A Short Survey on the Applications of Unawareness
Research Papers
"Justifying Cursed Equilibrium via Partial Awareness"
We show that given any finite Bayesian game with a commonly-known common prior probability distribution, its set of cursed equilibria coincides a set of Bayesian Nash equilibria of an augmented game where players perceive other players types as if they are partially aware of others' original information structures. Consistent with the intuition that cursedness implies scarce computational resource, partial awareness is equivalent to a reduction of the complexity of players' strategic computation. This result also shows the potential of using unawareness to formulate imperfect strategic sophistication.
"Fair Disclosure and Investor Asymmetric Awareness in Stock Markets"
Version 0308, Version 1007
(Outstanding Doctoral Student Paper award, the 2007 Mid-Atlantic Regional Meeting of the American Accounting Association)
ABSTRACT
The notion of awareness is introduced to study Regulation Fair Disclosure, a rule implemented by the U.S. Security and Exchange Commission in 2000. The regulator aims to reduce information asymmetry among investors, and expects public forums to subsume the forbidden information channel of selective forums. We show that even with cooperative managers and effective technology, this is only possible under the assumption of symmetric awareness. If a professional investor is aware of more uncertainties than others are, lacking the incentive to share the insights, he would not raise critical questions and acquire relevant information at public forums. This leads to inefficient information production. We also analyze the market prices and investors' welfare under different disclosure forms and awareness assumptions. At last, we discuss the implications of asymmetric awareness on the overall benefit and cost, the empirical findings, and the policies of the regulation.
"The Dirty Face Problem with Unawareness"
ABSTRACT
By revisiting the classic dirty face problem we highlight the notion of unawareness (a simpler state space) and compare it with impreciseness (a coarser information partition). In new versions of the problem, one agent can be imprecise about or unaware of the state of some other agents. We show that, the unaware agent learns faster yet could be wrong, however some (not all) other agents have better information and also learn faster. Neither can happen in the impreciseness case.
ABSTRACT
Given two players holding a common prior and distinct information partitions, the No Bet theorem (Sebenius and Geanakoplos, 1982) says that when at a state it is common knowledge that one's conditional expectation is no less than a certain number but the other one's is not greater than it, their conditional expectations must be the same. The extended theorem generalizes the result by taking away the separating number which is sometimes not available in practice. We also generalize the extended theorem to the case where priors are heterogeneous. As an application, we show that if the ranking of each player's expectation, or just the identity of the highest/lowest one is common knowledge, players must agree in the logic of the extended theorem, but may not agree under the original No Bet theorem.
"The Role of Firm Size in Executive Compensation" (in progress)
ABSTRACT
We modify the principal-agent model of Holmstrom and Milgrom (1987) by assuming that firm size is an amplifier of executives' effort and variance of performance noise. Within realistic ranges of parameters, our model is able not only to explain why the pay-performance sensitivity is tiny even for shareholders with low risk aversion, but also predicts that pay-performance sensitivity is slowly and monotonically decreasing as size increases and that pay-size sensitivity is almost constant over the range of size. To test these hypotheses, we examine data of American semiconductor industry and find consistency between theory and practice.