Persuasion in Global Games with Application to Stress Testingapa522/Slides-Persuasion-GG.pdfDamages...
Transcript of Persuasion in Global Games with Application to Stress Testingapa522/Slides-Persuasion-GG.pdfDamages...
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Persuasion in Global Gameswith Application to Stress Testing
Nicolas Inostroza Alessandro Pavan
December 26, 2019
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Motivation
Coordination: central to many socio-economic environments
Damages to society of mkt coordination on undesirable actions can be severe
Monte dei Paschi di Siena (MPS)
creditors + speculators with heterogenous beliefs about size ofnonperforming loans
default by MPS: major crisis in Eurozone (and beyond)
Government intervention
limited by legislation passed in 2015
Persuasion (stress test design): instrument of last resort
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Questions
Structure of optimal stress tests?
What information should be passed on to mkt?
“Right” notion of transparency?
Optimality of
pass/fail policies
monotone rules
Properties of persuasion in global games?
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Related literature
Persuasion and Information design: Myerson (1986), Aumann and Maschler (1995),Calzolari and Pavan (2006,a,b), Glazer and Rubinstein (2004, 2012), Rayo and Segal(2010), Kamenica and Gentzkow (2011), Ely (2016), Bergemann and Morris (2017),Lipnowski and Mathevet (2017), Mathevet, Pearce, Stacchetti (2017), Dworczak andMartini (2019), Dworczak and Pavan (2019)...
Persuasion in Games: Alonso and Camara (2013), Barhi and Guo (2016), Taneva (2016),Mathevet, Perego, Taneva (2019)...
Persuasion with ex-ante heterogenous receivers: Bergemann and Morris (2016),Kolotilin et al (2016), Laclau and Renou (2017), Chan et al (2016), Basak and Zhou(2017), Che and Horner (2017), Doval and Ely (2017), Guo and Shmaya (2017)...
Financial Regulation and Stress Test Design: Goldstein and Leitner (2015), Goldsteinand Sapra (2014), Alvarez and Barlevy (2017), Bouvard et al. (2015), Goldstein andHuang (2016), Williams (2017), Inostroza (2019)...
Global Games w. Endogenous Info: Angeletos, Hellwig and Pavan (2006, 2007),Angeletos and Pavan (2013), Edmond (2013), Iachan and Nenov (2015), Denti (2016),Yang (2016), Morris and Yang (2019), Li et al (2019), Morris, Oyama, Takahashi (2019)...
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Plan
Basic Model
Perfect Coordination Property
Pass/Fail Policies
(Non-)Monotone Policies
General Model and Results
Micro-foundations
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Stylized Global Game of Regime Change
Policy maker (PM)
Agents i ∈ [0, 1]
Actions
ai =
{1 (pledge)
0 (not pledge)
A ∈ [0, 1] : aggregate pledge
Default outcome: r ∈ {0, 1}, with r = 0 in case of default
Default rule
r =
{0 if A < 1− θ1 if A ≥ 1− θ
“fundamentals”θ parametrize liquidity, performing loans, etc.
