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Dynamic Information Design with Diminishing Sensitivity Over News

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  • Jetlir Duraj
  • Kevin He

Abstract

A benevolent sender communicates non-instrumental information over time to a Bayesian receiver who experiences gain-loss utility over changes in beliefs ("news utility"). We show how to compute the optimal dynamic information structure for arbitrary news-utility functions. With diminishing sensitivity over the magnitude of news, one-shot resolution of uncertainty is strictly suboptimal under commonly used functional forms. Information structures that deliver bad news gradually are never optimal. We identify additional conditions that imply the sender optimally releases good news in small pieces but bad news in one clump. When the sender lacks commitment power, diminishing sensitivity leads to a credibility problem for good-news messages. Without loss aversion, the babbling equilibrium is essentially unique. More loss-averse receivers may enjoy higher equilibrium news-utility, contrary to the commitment case. We discuss applications to media competition and game shows.

Suggested Citation

  • Jetlir Duraj & Kevin He, 2019. "Dynamic Information Design with Diminishing Sensitivity Over News," Papers 1908.00084, arXiv.org, revised Nov 2019.
  • Handle: RePEc:arx:papers:1908.00084
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    References listed on IDEAS

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    1. Robert J. Aumann, 1995. "Repeated Games with Incomplete Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011476.
    2. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    3. Pagel, Michaela, 2012. "Expectations-Based Reference-Dependent Preferences and Asset Pricing," MPRA Paper 47933, University Library of Munich, Germany.
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