Search Results
Report
Misinformation in Social Media: The Role of Verification Incentives
We develop a model in which the prevalence and sharing of misinformation endogenously arise from the interaction between (i) users’ decisions to verify and share news of unknown truthfulness and (ii) producers’ choices to generate fake content. We use the model to examine how policies intended to combat misinformation affect users’ incentives to engage in costly news verification. Via this channel, unintended effects may emerge from: lowering verification costs borne by users; disrupting the supply of fake content; and introducing imperfect filters. We provide sensitivity measures, akin ...
Report
Leader-Follower Dynamics in Shareholder Activism
Motivated by the rise of hedge fund activism, we consider a leader blockholder and a follower counterpart who first trade in sequence to build their blocks and then intervene in a firm. With endogenous fundamentals and steering dynamics, the leader ceases to trade in an unpredictable way: she buys or sells to induce the follower to acquire a larger block and thus spend more resources to improve firm value. Key is that the activists have correlated private information—initial blocks, firms' fundamentals, or their own productivity—so that prices either overreact or underreact to order ...
Discussion Paper
Who’s Borrowing and Lending in the Fed Funds Market Today?
The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate set in the market for uncollateralized short-term lending and borrowing of central bank reserves in the U.S. Since the global financial crisis, the market for federal funds has changed markedly. In this post, we take a closer look at who is currently trading in the federal funds market, as well as the reasons for their participation.
Report
Signaling with Private Monitoring
A sender signals her private information to a receiver who privately monitors the sender’s behavior, while the receiver transmits his private inferences back through an imperfect public signal of his actions. In a linear-quadratic-Gaussian setup in continuous time, we construct linear Markov equilibria, where the state variables are the players’ beliefs up to the sender’s second order belief. This state is an explicit function of the sender’s past play—hence, her private information—which leads to separation through the second-order belief channel. We examine the implications of ...
Discussion Paper
Who Is Borrowing and Lending in the Eurodollar and Selected Deposit Markets?
A recent Liberty Street Economics post discussed who is borrowing and lending in the federal funds (fed funds) market. This post explores activity in two other markets for short-term bank liabilities that are often perceived as close substitutes for fed funds—the markets for Eurodollars and “selected deposits.”
Discussion Paper
Consumer Scores and Price Discrimination
The consumer suffers because she buys less (with the loss represented by the red area). And while not depicted, she also suffers from future price discrimination due to information about her willingness to pay (that is, the intercept of her demand function) getting transmitted to Firm 2. However, Firm 1 is forced to lower its price (P’ in the figure) after the strategic demand reduction occurs. If the consumer has high willingness to pay, the benefit of this discount applied to many units is such that she wants to be tracked (the blue area—a benefit—grows as the intercept of demand ...
Discussion Paper
Breaking Down the Market for Misinformation
The spread of misinformation online has been recognized as a growing social problem. In responding to the issue, social media platforms have (i) promoted the services of third-party fact-checkers; (ii) removed producers of misinformation and downgraded false content; and (iii) provided contextual information for flagged content, empowering users to determine the veracity of information for themselves. In a recent staff report, we develop a flexible model of misinformation to assess the efficacy of these types of interventions. Our analysis focuses on how well these measures incentivize users ...
Discussion Paper
Leader-Follower Dynamics in Shareholder Activism
Activist shareholders play a central role in modern corporations, influencing the capital structure, business strategy, and governance of firms. Such “blockholders” range from investors who actively jawbone or break up firms to index funds that are largely passive in that they limit themselves to voting. In between, however, is a key group of blockholders that have historically focused on trading but have embraced activism as an established business strategy in the past few decades. Campaigns involving such “trading” blockholders have become ubiquitous, increasingly targeting ...
Discussion Paper
The Central Banking Beauty Contest
Expectations can play a significant role in driving economic outcomes, with central banks factoring market sentiment into policy decisions and market participants forming their own assumptions about monetary policy. But how well do central banks understand the expectations of market participants—and vice versa? Our model, developed in a recent paper, features a dynamic game between (i) a monetary authority that cannot commit to an inflation target and (ii) a set of market participants that understand the incentives created by that credibility problem. In this post, we describe the game, a ...