Alessandro Pavan

• Ph.D, Toulouse School of Economics
• Professor at Northwestern University

We study mechanism design in dynamic quasilinear environments where private information arrives over time and decisions are made over multiple periods. We make three contributions. First, we provide a necessary condition for incentive compatibility that takes the form of an envelope formula for the derivative of an agent's equilibrium expected payo...

This paper studies the exchange of information between two principals who contract sequentially with the same agent, as in the case of a buyer who purchases from multiple sellers. We show that when (a) the upstream principal is not personally interested in the downstream level of trade, (b) the agent’s valuations are positively correlated, and (c)...

Global games of regime change—coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attack it— have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing a...

We study optimal labor-income taxation in a dynamic economy in which the agents’ productivity is their own private information, is stochastic, and evolves endogenously over the lifecycle due to learning-by-doing. First, we identify novel distortions that originate in the endogeneity of the agents’ private information and that contribute to higher l...

We study platform markets in which the information about users' preferences is dispersed. First, we show how the dispersion of information introduces idiosyncratic uncertainty about the participation of the other side of the market and how the latter shapes the elasticity of the demands and the equilibrium prices. We then study the effects on profi...

We introduce a model of (platform‐mediated) many‐to‐many matching in which agents' preferences are both vertically and horizontally differentiated. We first show how the model can be used to derive the profit‐maximizing matching plans under customized pricing. We then investigate the implications for targeting and welfare of uniform pricing (be it...

We study the interaction between the inefficiency in the acquisition of private information and trading in financial markets. We show that as the cost of information declines, traders over-invest in information acquisition and trade too much on their private information. We also show that, generically, there exists no policy based on the price of t...

In many games of interest (e.g., trade, entry, leadership, warfare, and partnership environments), one player (the leader) covertly acquires information about the state of Nature before choosing whether to engage with another player (the follower). The friendliness of the follower’s reaction depends on his beliefs about what motivated the leader’s...

How should firms be incentivized to adopt new technologies when the technical merits and spillovers of such technologies are uncertain? We show that, when information is dispersed but exogenous, efficiency can be induced with simple (constant) subsidies. When, instead, firms must also be incentivized to collect information efficiently, subsidies mu...

Two-sided markets are markets in which agents match through a platform, which designs and prices matching opportunities. Typical examples include: ad-exchanges matching advertisers with publishers; media outlets matching readers or viewers with content providers and advertisers; video-game consoles matching gamers with game developers; operating sy...

Entrepreneurs and venture capitalists are concerned about investors’ beliefs in asset markets because these beliefs shape the value of a potential IPO and the possibility to expand. Investors’ beliefs, on the other hand, can be influenced by startup activity insofar as the latter contains valuable information about eventual profitability. This two-...

We study platform markets in which agents arrive gradually, experience changes to their preferences over time, and are frequently re‐matched. We introduce simple auctions specifically designed for such markets. Upon joining, agents select a status that determines the weight assigned to their future bids. Each match is then assigned a score that dep...

We introduce the concept of "relative exposure to the unexpected" and show that, when parties to a contract covertly engage in information acquisition prior to designing the contract, the concept underlies a variety of phenomena such as expectation conformity (the parties' tendency to conform to the level of cognition that is expected of them), ove...

We propose a robust solution concept for Bayesian persuasion that accounts for the Sender's concern that her Bayesian belief about the environment—which we call the conjecture —may be false. Specifically, the Sender is uncertain about the exogenous sources of information the Receivers may learn from, and about strategy selection. She first identifi...

The paper studies "cognitive games," that is, games in which the players can influence their understanding of a strategic situation before playing the primitive (normal-or extensive-form) game. The analysis covers both the case of self-directed cognition (as when a player controls her own information structure) and the case of manipulative cognitio...

This paper uses a recursive approach to arrive at a concise formula describing the forces responsible for the dynamics of wedges (i.e., distortions in the second-best allocations relative to their first-best counterparts) in a large class of economies with an arbitrary number of periods, and where the agents' private information evolves over time,...