θ drawn from an abs. continuous cdf F , with smooth density f strictly
positive over R
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Stylized Global Game of Regime Change
PM’s payoff
UP(θ,A) =
{W if r = 1
L < W if r = 0
Agents’ payoff from not pledging (safe action) normalized to zero
Agents’ payoff from pledging
u =
{g > 0 if r = 1
b < 0 if r = 0
Supermodular game w. dominance regions: (−∞, 0) and [1,+∞)
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Beliefs
x ≡ (xi )i∈[0,1] ∈ X: signal profile with each
xi ∼ p(·|θ)
i.i.d., given θ
X(θ) ⊂ R[0,1] : collection of signal profiles consistent with θ
xi = θ + σξi with ξi ∼ N(0, 1)
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Disclosure Policies (Stress Tests)
Disclosure policy Γ = (S , π)
S : set of scores/grades/disclosures
π(θ) : score given to bank of type θ
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Timing
1 PM announces Γ = (S , π) and commits to it
2 (θ, x) realized
3 π(θ) publicly announced
4 Agents simultaneously choose whether or not to pledge
5 Default outcome and payoffs
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Solution Concept: MARP
Robust/adversarial approach
PM does not trust her ability to coordinate mkt on her favorite course ofaction
Most Aggressive Rationalizable Profile (MARP):
minimizes PM’s payoff across all profiles surviving iterated deletion ofinterim strictly dominated strategies (IDISDS)
aΓ ≡ (aΓi )i∈[0,1]: MARP consistent with Γ
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Perfect Coordination Property [PCP]
Definition 1
Γ = {S , π} satisfies PCP if, for any θ, x ∈ X(θ), i , j ∈ [0, 1],aΓi (xi , π(θ)) = aΓ
j (xj , π(θ)), where aΓ ≡ (aΓi )i∈[0,1] is MARP consistent with Γ
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Perfect Coordination Property [PCP]
Theorem 1
Given any (regular) Γ, there exists (regular) Γ∗ satisfying PCP and s.t., for any θ,default probability under Γ∗ same as under Γ.
Regularity: MARP well defined
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Perfect Coordination Property [PCP]
Policy Γ∗ = (S∗, π∗) removes any strategic uncertainty
It preserves structural uncertainty
Under Γ∗, agents know actions all other agents take but not what beliefsrationalize such actions
Inability to predict beliefs that rationalize other agents’ actions essential tominimization of risk of default
“Right” form of transparency
conformism in beliefs about mkt response...not in beliefs about “fundamentals”
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PCP: Proof sketch
Let rΓ(θ) ∈ {0, 1} be default outcome at θ when agents play according to aΓ
Let Γ∗ = {S∗, π∗} be s.t. S∗ = S × {0, 1} and
π∗(θ) = (π(θ), rΓ(θ))
Key step: given s∗ = (π(θ), 1)⇒ MARP under Γ∗ less aggressive than MARPunder Γ given s = π(θ)
At any round n of IDIDS
aΓi,(n)(xi , π(θ)) = 1⇒ aΓ∗
i,(n)(xi , (π(θ), 1) = 1, ∀i , ∀xi
Given s∗ = (π(θ), 1) ⇒ each agent pledges irrespective of xi
Given s∗ = (π(θ), 0) ⇒ each agent refrains from pledging, irrespective of xi
For all θ, prob. of default under Γ∗ same as under Γ
(formal proof)
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PCP: Lesson
Optimal policy combines:
public Pass/Fail announcement
eliminate strategic uncertainty
additional disclosures necessary to guarantee that, when r = 1 is announced(i.e., when bank passed the test), all agents pledge under MARP
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Pass/fail Policies
Can signals other than r = 0, 1 be dispensed with?
Theorem 2
Given any policy Γ satisfying PCP, there exists binary policy Γ∗ = ({0, 1}, π∗)also satisfying PCP and s.t., for any θ, prob of default under Γ∗ same as under Γ.
MARP in threshold strategies: signals other than regime outcome can bedropped (averaging over s) without affecting incentives
Result hinges on Log-SM of p(x |θ) ⇒ MLRP
co-movement between state θ and belies
(Example)
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Optimality of Monotone Tests
θ*θ
π*(0|θ)
1
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Sub-optimality of Monotone Tests
Let θMS ∈ (0, 1) be implicitly defined by∫ 1
0
u(θMS , l)dl = 0 (1)
Let DΓ ≡{
(θi , θi ] : i = 1, ...,N}
be partition of [θ, θMS ] induced by Γ with
∆ (Γ) ≡ maxi=1,...,N
|θi − θi |
denoting its mesh.
Theorem 3
There exists σ > 0 and E : (0, σ]→ R+, with limσ→0+E(σ) = 0, s.t, for anyσ ∈ (0, σ], following is true: given any binary policy Γ satisfying PCP and s.t.∆ (Γ) > E(σ), there exists another binary policy Γ∗ with ∆ (Γ∗) < E(σ) that alsosatisfies PCP and yields policy maker payoff strictly higher than Γ.
