Session 14: The Economics of Transparency

Does verifiability in communication facilitate or hinder information transmission? We study sender-receiver settings with partially-aligned preferences in which verifiable evidence is a noisy signal of the sender’s private information. In these settings, verifiability entails a tradeoff: it enhances the sender’s credibility, but it also restricts how flexibly she can communicate her private information. This tradeoff changes the economics of verifiable disclosure. When preferences are sufficiently aligned, full evidence disclosure is not only unattainable in equilibrium, but also inefficient: the sender can strategically conceal misleading evidence and thereby communicate more than the literal content of her verifiable evidence. Man-dating disclosure in such settings is therefore detrimental. The same tradeoff governs the comparison with cheap talk: verifiability hinders communication when preferences are sufficiently aligned, but improves it when they are sufficiently mis-aligned. We further show that verifiable disclosure can be informative even when the evidence itself is uninformative and, more generally, that making evidence more informative need not improve communication.

We study the role of timestamps in a dynamic disclosure game. At a random date, a sender privately obtains one piece of hard evidence about a hidden binary state evolving as a continuous-time Markov chain and can disclose it at any later date. When evidence carries a timestamp, the unique equilibrium features immediate disclosure of good evidence and disclosure of bad evidence after a deterministic, timestamp-dependent delay. Without timestamps, unless the prior is low, equilibrium must feature delayed disclosure of good evidence; under some conditions, bad evidence is never disclosed. We construct an equilibrium in which good evidence is initially delayed, then stochastically released, and eventually disclosed immediately. Timestamps prevent pretending old good evidence is fresh and allow proving bad evidence is old, thereby accelerating disclosure of good evidence and facilitating disclosure of bad evidence.

This study examines how limits on lying costs impact Sender/Receiver games. Individuals typically face limited penalties for nonviolent offenses that, in the context of a disclosure game, suggest bounds on the cost of lying. I examine a Sender/Receiver game where the Sender may be uninformed and/or may incur a cost of messaging. In the unique equilibrium, high types cannot fully separate if there is any finite bound on lying costs. The limited separation holds even if the type space is unbounded. Instead, high types collect into a single upper-tailed pool. If the limit on lying costs is sufficiently low, the only message distinguishes a single pool of high types from a single pool of low types. The composition of the high pool depends on the high types’ ability to separate from low, otherwise nondisclosing types which, in turn, depends on the maximum lying costs. The results show that the maximum lying costs dictate whether any types can separate beyond a high-versus-low pool, and the amount of information potentially conveyed.

In online marketplaces, consumers rely on reviews to make informed purchase decisions, making the presence of fake reviews detrimental. Consumers who are aware that fake reviews exist may look for indicators that help them identify which products are more likely to contain manipulated feedback. One potential signal is the discrepancy in rating distributions, which is prominently displayed on product pages. In this paper, we study how fake reviews influence consumer demand through rating discrepancies, while controlling for average product ratings. First, we conduct two experiments to establish and quantify the channel of the impact of ratings discrepancy on consumer demand through consumer suspicion of fake reviews. The first experiment shows that a greater rating discrepancy increases consumer suspicion of fake reviews, and the second experiment shows that heightened suspicion reduces consumer willingness to pay; both effects can be seen as economically large. Second, using an observational dataset from Amazon with fake review labels, we find that this consumer belief is empirically grounded: rating discrepancies are positively correlated with the probability that a product has fake reviews, with medium-to-large effect sizes. Third, using an identification strategy that exploits changes in ratings discrepancy due to rating distribution rounding, we find evidence consistent with a negative, economically large causal impact of ratings discrepancy on consumer demand. Together, these findings reveal that consumers use ratings discrepancies as a signal of fake reviews, and this suspicion impacts their purchase decisions. The findings highlight the importance of understanding the relationship between fake reviews, ratings discrepancies, and consumer demand in online marketplaces.

We investigate the impact of a unique legislative reform that granted anonymity to plaintiffs in court rulings for personal injury claims. Prior to the reform’s implementation in August 2015, claimants who rejected settlement offers faced the risk that court proceedings would publicly disclose sensitive information regarding their health and earnings. By eliminating this source of privacy loss, the reform provides an opportunity to examine how privacy considerations affect outcomes in a real-world setting. Our analysis measures changes in payments for personal injury versus property damage claims (which were not affected by the reform) for car accident cases handled by the major insurance firms in Israel between 2011-2020. Using a difference-in-differences framework, we find that the reform led to a 12-17% increase in payments for personal injury claims. We interpret this estimate as the implicit cost claimants were previously willing to bear, in the form of lower settlements, to avoid the disclosure of private information through court rulings. This result underscores the economic value individuals place on privacy, revealing that concerns about public exposure can significantly influence decision-making and negotiation outcomes. Our findings demonstrate the importance of privacy considerations in customer interactions where sensitive information is often involved.

