Optimal Stopping with Private Information
University of Bonn - Institute for Applied Mathematics
Microsoft Corporation - Microsoft Research New England
August 13, 2013
Many economic situations are modeled as stopping problems. Examples are job search, timing of market entry decisions, irreversible investment or the pricing of American options. We analyze optimal stopping as mechanism design problem with transfers. Under a dynamic single crossing condition all cut-off stopping rules can be implemented by a transfer that only depends on the realized stopping decision. We characterize the transfer using a novel technique based on constrained processes.
Finally, we apply our results in the context of job search with and without recall. We characterize the search behavior (time-dependent reservation wage policies) of a risk-averse unemployed that can be induced by a transfer of the unemployment agency.
Number of Pages in PDF File: 24
Keywords: Dynamic Mechanism Design, Optimal Stopping, Dynamic Implementability, Posted-Price Mechanism
JEL Classification: D82, C62working papers series
Date posted: July 10, 2013 ; Last revised: August 14, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.359 seconds