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Sub-optimality of Monotone Tests
Small σ: PM cannot give pass to all θ ∈ [θ′, θ′′] ⊂ [0, θMS ] with |θ′′ − θ′|large
when θ ∈ [θ′, θ′′], most agents receive signals xi ∈ [θ′, θ′′]
if π(θ) = 1 all θ ∈ [θ′, θ′′], irrespective of shape of π outside [θ′, θ′′],most agents with xi ∈ [θ′, θ′′] assign high prob to θ ∈ [θ′, θ′′], to otheragents assigning high prob to θ ∈ [θ′, θ′′], and so on
rationalizable for such agents to refrain from pledging
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Sub-optimality of Monotone Tests
Next suppose π(θ) = 0 for all θ ∈ [θ′, θ′′] ⊂ [0, θMS ] with |θ′′ − θ′| large
suppose PM passes θ ∈[θ′+θ′′
2 , θ′+θ′′
2 + ξ]
and fails
θ ∈[θ′′ + δ
2 , θ′′ + δ
], with ξ and δ small chosen s.t ex-ante prob of
passing same as under Γ
agents with signals x /∈[θ′+θ′′
2 , θ′+θ′′
2 + ξ]∪[θ′′ + δ
2 , θ′′ + δ
]have
stronger incentives to pledge
incentives to pledge for agents with signals
x ∈[θ′ + θ′′
2,θ′ + θ′′
2+ ξ
]∪[θ′′ +
δ
2, θ′′ + δ
]may be smaller; However, because for such individuals pledging wasunique rationalizable action under Γ, provided σ, ξ, δ are small, pledgingcontinues to be unique rationalizable action under new policy
PM can then pass also some types to the left of (θ′ + θ′′)/2 whileguaranteeing that all agents continue to pledge
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General Model
General P(x |θ)
Stochastic Γ: π : Θ→ ∆(S)
Default iff R(θ,A, z) ≤ 0
z drawn from Qθ: residual uncertainty
PM’s payoff
UP(θ,A, z) =
{W (θ,A, z) if r = 1
L(θ,A, z) if r = 0
Agents’ payoffs
u(θ,A, z) =
{g(θ,A, z) if r = 1
b(θ,A, z) if r = 0
Expected payoff differential: u(θ,A)
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General Model
For any common posterior G ∈ ∆(Θ), let UG (x) be expected payoffdifferential of agent with signal x who expects all other agents to pledge ifftheir signal exceeds x
Let ξG be the largest solution to UG (x) = 0
ξG = +∞ if UG (x) < 0 for all x
ξG = −∞ if UG (x) > 0 for all x
Finally, letθG ≡ inf
{θ : u(θ, 1− P(ξG |θ)) ≥ 0
}.
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General Model
Condition PC. For any Λ ∈ ∆(∆(Θ)) such that∫
GdΛ(G ) = F ,
∫ (∫ (UP(θ, 0)Iθ≤θG + UP(θ, 1)Iθ>θG
)dG (θ)
)dΛ(G )
≥∫ (∫UP(θ, 1− P(ξG |θ))dG (θ)
)dΛ(G )
Trivially satisfied when L(θ,A, z) is invariant in A and there is no aggregateuncertainty (e.g., z = 0 a.s.)
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General Model
Theorem 4
(a) Given any Γ, there exists Γ∗ satisfying PCP and s.t., for any θ, agents’expected payoff under aΓ∗ is at least as high as under aΓ.
(b) Suppose p(x |θ) is log-supermodular; then Γ∗ is binary.
(c) In addition to p(x |θ) being log-supermodular, suppose Condition PC holds.Then PM’s payoff under Γ∗ at least as high as under Γ.
PCP: announcement of sign of agents’ expected payoff under MARP
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Foundation for Monotone Tests
LetDP(θ) ≡ UP(θ, 1)− UP(θ, 0).