This document contains proofs and additional results for the manuscript “Persuasion in Global Games with Application to Stress Testing”. All numbered items (i.e., sections, subsections, lem- mas, conditions, propositions, and equations) in this document contain the prefix “S”. Any numbered reference without the prefix “S” refers to an item in the m...

We study robust/adversarial information design in global games, with an application to stress testing. We show that the optimal policy coordinates all market participants on the same course of action. Importantly, while it removes any “strategic uncertainty,” it preserves heterogeneity in “structural uncertainty” (that is, in beliefs over payoff fu...

The paper studies the interaction between traders' acquisition of private information and the aggregation of information in financial markets. We consider a canonical market microstructure in which partially-informed traders compete in schedules and prices partially aggregate the traders' private information. Before submitting their demand schedule...

We study the problem of a decision maker alternating between exploring existing alternatives in the consideration set and searching for new ones. We characterize the optimal policy and its key properties and identify implications for search and exploration dynamics. When the search technology is stationary or improves over time, search is equivalen...

We study games in which several principals contract with several privately-informed agents. We show that enabling the principals to engage in contractible private disclosures by sending private signals to the agents about how the mechanisms will respond to the agents' messages-can significantly affect the predictions of such games. Our first result...

Entrepreneurs and venture capitalists are concerned about investors' beliefs in asset markets because these beliefs shape the value of a potential IPO and the possibility to expand. Investors' beliefs, on the other hand, can be influenced by startup activity because the latter may contain valuable information about eventual profitability. This two-...

We study games in which several principals contract with several privately-informed agents. We show that enabling the principals to engage in contractible private disclosures by sending private signals to the agents about how the mechanisms will respond to the agents' messages-can significantly affect the predictions of such games. Our first result...

We study search, evaluation, and selection of candidates of unknown quality for a position. We examine the effects of “soft” affirmative action policies increasing the relative percentage of minority candidates in the candidate pool. We show that, while meant to encourage minority hiring, such policies may backfire if the evaluation of minority can...

We introduce a model of (platform-mediated) many-to-many matching in which agents’ pref- erences are both vertically and horizontally differentiated. We first show how the model can be used to derive the profit-maximizing matching plans under customized pricing. We then inves- tigate the implications for targeting and welfare of uniform pricing (be...

We study optimal income taxation when workers’ productivity is stochastic and evolves en- dogenously because of learning-by-doing. Learning-by-doing calls for higher wedges, and alters the relation between wedges and tax rates. In a calibrated model, we find that reforming the US tax code brings significant welfare gains and that a simple tax code...

The chapter has ten sections, which cover the theory of two-sided markets and related empirical work. Section 1 introduces the reader to the literature. Section 2 covers the case of markets dominated by a single monopolistic firm. Section 3 discusses the theoretical literature on competition for the market, focusing on pricing strategies that firms...

Two-sided markets are markets in which agents match through a platform, which designs and prices matching opportunities. Typical examples include ad-exchanges matching advertisers with publishers; media outlets matching readers/viewers with content providers and advertisers; video-game consoles matching gamers with game developers; operating system...

We propose a robust solution concept for Bayesian persuasion that accounts for the Sender’s concern that her Bayesian belief about the environment—which we call the conjecture—may be false. Specifically, the Sender is uncertain about the exogenous sources of information the Receivers may learn from, and about strategy selection. She first identifie...

Section A in this supplement contains results for the Rawlsian-risk-neutral case. It provides a proof for Proposition 3 in the main text, relates wedges to marginal tax rates, and shows how optimal tax codes can also be derived using a perturbation approach in the spirit of Saez (2001) adapted to the dynamic economy with LBD under consideration. Se...

We study search, evaluation, and selection of candidates of unknown quality for a position. We examine the effects of "soft" affirmative action policies increasing the relative percentage of minority candidates in the candidate pool. We show that, while meant to encourage minority hiring, such policies may backfire if the evaluation of minority can...

We study search, evaluation, and selection of candidates of unknown quality for a position. We examine the effects of "soft" affirmative action policies increasing the relative percentage of minority candidates in the candidate pool. We show that, while meant to encourage minority hiring, such policies may backfire if the evaluation of minority can...

