Markets versus Mechanisms
Event details
| Date | 29.09.2017 |
| Hour | 10:30 › 12:00 |
| Speaker | Christopher HENNESSY (London Business School) |
| Location | |
| Category | Conferences - Seminars |
We demonstrate limitations on the use of direct revelation mechanisms (DRMs) by corporations inhabiting economies with securities markets. Posting a standard DRM in an environment with a securities market endogenously increases the reservation value of the informed agent. If the informed agent rejects said DRM, then she convinces the market that she is uninformed, and she can trade aggressively sans price impact, generating large (off-equilibrium) trading gains. Due to this endogenous reservation value effect, using a DRM to screen out uninformed agents may be impossible. Even when screening is possible, refraining from posting a mechanism and instead relying on markets for information is optimal if the endogenous reservation value effect is sufficiently large. Finally, even if posting a DRM dominates relying on markets, outcomes are improved by introducing a search friction, which randomly limits the agent's ability to observe the DRM.
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Practical information
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