Condition M: Following properties hold:
1 The function U(θ; x) ≡ u(θ, 1− P(x |θ)) is log-supermodular;
2 For any x , and any θ0, θ1 ∈ [θ, θ], with θ0 < θ1, DP (θ1)DP (θ0) >
p(x|θ1)U(θ1;x)p(x|θ0)U(θ0;x)
Theorem 5
Suppose p(x |θ) log-supermodular, Condition PC holds, and Condition M holds.Given any Γ, there exists deterministic binary monotone Γ∗ = ({0, 1}, π∗)satisfying PCP and yielding a payoff weakly higher than Γ.
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Micro-foundations
Former liabilities:D
Bank’s legacy asset delivers
v (θ) ∈ R end of period 1
V (θ) end of period 2
Bank can issue
shares
new short-term debt
Potential investors
endowed with 1 unit of capital
market orders
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Micro-foundations
Y (p, θ, z): exogenous demand for shares (alternatively, debt)
Market clearing price p? (θ,A, z) solves
q + 1− A = A + Y (p?, θ, z) .
Default:R (θ,A, z) = v(θ) + ρSqp? (θ,A, z)− D ≤ 0
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Micro-foundations
Analysis can be used to study
effect of different recapitalization policies
(qE , qD)
role of uncertainty for toughness of optimal stress tests
uncertainty about bank’s profitability: σ
uncertainty about macro variables: z
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Conclusions
Information design in coordination games with heterogeneously informedagents
Application: Stress Test Design
Perfect coordination property (“right” notion of transparency)Pass/Fail testsMonotone rules
Extension 1: PM uncertain about mkt prior beliefs
robust-undominated design (w. Piotr Dworczak)
Extension 2: timing of optimal disclosures
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THANKS!
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PCP Proof
Here allow for stochastic policies π : Θ→ ∆(S)
Let r(ω; aΓ) ∈ {0, 1} be default outcome at ω ≡ (θ, x, s) when agents playaccording to aΓ
Let Γ∗ = {S∗, π∗} be s.t. S∗ = S × {0, 1} and
π∗((s, r(ω; aΓ))|θ) = π(s|θ), all (θ, s) s.t. π(s|θ) > 0
After receiving s∗ ≡ (s, 1), agents use Bayes’ rule to update beliefs aboutω ≡ (θ, x, s):
∂ΛΓ+
i (ω|xi , (s, 1)) =1{r(ω; aΓ) = 1}
ΛΓi (1|xi , s)
∂ΛΓi (ω|xi , s)
where
ΛΓi (1|xi , s) ≡
∫{ω:r(ω;aΓ)=1}
dΛΓi (ω|xi , s)
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PCP Proof
Let aΓ(n), aΓ∗
(n) be most aggressive profile surviving n round of IDISDS under Γand Γ∗, respectively
Definition 2
Strategy profile aΓ∗
(n) less aggressive than aΓ(n) iff, for any i ∈ [0, 1],
aΓ(n),i (xi , s) = 1 ⇒ aΓ∗
(n),i (xi , (s, 1)) = 1
Lemma 1
For any n, aΓ∗
(n) less aggressive than aΓ(n)
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PCP Proof
Proof by induction
Let aΓ0 = aΓ∗
0 be strategy profile where all agents refrain from pledging,regardless of their (endogenous and exogenous) information
Suppose that aΓ∗
(n−1) less aggressive than aΓ(n−1)
Note that r(ω|aΓ) = 0⇒ r(ω|aΓ(n−1)) = 0
(aΓ(n−1) more aggressive than aΓ = aΓ
∞)
Hence, r(ω; aΓ) = 1 “removes” from support of agents’ beliefs states (θ, x, s)for which default occurs under aΓ
(n−1)
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PCP Proof
Because
payoffs from pledging in case of default are negative