We study how the durability of customer relationships shapes competition, innovation, and the allocation of economic activity. Using novel data from M&A accounting disclosures, we construct a forward-looking measure of customer durability based on firms’ expected useful lives of their customer relationship-related intangible assets, covering nearly 9,500 acquisitions and $8 trillion in assets from 2002 through 2024. We document a substantial rise in durability across industries and examine its implications in an endogenous growth model in which longer-lasting customer relationships amplify incumbents’ market power. Empirically, greater durability is associated with higher markups and profit shares, increased concentration, reduced entry and exit, lower job reallocation, slower wage growth, and a declining labor share. Consistent with our model, we also find an inverted-U relationship between durability and innovation, with high durability reducing both the quantity and quality of innovation, partly through lower R&D investment. Taken together, our findings highlight rising customer durability as a novel mechanism that helps reconcile the simultaneous increase in market power and decline in U.S. business dynamism, with important implications for competition policy.

Signaling is wasteful. But how wasteful? We study the fraction of surplus dissipated in a separating equilibrium. For isoelastic environments, this waste ratio has a simple formula: β/(β + σ), where β is the benefit elasticity (reward to higher perception) and σ is the elasticity of higher types’ relative cost advantage. The ratio is constant across types and independent of other parameters, including convexity of cost in the signal. We show that the directional effects of β and σ on waste extend to non-isoelastic environments.

This study examines whether healthcare providers tunnel profits and assets to commonly-owned related parties by making inflated payments for their goods and services. Such practices allow providers to understate their profitability—which may encourage regulators to increase reimbursements and relax quality standards—and shield assets from malpractice liability. Using uniquely detailed nursing home financial data, we find evidence of widespread tunneling to related-party real estate and management companies. Our estimates suggest that 68% of nursing home profits are tunneled to related parties and that accounting for tunneled profits and assets raises the implied typical investment IRR from 4.83% to 13.11%.

Inspections are a common tool for acquiring information and incentivizing compliance. Though typically unannounced, they often follow a predictable schedule. We study how this predictability shapes firm effort and patient outcomes in U.S. nursing homes. Nursing homes “slack” in the low-risk period following an inspection and ramp up effort as their next inspection approaches. Patient survival mirrors this pattern, suggesting meaningful consequences for care quality. We embed these estimates in a dynamic model capturing how inspection regimes incentivize effort and reveal quality. Unpredictability induces as much additional effort as increasing inspection frequency by 10%, with minimal loss of informational value.

Bid-rigging in public procurements has severe implications for public service quality. We document a prevalent coordination strategy in Brazil, where the lowest bidder withdraws post-auction, allowing the second-lowest bidder to win at higher prices. This “kamikaze” strategy occurs in 17% of auctions, increasing prices by up to 11.7%. Evidence of coordination comes from ownership ties, common addresses, and repeated partnerships between kamikaze and winning firms. Coordination declined following a transparency reform that made ownership connections visible to auctioneers. Ultimately, such coordination correlates with adverse real non-price outcomes: increased road accidents following maintenance contracts and higher mortality rates in public hospitals.

In markets for structured credit, dealers voluntarily share price estimates with competitors before sealed-bid auctions. Using 53,000 auctions, we document that these price talks are informative, yet silent dealers win 55% of auctions. To reconcile these facts, we show theoretically that voluntary communication before competition produces anti-unraveling. Dealers with favorable information remain silent to preserve their competitive advantage in bidding, while dealers with unfavorable information disclose to soften competition. Dealer talk improves price efficiency, but strategic silence generates allocative inefficiency as winner’s curse-induced shading causes some nontalkers to underbid talkers.

This paper studies how experts with veto power—gatekeeping experts—influence agents through communication. Their expertise informs agents’ decisions, while veto power provides discipline. Gatekeepers face a dilemma: transparent communication can invite gaming, while opacity wastes expertise. How can gatekeeping experts guide behavior without being gamed? Many economic settings feature this tradeoff, including bank stress tests, environmental regulations, and financial auditing. Using financial auditing as the primary setting, I show that strategic vagueness resolves this dilemma: by revealing just enough to prevent the manager from inflating the report, the auditor guides the manager while minimizing opportunities for manipulation. This theoretical lens provides a novel rationale for why auditors predominantly accept clients’ financial reports. Comparative statics reveal that greater gatekeeper independence or expertise sometimes dampens communication. This paper offers insights into why gatekeepers who lack direct control can still be effective.