We propose a robust solution concept for Bayesian persuasion that accounts for the Sender’s concern that her Bayesian belief about the environment—which we call the conjecture—may be false. Specifically, the Sender is uncertain about the exogenous sources of information the Receivers may learn from, and about strategy selection. She first identifie...

We study platform markets in which the information about users’ preferences is dispersed. First, we show how the dispersion of information introduces idiosyncratic uncertainty about participation decisions and how the latter shapes the elasticity of the demands and the equilibrium prices. We then study the effects on profits, consumer surplus, and...

This document contains additional results for the manuscript "Matching Auctions." Section S.1 contains an example of an environment with an intermediate capacity constraint (that is, 1 < M < nA nB) in which the separability condition is violated and an index policy fails to be optimal, illustrating the role of this condition. Section S.2 contains a...

We develop a framework to study optimal sector-specific taxation, where each agent chooses an occupation by comparing her skill differential with the tax burden differential across sectors. Because skills are not perfectly transferable, the Diamond-Mirrlees theorem (according to which the second-best entails production efficiency) fails: social wel...

This document contains additional results for the manuscript “Di↵erential Taxation and Occu- pational Choice.” All numbered items (i.e., sections, subsections, lemmas, conditions, propositions, and equations) in this document contain the prefix “S”. Any numbered reference without the prefix “S” refers to an item in the main text. Please refer to th...

This document contains additional results for the manuscript "Information Management and Pricing in Platform Markets." All numbered items (i.e., sections, subsections, lemmas, conditions, propositions, and equations) in this document contain the prefix "S". Any numbered reference without the prefix "S" refers to an item in the main text. Please ref...

This is the first of two volumes containing papers and commentaries presented at the Eleventh World Congress of the Econometric Society, held in Montreal, Canada in August 2015. These papers provide state-of-the-art guides to the most important recent research in economics. The book includes surveys and interpretations of key developments in econom...

This article was prepared for an invited session at the 2015 World Congress of the Econometric Society. Through a unifying framework, I survey recent developments in the dynamic mechanism design literature and then introduce two new areas that I expect will draw attention in the years to come: robustness and endogenous types.

Section 1 in this supplement shows how the allocations in the two-period economy in the main text relate to their counterparts in the 40-period economy considered in the quantitative analysis in the last section of the paper. Section 2 shows that the wedges derived through the allocation approach coincide with the wedges derived through the perturb...

This document contains additional results for the manuscript "Matching Auctions." Section S.1 contains an example of an environment with an intermediate capacity constraint (that is, 1 < M < nA nB) in which the separability condition is violated and an index policy fails to be optimal, illustrating the role of this condition. Section S.2 contains a...

We study mediated many-to-many matching in markets in which valuations evolve over time as the result of shocks, learning through experimentation, or a preference for variety. The analysis uncovers the key trade- offs that platforms face in the design of their matching protocols. It shows that the dynamics that maximize either the platform’s profit...

Matching theory typically assumes that agents know their values for possible partners and confines attention to settings in which matching is either static, or driven by population dynamics. In many environments of interest, instead, dynamics originate in the agents learning their preferences through interactions with other agents. In this short pa...

We study centralized many-to-many matching in markets where agents have private information about (vertical) characteristics that determine match values. Our analysis reveals how matching patterns reflect cross-subsidization between sides. Agents are endogenously partitioned into consumers and inputs. At the optimum, the costs of procuring agents-i...

This document contains additional results for the manuscript “Di↵erential Taxation and Occu- pational Choice.” All numbered items (i.e., sections, subsections, lemmas, conditions, propositions, and equations) in this document contain the prefix “S”. Any numbered reference without the prefix “S” refers to an item in the main text. Please refer to th...

The Introduction to the Symposium Issue on “Dynamic Contracts and Mechanism Design” of the Journal of Economic Theory provides an overview of the dynamic mechanism design literature. We then introduce the papers that are contained in the Symposium issue and finally conclude by discussing avenues for future research. Several of the papers contained...

