Osaka Workshop on Economics of Institutions and Organization (#151)

How does a long-term relationship affect communication among relevant economic entities? In this paper, we study dynamic information design in repeated interaction, where the state is imperfectly persistent. We observe that dynamics introduces a novel distortion relative to the static counterpart. Even if both parties’ preferences are aligned in some state, revealing that state (which is myopically optimal for the informed) could make it difficult to persuade the uninformed in future periods (when the state switched to those with preference misalignment). This motif can distort the information in two different ways. If the state is moderately persistent (and the parties are moderately patient), then the optimal mechanism exhibits “inefficient pessimism” ; while if the state is much persistent, then it exhibits “inefficient optimism”. Methodologically, we argue that a duality-based approach in solving dynamic information design could be more tractable than a more standard approach.Abstract：Takuro Yamashita