payoff from pledging under Γ∗ when agents follow aΓ(n−1)
UΓ∗
i (xi , (s, 1); aΓ(n−1)) =
∫ωu(θ,A(ω;aΓ
(n−1)))1{r(ω;aΓ)=1}dΛΓi (ω|xi ,s)
ΛΓi (1|xi ,s)
>∫ωu(θ,A(ω;aΓ
(n−1)))dΛΓi (ω|xi ,s)
ΛΓi (1|xi ,s)
=UΓ
i (xi ,s;aΓ(n−1))
ΛΓi (1|xi ,s)
Hence, UΓi (xi , s; aΓ
(n−1)) > 0⇒ UΓ∗
i (xi , (s, 1); aΓ(n−1)) > 0
![Page 36: Persuasion in Global Games with Application to Stress Testingapa522/Slides-Persuasion-GG.pdfDamages to society of mkt coordination on undesirable actions can be severe Monte dei Paschi](https://reader035.fdocuments.in/reader035/viewer/2022071013/5fcb35a68400b07208516467/html5/thumbnails/36.jpg)
PCP Proof
That aΓ∗
(n−1) less aggressive than aΓ(n−1) along with supermodularity of game
implies that
UΓ∗
i (xi , (s, 1); aΓ(n−1)) > 0⇒ UΓ∗
i (xi , (s, 1); aΓ∗
(n−1)) > 0
As a consequence,
aΓ(n),i (xi , s) = 1 ⇒ aΓ∗
(n),i (xi , (s, 1)) = 1
This means that aΓ∗
(n) less aggressive than aΓ(n).
![Page 37: Persuasion in Global Games with Application to Stress Testingapa522/Slides-Persuasion-GG.pdfDamages to society of mkt coordination on undesirable actions can be severe Monte dei Paschi](https://reader035.fdocuments.in/reader035/viewer/2022071013/5fcb35a68400b07208516467/html5/thumbnails/37.jpg)
PCP Proof
Above lemma implies MARP under Γ∗, aΓ∗ ≡ aΓ∗
(∞), less aggressive than
MARP under Γ, aΓ ≡ aΓ(∞)
In turn, this implies that r(ω; aΓ) = 1 makes it common certainty thatr(ω; aΓ∗) = 1
Hence, all agents pledge after hearing that r(ω; aΓ) = 1
Similarly, r(ω; aΓ) = 0 makes it common certainty that θ < 1. Under MARP,all agents refrain from pledging when hearing that r(ω; aΓ) = 0
![Page 38: Persuasion in Global Games with Application to Stress Testingapa522/Slides-Persuasion-GG.pdfDamages to society of mkt coordination on undesirable actions can be severe Monte dei Paschi](https://reader035.fdocuments.in/reader035/viewer/2022071013/5fcb35a68400b07208516467/html5/thumbnails/38.jpg)
Example
Assume b = −g
Pledging rationalizable iff Pr(r = 1) ≥ 1/2
![Page 39: Persuasion in Global Games with Application to Stress Testingapa522/Slides-Persuasion-GG.pdfDamages to society of mkt coordination on undesirable actions can be severe Monte dei Paschi](https://reader035.fdocuments.in/reader035/viewer/2022071013/5fcb35a68400b07208516467/html5/thumbnails/39.jpg)
Example
No disclosure: under MARP, aΓi (xi ) = 0, all xi
![Page 40: Persuasion in Global Games with Application to Stress Testingapa522/Slides-Persuasion-GG.pdfDamages to society of mkt coordination on undesirable actions can be severe Monte dei Paschi](https://reader035.fdocuments.in/reader035/viewer/2022071013/5fcb35a68400b07208516467/html5/thumbnails/40.jpg)
Example
Suppose PM informs agents of whether θ is extreme or intermediate
aΓi (xi , s) = 1, all (xi , s)
![Page 41: Persuasion in Global Games with Application to Stress Testingapa522/Slides-Persuasion-GG.pdfDamages to society of mkt coordination on undesirable actions can be severe Monte dei Paschi](https://reader035.fdocuments.in/reader035/viewer/2022071013/5fcb35a68400b07208516467/html5/thumbnails/41.jpg)
Example
If, instead, PM only recommends to pledge (equivalently, Γ is pass/fail):aΓi (xi , 1) = 0 for all xi
Suboptimality of P/F policies (+ failure of RP)