Two-Sided Learning and the Ratchet Principle
I study a class of continuous-time games of learning and imperfect monitoring. A long-run player and a market share a common prior about the initial value of a Gaussian hidden state, and learn about its subsequent values by observing a noisy public signal. The long-run player can nevertheless contro...
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| Format: | Article |
| Language: | English |
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Oxford University Press (OUP)
2019
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| Online Access: | https://hdl.handle.net/1721.1/122362 |
| _version_ | 1826198340892622848 |
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| author | Cisternas Leyton, Gonzalo Sebastian |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Cisternas Leyton, Gonzalo Sebastian |
| author_sort | Cisternas Leyton, Gonzalo Sebastian |
| collection | MIT |
| description | I study a class of continuous-time games of learning and imperfect monitoring. A long-run player and a market share a common prior about the initial value of a Gaussian hidden state, and learn about its subsequent values by observing a noisy public signal. The long-run player can nevertheless control the evolution of this signal, and thus affect the market’s belief. The public signal has an additive structure, and noise is Brownian. I derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long-run player’s actions depend on the history of the game only through the market’s correct belief. Using these conditions, I demonstrate the existence of pure-strategy equilibria in Markov strategies for settings in which the long-run player’s flow utility is nonlinear. The central finding is a learning-driven ratchet principle affecting incentives. I illustrate the economic implications of this principle in applications to monetary policy, earnings management, and career concerns. |
| first_indexed | 2024-09-23T11:03:19Z |
| format | Article |
| id | mit-1721.1/122362 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T11:03:19Z |
| publishDate | 2019 |
| publisher | Oxford University Press (OUP) |
| record_format | dspace |
| spelling | mit-1721.1/1223622022-10-01T00:51:06Z Two-Sided Learning and the Ratchet Principle Cisternas Leyton, Gonzalo Sebastian Sloan School of Management I study a class of continuous-time games of learning and imperfect monitoring. A long-run player and a market share a common prior about the initial value of a Gaussian hidden state, and learn about its subsequent values by observing a noisy public signal. The long-run player can nevertheless control the evolution of this signal, and thus affect the market’s belief. The public signal has an additive structure, and noise is Brownian. I derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long-run player’s actions depend on the history of the game only through the market’s correct belief. Using these conditions, I demonstrate the existence of pure-strategy equilibria in Markov strategies for settings in which the long-run player’s flow utility is nonlinear. The central finding is a learning-driven ratchet principle affecting incentives. I illustrate the economic implications of this principle in applications to monetary policy, earnings management, and career concerns. 2019-10-03T18:59:00Z 2019-10-03T18:59:00Z 2018-01 2014-05 2019-09-27T11:43:59Z Article http://purl.org/eprint/type/JournalArticle 1467-937X 0034-6527 https://hdl.handle.net/1721.1/122362 Cisternas, Gonzalo et al. "Two-Sided Learning and the Ratchet Principle." Review of Economic Studies 85, 1 (January 2018): 307-351 en http://dx.doi.org/10.1093/RESTUD/RDX019 Review of Economic Studies Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Oxford University Press (OUP) Prof. Cisternas via Shikha Sharma |
| spellingShingle | Cisternas Leyton, Gonzalo Sebastian Two-Sided Learning and the Ratchet Principle |
| title | Two-Sided Learning and the Ratchet Principle |
| title_full | Two-Sided Learning and the Ratchet Principle |
| title_fullStr | Two-Sided Learning and the Ratchet Principle |
| title_full_unstemmed | Two-Sided Learning and the Ratchet Principle |
| title_short | Two-Sided Learning and the Ratchet Principle |
| title_sort | two sided learning and the ratchet principle |
| url | https://hdl.handle.net/1721.1/122362 |
| work_keys_str_mv | AT cisternasleytongonzalosebastian twosidedlearningandtheratchetprinciple |