This supplement contains additional results for the article "Dynamic Managerial Compensation: A Variational Approach." In particular, it contains proofs for Example 1, Propositions 6, and Proposition 7 omitted in the main document. It also contains a brief description of the numerical analysis at the end of Section 4 in the main document.

We study the optimal dynamics of incentives for a manager whose ability to generate cash flows changes stochastically with time and is his private information. We show that distortions (aka, wedges) under optimal contracts may either increase or decrease over time. In particular, when the manager's risk aversion and ability persistence are small, d...

The Introduction to the Symposium Issue on "Dynamic Contract and Mechanism Design" of the Journal of Economic Theory provides an overview of the dynamic mechanism design literature. We then introduce the papers that are contained in the Symposium issue and finally conclude by discussing avenues for future research. Several of the papers contained i...

We study information acquisition in a flexible framework with strategic complementarity or substitutability in actions and a rich set of externalities that are responsible for possible wedges between the equilibrium and the efficient acquisition of information. First, we relate the (in)efficiency in the acquisition of information to the (in)efficie...

We study monopoly and duopoly pricing in a two-sided market with dispersed information about users'preferences. First, we show how the dispersion of information introduces idiosyncratic uncertainty about participation rates and how the latter shapes the elasticity of the demands and thereby the equilibrium prices. We then study informative advertis...

This document contains additional results and an omitted proof for the paper "Dynamic Mechanism Design: A Myersonian Approach." Section S.1 contains the proof of the one-stage-deviation principle used in the proof of Theorem 2. Section S.2 contains a detailed analysis of Example 5. Section S.3 establishes conditions under which the allocation rule...

Global games with endogenous information often exhibit multiple equilibria. In this paper we show how one can nevertheless identify useful predictions that are robust across all equilibria and that could not have been delivered in the common-knowledge counterparts of these games. Our analysis is conducted within a flexible family of games of regime...

I consider a ‡exible framework of strategic interactions under incomplete information in which, prior to committing their actions (consumption, production, or investment decisions), agents choose the attention to allocate to an arbitrarily large number of information sources about the primitive events that are responsible for the incompleteness of...

We study centralized many-to-many matching in markets where agents have private informa-tion about (vertical) characteristics that determine match values. Our analysis reveals how match-ing patterns reflect cross-subsidization between sides. Agents are endogenously partitioned into consumers and inputs. At the optimum, the costs of procuring agents...

We develop a dynamic theory of managerial turnover in a world in which the quality of the match between a firm and its managers changes stochastically over time. Shocks to managerial productivity are anticipated at the time of contracting but privately observed by the managers. Our key positive result shows that the firm’s optimal retention decisio...

We study equilibrium information acquisition in a exible framework with strategic com-plementarity or substitutability. First we relate the (in)e¢ ciency in the acquisition of private information to the (in)e¢ ciency in the equilibrium response to private and public information, and explain why e¢ ciency in the use does not guarantee e¢ ciency in t...

In an environment where managers' ability to generate profits changes stochastically over time, we characterize the optimal turnover policy for a firm hiring a succession of managers. The focus is on the interaction between the compensation scheme used to incentivize the managers' effort and the retention policy used to screen the managers' types a...

We characterize the …rm's optimal contract for a manager who faces costly e¤ort decisions and whose ability to generate pro…ts for the …rm changes stochastically over time. The optimal contract is obtained as the solution to a dynamic mechanism design problem with hidden actions and persistent private shocks to the manager's productivity. When the...

This paper studies second-degree price discrimination in matching markets, that is, in markets where the product sold by a platform is access to other agents. In order to investigate the optimality of a large variety of pricing strategies, we tackle the problem from a mechanism design approach and allow the platform to offer any many-to-many matchi...

We introduce new revelation mechanisms for simultaneous common agency games which, although they do not always permit a complete equilibrium characterization, do facilitate the characterization of the equilibrium outcomes that are typically of interest in applications. We then show how these mechanisms can be used in applications such as menu aucti...

These notes examine the problem of how to extend envelope theorems to infinite-horizon dynamic mechanism design settings, with an application to the design of "bandit auctions."

