MICRO/THEORY: Information Acquisition, Investment and Competition; Professor Sergei Severinov (Vancouver School of Economics)

Abstract

We study competition between the firms, who can persuade the market or the decision market by acquiring and disclosing information. The firms face a tradeoff between productive investment and information acquisition in their resource allocation. Productive investment improves the firms’ productivity and the information/signals about it. We show that in the attempt to persuade the market, the firms divert substantial resources from productive investment into information acquisition, even though productive activities increase the chances of success in persuasion. We characterize the equilibrium budget allocation and the equilibrium disclosure both in competition and in the agency setting. More competition or higher hurdle rate in an agency setting lead to more information acquisition and lower efficiency. This result also holds in a setting with dynamic resource allocation, as there is no benefit from experimentation in our setting where the value of information lies only in its persuasion effect. We then show how a commitment by a firm to disclose all signals, or a commitment by the principal to a decision rule, curtail the inefficiency and stimulate productive investment.