TY - JOUR

T1 - Rational exaggeration and counter-exaggeration in information aggregation games

AU - Rausser, Gordon

AU - Simon, Leo K

AU - Zhao, Jinhua

PY - 2015

Y1 - 2015

N2 - We study an information aggregation game in which each of a finite collection of senders receives a private signal and submits a report to the center, who then makes a decision based on the average of these reports. The integration of three features distinguishes our framework from the related literature: players reports are aggregated by a mechanistic averaging rule, their strategy sets are intervals rather than binary choices, and they are ex ante heterogeneous. In this setting, players engage in a tug-of-war , as they exaggerate and counter-exaggerate in order to manipulate the center s decision. While incentives to exaggerate have been studied extensively, the phenomenon of counter-exaggeration is less well understood. Our main results are as follows. First, the cycle of counter-exaggeration can be broken only by the imposition of exogenous bounds on the space of admissible sender reports. Second, in the unique pure-strategy equilibrium, all but at most one player is constrained with positive probability by one of the report bounds. Our third and fourth results hold for a class of anchored games. We show that if the report space is strictly contained in the signal space, then welfare is increasing in the size of the report space, but if the containment relation is reversed, welfare is independent of the size of the space. Finally, the equilibrium performance of our heterogeneous players can be unambiguously ranked: a player s equilibrium payoff is inversely related to the probability that her exaggeration will be thwarted by the report bounds.

AB - We study an information aggregation game in which each of a finite collection of senders receives a private signal and submits a report to the center, who then makes a decision based on the average of these reports. The integration of three features distinguishes our framework from the related literature: players reports are aggregated by a mechanistic averaging rule, their strategy sets are intervals rather than binary choices, and they are ex ante heterogeneous. In this setting, players engage in a tug-of-war , as they exaggerate and counter-exaggerate in order to manipulate the center s decision. While incentives to exaggerate have been studied extensively, the phenomenon of counter-exaggeration is less well understood. Our main results are as follows. First, the cycle of counter-exaggeration can be broken only by the imposition of exogenous bounds on the space of admissible sender reports. Second, in the unique pure-strategy equilibrium, all but at most one player is constrained with positive probability by one of the report bounds. Our third and fourth results hold for a class of anchored games. We show that if the report space is strictly contained in the signal space, then welfare is increasing in the size of the report space, but if the containment relation is reversed, welfare is independent of the size of the space. Finally, the equilibrium performance of our heterogeneous players can be unambiguously ranked: a player s equilibrium payoff is inversely related to the probability that her exaggeration will be thwarted by the report bounds.

U2 - 10.1007/s00199-015-0870-2

DO - 10.1007/s00199-015-0870-2

M3 - Article

SN - 0938-2259

VL - 59

SP - 109

EP - 146

JO - Economic Theory

JF - Economic Theory

IS - 1

ER -