Applications of Information Design to Finance, Politics, and Education

Abstract

Information design is the study of how an informed player optimally communicates to influence the actions of another player. In the first chapter, I give a brief review of a few main results from the literature that I will be using in this dissertation. In the remainder of this dissertation, I will present novel applications and extensions of the information design framework to solve problems in finance, politics, and education. In chapter 2, I study a trader that has private information relating to the value of an asset. The traders trades are publicly observable, so their actions reveal information to the rest of the market. I find the optimal trading strategy and show that it rationalizes the commonly assumed price dynamics assumed in the finance literature. In chapter 3, I study the problem of gerrymandering. A state gets to elected several members of congress. The designer chooses how to divide the state into districts to each elect one congress member. I first show how the designer can maintain a congressional majority for their preferred political party, even when that party becomes the minority among the population. I then document in the data that state seat-vote curves (the fraction of seats a party wins as a function of the fraction of votes the party wins in the state) are highly responsive to changes in the vote share, and that this responsiveness is negatively correlated with the size of the state. This is explained in my equilibrium model. In chapter 4, I study university grading schemes. A worker has no way to credibly signal their productivity to potential employers on their own, so they hire a university to evaluate them and publish a rating. The university needs to balance their desire to help as many students as possible get hired (so they can charge high tuition) with their need to build and maintain a good reputation. The model explains observed patterns of grade inflation, especially concentrated among good schools. In chapter 5, I give a few concluding remarks and thoughts about future avenues for research.