Information regarding economic fundamentals is widely dispersed in society, is only imperfectly aggregated through prices or other indicators of aggregate activity, and cannot be centralized by the government or any other institution. In this paper we seek to identify policies that can improve the decentralized use of such dispersed information wit...

This note contains additional material omitted in the paper. Section A1 contains an example that illustrates how extended direct mechanisms can be put to work to identify necessary and sufficient conditions for the sustainability of an outcome as a sequential common agency equilibrium. Section A2 contains the formal statements (with corresponding p...

This paper considers dynamic games in which multiple principals contract sequentially and noncooperatively with the same agent. We first show that when contracting is private, i.e. when downstream principals do not observe the mechanisms offered upstream and the decisions taken in these mechanisms, all PBE outcomes can be characterized through pure...

We examine the design of incentive-compatible screening mechanisms for dynamic environments in which the agents types follow a (possibly non-Markov) stochastic process, decisions may be made over time and may affect the type process, and payoffs need not be time-separable. We derive a formula for the derivative of an agent’s equilibrium payoff with...

We characterize the optimal incentive scheme for a manager who faces costly eort decisions and whose ability to generate pro…ts for the …rm varies stochastically over time. The optimal contract is obtained as the solution to a dynamic mechanism design problem with hidden actions and persistent shocks to the agent's productivity. When the agent is r...

We illustrate, by means of two examples, why assuming the principals offer simple menus (i.e. collections of payoff-relevant alternatives) as opposed to more general mechanisms may preclude a complete characterization of the set of equilibrium outcomes in certain sequential contracting environments. We then discuss how refinements of the solution c...

This paper examines the problem of how to design incentive-compatible mechanisms in environments in which the agents’private information evolves stochastically over time and in which decisions have to be made in each period. The environments we consider are fairly general in that the agents’types are allowed to evolve in a non-Markov way, decisions...

This paper studies defense policies in a global-game model of speculative currency attacks. Although the signaling role of policy interventions sustains multiple equilibria, a number of novel predictions emerge which are robust across all equilibria. (i) The central bank intervenes by raising domestic interest rates, or otherwise raising the cost o...

I study the properties of optimal long-term contracts in an environment in which the agents type evolves stochastically over time. The model stylizes a buyer-seller relationship but the results apply quite naturally to many contractual situations including regulation and optimal income-taxation. I rst show, through a simple example, that distortion...

This paper studies defense policies in a global-game model of speculative currency attacks. Although the signaling role of policy interventions sustains multiple equilibria, a number of novel predictions emerge which are robust across all equilibria. (i) The central bank intervenses by raising domestic interest rates, or otherwise raising the cost...

This paper analyzes equilibrium and welfare for a tractable class of economies (games) that have externalities, strategic complementarity or substitutability, and heterogeneous information. First, we characterize the equilibrium use of information: complementarity heightens the sensitivity of equilibrium actions to public information, raising aggre...

This paper analyzes equilibrium and welfare for a tractable class of economies (games) that have externalities, strategic complementarity or substitutability, and heterogeneous information. First, we characterize the equilibrium use of information: complementarity heightens the sensitivity of equilibrium actions to public information, raising aggre...

This supplementary document contains a formal analysis of some of the extensions briefly discussed in Section 5 of the published version. Section A1 considers the game in which agents receive signals about the size of past attacks. Section A2 considers the game with observable shocks to the fundamentals. Section A3 considers the variant in which ag...

This paper considers dynamic games in which multiple principals contract sequentially and non-cooperatively with the same agent. We first show that when contracting is private, i.e. when downstream principals do not observe the mechanisms offered upstream and the decisions taken in these mechanisms, all PBE outcomes can be characterized through pur...

In recent years there has been a growing interest in macro models with heterogeneity in information and complementarity in actions. These models deliver promising positive properties, such as heightened inertia and volatility. But they also raise importantnormative questions, such as whether the heightened inertia and volatility are socially undesi...

Financial markets look at data on aggregate investment for clues about underlying profitability. At the same time, firms' investment depends on expected equity prices. This generates a two-way feedback between financial market prices and investment. In this paper we study the positive and normative implications of this interaction during episodes o...