A General Framework for Costly Information Transmission in Continuous Time
36 Pages Posted: 23 Jul 2010
Date Written: July 22, 2010
Abstract In this paper, we study a costly information transmission problem in the continuous time domain. We formulate a model that incorporates broadcasting costs, misaligned incentives between the information sender and receiver, receiver's naivety, and penality costs of misrepresenting information. We derive the Hamilton-Jacobi equation associated with this stochastic control problem and characterize the sender's optimal strategy. Two specific model settings are examined here. The infinite time horizon case is solved analytically while the finite time horizon case is solved numerically. Furthermore, this paper includes a practical application of the proposed model to the stock recommendation analysis, which is also solved numerically. The sensitivity of the numerical solution to model parameters is analyzed.
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