Essays in information economics

This dissertation is composed of three essays considering the role of private information in economic environments. The first essay considers efficient investments into technologies such as auditing and enforcement systems that are designed to mitigate information and enforcement frictions that impede the provision of first best insurance against income risk. In the model, the principal can choose a level of enforceability that inhibits an agent’s ability to renege on the contract and a level of auditing that inhibits his ability to conceal income. The dynamics of the optimal contract imply an endogenous lower bound on the lifetime utility of an agent, strictly positive auditing at all points in the contract and positive enforcement only when the agent’s utility is sufficiently low. Furthermore, the two technologies operate as complements and substitutes at alternative points in the state space. The second essay considers a planning problem with hidden actions and hidden states where the component of utility affected by the unobservable state is separable from component governed by the hidden action. I show how this problem can be written recursively with a one dimensional state variable representing a modified version of the continuation utility promise. I apply the framework to a model in which an agent takes an unobservable decision to invest in human capital using resources allocated to him by the planner. Unlike similar environments without physical investment, it is shown numerically the immiserising does not necessarily hold. In the third essay, with Kyungmin Kim, I examine the effects of commitment on information transmission. We study and compare the behavioral consequences of honesty and white lie in communication. An honest agent is committed to telling the truth, while a white liar may manipulate information but only for the sake of the principal. We identify the effects of honesty and white lie on communication and show that the principal is often better off with a possibly honest agent than with a potential white liar. This result provides a fundamental rationale on why honesty is thought to be an important virtue in many contexts