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Essays on misspecified models

Thysen, Heidi Christina (2021) Essays on misspecified models. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004277


These essays examine how relaxing common assumptions affect the strategic interactions between agents. It investigates how the presence of an agent with a simplified causal model influences the contract and disclosure of information with other agents, as well as the impact of changes to the institutional settings. By theoretically modelling these choices, it aims to improve the understanding of equilibrium effects and thereby contributing to debates about the optimal design of contracts, strategic information transmission and political budget cycles and the impact of assumptions. The first chapter analyses the contract between a firm owner and a employee, when the firm cannot observe the employee's action and the employee's belief about how her action influences the contractible variable is governed by a misspecified causal model. It contributes to the existing literature by explicitly modelling the source of the employee's misspecified beliefs. This approach allows us to shed light on the variables the firm owner would want to include in the contract given the employee's mistakes as well as the intermediate variables the employee needs to include in her causal model in order to act as if she understands how her action influence the contractible variable. The second chapter examines how an informed agent conveys information to an uninformed agent when he can simultaneously influence the messages she receives and how she interprets them. This relaxes the assumption that agents always understand the meaning of messages in equilibrium. The third chapter analyses how political budget cycles change when the politician in charge can choose to call for a snap election in periods before the end of the term. This contributes to the existing literature by taking the equilibrium effects of early election into consideration and thereby the effect of the continuation value of being in office.

Item Type: Thesis (PhD)
Additional Information: © 2021 Heidi Christina Thysen
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Q Science > QA Mathematics
Sets: Departments > Economics
Supervisor: Eliaz, Kfir and Levy, Gilat and Spiegler, Ran

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