We study financial intermediation in which sufficient sorting is impossible. We identify a new type of market failure that may occur even when returns of investing entrepreneurs are verifiable. Moreover, we suggest that the nature of competition determines the contracts banks offer. A monopoly bank will offer equity contracts. In any pure strategy equilibrium when lenders compete à la Bertrand,...

We give a formal treatment of optimal risk sharing contracts in the face of ambiguity. The ambiguity in a contract arises from clauses that are interpreted by the parties in di¤erent ways. The cost of ambiguity is represented in terms of perceived dispute costs. Taking the potential for dispute into account, we …nd that risk averse agents may forgo potential gains from risk sharing and choose i...

This paper extends the nonexistence result of Heifetz and Samet (Games Econ. Behav. 22 (1998) 260–273). They have shown that there exists no universal knowledge space to which every knowledge space can be mapped in a knowledge-preserving manner. We show that an analogous nonexistence result holds in the more general context of information structures. These structures can be viewed as generaliza...

The standard state-spaces of asymmetric information preclude non-trivial forms of unawareness (Modica and Rustichini, 1994, Dekel, Lipman and Rustichini, 1998). We introduce a generalized state-space model that allows for non-trivial unawareness among several individuals, and which satisfies strong properties of knowledge as well as all the desiderata on unawareness proposed this far in the lit...

We evaluate the 3 child muddy children puzzle using the epistemic logic of shallow depths GLEF . We give a resolution to the puzzle that involves only shallow depths of interpersonal inferences and does not use common knowledge. This resolution makes the necessary beliefs, interpersonal inferences, and interpretations of inactions explicit. We also show that our resolution is a minimal one in a...

An information transaction entails the purchase of information. Formally, it consists of an information structure together with a price. We develop an index of the appeal of information transactions, which is derived as a dual to the agent’s preferences for information. The index of information transactions has a simple analytic characterization in terms of the relative entropy from priors to p...

This paper shows that the efficiency of relational contracting can be increased by reducing the public information through a novel intertemporalgarbling process of signals. A distinctive and essential feature of our intertemporalgarbling process is that past outputs have enduring effects on future signals. This process reduces the principal’s maximal reneging temptation by linking together the ...

The objective of this paper is to present a unifying framework for studying the impact of new collaborative technologies (or consumer technologies) on markets, society and economic science. It aims to influence researchers in social sciences, entrepreneurs and policy-makers to accelerate the adoption of the learning, tools and opportunities which the new collaborative technologies bring into th...

Human utility embodies a number of seemingly irrational aspects. The leading example in this paper is that utilities often depend on the presence of salient unchosen alternatives. Our focus is to understand why an evolutionary process might optimally lead to such seemingly dysfunctional features in our motivations and to derive implications for the nature of our utility functions. Journal of Ec...

The paper analyses a simplified version of a Glosten-Milgrom style specialist security trading model with trade-timing. In a setting where traders are differentially informed, if the best-informed investors have a sufficiently strong or weak impact on prices then the investors with the strongest impact on prices delay their investment strategically, pretending to be the low-impact types. JEL Cl...