Who gains from information asymmetry?

Gil S. Epstein, Yosef Mealem

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

This article considers an asymmetric contest with incomplete information. There are two types of players: informed and uninformed. Each player has a different ability to translate effort into performance in terms of the contest success function. While one player's type is known to both players, the other is private information and known only to the player himself. We compare the Bayesian Nash equilibrium outcome of a one-sided private information contest to the Nash equilibrium with no private information, in which both players know the type of the other player. We show conditions under which uncertainty increases the investment of the uninformed player and the rent dissipation of the contest, while decreasing the expected net payoff of the informed player. In addition, we consider conditions under which the informed player - before knowing his own type - prefers that the uninformed player knows his type. Moreover, we show conditions for the existence/non-existence of equilibrium in a two-stage contest in which the informed player declares his type (or does not declare) in the first stage and in the second stage the two players play according to the information available to them.

Original languageEnglish
Pages (from-to)305-337
Number of pages33
JournalTheory and Decision
Volume75
Issue number3
DOIs
StatePublished - Sep 2013

Bibliographical note

Funding Information:
Acknowledgments Financial support from the Adar Foundation of the Economics Department of Bar-Ilan University is gratefully acknowledged. We are grateful to two anonymous referees for their constructive comments.

Keywords

  • Asymmetric contests
  • Incomplete information
  • Rent seeking

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