asset as may be the case) possesses private information about the value of the transaction (be it information about the cost of performing the service in question or about the value of the object being sold) and the solicitation of bids might be costly. We have in mind primarily informal scenarios that combine features of auctions and search, though the issues under consideration may be present in some formal auctions as well. The main contribution of this analysis is in gaining understanding of the manner in which information is aggregated in a class of realistic trading scenarios that have not been analyzed. The insights emerging from this analysis may also contribute to practical thinking about market design.
The fourth part explores models of contest over the control of a firm with widely dispersed ownership. The main focus is on the implications of allowing the sale of votes separately from shares. The main objectives are to provide a complete game theoretic model for this important class of problems and obtain new insights concerning the efficiency consequences of various restrictions on the form of tender offers particularly with respect to the separation of votes from shares. The contributions of this part are both methodological-- developing the complete analytical framework for this important class of models-- and substantive--understanding the consequences of trading votes separately from shares. The potential practical implications of this research are immediately obvious since it addresses directly issues that might be relevant for the regulation of financial markets.
